LAW ON TAXATION: Batch 3 (case 89-106)

CASE 89: MENDOZA

DIAZ v SECRETARY OF FINANCE
DOCTRINE: In fine, the Commissioner of Internal Revenue did not usurp
legislative prerogative or expand the VAT laws coverage when she
sought to impose VAT on tollway operations. Section 108(A) of the Code
clearly states that services of all other franchise grantees are subject to
VAT, except as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to franchise tax
under the latter provision. Neither are their services among the VATexempt transactions under Section 109 of the Code.
The VAT on franchise grantees has been in the statute books since 1994
when R.A. 7716 or the Expanded Value-Added Tax law was passed. It
is only now, however, that the executive has earnestly pursued the VAT
imposition against tollway operators. The executive exercises exclusive
discretion in matters pertaining to the implementation and execution of
tax laws. Consequently, the executive is more properly suited to deal
with the immediate and practical consequences of the VAT imposition.
FACTS: This is a case filed for declaratory relief by petitioners
challenging the imposition of VAT on toll fees. Petitioners allege that the
BIR attempted during the administration of President Gloria MacapagalArroyo to impose VAT on toll fees. The imposition was deferred,
however, in view of the consistent opposition of Diaz and other sectors to
such move. But, upon President Benigno C. Aquino IIIs assumption of
office in 2010, the BIR revived the idea and would impose the challenged
tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the
NIRC, intend to include toll fees within the meaning of sale of services
that are subject to VAT; that a toll fee is a users tax, not a sale of
services; that to impose VAT on toll fees would amount to a tax on public
service; and that, since VAT was never factored into the formula for
computing toll fees, its imposition would violate the non-impairment
clause of the constitution.
ISSUES:WON toll fees collected by tollway operators be subjected to
value- added tax?

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RULING: YES, VAT on toll may be implemented because this is not a

case of a tax on tax. Tollway operators are in the nature of franchise
grantees
The relevant law in this case is Section 108 of the NIRC, as
amended. VAT is levied, assessed, and collected, according to Section
108, on the gross receipts derived from the sale or exchange of services
as well as from the use or lease of properties. The third paragraph of
Section 108 defines sale or exchange of services as follows:
The phrase sale or exchange of services means the performance of all
kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking
goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes; common carriers
by air and sea relative to their transport of passengers, goods or cargoes
from one place in the Philippines to another place in the Philippines;
sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric utilities,
telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this Code and nonlife insurance companies (except their crop insurances), including surety,
fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties.
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than P10 million and gas
and water utilities) that Section 119 spares from the payment of

VAT. The word franchise broadly covers government grants of a

special right to do an act or series of acts of public concern.
In sum, fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense. A tax is imposed under the taxing
power of the government principally for the purpose of raising revenues
to fund public expenditures Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and expenses
incurred in the construction, maintenance and operation of the tollways,
as well as to assure them a reasonable margin of income. Although toll
fees are charged for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax. Taxes may
be imposed only by the government under its sovereign authority, toll
fees may be demanded by either the government or private individuals or
entities, as an attribute of ownership.
Parenthetically, VAT on tollway operations cannot be deemed a tax on
tax due to the nature of VAT as an indirect tax. In indirect taxation, a
distinction is made between the liability for the tax and burden of the tax.
The seller who is liable for the VAT may shift or pass on the amount of
VAT it paid on goods, properties or services to the buyer. In such a case,
what is transferred is not the sellers liability but merely the burden of the
VAT.
Thus, the seller remains directly and legally liable for payment of the
VAT, but the buyer bears its burden since the amount of VAT paid by the
former is added to the selling price. Once shifted, the VAT ceases to be a
tax and simply becomes part of the cost that the buyer must pay in order
to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of
services, who in this case is the tollway operator, is the person liable for
VAT. The latter merely shifts the burden of VAT to the tollway user as
part of the toll fees.

tollway operators gross receipts and not necessarily on the toll fees.
Although the tollway operator may shift the VAT burden to the tollway
user, it will not make the latter directly liable for the VAT. The shifted VAT
burden simply becomes part of the toll fees that one has to pay in order
to use the tollways.
CASE 90:GUEVARA, CARLO
PROGRESSIVE DEVT CORPORATION v QC
DOCTRINE: LICENSE FEES are imposed in the exercise of police
power primarily for purposes of regulation, while the TAXES are imposed
under the taxing power primarily for purposes of raising revenues. Thus,
if the generating of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not
make the imposition a tax.
FACTS: On 24 December 1969, the City Council of respondent Quezon
City adopted Ordinance No. 7997 (Market Code of Quezon City).
According to Sec. 3: Privately owned and operated public markets shall
submit monthly to the Treasurer's Office, a certified list of stallholders
showing the amount of stall fees or rentals paid daily by each
stallholderfailure to submit shall be subject to penalties.
The Market Code was later amended imposing a five percent (5 %) tax
on gross receipts on rentals or lease of space in privately-owned public
markets. In case of consistent failure to pay the percentage tax for the (3)
consecutive months, the City shall revoke the permit of the privatelyowned market to operate and/or take any other appropriate action or
remedy allowed by law for the collection of the overdue percentage tax
and surcharge.
Petitioner Progressive Development Corporation (owner of Farmers
Market & Shopping Center) filed a Petition for Prohibition with
Preliminary Injunction against respondent in the CFI on the ground that
the supervision fee or license tax imposed
is in reality a tax on
income which respondent may not impose, the same being expressly
prohibited by Republic Act No. 2264, as amended.

