6th WEEK: Continue Discussion on Assigned Sections of TRAIN LAW 1 CTA DECISION: The Tax Court held that
TA DECISION: The Tax Court held that the proceeds of sales of BOAC passage tickets in the
MADRIGAL V. RAFFERTY 38 P 414;
FACTS
Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnership
• On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73
• Vicente Madrigal was contending that the said declared income does not represent his income
for the year 1914 as it was the income of his conjugal partnership with Paterno. He said that in
computing for his additional income tax, the amount declared should be divided by 2.
• The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United
States Commissioner of Internal Revenue decided against the claim of Madrigal.
• Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged
to have been wrongfully and illegally assessed and collected by the CIR.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2
in computing for the additional income tax.
HELD: NO.
The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon
income and not upon capital and property.
• The essential difference between capital and income is that capital is a fund; income is a flow.
A fund of property existing at an instant of time is called capital. A flow of services rendered by
that capital by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called income. Capital is wealth, while income is
the service of wealth.
• As Paterno has no estate and income, actually and legally vested in her and entirely distinct
from her husband’s property, the income cannot properly be considered the separate income of
the wife for the purposes of the additional tax.
• To recapitulate, Vicente wants to half his declared income in computing for his tax since he is
arguing that he has a conjugal partnership with his wife. However, the court ruled that the one
that should be taxed is the income which is the flow of the capital, thus it should not be divided
into 2.
CIR V. BOAC 149 S 395;
FACTS: BOAC is a British Government-owned corporation organized and existing under the
laws of the United Kingdom.It is engaged in the international airline business. It did not carry
passengers or cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philip. — Wamer Barnes and Company,
Ltd., and later Qantas Airways — which was responsible for selling BOAC tickets covering
passengers and cargoes.
It is admitted that BOAC had no landing rights for traffic purposes in the Philippines,
and was not granted a Certificate of public convenience, except for a nine-month period, partly in
1961 and partly in 1962, when it was granted a temporary landing permit .
Petitioner assessed BOAC for deficiency income taxes covering the years 1959 to
1963. BOAC paid the assessment under protest.
Philippines do not constitute BOAC income from Philippine sources "since no service of carriage
of passengers or freight was performed by BOAC within the Philippines" and, therefore, said
income is not subject to Philippine income tax.
RESPONDENT’S MAIN ARGUMENT: BOAC's service of transportation is performed outside
the Philippines, the income derived is from sources without the Philippines and, therefore, not
taxable under our income tax laws.
ISSUES: Whether the revenue derived by BOAC from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income of BOAC from Philippine
sources, and, accordingly, taxable.
HELD:YES. Sales of tickets in the Philippines is taxable.
The source of an income is the property, activity or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. The absence of flight operations to and
from the Philippines is not determinative of the source of income or the site of income taxation.
In BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income:
1. The tickets exchanged hands and payments for fares were also made in Philippine
currency.
2. The site of the source of payments is the Philippines.
3. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying
the protection accorded by the Philippine government.
4. In consideration of such protection, the flow of wealth should share the burden of
supporting the government.
The definition of gross income under section 32 of tax code is broad and
comprehensive to include proceeds from sales of transport documents.
NOTE: Pursuant to Presidential Decree No. 69, international carriers are now taxed of 2-½ per
cent on their cross Philippine billings.
CIR V. MARUBENII GR 137377, DEC. 18, 2001;
FACTS
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985
deficiency income, branch profit remittance and contractor’s taxes from Marubeni Corp after
finding the latter to have properly availed of the tax amnesty under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the
Manila branch’s books of accounts for fiscal year ending March 1985, and found that respondent
had undeclared income from contracts with NDC and Philphos for construction of a wharf/port
complex and ammonia storage complex respectively.
On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency
taxes. CIR claims that the income respondent derived were income from Philippine sources,
hence subject to internal revenue taxes. On Sept 1986, respondent filed 2 petitions for review
with CTA: the first, questioned the deficiency income, branch profit remittance and contractor’s
tax assessments and second questioned the deficiency commercial broker’s assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax
amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under
Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec
15, 1986 and stated those who already availed amnesty under EO 41 should file an amended
return to avail of the new benefits. Marubeni filed a supplemental tax amnesty return on Dec 15,
1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the
deficiency taxes. CA affirmed on appeal.
ISSUE: W/N Marubeni is exempted from paying tax
HELD: YES.
1. On date of effectivity 
CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in
Sec 4b of EO 41:
“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein
granted: xxx b)  Those with income tax cases already filed in Court as of the effectivity hereof;”
Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a
case had already been filed and was pending before the CTA and Marubeni therefore fell under
the exception. However, the point of reference is the date of effectivity of EO 41 and that the
filing of income tax cases must have been made before and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with
CTA on Sept 26, 1986. When EO 41 became effective, the case had not yet been filed.
