G.R. No.

L-16021 August 31, 1962 In his second assignment of error, petitioner contends that the sale of the business known as "La
Suiza Bakery" was a sale not of the individual assets comprising the same but of an entire, single
asset which, under the law, is a capital asset.
ANTONIO PORTA FERRER, petitioner,
vs.
(COLLECTOR) now COMMISSIONER OF INTERNAL REVENUE, respondent. Section 34 of the Tax Code provides in part:

REGALA, J.: Capital gains and losses. (a) Definitions. As used in this Title

This is a petition to review the decision of the Court of Tax Appeals, denying petitioner's claim for
refund against respondent.
The petitioner was the sole proprietor of the "La Suiza Bakery" on R. Hidalgo, Quiapo, Manila. He
owned this bakery from October 16, 1951 up to September 15, 1955, when he sold the same to
Juan Pons for the sum of P100,000.00. The assets of the bakery consisted of accounts receivable
raw materials, wrapping supplies, firewood, unexpired insurance, good-will, machinery and
equipment, and furniture and fixtures, with a total book value of P74,321.91. In selling the bakery,
petitioner spent P5,000.00 for broker's commission and P1,000.00 for accountant's fee, or a total of
P6,000.00.
(1) Capital assets.-The term "capital assets" means property held by the taxpayer
(whether or not connected with his trade or business), but does not include, stock in trade
of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by
the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
of property used in the trade or business, of a character which is subject to allowance for
depreciation provided in subsection (f) of section thirty; or real property used in the trade
or business of the taxpayer.
xxx xxx xxx

After deducting the total book value of the assets and the incidental expenses from the gross selling (b) Percentage taken into account. In the case of a taxpayer, other than a corporation,
price, petitioner filed on February 14, 1956 his income tax return, showing a net profit of P19,678.09 only the following percentage of the gain or loss recognized upon the sale shall be taken
as having been realized from the sale of the bakery. On the basis of this amount, he paid P2,439.00 into account in computing net capital gain, net capital loss, and net income.
as income tax on February 15, 1956.
(1) One hundred per centum if the capital asset has been held for not more than twelve
Petitioner later requested the respondent to refund to him the sum of P2,030.00, claiming that the months;
bakery was a capital asset which he had held for more than twelve months, so that the profit from its
sale was a long term capital gain, and therefore, only 50 per cent of it was taxable under the
(2) Fifty per centum if the capital asset has been held for more than twelve months.
National Internal Revenue Code. When no action was taken by respondent on his request, petitioner
filed a petition for refund in the Court of Tax Appeals.
Parenthetically, it may be noted that tax rates are graduated upwards as the total amount of income
increases. But capital assets are generally held for a period in excess of a year. When held for more
The Tax Court held that the sale of the bakery did not constitute a sale of a single asset but of
than a year, the profit or loss realized is reported for tax purposes only in the year that the asset was
individual assets, some of which were capital assets while others were ordinary assets. But since
sold or exchanged even though the increment might have developed over several years or was the
petitioner failed to show what portion of the selling price of the bakery was fairly attributable to each
result of years of effort. Since the gain is taxed all in one year, a higher rate of tax would necessarily
asset, the Tax Court held that it could not ascertain the capital and/or ordinary gains taxes properly
be paid be included; similarly, only a limited amount of any loss than if a part of the gain were
payable upon the sale of the business. For this reason, it denied petitioner's claim for refund.
reported each year the asset was held. In an attempt to compensate for this, only a percentage of
the gain on such sales is required to can be deducted in the year in which realized. (Alexander,
In his first assignment of error, the petitioner contends that the Tax Court erred in holding that he had Federal Tax Handbook, p. 411, 1959 ed.)
made a profit of P19,678.09 from the sale of the bakery, upon which amount the income tax was
based. The petitioner now claims that the business had liabilities amounting to P19,183.01 which, if
The issue then is whether or not the sale of the La Suiza Bakery was a sale of a capital asset so that
deducted along with the book value of the assets and the incidental expenses from the selling price
the profits derived from the sale is taxable up to 50 per cent only, considering that petitioner owned it
of P100,000.00, would show a profit of P495.05 only.
for more than twelve months, or whether the business is to be comminuted into its component parts,
each part to be tested against the definition of a capital assets in the Tax Code.1wph1.t
We agree with the contention of the respondent that the matter of computation of profit cannot be
taken up in this appeal because the same was neither raised in the Tax Court nor made within the
We find that Section 34 (a) (1) of our Tax Code is patterned after Section 117 (a) (1) of the U.S.
issues of the pleadings of the parties. (Sec. 19, Rule 48, Rules of Court.) There, the only issues
Internal Revenue Code (26 USCA, Sec. 117 [a] [17]). In interpreting this latter provision, the United
were whether the Tax Court had jurisdiction over this case and whether or not the sale of the bakery
States Circuit Court of Appeals held in the leading case of Williams v. McGowan, 152 F2d 570, 162
was a sale of capital asset or of individual assets comprising the business. The rule is well settled
ALR 1036 thus
that no question will be considered by the appellate court which has not been raised in the court
below. When a party deliberately adopts a certain theory, and the case is tried and decided upon the
theory in the court below, he will not be permitted to change his theory on appeal, cause to permit . . . We have to decide only whether upon the sale of a going business it is to be
him to do so would be unfair to the adverse party. (Northern Motors, Inc. v. Prince Line, et al., G.R. comminuted into its fragments, and these are to be separately matched against the
No. L-13884, February 29, 1960 citing Toribio v. Decasa, 55 Phil. 461; San Agustin v. Barrios, 68 definition in Section 117 (a) (1), or whether the whole business is to be treated as if it were
Phil. 475; Molina v. Somes, 24 Phil. 49; and Agoncillo and Mario v. Javier, 38 Phil. 424.) a single piece of property.
 Our law has been sparing in the creation of juristic entities; it has never, for example,
taken over the Roman "universitas facti" and indeed for many years it fumbled uncertainly
with the concept of a corporation. One might have supposed that partnership would have
been an especially promising field in which to raise up an entity, particularly since
merchants have always kept their accounts upon that basis. Yet there too our law resisted
at the price of great and continuing confusion; and even when it might be thought that a
statute admitted, if it did not demand, recognition of the firm as an entity, the old concepts
prevailed. Francis v. McNeal, 228 US 695, 33 S Ct 701, 57 L. ed. 1029, LRA 1915 E 706.
And so, even though we might agree that under the influence of the Uniform Partnership
Act a partner's interest in the firm should be treated as indivisible, and for that reason a
"capital asset" within Section 117 (a) (1), we should be chary about extending further so
exotic a jural concept. Be that as it may, in this instance the section itself furnishes the
answer. It starts in the broadest way by declaring that all "property" is "capital asset", and
then makes three exceptions. The first is "stock in trade . . . or other property of a kind
which would properly be included in the inventory"; next comes "property held . . .
primarily for sale to customers"; and finally property "used in the trade or business of a
character which is subject to . . . allowance for depreciation." In the face of this language,
although it may be true that a "stock in trade," taken by itself should be treated as a
"universitas facti" by no possibility can a whole business be so treated; and the same is
true as to any property within the other exceptions. Congress plaintly did mean to
comminute the elements of a business; plainly it did not regard the whole as "capital
assets."
This ruling was cited with approval by the United State Supreme Court in Watson v. Commissioner,
345 U.S. 544, 97 L. ed. 1232.
In line with this ruling, We hold that the sale of the "La Suiza Bakery" was a sale not of a single
asset but of individual assets that made up the business. And since petitioner failed to point out what
part of the price he had received could be fairly attributed to each asset, the Tax Court correctly
denied his claim.
While agreeing with the Tax Court that the good-will of the business is a capital asset, petitioner
nevertheless contends that there is neither factual nor legal basis for concluding that the good-will of
the bakery which he had acquired for P10,000.00 was sold at the same price. The petitioner states
that he sold the assets of the bakery at their stated book value and that whatever amount of the
selling price exceeded the total book value of the assets minus the good-will should be attributed to
the latter alone. In short, it is urged that whatever profit was made from the sale came solely from
the bakery's good-will which the Tax Court held to be a capital asset, only 50 per cent of which was
taxable.
The Tax Court's finding that the petitioner acquired and sold the good-will of the bakery for the same
amount is supported by evidence (Exhibit "4" of respondent) which has not been rebutted. Indeed, it
is inconceivable how a business, which was heavily indebted as petitioner contends can ever
possess a good-will that can command so high a price.
For this reason, We believe that any profit which the petitioner may have gained in the same must
have come from the sale of the other assets of the business which must have been sold for amounts
other than their stated book value. As the Tax Court held, in order to ascertain the capital and/or
ordinary gains taxes properly payable on the sale of a business, including its tangible assets, it is
incumbent upon the taxpayer to show not only the cost basis of each asset, but also what portion of
the selling price is fairly attributable to each asset. (Cohen v. Kelm, 119 F supp. 376.)
WHEREFORE, the decision of the Court of Tax Appeals is hereby affirmed, with costs against the
petitioner.
Bengzon, C.J., Bautista Angelo, Labrador, Paredes, Dizon and Makalintal, JJ., concur.
Concepcion and Barrera, JJ., concur in the result.
Padilla, J., took no part.
G.R. No. 147188 September 14, 2004
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna
Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-
G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for
the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22
for the year 1989, and ordered the cancellation and setting aside of the assessment issued by
Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than P90 million.4
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who,
in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These
two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public.5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring,
among other things, its gain from the sale of real property in the amount of P75,728.021. After
crediting withholding taxes of P254,497.00, it paid P26,341,2078 for its net taxable income
of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January
1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand
letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against
the old CIC, and not against the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC
free from all tax liabilities for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators
Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995
from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the
amount of P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return
Add: Additional gain on sale of real property taxable under ordinary corporate income but were
with individual capital gains(P200M 100M)
Total Net Taxable Income per investigation
Tax Due thereof at 35%
Less: Payment already made
In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the change in the income structure
of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital
gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud
of the sale of the properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of
the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million
(the difference between the second simulated sale for P200 million and the first simulated sale
for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of
Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed
by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such
falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9
January 1995substituted
was well within the prescriptive period prescribed by Section 223 (a) of the National
Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the
discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate
personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares
of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of
the individual directors of CIC, should be held liable for the deficiency income tax, especially
because the gains realized from the sale were withdrawn by him as cash advances or paid to him as
cash dividends. Since he is already dead, his estate shall answer for his liability.

1. Per return In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a
2. Thru Capital Gains Tax made pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax
by R.A. Altonaga evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess
CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the governments right to assess CIC prescribed
on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The
CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in
Add: 50% Surcharge itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA
declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly,
cancelled and set aside the assessment issued by the Commissioner on 9 January 1995.
25% Surcharge

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by
CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter
Total
was a representative, dummy, and a close business associate of the former, having held his office in
a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly
Add: Interest 20% from owned by Toda for representation services rendered. The CTA denied20 the motion for
reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals.
4/16/90-4/30/94 (.808)

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more advantageously situated and having the necessary
TOTAL AMT. DUE & COLLECTIBLE
expertise in matters of taxation, is "better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate."22

