DUMAUAL, JEANNE PAULINE J.
2019-2020
THE NATIONAL INTERNAL REVENUE CODE
G.R. No. 128315 June 29, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PASCOR REALTY AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and
VIRGINIA S. DIO, respondents.
PANGANIBAN, J.:
An assessment contains not only a computation of tax liabilities, but also a
demand for payment within a prescribed period. It also signals the time when
penalties and protests begin to accrue against the taxpayer. To enable the
taxpayer to determine his remedies thereon, due process requires that it must
be served on and received by the taxpayer. Accordingly, an affidavit, which
was executed by revenue officers stating the tax liabilities of a taxpayer and
attached to a criminal complaint for tax evasion, cannot be deemed an
assessment that can be questioned before the Court of Tax Appeals.
Statement of the Case
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court praying for the nullification of the October 30, 1996
Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853, which effectively
affirmed the January 25, 1996 Resolution 3 of the Court of Tax Appeals 4 CTA
Case No. 5271. The CTA disposed as follows:
WHEREFORE, finding [the herein petitioner's] "Motion to
Dismiss" as UNMERITORIOUS, the same is hereby DENIED. [The
CIR] is hereby given a period of thirty (30) days from receipt
hereof to file her answer.
Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the Court of
Appeals denying reconsideration.
Atty. Santos, Taxation I
The Facts
As found by the Court of Appeals, the undisputed facts of the case are as
follows:
It appears that by virtue of Letter of Authority No. 001198,
then BIR Commissioner Jose U. Ong authorized Revenue
Officers Thomas T. Que, Sonia T. Estorco and Emmanuel M.
Savellano to examine the books of accounts and other
accounting records of Pascor Realty and Development
Corporation. (PRDC) for the years ending 1986, 1987 and
1988. The said examination resulted in a recommendation for
the issuance of an assessment in the amounts of P7,498,434.65
and P3,015,236.35 for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner of Internal Revenue filed
a criminal complaint before the Department of Justice
against the PRDC, its President Rogelio A. Dio, and its
Treasurer Virginia S. Dio, alleging evasion of taxes in the total
amount of P10,513,671 .00. Private respondents PRDC, et. al.
filed an Urgent Request for Reconsideration/Reinvestigation
disputing the tax assessment and tax liability.
On March 23, 1995, private respondents received a
subpoena from the DOJ in connection with the criminal
complaint filed by the Commissioner of Internal Revenue (BIR)
against them.1âwphi1.nêt
In a letter dated May 17, 1995, the CIR denied the urgent
request for reconsideration/reinvestigation of the private
respondents on the ground that no formal assessment of the
has as yet been issued by the Commissioner.
Private respondents then elevated the Decision of the CIR
dated May 17, 1995 to the Court of Tax Appeals on a petition
for review docketed as CTA Case No. 5271 on July 21, 1995.
On September 6, 1995, the CIR filed a Motion to Dismiss the
petition on the ground that the CTA has no jurisdiction over
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the subject matter of the petition, as there was no formal
assessment issued against the petitioners. The CTA denied the
said motion to dismiss in a Resolution dated January 25, 1996
and ordered the CIR to file an answer within thirty (30) days
from receipt of said resolution. The CIR received the resolution
on January 31, 1996 but did not file an answer nor did she
move to reconsider the resolution.
Instead, the CIR filed this petition on June 7, 1996, alleging as
grounds that:
Respondent Court of Tax Appeals acted with
grave abuse of discretion and without
jurisdiction in considering the affidavit/report
of the revenue officer and the indorsement
of said report to the secretary of justice as
assessment which may be appealed to the
Court of Tax Appeals;
Respondent Court Tax Appeals acted with
grave abuse of discretion in considering the
denial by petitioner of private respondents'
Motion for Reconsideration as [a] final
decision which may be appealed to the
Court of Tax Appeals.
In denying the motion to dismiss filed by the CIR, the Court of
Tax Appeals stated:
We agree with petitioners' contentions, that
the criminal complaint for tax evasion is the
assessment issued, and that the letter denial
of May 17, 1995 is the decision properly
appealable to [u]s. Respondent's ground of
denial, therefore, that there was no formal
assessment issued, is untenable.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
It is the Court's honest belief, that the criminal case for tax
evasion is already an assessment. The complaint, more
particularly, the Joint Affidavit of Revenue Examiners Lagmay
and Savellano attached thereto, contains the details of the
assessment like the kind and amount of tax due, and the
period covered:
Petitioners are right, in claiming that the provisions of Republic
Act No. 1125, relating to exclusive appellate jurisdiction of this
Court, do not, make any mention of "formal assessment." The
law merely states, that this Court has exclusive appellate
jurisdiction over decisions of the Commissioner of Internal
Revenue on disputed assessments, and other matters arising
under the National Internal Revenue Code, other law or part
administered by the Bureau of Internal Revenue Code.
As far as this Court is concerned, the amount and kind of tax
due, and the period covered, are sufficient details needed
for an "assessment." These details are more than complete,
compared to the following definitions of the term as quoted
hereunder. Thus:
Assessment is laying a tax. Johnson City v. Clinchfield R. Co.,
43 S.W. (2d) 386, 387, 163 Tenn. 332. (Words and Phrases,
Permanent Edition, Vol. 4, p. 446).
The word assessment when used in connection with taxation,
may have more than one meaning. The ultimate purpose of
an assessment to such a connection is to ascertain the
amount that each taxpayer is to pay. More commonly, the
word "assessment" means the official valuation of a taxpayer's
property for purpose of taxation. State v. New York, N.H. and
H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid. p. 445)
From the above, it can be gleaned that an assessment simply
states how much tax is due from a taxpayer. Thus, based on
these definitions, the details of the tax as given in the Joint
Affidavit of respondent's examiners, which was attached to
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the tax evasion complaint, more than suffice to qualify as an
assessment. Therefore, this assessment having been disputed
by petitioners, and there being a denial of their letter
disputing such assessment, this Court unquestionably
acquired jurisdiction over the instant petition for review. 6
As earlier observed, the Court of Appeals sustained the CTA and dismissed the
petition.
Hence, this recourse to this Court. 7
