TAX1 CASE DIGESTS

General Principles
TABLE OF CONTENTS

Case Doctrines 1
Cases
1. CIR vs. ALGUE, INC.
4
G.R. No. L-28896. February 17, 1988.
2. PAL vs. EDU
6
G.R. No. L-41383. August 15, 1988.
3. ESSO STANDARD EASTERN INC. vs. CIR
9
G.R. No. L-29508-09. July 7, 1989.
4. Physical Therapy vs. Municipal Board of Manila
12
G.R. No. L-10448. August 30, 1957.
5. REPUBLIC vs. MAMBULAO LUMBER
14
G.R. No. L-17725. February 28, 1962.
6. ENGRACIO FRANCIA vs. IAC
16
G.R. No. L-67649. June 28, 1988.
7. MELECIO R. DOMINGO vs. HON. LORENZO C.
GARLITOS 17
G.R. No. L-18994. June 29, 1963.
8. DAVAO GULF LUMBER CORP. vs. CIR
18
G.R. No. 117359. July 23, 1998.
9. CALTEX PHILIPPINES, INC. vs. COA
20
G.R. No. 92585. May 8, 1992.
10. CIR vs. CA, CTA and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILS, INC. 22
G.R. No. 124043. October 14, 1998.
11. PASCUAL vs. SECRETARY OF PUBLIC WORKS
24
G.R. No. L-10405. December 29, 1960.
12. MACTAN CEBU INTERNATIONAL AIRPORT
AUTHORITY vs. MARCOS 26
G.R. No. 120082. September 11, 1996.

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 TAX1 CASE DIGESTS
General Principles
CASE DOCTRINES
1. CIR vs. ALGUE, INC.
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance. On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.
2. PAL vs. EDU
Taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is,
at least, one of the real and substantial purposes, then the exaction is
properly called a tax.
Motor vehicle registration fees as at present exacted pursuant to the Land
Transportation and Traffic Code are actually taxes intended for additional
revenues of government even if one fifth or less of the amount collected is
set aside for the operating expenses of the agency administering the
program.
3. ESSO STANDARD EASTERN vs. CIR
A margin fee is not a tax but an exaction designed to curb the excessive
demands upon our international reserve. The margin fee under Republic
Act No. 2009 was imposed by the State in the exercise of its police power
and not the power of taxation.
The statutory test of deductibility where it is axiomatic that to be deductible
as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred
within the taxable year, and (3) it must be paid or incurred in carrying on a
trade or business. In addition, not only must the taxpayer meet the business
test, he must substantially prove by evidence or records the deductions
claimed under the law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary and necessary
does not justify its deduction. (Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, 102 SCRA 246)
The paramount rule is that claims for deductions are a matter of legislative
grace and do not turn on mere equitable considerations. . . . The taxpayer
Page 2 of 26
in every instance has the burden of justifying the allowance of any
deduction claimed.
4. PHYSICAL THERAPY vs. MUNICIPAL BOARD OF MANILA
The amount of the fee or charge is properly considered in determining
whether it is a tax or an exercise of the police power. The amount may be
so large as to itself show that the purpose was to raise revenue and not to
regulate, but in regard to this matter there is a marked distinction between
license fees imposed upon useful and beneficial occupations which the
sovereign wishes to regulate but not restrict, and those which are inimical
and dangerous to the public, health, morals or safety. In the latter case the
fee maybe very large without necessarily being a tax.
The amount of the fee or charge is properly considered in determining
whether it is a tax or an exercise of the police power. The amount may be
so large as to itself show that the purpose was to raise revenue and not to
regulate, but in regard to this matter there is a marked distinction between
license fees imposed upon useful and beneficial occupations which the
sovereign wishes to regulate but not restrict, and those which are inimical
and dangerous to the public, health, morals or safety. In the latter case the
fee maybe very large without necessarily being a tax.
5. REPUBLIC vs. MAMBULAO LUMBER
Internal Revenue Taxes, such as forest charges, cannot be the subject of
set-off or compensation. It is because taxes are not in the nature of
contracts between the parties but grow out of a duty to, and are positive
acts of, the government, to the making and enforcing of which, the personal
consent of the individual taxpayer is not required.
6. FRANCIA vs. IAC
There can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on
the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await the results
of a lawsuit against the government.
7. DOMINGO vs. GARLITOS
Art. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts
to the concurrent amount, even though the creditors and debtors are not
aware of the compensation.
 TAX1 CASE DIGESTS
General Principles
8. DAVAO GULF LUMBER CORP. vs. CIR
A tax cannot be imposed unless it is supported by the clear and express
language of a statute; on the other hand, once the tax is unquestionably
imposed, "[a] claim of exemption from tax payments must be clearly shown
and based on language in the law too plain to be mistaken." Since the
partial refund authorized under Section 5, R.A. 1435, is in the nature of tax
exemption, it must be construed strictissimi juris against the grantee.
There is no tax exemption solely on the ground of equity.
manifest and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption "must expressly be granted in a
statute stated in a language too clear to be mistaken."
Tax exemption, when granted; requisites: a non-stock, non-profit
educational institution must prove with substantial evidence that (1) it falls
under the classification non-stock, non-profit educational institution; and (2)
the income it seeks to be exempted from taxation is used actually, directly,
and exclusively for educational purposes.

Because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor
of the government. Otherwise stated, any exemption from the payment of
a tax must be clearly stated in the language of the law; it cannot be merely
implied therefrom.
9. CALTEX PHILIPPINES, INC. vs. COA
Tax exemptions as a general rule are construed strictly against the grantee
and liberally in favor of the taxing authority. The burden proof rests upon
the party claiming exemption to prove that it 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.
Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of the 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.
11. PASCUAL vs. SECRETARY OF PUBLIC WORKS
Generally, under the express or implied provisions of the constitution,
public funds may be used only for a public purpose. The right of the
legislature to appropriate public funds is correlative with its right to tax, and,
under constitutional provisions against taxation except for public purposes
and prohibiting the collection of a tax for one purpose and the devotion
thereof to another purpose, no appropriate of state funds can be made for
other than a public purpose.
12. MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY vs. MARCOS
Tax statutes are construed strictly against the government and liberally in
favor of the taxpayer. But since taxes are paid for civilized society, or are
the lifeblood of the nation, the law frowns against exemptions from taxation
and statutes granting tax exemptions are thus construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority.

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.

10. CIR vs. CA

Because taxes are the lifeblood of the nation, the Court has always applied
the doctrine of strict interpretation in construing tax exemptions.
Furthermore, a claim of statutory exemption from taxation should be

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 TAX1 CASE DIGESTS
General Principles
1 These were collected by the payees for their work in the creation of the
CIR vs. ALGUE, INC.
[G.R. No. 0000. Month 00, 0000]
DOCTRINE
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose
of taxation, which is the promotion of the common good, may be achieved.
FACTS
The private respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for
the years 1958 and 1959. On January 18, 1965, Algue filed a letter of protest
or request for reconsideration, which letter was stamp-received on the same
day in the office of the petitioner. On March 12, 1965, a warrant of distraint and
levy was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest. A
search of the protest in the dockets of the case proved fruitless. Atty. Guevara
produced his file copy and gave a photostat to BIR agent Ramon Reyes, who
deferred service of the warrant. On April 7, 1965, Atty. Guevara was finally
informed that the BIR was not taking any action on the protest and it was only
then that he accepted the warrant of distraint and levy earlier sought to be
served. Sixteen days later, on April 23, 1965, Algue filed a petition for review of
the decision of the Commissioner of Internal Revenue with the Court of Tax
Appeals.
The petitioner contends that the claimed deduction of P75,000.00 was properly
disallowed because it was not an ordinary, reasonable or necessary business
expense. The petitioner claims that these payments are fictitious because most
of the payees are members of the same family in control of Algue. It is argued
that no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In
short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held
that the said amount had been legitimately paid by the private respondent for
actual services rendered. The payment was in the form of promotional fees.
Page 4 of 26
Vegetable Oil Investment Corporation of the Philippines and its subsequent
purchase of the properties of the Philippine Sugar Estate Development
Company.
Hence, this petition.
ISSUE
1. Whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns.
2. Whether or not the appeal of the private respondent from the decision of
the Collector of Internal Revenue was made on time and in accordance
with law.
RULING
1. The claimed deduction by Algue Inc. was permitted under the
Internal Revenue Code and should therefore not have been
disallowed by the CIR.
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by
involving an imaginary deduction. Algue Inc. was a family corporation where
strict business procedures were not applied and immediate issuance of receipts
was not required. at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to
make up the total of P75,000.00. This arrangement was understandable in view
of the close relationship among the persons in the family corporation
The amount of the promotional fees was not excessive. The total commission
paid by the Philippine Sugar Estate Development Co. to Algue Inc. was P125K.
After deducting the said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the
payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate
properties.
Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses
- All the 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 xxx
 TAX1 CASE DIGESTS
General Principles
The burden is on the taxpayer to prove the validity of the claimed deduction. In
this case, Algue Inc. has proved that the payment of the fees was necessary
and reasonable in the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an experimental enterprise
and involve themselves in a new business requiring millions of pesos.