The Estate thereafter filed a letter of protest.13 Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:
 I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED
NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES
OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE
CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER
TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989
HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by
CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially
incapable of purchasing it. She further points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the
Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between
CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana
as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series
of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI,
and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989
as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda
through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return
of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed?
and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year
1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is
a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer
to further or additional civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown
that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith,"
"willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is
unlawful.24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989,
prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received P40 million from RMI,25and not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance26 as "other inv. Cibeles Bldg." Also, as of 31 July 1989, another P40
million was debited and reflected in RMIs trial balance as "other inv. Cibeles Bldg." This would
show that the real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and
one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy
Prieto, the assistant accountant of CIC and an old timer in the company.27 But Mr. Prieto did not
testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for investigation of Altonaga was
unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless,
that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale
to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale.
Admitted one hundred percent. But isnt this precisely the definition of tax planning?
Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax
Code exists, allowing tax free transfers of property for stock, changing the structure of the
property and the tax to be paid. As long as it is done legally, changing the structure of a
transaction to achieve a lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner
[sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring
supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage
is taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be
paid especially that the transfer from him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax shelter. Altonaga
never controlled the property and did not enjoy the normal benefits and burdens of ownership. The
sale to him was merely a tax ploy, a sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on
the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. 31
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by
the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and
each step from the commencement of negotiations to the consummation of the sale is relevant. A
sale by one person cannot be transformed for tax purposes into a sale by another by using the latter
as a conduit through which to pass title. To permit the true nature of the transaction to be disguised
by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. 34 The two
sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended
(now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources
by every corporation organized in, or existing under the laws of the Philippines, and
partnerships, no matter how created or organized but not including general professional
partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not
exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds
one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986 35 (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a)
In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court after the collection of such tax
may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud or omission: Provided, That in a fraud assessment which has become final
and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of
the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of
the transactions even prior to the execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the execution of public documents and the
declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud.
As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the
year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles
property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten
years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing
it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the
liabilities of a corporation and vice versa. There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that personal liability of a corporate
director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly
and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the
years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically
provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no
liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance
claims other than those reported in its audited financial statement as of December 31,
1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has
at all times been conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free
from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and
1989.39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income
tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held
himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs
deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since
its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares
of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the
Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and
another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to
pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989,
plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
[MISSING/NO ACCESS]
CA-GR SP No. 37402 August 28, 1997
CIR vs Del Rosario
G.R. No. 150308 November 26, 2004
VIVE EAGLE LAND, INC. and VIRGILIO O. CERVANTES, petitioners,
vs.
COURT OF APPEALS and GENUINO ICE CO., INC., respondents.
CALLEJO, SR., J.:
This is a petition filed by Vive Eagle Land, Inc. (VELI) and Virgilio Cervantes for the review of the
July 19, 2001 Decision1 and October 4, 2001 Resolution of the Court of Appeals (CA) in CA-G.R. CV
No. 51933.
The Antecedents
The Spouses Raul and Rosalie Flores were the owners of two parcels of land situated along Aurora
Boulevard, Cubao, Quezon City, covered by
Transfer Certificates of Title (TCT) Nos. 241845 and 241846, with an area of 1,026 and 2,963
square meters, respectively. On October 10, 1987, the Spouses Flores and Tatic Square
International Corporation (TATIC) executed an Agreement to Sell in which the said spouses bound
and obliged themselves to sell the properties to TATIC. The latter then applied for a loan with the
Capital Rural Bank of Makati, Inc. (Bank) to finance its purchase of the said lots. The Bank agreed to
grant the application of TATIC in the amount of P5,757,827.63 provided that the torrens titles over
the subject properties would be registered under the name of the latter as the subject lots would be
used as collateral for the payment of the said loan.2
On April 13, 1988, the Spouses Flores, TATIC, Isidro S. Tobias (who acted as broker), and the Bank
executed a Memorandum of Agreement (MOA), wherein the Spouses Flores, as vendees-owners,
warranted that "the titles of the two properties were free and clear from any and all obligations and
claims, whether past or present, from any creditors or third persons." Tobias, as broker, undertook to
pay any and all the taxes and assessments imposed and/or charged over the lots, including the
payment of capital gains tax; and to secure tax clearances from the proper government agencies
within thirty days from April 12, 1988. Tobias also undertook to remove any and all
tenants/occupants on the lots within sixty days from April 12, 1988 with the assistance and
cooperation of the Spouses Flores. The parties agreed that the expenses to be incurred by Tobias
and TATIC would be deducted from the purchase price of the property, which was estimated at
P790,000.00:
6. The BROKER undertakes to clear the titles covering the two (2) parcels of land from
any and all liens and encumbrances, including future claims and/or liability from any
person or entity within thirty (30) days from April 12, 1988. Towards this end, the OWNER
shall endeavor to provide the BROKER the documents/papers, which are necessary and
proper to carry out this objective;
The OWNERS warrant that the titles of the two properties are free and clear from any and
all obligations and claims, whether past or present, from any bank or financial institution or
any other creditor, or third persons;
7. The BROKER shall undertake to pay any and all taxes and assessments imposed
and/or charged over the two (2) parcels of land including the payment of capital gains tax
and secure tax clearance from the proper government agency/ies within thirty (30) days
from April 12, 1988. Official receipts of payments thereof shall be presented and delivered
to CAPITAL BANK;
The payment of any taxes and assessments on the two parcels of land may be advanced
by CAPITAL BANK provided that TATIC SQUARE will execute a Promissory Note in favor
of CAPITAL BANK in the amount corresponding thereto. The amount covered by this
Promissory Note shall be deducted from the balance of the purchase price payable by
TATIC SQUARE to the OWNERS;
8. The BROKER and TATIC SQUARE shall undertake to remove any and all
occupants/tenants of the two (2) parcels of land whether legally or illegally residing thereat
within sixty (60) days from April 12, 1988 with the assistance and cooperation of the
OWNERS;
9. Any and all expenses to be incurred in complying with the undertakings mentioned in
paragraphs 6, 7 and 8 shall be deducted from the purchase price of the two parcels of
land, the expenses of which is estimated to be SEVEN HUNDRED NINETY THOUSAND
PESOS (P790,000.00). If the said amount of P790,000.00 would not be sufficient, the
other expenses connected therewith shall be taken and/or deducted from the amount due
the BROKER.3
On the same day, the Spouses Flores executed a deed of absolute sale over the two parcels of land
for the price of P5,700,000.00 in favor of TATIC.4 The Spouses Flores, thereafter, turned over the
custody of the owner's copy of their titles to the Bank.5
Although the torrens titles over the lots were still in the custody of the Bank, TATIC, as vendor, and
petitioner VELI, as vendee, executed a deed of absolute sale6 on April 14, 1988, in which TATIC sold
the properties to the petitioner for P6,295,224.88, receipt of which was acknowledged in the said
deed by TATIC. The latter warranted in the said deed that there were valid titles to the property and
that it would deliver possession thereof to the petitioner. The parties executed a deed entitled
"Addendum" in which they agreed on the following:
1. TATIC SQUARE represents and warrants that the titles covering the two (2) parcels of
land are free from any and all liens and encumbrances except the mortgage which may be
subsisting in favor of CAPITAL BANK. TATIC SQUARE shall cause the registration and
transfer of the titles covering the two (2) parcels of land in its name;
TATIC SQUARE undertakes to remove all the occupants/tenants whether legally or
illegally residing thereat within sixty (60) days from April 12, 1988. Otherwise, VELI shall
have the right and authority to withhold payment of the remaining balance of the purchase
price of the sale of the entire project;
 2. In consideration of the execution of the Deed of Sale over the two (2) parcels of land
(Annex "A" hereof), VELI hereby absorbs and assumes to pay the loan obligations of
TATIC SQUARE with CAPITAL BANK in the principal amount of FIVE MILLION SEVEN
HUNDRED FIFTY-SEVEN THOUSAND EIGHT HUNDRED TWENTY-SEVEN & 63/100
(P5,757,827.63) plus whatever interests and other charges that may be imposed thereon
by CAPITAL BANK including the release of the mortgage constituted over the property
upon full payment of the loan;
3. TATIC SQUARE, likewise, represents and warrants that it is the absolute owner of the
entire project known as TATIC WALK-UP CONDOMINIUM including its accessories and
appurtenance thereto;
4. In accordance with the Deed of Sale of the entire project (Annex "B" hereof), VELI shall
promptly pay on its due date TATIC SQUARE, the remaining balance of the purchase
price in the amount of P400,000.00 subject to adjustment set forth in the next preceding
paragraph.7
On November 11, 1988, VELI, as vendor, through its president, petitioner Virgilio Cervantes, and
respondent Genuino Ice Co., Inc., as vendee, executed a deed of absolute sale8 over the parcel of
land covered by TCT No. 241846 for the price of P4,000,000.00, receipt of which was acknowledged
by petitioner VELI. On the same day, the respondent and petitioner VELI executed a deed of
assignment of rights in which the latter assigned in favor of the respondent, for and in consideration
of P4,000,000.00, all its rights and interests under the Deed of Absolute Sale executed on April 13,
1988 by the Spouses Flores and the deed of absolute sale executed by TATIC in its favor, insofar as
that lot covered by TCT No. 241846 only was concerned.9
In the meantime, the respondent, through counsel, wrote petitioner VELI and made the following
demands:
In view of the foregoing facts, demand is hereby made upon you to pay to the BIR the
capital gains tax amounting to P285,000.00 and deliver to us the receipt and/or clearance
thereof, plus the interests for all registration fees on account of delay in the payment of the
capital gains tax and the 1% documentary stamp tax for the sale of the property from your
company to our client or to give them a BIR clearance regarding payment of all said taxes
within five (5) days from receipt hereof; otherwise, much to our regret, we will be
constrained to file legal action for specific performance and damages against your
company in order to protect the interest of our client.10
In a letter to the respondent, petitioner VELI, through counsel, rejected the former's demand.11
On June 24, 1990, the respondent filed a Complaint against petitioner VELI and its president, Virgilio
Cervantes, for specific performance and damages in the Regional Trial Court (RTC) of Quezon City.
The respondent alleged, inter alia, that petitioner VELI failed (a) to transfer title to and in the name of
the respondent over the property covered by TCT No. 241846 despite the lapse of a reasonable
time; (b) to cause the eviction/removal of the squatters/occupants on the property; and (c) to pay the
capital gains tax and other assessments due to effectuate the transfer of the titles of the property to
and in its name. The respondent prayed that, after due proceedings, judgment be rendered in its
favor, thus:
WHEREFORE, premises considered, it is most respectfully prayed that, after trial,
judgment be rendered against defendants to, jointly and severally, indemnify plaintiff as
follows:
I. FIRST CAUSE OF ACTION
a) To effect or cause the transfer of title in favor of the plaintiff;
b) To pay the capital gains tax and other requirements or expenses necessary
to effect said transfer.
II. SECOND CAUSE OF ACTION
a) To direct defendants to cause the removal or eviction of the squatters or
unlawful occupants for (sic) the area;
b) In the alternative, if eviction is not accomplished to forfeit the amount of
P300,000 in favor of plaintiff.
III. THIRD CAUSE OF ACTION
a) To pay actual damages in the amount of no less than FIVE HUNDRED
THOUSAND PESOS;
b) To pay exemplary damages in the amount of FIVE HUNDRED THOUSAND
PESOS;
c) Attorney's fees in the amount of P250,000;
d) Costs of suits.
Plaintiff further prays for such relief or reliefs as may be just and equitable under the
premises.12
In their answer13 to the complaint, the petitioners alleged that the respondent had no cause of action
against them because (a) petitioner VELI was exempt from the payment of capital gains tax; (b) the
Spouses Flores and Tobias were liable for the payment of capital gains tax; and (c) the Spouses
Flores and Tobias were responsible for the eviction of the occupants/squatters from the property.
The trial court rendered judgment, amended per its Order dated April 17, 1995, in favor of the
respondent. The fallo of the decision, as amended, reads:
WHEREFORE, foregoing considered, judgment is hereby rendered in favor of plaintiff
ordering defendants to cause the transfer of the title to the plaintiff. The payment of the
capital gains tax shall be paid by the defendants. Further, defendants are hereby ordered
to remove or evict or cause the removal or eviction of the squatters or unlawful occupants
of the area, otherwise, the amount of P300,000.00 shall be deemed forfeited in favor of
plaintiff; to pay attorney's fees of P20,000.00 and to pay the costs.
SO ORDERED.14
The trial court held that the petitioners were liable for the payment of the capital gains tax, and that
the respondent was not privy to the deeds of absolute sale executed by the Spouses Flores and
TATIC, and TATIC and petitioner VELI, and as such is not bound by the said deeds; neither could
the respondent enforce the same against the Spouses Flores, TATIC and petitioner VELI.
In due course, the petitioners appealed to the CA which rendered judgment, on July 19, 2001,
affirming, with modification, the appealed decision. The CA held that the petitioners were liable for
the expenses for the registration of the sale. It also ruled that the respondent was not bound by the
deed of absolute sale executed by TATIC and the petitioners because it was not a party thereto, and
that the latter were obliged to cause the eviction of the squatters from the property.15
The petitioners, in the instant petition for review, raise the following issues for resolution: (a) whether
or not petitioner VELI is obliged to pay for the expenses for transfer of the property and the issuance
of the titles to and under the name of the respondent; (b) whether or not the petitioners are liable for
the capital gains tax for the sale between petitioner VELI and the respondent; and (c) whether or not
the petitioners are obliged to evict the remaining squatters from the land.
Petitioner VELI is Obliged to Cause the Registration of the November 11, 1988
Deed of Absolute Sale in Favor of Respondent, the Issuance of a Torrens Title
in the Name of Respondent and the Eviction of the Tenants/Occupants
from the Property at the Expense of the Petitioner.
The petitioners assail the ruling of the CA that, under Article 1487 of the New Civil Code, petitioner
VELI, as vendor, is liable for the expenses for the registration of the third deed of sale in favor of the
respondent, as vendee, and to secure a torrens title over the property to and under the name of the
latter. The petitioners contend that, under the MOA executed by the Spouses Flores, Tobias (the
broker), the Bank and TATIC, the April 14, 1988 agreement and the first deed of sale executed by
the Spouses Flores and Tobias, the latter obliged themselves to spend for the registration of the said
deed of absolute sale and for the issuance of torrens titles over the properties in the name of the
vendees; and further obliged themselves to cause the eviction of the tenants/occupants from the
property within sixty days from April 12, 1988. The petitioners, likewise, emphasize that, under the
April 14, 1988 agreement of the petitioners and TATIC, the latter obliged itself to cause and spend
for the registration of the second deed of sale between petitioner VELI and TATIC, and the issuance
of the titles over the property in favor of petitioner VELI; and to cause the eviction of the
tenants/occupants from the property within sixty days from April 12, 1988. Also, under the deed of
assignment of rights executed by petitioner VELI and the respondent, the latter acquired the rights
and interests of petitioner VELI under the deeds of sale executed by the Spouses Flores in favor of
TATIC, and by TATIC in favor of petitioner VELI.
The petitioners aver that, under the deed of sale they executed in favor of the respondent, as well as
the acts of the parties before, contemporaneous with and subsequent to the execution of the said
deed, they cannot be held liable for the expenses for the registration of the third deed of sale, the
transfer of titles to and under the name of the respondent, for payment of the capital gains tax and
the eviction of the tenants/occupants on the property. Such acts include the execution of the
following: the addendum to the said deed of sale; the deed of assignment of rights executed by
petitioner VELI in favor of the respondent; and the deeds executed by the Spouses Flores, TATIC
and Tobias.
The petitioners contend that the CA erred in ruling that the respondent is not bound by the deeds
executed by the Spouses Flores, TATIC and Tobias, and by TATIC and petitioner VELI simply
because the respondent was not a party to the said deeds. The petitioners insist that the respondent
acquired the rights and interests of its predecessors; and, being the vendee/owner of the property
covered by TCT No. 241846, the petitioners had the right to enforce the said contracts against its
predecessors.
We are not in full accord with the petitioners. It bears stressing that there are three separate deeds
of absolute sale on record, to wit: first, the April 13, 1988 deed of absolute sale executed by the
Spouses Flores and TATIC; second, the April 14, 1988 deed of absolute sale executed by TATIC in
favor of petitioner VELI; and third, the November 11, 1988 deed of absolute sale between petitioner
VELI, as vendor, and the respondent, as vendee, over the property covered by TCT No. 241846.
Under the April 13, 1988 MOA executed by the Spouses Flores, Tobias, TATIC and the Bank, the
Spouses Flores and Tobias obliged themselves to spend for and cause the registration of the first
deed of absolute sale, to cause the issuance of the torrens titles over the property to and under the
name of TATIC, as vendee, and to pay the capital gains tax on the said sales. Tobias and TATIC
bound and obliged themselves to cause the eviction of the tenants/occupants on the property within
sixty days from April 12, 1988, with the assistance of the Spouses Flores. On the other hand, under
the April 14, 1988 agreement of TATIC and petitioner VELI, TATIC obliged itself to spend for the
registration of the second deed of absolute sale and the issuance of the titles over the property to
and under the name of petitioner VELI, and to cause the eviction of the tenants/occupants from the
property within sixty days from April 12, 1988. TATIC did not bind itself to pay the capital gains tax
for the said sale.
Indeed, under the third deed of absolute sale, petitioner VELI did not oblige itself to spend for the
registration of the said deed; to secure a torrens title over the property to and under the name of the
respondent; or to cause the eviction of the tenants/occupants on the property. Nevertheless,
petitioner VELI is liable for the said expenses because, under Article 148716 of the New Civil Code,
the expenses for the registration of the sale should be shouldered by the vendor unless there is a
stipulation to the contrary. In the absence of any stipulation of the parties relating to the expenses for
the registration of the sale and the transfer of the title to the vendee, Article 1487 shall be applied in
a supplementary manner.17
Under Article 149518 of the New Civil Code, petitioner VELI, as the vendor, is obliged to transfer title
over the property and deliver the same to the vendee. While Article 149819 of the New Civil Code
provides that the execution of a notarized deed of absolute sale shall be equivalent to the delivery of
the property subject of the contract, the same shall not apply if, from the deed, the contrary does not
appear or cannot clearly be inferred. In the present case, the respondent and petitioner VELI agreed
that the latter would cause the eviction of the tenants/occupants and deliver possession of the
property. It is clear that at the time the petitioner executed the deed of sale in favor of the
respondent, there were tenants/occupants in the property. It cannot, thus, be concluded that,
through the execution of the third deed of sale, the property was thereby delivered to the
respondent.
Petitioner VELI is obliged to cause the eviction of the tenants/occupants unless there is a contrary
agreement of the parties. Indeed, under the addendum executed by petitioner VELI and the
respondent, the latter was given the right to withhold P300,000.00 of the purchase price until after
petitioner VELI cleared the property of squatters.
While it is true that the respondent acquired the rights and interests of TATIC under the first deed of
sale and that of petitioner VELI under the second deed of sale by virtue of the deed of assignment of
rights executed by the petitioners and the respondent, the latter cannot enforce the terms and
conditions of the said deeds. It must be stressed that there is no showing in the records that the