For this reason, VAT on tollway operations cannot be a tax on tax even
if toll fees were deemed as a users tax. VAT is assessed against the

LAW ON TAXATION: Batch 3 (case 89-106)

Respondent argued that it had authority to enact the ordinances. The

Solicitor General also contended that the tax on gross receipts was not a
tax on income but one imposed for the enjoyment of the privilege to
engage in a particular trade or business which was within the power of
respondent to impose.
The lower court dismissed the petition ruling that the questioned
imposition is not a tax on income, but rather a privilege tax or license fee
which local governments, like respondent, are empowered to impose and
collect. Petitioner filed a petition for review with the SC.
ISSUE: WON the tax imposed by respondent on gross receipts of stall
rentals is properly characterized as partaking of the nature of an income
tax or, alternatively, of a license fee.
RULING: It is a LICESNE FEE. The five percent (5%) tax imposed in
Ordinance No. 9236 constitutes, not a tax on income, not a city income
tax within the meaning of the Local Autonomy Act, but rather a license
tax or fee for the regulation of the business in which the petitioner is
engaged. While it is true that the amount imposed by the questioned
ordinances may be considered in determining whether the exaction is
really one for revenue or prohibition, instead of one of regulation under
the police power, it nevertheless will be presumed to be reasonable.
Local' governments are allowed wide discretion in determining the rates
of imposable license fees even in cases of purely police power measures,
in the absence of proof as to particular municipal conditions and the
nature of the business being taxed as well as other detailed factors
relevant to the issue of arbitrariness or unreasonableness of the
questioned rates.
Petitioner has not shown that the rate of the gross receipts tax is so
unreasonably large and excessive and so grossly disproportionate to the
costs of the regulatory service being performed by the respondent as to
compel the Court to characterize the imposition as a revenue measure
exclusively. The lower court correctly held that the gross receipts from
stall rentals have been used only as a basis for computing the fees or
taxes due respondent to cover the latter's administrative expenses
The term "tax" frequently applies to all kinds of exactions of monies
which become public funds. It is often loosely used to include levies for

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revenue as well as levies for regulatory purposes such that license fees
are frequently called taxes although license fee is a legal concept
distinguishable from tax: the former is imposed in the exercise of police
power primarily for purposes of regulation, while the latter is imposed
under the taxing power primarily for purposes of raising revenues. Thus,
if the generating of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not
make the imposition a tax.
To be considered a license fee, the imposition questioned must relate to
an occupation or activity that so engages the public interest in health,
morals, safety and development as to require regulation for the
protection and promotion of such public interest; the imposition must also
bear a reasonable relation to the probable expenses of regulation, taking
into account not only the costs of direct regulation but also its incidental
consequences as well. When an activity, occupation or profession is of
such a character that inspection or supervision by public officials is
reasonably necessary for the safeguarding and furtherance of public
health, morals and safety, or the general welfare, the legislature may
provide that such inspection or supervision or other form of regulation
shall be carried out at the expense of the persons engaged in such
occupation or performing such activity, and that no one shall engage in
the occupation or carry out the activity until a fee or charge sufficient to
cover the cost of the inspection or supervision has been paid.
Accordingly, a charge of a fixed sum which bears no relation at all to the
cost of inspection and regulation may be held to be a tax rather than an
exercise of the police power.
The "Farmers' Market and Shopping Center" being a public market in the'
sense of a market open to and inviting the patronage of the general
public, even though privately owned, petitioner's operation thereof
required a license issued by the respondent City, the issuance of which,
applying the standards set forth above, was done principally in the
exercise of the respondent's police power. The operation of a privately
owned market is, as correctly noted by the Solicitor General, equivalent
to or quite the same as the operation of a government-owned market;
both are established for the rendition of service to the general public,
which warrants close supervision and control by the respondent City, for
the protection of the health of the public by insuring, e.g., the

maintenance of sanitary and hygienic conditions in the market,

compliance of all food stuffs sold therein, and so forth
DISPOSITIVE: Petition is DENIED, Respondent WON.
CASE 91: PANTORGO
PAL v EDU
DOCTRINE: 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 1/5 or less of the
amount collected is set aside for the operating expenses of the
administering the program. The nature of an exaction is to be determined
by the purpose for which it is being exacted. 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.
FACTS:
1. 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. Mo. 4271, as amended by RA 2360
and 2667.
2. Under its franchise, PAL is exempt from the payment of taxes.
3. Sometime in 1971, appellee Commissioner Romeo F. Edu, issued a
regulation requiring all tax exempt entities, among them PAL to pay
motor vehicle registration fees.
4. Despite PALs protestations, Commissioner Edu refused to register
PALs motor vehicles unless the amounts imposed were paid.
5. PAL paid under protest, the amount of P19,529.75 as registration fees
of its motor vehicles.
6. After paying under protest, PAL wrote a letter to Comm. Edu
demanding a refund of the amounts paid, invoking the ruling of Calalang
vs. Lorenzo where it was held that motor vehicle registration fees are in
reality tax from the payment of which PAL is exempt by virtue of its
legislative franchise.
7. Appellee Edu denied the request for refund basing his action on
decision of Republic vs. Philippine Rabbit Bus Line, Inc. 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.

8. Hence, PAL filed a complaint against Land Transportation

Commissioner Romeo Edu and National Treasurer Ubaldo Carbonell.
9.Edu and Carbonell filed a Motion to dismiss contending that while Act
4271 exempts PAL from the payment of any tax except 2% on its gross
revenue or earnings, it does not exempt PAL from paying regulatory
fees, such as motor vehicle registration fees,
10. TC= dismissed PALs complaint, guided by the ruling of Republic vs.
Philippine rabbit bus lines, Inc.
11. PAL appealed to CA
12. CA certified to SC the case (issue involved questions of law)
ISSUE:
1. WON motor vehicle registration fees are considered taxes
2. WON administrative agency (Land Transportation) be required to
refund the amounts paid by PAL
HELD:
1. YES. 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 1/5 or
less of the amount collected is set aside for the operating expenses
of the administering the program.
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.
It is quite apparent that vehicle registration fees were originally
simple exactions intended only for regulatory purposes in the
exercise of the States police powers. Over the years, however, as
vehicular traffic exploded in number and motor vehicles became
absolute necessities, 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.
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 CTA, It is possible for an exaction to be both tax and
regulation. License fees are often looked to as source of revenue as
well as a means of regulation. This is true, for example, of

LAW ON TAXATION: Batch 3 (case 89-106)

automobile license fees. In such case, the fees may be properly

regarded as taxes even though they also served 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 tax. These exactions are sometimes called regulatory
taxes, which classify taxes on tobacco and alcohol as regulatory
taxes.
2. NO. Land Transportation agency cannot be required to refund the
amounts paid by PAL.