Taxes are what we pay for civilization 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 one's hard earned
income to the taxing authorities, every person who is able to must contribute
his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material values

Taxation must be exercised reasonably and in accordance with the prescribed

procedure. If it is not, then the taxpayer has a right to complain and the courts
will then come to his succor.

2. Algue Inc.’s appeal from the decision of the CIR was filed on time
with the CTA in accordance with Rep. Act No. 1125.

RA 1125: the appeal may be made within thirty days after receipt of the
decision or ruling challenged. During the intervening period, the warrant
was premature and could therefore not be served.

Page 5 of 26
 TAX1 CASE DIGESTS
General Principles
2 paid. The appellant thus paid, under protest, the amount of P19,529.75 as
PAL vs. EDU
[G.R. No. L-41383. August 15, 1988.]
DOCTRINE
Taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes, then the exaction is properly
called a tax.
Motor vehicle registration fees as at present exacted pursuant to the Land
Transportation and Traffic Code are actually taxes intended for additional
revenues of government even if one fifth or less of the amount collected is set
aside for the operating expenses of the agency administering the program.
FACTS
The Philippine Airlines (PAL) is a corporation organized and existing under the
laws of the Philippines and engaged in the air transportation business under a
legislative franchise, Act No. 4271, as amended by Republic Act Nos. 2360 and
2667. Under its franchise, PAL is exempt from the payment of taxes. The
pertinent provision of the franchise provides as follows:
"Section 13. In consideration of the franchise and rights hereby granted, the
grantee shall pay to the National Government during the life of this franchise a
tax of two per cent of the gross revenue or gross earning derived by the grantee
from its operations under this franchise. Such tax shall be due and payable
quarterly and shall be in lieu of all taxes of any kind, nature or description,
levied, established or collected by any municipal, provincial or national
authority; Provided, that if, after the audit of the accounts of the grantee by the
Commissioner of Internal Revenue, a deficiency tax is shown to be due, the
deficiency tax shall be payable within the ten days from the receipt of the
assessment. The grantee shall pay the tax on its real property in conformity
with existing law."
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series
of 1956) PAL has, since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Edu, issued a
regulation requiring all tax exempt entities, among them PAL to pay motor
vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's
motor vehicles unless the amounts imposed under Republic Act 4136 were
Page 6 of 26
registration fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling
in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle
registration fees are in reality taxes from the payment of which PAL is exempt
by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in
Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970)
to the effect that motor vehicle registration fees are regulatory exactions and
not revenue measures and, therefore, do not come within the exemption
granted to PAL under its franchise. Hence, PAL filed the complaint against Land
Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo
Carbonell with the Court of First Instance of Rizal.
Appellee Romeo F. Edu, in his capacity as LTC Commissioner, and Ubaldo
Carbonell, in his capacity as National Treasurer, filed a motion to dismiss
alleging that the complaint states no cause of action.They contended that while
Act 4271 exempts PAL from the payment of any tax except two per cent on its
gross revenue or earnings, it does not exempt the plaintiff from paying
regulatory fees, such as motor vehicle registration fees.
RTC: rendered a decision dismissing the appellant's complaint "guided by the
later ruling laid down by the Supreme Court in the case of Republic v. Philippine
Rabbit Bus Lines, Inc. (supra)." From this judgment, PAL appealed to the Court
of Appeals which certified the case to us.
ISSUE
1. Whether or not a motor vehicle registration fee is a tax
2. Whether or not the respondent administrative agency may be required to
refund the amounts stated in the complaint of PAL?
RULING
1. Whether or not a motor vehicle registration fee is a tax
Calalang v. Lorenzo and Republic v. Philippine Rabbit Bus Lines, Inc. cited by
PAL and Commissioner Romeo F. Edu respectively, discuss the main points of
contention in the case at bar.
 TAX1 CASE DIGESTS
General Principles
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was imposed by
Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its
heading speaks of 'registration fees.' The term is repeated four times in the body
thereof. Equally so, mention is made of the 'fee for registration.' (Ibid., Subsection
G) A subsection starts with a categorical statement 'No fees shall be charged.'
(Ibid., Subsection H) The conclusion is difficult to resist therefore that the Motor
Vehicle Act requires the payment not of a tax but of a registration fee under the
police power. Hence the inapplicability of the section relied upon by defendant-
appellee under the Back Pay Law. It is not held liable for a tax but for a
registration fee. It therefore cannot make use of a backpay certificate to meet
such an obligation.
"Any vestige of any doubt as to the correctness of the above conclusion should
be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the
imposition of additional tax on privately-owned passenger automobiles,
motorcycles and scooters was amended by Republic Act No. 5470 which is (sic)
approved on May 30, 1969.) A special science fund was thereby created and its
title expressly sets forth that a tax on privately-owned passenger automobiles,
motorcycles and scooters was imposed. The rates thereof were provided for in
its Section 3 which clearly specifies that 'additional tax' was to be paid as
distinguished from the registration fee under the Motor Vehicle Act. There cannot
be any clearer expression therefore of the legislative will, even on the
assumption that the earlier legislation could by stretching the point be
susceptible of the interpretation that a tax rather than a fee was levied. What is
thus most apparent is that where the legislative body relies on its authority to tax
it expressly so states, and where it is enacting a regulatory measure, it is equally
explicit." (at p. 216)
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court,
on the other hand, held:
"The charges prescribed by the Revised Motor Vehicle Law for the registration
of motor vehicles are in section 8 of that law called 'fees.' But the appellation is
no impediment to their being considered taxes if taxes they really are. For not
the name but the object of the charge determines whether it is a tax or a fee.
Generally speaking, taxes are for revenue, whereas fees are exactions for
purposes of regulation and inspection and are for that reason limited in amount
to what is necessary to cover the cost of the services rendered in that connection.
Hence, 'a charge fixed by statute for the service to be performed by an officer,
where the charge has no relation to the value of the services performed and
where the amount collected eventually finds its way into the treasury of the
branch of the government whose officer or officers collected the charge, is not a
fee but a tax.' (Cooley on Taxation, Vol. 1, 4th ed., p. 110.)
Page 7 of 26
"From the data submitted in the court below, it appears that the expenditures of
the Motor Vehicle Office are but a small portion — about 5 per centum — of the
total collections from motor vehicle registration fees. And as proof that the money
collected is not intended for the expenditures of that office, the law itself provides
that all such money shall accrue to the funds for the construction and
maintenance of public roads, streets and bridges. It is thus obvious that the fees
are not collected for regulatory purposes, that is to say, as an incident to the
enforcement of regulations governing the operation of motor vehicles on public
highways, for their express object is to provide revenue with which the
Government is to discharge one of its principal functions — the construction and
maintenance of public highways for everybody's use. They are veritable taxes,
not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees
as taxes, for it provides that 'no other taxes or fees than those prescribed in this
Act shall be imposed,' thus implying that the charges therein imposed — though
called fees — are of the category of taxes. The provision is contained in section
70, of subsection (b), of the law, as amended by section 17 of Republic Act 587,
which reads:
"'Sec. 70 (b) No other taxes or fees than those prescribed in this Act shall be
imposed for the registration or operation or on the ownership of any motor
vehicle, or for the exercise of the profession of chauffeur, by any municipal
corporation, the provisions of any city charter to the contrary notwithstanding:
Provided, however, That any provincial board, city or municipal council or board,
or other competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their respective
jurisdiction, as may be authorized and approved by the Secretary of Public
Works and Communications, and also for the use of such public roads, as may
be authorized by the President of the Philippines upon the recommendation of
the Secretary of Public Works and Communications, but in none of these cases,
shall any toll fees be charged or collected until and unless the approved schedule
of tolls shall have been posted legibly in a conspicuous place at such toll station.'"
(at pp. 213-214)o
It appears that the legislative intent and purpose behind the law requiring
owners of vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser degree, pay
for the operating expenses of the administering agency. On the other hand, the
Philippine Rabbit case mentions a presumption arising from the use of the term
"fees" which appears to have been favored by the legislature to distinguish fees
from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which
reads:
"Sec. 13. Payment of taxes upon registration. — No original registration of motor
vehicles subject to payment of taxes, customs duties or other charges shall be
 TAX1 CASE DIGESTS
General Principles
accepted unless proof of payment of the taxes due thereon has been presented
to the Commission."
referring to taxes other than those imposed on the registration, operation or
ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an
Instrument of regulation. As stated by a former presiding judge of the Court of
Tax Appeals and writer on various aspects of taxes:
"It is possible for an exaction to be both tax and regulation. License fees are
often looked to as a source of revenue as well as a means of regulation.
(Sonzinsky v. U.S., 300 U.S. 506) This is true, for example, of automobile license
fees. In such case, the fees may properly be regarded as taxes even though they
also serve as an instrument of regulation. If the purpose is primarily revenue, or
if revenue is at least one of the real and substantial purposes, then the exaction
is properly called a tax.”
Indeed, taxation may be made the implement of the state's police power (Lutz
v. Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax. Such is the
case of motor vehicle registration fees. The conclusions become inescapable
in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same
provision appears as Section 59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax as the law refers to
the imposition on the registration, operation or ownership of a motor vehicle as
a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state
that the imposition is a tax, Section 59(b) speaks of "taxes or fees . . . for the
registration or operation or on the ownership of any motor vehicle, or for the
exercise of the profession of chauffeur . . ." making the intent to impose a tax
more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of
an "additional tax," where the law could have referred to an original tax and not
one in addition to the tax already imposed on the registration, operation, or
ownership of a motor vehicle under Rep. Act 4136. Simply put, if the exaction
under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act
5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees"
such as the special permit fees for certain types of motor vehicles (Sec. 10) and
additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be revenue-raising.
Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor
vehicle registration fee and chauffeurs' license fee. Such fees are to go into the
Page 8 of 26
expenditures of the Land Transportation Commission as provided for in the last
proviso of sec. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple exactions