Spouses Flores, Tobias and TATIC conformed to the said deed of assignment of rights or that the
same was registered in the office of the Register of Deeds in accordance with Article 1625 20 of the
New Civil Code.
Moreover, the execution, by petitioner VELI and the respondent, of such deed of assignment of
rights did not relieve the said petitioner of its obligation to clear the property of tenants/occupants.
This is because the following agreement was embodied in their addendum:
NOW THEREFORE, for and in consideration of the foregoing premises, the Transferee
hereby retains and holds from the Transferor the amount of Three Hundred Thousand &
00/100 Pesos (P300,000.00), from the purchase price due the Transferor until after the
premises have been rid of and cleared from squatters occupying therein.
That after the said parcel of land has been cleared of squatters, the Transferee shall
immediately remit to the Transferor the aforesaid sum of Three Hundred Thousand &
00/100 Pesos (P300,000.00) without need of further act or deed.21
Petitioner VELI is Not Liable for
Payment of the Capital Gains Tax for the Third Sale
We agree with the petitioners' contention that petitioner VELI is not liable for the payment of capital
gains tax for the third deed of sale. A capital gains tax is a final tax assessed on the presumed gain
derived by citizens and resident aliens, as well as estates and trusts, from the sale or exchange of
real property.22 Under the first sale, per the agreement of the Spouses Flores, TATIC, and Tobias,
the said spouses were obliged to pay the capital gains tax. However, under the deed of absolute
sale for the second sale, TATIC was not obliged to pay the said tax. The Court notes that in answer
to the respondent's demand letter, petitioner VELI claimed that such tax could not be assessed
against it or against TATIC for the reason that they are corporations and, therefore, exempt from the
payment of capital gains tax for any sale or exchange or disposition of property.
It is settled that only laws existing at the time of the execution of a contract are applicable thereto
and not later statutes, unless the latter are specifically intended to have retroactive effect.23 When
the first and second deeds of absolute sale took place in 1988, the 1977 National Internal Revenue
Code (NIRC), as amended by Batas Pambansa Blg. 37 and
Executive Order No. 237 was still in effect. Under Sections 21(e)24 and 34(h)25 of the 1977 NIRC, as
amended, the Spouses Flores, as vendors, were liable for the payment of capital gains tax. In the
second sale, however, TATIC was not similarly liable because while Article 1487 of the Civil Code
provides that the seller is obliged to pay the capital gains tax based on its obligation to transfer title
over the property to the vendee under Sections 21(e) and 34(h) of the 1977 NIRC, the payment of
capital gains tax from the sale, exchange of disposition of real property devolved only upon
individual taxpayers. In fact, the Bureau of Internal Revenue (BIR), in response to the queries of
several corporations which had sold, exchanged or disposed of their real properties, more
particularly in BIR Ruling Nos. 159 (September
13, 1985), 127 (July 12, 1983), 191 (November 15, 1983), 195 (November 15, 1983), 60 (May 12,
1986), 177 (September 17, 1986), and 415-87 (December 23, 1987), definitely ruled that the
corporations were exempt from the payment of capital gains tax. Their income from the sale or
exchange or disposition of real property was treated as ordinary income, and was taxed as such.
One of the opinions of the BIR Commissioner reads:
Ruling No. 159
September 13, 1985
Gentlemen:
In reply to your letter dated September 11, 1985, I have the honor to inform you that
Revenue Regulations No. 8-79 implementing Section 34(h) of the Tax Code, as amended
by Batas Pambansa Blg. 37 is explicit that only natural persons or individuals are liable to
the final capital gains tax prescribed therein. Such being the case, the gains derived by
your client, the Religious of the Virgin Mary from the sale of its real property in Balanga,
Bataan, is not subject to the final capital gains tax prescribed by Section 34(h) of the Tax
Code, as amended by Batas Pambansa Blg. 37 but to the ordinary corporate income tax
prescribed under Section 24(a) of the same Code, as amended.
Very truly yours,
(Sgd.)
RUBEN B. ANCHETA
Acting Commissioner
This is the reason why, in the second sale, neither TATIC nor petitioner VELI paid any capital gains
tax. Similarly, in the third sale, i.e., between petitioner VELI and the respondent, petitioner VELI,
being a corporation, was not obliged to pay the capital gains tax. However, petitioner VELI, as seller,
should have included in its ordinary income tax return, whatever gain or loss it incurred with respect
to the sale of the property in dispute, pursuant to Section 24(a)26 of the 1977 NIRC, as amended.
We do not agree with the ruling of the CA that, under Section 24(d) of the 1997 NIRC, previously
Section 34(h) of the 1977 NIRC, petitioner VELI is obliged to pay capital gains tax for its sale of the
property to the respondent. Section 34(h) of the 1977 NIRC, as amended by B.P. Blg. 37 reads as
follows:
(h) The provision of paragraph (b) of this Section to the contrary notwithstanding, net
capital gains from the sale or other disposition of real property by citizens of the
Philippines or resident alien individuals shall be subject to the final income tax rates
prescribed as follows:
NET CAPITAL GAINS RATES
On the first P100,000 or less 10%
On any amount over P100,000 20%
Such tax shall be in lieu of the tax imposed under Section 21 of this Code; Provided,
however, That the tax liability, if any, on gains from sales or other dispositions of real
property to the government or any of its political subdivisions or agencies or to
government-owned and controlled corporations shall be determined either under Section
21 hereof or under this Section, at the option of the taxpayer; Provided, further, That if the
taxpayer elects to report such gains in accordance with the provisions of Section 43(b),
the amount of the tax which shall be paid on each installment shall be the proportion of
the tax herein imposed, which the installment payment received bears to the total selling
price; Provided, finally, That failure on the part of the seller to pay tax imposed herein on
any gains returnable under the installment method will automatically disqualify the seller-
taxpayer from paying the tax in installments and the unpaid portion of the tax shall
immediately be due and demandable. The tax herein imposed shall be returned and paid
in accordance with Sections 45(c)27 and 51(a)(4) of this Code.
No registration of any document transferring real property shall be effected by Register of
Deeds unless the Commissioner or his duly authorized representative has certified that
such transfer has been reported and the tax herein imposed, if any, has been paid; in
case of deferred-payment sales of real property where the vendor retains title to the
property, the vendee shall furnish the Commissioner with a copy of the instrument of sale
within the same period prescribed for payment of the tax herein imposed.
Section 24(D) of the 1997 NIRC, which refers to the capital gains from sale of real property, is found
in the Title "Chapter III Tax on Individuals," and is herein quoted:
(D) Capital Gains from Sale of Real Property.
(1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent
(6%) based on the gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as capital assets, including
pacto de retro sales and other forms of conditional sales, by individuals, including estates
and trusts: Provided, That the tax liability, if any, on gains from sales or other disposition of
real property to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined either under Section
24(A)or under this Subsection, at the option of the taxpayer.
As pointed out earlier, the sale between petitioner VELI and the respondent occurred in November
11, 1988. At that point in time, it was the 1977 NIRC as amended, which was in effect. Hence, the
applicable law is Section 34(h). Section 24(d) of the 1997 NIRC, which requires corporations to pay
capital gains tax at rates provided for in Chapter IV, Section 27 thereof, cannot be applied
retroactively.28 The latter provision reads:
CHAPTER IV TAX ON CORPORATIONS
Section 27. Rates of Income Tax on Domestic Corporations.
(D) Rates of Tax on Certain Passive Incomes.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. A final tax of six percent (6%) is hereby imposed on the gain presumed to have
been realized on the sale, exchange or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are treated as capital assets, based on
the gross selling price or fair market value as determined in accordance with Section 6(E)
of this Code, whichever is higher, of such lands and/or buildings.
The gains that a corporation earned in the sale, exchange or disposition of the real properties it
made should be included in the Corporation's return, pursuant to Sections 24(a) and 45 of the 1977
NIRC, as amended.29
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The decision of the
Court of Appeals in CA-G.R. CV No. 51933 is hereby AFFIRMED WITH MODIFICATION. That
portion of the Decision of the Court of Appeals mandating petitioner Vive Eagle Land, Inc. to pay
capital gains tax for the November 11, 1988 sale of the property covered by TCT No. 241846 to
respondent Genuino Ice Co., Inc. is DELETED. No costs.
SO ORDERED.
Puno, J., Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.
G.R. No. 175410 November 12, 2014
SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should have been paid in lieu of the taxes paid. Determining
the proper category of tax that should have been paid is not an assessment. It is incidental to
determining whether there should be a refund.
A Philippine Economic Zone Authority (PEZA)-registered corporation that has never commenced
operations may not avail the tax incentives and preferential rates given to PEZA-registered
enterprises. Such corporation is subject to ordinary tax rates under the National Internal Revenue
Code of 1997.
This is a petition for review1 on certiorari of the November 3, 2006 Court of Tax Appeals En Banc
decision.2 It affirmed the Court of Tax Appeals Second Divisions decision3 and resolution4 denying
petitioner SMI-Ed Philippines Technology, Inc.s (SMI-Ed Philippines) claim for tax refund. 5
SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of
manufacturing ultra high-density microprocessor unit package."6
After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings and purchased
machineries and equipment.7 As of December 31, 1999, the total cost of the properties amounted
to P3,150,925,917.00.8
SMI-Ed Philippines "failed to commence operations."9 Its factory was temporarily closed, effective
October 15, 1999. On August 1, 2000, it sold its buildings and some of its installed machineries and
equipment to Ibiden Philippines, Inc., another PEZA-registered enterprise, for 2,100,000,000.00
(P893,550,000.00). SMI-Ed Philippines was dissolved on November 30, 2000.10
In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross sales
of itsproperties to 5% final tax on PEZA registered corporations. SMI-Ed Philippines paid taxes
amounting to P44,677,500.00.11
On February 2, 2001, after requesting the cancellation of its PEZA registration and amending its
articles of incorporation to shorten its corporate term, SMI-Ed Philippines filed an administrative
claim for the refund of P44,677,500.00 with the Bureauof Internal Revenue (BIR). SMIEd Philippines
alleged that the amountwas erroneously paid. It also indicated the refundable amount in its final
income tax return filed on March 1, 2001. It also alleged that it incurred a net loss
of P2,233,464,538.00.12
The BIR did not act on SMI-Ed Philippines claim, which prompted the latter to file a petition for
reviewbefore the Court of Tax Appeals on September 9, 2002.13
The Court of Tax Appeals Second Division denied SMI-Ed Philippines claim for refund in the
decision dated December 29, 2004.14
The Court of Tax Appeals Second Division found that SMI-Ed Philippines administrative claim for
refund and the petition for review with the Court of Tax Appeals were filed within the two-year
prescriptive period.15 However, fiscal incentives given to PEZA-registered enterprises may be
availed only by PEZA-registered enterprises that had already commenced operations. 16 Since SMI-
Ed Philippines had not commenced operations, it was not entitled to the incentives of either the
income tax holiday or the 5% preferential tax rate.17 Payment of the 5% preferential tax amounting
to P44,677,500.00 was erroneous.18
After finding that SMI-Ed Philippines sold properties that were capital assets under Section 39(A)(1)
of the National Internal Revenue Code of 1997, the Court of Tax Appeals Second Division subjected
the sale of SMIEd Philippines assets to 6% capital gains tax under Section 27(D)(5) of the same
Code and Section 2 of Revenue Regulations No. 8-98.19 It was found liable for capital gains tax
amounting to P53,613,000.00.20 Therefore, SMIEd Philippines must still pay the balance
of P8,935,500.00 as deficiency tax,21 "which respondent should perhaps look into."22 The dispositive
portion of the Court of Tax Appeals Second Divisions decision reads:
WHEREFORE, premises considered, the instant petition is hereby DENIED.
SO ORDERED.23
The Court of Tax Appeals denied SMI-Ed Philippines motion for reconsideration in its June 15, 2005
resolution.24
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of Tax Appeals En
Banc.25 It argued that the Court of Tax Appeals Second Division erroneously assessed the 6%
capital gains tax on the sale of SMI-Ed Philippines equipment, machineries, and buildings. 26 It also
argued that the Court of Tax Appeals Second Division cannot make an assessment at the first
instance.27 Even if the Court of Tax Appeals Second Division has such power, the period to make an
assessment had already prescribed.28
In the decision promulgated on November 3, 2006, the Court of Tax Appeals En Banc dismissed
SMI-Ed Philippines petition and affirmed the Court of Tax Appeals Second Divisions decision and
resolution.29 The dispositive portion of the Court of Tax Appeals En Bancs decision reads:
WHEREFORE, finding no reversible error to reverse the assailed Decision promulgated on
December 29, 2004 and the Resolution dated June 15, 2005, the instant petition for review is hereby
DISMISSED. Accordingly, the assailed Decision and Resolution are hereby AFFIRMED. SO
ORDERED.30
SMI-Ed Philippines filed a petition for review before this court on December 27, 2006,31 praying for
the grant of its claim for refund and the reversal of the Court of Tax Appeals En Bancs decision. 32
SMI-Ed Philippines assigned the following errors:
A. The honorable CTA En Banc grievously erred and acted beyond its jurisdiction when it
assessed for deficiency tax in the first instance.
B. Even assuming that the honorable CTA En Banc has the right to make an assessment
against the petitioner-appellant, it grievously erred in finding that the machineries and
equipment sold by the petitioner-appellant is subject to the six percent (6%) capital gains
tax under Section 27(D)(5) of the Tax Code.33
Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an assessment since its
jurisdiction, with respect to the decisions of respondent, is merely appellate.34 Moreover, the power
to make assessment had already prescribed under Section 203 of the National Internal Revenue
Code of 1997 since the return for the erroneous payment was filed on September 13, 2000. This is
more than three (3) years from the last day prescribed by law for the filing of the return.35
Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjected petitioners
machineries to 6% capital gains tax.36 Section 27(D)(5) of the National Internal Revenue Code of
1997 is clear that the 6% capital gains tax on domestic corporations applies only on the sale of lands
and buildings and not tomachineries and equipment.37 Since 1,700,000,000.00 of the
2,100,000,000.00 constituted the consideration for the sale of petitioners machineries, only
400,000,000.00 or P170,200,000.00 should be subjected to the 6% capital gains tax.38 Petitioner
should be liable only for P10,212,000.00.39 It should be entitled to a refund of P34,464,500.00 after
deducting P10,212,000.00 from the erroneously paid final tax of P44,677,500.00.40
In its comment, respondent argued that the Court of Tax Appeals determination of petitioners
liability for capital gains tax was not an assessment. Such determination was necessary to settle the
question regarding the tax consequence of the sale of the properties.41 This is clearly within the
Court of Tax Appeals jurisdiction under Section 7 of Republic Act No. 9282.42 Respondent also
argued that "petitioner failed to justify its claim for refund."43
The petition is meritorious.
I
Jurisdiction of the Court of Tax Appeals
The term "assessment" refers to the determination of amounts due from a person obligated to make
payments. In the context of national internal revenue collection, it refers the determination of the
taxes due from a taxpayer under the National Internal Revenue Code of 1997.
The power and duty to assess national internal revenue taxes are lodged with the BIR. 44 Section 2 of
the National Internal Revenue Code of 1997 provides:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenue
shall be under the supervision and control of the Department of Finance and its powers and duties
shall comprehend the assessment and collection ofall national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including
the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers
conferred to it by this Code or other laws. (Emphasis supplied) The BIR is not mandated to make an
assessment relative to every return filed with it. Tax returns filed with the BIR enjoy the presumption
that these are in accordance with the law.45 Tax returns are also presumed correct since these are
filed under the penalty of perjury.46Generally, however, the BIR assesses taxes when it appears,
after a return had been filed, that the taxes paid were incorrect,47 false,48 or fraudulent.49 The BIR
also assesses taxes when taxes are due but no return is filed.50 Thus:
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements
for Tax Administration and Enforcement.
(A) Examination of Returns and Determination of Tax Due. - After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct amount of tax:
Provided, however; That failure to file a return shall not prevent the Commissioner from authorizing
the examination of any taxpayer.The tax or any deficiency tax so assessed shall be paid upon notice
and demand from the Commissioner or from his duly authorized representative.
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the
tax may be assessed, or a preceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for the collection thereof. (Emphasis
supplied)
The Court of Tax Appeals has no powerto make an assessment at the first instance. On matters
such as tax collection, tax refund, and others related to the national internal revenue taxes, the
Court of Tax Appeals jurisdiction is appellate in nature.
Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by Republic Act No.
9282,52 provide that the Court of Tax Appeals reviews decisions and inactions of the Commissioner
of Internal Revenue in disputed assessments and claims for tax refunds. Thus: SEC. 7. Jurisdiction.-
The CTA shall exercise:
a. Exclusive appellate jurisdiction toreview by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relations thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial[.] (Emphasis supplied) Based on these provisions, the following must be
present for the Court of Tax Appeals to have jurisdiction over a case involving the BIRs
decisions or inactions:
a) A case involving any of the following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees, or other charges, penalties
in relation thereto; and
iii. Other matters arising under the National Internal Revenue Code of
1997.
b) Commissioner of Internal Revenues decision or inaction in a case submitted
to him or her
Thus, the BIR first has to make an assessment of the taxpayers liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that assessment before the BIR. If the BIR issues a
decision that is unfavorable to the taxpayer or if the BIR fails to act on a dispute brought by the
taxpayer, the BIRs decision or inaction may be brought on appeal to the Court of Tax Appeals. The
Court of Tax Appeals then acquires jurisdiction over the case.
When the BIRs unfavorable decision is brought on appeal to the Court of Tax Appeals, the Court of
Tax Appeals reviews the correctness of the BIRs assessment and decision. In reviewing the BIRs
assessment and decision, the Court of Tax Appeals had to make its own determination of the
taxpayers tax liabilities. The Court of Tax Appeals may not make such determination before the BIR
makes its assessment and before a dispute involving such assessment is brought to the Court of
Tax Appeals on appeal.
The Court of Tax Appeals jurisdiction is not limited to cases when the BIR makes an assessment or
a decision unfavorable to the taxpayer. Because Republic Act No. 112553 also vests the Court of Tax
Appeals with jurisdiction over the BIRs inaction on a taxpayers refund claim, there may be
instances when the Court of Tax Appeals has to take cognizance of cases that have nothing to do
with the BIRs assessments or decisions. When the BIR fails to act on a claim for refund of
voluntarily but mistakenly paid taxes, for example, there is no decision or assessment involved.
Taxes are generally self-assessed. They are initially computed and voluntarily paid by the taxpayer.
The government does not have to demand it. If the tax payments are correct, the BIR need not
make an assessment.
The self-assessing and voluntarily paying taxpayer, however, may later find that he or she has
erroneously paid taxes. Erroneously paid taxes may come in the form of amounts thatshould not
have been paid. Thus, a taxpayer may find that he or she has paid more than the amount that
should have been paid under the law. Erroneously paid taxes may also come in the form of tax
payments for the wrong category of tax. Thus, a taxpayer may find that he or she has paid a certain
kindof tax that he or she is not subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the request for
refund, the taxpayer may bring the matter to the Court of Tax Appeals.
From the taxpayers self-assessment and tax payment up to his or her request for refund and the
BIRs inaction,the BIRs participation is limited to the receipt of the taxpayers payment. The BIR
does not make an assessment; the BIR issues no decision; and there is no dispute yet involved.
Since there is no BIR assessment yet, the Court of Tax Appeals may not determine the amount of
taxes due from the taxpayer. There is also no decision yet to review. However, there was inaction on
the part of the BIR. That inaction is within the Court of Tax Appeals jurisdiction.
In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if they do not
involve BIR assessments or decisions.
In this case, the Court of Tax Appeals jurisdiction was acquired because petitioner brought the case
on appeal before the Court of Tax Appeals after the BIR had failed to act on petitioners claim for
refund of erroneously paid taxes. The Court of Tax Appeals did not acquire jurisdiction as a result of
a disputed assessment of a BIR decision.
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains
tax or other taxes at the first instance. The Court of Tax Appeals has no power to make an
assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that
petitioners transactions are subject to capital gains tax, however, the Court of Tax Appeals was not
making an assessment. It was merely determining the proper category of tax that petitioner should
have paid, in view of its claim that it erroneously imposed upon itself and paid the 5% final tax
imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental
matter necessary for the resolution of the principal issue, which is whether petitioner was entitled to
a refund.54
The issue of petitioners claim for tax refund is intertwined with the issue of the proper taxes that are
due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were
correct.55 If the tax return filed was not proper, the correctness of the amount paid and, therefore, the
claim for refund become questionable. In that case, the court must determine if a taxpayer claiming
refund of erroneously paid taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue,56 South African Airways claimed for
refund of its erroneously paid 2% taxes on its gross Philippine billings. This court did not
immediately grant South Africans claim for refund. This is because although this court found that
South African Airways was not subject to the 2% tax on its gross Philippine billings, this court also
found that it was subject to 32% tax on its taxable income.57
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the same benefits
provided for in the Export Development Act of 1994.
SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. Any provision of
existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national,
shall be imposed on business establishments operating within the ECOZONE. In lieu of paying
taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the
ECOZONE shall be remitted tothe national government. This five percent (5%) shall be shared and
distributed as follows:
a. Three percent (3%) to the national government;