Marubeni does not fall in the exception and is thus, not disqualified from availing of the amnesty
under EO 41 for taxes on income and branch profit remittance.
The difficulty herein is with respect to the contractor’s tax assessment (business tax) and
respondent’s availment of the amnesty under EO 64, which expanded EO 41’s coverage. When
EO 64 took effect on Nov 17, 1986, it did not provide for exceptions to the coverage of the
amnesty for business, estate and donor’s taxes. Instead, Section 8 said EO provided that:
“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect.”
Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of
effectivity. The general rule is that an amendatory act operates prospectively. It may not be
given a retroactive effect unless it is so provided expressly or by necessary implication and no
vested right or obligations of contract are thereby impaired.
2. On situs of taxation  28 (A) (1) of the 1997 NIRC being a general rule.  Petitioner, being an international carrier with
Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the
deficiency tax because the income from the projects came from the “Offshore Portion” as
opposed to “Onshore Portion”. It claims all materials and equipment in the contract under
the “Offshore Portion” were manufactured and completed in Japan, not in the Philippines,
and are therefore not subject to Philippine taxes.
(BG: Marubeni won in the public bidding for projects with government corporations NDC and
Philphos. In the contracts, the prices were broken down into a Japanese Yen Portion (I and II)
and Philippine Pesos Portion and financed either by OECF or by supplier’s credit. The Japanese
Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion II and
the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has
already paid the Onshore Portion, a fact that CIR does not deny.)
CIR argues that since the two agreements are turn-key, they call for the supply of both materials
and services to the client, they are contracts for a piece of work and are indivisible. The situs of
the two projects is in the Philippines, and the materials provided and services rendered were all
done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondent’s
entire receipts from the contracts, including its receipts from the Offshore Portion, constitute
income from Philippine sources. The total gross receipts covering both labor and materials
should be subjected to contractor’s tax (a tax on the exercise of a privilege of selling services or
labor rather than a sale on products).
Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in
the Philippines because some of them were completed in Japan (and in fact subcontracted) in
accordance with the provisions of the contracts. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen Portion I
were made and completed in Japan. These services were rendered outside Philippines’
taxing jurisdiction and are therefore not subject to contractor’s tax.Petition denied.
SOUTH AFRICAN AIRWAYS V. CIR GR 180356, FEB. 16, 2010;
FACTS:
 South African Airways, a foreign corporation with no license to do business in the
Philippines, sells passage documents for off-line flights through Aerotel Limited, general
sales agent in the Philippines 
 Feb 5, 2003: Petitioner filed a claim for refund erroneously paid tax on Gross
Philippine Billing (GPB) for the year 2010.  
 CTA: denied - petitioner is a resident foreign corp. engaged in trade or business in the
Philippines and therefore is NOT liable to pay tax on GPB under the Sec. 28 (A) (3) (a) of
the 1997 NIRC but cannot be allowed refund because liable for the 32% income tax from
its sales of passage documents.  
 This is upheld by the CTA and CTA En Banc
Issue:
1. W/N  petitioner is engaged in trade or business in the Philippines is subject to 32% income
tax.
2. W/N petitioner is entitled to refund
HELD: CTA En Banc decision is set side 
1. Yes.  Since it does not maintain flights to or from the Philippines, it is not taxable under Sec.
28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further
posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from
paying any other income tax for its sale of passage documents in the Philippines.  But, Sec. 28
(A)(1) of the 1997 NIRC does not exempt all international air carriers from the coverage of Sec.
no flights originating from the Philippines, does not fall under the exception. As such, petitioner
must fall under the general rule. This principle is embodied in the Latin maxim, exception firmat
regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as
coming within the purview of the general rule.

2. Underterminable.  Although offsetting of tax refund with tax deficiency is unavailing under Art.
1279 of the Civil Code, in CIR v. CTA it granted when deficiency assessment is intimately
related and inextricably intertwined with the right to claim for a tax refund.  Sec. 72 Chapter XI of
1997 NIRC is not applicable where petitioner's tax refund claim assumes that the tax return that
it filed were correct because petitioner is liable under Sec. 28 (A)(1), the correctness is now put
in doubt and refund cannot be granted.  It cannot be assumed that the liabilities for two different
provisions would be the same.  There is a necessity for the CTA to receive evidence and
establish the correct amount before a refund can be granted.
