Cases in Taxation Law 1 (reviewer)

Professor: Prosec. Loverhette Jeffrey P. Villordon

By: Dennie Vieve Idea (New Era University)

CASE BRIEF FACTS ISSUE/S DOCTRINES/DISCUSSIONS/DEFINITIONS

Definition and concept of taxation
Paseo Realty & Petitioner filed its Income Tax Return (ITR) for
Development the calendar year 1989. He later filed with
Corp. v. Court of respondent CTA for a refund of excess
Appeals creditable taxes withholding (CTW) and income
taxes for the years 1989 and 1990 in the
aggregate amount of 147, 036.15.
Respondent Commissioner (CIR) filed an
Answer stating some defenses. The Court
rendered decision in favor of the petitioner.
However, CIR filed a Motion for Reconsideration
(MFR) alleging that the amount sought to be
refunded “has already been included in the 172,
447 which the petitioner applied as tax credit for
the succeeding taxable year 1990.
Whether or not the Taxation is a destructive power which interferes with the
petitioner should be personal and property rights of the people and takes
refunded? from them a portion of their property for the support of
the government.
Since taxes are what we pay for civilized society, or are
lifeblood of nation against exemptions from taxation and
statutes granting tax exemptions are thus construes
strictissimi juris against the taxpayer and liberally in
favor of the taxing authority.
A claim of refund or exemption from tax payment must
clearly be shown and be based on language in the law
too plain to be mistaken.

Upon the respondent Court (RC) dismissed the

petition, the petitioner filed MFR which was
denied by the RC. Thus, petitioner filed a
petition for Review before the CA. The appellate
court held that petitioner is not entitled to a
refund because it appears that the latter did not
specify the amount to be refunded and the
amount to be applied as tax credit to the
succeeding taxable year, but only marked an “X”
to the box indicating “to be applied as tax credit
to the succeeding taxable year” when the latter
filed its income tax return for the year 1989.