In this case, petitioners claim that it erroneously paid the 5% final tax is an admission that the
b. One percent (1%) to the localgovernment units affected by the declaration of the
quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the
ECOZONE inproportion to their population, land area, and equal sharing factors; and
refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed
not liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South
African Airways, petitioners request for refund can neither be granted nor denied outright without c. One percent (1%) for the establishment of a development fund to be utilized for the
such determination.58 development of municipalities outside and contiguous to each ECOZONE: Provided,
however, That the respective share of the affected local government units shall be
determined on the basis of the following formula:
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of
the taxpayers liability should be computed and deducted from the refundable amount.
1. Population - fifty percent (50%);
Any liability in excess of the refundable amount, however, may not be collected in a case involving
solely the issue of the taxpayers entitlement to refund. The question of tax deficiencyis distinct and 2. Land area - twenty-five percent (25%); and
unrelated to the question of petitioners entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court cannot be expected to perform the
3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)
BIRs duties whenever it fails to do so either through neglect or oversight. Neither can court
processes be used as a tool to circumvent laws protecting the rights of taxpayers.
Based on these provisions, the fiscal incentives and the 5% preferential tax rate are available only to
businesses operating within the Ecozone.60 A business is considered in operation when it starts
II
entering into commercial transactions that are not merely incidental to but are related to the
purposes of the business. It is similar to the definition of "doing business," as applied in actions
Petitioners entitlement to benefits given to PEZA-registered enterprises involvingthe right of foreign corporations to maintain court actions. In Mentholatum Co. Inc., et al. v.
Mangaliman, et al.,61 this court said that the terms "doing" or "engaging in" or "transacting"
business":
Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the 5%
preferential tax rate under Republic Act No. 7916 or the Special Economic Zone Act of 1995. This is
because it never began its operation. . . . impl[y] a continuity of commercial dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the functions normally incident to, and
in progressive prosecution of, the purpose and object of its organization. 62 Petitioner never started
Essentially, the purpose of Republic Act No. 7916 is to promote development and encourage
its operations since its registration on June 29, 199863 because of the Asian financial
investments and business activities that will generate employment. 59 Giving fiscal incentives to
crisis.64 Petitioner admitted this.65 Therefore, it cannot avail the incentives provided under Republic
businesses is one of the means devised to achieve this purpose. It comes with the expectation that
Act No. 7916. It is not entitled to the preferential tax rate of 5% on gross income in lieu of all taxes.
persons who will avail these incentives will contribute to the purposes achievement. Hence, to avail
Because petitioner is not entitled to a preferential rate, it is subject to ordinary tax rates under the
the fiscal incentives under Republic Act No. 7916, the law did not say that mere PEZA registration is
National Internal Revenue Code of 1997.
sufficient.

III
Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:

Imposition of capital gains tax

SEC. 23. Fiscal Incentives. Business establishments operating within the ECOZONES shall be
entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating
the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, The Court of Tax Appeals found that petitioners sale of its properties is subject to capital gains tax.
otherwise known as the Omnibus Investment Code of 1987.
For petitioners properties to be subjected to capital gains tax, the properties must form part
ofpetitioners capital assets.
Section 39(A)(1) of the National Internal Revenue Code of 1997 defines "capital assets":
SEC. 39. Capital Gains and Losses. -
(A) Definitions.- As used in this Title -
(1) Capital Assets.- the term capital assets means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade orbusiness, or property used in the trade or business, of a character
which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer. (Emphasis supplied) Thus, "capital assets" refers
to taxpayers property that is NOT any of the following:
1. Stock in trade;
2. Property that should be included inthe taxpayers inventory at the close of the taxable
year;
3. Property held for sale in the ordinary course of the taxpayers business;
4. Depreciable property used in the trade or business; and
5. Real property used in the trade or business.
The properties involved in this case include petitioners buildings, equipment, and machineries. They
are not among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue
Code of 1997. None of the properties were used in petitioners trade or ordinary course of business
because petitioner never commenced operations. They were not part of the inventory. None of
themwere stocks in trade. Based on the definition of capital assets under Section 39 of the National
Internal Revenue Code of 1997, they are capital assets.
Respondent insists that since petitioners machineries and equipment are classified as capital
assets, their sales should be subject to capital gains tax. Respondent is mistaken.
In Commissioner of Internal Revenue v. Fortune Tobacco Corporation,66 this court said:
The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication. In answering the question of who is subject to tax statutes, it is
basic that in case of doubt, such statutes are to be construed most strongly against the government
and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the tax laws.67 (Citations omitted)
Capital gains of individuals and corporations from the sale of real properties are taxed differently.
Individuals are taxed on capital gains from sale of all real properties located in the Philippines and
classified as capital assets. Thus:
SEC. 24. Income Tax Rates.
....
(D) Capital Gains from Sale of Real Property.
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%)
based on the gross selling price or current fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to
have been realized from the sale, exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains
from sales or other dispositions of real property to the government or any of its political subdivisions
or agencies or to government-owned or controlled corporations shall be determined either under
Section 24 (A) or under this Subsection, at the option of the taxpayer.68 (Emphasis supplied)
For corporations, the National Internal Revenue Code of 1997 treats the sale of land and buildings,
and the sale of machineries and equipment, differently. Domestic corporations are imposed a 6%
capital gains tax only on the presumed gain realized from the sale of lands and/or buildings. The
National Internal Revenue Code of 1997 does not impose the 6% capital gains tax on the gains
realized from the sale of machineries and equipment. Section 27(D)(5) of the National Internal
Revenue Code of 1997 provides:
SEC. 27. Rates of Income tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
....
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A
final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the
sale, exchange or disposition of lands and/or buildings which are not actually used in the business of
a corporation and are treated as capital assets, based on the gross selling price of fair market value
as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands
and/or buildings. (Emphasis supplied)
Therefore, only the presumed gain from the sale of petitioners land and/or building may be
subjected to the 6% capital gains tax. The income from the sale of petitioners machineries and
equipment is subject to the provisions on normal corporate income tax.
To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax for the sold
land and/or building of petitioner and the amount of corporate income tax for the sale of petitioners
machineries and equipment should be deducted from the total final tax paid. Petitioner indicated,
however, in its March 1, 2001 income tax return for the 11-month period ending on November 30,
2000 that it suffered a net loss of P2,233,464,538.00.69 This declaration was made under the pain of
perjury. Section 267 of the National Internal Revenue Code of 1997 provides:
SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and other statement
required under this Code, shall, in lieu of an oath, contain a written statement that they are made
under the penalties of perjury. Any person who willfully files a declaration, return or statement
containing information which is not true and correct as to every material matter shall, upon
conviction, be subject to the penalties prescribed for perjury under the Revised Penal Code.
Moreover, Rule 131, Section 3(ff) of the Rules of Court provides for the presumption that the law has
been obeyed unless contradicted or overcome by other evidence, thus:
SEC. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted,
but may be contradicted and overcome by other evidence:
....
(ff) That the law has been obeyed;
excuse to inspect the books of taxpayers, not to determine the latters real liability, but to take
advantage of a possible opportunity to harass even law-abiding businessmen. Without such legal
defense, taxpayers would be open season to harassment by unscrupulous tax agents.75
Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.: 76
For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on
prescription, being a remedial measure, should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on prescription should perforce be strictly
construed[.]

....
The BIR did not make a deficiency assessment for this declaration. Neither did the BIR dispute this
statement in its pleadings filed before this court. There is, therefore, no reason todoubt the truth that
petitioner indeed suffered a net loss in 2000. . . . . Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers,
considering that the prescriptive period was precisely intended to give them peace of
mind.77 (Citation omitted)
Since petitioner had not started its operations, it was also not subject to the minimum corporate
income tax of 2% on gross income.70 Therefore, petitioner is not liable for any income tax.
The BIR had three years from the filing of petitioners final tax return in 2000 to assess petitioners
taxes. Nothing stopped the BIR from making the correct assessment. The elevation of the refund
IV
claim with the Court of Tax Appeals was not a bar against the BIRs exercise of its assessment
powers.
Prescription
The BIR, however, did not initiate any assessment for deficiency capital gains tax.78 Since more than
Section 203 of the National Internal Revenue Code of 1997 provides that as a general rule, the BIR a decade have lapsed from the filing of petitioner's return, the BIR can no longer assess petitioner
has three (3) years from the last day prescribed by law for the filing of a return to make an for deficiency capital gains taxes, if petitioner is later found to have capital gains tax liabilities in
assessment. If the return is filed beyond the last day prescribed by law for filing, the three-year excess of the amount claimed for refund.
period shall run from the actual date of filing. Thus:
The Court of Tax Appeals should not be expected to perform the BIR's duties of assessing and
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section collecting taxes whenever the BIR, through neglect or oversight, fails to do so within the prescriptive
222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by period allowed by law.
law for the filing of the return, and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period: Provided, That in a case where a
WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE. The Bureau of
return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from
Internal Revenue is ordered to refund petitioner SMI-Ed Philippines Technology, Inc. the amount of
the day the return was filed. For purposes of this Section, a return filed before the last day
5% final tax paid to the BIR, less the 6% capital gains tax on the sale of petitioner SMI-Ed
prescribed by law for the filing thereof shall be considered as filed on such last day.
Philippines Technology, Inc. 's land and building. In view of the lapse of the prescriptive period for
assessment, any capital gains tax accrued from the sale of its land and building that is in excess of
This court said that the prescriptive period to make an assessment of internal revenue taxes is the 5% final tax paid to the Bureau of Internal Revenue may no longer be recovered from petitioner
provided "primarily to safeguard the interests of taxpayers from unreasonable investigation." 71 This SMI-Ed Philippines Technology, Inc.
court explained in Commissioner of Internal Revenue v. FMF Development Corporation 72 the reason
behind the provisions on prescriptive periods for tax assessments: Accordingly, the government
SO ORDERED.
must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment
and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation
for taxes after the expiration of reasonable period of time.73
G.R. No. L-66653 June 19, 1986
Rules derogating taxpayers right against prolonged and unscrupulous investigations are strictly
construed against the government.74 COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BURROUGHS LIMITED AND THE COURT OF TAX APPEALS, respondents.
[T]he law on prescription should beinterpreted in a way conducive to bringing about the beneficent
purpose of affording protection to the taxpayer within the contemplation of the Commission which
recommended the approval of the law. To the Government, its tax officers are obliged to act Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent.
promptlyin the making of assessment so that taxpayers, after the lapse of the period of prescription,
would have a feeling of security against unscrupulous tax agents who will always try to find an

PARAS, J.:
Petition for certiorari to review and set aside the Decision dated June 27, 1983 of respondent Court
of Tax Appeals in its C.T.A. Case No. 3204, entitled "Burroughs Limited vs. Commissioner of Internal
Revenue" which ordered petitioner Commissioner of Internal Revenue to grant in favor of private
respondent Burroughs Limited, tax credit in the sum of P172,058.90, representing erroneously
overpaid branch profit remittance tax.
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the
Philippines through a branch office located at De la Rosa corner Esteban Streets, Legaspi Village,
Makati, Metro Manila.
Sometime in March 1979, said branch office applied with the Central Bank for authority to remit to its
parent company abroad, branch profit amounting to P7,647,058.00. Thus, on March 14, 1979, it paid
the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office
the amount of P6,499,999.30 computed as follows:
Amount applied for remittance................................ P7,647,058.00
Deduct: 15% branch profit
remittance tax ..............................................1,147,058.70
Net amount actually remitted.................................. P6,499,999.30
Claiming that the 15% profit remittance tax should have been computed on the basis of the amount
actually remitted (P6,499,999.30) and not on the amount before profit remittance tax
(P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the refund or
tax credit of the amount of P172,058.90 representing alleged overpaid branch profit remittance tax,
computed as follows:
Profits actually remitted .........................................P6,499,999.30
Remittance tax rate .......................................................15%
Branch profit remittance tax-
due thereon ......................................................P 974,999.89
Branch profit remittance
tax paid .............................................................Pl,147,058.70
Less: Branch profit remittance
tax as above computed................................................. 974,999.89
Total amount refundable........................................... P172,058.81
On February 24, 1981, private respondent filed with respondent court, a petition for review, docketed
as C.T.A. Case No. 3204 for the recovery of the above-mentioned amount of P172,058.81.
On June 27, 1983, respondent court rendered its Decision, the dispositive portion of which reads
ACCORDINGLY, respondent Commission of Internal Revenue is hereby ordered to grant a tax credit
in favor of petitioner Burroughs Limited the amount of P 172,058.90. Without pronouncement as to
costs.
SO ORDERED.
Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the instant petition
before this Court with the prayers as herein earlier stated upon the sole issue of whether the tax
base upon which the 15% branch profit remittance tax shall be imposed under the provisions of
section 24(b) of the Tax Code, as amended, is the amount applied for remittance on the profit
actually remitted after deducting the 15% profit remittance tax. Stated differently is private
respondent Burroughs Limited legally entitled to a refund of the aforementioned amount of
P172,058.90.
We rule in the affirmative. The pertinent provision of the National Revenue Code is Sec. 24 (b) (2)
(ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch
to its head office shall be subject to a tax of fifteen per cent (15 %) ...
In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of
Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that
"the tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the
profit actually remitted abroad and not on the total branch profits out of which the remittance is to be
made. " The said ruling is hereinbelow quoted as follows:
In reply to your letter of November 3, 1978, relative to your query as to the tax
base upon which the 15% branch profits remittance tax provided for under
Section 24 (b) (2) of the 1977 Tax Code shall be imposed, please be advised
that the 15% branch profit tax shall be imposed on the branch profits actually
remitted abroad and not on the total branch profits out of which the remittance is
to be made.
Please be guided accordingly.
Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an
overpayment in the amount of P172,058.90 which is the difference between the remittance tax
actually paid of Pl,147,058.70 and the remittance tax that should have been paid of P974,999,89,
computed as follows
 Profits actually remitted......................................... P6,499,999.30 SO ORDERED.

Remittance tax rate.............................................................. 15% Feria, Fernan, Alampay and Gutierrez, Jr., JJ., concur.