The claim for refund is made for payment given in 1971. Sec. 24
of RA 5431, dated June 27, 1968, repealed all earlier tax
exemptions of corporate taxpayers found in legislative franchise.
Any registration fees collected between June 17, 1968 and April
9, 1979 were correctly imposed because the tax exemption in
the franchise of PAL was repealed during the period.
NOTE: However, an amended franchise was given to PAL in
1979. Thus, 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,
PD 1590 and may no longer be exacted.
Section 13 of PD 1590:
In consideration of the franchise and rights hereby granted,
the grantee shall pay to the Philippine Government during
the lifetime of this franchise whichever of subsections (a) and
(b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantees
annual net taxable income computed in accordance with the
provisions of the Internal Revenue Code; or
(b) A franchise tax of 2% of the gross revenues derived by
the grantees from all sources, without distinction as to
transport or nontransport corporations; provided that with
respect to international airtransport service, only the gross

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passengers, mail and freight revenues from its outgoing

flights shall be subject to this law.
The tax paid by the grantee under either of the above
alternatives shall be in lieu of all taxes, duties, royalties,
registrations, license and other fees and charges of any kind,
nature or description imposed, levied, established, assessed,
or collected by any municipal, city, provincial, or national
authority or government agency, now or in the future,
including but not limited to the following:
xxxx
(5) All taxes, fees and other charges on the registration,
licensing, acquisition, and transfer of aircraft, equipment,
motor vehicles, and all other personal or real property of the
grantee.
DISPOSITIVE: Petition is partially granted. The prayed for refund of
registration fees paid in 1971 is DENIED. The Land Transportation
Franchising and Regulatory Board (LTFRB) is enjoined from collecting
any tax, fee, or other charge on the registration and licensing of the
petitioners motor vehicles from April 9, 1979 as provided in PD 1590.
CASE 92: KADJIM
ESSO v CIR
DOCTRINE: 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. Therefore, the margin fee
was imposed by the State in the exercise of its police power and not the
power of taxation.
FACTS: In CTA Case No. 1251, Esso Standard Eastern Inc. (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 Commissioner of Internal Revenue (CIR) on the ground that the

country's international reserves. The margin fee was imposed by the

expenses should be capitalized and might be written off as a loss only

State in the exercise of its police power and not the power of taxation.

when a "dry hole" should result. Esso then filed anamended return where
it asked for the refund of P323,279.00 by reason of its abandonment as

(2) NO. Ordinarily, an expense will be considered 'necessary' where the

dry holes of several of its oil wells. Also claimed as ordinary and

expenditure is appropriate and helpful in the development of the

necessary expenses in the same return was the amount of P340,822.04,

taxpayer's business. It is 'ordinary' when it connotes a payment which is

representing margin fees it had paid to the Central Bank on its profit

normal in relation to the business of the taxpayer and the surrounding

remittances to its New York head office.

circumstances. Since the margin fees in question were incurred for the
remittance of funds to Esso's Head Office in New York, which is a

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,

separate and distinct income taxpayer from the branch in the Philippines,

disallowing the claimed deduction for the margin fees paid on the ground

for its disposal abroad, it can never be said therefore that the margin fees

that the margin fees paid to the Central Bank could not be considered

were appropriate and helpful in the development of Esso's business in

taxes or allowed as deductible business expenses.

the Philippines exclusively or were incurred for purposes proper to the

conduct of the affairs of Esso's branch in the Philippines exclusively or

Esso appealed to the Court of Tax Appeals (CTA) for the refund of the

for the purpose of realizing a profit or of minimizing a loss in the

margin fees it had earlier paid contending that the margin fees were

Philippines exclusively. If at all, the margin fees were incurred for

deductible from gross income either as a tax or as an ordinary and

purposes proper to the conduct of the corporate affairs of Esso in New

necessary business

York, but certainly not in the Philippines.

expense.

However,

Essos

appeal

was

denied. Hence, the petition.

ISSUE:
(1) Whether or not the margin fees are taxes.
(2) Whether or not the margin fees are necessary and ordinarybusiness
expenses.
RULING:
(1) NO. A tax is levied to provide revenue for government operations,
while the proceeds of the margin fee are applied to strengthen our

DISPOSITIVE: CIR won. CTA decision is affirmed.

CASE 93: FILIO
APOSTOLIC PREFECT v TREASURER OF BAGUIO
DOCTRINE: The differences between a special assessment and a tax
are that (1) a special assessment can be levied only on land; (2) a
special assessment cannot (at least in most states) be made a personal
liability of the person assessed; (3) a special assessment is based wholly
on benefits; and (4) a special assessment is exceptional both as to time
and locality. The imposition of a charge on all property, real and
personal, in a prescribed area, is a tax and not an assessment, although
the purpose is to make a local improvement on a street or highway.

LAW ON TAXATION: Batch 3 (case 89-106)

FACTS: In 1937, an ordinance (Ordinance No. 137: Special Assessment

List, City of Baguio) was passed in the City of Baguio. The said
ordinance sought to assess properties of property owners within the
defined city limits. The said ordinance is for the construction of sewerage
and pipes. The Apostolic Prefect of Mt. Province (APMP), on the other
hand, is a religious corporation duly established under Philippine laws.
Pursuant to the ordinance, it paid a total amount of P1,019.37 in protest.
APMP later averred that it should be exempt from the said special
contribution since as a religious institution, it has a constitutionally
guaranteed right not to be taxed including its properties.

of the inhabitants of the city. The ordinance was in the nature of an

assessment and not taxation. The effects of the ordinance to the
properties affected in the payment protest of the claimant were
included in the above mentioned list for the construction of the
system of sewer pipe and sewerage. It has benefited and is of
benefit directly and especially to all the owners whose lots and areas
are included in special assessment list, city of Baguio.
DISPOSITIVE: The Apostolic Prefect Mountain Province lost. The order
of the Treasurer of Baguio City was confirmed. So Ordered

ISSUES
1) Whether the Ordinance 137 is a special assessment or a form of
tax exemption?
2) Whether or not Apostolic Prefect Mountain Province is exempt
from taxes?

Note: this case is originally in Spanish. I translated ton English to the

best that I can.