1|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Nature of Taxation
Mactan Cebu Petitioner Mactan Cebu International Airport
International Authority was created by virtue of R.A. 6958,
Airport Authority mandated to principally undertake the
v. Marcos economical, efficient, and effective control,
management, and supervision of the Mactan
International Airport and Lahug Airport, and
such other airports as may be established in
Cebu. Since the time of its creation, petitioner
MCIAA enjoyed the privilege of exemption from
payment of realty taxes in accordance with
Section 14 of its charter.
However, on October 11, 1994, Mr. Eustaquio
B. Cesa, Officer in Charge, Office of the
Treasurer of the City of Cebu, demanded
payment from realty taxes in the total amount of
P2229078.79. Petitioner objected to such
demand for payment as baseless and unjustified
claiming in its favor the afore-cited Section 14 of
R.A. 6958. It was also asserted that it is an
instrumentality of the government performing
governmental functions, citing Section 133 of
the Local Government Code of 1991.
Whether or not the Power to tax –
petitioner is a “taxable - is an incident of sovereignty and is unlimited in
person”? its range
- our Constitution provides that the rule of taxation
shall be uniform and equitable and Congress
shall evolve a progressive system of taxation
Tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer. But
since it is the lifeblood of the nation, the law frowns
upon exceptions and statutes granting the same are
thus construes against the tax payer and liberally in
favor of taxing authority
Taxation is the rule and exemption is the exception.
MCIAA’s exemption from payment of taxes is withdrawn
by virtue of Sections 193 and 234 of Local Government
Code. Statutes granting tax exemptions shall be strictly
construed against the taxpayer and liberally construed
in favor of the taxing authority.
The petitioner cannot claim that it was never a “taxable
person” under its Charter. It was only exempted from
the payment of realty taxes. The grant of the privilege
only in respect of this tax is conclusive proof of the
legislative intent to make it a taxable person subject to
all taxes, except real property tax.
If the grantee (of exemption) is a political subdivision or
instrumentality, the rigid rules of construction does not
apply because the practical effect of the exemption is
merely to reduce the amount of money that has to be
handled by the government
2|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Pepsi-Cola A case regarding the constitutionality of RA
Bottling Company 2264 (Local Autonomy Act) on the ground of
of the Phil. V. undue delegation of taxing authority and
Municipality of Ordinances 23 and 27 by the City of Tanauan
Tanauan Leyte based on the following grounds:
Ord. 23 – levies and collects taxes from
“softdrinks producers and manufacturers” a tax
of 1/6 of a centavo for every bottle corked
Ord. 27 – levies and collects on “softdrinks
produced/manufactured within the territorial
jurisdiction of the municipality” of a tax of P0.01
on each gallon
Gen. Rule: taxing powers of LGUs cannot extend to the
levy of taxes, fees of National Gov’t
Exception: it may be imposed on real property owned
by the State except when the beneficial use thereof has
been granted to a taxable person
Whether section 2, RA No. RA 2264 is constitutional.
2264 is constitutional? There is no validity to the assertion that the delegated
authority can be declared unconstitutional on the theory
Whether the of double taxation. It must be observed that the
ordinances are valid? delegating authority specifies the limitations and
enumerates taxed which local taxation may not be
exercised.
Ord. 27 does not partake of the nature of percentage
tax on sales because the tax is levied on the produced
and not on the sales. The intention is to substitute Ord.
23 – there was an implied repeal. Hence, no double
taxation, RA 2264 is not unconstitutional.
Other doctrines discussed:
General Rule:
- Power of taxation is essential and inherent
attribute of sovereignty
- It is a power that is purely legislative and which
the central legislature cannot delegate either to
the executive or judicial without infringing upon
the theory of separation of powers
Exception:
- In case of municipal corporations, legislative
power may be delegated to LGUs on matters of
local concern – because LGUs are granted with
3|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Roxas y Cia v. Case of inheritance received by petitioners from
Court of Tax their grandparents which includes an agricultural
Appeals land, residential house and shares of stocks.
The CIR demanded payment from petitioners for
the following:
- Real estate dealer’s tax (for the house
rentals received from one of the siblings)
- Income from the net profits derived from
the sale of the farm (sold to farmers, in
view of government’s inability to give
loan to the farmers)
The brothers protested the assessment but the
same was denied. On appeal, the Court of Tax
Appeals sustained the assessment. Hence, this
petition.
Characteristics of taxation
Sunio v. NLRC
Power of taxation compared with other powers
autonomous authority to create their own
sources of revenue and to levy taxes
When can property be taxed?
if there is lawful exercise of taxing power as when:
1. tax is for public purpose
2. the rule on uniformity is observed
3. either the person taxed is within the jurisdiction of the
gov’t
4. in the assessment and collection of certain kinds of
taxes, notice for hearing is provided
Whether the Roxases No. It should be borne in mind that the sale of the
were liable for the farmlands to the very farmers who tilled them for
taxes? generations was not only in consonance with, but more
in obedience to the request and pursuant to the policy
of our Government to allocate lands to the landless.
In order to maintain the general public’s trust and
confidence in the Government this power must be used
justly and not treacherously. It does not conform with
the sense of justice for the Government to persuade the
taxpayer to lend it a helping hand and later on penalize
him for duly answering the urgent call.
In fine, Roxas cannot be considered a real estate
dealer and is not liable for 100% of the sale. Pursuant
to Section 34 of the Tax Code, the lands sold to the
farmers are capital assets and the gain derived from the
sale thereof is capital gain, taxable only to the extent of
50%.
4|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
1. Police power President Ferdinand Marcos, exercising his
legislative powers, issued LOI No. 1465 which
Planters Products, provided, among others, for the imposition of a
Inc. v. FertiPhil capital recovery component (CRC) on the
Corp. domestic sale of all grades of fertilizers.
FPA remits its collection to Far East Bank and
Trust Company who applies to the payment of
corporate debts of Planters Products Inc. (PPI)
After the Edsa Revolution, FPA voluntarily
stopped the imposition of the P10 levy. Upon
return of democracy, Fertiphil demanded a
refund but PPI refused.
Fertiphil filed a complaint for collection and
damages against FPA and PPI with the RTC on
the ground that LOI No. 1465 is unjust,
unreasonable oppressive, invalid and unlawful
resulting to denial of due process of law.
2. Power of Engracio Francia was the owner of a 328 square
Eminent Domain meter land in Pasay City. In October 1977, a
portion of his land (125 square meter) was
Francia v. IAC expropriated by the government for P4,116.00.
The expropriation was made to give way to the
expansion of a nearby road.
It also appears that Francia failed to pay his real
estate taxes since 1963 amounting to
P2,400.00. So in December 1977, the remaining
203 square meters of his land was sold at a
Whether or not the Yes. Police power and the power of taxation are
LOI No. 1465 is an inherent powers of the state but distinct and have
invalid exercise of the different tests for validity. Police power is the power of
power of taxation the state to enact the legislation that may interfere with
rather the police personal liberty on property in order to promote general
power? welfare. While, the power of taxation is the power to
levy taxes as to be used for public purpose. The main
purpose of police power is the regulation of a behavior
or conduct, while taxation is revenue generation. The
lawful subjects and lawful means tests are used to
determine the validity of a law enacted under the police
power. The power of taxation, on the other hand, is
circumscribed by inherent and constitutional limitations.
In this case, it is for purpose of revenue. But it is a
robbery for the State to tax the citizen and use the
funds generation for a private purpose. Public purpose
does NOT only pertain to those purpose which are
traditionally viewed as essentially governmental
function such as building roads and delivery of basic
services, but also includes those purposes designed to
promote social justice. Thus, public money may now be
used for the relocation of illegal settlers, low-cost
housing and urban or agrarian reform.
Whether or not the tax No.
owed by Francia
should be set-off by As a rule, set-off of taxes is not allowed. There is no
the “debt” owed him legal basis for the contention. By legal compensation,
by the government? obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). This is not
applicable in taxes. There can be no off-setting of
taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to
pay a tax on the ground that the government owes
5|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
public auction (after due notice was given him).
The highest bidder was a certain Ho Fernandez
who paid the purchase price of P2,400.00
(which was lesser than the price of the portion of
his land that was expropriated).
Later, Francia filed a complaint to annul the
auction sale on the ground that the selling price
was grossly inadequate. He further argued that
his land should have never been auctioned
because the P2,400.00 he owed the
government in taxes should have been set-off
by the debt the government owed him (legal
compensation). He alleged that he was not paid
by the government for the expropriated portion
of his land because though he knew that the
payment therefor was deposited in the
Philippine National Bank, he never withdrew it.
Domingo v. In Domingo vs. Moscoso (106 PHIL 1138), the
Garlitos Supreme Court declared as final and executory
the order of the Court of First Instance of Leyte
for the payment of estate and inheritance taxes,
charges and penalties amounting to P40,058.55
by the Estate of the late Walter Scott Price. The
petition for execution filed by the fiscal, however,
was denied by the lower court. The Court held
that the execution is unjustified as the
Government itself is indebted to the Estate for
262,200; and ordered the amount of inheritance
taxes be deducted from the Government’s
indebtedness to the Estate.
him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
The Supreme Court emphasized: A claim for taxes is
not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which
are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of
the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper
subject of recoupment since they do not arise out of the
contract or transaction sued on.
Whether a tax and a The tax and debt are compensated.
debt may be
compensated? The court having jurisdiction of the Estate had found
that the claim of the Estate against the Government has
been recognized and an amount of P262,200 has
already been appropriated by a corresponding law (RA
2700).
Under the circumstances, both the claim of the
Government for inheritance taxes and the claim of the
intestate for services rendered have already become
overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation of
law, in accordance with Article 1279 and 1290 of the
Civil Code, and both debts are extinguished to the
concurrent amount.
6|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Purpose of taxation
1. Revenue PAL is engaged in the air transportation
Raising business under a legislative franchise (Act
2. non- 4271), wherein it is exempt from the
revenue/special or payment of taxes. On the strength of an opinion
regulatory of the Secretary of Justice, PAL was determined
to have not been paying motor vehicle
PAL v. Edu registration fees since 1956. The Land
Transportation Commissioner required all tax-
exempt entities, including PAL, to pay motor
vehicle registration fees. PAL protested. The
trial court dismissed PAL’s complaint. Hence,
this petition.
NAPOCOR v. City Petitioner is a government-owned and controlled
of Cabanatuan corporation created under Commonwealth Act
No. 120, as amended.
The respondent assessed the petitioner a
franchise tax amounting to P808,606.41,
representing 75% of 1% of the latter’s gross
receipts for the preceding year.
Petitioner refused to pay the tax assessment
arguing that the respondent has no authority to
impose tax on government entities. Petitioner
also contended that as a non-profit organization,
it is exempted from the payment of all forms of
taxes, charges, duties or fees in accordance
with sec. 13 of Rep. Act No. 6395, as amended.
Are motor vehicle If the legislative intent and purpose behind the law
registration fees taxes requiring owners of vehicles to pay for their registration
or regulatory taxes? is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree,
pay for the operating expenses of the administering
agency.
It is possible for an exaction to be both tax and
regulation. License fees are changes. looked to as a
source of revenue as well as a means of regulation
(Sonzinky v. U.S., 300 U.S. 506) This is true, for
example, of automobile license fees. Isabela such case,
the fees may properly be regarded as taxes even
though they also serve as an instrument of regulation.
If the purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes, then the
exaction is properly called a tax.
Whether or not the YES.
respondent city
government has the Taxes are the lifeblood of the government, for without
authority to issue taxes, the government can neither exist nor endure. A
Ordinance No. 165-92 principal attribute of sovereignty, the exercise of taxing
and impose an annual power derives its source from the very existence of the