Ruling of the Court of Appeals
The Court of Appeals held that the tax court committed no grave abuse of
discretion in ruling that the Criminal Complaint for tax evasion filed by the
Commissioner of Internal Revenue with the Department of Justice constituted
an "assessment" of the tax due, and that the said assessment could be the
subject of a protest. By definition, an assessment is simply the statement of the
details and the amount of tax due from a taxpayer. Based on this definition,
the details of the tax contained in the BIR examiners' Joint Affidavit, 8 which
was attached to the criminal Complaint, constituted an assessment. Since the
assailed Order of the CTA was merely interlocutory and devoid of grave
abuse of discretion, a petition for certiorari did not lie.
Issues
Petitioners submit for the consideration of this Court following issues:
(1) Whether or not the criminal complaint for
tax evasion can be construed as an
assessment.
(2) Whether or not an assessment is
necessary before criminal charges for tax
evasion may be instituted.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(3) Whether or not the CTA can take
cognizance of the case in the absence of an
assessment. 9
In the main, the Court will resolve whether the revenue officers' Affidavit-
Report, which was attached to criminal revenue Complaint filed the
Department of Justice, constituted an assessment that could be questioned
before the Court of Tax Appeals.
The Court's Ruling
The petition is meritorious.
Main Issue: Assessment
Petitioner argues that the filing of the criminal complaint with the Department
of Justice cannot in any way be construed as a formal assessment of private
respondents' tax liabilities. This position is based on Section 205 of the National
Internal Revenue Code 10 (NIRC), which provides that remedies for the
collection of deficient taxes may be by either civil or criminal action. Likewise,
petitioner cites Section 223(a) of the same Code, which states that in case of
failure to file a return, the tax may be assessed or a proceeding in court may
be begun without assessment.
Respondents, on the other hand, maintain that an assessment is not an action
or proceeding for the collection of taxes, but merely a notice that the amount
stated therein is due as tax and that the taxpayer is required to pay the same.
Thus, qualifying as an assessment was the BIR examiners' Joint Affidavit, which
contained the details of the supposed taxes due from respondent for taxable
years ending 1987 and 1988, and which was attached to the tax evasion
Complaint filed with the DOJ. Consequently, the denial by the BIR of private
respondents' request for reinvestigation of the disputed assessment is properly
appealable to the CTA.
We agree with petitioner. Neither the NIRC nor the regulations governing the
protest of assessments 11 provide a specific definition or form of an
assessment. However, the NIRC defines the specific functions and effects of
an assessment. To consider the affidavit attached to the Complaint as a
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proper assessment is to subvert the nature of an assessment and to set a bad
precedent that will prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the
taxpayer that he or she has tax liabilities. But not all documents coming from
the BIR containing a computation of the tax liability can be deemed
assessments.
To start with, an assessment must be sent to and received by a taxpayer, and
must demand payment of the taxes described therein within a specific
period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax
due, in case the taxpayer fails to pay deficiency tax within the time prescribed
for its payment in the notice of assessment. Likewise, an interest of 20
percent per annum, or such higher rates as may be prescribed by rules and
regulations, is to be collected from the date prescribed for its payment until
the full payment. 12
The issuance of an assessment is vital in determining, the period of limitation
regarding its proper issuance and the period within which to protest it. Section
203 13 of the NIRC provides that internal revenue taxes must be assessed
within three years from the last day within which to file the return. Section
222, 14 on the other hand, specifies a period of ten years in case a fraudulent
return with intent to evade was submitted or in case of failure to file a return.
Also, Section 228 15 of the same law states that said assessment may be
protested only within thirty days from receipt thereof. Necessarily, the taxpayer
must be certain that a specific document constitutes an assessment.
Otherwise, confusion would arise regarding the period within which to make
an assessment or to protest the same, or whether interest and penalty may
accrue thereon.
It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the collector of
internal revenue releases, mails or sends such notice to the taxpayer. 16
In the present case, the revenue officers' Affidavit merely contained a
computation of respondents' tax liability. It did not state a demand or a period
for payment. Worse, it was addressed to the justice secretary, not to the
taxpayers.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Respondents maintain that an assessment, in relation to taxation, is simply
understood' to mean:
A notice to the effect that the amount therein stated is due
as tax and a demand for payment thereof. 17
Fixes the liability of the taxpayer and ascertains the facts and
furnishes the data for the proper presentation of tax rolls. 18
Even these definitions fail to advance private respondents' case. That the BIR
examiners' Joint Affidavit attached to the Criminal Complaint contained some
details of the tax liabilities of private respondents does not ipso facto make it
an assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant
to be a notice of the tax due and a demand to the private respondents for
payment thereof.
The fact that the Complaint itself was specifically directed and sent to the
Department of Justice and not to private respondents shows that the intent of
the commissioner was to file a criminal complaint for tax evasion, not to issue
an assessment. Although the revenue officers recommended the issuance of
an assessment, the commissioner opted instead to file a criminal case for tax
evasion. What private respondents received was a notice from the DOJ that a
criminal case for tax evasion had been filed against them, not a notice that
the Bureau of Internal Revenue had made an assessment.
In addition, what private respondents sent to the commissioner was a motion
for a reconsideration of the tax evasion charges filed, not of an assessment, as
shown thus:
This is to request for reconsideration of the tax evasion charges against my
client, PASCOR Realty and Development Corporation and for the same to be
referred to the Appellate Division in order to give my client the opportunity of
a fair and objective hearing. 19
Additional Issues:
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