intended only for regulatory purposes in the exercise of the State's police
powers. Over the years, however, as vehicular traffic exploded in number and
motor vehicles became absolute necessities without which modern life as we
know it would stand still, Congress found the registration of vehicles a very
convenient way of raising much needed revenues. Without changing the earlier
denomination of registration payments as "fees," their nature has become that
of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at
present exacted pursuant to the Land Transportation and Traffic Code are
actually taxes intended for additional revenues of government even if one fifth
or less of the amount collected is set aside for the operating expenses of the
agency administering the program.
3. May the respondent administrative agency be required to refund the
amounts stated in the complaint of PAL?
NO. The claim for refund is made for payments given in 1971. It is not clear
from the records as to what payments were made in succeeding years. We
have ruled that Section 24 of Rep. Act No. 5431, dated June 27, 1968, repealed
all earlier tax exemptions of corporate taxpayers found in legislative franchises
similar to that invoked by PAL in this case.
Any registration fees collected between June 27, 1968 and April 9, 1979, were
correctly imposed because the tax exemption in the franchise of PAL was
repealed during the period. However, an amended franchise was given to PAL
in 1979. PAL's current franchise is clear and specific. It has removed the
ambiguity found in the earlier law. PAL is now exempt from the payment of any
tax, fee, or other charge on the registration and licensing of motor vehicles.
Such payments are already included in the basic tax or franchise tax provided
in Subsections (a) and (b) of Section 13, P.D. 1590 and may no longer be
exacted.
WHEREFORE, the petition is hereby partially GRANTED.
3
ESSO STANDARD EASTERN INC. vs. CIR
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General Principles
[G.R. No. L-29508-09. July 7, 1989.]
DOCTRINES
A margin fee is not a tax but an exaction designed to curb the excessive
demands upon our international reserve. The margin fee under Republic Act
No. 2009 was imposed by the State in the exercise of its police power and not
the power of taxation.
The statutory test of deductibility where it is axiomatic that to be deductible as
a business expense, three conditions are imposed, namely: (1) the expense
must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying on a trade or
business. In addition, not only must the taxpayer meet the business test, he
must substantially prove by evidence or records the deductions claimed under
the law, otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify its
deduction. (Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 102 SCRA 246)
The paramount rule is that claims for deductions are a matter of legislative
grace and do not turn on mere equitable considerations. . . . The taxpayer in
every instance has the burden of justifying the allowance of any deduction
claimed.
FACTS
In CTA Case No. 1251, petitioner 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. This claim
was disallowed by the respondent Commissioner of Internal Revenue on the
ground that the expenses should be capitalized and might be written off as a
loss only when a "dry hole" should result. ESSO then filed an amended return
where it asked for the refund of P323,279.00 by reason of its abandonment as
dry holes of several of its oil wells. Also claimed as ordinary and necessary
expenses in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit remittances to its New
York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,
disallowing the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the
year 1960, in the amount of P367,994.00, plus 18% interest thereon of
Page 9 of 26
P66,238.92 for the period from April 18, 1961 to April 18, 1964, for a total of
P434,232.92. The deficiency arose from the disallowance of the margin fees of
P1,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its
New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the
tax credit of P221,033.00 representing its overpayment on its income tax for
1959 and paying under protest the additional amount of P213,201.92. On
August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the
interest on its deficiency income tax. It argued that the 18% interest should have
been imposed not on the total deficiency of P367,944.00 but only on the amount
of P146,961.00, the difference between the total deficiency and its tax credit of
P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest
on the entire amount of the deficiency tax. On May 4, 1965, the CIR also denied
the claims of ESSO for refund of the overpayment of its 1959 and 1960 income
taxes, holding that the margin fees paid to the Central Bank could not be
considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959,
contending that the margin fees were deductible from gross income either as a
tax or as an ordinary and necessary business expense. It also claimed an
overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were
not legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959
and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess
interest. This portion of the decision was appealed by the CIR but was affirmed
by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502-
03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision
denying its claims for the refund of the margin fees P102,246.00 for 1959 and
P434,234.92 for 1960. That is the issue now before us.
ISSUE
Whether R.A. 2009, entitled An Act to Authorize the Central Bank of the
Philippines to Establish a Margin Over Banks' Selling Rates of Foreign
Exchange, is a police measure or a revenue measure.
RULING
 TAX1 CASE DIGESTS
General Principles
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated
through Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction
designed to discourage imports and encourage exports, and ultimately, `curtail
any excessive demand upon the international reserve' in order to stabilize the
currency. Originally adopted to cope with balance of payment pressures,
exchange restrictions have come to serve various purposes, such as limiting
non-essential imports, protecting domestic industry — and when combined with
the use of multiple currency rates providing a source of revenue to the
government, and are in many developing countries regarded as a more or less
inevitable concomitant of their economic development programs. The different
measures of exchange control or restriction cover different phases of foreign
exchange transactions, i.e., in quantitative restriction, the control is on the
amount of foreign exchange allowable. In the case of the margin levy, the
immediate impact is on the rate of foreign exchange; in fact, its main function is
to control the exchange rate without changing the par value of the peso as fixed
in the Bretton Woods Agreement Act. For a member nation is not supposed to
alter its exchange rate (at par value) to correct a merely temporary disequilibrium
in its balance of payments. By its nature, the margin levy is part of the rate of
exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign
exchange and hence should not form part of the exchange rate, suffice it to state
that We have already held the contrary for the reason that a tax is levied to
provide revenue for government operations, while the proceeds of the margin
fee are applied to strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v.
Central Bank, the same idea was expressed, though in connection with a
different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's
foreign exchange constitutes an export tax. A tax is a levy for the purpose of
providing revenue for government operations, while the proceeds of the 20%
retention, as we have seen, are applied to strengthen the Central Bank's
international reserve.
We conclude then that the margin fee was imposed by the State in the exercise
of its police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should
nevertheless be considered necessary and ordinary business expenses and
therefore still deductible from its gross income. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the United States.
Page 10 of 26
Such remittance was an expenditure necessary and proper for the conduct of
its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code
reading as follows:
SEC. 30.Deductions from gross income.— In computing net income there shall
be allowed as deductions —
(a)Expenses:
(1)In general. — All the 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; traveling expenses while away from home in the pursuit of a trade or
business; and rentals or other payments required to be made as a condition to
the continued use or possession, for the purpose of the trade or business, of
property to which the taxpayer has not taken or is not taking title or in which he
has no equity.
(2)Expenses allowable to non-resident alien individuals and foreign
corporations. — In the case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the necessary expenses paid or
incurred in carrying on any business or trade conducted within the Philippines
exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 4 the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must
point to some specific provision of the statute in which that deduction is
authorized and must be able to prove that he is entitled to the deduction which
the law allows. As previously adverted to, the law allowing expenses as
deduction from gross income for purposes of the income tax is Section 30(a) (1)
of the National Internal Revenue which allows a deduction of 'all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any
trade or business.' An item of expenditure, in order to be deductible under this
section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to
be deductible as a business expense, three conditions are imposed, namely: (1)
the expense must be ordinary and necessary, (2) it must be paid or incurred
within the taxable year, and (3) it must be paid or incurred in carrying on a trade
or business. In addition, not only must the taxpayer meet the business test, he
must substantially prove by evidence or records the deductions claimed under
 TAX1 CASE DIGESTS
General Principles
the law, otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify its
deduction.
While it is true that there is a number of decisions in the United States delving
on the interpretation of the terms 'ordinary and necessary, as used in the federal
tax laws, no adequate or satisfactory definition of those terms is possible.
Similarly, this Court has never attempted to define with precision the terms
'ordinary and necessary.' There are however, certain guiding principles worthy
of serious consideration in the proper adjudication of conflicting claims.
Ordinarily, an expense will be considered `necessary, where the expenditure is
appropriate and helpful in the development of the taxpayer's 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 term 'ordinary' does not
require that the payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be unique or non-
recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction
depends in each case on the particular facts and the relation of the payment to
the type of business in which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the determination. Assuming
that the expenditure is ordinary and necessary in the operation of the taxpayer's
business, the answer to the question as to whether the expenditure is an
allowable deduction as a business expense must be determined from the nature
of the expenditure itself, which in turn depends on the extent and permanency
of the work accomplished by the expenditure.
Since the margin fees in question were incurred for the remittance of finds to
petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can never
be said therefore that the margin fees were appropriate and helpful in the
development of petitioner's business in the Philippines exclusively or were
incurred for purposes proper to the conduct of the affairs of petitioner's branch
in the Philippines exclusively or for the purpose of realizing a profit or of
minimizing a loss in the Philippines exclusively. If at all, the margin fees were
incurred for purposes proper to the conduct of the corporate affairs of Standard
Vacuum Oil Company in New York, but certainly not in the Philippines.
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. This is error. The public
respondent is correct when it asserts that "the paramount rule is that claims for
deductions are a matter of legislative grace and do not turn on mere equitable
considerations . . . The taxpayer in every instance has the burden of justifying
the allowance of any deduction claimed."
It is clear that ESSO, having assumed an expense properly attributable to its
head office, cannot now claim this as an ordinary and necessary expense
paid or incurred in carrying on its own trade or business.