tax on “businesses state whose social contract with its citizens obliges it to
enjoying a franchise? promote public interest and common good. The theory
behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-
being of the people.
Section 137 of the LGC clearly states that the LGUs
can impose franchise tax “notwithstanding any
exemption granted by any law or other special law.”
7|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
The respondent filed a collection suit in the
RTC, demanding that petitioner pay the
assessed tax due, plus surcharge. Respondent
alleged that petitioner’s exemption from local
taxes has been repealed by section 193 of the
LGC.
RTC upheld NPC’s tax exemption. On appeal
the CA reversed the trial court’s Order.
Theory and basis of taxation
1. Lifeblood The BIR assessed Algue a total amount of
theory delinquency taxes of Php 83,183.85 for the
years 1958 and 1959. It contends that the
CIR v. Algue company's claimed deduction of Php 75,000 in
the form of promotional fees is disallowed
because it was not ordinary reasonable or
necessary business expenses. Algue filed a
protest.
BIR did not take any action. So, Algue filed a
petition for review with the Court of Tax Appeals
which rule in favor of Algue. Thus, the current
petition.
This particular provision of the LGC does not admit any
exception.
Section 193 buttresses the withdrawal of extant tax
exemption privileges. By stating that unless otherwise
provided in this Code, tax exemptions or incentives
granted to or presently enjoyed by all persons, whether
natural or juridical, including government-owned or
controlled corporations except (1) local water districts,
(2) cooperatives duly registered under R.A. 6938, (3)
non-stock and non-profit hospitals and educational
institutions, are withdrawn upon the effectivity of this
code, the obvious import is to limit the exemptions to
the three enumerated entities.
Doubtless, the power to tax is the most effective
instrument to raise needed revenues to finance and
support myriad activities of the local government units
for the delivery of basic services essential to the
promotion of the general welfare and the enhancement
of peace, progress, and prosperity of the people.
Whether the BIR No.
correctly disallowed
the deduction? The burden is on the taxpayer to prove the validity of
the claimed deduction.
In this case, Algue Inc. has proved that the payment of
the fees was necessary and reasonable in the light of
the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an
experimental enterprise and involve themselves in a
new business requiring millions of pesos.
8|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Talento v. Escalda
Necessity Theory The petitioner Philippine Guaranty Co., Inc., a
domestic insurance company, entered into
Phil. Guaranty Co. reinsurance contracts with foreign insurance
Inc. v. CIR companies not doing business in the country,
thereby ceding to foreign reinsurers a portion of
the premiums on insurance it has originally
underwritten in the Philippines. The premiums
paid by such companies were excluded by the
petitioner from its gross income when it file its
income tax returns for 1953 and 1954.
Furthermore, it did not withhold or pay tax on
them. Consequently, the CIR assessed against
the petitioner withholding taxes on the ceded
Taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every
person who is able to must contribute his share in the
running of the government. The government for its part,
is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the
people and enhance their moral and material values
Taxation must be exercised reasonably and in
accordance with the prescribed procedure. If it is not,
then the taxpayer has a right to complain and the courts
will then come to his succor
While it is true that taxes are the lifeblood of the
government, however, there is an exception – where a
tax payer has clear and unmistakable right to refuse
payment, the grounds posed by Respondent would
have a direct bearing on the assessment made by
petitioner.
Are insurance No.
companies not
required to withhold The power to tax is an attribute of sovereignty. It is a
tax on reinsurance power emanating from necessity. It is a necessary
premiums ceded to burden to preserve the State's sovereignty and a
foreign insurance means to give the citizenry an army to resist an
companies, which aggression, a navy to defend its shores from invasion, a
deprives the corps of civil servants to serve, public improvement
government from designed for the enjoyment of the citizenry and those
collecting the tax due which come within the State's territory, and facilities and
from them? protection which a government is supposed to provide.
Considering that the reinsurance premiums in question
were afforded protection by the government and the
9|Page
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
reinsurance premiums to which the latter
protested the assessment on the ground that the
premiums are not subject to tax for the
premiums did not constitute income from
sources within the Philippines because the
foreign reinsurers did not engage in business in
the Philippines, and CIR's previous rulings did
not require insurance companies to withhold
income tax due from foreign companies.
Doctrines in Taxation
Double taxation On September 30, 1946 the municipal board of
a. strict sense Iloilo City enacted Ordinance 86, imposing
license tax fees as follows: (1) tenement house
Villanueva v. Iloilo (casa de vecindad), P25.00 annually; (2)
City tenement house, partly or wholly engaged in or
dedicated to business in the streets of J.M.
Basa, Iznart and Aldeguer, P24.00 per
apartment; (3) tenement house, partly or wholly
engaged in business in any other streets,
P12.00 per apartment.
The validity and constitutionality of this
ordinance were challenged by the spouses
Eusebio Villanueva and Remedies Sian
Villanueva, owners of four tenement houses
containing 34 apartments. On January 15, 1960
the municipal board of Iloilo City, believing,
obviously, that with the passage of Republic Act
2264, otherwise known as the Local Autonomy
Act, it had acquired the authority or power to
recipient foreign reinsurers exercised rights and
privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of
maintaining the state.
The petitioner's defense of reliance of good faith on
rulings of the CIR requiring no withholding of tax due on
reinsurance premiums may free the taxpayer from the
payment of surcharges or penalties imposed for failure
to pay the corresponding withholding tax, but it certainly
would not exculpate it from liability to pay such
withholding tax. The Government is not estopped
from collecting taxes by the mistakes or errors of
its agents.
Whether or not the tax It is necessary to determine the true nature of the tax.
imposed by the The appellees strongly maintain that it is a "property
ordinance falls within tax" or "real estate tax," and not a "tax on persons
any of the exception engaged in any occupation or business or exercising
provided in Section 2 privileges," or a license tax, or a privilege tax, or an
of the Local Autonomy excise tax. The tax in question is not a real estate tax.
Act, thus imposing a
double taxation? A real estate tax is a direct tax on the ownership of
lands and buildings or other improvements thereon and
is payable regardless of whether the property is used or
not. The tax is usually single or indivisible, although the
land and building or improvements erected thereon are
assessed separately, except when the land and
building or improvements belong to separate owners. It
is a fixed proportion of the assessed value of the
property taxed, and requires, therefore, the intervention
of assessors. It is collected or payable at appointed
times, and it constitutes a superior lien on and is
enforceable against the property subject to such
taxation, and not by imprisonment of the owner. The tax
10 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
enact an ordinance similar to that previously
declared by this Court as ultra vires, thus
enacted an “Ordinance Imposing Municipal
License Tax on Persons Engaged in the
Business of Operating Tenement Houses”.
b. broad sense
San Miguel
Brewery v. City of
Cebu
CIR v. Bank of Petitioner PBCom filed its first and second
Commerce quarter income tax returns, reported profits, and
paid income taxes amounting to P5.2M in 1985.
However, at the end of the year PBCom
suffered losses so that when it filed its Annual
imposed by the ordinance in question does not possess
the aforestated attributes.
Clearly, therefore, the tax in question is not a real
estate tax. "The spirit, rather than the letter, or an
ordinance determines the construction thereof, and the
court looks less to its words and more to the context,
subject-matter, consequence and effect. Accordingly,
what is within the spirit is within the ordinance although
it is not within the letter thereof, while that which is in
the letter, although not within the spirit, is not within the
ordinance." It is within neither the letter nor the spirit of
the ordinance that an additional real estate tax is being
imposed, otherwise the subject-matter would have been
not merely tenement houses. It is plain from the context
of the ordinance that the intention is to impose a license
tax on the operation of tenement houses, which is a
form of business or calling. Thus, there is no double
taxation.
Is Ordinance 298 No. double taxation is not prohibited by the Constitution
invalid on the ground and there is double taxation when the same person is
of double taxation? taxed by the same jurisdiction for the same purpose,
which is not present in the case of San Miguel Brewery.
The ordinance in question imposes a tax on the sale or
disposal of every “bottle or container” of “liquor” –
a typical tax or revenue measure. Whereas, the
PhP600 it pays annually is for a “second-class
wholesale liquor license” – a license to engage in
such business, which is a regulatory measure.
Is the contention of No.
the petitioner correct?
Is the revenue circular The relaxation of revenue regulations by RMC 7-85 is
a valid exemption to not warranted as it disregards the two-year prescriptive
the NIRC? period set by law.
11 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise
reported a net loss of P14.1 M, and thus
declared no tax payable for the year. In 1988,
the bank requested from CIR for a tax credit and
tax refunds representing overpayment of taxes.
Pending investigation of the respondent CIR,
petitioner instituted a Petition for Review before
the Court of Tax Appeals (CTA). CTA denied its
petition for tax credit and refund for failing to file
within the prescriptive period to which the
petitioner belies arguing the Revenue Circular
No.7-85 issued by the CIR itself states that
claim for overpaid taxes are not covered by the
two-year prescriptive period mandated under the
Tax Code.
Modes of eliminating double taxation
CIR v. Procter and Procter and Gamble Philippines is a wholly Whether PMC
Gamble owned subsidiary of Procter and Gamble Philippines is entitled
USA (PMC-USA), a non-resident foreign to the 15% preferential
corporation in the Philippines, not engaged in tax rate on dividends
trade and business therein. PMC-USA is the declared and remitted
sole shareholder of PMC Philippines and is to its parent
entitled to receive income from PMC Philippines corporation?
in the form of dividends, if not rents or royalties.
For the taxable years 1974 and 1975, PMC
Philippines filed its income tax return and also
declared dividends in favor of PMC-USA. In
1977, PMC Philippines, invoking the tax-sparing
provision of Section 24 (b) as the withholding
agent of the Philippine Government with respect
to dividend taxes paid by PMC-USA, filed a
claim for the refund of 20 percentage point
Basic is the principle that "taxes are the lifeblood of the
nation." The primary purpose is to generate funds for
the State to finance the needs of the citizenry and to
advance the common weal. Due process of law under
the Constitution does not require judicial proceedings in
tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to
obtain the means to carry on its operations and it is of
utmost importance that the modes adopted to enforce
the collection of taxes levied should be summary and
interfered with as little as possible.
From the same perspective, claims for refund or tax
credit should be exercised within the time fixed by law
because the BIR being an administrative body enforced
to collect taxes, its functions should not be unduly
delayed or hampered by incidental matters.
The issue raised is one made for the first time before
the Supreme Court. Under the same underlying
principle of prior exhaustion of administrative remedies,
on the judicial level, issues not raised in the lower court
cannot be generally raised for the first time on appeal.
Nonetheless, it is axiomatic that the state can never be
allowed to jeopardize the government’s financial
position. The submission of the Commissioner that
PMC Philippines is but a withholding agent of the
government and therefore cannot claim reimbursement
of alleged overpaid taxes, is completely meritorious.
The real party in interest is PMC-USA, which should
prove that it is entitled under the US Tax Code to a US
Foreign Tax Credit equivalent to at least 20 percentage
points spared or waived as otherwise considered or
deemed paid by the Government.
12 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
portion of the 35 percentage whole tax paid with
the Commissioner of Internal Revenue.
CIR v. SC JOHNSON AND SON, INC is a domestic
Johnson and Son, corporation organized and operating under the
Inc. Philippine laws, entered into a license
agreement with SC Johnson and Son, United
States of America(USA), a non-resident foreign
corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to
use the trademark, patents and technology
owned by the latter including the right to
manufacture, package and distribute the
products covered by the Agreement and secure
assistance in management, marketing and
production from SC Johnson and Son, U. S. A.
The said License Agreement was duly
registered with the Technology Transfer Board
of the Bureau of Patents, Trade Marks and
Technology Transfer under Certificate of
Registration No. 8064. For the use of the
trademark or technology, SC JOHNSON AND