Assessment Not had been filed against him, not that the commissioner has issued an
assessment. It must be stressed that a criminal complaint is instituted not to
Necessary Before Filing of demand payment, but to penalize the taxpayer for violation of the Tax Code.

Criminal Complaint WHEREFORE, the petition is hereby GRANTED. The assailed Decision is
REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs.
Private respondents maintain that the filing of a criminal complaint must be
preceded by an assessment. This is incorrect, because Section 222 of the NIRC
specifically states that in cases where a false or fraudulent return is submitted
or in cases of failure to file a return such as this case, proceedings in court may
be commenced without an assessment. Furthermore, Section 205 of the same
Code clearly mandates that the civil and criminal aspects of the case may be
pursued simultaneously. In Ungab v. Cusi,20 petitioner therein sought the
dismissal of the criminal Complaints for being premature, since his protest to
the CTA had not yet been resolved. The Court held that such protests could
not stop or suspend the criminal action which was independent of the
resolution of the protest in the CTA. This was because the commissioner of
internal revenue had, in such tax evasion cases, discretion on whether to issue
an assessment or to file a criminal case against the taxpayer or to do both.

Private respondents insist that Section 222 should be read in relation to Section
255 of the NLRC, 21 which penalizes failure to file a return. They add that a tax
assessment should precede a criminal indictment. We disagree. To reiterate,
said Section 222 states that an assessment is not necessary before a criminal
charge can be filed. This is the general rule. Private respondents failed to show
that they are entitled to an exception. Moreover, the criminal charge need
only be supported by a prima facie showing of failure to file a required return.
This fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a

complaint. Before an assessment is issued, there is, by practice, a pre-
assessment notice sent to the taxpayer. The taxpayer is then given a chance
to submit position papers and documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an assessment signed by him
or her is then sent to the taxpayer informing the latter specifically and clearly
that an assessment has been made against him or her. In contrast, the
criminal charge need not go through all these. The criminal charge is filed
directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case