RULING
1) The Ordinance 137 is a special assessment and not a form of
tax exemption. While the word tax in its broad meaning, includes
both general taxes and special assessments, and in a general sense
a tax is an assessment, and an assessment is a tax, yet there is a
recognized distinction between them in that assessment is confined
to local impositions upon property for the payment of the cost of
public improvements in its immediate vicinity and levied with
reference to special benefits to the property assessed. The
differences between a special assessment and a tax are that (1) a
special assessment can be levied only on land; (2) a special
assessment cannot (at least in most states) be made a personal
liability of the person assessed; (3) a special assessment is based
wholly on benefits; and (4) a special assessment is exceptional both
as to time and locality. The imposition of a charge on all property,
real and personal, in a prescribed area, is a tax and not an
assessment, although the purpose is to make a local improvement
on a street or highway. A charge imposed only on property owners
benefited is a special assessment rather than a tax notwithstanding
the statute calls it a tax.
2) No, Apostolic Prefect Mountain Province is not exempt from taxes. In
the case at bar, the Prefect cannot claim exemption because the
assessment is not taxation per se but rather a system for the benefits

CASE 95: SEMILLA

FRANCIA v IAC

LAW ON TAXATION 1 [ATTY. VOLTAIRE SALUD] || Batch 4, Block 4 (2015)

CASE 94: AGUILAR

CALTEX v COA

DOCTRINE: 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. According to SC
FACTS:
1. Engracio Francia (owner of a 328 sqm. land in Pasay City.
2. October 1977, a portion of his land (125 sqm.) was expropriated by
the government for P4,116.00. The expropriation was made to give
way to the expansion of a nearby road.
3. Also, Francia failed to pay his real estate taxes since 1963
amounting to P2,400.00. So in December 1977, the remaining 203
sqm. of his land was sold at a public auction (after due notice was
given him).
4. The highest bidder was Ho Fernandez who paid the purchase price
of P2,400.00 (which was lesser than the price of the portion of his
land that was expropriated).

5. Later, Francia filed a complaint to annul the auction sale on the

ground that the selling price was grossly inadequate.
- He further argued that his land should have never been
auctioned because the P2,400.00 he owed the government in
taxes should have been set-off by the debt the government owed
him (legal compensation).
- He alleged that he was not paid by the government for the
expropriated portion of his land because though he knew that the
payment therefor was deposited in the Philippine National Bank,
he never withdrew it.
ISSUE: WON the tax owed by Francia should be set-off by the debt
owed him by the government?
RULING: NO. As a rule, set-off of taxes is not allowed. There is no legal
basis for the contention. By legal compensation, obligations of persons,
who in their own right are reciprocally debtors and creditors of each
other, are extinguished (Art. 1278, Civil Code). This is not applicable in
taxes. 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.
In this case, all he (Francia) has to do was to withdraw the money. Had
he done that, he could have paid his tax obligations even before the
auction sale or could have exercised his right to redeem which he did
not do.
Anent the issue that the selling price of P2,400.00 was grossly
inadequate, the same is not tenable. The Supreme Court said: alleged
gross inadequacy of price is not material when the law gives the owner
the right to redeem as when a sale is made at public auction, upon the
theory that the lesser the price, the easier it is for the owner to effect
redemption. If mere inadequacy of price is held to be a valid objection to
a sale for taxes, the collection of taxes in this manner would be greatly
embarrassed, if not rendered altogether impracticable. Where land is
sold for taxes, the inadequacy of the price given is not a valid objection to
the sale. This rule arises from necessity, for, if a fair price for the land
were essential to the sale, it would be useless to offer the property.

Indeed, it is notorious that the prices habitually paid by purchasers at tax

sales are grossly out of proportion to the value of the land.
CASE 96: CADA
REPUBLIC v ERICTA AND SAMPAGUITA PICTURES
DOCTRINE: Legal compensation cannot take place against the Republic
with respect to taxes, fees, duties and similar forced contributions due to
it, there could be no gainsaying the proposition that, under the facts,
Sampaguita was entitled to judgment upon its counterclaim for the
payment by the Republic of its indebtedness in virtue of the back pay
certificates in question, with the ultimate result that the claim and
counter-claim of the parties, respectively will offset each other.
FACTS: The Philippine Government pursuant to R.A. No. 304, as
amended by R.A. No. 800 issued "back pay certificates". The Treasurer
of the Philippines was empowered to receive applications for back pay
and to issue in favor of the applicants certificates of indebtedness
redeemable by the Government within 10 years for the amounts
determined to be justly due them.
Sampaguita Pictures came to incur an obligation for percentage,
withholding and amusement taxes in the amount of P10,268.41 in favor
of the Republic of the Philippines. In satisfaction thereof (together with
another obligation of the same nature due from Vera-Perez Corporation,
Pictures, Inc.), Sampaguita tendered and delivered to the Office of the
Municipal Treasurer of Bocaue, Bulacan sixteen back pay negotiable
certificates of indebtedness in the aggregate sum of P16,763.60.
However, the Assistant Regional Director of the BIR wrote to Vera-Perez
Corporation advising that the acceptance of the Negotiable Certificates of
Indebtedness was erroneous and the payment was invalid because said
certificates were not acceptable as payments in accordance with the
provisions of General Circular No. V-289. No one acted on the said letter
so the Solicitor General brought suit in behalf of the Republic of the
Philippines. The trial court dismissed both the complaint and the
counterclaim. Hence, this appeal filed by the Solicitor General.
ISSUE: WON payment is void since Sampaguita is only a mere assignee
of the certificates.

LAW ON TAXATION: Batch 3 (case 89-106)

HELD: NO. Payment is not void. Sampaguita, as assignee of the

certificates of indebtedness, had "succeeded to the original rights of the
holders thereof," and was therefore authorized to demand payment by
the Republic of the indebtedness thereby represented.
Even if as the Solicitor General points out, "there is no certainty when the
certificates are actually redeemable" because the law say "that they are
redeemable .. within ten years from the date of issuance ", there can be
no question that after the lapse of ten (10) years from the declared date
of redeemability, payment of the indebtedness was already eligible. The
Trial Court was saying in effect that while judgment should be rendered
in favor of the Republic against Sampaguita for unpaid taxes in the
amount of P10,268.41, judgment ought at the same time to issue for
Sampaguita commanding payment to it by the Republic of the same
sum, representing the face value of the certificates of indebtedness
assigned to it and for recovery of which it had specifically prayed in its
counterclaim.
DISPOSITIVE: Petition is DENIED.
CASE 97: PASCUAL
REPUBLIC v MAMBULAO LUMBER COMPANY
DOCTRINE: The general rule, based on grounds of public policy is wellsettled 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 financial affairs of the government will be
thrown into great confusion.