In the light of the above explanation, we hold that the Court of Tax Appeals did
not err when it held on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and necessary

deductible expense, it may be asked: Were the margin fees paid by petitioner on
its profit remittances to its Head Office in New York appropriate and helpful in
the taxpayer's business in the Philippines? Were the margin fees incurred for
purposes proper to the conduct of the affairs of petitioner's branch in the
Philippines? Or were the margin fees incurred for the purpose of realizing a profit
or of minimizing a loss in the Philippines? Obviously not. As stated in the Lopez
case, the margin fees are not expenses in connection with the production or
earning of petitioner's incomes in the Philippines. They were expenses incurred
in the disposition of said incomes; expenses for the remittance of funds after they
have already been earned by petitioner's branch in the Philippines for the
disposal of its Head Office in New York which is already another distinct and
separate income taxpayer.

xxx xxx xxx

Page 11 of 26
 TAX1 CASE DIGESTS
General Principles
4 Code and Executive Order No. 317, series of 1941, as amended by Executive
PHYSICAL THERAPY vs. MUNICIPAL BOARD OF MANILA
[G.R. No. L-10448. August 30, 1957.]
DOCTRINE
The amount of the fee or charge is properly considered in determining whether
it is a tax or an exercise of the police power. The amount may be so large as to
itself show that the purpose was to raise revenue and not to regulate, but in
regard to this matter there is a marked distinction between license fees imposed
upon useful and beneficial occupations which the sovereign wishes to regulate
but not restrict, and those which are inimical and dangerous to the public,
health, morals or safety. In the latter case the fee maybe very large without
necessarily being a tax.
FACTS
The petitioner-appellant, an association of registered massagists and licensed
operators of massage clinics in the City of Manila and other parts of the country,
filed an action in the Court of First Instance of Manila for declaratory judgment
regarding the validity of Municipal Ordinance No. 3659, promulgated by the
Municipal Board and approved by the City Mayor. To stop the City from
enforcing said ordinance, the petitioner secured an injunction upon filing of a
bond in the sum of P1,000.00. The trial court dismissed the petition and later
dissolved the writ of injunction previously issued.
The petitioner appealed said order of dismissal directly to this Court. In support
of its appeal, petitioner-appellant contends among other things that the trial
court erred in holding that the Ordinance in question has not restricted the
practice of massotherapy in massage clinics to hygienic and aesthetic
massage, that the Ordinance is valid as it does not regulate the practice of
massage, that the Municipal Board of Manila has the power to enact the
Ordinance in question by virtue of Section 18, Subsection (kk), Republic Act
409, and that the permit fee of P100.00 is moderate and not unreasonable.
The main contention of the appellant in its appeal and the principal ground of
its petition for declaratory judgment is that the City of Manila is without authority
to regulate the operation of massagists and the operation of massage clinics
within its jurisdiction; that whereas under the Old City Charter, particularly,
Section 2444 (e) of the Revised Administrative Code, the Municipal Board was
expressly granted the power to regulate and Gx the license fee for the
occupation of massagists, under the New Charter of Manila, Republic Act 409,
said power has been withdrawn or omitted and that now the Director of Health,
pursuant to authority conferred by Section 938 of the Revised Administrative
Page 12 of 26
Order No. 392, series, 1951, is the one who exercises supervision over the
practice of massage and over massage clinics in the Philippines; that the
Director of Health has issued Administrative Order No. 10, dated May 5, 1953,
prescribing "rules and regulations governing the examination for admission to
the practice of massage, and the operation of massage clinics, offices, or
establishments in the Philippines", which order was approved by the Secretary
of Health and duly published in the Official Gazette; that Section 1 (a) of
Ordinance No. 3659 has restricted the practice of massage to only hygienic and
aesthetic massage prohibits or does not allow qualified massagists to practice
therapeutic massage in their massage clinics. Appellant also contends that the
license fee of P100.00 for operator in Section 2 of the Ordinance is
unreasonable, may, unconscionable.
ISSUE
Whether or not Ordinance No. 3695 is an enacted as a means of regulation or
revenue generation
RULING
It would appear to us that the purpose of the Ordinance is not to regulate the
practice of massage, much less to restrict the practice of licensed and qualified
massagists of therapeutic massage in the Philippines. The end sought to be
attained in the Ordinance is to prevent the commission of immorality and the
practice of prostitution in an establishment masquerading as a massage clinic
where the operators thereof offer to massage or manipulate superficial parts of
the bodies of customers for hygienic and aesthetic purposes.
This intention can readily be understood by the building requirements in Section
3 of the Ordinance, requiring that there be separate rooms for male and female
customers; that instead of said rooms being separated by permanent partitions
and swinging doors, there should only be sliding curtains between them; that
there should be "no private rooms or separated compartments, except those
assigned for toilet, lavatories, dressing room, office or kitchen"; that every
massage clinic should be provided with only one entrance and shall have no
direct or indirect communication whatsoever with any dwelling place, house or
building; and that no operator, massagist, attendant or helper will be allowed
"to use or allow the use of a massage clinic as a place of assignation or permit
the commission therein of any immoral or indecent act", and in fixing the
operating hours of such clinic between 8:00 a.m. and 11:00 p.m.
his intention of the Ordinance was correctly ascertained by Judge Hermogenes
Concepcion, presiding in the trial court, in his order of dismissal where he said:
 TAX1 CASE DIGESTS
General Principles
"What the Ordinance tries to avoid is that the massage clinic run by an operator In conclusion, we find and hold that the Ordinance in question as we interpret
who may not be a masseur or massagista may be used as cover for the running it and as intended by the appellees is valid. The order appealed from is
or maintaining a house of prostitution." hereby affirmed.

Ordinance No. 3659, particularly, Sections 1 to 4, should be considered as

limited to massage clinics used in the practice of hygienic and aesthetic
massage. We do not believe that the Municipal Board of the City of Manila and
the Mayor wanted or intended to regulate the practice of massage in general or
restrict the same to hygienic and aesthetic only.

As to the authority of the City Board to enact the Ordinance in question, the City
Fiscal, in representation of the appellees, calls our attention to Section 18 of
the New Charter of the City of Manila, Republic Act No. 409, which gives
legislative powers to the Municipal Board to enact all ordinances it may deem
necessary and proper for the promotion of the morality, peace, good order,
comfort, convenience and general welfare of the City and its inhabitants. This
is generally referred to as the General Welfare Clause, a delegation in statutory
form of the police power, under which municipal corporations are authorized to
enact ordinances to provide for the health and safety, and promote the morality,
peace and general welfare of its inhabitants. We agree with the City Fiscal.

As regards the permit fee of P100.00, it will be seen that said fee is made
payable not by the masseur or massagist, but by the operator of a massage
clinic who may not be a massagist himself. Compared to permit fees required
in other operations, P100.00 may appear to be too large and rather
unreasonable. However, much discretion is given to municipal corporations in
determining the amount of said fee without considering it as a tax for revenue
purposes:

"The amount of the fee or charge is properly considered in determining whether

it is a tax or an exercise of the police power. The amount may be so large as to
itself show that the purpose was to raise revenue and not to regulate, but in
regard to this matter there is a marked distinction between license fees imposed
upon useful and beneficial occupations which the sovereign wishes to regulate
but not restrict, and those which are inimical and dangerous to public health,
morals or safety. In the latter case the fee may be very large without necessarily
being a tax." (Cooley on Taxation, Vol. IV, pp. 3516-17;)

Evidently, the Manila Municipal Board considered the practice of hygienic and
aesthetic massage not as a useful and beneficial occupation which will promote
and is conducive to public morals, and consequently, imposed the said permit
fee for its regulation.