Atty. Santos, Taxation I Page 5


G.R. No. 120880 June 5, 1997
FERDINAND R. MARCOS II, petitioner,
vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE
and HERMINIA D. DE GUZMAN, respondents.
TORRES, JR., J.:
In this Petition for Review on Certiorari, Government action is once again
assailed as precipitate and unfair, suffering the basic and oftly implored
requisites of due process of law. Specifically, the petition assails the
Decision 1 of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No.
31363, where the said court held:
In view of all the foregoing, we rule that the deficiency
income tax assessments and estate tax assessment, are
already final and (u)nappealable-and-the subsequent levy of
real properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218 of the
National Internal Revenue Code. This summary tax remedy is
distinct and separate from the other tax remedies (such as
Judicial Civil actions and Criminal actions), and is not
affected or precluded by the pendency of any other tax
remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby
rendered DISMISSING the petition for certiorari with prayer for
Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
More than seven years since the demise of the late Ferdinand E. Marcos, the
former President of the Republic of the Philippines, the matter of the
settlement of his estate, and its dues to the government in estate taxes, are still
unresolved, the latter issue being now before this Court for resolution.
Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent,
questions the actuations of the respondent Commissioner of Internal Revenue
in assessing, and collecting through the summary remedy of Levy on Real
Properties, estate and income tax delinquencies upon the estate and
properties of his father, despite the pendency of the proceedings on probate
of the will of the late president, which is docketed as Sp. Proc. No. 10279 in the
Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition
for Certiorari and Prohibition with an application for writ of preliminary
injunction and/or temporary restraining order on June 28, 1993, seeking to —
I. Annul and set aside the Notices of Levy on real property
dated February 22, 1993 and May 20, 1993, issued by
respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26,
1993;
III. Enjoin the Head Revenue Executive Assistant Director II
(Collection Service), from proceeding with the Auction of the
real properties covered by Notices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its
Decision 2 on November 29, 1994, ruling that the deficiency assessments for
estate and income tax made upon the petitioner and the estate of the
deceased President Marcos have already become final and unappealable,
and may thus be enforced by the summary remedy of levying upon the
properties of the late President, as was done by the respondent Commissioner
of Internal Revenue.
WHEREFORE, premises considered judgment is hereby
rendered DISMISSING the petition for Certiorari with prayer for
Restraining Order and Injunction.
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

No pronouncements as to cost. and the consequent estate tax due,

incapable of exact pecuniary determination
SO ORDERED. at this time. Thus, respondents' assessment of
the estate tax and their issuance of the
Notices of Levy and Sale are premature,
Unperturbed, petitioner is now before us assailing the validity of the appellate
confiscatory and oppressive.
court's decision, assigning the following as errors:

[b] Petitioner, as one of the late President's

A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE
compulsory heirs, was never notified, much
SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT
less served with copies of the Notices of Levy,
ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF
contrary to the mandate of Section 213 of
THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE
the NIRC. As such, petitioner was never given
PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE
an opportunity to contest the Notices in
PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH
violation of his right to due process of law.
FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA
LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL
OTHER COURTS AND ADMINISTRATIVE AGENCIES. C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION,
RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT IT
HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY
SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS
DECIDING THAT SINCE THE TAX ASSESSMENTS OF PETITIONER
POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY
AND HIS PARENTS HAD ALREADY BECOME FINAL AND
INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S
UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS
AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE
OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF
ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS
WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL,
OF LEVY.
HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE
UNLAWFUL MANNER AND METHOD IN WHICH TAX
COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS The facts as found by the appellate court are undisputed, and are hereby
COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT adopted:
SHOULD HAVE FAVORABLY CONSIDERED THE MERITS OF THE
FOLLOWING GROUNDS IN THE PETITION: On September 29, 1989, former President Ferdinand Marcos
died in Honolulu, Hawaii, USA.
(1) The Notices of Levy on Real Property were
issued beyond the period provided in the On June 27, 1990, a Special Tax Audit Team was created to
Revenue Memorandum Circular No. 38-68. conduct investigations and examinations of the tax liabilities
and obligations of the late president, as well as that of his
(2) [a] The numerous pending court cases family, associates and "cronies". Said audit team concluded
questioning the late President's ownership or its investigation with a Memorandum dated July 26, 1991. The
interests in several properties (both personal investigation disclosed that the Marcoses failed to file a
and real) make the total value of his estate, written notice of the death of the decedent, an estate tax