Remittance tax due................................................... P974,999.89 G.R. No. 103092 July 21, 1994

is well-taken. As correctly held by respondent Court in its assailed decision- BANK OF AMERICA NT & SA, petitioner,
vs.
HONORABLE COURT OF APPEALS, AND THE COMMISSIONER OF INTERNAL
Respondent concedes at least that in his ruling dated January 21, 1980 he held
REVENUE, respondents.
that under Section 24 (b) (2) of the Tax Code the 15% branch profit remittance
tax shall be imposed on the profit actually remitted abroad and not on the total
branch profit out of which the remittance is to be made. Based on such ruling G.R. No. 103106 July 21, 1994
petitioner should have paid only the amount of P974,999.89 in remittance tax
computed by taking the 15% of the profits of P6,499,999.89 in remittance tax
BANK OF AMERICA NT & SA, petitioner,
actually remitted to its head office in the United States, instead of
vs.
Pl,147,058.70, on its net profits of P7,647,058.00. Undoubtedly, petitioner has
THE HONORABLE COURT OF APPEALS AND THE COMMISSIONER OF INTERNAL
overpaid its branch profit remittance tax in the amount of P172,058.90.
REVENUE, respondents.

Petitioner contends that respondent is no longer entitled to a refund because Memorandum Circular
Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for petitioner.
No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980.
The said memorandum circular states

Considering that the 15% branch profit remittance tax is imposed and collected
at source, necessarily the tax base should be the amount actually applied for by VITUG, J.:
the branch with the Central Bank of the Philippines as profit to be remitted
abroad.
Section 24(b) (2) (ii) of the National Internal Revenue Code, in the language it was worded in 1982
(the taxable period relevant to the case at bench), provided, in part, thusly:
Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the
Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the branch
Sec. 24. Rates of tax on corporations. . . .
profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March
17, 1982 cannot be given retroactive effect in the light of Section 327 of the National Internal
Revenue Code which provides- (b) Tax on foreign corporations. . . .

Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal
of any of the rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the
Commissioner shag not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the Bureau of
Internal Revenue; (b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the ruling is
based, or (c) where the taxpayer acted in bad faith. (ABS-CBN Broadcasting
Corp. v. CTA, 108 SCRA 151-152)
(2) (ii) Tax on branch profit and remittances.
Any profit remitted abroad by a branch to its head office shall be subject to a tax
of fifteen per cent (15%) . . . ."
Petitioner Bank of America NT & SA argues that the 15% branch profit remittance tax on the basis of
the above provision should be assessed on the amount actually remitted abroad, which is to say that
the 15% profit remittance tax itself should not form part of the tax base. Respondent Commissioner
of Internal Revenue, contending otherwise, holds the position that, in computing the 15% remittance
tax, the tax should be inclusive of the sum deemed remitted.

The prejudice that would result to private respondent Burroughs Limited by a retroactive application
of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the substantial
amount of P172,058.90. And, insofar as the enumerated exceptions are concerned, admittedly,
Burroughs Limited does not fall under any of them.
WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby AFFIRMED. No
pronouncement as to costs.
The statement of facts made by the Court of Tax Appeals, later adopted by the Court of Appeals,
and not in any serious dispute by the parties, can be quoted thusly:
Petitioner is a foreign corporation duly licensed to engage in business in the
Philippines with Philippine branch office at BA Lepanto Bldg., Paseo de Roxas,
Makati, Metro Manila. On July 20, 1982 it paid 15% branch profit remittance tax
in the amount of P7,538,460.72 on profit from its regular banking unit operations
and P445,790.25 on profit from its foreign currency deposit unit operations or a
 total of P7,984,250.97. The tax was based on net profits after income tax
without deducting the amount corresponding to the 15% tax.
Petitioner filed a claim for refund with the Bureau of Internal Revenue of that
portion of the payment which corresponds to the 15% branch profit remittance
tax, on the ground that the tax should have been computed on the basis of
profits actually remitted, which is P45,244,088.85, and not on the amount before
profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting
respondent's decision, petitioner filed a petition for review on June 14, 1984
with this Honorable Court for the recovery of the amount of P1,041,424.03
computed as follows:
Net Profits After Profit Tax Due Alleged
Income Tax But Remittance Alleged by Overpayment
Before Profit Tax Paid Petitioner Item 1-2
Remittance Tax _________ _________ ___________
A. Regular Banking
Unit Operations
(P50,256,404.82)
1. Computation of BIR
15% x P50,256,404.82 - P7,538,460.72
2. Computation of
Petitioner
- P50,256,404.82 x 15% P6,555,183.24 P983,277.48
1.15
B. Foreign Currency
Deposit Unit
Operations
(P2,971,935)
1. Computation of BIR
15% x - P2,971,935.00 P445,790.25
2. Computation of
Petitioner
- P2,971,935.00 x 15% P387,643.70 P58,146.55
T O T A L. . P7,984,250.97 P6,942,286.94 P1,041,424.02" 1
The Court of Tax Appeals upheld petitioner bank in its claim for refund. The Commissioner of
Internal Revenue filed a timely appeal to the Supreme Court (docketed G.R. No. 76512) which
referred it to the Court of Appeals following this Court's pronouncement in Development Bank of the
Philippines vs. Court of Appeals, et al. (180 SCRA 609). On 19 September 1990, the Court of
Appeals set aside the decision of the Court of Tax Appeals. Explaining its reversal of the tax court's
decision, the appellate court said:
The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the
aforesaid law through an analysis of the wordings thereof, which to their minds
reveal an intent to mitigate at least the harshness of successive taxation. The
use of the word remitted may well be understood as referring to that part of the
said total branch profits which would be sent to the head office as distinguished
from the total profits of the branch (not all of which need be sent or would be
ordered remitted abroad). If the legislature indeed had wanted to mitigate the
harshness of successive taxation, it would have been simpler to just lower the
rates without in effect requiring the relatively novel and complicated way of
computing the tax, as envisioned by the herein private respondent. The same
result would have been achieved. 2
Hence, these petitions for review in G.R. No. 103092 and G.R.
No. 103106 (filed separately due to inadvertence) by the law firms of "Agcaoili and Associates" and
of "Sycip, Salazar, Hernandez and Gatmaitan" in representation of petitioner bank.
We agree with the Court of Appeals that not much reliance can be made on our decision in
Burroughs Limited vs. Commission of Internal Revenue (142 SCRA 324), for there we ruled against
the Commissioner mainly on the basis of what the Court so then perceived as his position in a 21
January 1980 ruling the reversal of which, by his subsequent ruling of 17 March 1982, could not
apply retroactively against Burroughs in conformity with Section 327 (now Section 246, re: non-
retroactivity of rulings) of the National Internal Revenue Code. Hence, we held:
Petitioner's aforesaid contention is without merit. What is applicable in the case
at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in question
on March 14, 1979. Memorandum Circular
No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of
Section 327 of the National Internal Revenue Code which
provides
Sec. 327. Non-retroactivity of rulings. Any revocation,
modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if
the revocation, modification, or reversal will be prejudicial to
the taxpayer except in the following cases (a) where the
taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau
of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based, or (c)
where the taxpayer acted in bad faith. (ABS-CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a
retroactive application of Memorandum Circular No. 8-82 is beyond question for
it would be deprived of the substantial amount of P172,058.90. And, insofar as
the enumerated exceptions are concerned, admittedly, Burroughs Limited does
not fall under any of them.
The Court of Tax Appeals itself commented similarly when it observed thusly in its
decision:
In finding the Commissioner's contention without merit, this Court however ruled
against the applicability of Revenue Memorandum Circular No. 8-82 dated
 March 17, 1982 to the Burroughs Limited case because the taxpayer paid the
branch profit remittance tax involved therein on March 14, 1979 in accordance
with the ruling of the Commissioner of Internal Revenue dated January 21,
1980. In view of Section 327 of the then in force National Internal Revenue
Code, Revenue Memorandum Circular No. 8-82 dated March 17, 1982 cannot
be given retroactive effect because any revocation or modification of any ruling
or circular of the Bureau of Internal Revenue should not be given retroactive
application if such revocation or modification will, subject to certain exceptions
not pertinent thereto, prejudice taxpayers. 3
The Solicitor General correctly points out that almost invariably in an ad valorem tax, the tax paid or
withheld is not deducted from the tax base. Such impositions as the ordinary income tax, estate and
gift taxes, and the value added tax are generally computed in like manner. In these cases, however,
it is so because the law, in defining the tax base and in providing for tax withholding, clearly spells it
out to be such. As so well expounded by the Tax Court
. . . In all the situations . . . where the mechanism of withholding of taxes at
source operates to ensure collection of the tax, and which respondent claims
the base on which the tax is computed is the amount to be paid or remitted, the
law applicable expressly, specifically and unequivocally mandates that the tax is
on the total amount thereof which shall be collected and paid as provided in
Sections 53 and 54 of the Tax Code. Thus:
Dividends received by an individual who is a citizen or
resident of the Philippines from a domestic corporation,
shall be subject to a final tax at the rate of fifteen (15%) per
cent on the total amount thereof, which shall be collected
and paid as provided in Sections 53 and 54 of this
Code. (Emphasis supplied; Sec. 21, Tax Code)
Interest from Philippine Currency bank deposits and yield
from deposit substitutes whether received by citizens of the
Philippines or by resident alien individuals, shall be subject
to a final tax as follows: (a) 15% of the interest or savings
deposits, and (b) 20% of the interest on time deposits and
yield from deposits substitutes, which shall be collected
and paid as provided in Sections 53 and 54 of this Code: . .
. (Emphasis supplied; Sec. 21, Tax Code applicable.)
And on rental payments payable by the lessee to the lessor (at 5%), also cited
by respondent, Section 1, paragraph (C), of Revenue Regulations No. 13-78,
November 1, 1978, provides that:
Section 1. Income payments subject to withholding tax and
rates prescribed therein. Except as therein otherwise
provided, there shall be withheld a creditable income tax at
the rates herein specified for each class of payee from the
following items of income payments to persons residing in
the Philippines.
xxx xxx xxx
(C) Rentals When the gross rental or the payment
required to be made as a condition to the continued use or
possession of property, whether real or personal, to which
the payor or obligor has not taken or is not taking title or in
which he has no equity, exceeds five hundred pesos
(P500.00) per contract or payment whichever is greater
five per centum (5%).
Note that the basis of the 5% withholding tax, as expressly and unambiguously
provided therein, is on the gross rental. Revenue Regulations No. 13-78 was
promulgated pursuant to Section 53(f) of the then in force National Internal
Revenue Code which authorized the Minister of Finance, upon recommendation
of the Commissioner of Internal Revenue, to require the withholding of income
tax on the same items of income payable to persons (natural or judicial) residing
in the Philippines by the persons making such payments at the rate of not less
than 2 1/2% but not more than 35% which are to be credited against the income
tax liability of the taxpayer for the taxable year.
On the other hand, there is absolutely nothing in Section 24(b) (2)
(ii), supra, which indicates that the 15% tax on branch profit remittance is on the
total amount of profit to be remitted abroad which shall be collected and paid in
accordance with the tax withholding device provided in Sections 53 and 54 of
the Tax Code. The statute employs "Any profit remitted abroad by a branch to
its head office shall be subject to a tax of fifteen per cent (15%)" without
more. Nowhere is there said of "base on the total amount actually applied for by
the branch with the Central Bank of the Philippines as profit to be remitted
abroad, which shall be collected and paid as provided in Sections 53 and 54 of
this Code." Where the law does not qualify that the tax is imposed and collected
at source based on profit to be remitted abroad, that qualification should not be
read into the law. It is a basic rule of statutory construction that there is no safer
nor better canon of interpretation than that when the language of the law is clear
and unambiguous, it should be applied as written. And to our mind, the term
"any profit remitted abroad" can only mean such profit as is "forwarded, sent, or
transmitted abroad" as the word "remitted" is commonly and popularly accepted
and understood. To say therefore that the tax on branch profit remittance is
imposed and collected at source and necessarily the tax base should be the
amount actually applied for the branch with the Central Bank as profit to be
remitted abroad is to ignore the unmistakable meaning of plain words. 4
In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad."
There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is
imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The
taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local
branch of the corporation, using its own local funds, which remits the tax to the Philippine
Government.
The remittance tax was conceived in an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a majority of all the latter's shares of stock are
owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local
branches were made to pay only the usual corporate income tax of 25%-35% on net income (now a
uniform 35%) applicable to resident foreign corporations (foreign corporations doing business in the
Philippines). While Philippine subsidiaries of foreign corporations were subject to the same rate of
25%-35% (now also a uniform 35%) on their net income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax (reduced conditionally from 35%). In order to avert
what would otherwise appear to be an unequal tax treatment on such subsidiaries vis-a-vis local
branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on
their remittances of profits abroad. But this is where the tax pari-passu ends between domestic
branches and subsidiaries of foreign corporations.
The Solicitor General suggests that the analogy should extend to the ordinary application of the
withholding tax system and so with the rule on constructive remittance concept as well. It is difficult
to accept the proposition. In the operation of the withholding tax system, the payee is the taxpayer,
the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an
agent of the government for the collection of the tax in order to ensure its payment. Obviously, the
amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of
the tax base. Since the payee, not the payor, is the real taxpayer, the rule on constructive remittance
(or receipt) can be easily rationalized, if not indeed, made clearly manifest. It is hardly the case,
however, in the imposition of the 15% remittance tax where there is but one taxpayer using its own
domestic funds in the payment of the tax. To say that there is constructive remittance even of such
funds would be stretching far too much that imaginary rule. Sound logic does not defy but must
concede to facts.
We hold, accordingly, that the written claim for refund of the excess tax payment filed, within the two-
year prescriptive period, with the Court of Tax Appeals has been lawfully made.
WHEREFORE, the decision of the Court of Appeals appealed from is REVERSED and SET ASIDE,
and that of the Court of Tax Appeals is REINSTATED.
SO ORDERED.
[G.R. No. L-26145. February 20, 1984.]
THE MANILA WINE MERCHANTS, INC., Petitioner, v. THE COMMISSIONER OF INTERNAL
REVENUE, Respondent.
SYLLABUS
1. TAXATION; NATIONAL INTERNAL REVENUE CODE; CORPORATE INCOME TAX;
ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXEMPTION THEREFROM. A prerequisite
to the imposition of the tax has been that the corporation be formed or availed of for the purpose of
avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any other
corporation by permitting the earnings and profits of the corporation to accumulate instead of
dividing them among or distributing them to the shareholders. If the earnings and profits were
distributed, the shareholders would be required to pay an income tax thereon whereas, if the
distribution were not made to them, they would incur no tax in respect to the undistributed earnings
and profits of the corporation (Mertens, Law on Federal Income Taxation, Vol. 7, Chapter 39, p. 44).
The touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation (Ibid., p. 47). Thus, if the failure to pay dividends is due to some
other cause, such as the use of undistributed earnings and profits for the reasonable needs of the
business, such purpose does not fall within the interdiction of the statute (Ibid., p. 45).
2. ID.; ID.; ID.; ID.; ID.; WHEN ACCUMULATION CONSIDERED UNREASONABLE. An
accumulation of earnings or profits (including undistributed earnings or profits of prior years) is
unreasonable if it is not required for the purpose of the business, considering all the circumstances
of the case (Sec. 21, Revenue Regulations No. 2).
3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS," CONSTRUED. To
determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the
Courts of the United States have invented the so-called "Immediacy Test" which construed the
words "reasonable needs of the business" to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. American cases likewise hold that investment of the earnings and profits of
the corporation in stock or securities of an unrelated business usually indicates an accumulation
beyond the reasonable needs of the business. (Helvering v. Chicago Stockyards Co., 318 US 693;
Helvering v. National Grocery Co., 304 US 282).
4. REMEDIAL LAW; APPEALS; FACTUAL FINDINGS OF THE COURT OF TAX APPEALS,
BINDING. The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds
were in no way related to petitioners business of importing and selling wines whisky, liquors and
distilled spirits, and thus construed as an investment beyond the reasonable needs of the business
is binding on Us, the same being factual (Renato Raymundo v. Hon. De Jova, 101 SCRA 495).
Furthermore, the wisdom behind thus finding cannot be doubted, The case of J.M. Perry & Co. v.
Commissioner of Internal Revenue supports the same.
5. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF
CORPORATIONS; ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXCEPTION
THEREFROM; ACCUMULATION OF EARNINGS, MUST BE USED FOR REASONABLE NEEDS
OF BUSINESS WITHIN A REASONABLE TIME. The records further reveal that from May 1951
when petitioner purchased the U.S.A. Treasury shares, until 1962 when it finally liquidated the same,
it (petitioner) never had the occasion to use the said shares in aiding or financing its importation.
This militates against the purpose enunciated earlier by petitioner that the shares were purchased to
finance its importation business. To justify an accumulation of earnings and profits for the reasonably
anticipated future needs, such accumulation must be used within a reasonable time after the close
of the taxable year (Mertens, Ibid., p. 104).
6. ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE TIME OF ACCUMULATION, BASIS OF
THE TAX; ACCUMULATION OF PROFITS IN CASE AT BAR, UNREASONABLE. In order to
determine whether profits are accumulated for the reasonable needs of the business as to avoid the
surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the
time of accumulation not subsequently declared intentions which are merely the product of
afterthought (Basilan Estates, Inc. v. Comm. of Internal Revenue, 21 SCRA 17 citing Jacob Mertens,
Jr., The law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213; Smoot and San &
Gravel Corp. v. Comm., 241 F 2d 197). A speculative and indefinite purpose will not suffice. The
mere recognition of a future problem and the discussion of possible and alternative solutions is not
sufficient. Definiteness of plan coupled with action taken towards its consummation are essential
(Fuel Carriers, Inc. v. US 202 F supp. 497; Smoot Sand & Gravel Corp. v. Comm., supra). Viewed
on the foregoing analysis and tested under the "immediacy doctrine," We are convinced that the
Court of Tax Appeals is correct in finding that the investment made by petitioner in the U.S.A.
Treasury shares in 1951 was an accumulation of profits in excess of the reasonable needs of
petitioners business.chanroblesvirtuallawlibrary
7. ID.; ID.; ID.; ID.; ACCUMULATIONS OF PRIOR YEARS TAKEN INTO ACCOUNT IN
DETERMINATION OF LIABILITY THEREFOR. The rule is now settled in Our jurisprudence that
undistributed earnings or profits of prior years are taken into consideration in determining
unreasonable accumulation for purposes of the 25% surtax. The case of Basilan Estates, Inc. v.
Commissioner of Internal Revenue further strengthen this rule in determining unreasonable
accumulation for the year concerned.In determining whether accumulations of earnings or profits in
a particular year are within the reasonable needs of a corporation, it is necessary to take into income tax and part of the surplus for prior years. Respondent further submits that the accumulated
account prior accumulations, since accumulations prior to the year involved may have been earnings tax should be based on 25% of the total surplus available at the end of each calendar year
sufficient to cover the business needs and additional accumulations during the year involved would while petitioner maintains that the 25% surtax is imposed on the total surplus or net income for the
not reasonably be necessary. year after deducting therefrom the income tax due.