ASSOCIATION OF NON-PROFIT CLUBS V. CIR, GR 228539, JUNE 26, 2019
FACTS:
 August 3, 2012: Bureau of Internal Revenue (BIR) issued issued Revenue
Memorandum Circular (RMC) No. 35-2012 entitled “"Clarifying the Taxability of Clubs
Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit
Purposes” which was addressed to all revenue officials, employees, and others concerned
for their guidance regarding the income tax and Valued Added Tax (VAT) liability of the
said recreational clubs.
 RMC No. 35-2012 states that "clubs which are organized and operated exclusively for
pleasure, recreation, and other non-profit purposes are subject to income tax under the
National Internal Revenue Code of 1997, as amended (1997 NIRC)."  In justifying the
interpration, the BIR raised the doctrine of casus omissus pro omisso habendus est, a
person, object, or thing omitted from an enumeration must be held to have been omitted
intentionally. The provision in the 1977 Tax Code which granted income tax exemption to
such recreational clubs was omitted in the 1997 NIRC, as amended and  Section 105,
Chapter I, Title IV of the 1997 NIRC, which states that even a nonstock, nonprofit private
organization or government entity is liable to pay VAT on the sale of goods or services.
 October 25, 2012: During the meeting of ANPC and other club member
representatives with Atty. Elenita Quimosing (Atty. Quimosing), Chief of Staff and
Operations Group of the BIR, Atty. Quimosing suggested the attendees to submit a position
paper to the BIR regarding their concerts about the Circular.   
 September Since the BIR has not action upon NPC’s request on its position paper for
the non-application of RMC No. 35-2012, ANPC, filed before the RTC a petition for
declaratory relief to declare RMC no. 35-2012 invalid, unjust, oppressive, confiscatory, and
in violation of the due process clause of the Constitution for it is beyond the BIR’s rule-
making authority.
 RTC: Denied the petition for declaratory relief and upheld RMC No. 35-2012
 ANPC filed a petition for review on certiorari raising pure questions of law
ISSUES: 
1.    W/N the doctrine of hierarchy of courts should apply and the matter should be first elevated
the matter to the Secretary of Finance for review pursuant to Section 4, Title I of the 1997 NIRC.
2.    W/N RMC No. 35-2012 is constitutional.
HELD: Partly meritorious.
1.    NO.  The petition for review on certiorari, filed pursuant to Section 2 (c), Rule 41 in relation
to Rule 45 of the Rules of Court, is the sole remedy to appeal a decision of the RTC in cases
involving pure questions of law
 The doctrine of hierarchy of courts is violated only when relief may be had through
multiple fora having concurrent jurisdiction over the case, such as in petitions for certiorari,
mandamus, and prohibition which are concurrently cognizable either by the Regional Trial
Courts, the Court of Appeals, or the Supreme Court.
 Uy v. Contreras: This Court, the Court of Appeals, and the Regional Trial Courts have
concurrent original jurisdiction to issue writs of certiorari, prohibition, mandamus, quo
warranto, and habeas corpus, such concurrence does not accord litigants unrestrained
freedom of choice of the court to which application therefor may be directed. There is a
hierarchy of courts determinative of the venue of appeals which should also serve as a
general determinant of the proper forum for the application for the extraordinary writs.
  
2.    Yes. 
 RMC No. 35-2012 erroneously foisted a sweeping interpretation that membership fees
and assessment dues are sources of income of recreational clubs from which income tax
liability may accrue.  As correctly argued by ANPC, membership fees, assessment dues,
and other fees of similar nature only constitute contributions to and/or replenishment of the
funds for the maintenance and operations of the facilities offered by recreational clubs to
their exclusive members.  They represent funds "held in trust" by these clubs to defray their
operating and general costs and hence, only constitute infusion of capital.
 Well-enshrined principle in our jurisdiction that the State cannot impose a tax on
capital as it constitutes an unconstitutional confiscation of property.  An income tax is
arbitrary and confiscatory if it taxes capital because capital is not income.
 Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary (G.R. No. 108524, November 10, 1994): Court held that "as a matter of power, a
court, when confronted with an interpretative rule, [such as RMC No. 35-2012] is free to (i)
give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment;
or (iii) give some intermediate degree of authoritative weight to the interpretative rule."  By
sweepingly including in RMC No. 35-2012 all membership fees and assessment dues in its
classification of "income of recreational clubs from whatever source'' that are "subject to
income tax,"the BIR exceeded its rule-making authority.
 In the same way, the Court declares as invalid the BIR's interpretation in RMC No. 35-
2012 that membership fees, assessment dues, and the like are part of "the gross receipts
of recreational clubs" that are "subject to VAT.  Basic principle that before a transaction is
imposed VAT, a sale, barter or exchange of goods or properties, or sale of a service is
required.  This is true even if such sale is on a cost-reimbursement basis.