Atty. Santos, Taxation I Page 7


returns [sic], as well as several income tax returns covering the
years 1982 to 1986, — all in violation of the National Internal
Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda
R. Marcos before the Regional Trial of Quezon City for
violations of Sections 82, 83 and 84 (has penalized under
Sections 253 and 254 in relation to Section 252 — a & b) of the
National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the
preparation and filing of the Estate Tax Return for the estate
of the late president, the Income Tax Returns of the Spouses
Marcos for the years 1985 to 1986, and the Income Tax
Returns of petitioner Ferdinand "Bongbong" Marcos II for the
years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency
estate tax assessment no. FAC-2-89-91-002464 (against the
estate of the late president Ferdinand Marcos in the amount
of P23,293,607,638.00 Pesos); (2) Deficiency income tax
assessment no. FAC-1-85-91-002452 and Deficiency income
tax assessment no. FAC-1-86-91-002451 (against the Spouses
Ferdinand and Imelda Marcos in the amounts of P149,551.70
and P184,009,737.40 representing deficiency income tax for
the years 1985 and 1986); (3) Deficiency income tax
assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463
(against petitioner Ferdinand "Bongbong" Marcos II in the
amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos;
and P6,376.60 Pesos representing his deficiency income taxes
for the years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of
the deficiency estate and income tax assessments were all
personally and constructively served on August 26, 1991 and
September 12, 1991 upon Mrs. Imelda Marcos (through her
caretaker Mr. Martinez) at her last known address at No. 204
Ortega St., San Juan, M.M. (Annexes "D" and "E" of the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Petition). Likewise, copies of the deficiency tax assessments
issued against petitioner Ferdinand "Bongbong" Marcos II
were also personally and constructively served upon him
(through his caretaker) on September 12, 1991, at his last
known address at Don Mariano Marcos St. corner P. Guevarra
St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition).
Thereafter, Formal Assessment notices were served on
October 20, 1992, upon Mrs. Marcos c/o petitioner, at his
office, House of Representatives, Batasan Pambansa, Quezon
City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or
her duly authorized representative or counsel), to a
conference, was furnished the counsel of Mrs. Marcos, Dean
Antonio Coronel — but to no avail.
The deficiency tax assessments were not protested
administratively, by Mrs. Marcos and the other heirs of the late
president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two
notices of levy on real property against certain parcels of
land owned by the Marcoses — to satisfy the alleged estate
tax and deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property
were issued for the purpose of satisfying the deficiency
income taxes.
On May 26, 1993, additional four (4) notices of Levy on real
property were again issued. The foregoing tax remedies were
resorted to pursuant to Sections 205 and 213 of the National
Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty.
Loreto Ata (counsel of herein petitioner) calling the attention
of the BIR and requesting that they be duly notified of any
action taken by the BIR affecting the interest of their client
Ferdinand "Bongbong" Marcos II, as well as the interest of the
late president — copies of the aforesaid notices were, served
Page 8

on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda
Marcos, the petitioner, and their counsel of record, "De Borja,
Medialdea, Ata, Bello, Guevarra and Serapio Law Office".
Notices of sale at public auction were posted on May 26,
1993, at the lobby of the City Hall of Tacloban City. The public
auction for the sale of the eleven (11) parcels of land took
place on July 5, 1993. There being no bidder, the lots were
declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II
filed the instant petition for certiorari and prohibition under
Rule 65 of the Rules of Court, with prayer for temporary
restraining order and/or writ of preliminary injunction.
It has been repeatedly observed, and not without merit, that the enforcement
of tax laws and the collection of taxes, is of paramount importance for the
sustenance of government. Taxes are the lifeblood of the government and
should be collected without unnecessary hindrance. However, such collection
should be made in accordance with law as any arbitrariness will negate the
very reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may
be achieved. 3
Whether or not the proper avenues of assessment and collection of the said
tax obligations were taken by the respondent Bureau is now the subject of the
Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of
properties of the late President Marcos effected by the BIR are null and void
for disregarding the established procedure for the enforcement of taxes due
upon the estate of the deceased. The case of Domingo vs. Garlitos 4 is
specifically cited to bolster the argument that "the ordinary procedure by
which to settle claims of indebtedness against the estate of a deceased,
person, as in an inheritance (estate) tax, is for the claimant to present a claim
before the probate court so that said court may order the administrator to
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
pay the amount therefor." This remedy is allegedly, exclusive, and cannot be
effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded from
denying a request by the government for the immediate payment of taxes,
and should order the payment of the same only within the period fixed by the
probate court for the payment of all the debts of the decedent. In this regard,
petitioner cites the case of Collector of Internal Revenue vs. The Administratrix
of the Estate of Echarri (67 Phil 502), where it was held that:
The case of Pineda vs. Court of First Instance of Tayabas and
Collector of Internal Revenue (52 Phil 803), relied upon by the
petitioner-appellant is good authority on the proposition that
the court having control over the administration proceedings
has jurisdiction to entertain the claim presented by the
government for taxes due and to order the administrator to
pay the tax should it find that the assessment was proper, and
that the tax was legal, due and collectible. And the rule laid
down in that case must be understood in relation to the case
of Collector of Customs vs. Haygood, supra., as to the
procedure to be followed in a given case by the government
to effectuate the collection of the tax. Categorically stated,
where during the pendency of judicial administration over the
estate of a deceased person a claim for taxes is presented by
the government, the court has the authority to order
payment by the administrator; but, in the same way that it
has authority to order payment or satisfaction, it also has the
negative authority to deny the same. While there are cases
where courts are required to perform certain duties
mandatory and ministerial in character, the function of the
court in a case of the present character is not one of them;
and here, the court cannot be an organism endowed with
latitude of judgment in one direction, and converted into a
mere mechanical contrivance in another direction.
On the other hand, it is argued by the BIR, that the state's authority to collect
internal revenue taxes is paramount. Thus, the pendency of probate
proceedings over the estate of the deceased does not preclude the
assessment and collection, through summary remedies, of estate taxes over
Page 9

