Doctrines in Taxation 1 Cases (Chapter 1) 2014

Chapter 1 Case Doctrines

1. CIR v. Algue

It is said that 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.

But even as we concede the inevitability and indispensability of taxation, it is a

requirement in all democratic regimes that it 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. For all the awesome power of the tax collector,
he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that
the law has not been observed.

2. PAL v. Edu

- It is possible for an exaction to be both a tax and a regulation. License fees are
charges looked to as a source of revenue as well as a means 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. These exactions are sometimes
called regulatory taxes.

- There can be no doubt as to the power of Congress to repeal the earlier exemption it
granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the
Constitution as amended in 1973 expressly provide that no franchise shall be granted to
any individual, firm, or corporation except under the condition that it shall be subject to
amendment, alteration, or repeal by the legislature when the public interest so requires.

3. ESSO v. CIR

A margin fee, imposed by the Central Bank is not a tax. Margin levy on foreign
exchange is a form of exchange control or restriction designed to discourage imports
and encourage exports, and ultimately, 'curtail any excessive demand upon the
international reserve' in order to stabilize the currency. Neither is margin fee an ordinary
expense in furtherance of a business deductible from such entity’s gross income for
purposes of computing its taxable income.

4. Physical Therapy Organization of the Philippines v. Municipal Board of Manila

The amount of the fee or charge is properly considered in determining whether it is a tax
or an exercise of the police power. The amount may be so large as to itself show that
the purpose was to raise revenue and not to regulate, but in regard to this matter there
is a marked distinction between license fees imposed upon useful and beneficial

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occupations which the sovereign wishes to regulate but not restrict, and those which are
inimical and dangerous to public health, morals or safety. In the latter case the fee may
be very large without necessarily being a tax.

5. Republic v. Mambulao Lumber

Internal revenue taxes cannot be the subject of set-off or compensation.

The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of a duty to, and are the
positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required.

6. Francia v. IAC

There can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.

Reason: government and taxpayer are not mutually creditors and debtors of each other'
under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off."

7. Domingo v. Garlitos

When the claim a person against the Government has been recognized and an amount
has already been appropriated for the purpose by a corresponding law, then both the
claim of the Government for taxes and the claim of the person have already become
overdue, demandable and fully liquidated. Under these circumstances, compensation is
proper.

8. Davao Gulf Lumber v. CIR

A claim of exemption from tax payments must be clearly shown and based on language
in the law too plain to be mistaken.” A tax exemption must be construed strictissimi
juris against the grantee. Consequently, when the law granting an exemption does not
explicitly provide that a refund may be based on higher rates which were nonexistent at
the time of its enactment, courts cannot presume otherwise.

9. Caltex v. COA

It is settled that a taxpayer may not offset taxes due from the claims that he may have
against the government.Taxes cannot be the subject of compensation because the

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government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-
off.

10. CIR v. CA and YMCA

- Article VI, Section 28 of par. 3 of the 1987 Constitution exempts not the institution itself
but the lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes.” The exemption created by said provision
pertains only to property taxes.

- To fall under the income tax exemption granted by Article XIV, Section 4, par. 3 of the
Constitution, the one invoking it must prove 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 term “educational institution” or “institution of learning” refers to schools. The

school system is synonymous with formal education, which “refers to the hierarchically
structured and chronological graded learnings organized and provided by the formal
school system and for which certification is required in order for the learner to progress
through the grades or move to the higher levels. Even non-formal education is
understood to be school-based and “private auspices such as foundations and civic-
spirited organizations” are ruled out.

11. Pascual v. Secretary of Public Works

- The taxing power must be exercised for public purposes only. Money raised by
taxation can be expended only for public purposes and not for the advantage of private
individuals.

- In the determination of the degree of interest essential to give the requisite standing to
attack the constitutionality of a statute, the general rule is that not only persons
individually affected, but also taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys.

12. Mactan Cebu International Airport Authority v. Marcos

- Nothing can prevent Congress from decreeing that even instrumentalities or agencies
of the Government performing governmental functions may be subject to tax. Where it is
done precisely to fulfill a constitutional mandate and national policy, no one can doubt
its wisdom.

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