LAW ON TAXATION 1 [ATTY. VOLTAIRE SALUD] || Batch 4, Block 4 (2015)

FACTS:
1. For various periods from 1952 to 1954, Lumber Mambulao Company
has a liability aggregating to P4,802.37 for forest charges in favor of
the Republic.
2. For the periods 1948 to 1956 and 1947 to 1948, Lumber Mambulao
paid to the Republic a sum of P9,127.50 for reforestation charges
pursuant to Sec. 1 of Republic Act 115, which provides that there
shall be collected, in addition to the regular forest charges provided
under the 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
watersheds, denuded areas ... and other public forest lands, which
upon investigation, are found needing reforestation or afforestation.
3. Lumber Mambulao claims that since the Republic had not made use
of the reforestation charges collected from it for reforesting the
denuded area of the land covered by its license, the Republic should
refund said amount.
4. Lumber Mambulao made such claims known to the director of
forestry through a letter requesting that the bureau credit their
account for the said reforestation charges or set-off their debts with
said amount.
5. Consequently, the issue was brought before the CFI of Manila which
ordered Lumber Mambulao to pay the Republic for said forest
charges. Hence, this appeal.
ISSUE: WON the sum paid by Mambulao Lumber to the Republic as
reforestation charges from 1947 to 1956 may be set off or applied to the
payment of forest charges due and owing from the former to the latter.
RULING: NO. The amount paid by a licensee as reforestation charges is
in the nature of a tax which forms a part of the Reforestation Fund,
payable by him irrespective of 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.

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.
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 financial
affairs of the government will be thrown into great confusion.
DISPOSITIVE: Law on compensation is inapplicable. Judgment of CFI
appealed from is affirmed
CASE 98: AGBISIT
PHILEX MINING v CIR
DOCTRINE: Taxes cannot be subject to compensation for the simple
reason that the government and taxpayer are not creditors and debtors
of each other.
FACTS: On Aug. 5, 1992, the BIR sent a letter to Philex, asking it to
nd
rd
th
settle its tax liabilities for the 2 , 3 and 4 quarter of 1991, as well as
st
nd
the 1 and 2 quarter of 1992 in the total amount of P123,821,982.52.
Philex protested the demand for payment of the tax liabilities stating that
it has pending claims for VAT input credit/refund for the taxes it paid for
the years 1989 to 1991 in the amount of P119,977,037.02 plus interest.
Philex asserts that these claims for tax credit/refund should be applied
against the tax liabilities. BIR found no merit in Philexs position. In view

of the BIRs denial of the offsetting of Philexs claim for VAT input
credit/refund against its exercise tax obligation, Philex raised the issue to
the Court of Tax Appeals. The Court of Tax Appeals ruled that taxes
cannot be subject to set-off on compensation since claim for taxes is not
a debt or contract. The CA affirmed the decision of the CTA.
ISSUE: Whether or not Philexs tax liabilities can be off-set with its claims
of tax credit/refund?
RULING: NO. The Court has ruled in several instances that taxes cannot
be subject to compensation for the simple reason that the government
and taxpayer are not creditors and debtors of each other. There is a
material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. It must be noted that a
distinguishing feature of a tax is that it is compulsory rather than a matter
of bargain. Hence, a tax does not depend upon the consent of the
taxpayer. If any payer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot
refuse to pay his taxes when they fall due simply because he has a claim
against the government or that the collection of the tax is contingent on
the result of the lawsuit it filed against the government. Moreover,
Philexs theory that would automatically apply its VAT input credit/refund
against its tax liabilities can easily give rise to confusion and abuse,
depriving the government of authority over the manner by which
taxpayers credit and offset their tax liabilities.
CASE 99: GUEVARA, ARJUNA
DOMINGO v CARLITOS
DOCTRINE: Tax owing to the government may be subjected to
compensation by operation of law provided that the governments liability
to the individual has already been recognized and an amount thereto has
already been appropriated by a corresponding law.
FACTS
In Domingo vs. Moscoso (G.R No. L-14675), the Supreme Court
declared as final and executory the order of the Court of First Instance of
Leyte for the payment of estate and inheritance taxes, charges and

10

LAW ON TAXATION: Batch 3 (case 89-106)

penalties amounting to P40,058.55 by the Estate of the late Walter Scott

Price. The petition for execution filed by the fiscal, however, was denied
by the lower court. The Court held that the execution is unjustified as the
Government itself is indebted to the Estate for 262,200; and ordered the
amount of inheritance taxes be deducted from the Governments
indebtedness to the Estate.
ISSUE: Whether or not the inheritance tax due from the estate of Walter
Price may be offset from the governments liability to his estate.
RULING: YES. 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 by a
corresponding law (RA 2700). Under the 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 Article 1279 and 1290 of the Civil
Code, and both debts are extinguished to the concurrent amount.
DISPOSITIVE: The petition for certiorari and mandamus are denied.
CASE 100: REYES
NDC v CIR
DOCTRINE: Under Section 53(c) of the Tax code provides a penalty for
any person who remiss to deduct a withholding tax fixed by law for
payment of taxes. Failing to do so would open the same to penalty.
FACTS: The national Development Company entered into contracts in
Tokyo with several Japanese shipbuilding companies for the construction
of twelve ocean-going vessels. The purchase price was to come from the
proceeds of bonds issued by the Central Bank. Initial payments were
made in cash and through irrevocable letters of credit. Fourteen
promissory notes were signed for the balance by the NDC and, as
required by the shipbuilders, guaranteed by the Republic of the
Philippines. Pursuant thereto, the remaining payments and the interests
thereon were remitted in due time by the NDC to Tokyo. The vessels
were eventually completed and delivered to the NDC in Tokyo. The NDC