Page 13 of 26
 TAX1 CASE DIGESTS
General Principles
5 denuded areas . . . and other public forest lands, which upon investigation, are
REPUBLIC vs. MAMBULAO LUMBER
[G.R. No. L-17725. February 28, 1962.]
DOCTRINE
Internal Revenue Taxes, such as forest charges, cannot be the subject of set-
off or compensation. It is because taxes are not in the nature of contracts
between the parties but grow out of a duty to, and are positive acts of, the
government, to the making and enforcing of which, the personal consent of the
individual taxpayer is not required.
FACTS
Under the first cause of action, for forest charges covering the period from
September 10, 1952 to May 24, 1953, defendants admitted that they have a
liability of P587.37, which liability is covered by a bond executed by defendant
General Insurance & Surety Corporation for Mambulao Lumber Company,
jointly and severally in character, on July 29, 1953, in favor of herein plaintiff;
Under the second cause of action, both defendants admitted a joint and several
liability in favor of plaintiff in the sum of P286.70, also covered by a bond dated
November 27, 1953;
Under the third cause of action, both defendants admitted a joint and several
liability in favor of plaintiff for P3,928.30, also covered by a bond dated July 20,
1954. These three liabilities aggregate to P4,802.37.
If the liability of defendants in favor of plaintiff in the amount already mentioned
is admitted, then what is the defense interposed by the defendants? The
defense presented by the defendants is quite unusual in more ways than one.
It appears that from July 21, 1948 to December 29, 1956, defendant Mambulao
Lumber Company paid to the Republic of the Philippines P8,200.52 for
“reforestation charges” and for the period commencing from April 30, 1947 to
June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines
for “reforestation charges”. These reforestation charges were paid to the
plaintiff in pursuance of Section 1 of Republic Act 115 which provides that there
shall be collected, in addition to the regular forest charges provided under
Section 264 of Commonwealth Act 466 known as the National Internal Revenue
Code, the amount of P0.50 on each cubic meter of timber . . . cut out and
removed from any public forest for commercial purposes. The amount collected
shall be expended by the director of forestry, with the approval of the secretary
of agriculture and commerce, for reforestation and afforestation of water sheds,
Page 14 of 26
found needing reforestation or afforestation . . . .
The total amount of the reforestation charges paid by Mambulao Lumber
Company is P9,127.50, and it is the contention of defendant Mambulao Lumber
Company that since the Republic of the Philippines has not made use of those
reforestation charges collected from it for reforesting the denuded area of the
land covered by its license, the Republic of the Philippines should refund said
amount, or, if it cannot be refunded, at least it should be compensated with
what Mambulao Lumber Company owed the Republic of the Philippines for
reforestation charges.
In line with these thought, defendant Mambulao Lumber Company wrote the
director of forestry a letter in paragraph 4 of which said defendant requested
“that our account with your bureau be credited with all the reforestation charges
that you have imposed on us from July 1, 1947 to June 14, 1956, amounting to
around P2,988.62”. This letter of defendant Mambulao Lumber Company was
answered by the director of forestry in which the director of forestry quoted an
opinion of the secretary of justice, to the effect that he has no discretion to
extend the time for paying the reforestation charges and also explained why
not all denuded areas are being reforested.
ISSUE
Whether the sum of P9,127.50 paid by defendant-appellant company to
plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or
applied to the payment of the sum of P4,802.37 as forest charges due and
owing from appellant to appellee
RULING
Section 1 of Republic Act No. 115, provides that the amount collected as
reforestation charges from a timber licensee or concessionaire shall constitute
a fund to be known as the Reforestation Fund, and that the same shall be
expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources for the reforestation or afforestation, among
others, of denuded areas which, upon investigation, are found to be needing
reforestation or afforestation. Note that 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.
Observe too, that the licensee's area may or may not be reforested at all,
depending on whether the investigation thereof by the Director of Forestry
shows that said area needs reforestation. The conclusion seems to be that the
 TAX1 CASE DIGESTS
General Principles
amount paid by a licensee as reforestation charges is in the nature of a tax financial affairs of the government will be thrown into great confusion." (47 Am. Jur.
which forms a part of the Reforestation Fund, payable by him irrespective of 766-767.)
whether the area covered by his license is reforested or not. Said fund, as the
law expressly provides, shall be expended in carrying out the purposes
provided for thereunder, namely, the reforestation or afforestation, among
others, of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of compensation in Article 1278 of the

new Civil Code 2 is applicable, such that the sum of P9,127.50 paid by it as
reforestation charges may compensate its indebtedness to appellee in the sum
of P4,802.37 as forest charges. But in the view we take of this case, appellant
and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed:

"Under Article 1278, NCC, compensation should take place when two persons
in their own right are creditors and debtors of each other. With respect to the
forest charges which the defendant Mambulao Lumber Company has paid to the
government, they are in the coffers of the government as taxes collected, and
the government does not owe anything to defendant Mambulao Lumber
Company. So, it is crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other,
because compensation refers to mutual debts. . . . ."

And the weight of authority is to the effect that internal revenue taxes, such as
the forest charges in question, can not be the subject of set-off or
compensation.

"A claim for taxes is not such a debt, demand, contract or judgment as is allowed
to be set-off under the statutes of set-off, which are construed uniformly, in the
light of public policy, to exclude the remedy in an action or any indebtedness of
the state or municipality to one who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. . . . ." (80 C.J.S. 73-74.)

"The general rule, based on grounds of public policy is well- settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of a duty to, and are the
positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. . . . If the taxpayer can properly refuse
to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate
and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the
collection of the tax must await and abide the result of a lawsuit, and meanwhile the

Page 15 of 26
 TAX1 CASE DIGESTS
General Principles
6 portion of his land was expropriated on October 15, 1977. Hence, his tax
ENGRACIO FRANCIA vs. IAC obligation had been set-off by operation of law as of October 15, 1977.
[G.R. No. L-67649. June 28, 1988.]
The petition was dismissed by the lower court. Hence this petition.
DOCTRINE
There can be no off-setting of taxes against the claims that the taxpayer may ISSUE
have against the government. A person cannot refuse to pay a tax on the Whether or not the petitioner’s tax obligations have been extinguished by legal
ground that the government owes him an amount equal to or greater than the compensation
tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government. RULING
By legal compensation, obligations of persons, who in their own right are
FACTS reciprocally debtors and creditors of each other, are extinguished (Art. 1278,
Engracio Francia is the registered owner of a residential lot and a two-story Civil Code). The circumstances of the case do not satisfy the requirements
house built upon it situated at Barrio San Isidro, now District of Sta. Clara, provided by Article 1279, to wit:
Pasay City, Metro Manila.
"(1) that each one of the obligors be bound principally and that he be at the same
On October 15, 1977, a 125 square meter portion of Francia's property was time a principal creditor of the other;
expropriated by the Republic of the Philippines for the sum of P4,116.00 xxx xxx xxx
representing the estimated amount equivalent to the assessed value of the "(3) that the two debts be due.
xxx xxx xxx
aforesaid portion.
This principal contention of the petitioner has no merit. We have consistently
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes.
ruled that there can be no off-setting of taxes against the claims that the
Thus, on December 5, 1977, his property was sold at public auction by the City
taxpayer may have against the government. A person cannot refuse to pay a
Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464
tax on the ground that the government owes him an amount equal to or greater
known as the Real Property Tax Code in order to satisfy a tax delinquency of
than the tax being collected. The collection of a tax cannot await the results of
P2,400.00. Ho Fernandez was the highest bidder for the property.
a lawsuit against the government.
Francia was not present during the auction sale since he was in Iligan City at
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court
that time helping his uncle ship bananas.
ruled that Internal Revenue Taxes cannot be the subject of set-off or
compensation.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-
P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez,
seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name
of a new certificate of title. Upon verification through his lawyer, Francia
discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez
by the City Treasurer on December 11, 1978. The auction sale and the final bill
of sale were both annotated at the back of TCT No. 4739 (37795) by the
Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. Francia
contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a