SON, INC was obliged to pay SC Johnson and
Son, USA royalties based on a percentage of
net sales and subjected the same to 25%
withholding tax on royalty payments which
respondent paid for the period covering July
Herein, the claimant failed to show or justify the tax
return of the disputed 15% as it failed to show the
actual amount credited by the US Government against
the income tax due from PMC-USA on the dividends
received from PMC Philippines; to present the income
tax return of PMC-USA for 1975 when the dividends
were received; and to
submit duly authenticated document showing that the
US government credited the 20% tax deemed paid in
the Philippines
Methods resorted to in eliminating double taxation;
Exemption and Credit Methods, Explained.— Double
taxation usually takes place when a person is resident
of a contracting state and derives income from, or owns
capital in, the other contracting state and both states
impose tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts to several
methods.
First, it sets out the respective rights to tax of the state
of source or situs and of the state of residence with
regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of
the contracting states; however, for other items of
income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the
state of source is limited.
The second method for the elimination of double
taxation applies whenever the state of source is given a
full or limited right to tax together with the state of
residence. In this case, the treaties make it incumbent
upon the state of residence to allow relief in order to
avoid double taxation.
13 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
1992 to May 1993.00 On October 29,1993,
JOHNSON AND SON, INC USA filed with the
International Tax Affairs Division (ITAD) of the
BIR a claim for refund of overpaid withholding
tax on royalties arguing that, since the
agreement was approved by the Technology
Transfer Board, the preferential tax rate of 10%
should apply to the respondent. Respondent
submits that royalties paid to SC Johnson and
Son, USA is only subject to 10%withholding tax
pursuant to the most-favored nation clause of
the RP-US Tax Treaty in relation to the RP-West
Germany Tax Treaty.
The Internal Tax Affairs Division of the BIR ruled
against SC Johnson and Son, Inc. and an
appeal was filed by the former to the Court of
tax appeals. The CTA ruled against CIR and
ordered that a tax credit be issued in favor of SC
Johnson and Son, Inc. Unpleased with the
decision, the CIR filed an appeal to the CA
which subsequently affirmed in toto the decision
of the CTA. Hence, an appeal on certiorari was
filed to the SC.
Tax avoidance
Delpher Trades v.
IAC
There are two methods of relief—the exemption method
and the credit method.
In the exemption method, the income or capital which
is taxable in the state of source or situs is exempted in
the state of residence, although in some instances it
may be taken into account in determining the rate of tax
applicable to the taxpayer’s remaining income or
capital.
On the other hand, in the credit method, although the
income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter.
The basic difference between the two methods is that in
the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon
the tax.
Delpher Trades is a business conduit of the Pachecos.
What they did is to invest their properties and change
the nature of ownership to take control of the said
properties and to save on inheritance taxes.
There is no objectionable about this “estate planning”
scheme. The legal right of a tax payer to decrease the
amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits,
cannot be doubted.
14 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Tax evasion
CIR v. Estate of Cibeles Insurance Corp. (CIC) authorized
Benigno Toda, Jr. Benigno P. Toda Jr., President and Owner of
99.991% of outstanding capital stock, to sell the
Cibeles Building and 2 parcels of land which he
sold to Rafael A. Altonaga on August 30, 1987
for P 100M who then sold it on the same day to
Royal Match Inc. for P 200M.
CIC included gains from sale of real property of
P 75,728.021 in its annual income tax return
while Altonaga paid a 5% capital gains tax of P
10M
Toda Jr. died 3 years later.
March 29, 1994: BIR sent an assessment notice
and demand letter to CIC for deficiency of
income tax of P 79,099, 999.22
January 27, 1995: BIR sent the same to the
estate of Toda Jr.
Estate filed a protest which was dismissed -
fraudulent sale to evade the 35% corporate
income tax for the additional gain of P 100M and
that there is in fact only 1 sale.
Since it is falsity or fraud, the prescription period
is 10 years from the discovery of the falsity or
fraud as prescribed under Sec. 223 (a) of the
NIRC
CTA: No proof of fraudulent transaction so the
applicable period is 3 years after the last day
Whether or not CIC is Taxation; Tax Avoidance Distinguished from Tax
liable for income tax? Evasion.— 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
arm’s 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.
Same; Same; Factors to Determine Tax Evasion.—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.
Taxation; Tax Avoidance Distinguished from Tax
Evasion.— 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
arm’s 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.
Same; Same; Factors to Determine Tax Evasion.—Tax
evasion connotes the integration of three factors: (1)
15 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
prescribed by law for filing the return. The CA
affirmed this. Hence, the CIR appealed.
Nature of tax exemption
MERALCO v. Vera Meralco is the holder of a franchise to construct, Whether or not
maintain, and operate an electric light, heat, and Meralco is exempt
power system in the City of Manila and its
suburbs. In 1962 and 1963, Meralco imported
and received from abroad copper wires,
transformers, and insulators for use in the
operation of its business. The Collector of
Customs, as deputy of the Commissioner of
Internal Revenue, levied and collected a
compensating tax. Meralco claimed for refund
for the said years, but such claims were either
not acted upon or denied by the Commissioner.
Rodriguez v. Congress enacted RA No. 333 – creating a
Collector capital city planning.
Republic sued petitioner in the CFI-QC for the
expropriation of land owned by the latter
situated in the area delimited for the said
project.
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.
Meralco is not exempt from paying the compensation
tax provided for in Section 190 of the Tax Code, the
from payment of a purpose of which is to “place casual importers, who are
compensating tax on not merchants on equal footing with established
poles, wires, merchants who pay sales tax on articles imported by
transformers and them.”
insulators imported by
it for use in the Meralco’s claim for exemption from payment of the
operation of its electric compensating tax is not clear or expressed, contrary to
light, heat, and power the rule that “exemptions from taxation are highly
system? disfavored in law, and he who claims exemption must
be able to justify his claim by the clearest grant of
organic or statute law.”
Tax exemption are strictly construed against the
taxpayer, they being highly disfavored and may almost
be said to be “odious to the law.” When exemption is
claimed, it must be shown indubitably to exist, for every
presumption is against it, and a well-founded doubt is
fatal to the claim.
Whether or not the Exemption from taxation is not favored and is never
income in the form of presumed. The grant thereof must be strictly construed
bonds are exempt against the tax payer.
from taxes?
The law invokes in the case at bar does not make any
reference whatsoever to exemption of income derived
from sale of expropriated property.
16 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
The trial court ruled in favor of the government.
In view, the government paid petitioner the
amount for the expropriation, a part of which is
in the form of bonds. This income was not
included by petitioner in its ITR. When he was
assessed for tax deficiency, petitioner invokes
that the bonds paid were tax exempt.
Kinds of Tax exemption
Implied PLDT is a grantee of a franchise under Republic Whether or not PLDT,
Act (R.A.) No. 7082 to install, operate and
CIR v. PLDT maintain a telecommunications system
throughout the Philippines.
For equipment, machineries and spare parts it
imported for its business on different dates.
PLDT addressed a letter to the BIR seeking a
confirmatory ruling on its tax exemption privilege taxes on its
under Section 12 of R.A. 7082.
The CTA and CA upheld Respondent’s
privilege. But the CIR appealed.
Such assurance or promise, made without statutory
provision, cannot bind the Government.
It is well known rule that erroneous application and
enforcement of the law by public officers do not block
subsequent correct application of the statute and that
the government is never estopped by mistake or error
on the part of its agents.
Time and again, the Court has stated that taxation is
given the tax the rule, exemption is the exception. Accordingly,
component of its statutes granting tax exemptions must be construed in
franchise, is exempt strictissimi juris against the taxpayer and liberally in
from paying VAT, favor of the taxing authority. To him, therefore, who
compensating taxes, claims a refund or exemption from tax payments rests
advance sales taxes the burden of justifying the exemption by words too
and internal revenue plain to be mistaken and too categorical to be
misinterpreted.
importations?
As may be noted, the clause in lieu of all taxes in
Section 12 of RA 7082 is immediately followed by the
limiting or qualifying clause on this franchise or earnings
thereof, suggesting that the exemption is limited to
taxes imposed directly on PLDT since taxes pertaining
to PLDTs franchise or earnings are its direct liability.
Accordingly, indirect taxes, not being taxes on PLDTs
franchise or earnings, are outside the purview of the in
lieu provision.
Jurisprudence thus teaches that imparting the in lieu of
all taxes” clause a literal meaning, as did the Court of
Appeals and the CTA before it, is fallacious. It is basic
that in construing a statute, it is the duty of courts to
seek the real intent of the legislature, even if, by so
17 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Contractual Cagayan Electric Power and light Co, Inc.
(CEPALCO) was granted a franchise in 1961
Prov. of Misamis under RA 3247 to install, operate and maintain
Oriental v. an electric light, heat and power system in
CERALCO Cagayan de Oro and its suburbs. In 1973, the
Local Tax Code (PD 231) was promulgated,
where Section 9 thereof providing for a franchise
tax. Pursuant thereto, the province of Misamis
Oriental enacted Provincial Revenue Ordinance
19, whose Section 12 also provides for a
franchise tax. The Provincial Treasurer
demanded payment of the provincial franchise
tax from CEPALCO. CEPALCO paid under
protest.
Compromise Petitioner Gil A. Valera was appointed by
President Gloria Macapagal Arroyo as Deputy
Valera v. Commissioner of Customs in charge of the
OMBUDSMAN Revenue Collection Monitoring Group on July
13, 2001. He took his oath of office on August 3,
2001, and assumed his post on August 7 of the
same year.
On December 21, 2001, he filed in the Regional
Trial Court (RTC) of Manila, for and on behalf of
the Bureau of Customs, a collection case with
prayer for the issuance of a writ of preliminary
doing, they may limit the literal meaning of the broad
language.
Whether CEPALCO is Local Tax Regulation 3-75 issued by the Secretary of
exempt from the Finance in 1976 made it clear that the franchise tax
provincial franchise provided in the Local Tax Code may only be imposed
tax? on companies with franchise that do not contain the
exempting clause, i.e. “in-lieu-of-all-taxes-proviso.”
CEPALCO’s franchise i.e. RA 3247, 3571 and 6020
(Section 3 thereof), uniformly provides that “in
consideration of the franchise and rights hereby
granted, the grantee shall pay a franchise tax equal to
3% of the gross earnings for electric current sold under
the franchise, of which 2% goes to the national
Treasury and 1% goes into the treasury of the
municipalities of Tagoloan, Opol, Villanueva, Jasaan,
and Cagayan de Oro, as the case may be: Provided,
that the said franchise tax of 3% of the gross earnings
shall be in lieu of all taxes and assessments of
whatever authority upon privileges, earnings, income,
franchise and poles, wires, transformers, and insulators
of the grantee from which taxes and assessments the
grantee is hereby expressly exempted.
Doctrine related to the case:
No amount of reasoning can infuse an empty plea
to justify this bloodletting. Fundamental it is in law
that taxes being the lifeblood of the government, such
must be continuously replenished and carefully
preserved and no public official should maintain a
standard lower than utmost diligence in keeping our
revenue system flowing. It is not for any government
official to deem it within his complete control to let
precious blood flow to the private sphere where it would
18 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
attachment for the collection of P37,195,859.00
in unpaid duties and taxes against Steel Asia
Manufacturing Corporation (SAMC), which
utilized fraudulent tax credit certificates in the
payment of its duties.
The Director of the Criminal Investigation and
Detention Group of the Philippine National
Police, Eduardo Matillano, filed a letter-
complaint against petitioner with the
Ombudsman, alleging that while in the
performance of his official functions, Atty. Gil A.
Valera had compromised the case against the
Steel Asia Manufacturing Corporation without
proper authority from the Commissioner.
have been rightfully and lawfully collected by the public
through the government.
Persons appointed to the revenue collection
agencies of the government, like petitioner, ought
to live up to the strictest standards of honesty and
integrity in the public service and must at all times
be above suspicion. Because of the nature of their
office, the officials and employees of the Bureau of
Customs should serve as the primary role models in the
faithful observance of the constitutional canon that
public office is a public trust.