The records show the following analysis of petitioners net income, cash dividends and earned
DECISION surplus for the years 1946 to 1957: 1

Percentage of
GUERRERO, J.:
Dividends to

In this Petition for Review on Certiorari, Petitioner, the Manila Wine Merchants, Inc., disputes the Net Income Total Cash Net Income Balance
decision of the Court of Tax Appeals ordering it (petitioner) to pay respondent, the Commissioner of
Internal Revenue, the amount of P86,804.38 as 25% surtax plus interest which represents the After Income Dividends After of Earned
additional tax due petitioner for improperly accumulating profits or surplus in the taxable year 1957
under Sec. 25 of the National Internal Revenue Code.chanrobles virtualawlibrary Year Tax Paid Income Tax Surplus
chanrobles.com:chanrobles.com.ph
1946 P 613,790.00 P 200,000. 32.58% P 234,104.81
The Court of Tax Appeals made the following finding of facts, to wit:jgc:chanrobles.com.ph
1947 425,719.87 360,000. 84.56% 195,167.10
"Petitioner, a domestic corporation organized in 1937, is principally engaged in the importation and
sale of whisky, wines, liquors and distilled spirits. Its original subscribed and paid capital was 1948 415,591.83 375,000. 90.23% 272,991.38
P500,000.00. Its capital of P500,000.00 was reduced to P250,000.00 in 1950 with the approval of
the Securities and Exchange Commission but the reduction of the capital was never implemented. 1949 335,058.06 200,000. 59.69% 893,113.42
On June 21, 1958, petitioners capital was increased to P1,000,000.00 with the approval of the said
Commission. 1950 399,698.09 600,000. 150.11% 234,987.07

On December 31, 1957, herein respondent caused the examination of herein petitioners book of 1951 346,257.26 300,000. 86.64% 281,244.33
account and found the latter of having unreasonably accumulated surplus of P428,934.32 for the
calendar year 1947 to 1957, in excess of the reasonable needs of the business subject to the 25% 1952 196,161.97 200,000. 101.96% 277,406.30
surtax imposed by Section 25 of the Tax Code.
1953 169,714.04 200,000. 117.85% 301,138.84
On February 26, 1963, the Commissioner of Internal Revenue demanded upon the Manila Wine
Merchants, Inc. payment of P126,536.12 as 25% surtax and interest on the latters unreasonable 1954 238,124.85 250,000. 104.99% 289,262.69
accumulation of profits and surplus for the year 1957, computed as follows:chanrob1es virtual 1aw
library 1955 312,284.74 200,000. 64.04% 401,548.43

Unreasonable accumulation of surtax P428,934.42 1956 374,240.28 300,000. 80.16% 475,788.71

1957 353,145.71 400,000. 113.27% 428,934.42

25% surtax due thereon P107,234.00

Add: 1/2% monthly interest from June 20, P4,179,787.36 P3,585.000. 85.77% P3,785.688.50

1959 to June 20, 1962 19,302.12 ========== ========= ======= ==========

Another basis of respondent in assessing petitioner for accumulated earnings tax is its substantial
investment of surplus or profits in unrelated business. These investments are itemized as
TOTAL AMOUNT DUE AND COLLECTIBLE P126,536.12 follows:chanrob1es virtual 1aw library

========= 1. Acme Commercial Co., Inc. P 27,501.00

Respondent contends that petitioner has accumulated earnings beyond the reasonable needs of its 2. Union Insurance Society
business because the average ratio of the cash dividends declared and paid by petitioner from 1947
to 1957 was 40.33% of the total surplus available for distribution at the end of each calendar year. of Canton 1,145.76
On the other hand, petitioner contends that in 1957, it distributed 100% of its net earnings after
3. U.S.A. Treasury Bond 347,217.50
4. Wack Wack Golf &
Country Club 1.00
construction of the improvements thereon, most of its available funds including the Treasury Bills
375,865.26
=========
As to the investment of P27,501.00 made by petitioner in the Acme Commercial Co., Inc., Mr. N.R.E.
Hawkins, president of the petitioner corporation 2 explained as follows:chanrob1es virtual 1aw
library
The first item consists of shares of Acme Commercial Co., Inc. which the Company acquired in
1947 and 1949. In the said years, we thought it prudent to invest in a business which patronizes us.
As a supermarket, Acme Commercial Co., Inc. is one of our best customers. The investment has
proven to be beneficial to the stockholders of this Company. As an example, the Company received
cash dividends in 1961 totalling P16,875.00 which was included in its income tax return for the said
year.
As to the investments of petitioner in Union Insurance Society of Canton and Wack Wack Golf Club
in the sums of P1,145.76 and P1.00, respectively, the same official of the petitioner-corporation
stated that: 3
The second and fourth items are small amounts which we believe would not affect this case
substantially. As regards the Union Insurance Society of Canton shares, this was a pre-war
investment, when Wise & Co., Inc., Manila Wine Merchants and the said insurance firm were
common stockholders of the Wise Bldg. Co.,, Inc. and the three companies were all housed in the
same building. Union Insurance invested in Wise Bldg. Co., Inc. but invited Manila Wine Merchants,
Inc. to buy a few of its shares.
As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr. Hawkins explained as follows: 4
With regards to the U.S.A. Treasury Bills in the amount of P347,217.50, in 1950, our balance sheet
for the said year shows the Company had deposited in current account in various banks
P629,403.64 which was not earning any interest. We decided to utilize part of this money as reserve
to finance our importations and to take care of future expansion including acquisition of a lot and the
construction of our own office building and bottling plant.
At that time, we believed that a dollar reserve abroad would be useful to the Company in meeting
immediate urgent orders of its local customers. In order that the money may earn interest, the
Company, on May 31, 1951 purchased US Treasury bills with 90-day maturity and earning
approximately 1% interest with the face value of US$175,000.00. US Treasury Bills are easily
convertible into cash and for the said reason they may be better classified as cash rather than
investments.
The Treasury Bills in question were held as such for many years in view of our expectation that the
Central Bank inspite of the controls would allow no-dollar licenses importations. However, since the
Central Bank did not relax its policy with respect thereto, we decided sometime in 1957 to hold the
bills for a few more years in view of our plan to buy a lot and construct a building of our own.
According to the lease agreement over the building formerly occupied by us in Dasmarias St., the
lease was to expire sometime in 1957. At that time, the Company was not yet qualified to own real
property in the Philippines. We therefore waited until 60% of the stocks of the Company would be
owned by Filipino citizens before making definite plans. Then in 1959 when the Company was
already more than 60% Filipino owned, we commenced looking for a suitable location and then
finally in 1961, we bought the man lot with an old building on Otis St., Paco, our present site, for
P665,000.00. Adjoining smaller lots were bought later. After the purchase of the main property, we
proceeded with the remodelling of the old building and the construction of additions, which were
completed at a cost of P143,896.00 in April, 1962.
In view of the needs of the business of this Company and the purchase of the Otis lots and the
had been utilized, but inspite of the said expenses the Company consistently declared dividends to
its stockholders. The Treasury Bills were liquidated on February 15, 1962.
Respondent found that the accumulated surplus in question were invested to unrelated business
which were not considered in the immediate needs of the Company such that the 25% surtax be
imposed therefrom."cralaw virtua1aw library
Petitioner appealed to the Court of Tax Appeals.
On the basis of the tabulated figures, supra, the Court of Tax Appeals found that the average
percentage of cash dividends distributed was 85.77% for a period of 11 years from 1946 to 1957
and not only 40.33% of the total surplus available for distribution at the end of each calendar year
actually distributed by the petitioner to its stockholders, which is indicative of the view that the Manila
Wine Merchants, Inc. was not formed for the purpose of preventing the imposition of income tax
upon its shareholders. 5
With regards to the alleged substantial investment of surplus or profits in unrelated business, the
Court of Tax Appeals held that the investment of petitioner with Acme Commercial Co., Inc., Union
Insurance Society of Canton and with the Wack Wack Golf and Country Club are harmless
accumulation of surplus and, therefore, not subject to the 25% surtax provided in Section 25 of the
Tax Code. 6
As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals ruled that its
purchase was in no way related to petitioners business of importing and selling wines, whisky,
liquors and distilled spirits. Respondent Court was convinced that the surplus of P347,217.50 which
was invested in the U.S.A. Treasury Bonds was availed of by petitioner for the purpose of preventing
the imposition of the surtax upon petitioners shareholders by permitting its earnings and profits to
accumulate beyond the reasonable needs of business. Hence, the Court of Tax Appeals modified
respondents decision by imposing upon petitioner the 25% surtax for 1957 only in the amount of
P86,804.38 computed as follows:chanrob1es virtual 1aw library
Unreasonable accumulation
of surplus P347,217.50
25% surtax due thereon P 86,804.38 7
On May 30, 1966, the Court of Tax Appeals denied the motion for reconsideration filed by petitioner
on March 30, 1966. Hence, this petition.
Petition assigns the following errors:chanrob1es virtual 1aw library
I
The Court of Tax Appeals erred in holding that petitioner was availed of for the purpose of preventing
the imposition of a surtax on its shareholders.
II

The Court of Tax Appeals erred in holding that petitioners purchase of U.S.A. Treasury Bills in 1951
was an investment in unrelated business subject to the 25% surtax in 1957 as surplus profits
improperly accumulated in the latter years.
III
The Court of Tax Appeals erred in not finding that petitioner did not accumulate its surplus profits
improperly in 1957, and in not holding that such surplus profits, including the so-called unrelated
investments, were necessary for its reasonable business needs.
IV
The Court of Tax Appeals erred in not holding that petitioner had overcome the prima facie
presumption provided for in Section 25(c) of the Revenue Code.
V of the case. 11
The Court of Tax Appeals erred in finding petition liable for the payment of the surtax of P86,804.38
and in denying petitioners Motion for Reconsideration and/or New Trial.
The issues in this case can be summarized as follows: (1) whether the purchase of the U.S.A.
Treasury bonds by petitioner in 1951 can be construed as an investment to an unrelated business
and hence, such was availed of by petitioner for the purpose of preventing the imposition of the
surtax upon petitioners shareholders by permitting its earnings and profits to accumulate beyond
the reasonable needs of the business, and if so, (2) whether the penalty tax of twenty-five percent
(25%) can be imposed on such improper accumulation in 1957 despite the fact that the
accumulation occurred in 1951.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
The pertinent provision of the National Internal Revenue Code reads as
follows:jgc:chanrobles.com.ph
"Sec. 25. Additional tax on corporations improperly accumulating profits or surplus. (a) Imposition
of Tax. If any corporation, except banks, insurance companies, or personal holding companies
whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of
the tax upon its shareholders or members or the shareholders or members of another corporation,
through the medium of permitting its gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal
to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which
shall be in addition to the tax imposed by section twenty-four and shall be computed, collected and
paid in the same manner and subject to the same provisions of law, including penalties, as that tax:
Provided, that no such tax shall be levied upon any accumulated profits or surplus, if they are
invested in any dollar-producing or dollar-saving industry or in the purchase of bonds issued by the
Central Bank of the Philippines.
x x x "It appears that the taxpayer corporation was engaged in the business of cold storage and
(c) Evidence determinative of purpose. The fact that the earnings of profits of a corporation
are permitted to accumulate beyond the reasonable needs of the business shall be determinative of
the purpose to avoid the tax upon its shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary." (As amended by Republic Act No. 1823).
As correctly pointed out by the Court of Tax Appeals, inasmuch as the provisions of Section 25 of
the National Internal Revenue Code were bodily lifted from Section 102 of the U.S. Internal Revenue
Code of 1939, including the regulations issued in connection therewith, it would be proper to resort
to applicable cases decided by the American Federal Courts for guidance and
enlightenment.chanrobles virtual lawlibrary
A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for
the purpose of avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any
other corporation by permitting the earnings and profits of the corporation to accumulate instead of
dividing them among or distributing them to the shareholders. If the earnings and profits were
distributed, the shareholders would be required to pay an income tax thereon whereas, if the
distribution were not made to them, they would incur no tax in respect to the undistributed earnings
and profits of the corporation. 8 The touchstone of liability is the purpose behind the accumulation of
the income and not the consequences of the accumulation. 9 Thus, if the failure to pay dividends is
due to some other cause, such as the use of undistributed earnings and profits for the reasonable
needs of the business, such purpose does not fall within the interdiction of the statute. 10
An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is
unreasonable if it is not required for the purpose of the business, considering all the circumstances
In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that these bonds were so
purchased (1) in order to finance their importation; and that a dollar reserve abroad would be useful
to the Company in meeting urgent orders of its local customers and (2) to take care of future
expansion including the acquisition of a lot and the construction of their office building and bottling
plant.
We find no merit in the petition.
To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the purchase of the U.S.A.
Treasury Bonds in 1951 with a face value of $175,000.00 was an investment within the reasonable
needs of the Corporation.
To determine the "reasonable needs" of the business in order to justify an accumulation of earnings,
the Courts of the United States have invented the so-called "Immediacy Test" which construed the
words "reasonable needs of the business" to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. 12 American cases likewise hold that investment of the earnings and profits
of the corporation in stock or securities of an unrelated business usually indicates an accumulation
beyond the reasonable needs of the business. 13
The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds were in no
way related to petitioners business of importing and selling wines whisky, liquors and distilled spirits,
and thus construed as an investment beyond the reasonable needs of the business 14 is binding on
Us, the same being factual. 15 Furthermore, the wisdom behind thus finding cannot be doubted, The
case of J.M. Perry & Co. v. Commissioner of Internal Revenue 16 supports the same. In that case,
the U.S. Court said the following:jgc:chanrobles.com.ph
wareshousing in Yahima, Washington. It maintained a cold storage plant, divided into four units,
having a total capacity of 490,000 boxes of fruits. It presented evidence to the effect that various
alterations and repairs to its plant were contemplated in the tax years, . . .
It also appeared that in spite of the fact that the taxpayer contended that it needed to maintain this
large cash reserve on hand, it proceeded to make various investments which had no relation to its
storage business. In 1934, it purchased mining stock which it sold in 1935 at a profit of US
$47,995.29. . . .

All these things may reasonably have appealed to the Board as incompatible with a purpose to
strengthen the financial position of the taxpayer and to provide for needed alteration."cralaw
virtua1aw library
The records further reveal that from May 1951 when petitioner purchased the U.S.A. Treasury
shares, until 1962 when it finally liquidated the same, it (petitioner) never had the occasion to use
the said shares in aiding or financing its importation. This militates against the purpose enunciated
earlier by petitioner that the shares were purchased to finance its importation business. To justify an
accumulation of earnings and profits for the reasonably anticipated future needs, such accumulation
must be used within a reasonable time after the close of the taxable year. 17
Petitioner advanced the argument that the U.S.A. Treasury shares were held for a few more years
from 1957, in view of a plan to buy a lot and construct a building of their own; that at that time
(1957), the Company was not yet qualified to own real property in the Philippines, hence it
(petitioner) had to wait until sixty percent (60%) of the stocks of the Company would be owned by
Filipino citizens before making definite plans. 18
These arguments of petitioner indicate that it considers the U.S.A. Treasury shares not only for the
purpose of aiding or financing its importation but likewise for the purpose of buying a lot and
constructing a building thereon in the near future, but conditioned upon the completion of the 60%
citizenship requirement of stock ownership of the Company in order to qualify it to purchase and
own a lot. The time when the company would be able to establish itself to meet the said requirement
and the decision to pursue the same are dependent upon various future contingencies. Whether
these contingencies would unfold favorably to the Company and if so, whether the Company would
decide later to utilize the U.S.A. Treasury shares according to its plan, remains to be seen. From
these assertions of petitioner, We cannot gather anything definite or certain. This, We cannot
approve.chanrobles law library
In order to determine whether profits are accumulated for the reasonable needs of the business as
to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is
manifested at the time of accumulation not subsequently declared intentions which are merely the
product of afterthought. 19 A speculative and indefinite purpose will not suffice. The mere
recognition of a future problem and the discussion of possible and alternative solutions is not
sufficient. Definiteness of plan coupled with action taken towards its consummation are essential. 20
The Court of Tax Appeals correctly made the following ruling: 21
"As to the statement of Mr. Hawkins in Exh. "B" regarding the expansion program of the petitioner by
purchasing a lot and building of its own, we find no justifiable reason for the retention in 1957 or
thereafter of the US Treasury Bonds which were purchased in 1951.
x x x
"Moreover, if there was any thought for the purchase of a lot and building for the needs of
petitioners business, the corporation may not with impunity permit its earnings to pile up merely
because at some future time certain outlays would have to be made. Profits may only be
accumulated for the reasonable needs of the business, and implicit in this is further requirement of a
reasonable time."cralaw virtua1aw library
Viewed on the foregoing analysis and tested under the "immediacy doctrine," We are convinced that
the Court of Tax Appeals is correct in finding that the investment made by petitioner in the U.S.A.
Treasury shares in 1951 was an accumulation of profits in excess of the reasonable needs of
petitioners business.
Finally, petitioner asserts that the surplus profits allegedly accumulated in the form of U.S.A.
Treasury shares in 1951 by it (petitioner) should not be subject to the surtax in 1957. In other words,
petitioner claims that the surtax of 25% should be based on the surplus accumulated in 1951 and
not in 1957.
This is devoid of merit.
The rule is now settled in Our jurisprudence that undistributed earnings or profits of prior years are
taken into consideration in determining unreasonable accumulation for purposes of the 25% surtax.
22 The case of Basilan Estates, Inc. v. Commissioner of Internal Revenue 23 further strengthen this
rule, and We quote:jgc:chanrobles.com.ph
"Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year
on review was 1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet
of the petitioner for 1953. To check the figure arrived at, the examiner traced the accumulation
process from 1947 until 1953, and petitioners figure stood out to be correct. There was no error in
the process applied, for previous accumulations should be considered in determining unreasonable
accumulation for the year concerned.In determining whether accumulations of earnings or profits in
a particular year are within the reasonable needs of a corporation, it is necessary to take into
account prior accumulations, since accumulations prior to the year involved may have been
sufficient to cover the business needs and additional accumulations during the year involved would
not reasonably be necessary." chanroblesvirtuallawlibrary
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is
AFFIRMED in toto, with costs against petitioner.
SO ORDERED.
G.R. No. L-22492 September 5, 1967
BASILAN ESTATES, INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Felix A. Gulfin and Antonio S. Alano for petitioner.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal offices
in Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an income tax of
P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per examiners' report of
February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and
P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25
of the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy was
issued but the same was not executed because Basilan Estates, Inc. succeeded in getting the
Deputy Commissioner of Internal Revenue to order the Director of the district in Zamboanga City to
hold execution and maintain constructive embargo instead. Because of its refusal to waive the
period of prescription, the corporation's request for reinvestigation was not given due course, and on
December 2, 1960, notice was served the corporation that the warrant of distraint and levy would be
executed.
On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a petition for Add: Over-claimed depreciation P10,500.49
review of the Commissioner's assessment, alleging prescription of the period for assessment and Mis. expenses disallowed 6,759.17
collection; error in disallowing claimed depreciations, travelling and miscellaneous expenses; and
error in finding the existence of unreasonably accumulated profits and the imposition of 25% surtax 2,300.40
thereon. On October 31, 1963, the Court of Tax Appeals found that there was no prescription and Officer's travelling expenses disallowed
affirmed the deficiency assessment in toto.
Net Income per Investigation
On February 21, 1964, the case was appealed to Us by the taxpayer, upon the following issues: 20% tax on P59,702.96
Less: Tax already assessed
1. Has the Commissioner's right to collect deficiency income tax prescribed?
Deficiency income tax
2. Was the disallowance of items claimed as deductible proper? Add: Additional tax of 25% on P347,507.01

3. Have there been unreasonably accumulated profits? If so, should the 25% surtax be imposed on Tax Due & Collectible
the balance of the entire surplus from 1947-1953, or only for 1953?

4. Is the petitioner exempt from the penalty tax under Republic Act 1823 amending Section 25 of the
Tax Code?
PRESCRIPTION
There is no dispute that the assessment of the deficiency tax was made on February 26, 1959; but
the petitioner claims that it never received notice of such assessment or if it did, it received the
notice beyond the five-year prescriptive period. To show prescription, the annotation on the notice
(Exhibit 10, No. 52, ACR, p. 54-A of the BIR records) "No accompanying letter 11/25/" is advanced
as indicative of the fact that receipt of the notice was after March 24, 1959, the last date of the five-
year period within which to assess deficiency tax, since the original returns were filed on March 24,
1954.
Although the evidence is not clear on this point, We cannot accept this interpretation of the
petitioner, considering the presence of circumstances that lead Us to presume regularity in the
performance of official functions. The notice of assessment shows the assessment to have been
made on February 26, 1959, well within the five-year period. On the right side of the notice is also
stamped "Feb. 26, 1959" denoting the date of release, according to Bureau of Internal Revenue
practice. The Commissioner himself in his letter (Exh. H, p. 84 of BIR records) answering petitioner's
request to lift, the warrant of distraint and levy, asserts that notice had been sent to petitioner. In the
letter of the Regional Director forwarding the case to the Chief of the Investigation Division which the
latter received on March 10, 1959 (p. 71 of the BIR records), notice of assessment was said to have
been sent to petitioner. Subsequently, the Chief of the Investigation Division indorsed on March 18,
1959 (p. 24 of the BIR records) the case to the Chief of the Law Division. There it was alleged that
notice was already sent to petitioner on February 26, 1959. These circumstances pointing to official
performance of duty must necessarily prevail over petitioner's contrary interpretation. Besides, even
granting that notice had been received by the petitioner late, as alleged, under Section 331 of the
Tax Code requiring five years within which to assess deficiency taxes, the assessment is deemed
made when notice to this effect is released, mailed or sent by the Collector to the taxpayer and it is
not required that the notice be received by the taxpayer within the aforementioned five-year period.1
ASSESSMENT
The questioned assessment is as follows:
The Commissioner disallowed:
Over-claimed depreciation P10,500.49
Miscellaneous expenses 6,759.17
Officer's travelling expenses 2,300.40
DEDUCTIONS
A. Depreciation. Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to
1949 on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of
said assets by increasing it to conform with the increase in cost for their replacement. Accordingly,
from 1950 to 1953 it deducted from gross income the value of depreciation computed on the
reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction:
Reappraised assets
New assets consisting of hospital building and equipment
Total depreciation
Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal
Revenue found that the reappraised assets depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the Commissioner had already
determined, with taxpayer's concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the
Commissioner pegged the deductible depreciation for 1953 on the same old assets at P36,842.04
and disallowed the excess thereof in the amount of P10,500.49.
The question for resolution therefore is whether depreciation shall be determined on the acquisition
cost or on the reappraised value of the assets.