LAW ON TAXATION 1 [ATTY. VOLTAIRE SALUD] || Batch 4, Block 4 (2015)

remitted to the shipbuilders in Tokyo a sum of money as interest on the

balance of the purchase price. No tax was withheld.
The Commissioner then held the NDC liable on such tax. The NDC went
to the Court of Tax Appeals. The BIR was sustained by the CTA with a
slight modification for a compromise penalty
ISSUE: Whether of not the NDC is liable to pay tax on interest it remitted
to the Japanese builders
HELD: NO. It is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of
these companies and not the Republic of the Philippines that was subject
to the tax the NDC did not withhold. In effect, therefore, the imposition of
the deficiency taxes on the NDC is a penalty for its failure to withhold the
same from the Japanese shipbuilders. Such liability is imposed by
Section 53(c) of the Tax Code. The NDC remised in the discharge of its
obligation as the withholding agent of the government so should be held
liable for its omission
CASE 101: DACARA
OSMENA v ORBOS
DOCTRINE: All money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such purposes only. If
the purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds
of the Government.
FACTS: President Ferdinand Marcos issued P.D. 1956 creating a
Special Account in the General Fund, designated as the Oil Price
Stabilization Fund (OPSF). The OPSF was designed to reimburse oil
companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustments and from increases in
the world market prices of crude oil. Subsequently, the OPSF was
reclassified into a "trust liability account. President Corazon C. Aquino
promulgated E. O. 137 expanding the grounds for reimbursement to oil

11

companies for possible cost under recovery incurred as a result of the

reduction of domestic prices of petroleum products.
The petitioner argues that "the monies collected pursuant to P.D. 1956,
as amended, must be treated as a special fund' not as a 'trust account'
or a 'trust fund,' and that "if a special tax is collected for a specific
purpose, the revenue generated therefrom shall 'be treated as a special
fund' to be used only for the purpose indicated, and not channeled to
another government objective." Petitioner further points out that since "a
'special fund' consists of monies collected through the taxing power of a
State, such amounts belong to the State, although the use thereof is
limited to the special purpose/objective for which it was created."
The petitioner does not suggest that a "trust account" is illegal per se, but
maintains that the monies collected, which form part of the OPSF, should
be maintained in a special account of the general fund for the reason that
the Constitution so provides, and because they are, supposedly, taxes
levied for a special purpose. He assumes that the Fund is formed from a
tax undoubtedly because a portion thereof is taken from collections of ad
valorem taxes and the increases thereon.
ISSUES:
1. WON the powers granted to the ERB under P.D. 1956 partake of
the nature of the taxation power of the state such that the
creation of the trust fund violates Section 29(3), Article VI of the
Constitution.
2. WON there is an undue delegation of legislative power of
taxation.
RULING:
1. NO. The OPSF is a "Trust Account" which was established "for
the purpose of minimizing the frequent price changes brought
about by exchange rate adjustment and/or changes in world
market prices of crude oil and imported petroleum products."
Under P.D. No. 1956, as amended by Executive Order No. 137
dated 27 February 1987, this Trust Account may be funded from
any of the following sources:
a) Any increase in the tax collection from ad valorem tax or

customs duty imposed on petroleum products subject to tax

under this Decree arising from exchange rate adjustment, as
may be determined by the Minister of Finance in consultation
with the Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax
exemptions of government corporations, as may be determined
by the Minister of Finance in consultation with the Board of
Energy;
c) Any additional amount to be imposed on petroleum products
to augment the resources of the Fund through an appropriate
Order that may be issued by the Board of Energy requiring
payment of persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;
d) Any resulting peso cost differentials in case the actual peso
costs paid by oil companies in the importation of crude oil and
petroleum products is less than the peso costs computed using
the reference foreign exchange rate as fixed by the Board of
Energy.
Hence, it seems clear that while the funds collected may be
referred to as taxes, they are exacted in the exercise of the
police power of the State. Moreover, that the OPSF is a special
fund is plain from the special treatment given it by E.O. 137. It is
segregated from the general fund; and while it is placed in what
the law refers to as a "trust liability account," the fund
nonetheless remains subject to the scrutiny and review of the
COA. The Court is satisfied that these measures comply with the
constitutional description of a "special fund." Indeed, the practice
is not without precedent.
2. NONE. With regard to the alleged undue delegation of legislative
power, the Court finds that the provision conferring the authority

12

LAW ON TAXATION: Batch 3 (case 89-106)

upon the ERB to impose additional amounts on petroleum

products provides a sufficient standard by which the authority
must be exercised. In addition to the general policy of the law to
protect the local consumer by stabilizing and subsidizing
domestic pump rates, 8(c) of P.D. 1956 expressly authorizes
the ERB to impose additional amounts to augment the resources
of the Fund.
DISPOSITIVE: The petition is GRANTED insofar as it prays for the
nullification of the reimbursement of financing charges, paid pursuant to
E.O. 137, and DISMISSED in all other respects.
CASE 102: CARILLO
COMMISSIONER OF INTERNAL REVENUE v CA
DOCTRINE: An executive order of tax amnesty, without specific
exceptions or any exclusionary rule, should be treated as a general grant
of tax amnesty covering not only assessments after the promulgation of
the tax amnesty but as well as those assessed beforehand.
FACTS: On 22 August 1986, Executive Order No. 41 was promulgated
declaring a one-time tax amnesty on unpaid income taxes, later
amended to include estate and donor's taxes and taxes on business, for
the taxable years 1981 to 1985. Respondent R.O.H. Auto Products
Philippines, Inc., availing of the amnesty, filed in October 1986 and
November 1986, its Tax Amnesty Return and Supplemental Tax
Amnesty Return No. and paid the corresponding amnesty taxes due.
Prior to this availment, petitioner Commissioner of Internal Revenue, in a
communication received by private respondent on August 13, 1986,
assessed the latter deficiency income and business taxes for its fiscal
years 1981 and 1982 in an aggregate amount of P1,410,157.71.
Meanwhile, respondent averred that since it had been able to avail itself
of the tax amnesty, the deficiency tax notice should forthwith be
cancelled and withdrawn. This was denied by the CIR Revenue
Memorandum Order No. 4-87, implementing Executive Order No. 41,
had construed the amnesty coverage to include only assessments issued
by the Bureau of Internal Revenue after the promulgation of the