Page 16 of 26
 TAX1 CASE DIGESTS
General Principles
7 continues until said properties have been distributed among the heirs entitled
DOMINGO vs. GARLITOS
[G.R. No. L-18994. June 29, 1963.]
DOCTRINE
Art. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts to
the concurrent amount, even though the creditors and debtors are not aware of
the compensation.
FACTS
This is a petition for certiorari and mandamus against the Judge of the Court of
First Instance of Leyte, Hon. Lorenzo C. Garlitos, presiding, seeking to annul
certain orders of the court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes.
In Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, 106 Phil., 1138, this
Court declared as final and executory the order for the payment by the estate
of the estate and inheritance taxes, charges and penalties amounting to
P40,058.55, issued by the Court of First Instance of Leyte in special
proceedings entitled "In the Matter of the Intestate Estate of the Late Walter
Scott Price." In order to enforce the claims against the estate the fiscal
presented a petition dated June 21, 1961, to the court below for the execution
of the judgment. The petition was, however, denied by the court which held that
the execution is not justifiable as the Government is indebted to the estate
under administration in the amount of P262,200.
thereto. During the pendency of the proceedings all the estate is in custodia
legis and the proper procedure is not to allow the sheriff, in case of a court
judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that
the court having jurisdiction of the estate had found that the claim of the estate
against the Government has been recognized and an amount of P262,200 has
already been appropriated for the purpose by a corresponding law (Rep. Act
No. 2700). Under the above circumstances, both the claim of the Government
for inheritance taxes and the claim of the intestate for services rendered have
already become overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with
the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount, thus:
"Art. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts to
the concurrent amount, even though the creditors and debtors are not aware of
the compensation."
It is clear, therefore, that the petitioner has no clear right to execute the
judgment for taxes against the estate of the deceased Walter Scott Price.
Furthermore, the petition for certiorari and mandamus is not the proper remedy
for the petitioner. Appeal is the remedy.

ISSUE
Whether or not legal compensation took place.

RULING
The petition to set aside the orders of the court below and for the execution of
the claims of the Government against the estate must be denied for lack of
merit. The ordinary procedure by which to settle claims or indebtedness against
the estate of a deceased person, as an inheritance tax, is for the claimant to
present a claim before the probate court so that said court may order the
administrator to pay the amount thereof.

The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging
to the estate are under the jurisdiction of the court and such jurisdiction

Page 17 of 26
 TAX1 CASE DIGESTS
General Principles
8 1981) had prescribed. Disallowed on the ground that they were not included in
DAVAO GULF LUMBER CORP. vs. CIR
[G.R. No. 117359. July 23, 1998.]
DOCTRINE
A tax cannot be imposed unless it is supported by the clear and express
language of a statute; on the other hand, once the tax is unquestionably
imposed, "[a] claim of exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken." Since the partial refund
authorized under Section 5, R.A. 1435, is in the nature of tax exemption, it must
be construed strictissimi juris against the grantee.
There is no tax exemption solely on the ground of equity.
Because taxes are the lifeblood of the nation, statutes that allow exemptions
are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must
be clearly stated in the language of the law; it cannot be merely implied
therefrom.
FACTS
Petitioner is a licensed forest concessionaire possessing a Timber License
Agreement granted by the Ministry of Natural Resources (now DENR). From
July 1, 1980 to January 31, 1982 petitioner purchased, from various oil
companies, refined and manufactured mineral oils as well as motor and diesel
fuels, which it used exclusively for the exploitation and operation of its forest
concession. Said oil companies paid the specific taxes imposed, under
Sections 153 and 156 7 of the 1977 National Internal Revenue Code (NIRC),
on the sale of said products. Being included in the purchase price of the oil
products, the specific taxes paid by the oil companies were eventually passed
on to the user, the petitioner in this case.
Petitioner filed before Respondent Commissioner of Internal Revenue (CIR) a
claim for refund in the amount of P120,825.11, representing 25% of the specific
taxes actually paid on the above-mentioned fuels and oils that were used by
petitioner in its operations as forest concessionaire.
Petitioner filed at the CTA a petition for review where the CTA rendered its
decision finding petitioner entitled to a partial refund of specific taxes the latter
had paid in the reduced amount of P2,923.15. The CTA ruled that the claim on
purchases of lubricating oil (from July 1, 1980 to January 19, 1981) and on
manufactured oils other than lubricating oils (from July 1, 1980 to January 4,
Page 18 of 26
the original claim filed before the CIR were the claims for refund on purchases
of manufactured oils from January 1, 1980 to June 30, 1980 and from February
1, 1982 to June 30, 1982. In regard to the other purchases, the CTA granted
the claim, but it computed the refund based on rates deemed paid under RA
1435, and not on the higher rates actually paid by petitioner under the NIRC.
Insisting that the basis for computing the refund should be the increased rates
prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the matter
to the Court of Appeals. The Court of Appeals affirmed the CTA Decision.
Hence, this petition for review.
Petitioner argues that the refund should be based on the increased rates of
speci5c taxes which it actually paid, as prescribed in Sections 153 and 156 of
the NIRC. Public respondent, on the other hand, contends that it should be
based on speci5c taxes deemed paid under Sections 1 and 2 of RA 1435.
ISSUE
Whether or not petitioner is entitled under Republic Act No. 1435 to the refund
of 25% of the amount of speci5c taxes it actually paid on various re5ned and
manufactured mineral oils and other oil products taxed under Sec. 153 and Sec.
156 of the 1977 (Sec. 142 and Sec. 145 of the 1939) National Internal Revenue
Code.
RULING
A tax cannot be imposed unless it is supported by the clear and express
language of a statute; 1 9 on the other hand, once the tax is unquestionably
imposed, "[a] claim of exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken." 20 Since the partial
refund authorized under Section 5, RA 1435, is in the nature of a tax exemption,
21 it must be construed strictissimi juris against the grantee. Hence, petitioner's
claim of refund on the basis of the speci5c taxes it actually paid must expressly
be granted in a statue stated in a language too clear to be mistaken.
We have carefully scrutinized RA 1435 and the subsequent pertinent statutes
and found no expression of a legislative will authorizing a refund based on the
higher rates claimed by petitioner. The mere fact that the privilege of refund
was included in Section 5, and not in Section 1, is insufficient to support
petitioner's 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.
 TAX1 CASE DIGESTS
General Principles

Finally, petitioner 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.” We disagree. According to an eminent authority on taxation,
“there is no tax exemption solely on the ground of equity.”

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9 Code (Retention of Money for Satisfaction of Indebtedness to Government)
CALTEX PHILIPPINES, INC. vs. COA
[G.R. No. 92585. May 8, 1992.]
DOCTRINE
Tax exemptions as a general rule are construed strictly against the grantee and
liberally in favor of the taxing authority. The burden proof rests upon the party
claiming exemption to prove that it 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.
Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of the 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.
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.
FACTS
The Oil Price Stabilization Fund (OPSF) was created under Sec. 8, PD 1956,
as amended by EO 137 for the purpose of minimizing frequent price changes
brought about by exchange rate adjustments. It will be used to reimburse the
oil companies for cost increase and possible cost under recovery incurred due
to reduction of domestic prices.
COA sent a letter to Caltex directing the latter to remit to the OPSF its collection.
Caltex requested COA for an early release of its reimbursementcertificates
which the latter denied.
COA disallowed recover of financing charges, inventory losses and sales to
marcopper and atlas but allowed the recovery of product sale or those arising
from export sales.
Petitioner’s Contention:
Department of Finance issued Circular No. 4-88 allowing
reimbursement.Denial of claim for reimbursement would be inequitable. NCC
(compensation)and Sec. 21, Book V, Title I-B of the Revised Administrative
Page 20 of 26
allows offsetting.
Amounts due do not arise as a result of taxation since PD 1956 did not create
a source of taxation, it instead established a special fund. This lack of public
purpose behind OPSF exactions distinguishes it from tax.
Respondent’s Contention:
Based on Francia v. IAC , there’s no offsetting of taxes against the the claims
that a taxpayer may have against the government, as taxes do not arise from
contracts or depend upon the will of the taxpayer, but are imposed by law.
ISSUE
Whether the amounts due from Caltex to the OPSF may be offset against
Caltex’s outstanding claims from said funds
RULING
Anent the claims airising from sales to the National Power Corporation,
underrecovery arising from sales to NPC are reimbursable because NPC was
granted full exemption from the payment of taxes; to prove this, respondents
trace the laws providing for such exemption. Fiscal Incentives Regulatory
Board's Resolution No. 1787 of 24 June 1987 provides, in part, "that the tax
and duty exemption privileges of the National Power Corporation, including
those pertaining to its domestic purchases of petroleum and petroleum
products . . . are restored effective March 10, 1987." In a Memorandum issued
on 5 October 1987 by the Office of the President, NPC's tax exemption was
confirmed and approved. Futhermore, the intention to exempt sales of
petroleum products to the NPC is evident in the recently passed Republic Act
No. 6952 establishing the Petroleum Price Standby Fund to support the OPSF.
Hence, Caltex can recover its claim arising from sales of petroleum products to
the NAPOCOR.
With respect to its claim for reimbursement on sales to Atlas and Marcopper,
Caltex cannot rely on LOI 1416 as such was never published in the OG as
required by Art. 2 of the NCC, and therefore, has no binding effect. Also, 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 the case at bar, Caltex failed to prove that it is entitled, as a consequence of
its sales to ATLAS and MARCOPPER, to claim reimbursement from the OPSF
 TAX1 CASE DIGESTS
General Principles
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 That compensation had been the practice in the past can set no valid
respect to the payment of OPSF dues. precedent. Such a practice has no legal basis. Lastly, R.A. No. 6952 does not
authorize oil companies to offset their claims against their OPSF contributions.
An examination of the records of this case shows that Caltex failed to prove or Instead, it prohibits the government from paying any amount from the
substantiate its contention that the amount of P130,420,235.00 is still pending Petroleum Price Standby Fund to oil companies which have outstanding
before the OEA and the DOF. Since the amount has already been passed upon obligations with the government, without said obligation being offset first subject
by the OEA, the ruling of COA disapproving said claim must be upheld. to the rules on compensation in the Civil Code.