the same. According to the respondent, claims for payment of estate and
income taxes due and assessed after the death of the decedent need not be
presented in the form of a claim against the estate. These can and should be
paid immediately. The probate court is not the government agency to decide
whether an estate is liable for payment of estate of income taxes. Well-settled
is the rule that the probate court is a court with special and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited
jurisdiction, as a probate court over estate of deceased individual, is not a
trifling thing. The court's jurisdiction, once invoked, and made effective,
cannot be treated with indifference nor should it be ignored with impunity by
the very parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the
probate court to approve the sale of properties of a deceased person by his
prospective heirs before final adjudication; 5 to determine who are the heirs of
the decedent; 6 the recognition of a natural child; 7 the status of a woman
claiming to be the legal wife of the decedent; 8 the legality of disinheritance
of an heir by the testator; 9 and to pass upon the validity of a waiver of
hereditary rights. 10
The pivotal question the court is tasked to resolve refers to the authority of the
Bureau of Internal Revenue to collect by the summary remedy of levying
upon, and sale of real properties of the decedent, estate tax deficiencies,
without the cognition and authority of the court sitting in probate over the
supposed will of the deceased.
The nature of the process of estate tax collection has been described as
follows:
Strictly speaking, the assessment of an inheritance tax does
not directly involve the administration of a decedent's estate,
although it may be viewed as an incident to the complete
settlement of an estate, and, under some statutes, it is made
the duty of the probate court to make the amount of the
inheritance tax a part of the final decree of distribution of the
estate. It is not against the property of decedent, nor is it a
claim against the estate as such, but it is against the interest
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
or property right which the heir, legatee, devisee, etc., has in
the property formerly held by decedent. Further, under some
statutes, it has been held that it is not a suit or controversy
between the parties, nor is it an adversary proceeding
between the state and the person who owes the tax on the
inheritance. However, under other statutes it has been held
that the hearing and determination of the cash value of the
assets and the determination of the tax are adversary
proceedings. The proceeding has been held to be
necessarily a proceeding in rem. 11
In the Philippine experience, the enforcement and collection of estate tax, is
executive in character, as the legislature has seen it fit to ascribe this task to
the Bureau of Internal Revenue. Section 3 of the National Internal Revenue
Code attests to this:
Sec. 3. Powers and duties of the Bureau. — The powers and
duties of the Bureau of Internal Revenue shall comprehend
the assessment and collection of all national internal revenue
taxes, fees, and charges, and the enforcement of all
forfeitures, penalties, and fines connected therewith,
including the execution of judgments in all cases decided in
its favor by the Court of Tax Appeals and the ordinary courts.
Said Bureau shall also give effect to and administer the
supervisory and police power conferred to it by this Code or
other laws.
Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal
treatment of claims for taxes charged against the estate of the decedent.
Such taxes, we said, were exempted from the application of the statute of
non-claims, and this is justified by the necessity of government funding,
immortalized in the maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt rei publicae — taxes are the sinews of the
state.
Taxes assessed against the estate of a deceased person,
after administration is opened, need not be submitted to the
committee on claims in the ordinary course of administration.
Page 10

In the exercise of its control over the administrator, the court
may direct the payment of such taxes upon motion showing
that the taxes have been assessed against the estate.
Such liberal treatment of internal revenue taxes in the probate proceedings
extends so far, even to allowing the enforcement of tax obligations against
the heirs of the decedent, even after distribution of the estate's properties.
Claims for taxes, whether assessed before or after the death
of the deceased, can be collected from the heirs even after
the distribution of the properties of the decedent. They are
exempted from the application of the statute of non-claims.
The heirs shall be liable therefor, in proportion to their share in
the inheritance. 13
Thus, the Government has two ways of collecting the taxes in
question. One, by going after all the heirs and collecting from
each one of them the amount of the tax proportionate to the
inheritance received. Another remedy, pursuant to the lien
created by Section 315 of the Tax Code upon all property
and rights to property belong to the taxpayer for unpaid
income tax, is by subjecting said property of the estate which
is in the hands of an heir or transferee to the payment of the
tax due the estate. (Commissioner of Internal Revenue vs.
Pineda, 21 SCRA 105, September 15, 1967.)
From the foregoing, it is discernible that the approval of the court, sitting in
probate, or as a settlement tribunal over the deceased is not a mandatory
requirement in the collection of estate taxes. It cannot therefore be argued
that the Tax Bureau erred in proceeding with the levying and sale of the
properties allegedly owned by the late President, on the ground that it was
required to seek first the probate court's sanction. There is nothing in the Tax
Code, and in the pertinent remedial laws that implies the necessity of the
probate or estate settlement court's approval of the state's claim for estate
taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement
court which is bidden not to authorize the executor or judicial administrator of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
the decedent's estate to deliver any distributive share to any party interested
in the estate, unless it is shown a Certification by the Commissioner of Internal
Revenue that the estate taxes have been paid. This provision disproves the
petitioner's contention that it is the probate court which approves the
assessment and collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate
taxes, this should have been pursued through the proper administrative and
judicial avenues provided for by law.
Section 229 of the NIRC tells us how:
Sec. 229. Protesting of assessment. — When the Commissioner
of Internal Revenue or his duly authorized representative finds
that proper taxes should be assessed, he shall first notify the
taxpayer of his findings. Within a period to be prescribed by
implementing regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond, the
Commissioner shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation in such form and
manner as may be prescribed by implementing regulations
within (30) days from receipt of the assessment; otherwise, the
assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual,
association or corporation adversely affected by the decision
on the protest may appeal to the Court of Tax Appeals within
thirty (30) days from receipt of said decision; otherwise, the
decision shall become final, executory and demandable. (As
inserted by P.D. 1773)
Apart from failing to file the required estate tax return within the time required
for the filing of the same, petitioner, and the other heirs never questioned the
assessments served upon them, allowing the same to lapse into finality, and
prompting the BIR to collect the said taxes by levying upon the properties left
by President Marcos.
Page 11