LAW ON TAXATION 1 [ATTY. VOLTAIRE SALUD] || Batch 4, Block 4 (2015)

executive order on August 22 1986 and not to assessments theretofore

made.
On appeal, The Court of Tax appeal upheld for the respondent, which
was further upheld by the Court of Appeals.
ISSUE: Whether or not the deficiency assessments were extinguished by
reason of respondents availment of the tax amnesty.
HELD: YES. This is because the scope of the amnesty covers the
unpaid income taxes for the years 1981 to 1985. If, as the Commissioner
argues, Executive Order No. 41 had not been intended to include 19811985 tax liabilities already assessed (administratively) prior to August 22,
1986, the law could have simply so provided in its exclusionary clauses.
It did not. The conclusion is unavoidable, and it is that the executive
order has been designed to be in the nature of a general grant of tax
amnesty subject only to the cases specifically excepted by it.
Further, the law provides that, upon full compliance with the conditions of
the tax amnesty and the rules and regulations issued pursuant to this
Executive order, the taxpayer shall be relieved of any income tax liability
on any untaxed income from January 1, 1981 to December 31, 1985,
including increments thereto and penalties on account of the nonpayment of the said tax. Civil, criminal or administrative liability arising
from the non-payment of the said tax, which are actionable under the
National Internal Revenue Code, as amended, are likewise deemed
extinguished.
DISPOSITIVE: CIR lost.
CASE 103: MARASIGAN
REPUBLIC v CA
DOCTRINE: In a suit for collection of internal revenue taxes, where the
assessment has already become final and executory, the action to collect
is akin to an action to enforce a judgment. No inquiry can be made
therein as to the merits of the original case or the justness of the
judgment relied upon.

13

FACTS:
1. In a demand letter, the Commissioner of Internal Revenue assessed
private respondent Nielson & Co., Inc. deficiency taxes for the years
1949 to 1952, totalling P14,449.00.
2. Petitioner reiterated its demand upon private respondent for payment
of said amount thru 3 demand letters. Private respondent did not
contest the assessment in the Court of Tax Appeals. On the theory
that the assessment had become final and executory, petitioner then
filed a complaint for collection of the said amount against private
respondent with the Court of First Instance of Manila.
3. For failure to serve summons upon private respondent, the complaint
was dismissed by the CFI. There was again failure to serve
summons which led to the dismissal of the case and the finality
thereof. The Court a quo rendered a decision against the private
respondent. On appeal to the respondent Court of Appeals, the
decision was reversed. Petitioner, Republic of the Philippines, filed a
motion for reconsideration which was likewise denied by said Court
in a resolution. Hence, this petition.
ISSUE: WON private respondent was duly notified of the tax assessment
making it final and executory.
RULING: YES. Petitioner failed to adduce proof as to whether or not the
private respondent indeed received the assessment letter. Records,
however, show that petitioner wrote private respondent a follow-up letter
reiterating its demand for the payment of taxes as originally demanded in
petitioner's first letter. This follow-up letter is considered a notice of
assessment in itself which was duly received by private respondent in
accordance with its own admission. This follow-up letter is considered a
notice of assessment in itself which was duly received by private
respondent in accordance with its own admission. Under Section 7 of
Republic Act No. 1125, the assessment is appealable to the Court of Tax
Appeals within thirty (30) days from receipt of the letter. The taxpayer's
failure to appeal in due time, as in the case at bar, makes the
assessment in question final, executory and demandable. Thus, private
respondent is now barred from disputing the correctness of the
assessment or from invoking any defense that would reopen the question
of its liability on the merits.

CASE 104: MOLON

MAMBULAO LUMBER CO. v REPUBLIC
DOCTRINE: The general rule, based on grounds of public policy is wellsettled 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 financial affairs of the government will be
thrown into great confusion.
FACTS:
6. For various periods from 1952 to 1954, Lumber Mambulao Company
has a liability aggregating to P4,802.37 for forest charges in favor of
the Republic.
7. For the periods 1948 to 1956 and 1947 to 1948, Lumber Mambulao
paid to the Republic a sum of P9,127.50 for reforestation charges
pursuant to Sec. 1 of Republic Act 115, which provides that there
shall be collected, in addition to the regular forest charges provided
under the 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
watersheds, denuded areas ... and other public forest lands, which
upon investigation, are found needing reforestation or afforestation.
8. Lumber Mambulao claims that since the Republic had not made use
of the reforestation charges collected from it for reforesting the
denuded area of the land covered by its license, the Republic should
refund said amount.
9. Lumber Mambulao made such claims known to the director of
forestry through a letter requesting that the bureau credit their

14

LAW ON TAXATION: Batch 3 (case 89-106)

account for the said reforestation charges or set-off their debts with
said amount.
10. Consequently, the issue was brought before the CFI of Manila which
ordered Lumber Mambulao to pay the Republic for said forest
charges. Hence, this appeal.

DISPOSITIVE: Law on compensation is inapplicable. Judgment of CFI

appealed from is affirmed

ISSUE: WON the sum paid by Mambulao Lumber to the Republic as

reforestation charges from 1947 to 1956 may be set off or applied to the
payment of forest charges due and owing from the former to the latter.

DOCTRINE: Sec. 229 of the Code mandates that a request for

reconsideration must be made within 30 days from the taxpayer's receipt
of the tax deficiency assessment, otherwise the assessment becomes
final, unappealable and, therefore, demandable.

RULING: NO. The amount paid by a licensee as reforestation charges is

in the nature of a tax which forms a part of the Reforestation Fund,
payable by him irrespective of 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.
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.
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 financial
affairs of the government will be thrown into great confusion.