As to the offsetting, there is no merit in Caltex’s contention that the OPSF WHEREFORE, in view of the foregoing, judgment is hereby rendered
contributions are not for a public purpose because they go to a special fund of AFFIRMING the challenged decision of the Commission on Audit, except that
the government. Taxation is no longer envisioned as a measure merely to raise portion thereof disallowing petitioner's claim for reimbursement of
revenue to support the existence of the government; taxes may be levied with underrecovery arising from sales to the National Power Corporation, which is
a regulatory purpose to provide means for the rehabilitation and stabilization of hereby allowed.
a threatened industry which is affected with public interest as to be within the
police power of the state. There can be no doubt that the oil industry is greatly
imbued with public interest as it vitally affects the general welfare. Any
unregulated increase in oil prices could hurt the lives of a majority of the people
and cause economic crisis of untold proportions. It would have a chain reaction
in terms of, among others, demands for wage increases and upward spiralling
of the cost of basic commodities. The stabilization then of oil prices is of prime
concern which the state, via its police power, may properly address.

Also, 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.

Furthermore, technically, in respect to the taxes for the OPSF, the oil
companies merely act as agents for the Government in the latter's collection
since the taxes are, in reality, passed unto the end-users –the consuming
public. In that capacity, the petitioner, as one of such companies, has the
primary obligation to account for and remit the taxes collected to the
administrator of the OPSF. This duty stems from the fiduciary relationship
between the two; petitioner certainly cannot be considered merely as a debtor.
In respect, therefore, to its collection for the OPSF vis-a-vis its claims for
reimbursement, no compensation is likewise legally feasible. Firstly, the
Government and the petitioner cannot be said to be mutually debtors and
creditors of each other. Secondly, there is no proof that petitioner's claim is
already due and liquidated.

Page 21 of 26
 TAX1 CASE DIGESTS
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10
CIR vs. CA
[G.R. No. 124043. October 14, 1960.]
DOCTRINE
Because taxes are the lifeblood of the nation, the Court has always applied the
doctrine of strict interpretation in construing tax exemptions. Furthermore, a
claim of statutory exemption from taxation should be manifest and
unmistakable from the language of the law on which it is based. Thus, the
claimed exemption "must expressly be granted in a statute stated in a language
too clear to be mistaken."
Tax exemption, when granted; requisites: a non-stock, non-profit educational
institution must prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly, and exclusively
for educational purposes.
FACTS
YMCA is a non-stock, non-profit institution which conducts various programs
and activities that are beneficial to the public, especially the young people,
pursuant to its religious, educational, and charitable objectives.
In 1980, YMCA earned, among others, an income of P676,829.80 from leasing
out a portion of its premises to small shop owners, like restaurants and canteen
operators, and P44,259.00 from parking fees collected from non-members.
On July 2, 1984, the CIR issued an assessment to YMCA in the total amount
of P415,615.01 including surcharge and interest, for deficiency income tax,
deficiency expanded withholding taxes on rentals and professional fees and
deficiency withholding tax on wages.
YMCA formally protested the assessment and, as a supplement to its basic
protest, filed a letter dated October 8, 1989.
In reply, the CIR denied the claims of YMCA.
YMCA then filed a petition for review at the CTA on march 14, 1989 which ruled
in favor of YMCA finding that the leasing of facilities of the YMCA are
reasonably incidental to and reasonably necessary for the accomplishment of
the objectives of the YMCA.
Page 22 of 26
The CIR elevated the case to the CA which initially decided in favor of the CIR.
Upon MR of the YMCA, CA reversed itself. CIR’s MR was denied.
Hence, this petition for review under Rule 45 of the RoC.
ISSUE
Is the income derived from rentals of real property owned by the YMCA
(established as a “welfare, educational, and charitable non-profit organization)
subject to income tax under the NIRC and the Constitution?
RULING
Yes. The NIRC provides:
SEC. 27. Exemptions from tax on corporations. -- The following organizations
shall not be taxed under this Title in respect to income received by them as such
--
(g) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other
non-profitable purposes, no part of the net income of which inures to the benefit
of any private stockholder or member;
Notwithstanding the provision in the preceding paragraphs, the income of
whatever kind and character of the foregoing organization from any of their
properties, real or personal, or from any of their activities conducted for profit,
regardless of the disposition made of such income, shall be subject to the tax
imposed under this Code. (as amended by Pres. Decree No. 1457)
Because taxes are the lifeblood of the nation, the Court has always applied the
doctrine of strict interpretation in construing tax exemptions. Furthermore, a
claim of statutory exemption from taxation should be manifest and
unmistakable from the language of the law on which it is based. Thus, the
claimed exemption “must expressly be granted in a statute stated in a language
too clear to be mistaken.”
In the instant case, the exemption claimed by the YMCA is expressly disallowed
by the very wording of the last paragraph of then Section 27 of the NIRC which
mandates that the income of exempt organizations (such as the YMCA) from
any of their properties, real or personal, be subject to the imposed by the same
Code. Because the last paragraph of said section unequivocally subjects to tax
the rent income f the YMCA from its rental property,the Court is duty-bound to
 TAX1 CASE DIGESTS
General Principles
abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction.

A reading of the last par. of Sec. 27 shows that the income from any property
of exempt organizations, as well as that arising from any activity it conducts for
profit, is taxable. The phrase “any of their activities conducted for profit” does
not qualify the word “properties.” This makes income from the property of the
organization taxable, regardless of how that income is used -- whether for profit
or for lofty non-profit purposes.

The rental income is taxable regardless of whence such income is derived and
how it used or disposed of. Where the law does not distinguish, neither should
we.

Under the Constitution, what is exempted is not the institution itself; those
exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational
purposes. The tax exemption covers property taxes only. The income tax
exemption claimed by the YMCA finds no basis in Art. VI, Sec. 28(3) of the
Constitution.

Under Art. XIV, Sec. 4(3) of the Charter, YMCA is exempt from the payment of
property tax but not income tax on the rentals from its property. . The bare
allegation alone that it is a non-stock, non-profit educational institution is
insufficient to justify its exemption from the payment of income tax.

Laws allowing tax exemption are construed strictissimi juris. Hence, for the
YMCA to be granted the exemption it claims under the aforecited provision, it
must prove with substantial evidence that (1) it falls under the classification non-
stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and exclusively for
educational purposes. However, not a scintilla of evidence was submitted by
YMCA to prove that it met the said requisites.

WHEREFORE, the petition is GRANTED.