Such illegal acts of Atty. Gil A. Valera indeed

caused undue injury to the government by
having deprived the government of its right to
collect the legal interest, surcharges, litigation
expenses and damages and gave the Steel Asia
unwarranted benefits in the total uncollected
amount of P14,762,467.70.
Tax Amnesty
CIR v. Marubeni Respondent Marubeni Corporation is a foreign Whether Respondent Moreover, E.O. Nos. 41 and 64 are tax amnesty
Corp. corporation organized and existing under the is entitled to tax issuances.
laws of Japan. It is engaged in general import amnesty?
and export trading, financing and the A tax amnesty is a general pardon or intentional
construction business. It is duly registered to overlooking by the State of its authority to impose
engage in such business in the Philippines and penalties on persons otherwise guilty of evasion or
maintains a branch office in Manila. violation of a revenue or tax law. It partakes of an
absolute forgiveness or waiver by the government of its
It was found that respondent have undeclared right to collect what is due it and to give tax evaders
income from two (2) contracts in the Philippines, who wish to relent a chance to start with a clean slate.
both of which were completed in 1984.

19 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Petitioner’s revenue examiners recommended
an assessment for deficiency income, branch
profit remittance, and contractor’s and
commercial broker’s taxes. Respondent
questioned this assessment.
CIR assails the CA decision which affirmed
CTA, ordering CIR to desist from collecting the
1985 deficiency income, branch profit remittance
and contractor’s taxes from Marubeni Corp after
finding the latter to have properly availed of the
tax amnesty under EO 41 & 64, as amended.
Construction and PBCom filed its quarterly income tax returns for
Interpretation of: the first and second quarters of 1985, reported
profits and paid the total income tax of
Tax rules and P5,016,954. But, PBCom suffered net losses at
regulations the end of the year 1985 in the amount of
P25,317,288 and P14,129,602 at the end of
Phil Bank of 1986. But during these two years, PBCom
Commerce v. CIR earned rental income from leased properties.
The lessees withheld and remitted to the BIR
withholding creditable taxes in 1985 and 1986.
On August 7, 1987, petitioner requested the CIR
for a tax credit of P5,016,954 representing
overpayment of taxes. Thereafter, petitioner filed
claim for refund of creditable taxes.
The CIR said the claim for refund has
prescribed; on the contrary, petitioner asserts
that the BIR RMC 7-85 extends the 2-year
prescription period to 10 years.
A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. If granted, the terms of
the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in
favor of the taxing authority. For the right of taxation is
inherent in government. The State cannot strip itself of
the most essential power of taxation by doubtful words.
He who claims an exemption (or an amnesty) from the
common burden must justify his claim by the clearest
grant of organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt arises as to
the intent of the legislature, that doubt must be resolved
in favor of the state.
Whether or not RR 7-85 altering the 2-year prescriptive period imposed
Revenue Regulations by law to 10-year prescriptive period is invalid.
No. 7-85 which alters
the reglementary Administrative issuances are merely interpretations and
period from two (2) not expansions of the provisions of law, thus, in case of
years to ten (10) years inconsistency, the law prevails over them.
is valid? Administrative agencies have no legislative power.
“When the Acting Commissioner of Internal Revenue
issued RMC 7-85,
changing the prescriptive period of two years to ten
years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency
with the provision of Sec. 230 of 1977 NIRC. In so
doing, the BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed by
Congress.”
“It bears repeating that Revenue memorandum-
circulars are considered administrative rulings (in
the sense of more specific and less general
20 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal
Revenue. It is widely accepted that the
interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is
entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive
and will be ignored if judicially found to be
erroneous. Thus, courts will not countenance
administrative issuances that override, instead of
remaining consistent and in harmony with, the law they
seek to apply and implement.”

“Further, fundamental is the rule that the State

cannot be put in estoppel by the mistakes or errors
of its officials or agents. As pointed out by the
respondent courts, the nullification of RMC No. 7-85
issued by the Acting Commissioner of Internal Revenue
is an administrative interpretation which is not in
harmony with Sec. 230 of 1977 NIRC, for being
contrary to the express provision of a statute. Hence,
his interpretation could not be given weight for to do so
would, in effect, amend the statute.”
CIR v. Petron No. Petron is a transferee in good faith and for value of
the subject TCCs since the CIR had no allegation that
there was a deviation from the process for the approval
of the TCCs, which Petron used as payment to settle its
excise tax liabilities for the years 1995 to 1998.The
CIR’s claim that Petron have participated in the
fraudulent issuance and transfer of the TCCs is
negated by the Joint Stipulation it entered into with
Petron in the proceedings before the CTA which states
that Petron did not participate in the procurement and
issuance of the TCCs, which TCCs were transferred to

21 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Scope and Limitation of taxation
a. public purpose The Municipal Board of Manila enacted What law shall govern
Ordinance No. 7522, “An Ordinance Regulating the publication of tax
Bagatsing v. the Operation of Public Markets and Prescribing ordinance enacted by
Ramirez Fees for the Rentals of Stalls and Providing the Municipal Board of
Penalties for Violation thereof and for other Manila, the Revised
Purposes.” Respondent were seeking the City Charter or the
declaration of nullity of the Ordinance for the Local Tax Code?
reason that a) the publication requirement under
the Revised Charter of the City of Manila has
not been complied with, b) the Market
Committee was not given any participation in the
enactment, c) Sec. 3(e) of the Anti-Graft and
Corrupt Practices Act has been violated, and d)
the ordinance would violate P.D. 7 prescribing
Petron and later utilized by Petron in payment of its
excise taxes.
Taxes are the nation’s lifeblood through which
government agencies continue to operate and with
which the State discharges its functions for the welfare
of its constituents. As an exception, however, this
general rule cannot be applied if it would work injustice
against an innocent party. Petron, in this case, was
not proven to have had any participation in or
knowledge of the CIR’s allegation of the fraudulent
transfer and utilization of the subject TCCs.
Respondent’s status as a transferee in good faith and
for value of these TCCs has been established and even
stipulated upon by petitioner. Respondent was thereby
provided ample protection from the adverse
findings subsequently made by the Center.
Given the circumstances, the CIR’s invocation of
the non-applicability of estoppel in this case is
misplaced
Ordinance No. 7522 was not made for the corporation
but for the purpose of raising revenue for the city. That
is the object it serves. The entrusting of the collection of
the fees does not destroy the public purpose of the
ordinance. SO long as the purpose is public, it does not
matter whether the agency through which the money is
dispensed is public or private.
The right to tax depends upon the ultimate purpose and
object for which the fund is raised. It is not dependent
on the nature or character if the person of the
corporation whose intermediate agency is to be used in
applying it. The people may be taxes for a public
22 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
the collection of fees and charges on livestock
and animal products.
Gaston v. Petitioners are sugar producers and planters
Republic Planters and millers filed a MANDAMUS to implement
Bank the privatization of Republic Planters Bank, and
for the transfer of the shares in the government
bank to sugar producers and planters. (because
they are allegedly the true beneficial owners of
the bank since they pay P1.00 per picul of sugar
from the proceeds of sugar producers as
STABILIZATION FEES)
purpose, although it be under the direction of an
individual or private corporation.
Additional discussion:
In fact, there is no rule which prohibits the repeal even
by implication of a special or specific act by a general or
broad one. A charter provision may be impliedly
modified or superseded by a later statute, and where a
statute is controlling, it must be read into the charter
notwithstanding any particular charter provision. A
subsequent general law similarly applicable to all cities
prevails over any conflicting charter provision, for the
reason that a charter must not be inconsistent with the
general laws and public policy of the state.
A chartered city is not an independent sovereignty. The
state remains supreme in all matters not purely local.
Otherwise stated, a charter must yield to the
constitution and general laws of the state, it is to have
read into it that general law which governs the
municipal corporation and which the corporation cannot
set aside but to which it must yield. When a city adopts
a charter, it in effect adopts as part of its charter general
law of such character.
Whether the The stabilization fees collected are in the nature of a
stabilization fees tax, which is within the power of the State to impose for
collected from sugar the promotion of the sugar industry.
planters and millers
pursuant to section 7 The collections made accrue to a "Special Fund," a
of PD 388 are funds in "Development and Stabilization Fund," almost Identical
trust for the sugar to the "Sugar Adjustment and Stabilization Fund"
millers or for public created under Section 6 of Commonwealth Act 567.
funds?
23 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
The shares are currently held by Philsucom /
Sugar Regulatory Admin.
The Solgen countered that the stabilization fees
are considered government funds and that the
transfer of shares to from Philsucom to the
sugar producers would be irregular.
The tax collected is not in a pure exercise of the taxing
power. It is levied with a regulatory purpose, to provide
means for the stabilization of the sugar industry. The
levy is primarily in the exercise of the police power of
the State.
The protection of a large industry constituting one of the
great sources of the state's wealth and therefore
directly or indirectly affecting the welfare of so great a
portion of the population of the State is affected to such
an extent by public interests as to be within the police
power of the sovereign.
The stabilization fees in question are levied by the State
upon sugar millers, planters and producers for a special
purpose — that of "financing the growth and
development of the sugar industry and all its
components, stabilization of the domestic market
including the foreign market the fact that the State has
taken possession of moneys pursuant to law is
sufficient to constitute them state funds, even though
they are held for a special purpose.