Depreciation is the gradual diminution in the useful value of tangible property resulting from wear
Net Income per return and tear and normal obsolescense. The term is also applied to amortization of the value of
intangible assets, the use of which in the trade or business is definitely limited in
duration.2 Depreciation commences with the acquisition of the property and its owner is not bound to
see his property gradually waste, without making provision out of earnings for its replacement. It is
entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the
end of any given term of years, the original investment remains as it was in the beginning. It is not
only the right of a company to make such a provision, but it is its duty to its bond and stockholders,
and, in the case of a public service corporation, at least, its plain duty to the public.3 Accordingly, the
law permits the taxpayer to recover gradually his capital investment in wasting assets free from
income tax.4 Precisely, Section 30 (f) (1) which states:
(1)In general. A reasonable allowance for deterioration of property arising out of its use
or employment in the business or trade, or out of its not being used: Provided, That when
the allowance authorized under this subsection shall equal the capital invested by the
taxpayer . . . no further allowance shall be made. . . .
allows a deduction from gross income for depreciation but limits the recovery to the capital invested
in the asset being depreciated.
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges,5 not matters of right.6 They are not created by
implication but upon clear expression in the law.7
Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset
will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer
would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit
on the investment made has never been the underlying reason for the allowance of a deduction for
depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no
justification in the law. The determination, therefore, of the Commissioner of Internal Revenue
disallowing said amount, affirmed by the Court of Tax Appeals, is sustained.
B. Expenses. The next item involves disallowed expenses incurred in 1953, broken as follows:
Miscellaneous expenses P6,759.17
Officer's travelling expenses 2,300.40
Total
P9,059.57
These were disallowed on the ground that the nature of these expenses could not be satisfactorily
explained nor could the same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 was actual expenses credited to the
account of the president of the corporation incurred in the interest of the corporation during the
president's trip to Manila (pp. 33-34 of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the
president's travelling expenses to and from Manila as to the vouchers and receipts of these, he said
the same were made but got burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN).
Petitioner further argues that when it sent its records to Manila in February, 1959, the papers in
support of these miscellaneous and travelling expenses were not included for the reason that by
February 9, 1959, when the Bureau of Internal Revenue decided to investigate, petitioner had no
more obligation to keep the same since five years had lapsed from the time these expenses were
incurred (p. 41 of same TSN). On this ground, the petitioner may be sustained, for under Section
337 of the Tax Code, receipts and papers supporting such expenses need be kept by the taxpayer
for a period of five years from the last entry. At the time of the investigation, said five years had
lapsed. Taxpayer's stand on this issue is therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated, provides:
Sec. 25. Additional tax on corporations improperly accumulating profits or surplus (a)
Imposition of tax. If any corporation, except banks, insurance companies, or personal
holding companies, whether domestic or foreign, is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members or the shareholders
or members of another corporation, through the medium of permitting its gains and profits
to accumulate instead of being divided or distributed, there is levied and assessed against
such corporation, for each taxable year, a tax equal to twenty-five per centum of the
undistributed portion of its accumulated profits or surplus which shall be in addition to the
tax imposed by section twenty-four, and shall be computed, collected and paid in the
same manner and subject to the same provisions of law, including penalties, as that
tax.1awphl.nt
The Commissioner found that in violation of the abovequoted section, petitioner had unreasonably
accumulated profits as of 1953 in the amount of P347,507.01, based on the following circumstances
(Examiner's Report pp. 62-68 of BIR records):
1. Strong financial position of the petitioner as of December 31, 1953. Assets were
P388,617.00 while the liabilities amounted to only P61,117.31 or a ratio of 6:1.
2. As of 1953, the corporation had considerable capital adequate to meet the reasonable
needs of the business amounting to P327,499.69 (assets less liabilities).
3. The P200,000 reserved for electrification of drier and mechanization and the P50,000
reserved for malaria control were reverted to its surplus in 1953.
4. Withdrawal by shareholders, of large sums of money as personal loans.
5. Investment of undistributed earnings in assets having no proximate connection with the
business as hospital building and equipment worth P59,794.72.
6. In 1953, with an increase of surplus amounting to P677,232.01, the capital stock was
increased to P500,000 although there was no need for such increase.
Petitioner tried to show that in considering the surplus, the examiner did not take into account the
possible expenses for cultivation, labor, fertilitation, drainage, irrigation, repair, etc. (pp. 235-237 of
TSN of Dec. 7, 1962). As aptly answered by the examiner himself, however, they were already
included as part of the working capital (pp. 237-238 of TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000 for electrification of driers
and mechanization and P50,000 for malaria control which were reserved way back in 1948 (p. 67 of
the BIR records) but reverted to the general fund only in 1953. If there were any plans for these
amounts to be used in further expansion through projects, it did not appear in the records as was
properly indicated in 1948 when such amounts were reserved. Thus, while in 1948 it was already
clear that the money was intended to go to future projects, in 1953 upon reversion to the general
fund, no such intention was shown. Such reversion therefore gave occasion for the Government to
consider the same for tax purposes. The P250,000 reverted to the general fund was sought to be
explained as later used elsewhere: "part of it in the Hilano Industries, Inc. in building the factory site
and buildings to house technical men . . . part of it was spent in the facilities for the waterworks
system and for industrialization of the coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not
sufficient explanation. Persuasive jurisprudence on the matter such as those in the United States
from where our tax law was derived,8 has it that: "In order to determine whether profits were
accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not
subsequently declared intentions which are merely the products of after-thought."9 The reversion
here was made because the reserved amount was not enough for the projects intended, without any
intent to channel the same to some particular future projects in mind.
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue Code as
amended by R.A. 1823, approved June 22, 1957, whereby accumulated profits or surplus if invested
in any dollar-producing or dollar-earning industry or in the purchase of bonds issued by the Central
Bank, may not be subject to the 25% surtax. We have but to point out that the unreasonable
accumulation was in 1953. The exemption was by virtue of Republic Act 1823 which amended Sec.
25 only on June 22, 1957 more than three years after the period covered by the assessment.
In resume, Basilan Estates, Inc. is liable for the payment of deficiency income tax and surtax for the
year 1953 in the amount of P88,977.42, computed as follows:
Net Income per return P40,142.90
Add: Over-claimed depreciation 10,500.49

Net income per finding P50,643.39

Petitioner argues that since it has P560,717.44 as its expenses for the year 1953, a surplus of
P347,507.01 is not unreasonably accumulated. As rightly contended by the Government, there is no
need to have such a large amount at the beginning of the following year because during the year, 20% tax on P50,643.39 P10,128.67
current assets are converted into cash and with the income realized from the business as the year Less: Tax already assessed 8,028.00
goes, these expenses may well be taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is
erroneous to say that the taxpayer is entitled to retain enough liquid net assets in amounts
approximately equal to current operating needs for the year to cover "cost of goods sold and Deficiency income tax P2,100.67
operating expenses" for "it excludes proper consideration of funds generated by the collection of Add: 25% surtax on P347,507.01 86,876.75
notes receivable as trade accounts during the course of the year."10 In fact, just because the fatal
accumulations are less than 70% of the annual operating expenses of the year, it does not mean
that the accumulations are reasonable as a matter of law."11 Total tax due and collectible P88,977.42
===========
Petitioner tried to show that investments were made with Basilan Coconut Producers Cooperative
Association and Basilan Hospital (pp. 103-105 of TSN of Dec. 6, 1962) totalling P59,794.72 as of WHEREFORE, the judgment appealed from is modified to the extent that petitioner is allowed its
December 31, 1953. This shows all the more the unreasonable accumulation. As of December 31, deductions for travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable
1953 already P59,794.72 was spent yet as of that date there was still a surplus of P347,507.01. for P2,100.67 as deficiency income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably
accumulated profit of P347,507.01. No costs. So ordered.
Petitioner questions why the examiner covered the period from 1948-1953 when the taxable year on
review was 1953. The surplus of P347,507.01 was taken by the examiner from the balance sheet of G.R. No. 85749 May 15, 1989
petitioner for 1953. To check the figure arrived at, the examiner traced the accumulation process
from 1947 until 1953, and petitioner's figure stood out to be correct. There was no error in the COMMISSIONER OF INTERNAL REVENUE, petitioner,
process applied, for previous accumulations should be considered in determining unreasonable vs.
accumulations for the year concerned. "In determining whether accumulations of earnings or profits ANTONIO TUASON, INC. and THE COURT OF TAX APPEALS, respondents.
in a particular year are within the reasonable needs of a corporation, it is neccessary to take into
account prior accumulations, since accumulations prior to the year involved may have been
sufficient to cover the business needs and additional accumulations during the year involved would GRIO-AQUINO, J.:
not reasonably be necessary."12
Elevated to this Court for review is the decision dated October 14, 1988 of the Court of Tax Appeals
Another factor that stands out to show unreasonable accumulation is the fact that large amounts in CTA Case No. 3865, entitled "Antonio Tuason, Inc. vs. Commissioner of Internal Revenue," which
were withdrawn by or advanced to the stockholders. For the year 1953 alone these totalled set aside the petitioner Revenue Commissioner's assessment of P1,151,146.98 as the 25% surtax
P197,229.26. Yet the surplus of P347,507.01 was left as of December 31, 1953. We find on the private respondent's unreasonable accumulation of surplus for the years 1975-1978.
unacceptable petitioner's explanation that these were advances made in furtherance of the business
purposes of the petitioner. As correctly held by the Court of Tax Appeals, while certain expenses of
Under date of February 27, 1981, the petitioner, Commissioner of Internal Revenue, assessed
the corporation were credited against these amounts, the unspent balance was retained by the
Antonio Tuason, Inc.
stockholders without refunding them to petitioner at the end of each year. These advances were in
fact indirect loans to the stockholders indicating the unreasonable accumulation of surplus beyond
the needs of the business. a. Deficiency income tax for the years 1975,1976 and 1978 . . . . . . .
.. P37,491.83.
(b) Deficiency corporate quarterly income tax for the first quarter of 1975 . . . .
ALLEGED EXEMPTION
. . . . . . . . . . . . . . . . . 161.49.
 (c) 25% surtax on unreasonable accumulation of surplus for the years 1975-
1978 . . . . . . . . . . . . 1,151,146.98.
The private respondent did not object to the first and second items and, therefore, paid the amounts
demanded. However, it protested the assessment on a 25% surtax on the third item on the ground
that the accumulation of surplus profits during the years in question was solely for the purpose of
expanding its business operations as real estate broker. The request for reinvestigation was granted
on condition that a waiver of the statute of limitations should be filed by the private respondent. The
latter replied that there was no need of a waiver of the statute of limitaitons because the right of the
Government to assess said tax does not prescribe.
No investigation was conducted nor a decision rendered on Antonio Tuazon Inc.'s protest.
meantime, the Revenue Commissioner issued warrants of distraint and levy to enforce collection of
the total amount originally assessed including the amounts already paid.
The private respondent filed a petition for review in the Court of Tax Appeals with a request that
pending determination of the case on the merits, an order be issued restraining the Commissioner
and/or his representatives from enforcing the warrants of distraint and levy. Since the right asserted
by the Commissioner to collect the taxes involved herein by the summary methods of distraint and
levy was not clear, and it was shown that portions of the tax liabilities involved in the assessment
had already been paid, a writ of injunction was issued by the Tax Court on November 26, 1984,
ordering the Commissioner to refrain fron enforcing said warrants of distraint and levy. It did not
require the petitioner to file a bond (Annex A, pp. 28-30, Rollo).
In view of the reversal of the Commissioner's decision by the Court of Tax Appeals, the petitioner
appealed to this Court, raising the following issues:
1. Whether or not private respondent Antonio Tuason, Inc. is a holding company
and/or investment company;
2. Whether or not privaaate respondent Antonio Tuason, Inc. accumulated
surplus for the years 1975 to 1978; and
3. Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue
accumulation of surplus for the years 1975 to 1978.
Section 25 of the Tax Code at the time the surtax was assessed, provided:
Sec. 25. Additional tax on corporation improperly accumulating profits or
surplus.
(a) Imposition of tax. If any corporation, except banks, insurance companies,
or personal holding companies, whether domestic or foreign, is formed or
availed of for the purpose of preventing the imposition of the tax upon its
shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and assessed
against such corporation, for each taxable year, a tax equal to twenty-five per
centum of the undistributed portion of its accumulated profits or surplus which
shall be in addition to the tax imposed by section twenty-four, and shall be
computed, collected and paid in the same manner and subject to the same
provisions of law, including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is a mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned, directly or indirectly, by
one person.
(c) Evidence determinative of purpose. The fact that the earnings or profits of
a corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.
The petition for review is meritorious.
The Court of Tax Appeals conceded that the Revenue Commissioner's determination that Antonio
Tuason, Inc. was a mere holding or investment company, was "presumptively correct" (p. 7, Annex
A), for the corporation did not involve itself in the development of subdivisions but merely subdivided
its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends and
rental realized from the sale of realty.
Another circumstance supporting that presumption is that 99.99% in value of the outstanding stock
of Antonio Tuason, Inc., is owned by Antonio Tuason himself. The Commissioner "conclusively
presumed" that when the corporation accumulated (instead of distributing to the shareholders) a
surplus of over P3 million fron its earnings in 1975 up to 1978, the purpose was to avoid the
imposition of the progressive income tax on its shareholders.
That Antonio Tuason, Inc. accumulated surplus profits amounting to P3,263,305.88 for 1975 up to
1978 is not disputed. However, the private respondent vehemently denies that its purpose was to
evade payment of the progressive income tax on such dividends by its stockholders. According to
the private respondent, surplus profits were set aside by the company to build up sufficient capital
for its expansion program which included the construction in 1979-1981 of an apartment building,
and the purchase in 1980 of a condominium unit which was intended for resale or lease.
However, while these investments were actually made, the Commissioner points out that the
corporation did not use up its surplus profits. It allegation that P1,525,672.74 was spent for the
construction of an apartment building in 1979 and P1,752,332.87 for the purchase of a condominium
unit in Urdaneta Village in 1980 was refuted by the Declaration of Real Property on the apartment
building (Exh. C) which shows that its market value is only P429,890.00, and the Tax Declaration on
the condominium unit which reflects a market value of P293,830.00 only (Exh. D-1). The enormous
discrepancy between the alleged investment cost and the declared market value of these pieces of
real estate was not denied nor explained by the private respondent.
Since the company as of the time of the assessment in 1981, had invested in its business
operations only P 773,720 out of its accumulated surplus profits of P3,263,305.88 for 1975-1978, its
remaining accumulated surplus profits of P2,489,858.88 are subject to the 25% surtax.
All presumptions are in favor of the correctness of petitioner's assessment against the private
respondent. It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus Company vs.
Commissioner of Internal Revenue, 1 SCRA 538). Unfortunately, the private respondent failed to
overcome the presumption of correctness of the Commissioner's assessment.
The touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of
using the undistributed earnings and profits for the reasonable needs of the business, that purpose
would not fall within the interdiction of the statute" (Mertens Law of Federal Income Taxation, Vol. 7,
Chapter 39, p. 45 cited in Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, 127
SCRA 483, 493).
It is plain to see that the company's failure to distribute dividends to its stockholders in 1975-1978
was for reasons other than the reasonable needs of the business, thereby falling within the
interdiction of Section 25 of the Tax Code of 1977.
WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby set aside. The
petitioner's assessment of a 25% surtax against the Antonio Tuason, Inc. is reinstated but only on
the latter's unspent accumulated surplus profits of P2,489,585.88. No costs.
SO ORDERED.
G.R. No. 108067 January 20, 2000
CYANAMID PHILIPPINES, INC., petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondent.
QUISUMBING, J.:
Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision2 of the Court of
Tax Appeals, ordering petitioner to pay respondent Commissioner of Internal Revenue the amount of
three million, seven hundred seventy-four thousand, eight hundred sixty seven pesos and fifty
centavos (P3,774,867.50) as 25% surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January 30, 1987, under Sec. 25 of
the National Internal Revenue Code.1wphi1.nt
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly
owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture
of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an
importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of
deficiency income tax of one hundred nineteen thousand eight hundred seventeen (P119,817.00)
pesos for taxable year 1981, as follows:
Net income disclosed by the return as audited 14,575,210.00
Add: Discrepancies:
Professional fees/yr. 17018 261,877.00
per investigation 110,399.37
Total Adjustment 152,477.00
Net income per Investigation 14,727,687.00
Less: Personal and additional exemptions
Amount subject to tax 14,727,687.00
Income tax due thereon . . . 25% Surtax 2,385,231.50 3,237,495.00
Less: Amount already assessed 5,161,788.00
BALANCE 75,709.00
monthly interest from 1,389,639.00 44,108.00
Compromise penalties
TOTAL AMOUNT DUE 3,774,867.50 119,817.003
On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and 1981
Deficiency Percentage Assessment of P8,846.72.4 Petitioner, through its external accountant, Sycip,
Gorres, Velayo & Co., claimed, among others, that the surtax for the undue accumulation of
earnings was not proper because the said profits were retained to increase petitioner's working
capital and it would be used for reasonable business needs of the company. Petitioner contended
that it availed of the tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil
and criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the cancellation
of the assessment notices and rendered its resolution, as follows:
It appears that your client availed of Executive Order No. 41 under File No. 32A-F-
000455-41B as certified and confirmed by our Tax Amnesty Implementation Office on
October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of the tax amnesty
under Executive Order No. 41, as amended is sufficient basis, in appropriate cases, for
the cancellation of the assessment issued after August 21, 1986. (Revenue Memorandum
Order No. 4-87) Said availment does not, therefore, result in cancellation of assessments
issued before August 21, 1986. as in the instant case. In other words, the assessments in
this case issued on January 30, 1985 despite your client's availment of the tax amnesty
under Executive Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay this Office the
aforementioned deficiency income tax and surtax on undue accumulation of surplus in the
respective amounts of P119,817.00 and P3,774,867.50 inclusive of interest thereon for
the year 1981, within thirty (30) days from receipt hereof, otherwise this office will be
constrained to enforce collection thereof thru summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter.5
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both
parties agreed to compromise the 1981 deficiency income tax assessment of P119,817.00.
Petitioner paid a reduced amount twenty-six thousand, five hundred seventy-seven pesos
(P26,577.00) as compromise settlement. However, the surtax on improperly accumulated profits
remained unresolved.
Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings
for the year 1981 had no legal basis for the following reasons: (a) petitioner accumulated its
earnings and profits for reasonable business requirements to meet working capital needs and
retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid
Company, a corporation organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York Stock Exchange. This being the
case, no individual shareholder income taxes by petitioner's accumulation of earnings and profits,
instead of distribution of the same.
In denying the petition, the Court of Tax Appeals made the following pronouncements:
Petitioner contends that it did not declare dividends for the year 1981 in order to use the
accumulated earnings as working capital reserve to meet its "reasonable business
needs". The law permits a stock corporation to set aside a portion of its retained earnings
for specified purposes (citing Section 43, paragraph 2 of the Corporation Code of the
Philippines). In the case at bar, however, petitioner's purpose for accumulating its
earnings does not fall within the ambit of any of these specified purposes.
More compelling is the finding that there was no need for petitioner to set aside a portion
of its retained earnings as working capital reserve as it claims since it had considerable
liquid funds. A thorough review of petitioner's financial statement (particularly the Balance
Sheet, p. 127, BIR Records) reveals that the corporation had considerable liquid funds
consisting of cash accounts receivable, inventory and even its sales for the period is
adequate to meet the normal needs of the business. This can be determined by
computing the current asset to liability ratio of the company:
current ratio = current assets/ current liabilities
= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
========
The significance of this ratio is to serve as a primary test of a company's solvency to meet
current obligations from current assets as a going concern or a measure of adequacy of
working capital.
xxx xxx xxx
We further reject petitioner's argument that "the accumulated earnings tax does not apply
to a publicly-held corporation" citing American jurisprudence to support its position. The
reference finds no application in the case at bar because under Section 25 of the NIRC as
amended by Section 5 of P.D. No. 1379 [1739] (dated September 17, 1980), the
exceptions to the accumulated earnings tax are expressly enumerated, to wit: Bank, non-
bank financial intermediaries, corporations organized primarily, and authorized by the
Central Bank of the Philippines to hold shares of stock of banks, insurance companies, or
personal holding companies, whether domestic or foreign. The law on the matter is clear
and specific. Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to whether the provision of
Section 25 of the NIRC should apply to petitioner.
Equally clear and specific are the provisions of E.O. 41 particularly with respect to its
effectivity and coverage . . .
. . . Said availment does not result in cancellation of assessments issued before August
21, 1986 as petitioner seeks to do in the case at bar. Therefore, the assessments in this
case, issued on January 30, 1985 despite petitioner's availment of the tax amnesty under
E.O. 41 as amended, still subsist.
xxx xxx xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent
Commissioner of Internal Revenue the sum of P3,774,867.50 representing 25% surtax on
improper accumulation of profits for 1981, plus 10% surcharge and 20% annual interest
from January 30, 1985 to January 30, 1987.6
Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals. Affirming the CTA
decision, the appellate court said:
In reviewing the instant petition and the arguments raised herein, We find no compelling
reason to reverse the findings of the respondent Court. The respondent Court's decision is
supported by evidence, such as petitioner corporation's financial statement and balance
sheets (p. 127, BIR Records). On the other hand the petitioner corporation could only
come up with an alternative formula lifted from a decision rendered by a foreign court
(Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying said formula to
its particular financial position, the petitioner corporation attempts to justify its
accumulated surplus earnings. To Our mind, the petitioner corporation's alternative
formula cannot overturn the persuasive findings and conclusion of the respondent Court
based, as it is, on the applicable laws and jurisprudence, as well as standards in the
computation of taxes and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the
decision of the Court of Tax Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is
AFFIRMED in toto.7
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER
IS LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR THE YEAR 1981.8
Sec. 259 of the old National Internal Revenue Code of 1977 states:
Sec. 25. Additional tax on corporation improperly accumulating profits or surplus
(a) Imposition of tax. If any corporation is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members or the shareholders
or members of another corporation, through the medium of permitting its gains and profits
to accumulate instead of being divided or distributed, there is levied and assessed against
such corporation, for each taxable year, a tax equal to twenty-five per-centum of the
 undistributed portion of its accumulated profits or surplus which shall be in addition to the
tax imposed by section twenty-four, and shall be computed, collected and paid in the
same manner and subject to the same provisions of law, including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is mere holding company shall
be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment company where at any time
during the taxable year more than fifty per centum in value of its outstanding stock is
owned, directly or indirectly, by one person.
(c) Evidence determinative of purpose. The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by clear preponderance of evidence, shall prove the contrary.
(d) Exception. The provisions of this sections shall not apply to banks, non-bank
financial intermediaries, corporation organized primarily, and authorized by the Central
Bank of the Philippines to hold shares of stock of banks, insurance companies, whether
domestic or foreign.
The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty
tax designed to compel corporations to distribute earnings so that the said earnings by shareholders
could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated
earnings tax does not apply to Cyanamid, a wholly owned subsidiary of a publicly owned
company.10 Specifically, petitioner cites Golconda Mining Corp. vs. Commissioner, 507 F.2d 594,
whereby the U.S. Ninth Circuit Court of Appeals had taken the position that the accumulated
earnings tax could only apply to a closely held corporation.
A review of American taxation history on accumulated earnings tax will show that the application of
the accumulated earnings tax to publicly held corporations has been problematic. Initially, the Tax
Court and the Court of Claims held that the accumulated earnings tax applies to publicly held
corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that the accumulated
earnings tax could only apply to closely held corporations. Despite Golconda, the Internal Revenue
Service asserted that the tax could be imposed on widely held corporations including those not
controlled by a few shareholders or groups of shareholders. The Service indicated it would not follow
the Ninth Circuit regarding publicly held corporations.11 In 1984, American legislation nullified the
Ninth Circuit's Golconda ruling and made it clear that the accumulated earnings tax is not limited to
closely held corporations.12 Clearly, Golconda is no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank
financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does
not fall among those exempt classes. Besides, the rule on enumeration is that the express mention
of one person, thing, act, or consequence is construed to exclude all others. 13 Laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power.14 Taxation is the rule and exemption is the exception.15 The burden of proof rests upon
the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed,16 a
burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is that increase of working
capital by a corporation justifies accumulating income. Petitioner asserts that respondent court erred
in concluding that Cyanamid need not infuse additional working capital reserve because it had
considerable liquid funds based on the 2.21:1 ratio of current assets to current liabilities. Petitioner
relies on the so-called "Bardahl" formula, which allowed retention, as working capital reserve,
sufficient amounts of liquid assets to carry the company through one operating cycle. The
"Bardahl"17 formula was developed to measure corporate liquidity. The formula requires an
examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and
any extraordinary expenses reasonably anticipated, plus enough to operate the business during one
operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw
materials into inventory, and inventory into sales, including the time it takes to collect payment for
the
sales.18
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as
working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts that
Cyanamid had a working capital deficit of P7,986,633.00.19 Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly accumulated to increase the petitioner's working
capital for the succeeding year.
We note, however, that the companies where the "Bardahl" formula was applied, had operating
cycles much shorter than that of petitioner. In Atlas Tool Co., Inc, vs. CIR,20 the company's operating
cycle was only 3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi vs. United
States,21 the corporation's operating cycle was only 56.87 days, or 15.58% of the year. In the case of
Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will
need sufficient liquid funds, of at least three quarters of the year, to cover the operating costs of the
business. There are variations in the application of the "Bardahl" formula, such as average operating
cycle or peak operating cycle. In times when there is no recurrence of a business cycle, the working
capital needs cannot be predicted with accuracy. As stressed by American authorities, although the
"Bardahl" formula is well-established and routinely applied by the courts, it is not a precise rule. It is
used only for administrative convenience.22 Petitioner's application of the "Bardahl" formula merely
creates a false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of
the industry standard.23 The ratio of current assets to current liabilities is used to determine the
sufficiency of working capital. Ideally, the working capital should equal the current liabilities and
there must be 2 units of current assets for every unit of current liability, hence the so-called "2 to 1"
rule.24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said
working capital was expected to increase further when more funds were generated from the
succeeding year's sales. Available income covered expenses or indebtedness for that year, and
there appeared no reason to expect an impending "working capital deficit" which could have
necessitated an increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we held that:
. . . [T]here is no need to have such a large amount at the beginning of the following year
because during the year, current assets are converted into cash and with the income
realized from the business as the year goes, these expenses may well be taken care of.
[citation omitted]. Thus, it is erroneous to say that the taxpayer is entitled to retain enough
liquid net assets in amounts approximately equal to current operating needs for the year
to cover "cost of goods sold and operating expenses:" for "it excludes proper
 consideration of funds generated by the collection of notes receivable as trade accounts
during the course of the year."26
If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or
profits to accumulate, and the taxpayer contested such a determination, the burden of proving the
determination wrong, together with the corresponding burden of first going forward with evidence, is
on the taxpayer. This applies even if the corporation is not a mere holding or investment company
and does not have an unreasonable accumulation of earnings or profits.27
In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax
upon shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the
time of accumulation, not intentions declared subsequently, which are mere
afterthoughts.28 Furthermore, the accumulated profits must be used within a reasonable time after
the close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing
evidence, that such accumulation of profit was for the immediate needs of the business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:
To determine the "reasonable needs" of the business in order to justify an accumulation of
earnings, the Courts of the United States have invented the so-called "Immediacy Test"
which construed the words "reasonable needs of the business" to mean the immediate
needs of the business, and it was generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and profits, the accumulation was
not for the reasonable needs of the business, and the penalty tax would apply. (Mertens.
Law of Federal Income Taxation, Vol. 7, Chapter 39, p, 103).30
In the present case, the Tax Court opted to determine the working capital sufficiency by using the
ratio between current assets to current liabilities. The working capital needs of a business depend
upon nature of the business, its credit policies, the amount of inventories, the rate of the turnover,
the amount of accounts receivable, the collection rate, the availability of credit to the business, and
similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with
the required definiteness envisioned by the statute. We agree with the tax court that the burden of
proof to establish that the profits accumulated were not beyond the reasonable needs of the
company, remained on the taxpayer. This Court will not set aside lightly the conclusion reached by
the Court of Tax Appeals which, by the very nature of its function, is dedicated exclusively to the
consideration of tax problems and has necessarily developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority.31 Unless rebutted, all presumptions
generally are indulged in favor of the correctness of the CIR's assessment against the taxpayer.
With petitioner's failure to prove the CIR incorrect, clearly and conclusively, this Court is constrained
to uphold the correctness of tax court's ruling as affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals, sustaining
that of the Court of Tax Appeals, is hereby AFFIRMED. Costs against petitioner.1wphi1.nt
SO ORDERED.
G.R. No. 180066
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE AIRLINES, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court,
seeking the reversal and setting aside of the Decision1 dated 9 August 2007 and Resolution2 dated
11 October 2007 of the Court of Tax Appeals (CTA) en banc in CTA E.B. No. 246. The CTA en banc
affirmed the Decision3 dated 31 July 2006 of the CTA Second Division in C.T.A. Case No. 7010,
ordering the cancellation and withdrawal of Preliminary Assessment Notice (PAN) No. INC FY-3-31-
01-000094 dated 3 September 2003 and Formal Letter of Demand dated 12 January 2004, issued
by the Bureau of Internal Revenue (BIR) against respondent Philippine Airlines, Inc. (PAL), for the
payment of Minimum Corporate Income Tax (MCIT) in the amount of P272,421,886.58.
There is no dispute as to the antecedent facts of this case.
PAL is a domestic corporation organized under the corporate laws of the Republic of the Philippines;
declared the national flag carrier of the country; and the grantee under Presidential Decree No.
15904 of a franchise to establish, operate, and maintain transport services for the carriage of
passengers, mail, and property by air, in and between any and all points and places throughout the
Philippines, and between the Philippines and other countries.5
For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero taxable
income,6 which left it with unapplied creditable withholding tax7 in the amount of P2,334,377.95.
PAL did not pay any MCIT for the period.
In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal Revenue (CIR), PAL
requested for the refund of its unapplied creditable withholding tax for FY 2000-2001. PAL attached
to its letter the following: (1) Schedule of Creditable Tax Withheld at Source for FY 2000-2001; (2)
Certificates of Creditable Taxes Withheld; and (3) Audited Financial Statements.1avvphi1
Acting on the aforementioned letter of PAL, the Large Taxpayers Audit and Investigation Division 1
(LTAID 1) of the BIR Large Taxpayers Service (LTS), issued on 16 August 2002, Tax Verification
Notice No. 00201448, authorizing Revenue Officer Jacinto Cueto, Jr. (Cueto) to verify the supporting
documents and pertinent records relative to the claim of PAL for refund of its unapplied creditable
withholding tax for FY 2000-20001. In a letter dated 19 August 2003, LTAID 1 Chief Armit S.
Linsangan invited PAL to an informal conference at the BIR National Office in Diliman, Quezon City,
on 27 August 2003, at 10:00 a.m., to discuss the results of the investigation conducted by Revenue
Officer Cueto, supervised by Revenue Officer Madelyn T. Sacluti.
BIR officers and PAL representatives attended the scheduled informal conference, during which the
former relayed to the latter that the BIR was denying the claim for refund of PAL and, instead, was
assessing PAL for deficiency MCIT for FY 2000-2001. The PAL representatives argued that PAL was
not liable for MCIT under its franchise. The BIR officers then informed the PAL representatives that
the matter would be referred to the BIR Legal Service for opinion.
The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-000094, which was received
by PAL on 23 October 2003. LTAID 1 assessed PAL for P262,474,732.54, representing deficiency
MCIT for FY 2000-2001, plus interest and compromise penalty, computed as follows:
Sales/Revenues from Operation P 38,798,721,685.00
Less: Cost of Services 30,316,679,013.00
Gross Income from Operation 8,482,042,672.00
Add: Non-operating income 465,111,368.00 THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS ASSAILED DECISION
Total Gross Income for MCIT purposes 9,947,154,040.008 BECAUSE:
Rate of Tax 2%
Tax Due 178,943,080.80 (1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX PROVISION OF THE
Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74 NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC OF 1997). (sic) AS AMENDED; HENCE,
Compromise Penalty 25,000.00 IT IS COVERED BY THE MCIT PROVISION OF THE SAME CODE.
Total Amount Due P 262,474,732.549
PAL protested PAN No. INC FY-3-31-01-000094 through a letter dated 4 November 2003 to the BIR (2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF "OTHER TAXES" WHICH WOULD
LTS. ENABLE RESPONDENT TO AVAIL ITSELF OF THE "IN LIEU" (sic) OF ALL OTHER TAXES"
CLAUSE UNDER SECTION 13 OF P.D. NO. 1590 ("CHARTER").
On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of Demand for deficiency MCIT for FY
2000-2001 in the amount of P271,421,88658, based on the following calculation: (3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT OF [PALS]
CHARTER.
Sales/Revenues from Operation P 38,798,721,685.00
Less: Cost of Services (4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN WHAT WILL GIVE IT THE
Direct Costs - P 30,749,761,017.00 BENEFIT OF A LOWER TAX, BUT ALSO THE RESPONSIBILITY OF PAYING ITS SHARE OF THE
Less: Non-deductible TAX BURDEN, AS IS EVIDENT IN SECTION 22 OF RA NO. 9337.
interest expense 433,082,004.00 30,316,679,013.00
Gross Income from Operation P 8,482,042,672.00 (5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED; [PAL] IS LIABLE FOR
Add: Non-operating Income 465,111,368.00 THE DEFICIENCY MCIT.13
Total Gross Income for MCIT purposes P 9,947,154,040.00
MCIT tax due P 178,943,080.80 There is only one vital issue that the Court must resolve in the Petition at bar, i.e., whether PAL is
Interest 20% per annum 7/16/01 to 02/15/04 92,453,805.78 liable for deficiency MCIT for FY 2000-2001.
Compromise Penalty 25,000.00
Total MCIT due and demandable P 271,421,886.5810 The Court answers in the negative.
PAL received the foregoing Formal Letter of Demand on 12 February 2004, prompting it to file with
the BIR LTS a formal written protest dated 13 February 2004. Presidential Decree No. 1590, the franchise of PAL, contains provisions specifically governing the
taxation of said corporation, to wit:
The BIR LTS rendered on 7 May 2004 its Final Decision on Disputed Assessment, which was
received by PAL on 26 May 2004. Invoking Revenue Memorandum Circular (RMC) No. 66-2003, the Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the
BIR LTS denied with finality the protest of PAL and reiterated the request that PAL immediately pay Philippine Government during the life of this franchise whichever of subsections (a) and (b)
its deficiency MCIT for FY 2000-2001, inclusive of penalties incident to delinquency.1avvphi1 hereunder will result in a lower tax:

PAL filed a Petition for Review with the CTA, which was docketed as C.T.A. Case No. 7010 and
raffled to the CTA Second Division. The CTA Second Division promulgated its Decision on 31 July
2006, ruling in favor of PAL. The dispositive portion of the judgment of the CTA Second Division
reads:
WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED.
Accordingly, Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for the
payment of deficiency Minimum Corporate Income Tax in the amount of P272,421,886.58 are
hereby CANCELLED and WITHDRAWN.11
In a Resolution dated 2 January 2007, the CTA Second Division denied the Motion for
Reconsideration of the CIR.
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all
sources, without distinction as to transport or nontransport operations; provided, that with respect to
international air-transport service, only the gross passenger, mail, and freight revenues from its
outgoing flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes,
duties, royalties, registration, 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:

It was then the turn of the CIR to file a Petition for Review with the CTA en banc, docketed as C.T.A.
E.B. No. 246. The CTA en banc found that "the cited legal provisions and jurisprudence are teeming
with life with respect to the grant of tax exemption too vivid to pass unnoticed," and that "the Court in
Division correctly ruled in favor of the respondent [PAL] granting its petition for the cancellation of
Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for the deficiency
MCIT in the amount of P272,421,886.58."12 Consequently, the CTA en banc denied the Petition of
the CIR for lack of merit. The CTA en banc likewise denied the Motion for Reconsideration of the
CIR in a Resolution dated 11 October 2007.
Hence, the CIR comes before this Court via the instant Petition for Review on Certiorari, based on
the grounds stated hereunder:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas,
fuel, and oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or
fees are directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or
importer of said petroleum products but are billed or passed on to the grantee either as part of the
price or cost thereof or by mutual agreement or other arrangement; provided, that all such
purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive
use in its transport and nontransport operations and other activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations
by the grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary
and catering supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles,
supplies, or materials; provided, that such articles or supplies or materials are imported for the use
of the grantee in its transport and nontransport operations and other activities incidental thereto and
are not locally available in reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable to lessors, whether foreign or
domestic, of aircraft, engines, equipment, machinery, spare parts, and other property rented, leased,
or chartered by the grantee where the payment of such taxes is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans obtained and other obligations
incurred by the grantee where the payment of such taxes is assumed by the grantee;
5. All taxes, fees, and other charges on the registration, licensing, acquisition, and transfer of
aircraft, equipment, motor vehicles, and all other personal and real property of the grantee; and
6. The corporate development tax under Presidential Decree No. 1158-A.
The grantee, shall, however, pay the tax on its real property in conformity with existing law.
For purposes of computing the basic corporate income tax as provided herein, the grantee is
authorized:
(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of
depreciation; and
(b) To carry over as a deduction from taxable income any net loss incurred in any year up to five
years following the year of such loss.
Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on
quarterly basis to the Commissioner of Internal Revenue. Within sixty (60) days after the end of
each of the first three quarters of the taxable calendar or fiscal year, the quarterly franchise or
income-tax return shall be filed and payment of either the franchise or income tax shall be made by
the grantee.
A final or an adjustment return covering the operation of the grantee for the preceding calendar or
fiscal year shall be filed on or before the fifteenth day of the fourth month following the close of the
calendar or fiscal year. The amount of the final franchise or income tax to be paid by the grantee
shall be the balance of the total franchise or income tax shown in the final or adjustment return after
deducting therefrom the total quarterly franchise or income taxes already paid during the preceding
first three quarters of the same taxable year.
Any excess of the total quarterly payments over the actual annual franchise of income tax due as
shown in the final or adjustment franchise or income-tax return shall either be refunded to the
grantee or credited against the grantee's quarterly franchise or income-tax liability for the
succeeding taxable year or years at the option of the grantee.
The term "gross revenues" is herein defined as the total gross income earned by the grantee from;
(a) transport, nontransport, and other services; (b) earnings realized from investments in money-
market placements, bank deposits, investments in shares of stock and other securities, and other
investments; (c) total gains net of total losses realized from the disposition of assets and foreign-
exchange transactions; and (d) gross income from other sources. (Emphases ours.)
According to the afore-quoted provisions, the taxation of PAL, during the lifetime of its franchise,
shall be governed by two fundamental rules, particularly: (1) PAL shall pay the Government either
basic corporate income tax or franchise tax, whichever is lower; and (2) the tax paid by PAL, under
either of these alternatives, shall be in lieu of all other taxes, duties, royalties, registration, license,
and other fees and charges, except only real property tax.
The basic corporate income tax of PAL shall be based on its annual net taxable income, computed
in accordance with the National Internal Revenue Code (NIRC). Presidential Decree No. 1590 also
explicitly authorizes PAL, in the computation of its basic corporate income tax, to (1) depreciate its
assets twice as fast the normal rate of depreciation;14 and (2) carry over as a deduction from
taxable income any net loss incurred in any year up to five years following the year of such loss.15
Franchise tax, on the other hand, shall be two per cent (2%) of the gross revenues derived by PAL
from all sources, whether transport or nontransport operations. However, with respect to
international air-transport service, the franchise tax shall only be imposed on the gross passenger,
mail, and freight revenues of PAL from its outgoing flights.
In its income tax return for FY 2000-2001, filed with the BIR, PAL reported no net taxable income for
the period, resulting in zero basic corporate income tax, which would necessarily be lower than any
franchise tax due from PAL for the same period.
The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that the
MCIT is income tax for which PAL is liable. The CIR reasons that Section 13(a) of Presidential
Decree No. 1590 provides that the corporate income tax of PAL shall be computed in accordance
with the NIRC. And, since the NIRC of 1997 imposes MCIT, and PAL has not applied for relief from
the said tax, then PAL is subject to the same.
The Court is not persuaded. The arguments of the CIR are contrary to the plain meaning and
obvious intent of Presidential Decree No. 1590, the franchise of PAL.
Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997,16 pertinent
provisions of which are reproduced below for easy reference:
SEC. 27. Rates of Income Tax on Domestic Corporations.
(A) In General Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent (32%).
xxxx
(E) Minimum Corporate Income Tax on Domestic Corporations.
(1) Imposition of Tax. A minimum corporate income tax of two percent (2%) of the gross income as
of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under
this Title, beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is greater than the
tax computed under Subsection (A) of this Section for the taxable year.
Hence, a domestic corporation must pay whichever is higher of: (1) the income tax under Section
27(A) of the NIRC of 1997, computed by applying the tax rate therein to the taxable income of the
corporation; or (2) the MCIT under Section 27(E), also of the NIRC of 1997, equivalent to 2% of the
gross income of the corporation. Although this may be the general rule in determining the income tax
due from a domestic corporation under the NIRC of 1997, it can only be applied to PAL to the extent
allowed by the provisions in the franchise of PAL specifically governing its taxation.
After a conscientious study of Section 13 of Presidential Decree No. 1590, in relation to Sections
27(A) and 27(E) of the NIRC of 1997, the Court, like the CTA en banc and Second Division,
concludes that PAL cannot be subjected to MCIT for FY 2000-2001.
First, Section 13(a) of Presidential Decree No. 1590 refers to "basic corporate income tax." In
Commissioner of Internal Revenue v. Philippine Airlines, Inc.,17 the Court already settled that the
"basic corporate income tax," under Section 13(a) of Presidential Decree No. 1590, relates to the
general rate of 35% (reduced to 32% by the year 2000) as stipulated in Section 27(A) of the NIRC of
1997.
Section 13(a) of Presidential Decree No. 1590 requires that the basic corporate income tax be
computed in accordance with the NIRC. This means that PAL shall compute its basic corporate
income tax using the rate and basis prescribed by the NIRC of 1997 for the said tax. There is
nothing in Section 13(a) of Presidential Decree No. 1590 to support the contention of the CIR that
PAL is subject to the entire Title II of the NIRC of 1997, entitled "Tax on Income."
Second, Section 13(a) of Presidential Decree No. 1590 further provides that the basic corporate
income tax of PAL shall be based on its annual net taxable income. This is consistent with Section
27(A) of the NIRC of 1997, which provides that the rate of basic corporate income tax, which is 32%
beginning 1 January 2000, shall be imposed on the taxable income of the domestic corporation.
Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of gross
income specified in the said Code, less the deductions and/or personal and additional exemptions, if
any, authorized for such types of income by the same Code or other special laws. The gross
income, referred to in Section 31, is described in Section 32 of the NIRC of 1997 as income from
whatever source, including compensation for services; the conduct of trade or business or the
exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes
and winnings; pensions; and a partners distributive share in the net income of a general
professional partnership.
Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by
subtracting from gross income deductions authorized, not just by the NIRC of 1997,18 but also by
special laws. Presidential Decree No. 1590 may be considered as one of such special laws
authorizing PAL, in computing its annual net taxable income, on which its basic corporate income
tax shall be based, to deduct from its gross income the following: (1) depreciation of assets at twice
the normal rate; and (2) net loss carry-over up to five years following the year of such loss.
In comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based on the gross
income of the domestic corporation. The Court notes that gross income, as the basis for MCIT, is
given a special definition under Section 27(E)(4) of the NIRC of 1997, different from the general one
under Section 34 of the same Code.
According to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross income of a domestic
corporation engaged in the sale of service means gross receipts, less sales returns, allowances,
discounts and cost of services. "Cost of services" refers to all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (a) salaries and
employee benefits of personnel, consultants, and specialists directly rendering the service; and (b)
cost of facilities directly utilized in providing the service, such as depreciation or rental of equipment
used and cost of supplies.19 Noticeably, inclusions in and exclusions/deductions from gross income
for MCIT purposes are limited to those directly arising from the conduct of the taxpayers business. It
is, thus, more limited than the gross income used in the computation of basic corporate income tax.
In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxable
income, which is the basis for basic corporate income tax under Section 27(A); and gross income,
which is the basis for the MCIT under Section 27(E). The two terms have their respective technical
meanings, and cannot be used interchangeably. The same reasons prevent this Court from
declaring that the basic corporate income tax, for which PAL is liable under Section 13(a) of
Presidential Decree No. 1590, also covers MCIT under Section 27(E) of the NIRC of 1997, since the
basis for the first is the annual net taxable income, while the basis for the second is gross income.
Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27
of the NIRC of 1997, and one is paid in place of the other, the two are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc.,20 wherein it
held that income tax on the passive income21 of a domestic corporation, under Section 27(D) of the
NIRC of 1997, is different from the basic corporate income tax on the taxable income of a domestic
corporation, imposed by Section 27(A), also of the NIRC of 1997. Section 13 of Presidential Decree
No. 1590 gives PAL the option to pay basic corporate income tax or franchise tax, whichever is
lower; and the tax so paid shall be in lieu of all other taxes, except real property tax. The income tax
on the passive income of PAL falls within the category of "all other taxes" from which PAL is
exempted, and which, if already collected, should be refunded to PAL.
The Court herein treats MCIT in much the same way. Although both are income taxes, the MCIT is
different from the basic corporate income tax, not just in the rates, but also in the bases for their
computation. Not being covered by Section 13(a) of Presidential Decree No. 1590, which makes
PAL liable only for basic corporate income tax, then MCIT is included in "all other taxes" from which
PAL is exempted.
That, under general circumstances, the MCIT is paid in place of the basic corporate income tax,
when the former is higher than the latter, does not mean that these two income taxes are one and
the same. The said taxes are merely paid in the alternative, giving the Government the opportunity
to collect the higher amount between the two. The situation is not much different from Section 13 of
Presidential Decree No. 1590, which reversely allows PAL to pay, whichever is lower of the basic
corporate income tax or the franchise tax. It does not make the basic corporate income tax
indistinguishable from the franchise tax.
Given the fundamental differences between the basic corporate income tax and the MCIT, presented
in the preceding discussion, it is not baseless for this Court to rule that, pursuant to the franchise of
PAL, said corporation is subject to the first tax, yet exempted from the second.
Fourth, the evident intent of Section 13 of Presidential Decree No. 1520 is to extend to PAL tax
concessions not ordinarily available to other domestic corporations. Section 13 of Presidential
Decree No. 1520 permits PAL to pay whichever is lower of the basic corporate income tax or the
franchise tax; and the tax so paid shall be in lieu of all other taxes, except only real property tax.
Hence, under its franchise, PAL is to pay the least amount of tax possible.
Section 13 of Presidential Decree No. 1520 is not unusual. A public utility is granted special tax
treatment (including tax exceptions/exemptions) under its franchise, as an inducement for the
acceptance of the franchise and the rendition of public service by the said public utility.22 In this
case, in addition to being a public utility providing air-transport service, PAL is also the official flag
carrier of the country.
The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenes the
objective of Section 13 of Presidential Decree No. 1590. In effect, PAL would not just have two, but
three tax alternatives, namely, the basic corporate income tax, MCIT, or franchise tax. More
troublesome is the fact that, as between the basic corporate income tax and the MCIT, PAL shall be
made to pay whichever is higher, irrefragably, in violation of the avowed intention of Section 13 of
Presidential Decree No. 1590 to make PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case the "in lieu of all other taxes" clause
in Section 13 of Presidential Decree No. 1520, if it did not pay anything at all as basic corporate
income tax or franchise tax. As a result, PAL should be made liable for "other taxes" such as MCIT.
This line of reasoning has been dubbed as the Substitution Theory, and this is not the first time the
CIR raised the same. The Court already rejected the Substitution Theory in Commissioner of
Internal Revenue v. Philippine Airlines, Inc.,23 to wit:
"Substitution Theory"
of the CIR Untenable
A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes"
proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD
1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration
for its franchise. Either option excludes the payment of other taxes and dues imposed or collected
by the national or the local government. PAL has the option to choose the alternative that results in
lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.
Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which
(as earlier discussed) is computed by subtracting allowable deductions and exemptions from gross
income. By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized
the situation in which taxable income may result in a negative amount and thus translate into a zero
tax liability.
Notably, PAL was owned and operated by the government at the time the franchise was last
amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the
government corporation in the form of lower taxes. When respondent operates at a loss (as in the
instant case), no taxes are due; in this instances, it has a lower tax liability than that provided by
Subsection (b).
The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum of one
peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses
would not. There is no substantial distinction between a zero tax and a one-peso tax liability.
(Emphasis ours.)
Based on the same ratiocination, the Court finds the Substitution Theory unacceptable in the
present Petition.
The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind the
Substitution Theory. Section 22 of Republic Act No. 9337, more popularly known as the Expanded
Value Added Tax (E-VAT) Law, abolished the franchise tax imposed by the charters of particularly
identified public utilities, including Presidential Decree No. 1590 of PAL. PAL may no longer exercise
its options or alternatives under Section 13 of Presidential Decree No. 1590, and is now liable for
both corporate income tax and the 12% VAT on its sale of services. The CIR alleges that Republic
Act No. 9337 reveals the intention of the Legislature to make PAL share the tax burden of other
domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar involves the liability of PAL for MCIT
for the fiscal year ending 31 March 2001. Republic Act No. 9337, which took effect on 1 July 2005,
cannot be applied retroactively24 and any amendment introduced by said statute affecting the
taxation of PAL is immaterial in the present case.
And sixth, Presidential Decree No. 1590 explicitly allows PAL, in computing its basic corporate
income tax, to carry over as deduction any net loss incurred in any year, up to five years following
the year of such loss. Therefore, Presidential Decree No. 1590 does not only consider the possibility
that, at the end of a taxable period, PAL shall end up with zero annual net taxable income (when its
deductions exactly equal its gross income), as what happened in the case at bar, but also the
likelihood that PAL shall incur net loss (when its deductions exceed its gross income). If PAL is
subjected to MCIT, the provision in Presidential Decree No. 1590 on net loss carry-over will be
rendered nugatory. Net loss carry-over is material only in computing the annual net taxable income
to be used as basis for the basic corporate income tax of PAL; but PAL will never be able to avail
itself of the basic corporate income tax option when it is in a net loss position, because it will always
then be compelled to pay the necessarily higher MCIT.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done without
contravening Presidential Decree No. 1520.
Between Presidential Decree No. 1520, on one hand, which is a special law specifically governing
the franchise of PAL, issued on 11 June 1978; and the NIRC of 1997, on the other, which is a
general law on national internal revenue taxes, that took effect on 1 January 1998, the former
prevails. The rule is that on a specific matter, the special law shall prevail over the general law,
which shall be resorted to only to supply deficiencies in the former. In addition, where there are two
statutes, the earlier special and the later general the terms of the general broad enough to include
the matter provided for in the special the fact that one is special and the other is general creates a
presumption that the special is to be considered as remaining an exception to the general, one as a
general law of the land, the other as the law of a particular case. It is a canon of statutory
construction that a later statute, general in its terms and not expressly repealing a prior special
statute, will ordinarily not affect the special provisions of such earlier statute.25
Neither can it be said that the NIRC of 1997 repealed or amended Presidential Decree No. 1590.
While Section 16 of Presidential Decree No. 1590 provides that the franchise is granted to PAL with
the understanding that it shall be subject to amendment, alteration, or repeal by competent authority
when the public interest so requires, Section 24 of the same Decree also states that the franchise or
any portion thereof may only be modified, amended, or repealed expressly by a special law or
decree that shall specifically modify, amend, or repeal said franchise or any portion thereof. No such
special law or decree exists herein.
The CIR cannot rely on Section 7(B) of Republic Act No. 8424, which amended the NIRC in 1997
and reads as follows:
Section 7. Repealing Clauses.
xxxx
(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including
charters of government-owned or controlled corporations, decrees, orders, or regulations or parts
thereof, that are inconsistent with this Act are hereby repealed or amended accordingly.
The CIR reasons that PAL was a government-owned and controlled corporation when Presidential
Decree No. 1590, its franchise or charter, was issued in 1978. Since PAL was still operating under
the very same charter when Republic Act No. 8424 took effect in 1998, then the latter can repeal or
amend the former by virtue of Section 7(B).
The Court disagrees.
A brief recount of the history of PAL is in order. PAL was established as a private corporation under
the general law of the Republic of the Philippines in February 1941. In November 1977, the
government, through the Government Service Insurance System (GSIS), acquired the majority
shares in PAL. PAL was privatized in January 1992 when the local consortium PR Holdings acquired
a 67% stake therein.26
It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL was then a
government-owned and controlled corporation; but when Republic Act No. 8424, amending the
NIRC, took effect on 1 January 1998, PAL was already a private corporation for six years. The
repealing clause under Section 7(B) of Republic Act No. 8424 simply refers to charters of
government-owned and controlled corporations, which would simply and plainly mean corporations
under the ownership and control of the government at the time of effectivity of said statute. It is
already a stretch for the Court to read into said provision charters, issued to what were then
government-owned and controlled corporations that are now private, but still operating under the
same charters.
That the Legislature chose not to amend or repeal Presidential Decree No. 1590, even after PAL
was privatized, reveals the intent of the Legislature to let PAL continue enjoying, as a private
corporation, the very same rights and privileges under the terms and conditions stated in said
charter. From the moment PAL was privatized, it had to be treated as a private corporation, and its
charter became that of a private corporation. It would be completely illogical to say that PAL is a
private corporation still operating under a charter of a government-owned and controlled corporation.
The alternative argument of the CIR that the imposition of the MCIT is pursuant to the amendment
of the NIRC, and not of Presidential Decree No. 1590 is just as specious. As has already been
settled by this Court, the basic corporate income tax under Section 13(a) of Presidential Decree No.
1590 relates to the general tax rate under Section 27(A) of the NIRC of 1997, which is 32% by the
year 2000, imposed on taxable income. Thus, only provisions of the NIRC of 1997 necessary for the
computation of the basic corporate income tax apply to PAL. And even though Republic Act No.
8424 amended the NIRC by introducing the MCIT, in what is now Section 27(E) of the said Code,
this amendment is actually irrelevant and should not affect the taxation of PAL, since the MCIT is
clearly distinct from the basic corporate income tax referred to in Section 13(a) of Presidential
Decree No. 1590, and from which PAL is consequently exempt under the "in lieu of all other taxes"
clause of its charter.
The CIR calls the attention of the Court to RMC No. 66-2003, on "Clarifying the Taxability of
Philippine Airlines (PAL) for Income Tax Purposes As Well As Other Franchise Grantees Similarly
Situated." According to RMC No. 66-2003:
Section 27(E) of the Code, as implemented by Revenue Regulations No. 9-98, provides that MCIT
of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal
year, depending on the accounting period employed) is imposed upon any domestic corporation
beginning the 4th taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has
zero or negative taxable income or whenever the amount of MCIT is greater than the normal income
tax due from such corporation.
With the advent of such provision beginning January 1, 1998, it is certain that domestic corporations
subject to normal income tax as well as those choose to be subject thereto, such as PAL, are bound
to pay income tax regardless of whether they are operating at a profit or loss.
Thus, in case of operating loss, PAL may either opt to subject itself to minimum corporate income
tax or to the 2% franchise tax, whichever is lower. On the other hand, if PAL is operating at a profit,
the income tax liability shall be the lower amount between:
(1) normal income tax or MCIT whichever is higher; and
(2) 2% franchise tax.
The CIR attempts to sway this Court to adopt RMC No. 66-2003 since the "[c]onstruction by an
executive branch of government of a particular law although not binding upon the courts must be
given weight as the construction comes from the branch of the government called upon to
implement the law."27
But the Court is unconvinced.
It is significant to note that RMC No. 66-2003 was issued only on 14 October 2003, more than two
years after FY 2000-2001 of PAL ended on 31 March 2001. This violates the well-entrenched
principle that statutes, including administrative rules and regulations, operate prospectively only,
unless the legislative intent to the contrary is manifest by express terms or by necessary
implication.28
Moreover, despite the claims of the CIR that RMC No. 66-2003 is just a clarificatory and internal
issuance, the Court observes that RMC No. 66-2003 does more than just clarify a previous
regulation and goes beyond mere internal administration. It effectively increases the tax burden of
PAL and other taxpayers who are similarly situated, making them liable for a tax for which they were
not liable before. Therefore, RMC No. 66-2003 cannot be given effect without previous notice or
publication to those who will be affected thereby. In Commissioner of Internal Revenue v. Court of
Appeals,29 the Court ratiocinated that:
It should be understandable that when an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance for it gives no real consequence more than
what the law itself has already prescribed. When, upon the other hand, the administrative rule goes
beyond merely providing for the means that can facilitate or render least cumbersome the
implementation of the law but substantially adds to or increases the burden of those governed, it
behooves the agency to accord at least to those directly affected a chance to be heard, and
thereafter to be duly informed, before that new issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances under which it has been issued,
convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the
process the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of
the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope
Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes
bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new law
would have its amendatory provisions applied to locally manufactured cigarettes which at the time of
its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the
questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the
category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax.
Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate
consequence on private respondent's products. Evidently, in order to place "Hope Luxury,"
"Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject
them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR
not simply interpreted the law; verily, it legislated under its quasi-legislative authority. The due
observance of the requirements of notice, of hearing, and of publication should not have been then
ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and provided:
"RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations "It has been observed that one of the problem
areas bearing on compliance with Internal Revenue Tax rules and regulations is lack or insufficiency
of due notice to the tax paying public. Unless there is due notice, due compliance therewith may not
be reasonably expected. And most importantly, their strict enforcement could possibly suffer from
legal infirmity in the light of the constitutional provision on 'due process of law' and the essence of
the Civil Code provision concerning effectivity of laws, whereby due notice is a basic requirement
(Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).
"In order that there shall be a just enforcement of rules and regulations, in conformity with the basic
element of due process, the following procedures are hereby prescribed for the drafting, issuance
and implementation of the said Revenue Tax Issuances:
"(1). This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum
Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on
internal revenue tax rules and regulations.
"(2). Except when the law otherwise expressly provides, the aforesaid internal revenue tax
issuances shall not begin to be operative until after due notice thereof may be fairly presumed.
"Due notice of the said issuances may be fairly presumed only after the following procedures have
been taken:
"xxx xxx xxx "(5). Strict compliance with the foregoing procedures is enjoined.13
Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe
and comply with the above requirements before giving effect to its questioned circular. (Emphases
ours.)
The Court, however, stops short of ruling on the validity of RMC No. 66-2003, for it is not among the
issues raised in the instant Petition. It only wishes to stress the requirement of prior notice to PAL
before RMC No. 66-2003 could have become effective. Only after RMC No. 66-2003 was issued on
14 October 2003 could PAL have been given notice of said circular, and only following such notice to
PAL would RMC No. 66-2003 have taken effect. Given this sequence, it is not possible to say that
RMC No. 66-2003 was already in effect and should have been strictly complied with by PAL for its
fiscal year which ended on 31 March 2001.
Even conceding that the construction of a statute by the CIR is to be given great weight, the courts,
which include the CTA, are not bound thereby if such construction is erroneous or is clearly shown
to be in conflict with the governing statute or the Constitution or other laws. "It is the role of the
Judiciary to refine and, when necessary, correct constitutional (and/or statutory) interpretation, in the
context of the interactions of the three branches of the government."30 It is furthermore the rule of
long standing that this Court will not set aside lightly the conclusions reached by the CTA which, by
the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has,
accordingly, developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority.31 In the Petition at bar, the CTA en banc and in division both adjudged that
PAL is not liable for MCIT under Presidential Decree No. 1590, and this Court has no sufficient basis
to reverse them.
As to the assertions of the CIR that exemption from tax is not presumed, and the one claiming it
must be able to show that it indubitably exists, the Court recalls its pronouncements in
Commissioner of Internal Revenue v. Court of Appeals32:
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the imposition of
taxes. It is obviously both illogical and impractical to determine who are exempted without first
determining who are covered by the aforesaid provision. The Commissioner should have
determined first if private respondent was covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to
prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in
the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously. x x x (A) tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication." Parenthetically, in answering the question of who is subject to tax
statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against
the government and in favor of the subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly import." (Emphases ours.)
For two decades following the grant of its franchise by Presidential Decree No. 1590 in 1978, PAL
was only being held liable for the basic corporate income tax or franchise tax, whichever was lower;
and its payment of either tax was in lieu of all other taxes, except real property tax, in accordance
with the plain language of Section 13 of the charter of PAL. Therefore, the exemption of PAL from
"all other taxes" was not just a presumption, but a previously established, accepted, and respected
fact, even for the BIR.
The MCIT was a new tax introduced by Republic Act No. 8424. Under the doctrine of strict
interpretation, the burden is upon the CIR to primarily prove that the new MCIT provisions of the
NIRC of 1997, clearly, expressly, and unambiguously extend and apply to PAL, despite the latters
existing tax exemption. To do this, the CIR must convince the Court that the MCIT is a basic
corporate income tax,33 and is not covered by the "in lieu of all other taxes" clause of Presidential
Decree No. 1590. Since the CIR failed in this regard, the Court is left with no choice but to consider
the MCIT as one of "all other taxes," from which PAL is exempt under the explicit provisions of its
charter.
Not being liable for MCIT in FY 2000-2001, it necessarily follows that PAL need not apply for relief
from said tax as the CIR maintains.
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED, and the
Decision dated 9 August 2007 and Resolution dated 11 October 2007 of the Court of Tax Appeals en
banc in CTA E.B. No. 246 is hereby AFFIRMED. No costs.
SO ORDERED.
G.R. No. 133834 August 28, 2006
COMPAGNIE FINANCIERE SUCRES ET DENREES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari assailing the Decision1 of the Court
of Appeals dated October 27, 1997 in CA-G.R. SP No. 39501.
Compagnie Financiere Sucres et Denrees, petitioner, is a non-resident private corporation duly
organized and existing under the laws of the Republic of France.
On October 21, 1991, petitioner transferred its eight percent (8%) equity interest in the Makati
Shangri-La Hotel and Resort, Incorporated to Kerry Holdings Ltd. (formerly Sligo Holdings Ltd), as
shown by a Deed of Sale and Assignment of Subscription and Right of Subscription of the same
date. Transferred were (a) 107,929 issued shares of stock valued at P100.00 per share with a total
par value of P10,792,900.00; (b) 152,031 with a par value of P100.00 per share with a total par
value of P15,203,100.00; (c) deposits on stock subscriptions amounting to P43,147,630.28; and (d)
petitioners right of subscription.
On November 29, 1991, petitioner paid the documentary stamps tax and capital gains tax on the
transfer under protest.
On October 21, 1993, petitioner filed with the Commissioner of Internal Revenue, herein respondent,
a claim for refund of overpaid capital gains tax in the amount of P107,869.00 and overpaid
documentary stamps taxes in the sum of P951,830.00 or a total of P1,059,699.00. Petitioner alleged
that the transfer of deposits on stock subscriptions is not a sale/assignment of shares of stock
subject to documentary stamps tax and capital gains tax.
However, respondent did not act on petitioners claim for refund. Thus, on November 19, 1993,
petitioner filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA Case No.
5042.
In its Decision2 dated October 6, 1995, the CTA denied petitioners claim for refund. The CTA held
that it is clear from Section 176 of the Tax Code that sales "to secure the future payment of money
or for the future transfer of any bond, due-bill, certificates of obligation or stock" are taxable.
Furthermore, petitioner admitted that it profited from the sale of shares of stocks. Such profit is
subject to capital gains tax.
Petitioner filed a motion for reconsideration, but in a Resolution dated December 26, 1995, the CTA
denied the same. This prompted petitioner to file with the Court of Appeals a petition for review,
docketed as CA-G.R. SP No. 39501.
On October 27, 1997, the Court of Appeals denied the petition and affirmed the Decision of the CTA.
The appellate court ruled that a taxpayer has the onus probandi of proving entitlement to a refund or
deduction, following the rule that tax exemptions are strictly construed against the taxpayer and
liberally in favor of the State. Petitioner failed to meet the requisite burden of proof to support its
claim.

Hence, petitioners recourse to this Court by way of a Petition for Review on Certiorari.
The sole issue for our resolution is whether the Court of Appeals erred in holding that the
assignment of deposits on stock subscriptions is subject to documentary stamps tax and capital
gains tax.
Along with police power and eminent domain, taxation is one of the three basic and necessary
attributes of sovereignty. Thus, the State cannot be deprived of this most essential power and
attribute of sovereignty by vague implications of law. Rather, being derogatory of sovereignty, the
governing principle is that tax exemptions are to be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able
to justify his claim by the clearest grant of statute.3
In the instant case, petitioner seeks a refund. Tax refunds are a derogation of the States taxing
power. Hence, like tax exemptions, they are construed strictly against the taxpayer and liberally in
favor of the State.4 Consequently, he who claims a refund or exemption from taxes has the burden
of justifying the exemption by words too plain to be mistaken and too categorical to be
misinterpreted.5 Significantly, petitioner cannot point to any specific provision of the National Internal
Revenue Code authorizing its claim for an exemption or refund. Rather, Section 176 of the National
Internal Revenue Code applicable to the issue provides that the future transfer of shares of stocks is
subject to documentary stamp tax, thus:
SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of
due-bills, certificates of obligation, or shares or certificates of stock. On all sales, or agreements to
sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares
or certificates of stock in any association, company, or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other
evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due
bills, certificates of obligation or stock, or to secure the future payment of money, or for the future
transfer of any due-bill, certificates of obligation or stock, there shall be collected a documentary
stamp tax of fifty centavos (P1.50) on each two hundred pesos(P200.00), or fractional part thereof,
of the par value of such due-bill, certificates of obligation or stock: Provided, That only one tax shall
be collected on each sale or transfer of stock or securities from one person to another, regardless of
whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of
such sale or transfer; and Provided, further, That in case of stock without par value the amount of
the documentary stamp tax herein prescribed shall be equivalent to twenty-five percentum (25%) of
the documentary stamp tax paid upon the original issue of the said stock. (Emphasis supplied).
Clearly, under the above provision, sales to secure "the future transfer of due-bills, certificates of
obligation or certificates of stock" are liable for documentary stamp tax. No exemption from such
payment of documentary stamp tax is specified therein.
Petitioner contends that the assignment of its "deposits on stock subscription" is not subject to
capital gains tax because there is no gain to speak of. In the Capital Gains Tax Return on Stock
Transaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition cost of the
shares it sold, including the stock subscription is P69,143,630.28. The transfer price to Kerry
Holdings, Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the amount of
P1,189,239.64. As the CTA aptly ruled, " a tax on the profit of sale on net capital gain is the very
essence of the net capital gains tax law. To hold otherwise will ineluctably deprive the government of
its due and unduly set free from tax liability persons who profited from said transactions."
Verily, the Court of Appeals committed no error in affirming the CTA Decision.
We reiterate the well-established doctrine that as a matter of practice and principle, this Court will
not set aside the conclusion reached by an agency, like the CTA, especially if affirmed by the Court
of Appeals. By the very nature of its function, it has dedicated itself to the study and consideration of
tax problems and has necessarily developed an expertise on the subject, unless there has been an
abuse or improvident exercise of authority on its part, which is not present here.
WHEREFORE, we DENY the petition. The Decision of the Court of Appeals in CA-G.R. SP No.
39501 is AFFIRMED IN TOTO. Costs against petitioner.
SO ORDERED.