Petitioner submits, however, that "while the assessment of taxes may have
been validly undertaken by the Government, collection thereof may have
been done in violation of the law. Thus, the manner and method in which the
latter is enforced may be questioned separately, and irrespective of the
finality of the former, because the Government does not have the unbridled
discretion to enforce collection without regard to the clear provision of law." 14
Petitioner specifically points out that applying Memorandum Circular No. 38-
68, implementing Sections 318 and 324 of the old tax code (Republic Act
5203), the BIR's Notices of Levy on the Marcos properties, were issued beyond
the allowed period, and are therefore null and void:
. . . the Notices of Levy on Real Property (Annexes O to NN of
Annex C of this Petition) in satisfaction of said assessments
were still issued by respondents well beyond the period
mandated in Revenue Memorandum Circular No. 38-68.
These Notices of Levy were issued only on 22 February 1993
and 20 May 1993 when at least seventeen (17) months had
already lapsed from the last service of tax assessment on 12
September 1991. As no notices of distraint of personal
property were first issued by respondents, the latter should
have complied with Revenue Memorandum Circular No. 38-
68 and issued these Notices of Levy not earlier than three (3)
months nor later than six (6) months from 12 September 1991.
In accordance with the Circular, respondents only had until
12 March 1992 (the last day of the sixth month) within which
to issue these Notices of Levy. The Notices of Levy, having
been issued beyond the period allowed by law, are thus void
and of no effect. 15
We hold otherwise. The Notices of Levy upon real property were issued within
the prescriptive period and in accordance with the provisions of the present
Tax Code. The deficiency tax assessment, having already become final,
executory, and demandable, the same can now be collected through the
summary remedy of distraint or levy pursuant to Section 205 of the NIRC.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The applicable provision in regard to the prescriptive period for the
assessment and collection of tax deficiency in this instance is Article 223 of the
NIRC, which pertinently provides:
Sec. 223. Exceptions as to a period of limitation of assessment
and collection of taxes. — (a) In the case of a false or
fraudulent return with intent to evade tax or of a failure to file
a return, the tax may be assessed, or a proceeding in court
for the collection of such tax may be begun without
assessment, at any time within ten (10) years after the
discovery of the falsity, fraud, or omission: Provided, That, in a
fraud assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in the civil
or criminal action for the collection thereof.
xxx xxx xxx
(c) Any internal revenue tax which has been assessed within
the period of limitation above prescribed, may be collected
by distraint or levy or by a proceeding in court within three
years following the assessment of the tax.
xxx xxx xxx
The omission to file an estate tax return, and the subsequent failure to contest
or appeal the assessment made by the BIR is fatal to the petitioner's cause, as
under the above-cited provision, in case of failure to file a return, the tax may
be assessed at any time within ten years after the omission, and any tax so
assessed may be collected by levy upon real property within three years
following the assessment of the tax. Since the estate tax assessment had
become final and unappealable by the petitioner's default as regards
protesting the validity of the said assessment, there is now no reason why the
BIR cannot continue with the collection of the said tax. Any objection against
the assessment should have been pursued following the avenue paved in
Section 229 of the NIRC on protests on assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning
the late president's ownership or interests in several properties (both real and
Page 12