Having been levied for a special purpose, the revenues

collected are to be treated as a special fund, to be, in
the language of the statute, "administered in trust' for
the purpose intended. Once the purpose has been
fulfilled or abandoned, the balance, if any, is to be
transferred to the general funds of the Government.
Inherently Whether or not the POWER OF PRESIDENT TO IMPOSE TARIFF
legislative decision of DTI RATES: Without Section 28(2), Article VI, the executive
Secretary, to impose branch has no authority to impose tariffs and other
b. delegation to safeguard measures similar tax levies involving the importation of foreign
the President is valid? goods. Assuming that Section 28(2) Article VI did not
exist, the enactment of the SMA by Congress would be
voided on the ground that it would constitute an undue

24 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Southern Cross delegation of the legislative power to tax. The
Cement v. Phil constitutional provision shields such delegation from
Cement constitutional infirmity, and should be recognized as an
exceptional grant of legislative power to the President,
rather than the affirmation of an inherent executive
power.

QUALIFIERS: This being the case, the qualifiers

mandated by the Constitution on this presidential
authority attain primordial consideration: (1) there must
be a law; (2) there must be specified limits; and (3)
Congress may impose limitations and restrictions on
this presidential authority.

POWER EXERCISED BY ALTER EGOS OF PRES:

The Court recognizes that the authority delegated to the
President under Section 28(2), Article VI may be
exercised, in accordance with legislative sanction, by
the alter egos of the President, such as department
secretaries. Indeed, for purposes of the President’s
exercise of power to impose tariffs under Article VI,
Section 28(2), it is generally the Secretary of Finance
who acts as alter ego of the President. The SMA
provides an exceptional instance wherein it is the DTI or
Agriculture Secretary who is tasked by Congress, in
their capacities as alter egos of the President, to
impose such measures. Certainly, the DTI Secretary
has no inherent power, even as alter ego of the
President, to levy tariffs and imports.

TARIFF COMMISSION AND DTI SEC ARE AGENTS:

Concurrently, the tasking of the Tariff Commission
under the SMA should be likewise construed within the
same context as part and parcel of the legislative
delegation of its inherent power to impose tariffs and

25 | P a g e
Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
imposts to the executive branch, subject to limitations
and restrictions. In that regard, both the Tariff
Commission and the DTI Secretary may be regarded as
agents of Congress within their limited respective
spheres, as ordained in the SMA, in the implementation
of the said law which significantly draws its strength
from the plenary legislative power of taxation. Indeed,
even the President may be considered as an agent of
Congress for the purpose of imposing safeguard
measures. It is Congress, not the President, which
possesses inherent powers to impose tariffs and
imposts. Without legislative authorization through
statute, the President has no power, authority or right to
impose such safeguard measures because taxation is
inherently legislative, not executive.

When Congress tasks the President or his/her alter

egos to impose safeguard measures under the
delineated conditions, the President or the alter egos
may be properly deemed as agents of Congress to
perform an act that inherently belongs as a matter of
right to the legislature. It is basic agency law that the
agent may not act beyond the specifically delegated
powers or disregard the restrictions imposed by the
principal. In short, Congress may establish the
procedural framework under which such safeguard
measures may be imposed, and assign the various
offices in the government bureaucracy respective tasks
pursuant to the imposition of such measures, the task
assignment including the factual determination of
whether the necessary conditions exists to warrant such
impositions. Under the SMA, Congress assigned the
DTI Secretary and the Tariff Commission their
respective functions in the legislature’s scheme of
things.

26 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)

There is only one viable ground for challenging the

legality of the limitations and restrictions imposed by
Congress under Section 28(2) Article VI, and that is
such limitations and restrictions are themselves
violative of the Constitution. Thus, no matter how
distasteful or noxious these limitations and restrictions
may seem, the Court has no choice but to uphold their
validity unless their constitutional infirmity can be
demonstrated.

What are these limitations and restrictions that are

material to the present case? The entire SMA provides
for a limited framework under which the President,
through the DTI and Agriculture Secretaries, may
impose safeguard measures in the form of tariffs and
similar imposts.
c. Delegation to Whether or not
administrative Fortune Tobacco’s
agencies claim for refund of
overpaid excise taxes
CIR v. Fortune is based primarily on
Tobacco what it considers as
an “unauthorized
administrative
legislation” on the part
of the CIR?
Territorial (situs of taxation)
Meaning In 1935, plaintiff Manila Electric Company, a Whether or not the The Court held:
corporation organized and existing under the disputed tax is one
MERALCO v. laws of the Philippines, with its principal office imposed by the Where the insured against also within the Philippines,
Yatco and place of business in the City of Manila, Commonwealth of the the risk insured against also within the Philippines, and
insured with the City of New York Insurance Philippines upon a certain incidents of the contract are to be attended to in
Company and the United States Guaranty contract beyond its the Philippines, such as, payment of dividends when
jurisdiction? received in cash, sending of an unjuster into the

27 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Company, certain real and personal properties
situated in the Philippines.
The insurance was entered into in behalf of said
plaintiff by its broker in New York City. The
insurance companies are foreign corporations
not licensed to do business in the Philippines
and having no agents therein. The policies
contained provisions for the settlement and
payment of losses upon the occurrence of any
risk insured against, a sample of which is policy
No. 20 of the New York Insurance Company
attached to and made an integral part of the
agreed statement of facts.
Plaintiff through its broker paid, in New York, to
said insurance company premiums in the sum of
P91,696. The Collector of Internal Revenue,
under the authority of section 192 of Act No.
2427, as amended, assessed and levied a tax of
one per centum on said premiums, which
plaintiff paid under protest. The protest having
been overruled, plaintiff instituted the present
action to recover the tax. The trial court
dismissed the complaint, and from the judgment
thus rendered, plaintiff took the instant appeal.
Phil Guaranty v. The petitioner Philippine Guaranty Co., Inc., a
CIR domestic insurance company, entered into
reinsurance contracts with foreign insurance
companies not doing business in the country,
thereby ceding to foreign reinsurers a portion of
the premiums on insurance it has originally
underwritten in the Philippines.
Philippines in case of dispute, or making of proof of
loss, the Commonwealth of the Philippines has the
power to impose the tax upon the insured,
regardless of whether the contract is executed in a
foreign country and with a foreign corporation.
Under such circumstances, substantial elements of
the contract may be said to be so situated in the
Philippines as to give its government the power to
tax. And, even if it be assumed that the tax imposed
upon the insured will ultimately be passed on the
insurer, thus constituting an indirect tax upon the
foreign corporation, it would still be valid, because the
foreign corporation, by the stipulations of its contract,
has subjected itself to the taxing jurisdiction of the
Philippines.
After all, Commonwealth of the Philippines, by
protecting the properties insured, benefits the foreign
corporation, and it is but reasonable that the latter
should pay a just contribution therefor. It would certainly
be a discrimination against domestic corporations to
hold the tax valid when the policy is given by them and
invalid when issued by foreign corporations.
Whether or not the Section 24 of the Tax Code subjects foreign
foreign reinsurance corporations to tax on their income from sources within
premiums are taxable the Philippines. “sources” meaning activity, property or
here in our country? service giving rise to the income. (Hence, if the source
is in the Philippines although undertaken by a foreign
entity, it is taxable.)
Place of business should not be confused with place of
activity – “business” should not be the continuity and
28 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Consequently, the CIR assessed against the
petitioner withholding taxes on the ceded
reinsurance premiums to which the latter
protested the assessment on the ground that the
premiums are not subject to tax for the
premiums did not constitute income from
sources within the Philippines because the
foreign reinsurers did not engage in business in
the Philippines.
Uniformity and equality of taxation
Pepsi Cola In 1960, Ordinance No. 110 was passed in
Bottling v. City of Butuan. It was later amended by Ordinance 122.
Butuan This Ordinance imposes a tax on any person,
association, etc., of P0.10 per case of 24 bottles
of Pepsi- Cola. Pepsi operates within Butuan
and it paid under protest the amount of
P4.926.63 from August 16 to December 31,
1960 and the amount of P9,250.40 from January
1 to July 30, 1961 pursuant to said ordinance.
Pepsi filed a complaint for the recovery of the
total amount of P14,177.03 paid under protest
and those that it may later on pay until the
termination of this case on the ground that
Ordinance No. 110 as amended of the City of
Butuan is illegal, that the tax imposed is
excessive and that it is unconstitutional. Pepsi
averred it is unconstitutional because of the
following reasons:
1. it partakes of the nature of an import tax
because the tax “shall be based and computed
from the cargo manifest or bill of lading . . .
showing the number of cases” — not sold;
progression of transactions while “activity” may consists
of only a single transaction which may occur even
outside the business place.
Uniformity essential to the valid exercise of the power of
taxation does not require identity or equality under all
circumstances. The classification made in the exercise
of this authority, to be valid, must, however, be
reasonable and conforms to the requirements of equal
protection clause.
1. based on substantial distinction with real differences
2. should be germane to the purpose of the law
3. applies to future conditions
4.applies equally to all those belonging to the same
class
These conditions are not fully met by the ordinance in
question.
Indeed, if its purpose were merely to levy a burden
upon the sale of soft drinks or carbonated beverages,
there is no reason why sales thereof by dealers other
than agents or consignees of producers or merchants
established outside the City of Butuan should be
exempt from the tax.
29 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
2. it is highly unjust and discriminatory because
some dealers engaged in selling of carbonated
drinks are exempt while others are covered and
such exemption is not justified in the ordinance.
Reyes v. Petitioners JBL Reyes et al. owned a parcel of Is the approach on tax No.
Almanzor land in Tondo which are leased and occupied as assessment used by
dwelling units by tenants who were paying the City Assessor The taxing power has the authority to make a
monthly rentals of not exceeding P300. reasonable? reasonable and natural classification for purposes of
Sometimes in 1971 the Rental Freezing Law taxation but the government's act must not be prompted
was passed prohibiting for one year from its by a spirit of hostility, or at the very least discrimination
effectivity, an increase in monthly rentals of that finds no support in reason. It suffices then that
dwelling units where rentals do not exceed three the laws operate equally and uniformly on all
hundred pesos (P300.00), so that the Reyeses persons under similar circumstances or that all
were precluded from raising the rents and from persons must be treated in the same manner, the
ejecting the tenants. conditions not being different both in the privileges
In 1973, respondent City Assessor of Manila re- conferred and the liabilities imposed.
classified and reassessed the value of the
subject properties based on the schedule of Consequently, it stands to reason that petitioners who
market values, which entailed an increase in the are burdened by the government by its Rental Freezing
corresponding tax rates prompting petitioners to Laws (then R.A. No. 6359 and P.D. 20) under the
file a Memorandum of Disagreement averring principle of social justice should not now be penalized
that the reassessments made were "excessive, by the same government by the imposition of excessive
unwarranted, inequitable, confiscatory and taxes petitioners can ill afford and eventually result in
unconstitutional" considering that the taxes the forfeiture of their properties.
imposed upon them greatly exceeded the
annual income derived from their properties.
They argued that the income approach should
have been used in determining the land values
instead of the comparable sales approach which
the City Assessor adopted.
Prohibition against taxation of religious, charitable and education entities
CIR v. YMCA Private Respondent YMCA--a non-stock, non- Is YMCA’s contention No. Because taxes are the lifeblood of the nation, the
profit institution, which conducts various tenable? Court has always applied the doctrine of strict in
programs beneficial to the public pursuant to its interpretation in construing tax exemptions.
religious, educational and charitable objectives--