LAW ON TAXATION 1 [ATTY. VOLTAIRE SALUD] || Batch 4, Block 4 (2015)

CASE 105: VILLANUEVA

REPUBLIC v HIZON

FACTS: On July 18, 1986, the BIR issued to respondent Salud V. Hizon
a deficiency income tax assessment of P1,113,359.68 covering the fiscal
year 1981-1982. Respondent not having contested the assessment,
petitioner, on January 12, 1989, served warrants of distraint and levy to
collect the tax deficiency. However, for reasons not known, it did not
proceed to dispose of the attached properties. More than three years
later, or on November 3, 1992, respondent wrote the BIR requesting a
reconsideration of her tax deficiency assessment. The BIR, in a letter
dated August 11, 1994, denied the request. On January 1, 1997, it filed a
case with the Regional Trial Court, Branch 44, San Fernando, Pampanga
to collect the tax deficiency. The complaint was signed by Norberto Salud,
Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga,
the Bureau's Regional Director in Pampanga. Respondent moved to
dismiss the case on two grounds: (1) that the complaint was not filed
upon authority of the BIR Commissioner as required by 221 2 of the
National Internal Revenue Code, and (2) that the action had already
prescribed. Over petitioner's objection, the trial court, on August 28, 1997,
granted the motion and dismissed the complaint. Hence, a petition before
the Supreme Court.
ISSUE: WON the action for collection of taxes filed against Hizon as
respondent had already been barred by the statute of limitations
RULING: NO. Sec. 229 of the Code mandates that a request for
reconsideration must be made within 30 days from the taxpayer's receipt
of the tax deficiency assessment, otherwise the assessment becomes
final, unappealable and, therefore, demandable. The notice of
assessment for respondent's tax deficiency was issued by petitioner on
July 18, 1986. On the other hand, respondent made her request for

15

reconsideration thereof only on November 3, 1992, without stating when

she received the notice of tax assessment. She explained that she was
constrained to ask for a reconsideration in order to avoid the harassment
of BIR collectors. In all likelihood, she must have been referring to the
distraint and levy of her properties by petitioner's agents which took
place on January 12, 1989. Even assuming that she first learned of the
deficiency assessment on this date, her request for reconsideration was
nonetheless filed late since she made it more than 30 days thereafter.
Hence, her request for reconsideration did not suspend the running of
the prescriptive period provided under 223(c). Although the
Commissioner acted on her request by eventually denying it on August
11, 1994, this is of no moment and does not detract from the fact that the
assessment had long become demandable.
Sec. 23 of the NIRC
Any internal revenue tax which has been assessed within the period of
limitation above-prescribed may be collected by distraint or levy or by a
proceeding in court within three years following the assessment of the
tax.
The running of the three-year prescriptive period is suspended for the
period during which the Commissioner is prohibited from making the
assessment or beginning distraint or levy or a proceeding in court and for
sixty days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot be
located in the address given by him in the return filed upon which the tax
is being assessed or collected; provided, that, if the taxpayer informs the
Commissioner of any change in address, the running of the statute of
limitations will not be suspended; when the warrant of distraint or levy is
duly served upon the taxpayer, his authorized representative or a
member of his household with sufficient discretion, and no property could
be located; and when the taxpayer is out of the Philippines.
DISPOSITIVE: WHEREFORE, the petition is DENIED. It ruled against
Hizon.

CASE 106: CACHAPERO

CIR v METRO STAR SUPERAMA
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 Regional Director ordered petitioners books of accounts
and other accounting records to be examined for income tax and other
internal revenue taxes for the taxable year 1999. It was ascertained that
there was deficiency value-added and withholding taxes due from
petitioner in the amount of P292,874.16. Petitioner received a Formal
Letter of Demand assessing petitioner the said amount. On February 6,
2004, petitioner received a Warrant of Distraint and/or Levy demanding
payment of deficiency value-added tax and withholding tax payment in
the amount of P292,874.16. Petitioner filed with the Office of respondent
Commissioner a Motion for Reconsideration pursuant to Section 3.1.5 of
Revenue Regulations No. 12-99 denying that it received a Preliminary
Assessment Notice (PAN) and claiming that it was not accorded due
process.
CTA-Second Division found merit in the petition of Metro Star and
ordered respondent TO DESIST from collecting the subject taxes against
petitioner. It found that there was no clear showing that Metro Star
actually received the alleged PAN, dated January 16, 2002. It,
accordingly, ruled that the Formal Letter of Demand dated April 3, 2002,
as well as the Warrant of Distraint and/or Levy dated May 12, 2003 were
void, as Metro Star was denied due process.
CIR: insists that Metro Star received the PAN and that due process was
served nonetheless because the latter received the Final Assessment
Notice (FAN).
ISSUE: Is the failure to strictly comply with notice requirements
prescribed under Section 228 of the NIRC and Revenue Regulations
(R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are

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LAW ON TAXATION: Batch 3 (case 89-106)

the requirements of due process satisfied if only the FAN stating the
computation of tax liabilities and a demand to pay within the prescribed
period was sent to the taxpayer?
HELD: YES. Indeed, Section 228 of the Tax Code clearly requires that
the taxpayer must first be informed that he is liable for deficiency taxes
through the sending of a PAN. He must be informed of the facts and the
law upon which the assessment is made. The law imposes a substantive,
not merely a formal, requirement. To proceed heedlessly with tax
collection without first establishing a valid assessment is evidently
violative of the cardinal principle in administrative investigations - that
taxpayers should be able to present their case and adduce supporting
evidence.
Based also on R.R. No. 12-99 of the BIR, the sending of a PAN to
taxpayer to inform him of the assessment made is but part of the due
process requirement in the issuance of a deficiency tax assessment, the
absence of which renders nugatory any assessment made by the tax
authorities. The use of the word shall in subsection 3.1.2 describes the
mandatory nature of the service of a PAN. The persuasiveness of the
right to due process reaches both substantial and procedural rights and
the failure of the CIR to strictly comply with the requirements laid down
by law and its own rules is a denial of Metro Stars right to due
process. Thus, for its failure to send the PAN stating the facts and the
law on which the assessment was made as required by Section 228 of
R.A. No. 8424, the assessment made by the CIR is void.
------ end of batch 3 -------

LAW ON TAXATION 1 [ATTY. VOLTAIRE SALUD] || Batch 4, Block 4 (2015)

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