Page 23 of 26
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11
PASCUAL vs. SECRETARY OF PUBLIC WORKS
[G.R. No. L-10405. December 29, 1960.]
DOCTRINES
Generally, under the express or implied provisions of the constitution, public
funds may be used only for a public purpose. The right of the legislature to
appropriate public funds is correlative with its right to tax, and, under
constitutional provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the devotion thereof to
another purpose, no appropriate of state funds can be made for other than a
public purpose.
A law appropriating the public revenue is invalid if the public advantage or
benefit, derived from such expenditure, is merely incidental in the promotion of
a particular enterprise
FACTS
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of
Rizal, instituted this action for declaratory relief, with injunction, upon the
ground that Republic Act No. 920, entitled "An Act Appropriating Funds for
Public Works", approved on June 20, 1953, an item of P85,000.00, "for the
construction, reconstruction, repair, extension and improvement" of "Pasig
feeder road terminals";
that, at the time of the passage and approval of said Act, the aforementioned
feeder roads were "nothing but projected and planned subdivision roads, not
yet constructed, within the Antonio Subdivision situated at Pasig, Rizal" which
projected feeder roads "do not connect any government property or any
important premises to the main highway"; that the aforementioned Antonio
Subdivision were private properties of respondent Jose C. Zulueta, who, at the
time of the passage and approval of said Act, was a member of the Senate of
the Philippines;
that on May 29, 1953, respondent Zulueta, addressed a letter to the Municipal
Council of Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by
the council, subject to the condition "that the donor would submit a plan of the
said roads and agree to change the names of two of them"; that no deed of
donation in favor of the municipality of Pasig was, however, executed; that on
July 10, 1953, respondent Zulueta wrote another letter to said council, calling
attention to the approval of Republic Act No. 920, and the sum of P85,000.00
Page 24 of 26
appropriated therein for the construction of the projected feeder roads in
question; that the municipal council of Pasig endorsed said letter of respondent
Zulueta to the District Engineer of Rizal, who, up to the present "has not made
any endorsement thereon";
that inasmuch as the projected feeder roads in question were private property
at the time of the passage and approval of Republic Act No. 920, the
appropriation of P85,000.00 therein made, for the construction, reconstruction,
repair, extension and improvement of said projected feeder roads, was "illegal
and, therefore, void ab initio"; that said appropriation of P85,000.00 was made
by Congress because its members were made to believe that the projected
feeder roads in question were "public roads and not private streets of a private
subdivision'";
that, "in order to give a semblance of legality, when there is absolutely none, to
the aforementioned appropriation", respondent Zulueta executed, on
December 12, 1953, while he was a member of the Senate of the Philippines,
an alleged deed of donation—copy of which is annexed to the petition—of the
four (4) parcels of land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged deed of
donation was, on the same date, accepted by the then Executive Secretary;
that being subject to an onerous condition, said donation partook of the nature
of a contract; that, as such, said donation violated the provision of our
fundamental law prohibiting members of Congress from being directly or
indirectly financially interested in any contract with the Government, and,
hence, is unconstitutional, as well as null and void ab initio, for the construction
of the projected feeder roads in question with public funds would greatly
enhance or increase the value of the aforementioned subdivision of respondent
Zulueta, "aside from relieving him from the burden of constructing his
subdivision streets or roads at his own expense";
that the construction of said projected feeder roads was then being undertaken
by the Bureau of Public Highways; and that, unless restrained by the court, the
respondents would continue to execute, comply with, follow and implement the
aforementioned illegal provision of law, "to the irreparable damage, detriment
and prejudice not only to the petitioner but to the Filipino nation."
ISSUE
1. Whether or not the petitioner has locus standi to file the case
2. Whether or Not the deed of donation and the appropriation of funds
stipulated in RA 920 are constitutional.
 TAX1 CASE DIGESTS
General Principles
RULING
1. Whether or not the petitioner has locus standi to file the case
Petitioner has standing. It is well settled that the validity of a statute may be
contested only by one who will sustain a direct injury in consequence of its
enforcement. Yet, there are many decisions nullifying, at the instance of
taxpayers, laws providing for the disbursement of public funds, upon the theory
that "the expenditure of public funds by an officer of the State for the purpose
of administering an unconstitutional act constitutes an misapplication of such
funds," which may be enjoined at the request of a taxpayer. Although there are
some decisions to the contrary, 7 the prevailing view in the United States is
stated in the American Jurisprudence as follows:
"In the determination of the degree of interest essential to give the requisite standing
to attack the constitutionality of a statute the general rule is that only persons
individually affected, but also taxpayers, have sufcient interest in preventing the
illegal expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys."
2. Whether or Not the deed of donation and the appropriation of
funds stipulated in RA 920 are constitutional.
It is a general rule that the legislature is without power to appropriate public
revenue for anything but a public purpose. * * * It is the essential character of
the direct object of the expenditure which must determine its validity as
justifying a tax, and not the magnitude of the interests to be affected nor the
degree to which the general advantage of the community, and thus the public
welfare, may be ultimately benefited by their promotion. Incidental advantage
to the public or to the state, which results from the promotion of private interests
and the prosperity of private enterprises or business, does not justify their aid
by the use of public money." (25 R.L.C. pp. 398-400; Italics supplied.)
no appropriation of state funds can be made for other than a public purpose. *
**
"The test of the constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interests, as opposed to
the furtherance of the advantage of individuals, although each advantage to
individuals might incidentally serve the public. * * * ." (81 C.J.S. p. 1147; italics
supplied.)
The validity of a statute depends upon the powers of Congress at the time of
its passage or approval, not upon events occurring, or acts performed,
subsequently thereto. Referring to the P85,000.00 appropriation for the
projected feeder roads in question, the legality thereof depended upon whether
said roads were public or private property when the bill, which, later on, became
Republic Act No. 920, was passed by Congress, or, when said bill was
approved by the President and the disbursement of said sum became effective,
or on June 20, 1953. Inasmuch as the land on which the projected feeder roads
were to be constructed belonged then to respondent Zulueta, the result is that
said appropriation sought a private purpose, and, hence, was null and void.4
The donation to the Government, over five (5) months after the approval and
effectivity of said Act, made, according to the petition, for the purpose of giving
a "semblance of legality", or legalizing, the appropriation in question, did not
cure its aforementioned basic defect. Consequently, a judicial nullification of
said donation need not precede the declaration of unconstitutionality of said
appropriation.

The rule is set forth in Corpus Juris Secundum in the following language:
"In accordance with the rule that the taxing power must be exercised for public
purposes only, money raised by taxation can be expended only for public
purposes and not for the advantage of private individuals."

Explaining the reason underlying said rule, Corpus Juris Secundum states:
"Generally, under the express or implied provisions of the constitution, public
funds may be used only for a public purpose. The right of the legislature to
appropriate funds is correlative with its right to tax, and, under constitutional
provisions against taxation except for public purposes and prohibiting the
collection of a tax for one purpose and the devotion thereof to another purpose,

Page 25 of 26
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12
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY vs. HON.
FERDINAND J. MARCOS
[G.R. No. 120082, September 11, 1996]
DOCTRINE
Tax statutes are construed strictly against the government and liberally in favor
of the taxpayer. But since taxes are paid for civilized society, or are the lifeblood
of the nation, the law frowns against exemptions from taxation and statutes
granting tax exemptions are thus construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.
FACTS
Mactan Cebu International Airport Authority (MCIAA) was created by virtue of
Republic Act 6958. Since the time of its creation, MCIAA enjoyed the privilege
of exemption from payment of realty taxes in accordance with Section 14 of its
Charter. However on 11 October 1994, the Office of the Treasurer of Cebu,
demanded for the payment of realty taxes on several parcels of land belonging
to the petitioner.
Petitioner objected to such demand for payment as baseless and unjustified
and asserted that it is an instrumentality of the government performing
governmental functions, which puts limitations on the taxing powers of local
government units.
The City refused to cancel and set aside petitioner’s realty tax account, insisting
that the MCIAA is a government controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Government Code (LGC), and not an instrumentality of the government but
merely a government owned corporation performing proprietary functions.
MCIAA paid its tax account “under protest” when City is about to issue a warrant
of levy against the MCIAA’s properties.
MCIAA filed a Petition of Declaratory Relief with the RTC contending that the
taxing power of local government units do not extend to the levy of taxes or
fees on an instrumentality of the national government. It contends that by the
nature of its powers and functions, it has the footing of an agency or
instrumentality of the national government; which claim the City rejects. The
trial court dismissed the petition, citing that close reading of the LGC provides
the express cancellation and withdrawal of tax exemptions of Government
Owned and Controlled Corporations.
Page 26 of 26
ISSUE
Whether or not MCIAA is exempted form realty taxes
RULING
Tax statutes are construed strictly against the government and liberally in favor
of the taxpayer. But since taxes are paid for civilized society, or are the lifeblood
of the nation, the law frowns against exemptions from taxation and statutes
granting tax exemptions are thus construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.
A claim of exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. Taxation is the rule, exemption
therefrom is the exception. However, if the grantee of the exemption is a
political subdivision or instrumentality, the rigid rule of construction does not
apply because the practical effect of the exemption is merely to reduce the
amount of money that has to be handled by the government in the course of its
operations.
Further, since taxation is the rule and exemption therefrom the exception, the
exemption may be withdrawn at the pleasure of the taxing authority. The only
exception to this rule is where the exemption was granted to private parties
based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the
Constitution.
MCIAA is a “taxable person” under its Charter (RA 6958), and was only
exempted from the payment of real property taxes. The grant of the privilege
only in respect of this tax is conclusive proof of the legislative intent to make it
a taxable person subject to all taxes, except real property tax.
Since Republic Act 7160 or the Local Government Code (LGC) expressly
provides that “All general and special laws, acts, city charters, decrees [sic],
executive orders, proclamations and administrative regulations, or part of parts
thereof which are inconsistent with any of the provisions of this Code are hereby
repealed or modified accordingly.”
With that repealing clause in the LGC, the tax exemption provided for in RA
6958 had been expressly repealed by the provisions of the LGC. Therefore,
MCIAA has to pay the assessed realty tax of its properties effective after
January 1, 1992 until the present.