30 | P a g e
Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
leases out a portion of its premises to small
shop owners, like restaurants and canteen
operators, deriving substantial income for such.
Seeing this, the commissioner of internal
revenue (CIR) issued an assessment to private
respondent for deficiency income tax, deficiency
expanded withholding taxes on rentals and
professional fees and deficiency withholding tax
on wages.
YMCA opposed arguing that its rental income is
not subject to tax, mainly because of the
provisions of Section 27 of NIRC which provides
that civic league or organizations not organized
for profit but operate exclusively for promotion of
social welfare and those organized exclusively
for pleasure, recreation and other non-profitble
businesses shall not be taxed.
- Rental income derived by a tax-exempt
organization from the lease of its properties, real
or personal, is not exempt from income taxation,
even if such income is exclusively used for the
accomplishment of its objectives.
- A claim of statutory exemption from taxation
should be manifest and unmistakable from the
language of the law on which it is based. Thus, it
must expressly be granted in a statute stated in
a language too clear to be mistaken. Verba legis
non est recedendum — where the law does not
distinguish, neither should we.
- The bare allegation alone that one is a non-
stock, non-profit educational institution is
insufficient to justify its exemption from the
payment of income tax. It must prove with
substantial evidence that (1) it falls under the
classification non-stock, non-profit educational
institution; and (2) the income it seeks to be
exempted from taxation is used actually,
directly, and exclusively for educational
purposes.
- The Court cannot change the law or bend it to
suit its sympathies and appreciations.
Otherwise, it would be overspilling its role and
invading the realm of legislation. The Court,
given its limited constitutional authority, cannot
rule on the wisdom or propriety of legislation.
That prerogative belongs to the political
departments of government.
31 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Lung center of the Petitioner is a non-stock, non-profit entity
Phils. V. QC established by virtue of PD No. 1823, seeks
exemption from real property taxes when the
City Assessor issued Tax Declarations for the
land and the hospital building.
Petitioner predicted on its claim that it is a
charitable institution. The request was denied,
and a petition hereafter filed before the Local
Board of Assessment Appeals of Quezon City
(QC-LBAA) for reversal of the resolution of the
City Assessor.
Petitioner alleged that as a charitable institution,
is exempted from real property taxes under Sec
28(3) Art VI of the Constitution. QC-LBAA
dismissed the petition and the decision was
likewise affirmed on appeal by the Central Board
of Assessment Appeals of Quezon City. The
Court of Appeals affirmed the judgment of the
CBAA.
Whether or not As a general principle, a charitable institution does not
Petitioner is tax lose its character as such and its exemption from taxes
exempt? simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the
money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no
money inures to the private benefit of the persons
managing or operating the institution. In Congregational
Sunday School, etc. v. Board of Review, the State
Supreme Court of Illinois held, thus: … [A]n institution
does not lose its charitable character, and consequent
exemption from taxation, by reason of the fact that
those recipients of its benefits who are able to pay are
required to do so, where no profit is made by the
institution and the amounts so received are applied in
furthering its charitable purposes, and those benefits
are refused to none on account of inability to pay
therefor. The fundamental ground upon which all
exemptions in favor of charitable institutions are
based is the benefit conferred upon the public by
them, and a consequent relief, to some extent, of
the burden upon the state to care for and advance
the interests of its citizens.
The petitioner does not lose its character as a
charitable institution simply because the gift or donation
is in the form of subsidies granted by the government.
Thus, those payments are like a gift or donation of any
other kind except they come from the government.
Therefore, the fact that subsidization of part of the cost
of furnishing such housing is by the government rather
than private charitable contributions does not dictate
the denial of a charitable exemption if the facts
otherwise support such an exemption, as they do here.
32 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Prohibition against taxation of non-stock , non-profit institutions
CIR v. St. Luke’s St. Luke’s Medical Center, Inc. (St. Luke’s) is a
hospital organized as a non-stock and non-profit
corporation. St. Luke’s accepts both paying and
non-paying patients. The BIR assessed St.
Luke’s deficiency taxes for 1998 comprised of
deficiency income tax, value-added tax, and
withholding tax. The BIR claimed that St. Luke’s
should be liable for income tax at a preferential
rate of 10% as provided for by Section 27(B).
Further, the BIR claimed that St. Luke’s was
actually operating for profit in 1998 because only
13% of its revenues came from charitable
purposes. Moreover, the hospital’s board of
trustees, officers and employees directly benefit
from its profits and assets.
On the other hand, St. Luke’s maintained that it
is a non-stock and non-profit institution for
charitable and social welfare purposes exempt
from income tax under Section 30(E) and (G) of
the NIRC. It argued that the making of profit per
se does not destroy its income tax exemption.
Whether St. Luke’s is YES.
liable for deficiency
income tax in 1998 Section 27(B) of the NIRC imposes a 10% preferential
under Section 27(B) of tax rate on the income of (1) proprietary non-profit
the NIRC, which educational institutions and (2) proprietary non-profit
imposes a preferential hospitals. The only qualifications for hospitals are that
tax rate of 10^ on the they must be proprietary and non-profit.
income of proprietary
non-profit hospitals? “Proprietary” means private, following the definition of
a “proprietary educational institution” as “any private
school maintained and administered by private
individuals or groups” with a government permit.
“Non-profit” means no net income or asset accrues to
or benefits any member or specific person, with all the
net income or asset devoted to the institution’s
purposes and all its activities conducted not for profit.
“Non-profit” does not necessarily mean
“charitable.”
The Court defined “charity” in Lung Center of the
Philippines v. Quezon City as “a gift, to be applied
consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their
minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life
or [by] otherwise lessening the burden of
government.”
However, despite its being a tax exempt institution, any
income such institution earns from activities conducted
for profit is taxable, as expressly provided in the last
paragraph of Sec. 30.
33 | P a g e
Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)

To be a charitable institution, however, an organization

must meet the substantive test of charity in Lung
Center. The issue in Lung Center concerns
exemption from real property tax and not income tax.
However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of
government. In other words, charitable institutions
provide for free goods and services to the public
which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been
spent to address public needs, because certain
private entities already assume a part of the burden.
This is the rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is
compensated by its relief from doing public works which
would have been funded by appropriations from the
Treasury.

The Constitution exempts charitable institutions only

from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes.
However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3),
Article VI of the Constitution.

Section 30(E) of the NIRC defines the corporation or

association that is exempt from income tax. On the
other hand, Section 28(3), Article VI of the
Constitution does not define a charitable
institution, but requires that the institution
“actually, directly and exclusively” use the
property for a charitable purpose.

34 | P a g e
Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)

To be exempt from real property taxes, Section 28(3),

Article VI of the Constitution requires that a charitable
institution use the property “actually, directly and
exclusively” for charitable purposes.
To be exempt from income taxes, Section 30(E) of the
NIRC requires that a charitable institution must be
“organized and operated exclusively” for charitable
purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution
be “operated exclusively” for social welfare.

However, the last paragraph of Section 30 of the NIRC

qualifies the words “organized and operated
exclusively” by providing that:

Notwithstanding the provisions in the preceding

paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be subject to
tax imposed under this Code.

In short, the last paragraph of Section 30 provides that

if a tax exempt charitable institution conducts “any”
activity for profit, such activity is not tax exempt even as
its not-for-profit activities remain tax exempt.

Thus, even if the charitable institution must be

“organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in
“activities conducted for profit” without losing its tax
exempt status for its not-for-profit activities.

35 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Majority vote of Congress for grant of tax exemption
John Hay R.A. No. 7227 created and granted the Subic
People’s v. Lim SEZ incentives ranging from tax and duty-free
importations, exemption of businesses therein
from local and national taxes, to other hallmarks
of a liberalized financial and business climate.
And R.A. No. 7227 expressly gave authority to
the President to create through executive
proclamation, subject to the concurrence of the
local government units directly affected, other
Special Economic Zones (SEZ) in the areas
covered respectively by the Clark military
reservation, the Wallace Air Station in San
Fernando, La Union, and Camp John Hay.
On July 5, 1994 then President Ramos issued
Proclamation No. 420 which established a SEZ
on a portion of Camp John Hay.
In maintaining the validity of Proclamation No.
420, respondents contend that by extending to
the John Hay SEZ economic incentives similar
to those enjoyed by the Subic SEZ which was
established under R.A. No. 7227, the
proclamation is merely implementing the
legislative intent of said law to turn the US
military bases into hubs of business activity or
investment.
Provisions directly affecting taxation
Due process
Sison, Jr. v.
Ancheta
Whether the tax NO.
exemptions and other
financial incentives It is the legislative branch which has the inherent power
granted to the Subic not only to select the subjects of taxation but also grant
SEZ under Section 12 exemptions. Paragraph 4, Section 28 of Article VI of the
of RA 7227 are Constitution is crystal clear: "No law granting tax
applicable to the John exemption shall be passed without the concurrence of a
Hay SEZ? majority of all the Members of the Congress."
Hence, it is only the legislature, as limited by the
provisions of the Constitution, which has full power to
exempt any person or corporation or class of property
from taxation.
The Constitution may itself provide for specific tax
exemptions or local governments may pass ordinances
providing for exemption from local taxes, but otherwise,
it is only the legislative branch which has the power to
grant tax exemptions, its power to exempt being as
broad as its power to tax.
There is absolutely nothing in RA 7227 which can be
considered a grant of tax exemption in favor of public
respondent BCDA. Rather, the beneficiaries of the tax
exemptions and other incentives in Section 12 (the only
provision in RA 7227 which expressly grants tax
exemptions) are clearly the business enterprises
located within the Subic SEZ.
A bare allegation that Batas 135, which sets different
income tax schedules for fixed income earners and
business or professional income earners, is arbitrary
does not suffice to invalidate said tax statute.—The
36 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Equal protection Petitioners assail the CA decision and resolution
that upheld the constitutionality and validity of
Tiu v. CA EO 97-A, according to which the grant and
enjoyment of the tax and duty incentives
authorized under RA 7227 (“An Act Accelerating
the Conversion of Military Reservations Into
difficulty confronting petitioner is thus apparent. He
alleges arbitrariness. A mere allegation, as here, does
not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here
would condemn such a provision as void on its face, he
has not made out a case. This is merely to adhere to
the authoritative doctrine that where the due process
and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards,
there is a need for proof of such persuasive character
as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.
Due process clause may be invoked where a tax
statute is so arbitrary as to find no support in
Constitution.—It is undoubted that the due process
clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An
obvious example is where it can be shown to amount to
the confiscation of property. That would be a clear
abuse of power. It then becomes the duty of this Court
to say that such an arbitrary act amounted to the
exercise of an authority not conferred. That properly
calls for the application of the Holmes dictum. It has
also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public
purpose, or, in case of a retroactive statute is so harsh
and unreasonable, it is subject to attack on due process
grounds.
Whether or not EO YES.
97-A is
constitutional? The Court held that the classification was based on
valid and reasonable standards and does not violate
the equal protection clause.
37 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
Other Productive Uses, Creating the Bases
Conversion and Development Authority for this
Purpose, Providing Funds Therefor and for
Other Purposes”) were limited to the business
enterprises and residents within the fenced-in
area of the Subic Special Economic Zone
(SSEZ).
Among others, Section 12 of RA 7227 provides
that, “The provision of existing laws, rules and
regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed
within the Subic Special Economic Zone. In lieu
of paying taxes, three percent (3%) of the gross
income earned by all businesses and
enterprises within the Subic Special Economic
Zone shall be remitted to the National
Government, one percent (1%) each to the local
government units affected by the declaration of
the zone in proportion to their population area,
and other factors.
Non-impairment Cagayan Electric is a holder of a legislative
of obligations of franchise under RA 3247 where payment of 3%
contracts tax on gross earning is in lieu of all taxes and
assessments upon privileges. In 1968, RA 5431
CARELCO v. amended the franchise by making all corporate
Commissioner taxpayers liable for income tax. In 1969, through
RA 6020, its franchise was extended to two
other towns and the tax exemption was
reenacted. The commissioner required the
company to pay deficiency income taxes for the
intervening period (1968-1969).
Stages of taxation Petitioner Philex Mining Corp. assails the
decision of the Court of Appeals affirming the
4. Refund Court of Tax Appeals decision ordering it to pay
The fundamental right of equal protection of the laws is
not absolute, but is subject to reasonable classification.
If the groupings are characterized by substantial
distinctions that make real differences, one class may
be treated and regulated differently from another. The
classification must also be germane to the purpose of
the law and must apply to all those belonging to the
same class.
Classification, to be valid, must (1) rest on substantial
distinctions, (2) be germane to the purpose of the law,
(3) not be limited to existing conditions only, and (4)
apply equally to all members of the same class.
Whether or not Yes. Congress could impair the company’s legislative
CEPALCO is liable for franchise by making it liable for income tax.
tax?
The Constitution provides that a franchise is subject to
amendment, alteration or repeal by the Congress when
the public interest so requires. However, it cannot be
denied that the said 1969 assessment appears to be
highly controversial. It had reason not to pay income tax
because of the tax exemption its franchise. For this
reason, it should be liable only for tax proper and
should not be held liable for surcharge and interest.
Can there be an off- No. Philex's claim is an outright disregard of the basic
setting between the principle in tax law that taxes are the lifeblood of the
tax liabilities vis-a-vis government and so should be collected without
38 | P a g e
 Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
the amount of P110.7 M as excise tax liability for
Philex Mining v. the period from the 2nd quarter of 1991 to the
CIR 2nd quarter of 1992 plus 20% annual interest
from 1994 until fully paid pursuant to Sections
248 and 249 of the Tax Code of 1977.
Philex protested the demand for payment of the
tax liabilities stating that it has pending claims
for VAT input credit/refund for the taxes it paid
for the years 1989 to 1991 in the amount of
P120 M plus interest. Therefore these claims for
tax credit/refund should be applied against the
tax liabilities.
State Land Petitioner filed income tax return for 1997 having
Investments v. an accumulated tax credits of P23,632,959.05
CIR from which 1997 tax was deducted, leaving
P13,929,793.51 unutilized. Petitioner opted to
apply this amount as tax credit to the
succeeding taxable year 1998. For 1998,
petitioner still had an unutilized tax credit after
deducting 1998 tax, thus filed for a refund. CTA
ruled that failure of petitioner to present its 1999
corporate annual income tax return shows that it
incurred a net loss thus no tax liability.
claims of tax refund of unnecessary hindrance. Evidently, to countenance
the petitioner? Philex's whimsical reason would render ineffective our
tax collection system. Too simplistic, it finds no support
in law or in jurisprudence.
To be sure, Philex cannot be allowed to refuse the
payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the
government which has not yet been granted. Taxes
cannot be subject to compensation for the simple
reason that the government and the taxpayer are not
creditors and debtors of each other. There is a material
distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are
due to the Government in its sovereign capacity.
There can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or
greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the
government.
Whether or not A corporation entitled to a refund of excess creditable
petitioner is entitles to withholding tax may either obtain the refund or credit
the refund the amount to the succeeding taxable year. Sec 76
representing the states “In case the corporation is entitled to a refund of
excess creditable the excess estimated quarterly taxes paid, the
withholding tax for refundable amount shown on its final adjustment return
1997? may be credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding
taxable years.”
Petitioner filed with BIR its claim for the refund within
the two-year statutory limitation. Both CTA and CA
39 | P a g e
Cases in Taxation Law 1 (reviewer)
Professor: Prosec. Loverhette Jeffrey P. Villordon
By: Dennie Vieve Idea (New Era University)
failed to consider that petitioner’s intention was to apply
the tax credit to 1997 to its income tax due for 1998. It
was not necessary for petitioner to file it ITR for 1999,
thus requiring ITR of the succeeding year be presented
has no basis in law.

This Court held that if a tax payer suffered a net loss in

the succeeding year, incurring no tax liability to which a
previous year’s tax credit could be applied there is no
reason for BIR to withhold the refund that rightfully
belongs to the tax payer.

40 | P a g e