personal) make the total value of his estate, and the consequent estate tax
due, incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the Notices of
Levy and sale are premature and oppressive." He points out the pendency of
Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the
government to question the ownership and interests of the late President in
real and personal properties located within and outside the Philippines.
Petitioner, however, omits to allege whether the properties levied upon by the
BIR in the collection of estate taxes upon the decedent's estate were among
those involved in the said cases pending in the Sandiganbayan. Indeed, the
court is at a loss as to how these cases are relevant to the matter at issue. The
mere fact that the decedent has pending cases involving ill-gotten wealth
does not affect the enforcement of tax assessments over the properties
indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total
assessment of P23,292,607,638.00, stating that this amount deviates from the
findings of the Department of Justice's Panel of Prosecutors as per its resolution
of 20 September 1991. Allegedly, this is clear evidence of the uncertainty on
the part of the Government as to the total value of the estate of the late
President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of
estate tax which had already become final and unappealable.
It is not the Department of Justice which is the government agency tasked to
determine the amount of taxes due upon the subject estate, but the Bureau
of Internal Revenue, 16 whose determinations and assessments are presumed
correct and made in good faith. 17 The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of
official duties, an assessment will not be disturbed. Even an assessment based
on estimates is prima facie valid and lawful where it does not appear to have
been arrived at arbitrarily or capriciously. The burden of proof is upon the
complaining party to show clearly that the assessment is erroneous. Failure to
present proof of error in the assessment will justify the judicial affirmance of
said assessment. 18 In this instance, petitioner has not pointed out one single
provision in the Memorandum of the Special Audit Team which gave rise to
the questioned assessment, which bears a trace of falsity. Indeed, the
petitioner's attack on the assessment bears mainly on the alleged improbable
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
and unconscionable amount of the taxes charged. But mere rhetoric cannot
supply the basis for the charge of impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised,
considering the ample remedies afforded the taxpayer by the Tax Code, with
the Bureau of Internal Revenue and the Court of Tax Appeals, as described
earlier, and cannot be raised now via Petition for Certiorari, under the pretext
of grave abuse of discretion. The course of action taken by the petitioner
reflects his disregard or even repugnance of the established institutions for
governance in the scheme of a well-ordered society. The subject tax
assessments having become final, executory and enforceable, the same can
no longer be contested by means of a disguised protest. In the
main, Certiorari may not be used as a substitute for a lost appeal or
remedy. 19 This judicial policy becomes more pronounced in view of the
absence of sufficient attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the
petitioner, we find the respondent appellate court's pronouncements sound
and resilient to petitioner's attacks.
Anent grounds 3(b) and (B) — both alleging/claiming lack of
notice — We find, after considering the facts and
circumstances, as well as evidences, that there was sufficient,
constructive and/or actual notice of assessments, levy and
sale, sent to herein petitioner Ferdinand "Bongbong" Marcos
as well as to his mother Mrs. Imelda Marcos.
Even if we are to rule out the notices of assessments
personally given to the caretaker of Mrs. Marcos at the latter's
last known address, on August 26, 1991 and September 12,
1991, as well as the notices of assessment personally given to
the caretaker of petitioner also at his last known address on
September 12, 1991 — the subsequent notices given
thereafter could no longer be ignored as they were sent at a
time when petitioner was already here in the Philippines, and
at a place where said notices would surely be called to
petitioner's attention, and received by responsible persons of
sufficient age and discretion.
Page 13
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Thus, on October 20, 1992, formal assessment notices were xxx xxx xxx
served upon Mrs. Marcos c/o the petitioner, at his office,
House of Representatives, Batasan Pambansa, Q.C. (Annexes . . . Levy shall be effected by writing upon said certificate a
"A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum description of the property upon which levy is made. At the
of OSG). Moreover, a notice to taxpayer dated October 8, same time, written notice of the levy shall be mailed to or
1992 inviting Mrs. Marcos to a conference relative to her tax served upon the Register of Deeds of the province or city
liabilities, was furnished the counsel of Mrs. Marcos — Dean where the property is located and upon the delinquent
Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of taxpayer, or if he be absent from the Philippines, to his agent
Notices were also served upon Mrs. Imelda Marcos, the or the manager of the business in respect to which the liability
petitioner and their counsel "De Borja, Medialdea, Ata, Bello, arose, or if there be none, to the occupant of the property in
Guevarra and Serapio Law Office", on April 7, 1993 and June question.
10, 1993. Despite all of these Notices, petitioner never lifted a
finger to protest the assessments, (upon which the Levy and
xxx xxx xxx
sale of properties were based), nor appealed the same to
the Court of Tax Appeals.
The foregoing notwithstanding, the record shows that notices of warrants of
distraint and levy of sale were furnished the counsel of petitioner on April 7,
There being sufficient service of Notices to herein petitioner
1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his
(and his mother) and it appearing that petitioner continuously
office at the Batasang Pambansa. 21 We cannot therefore, countenance
ignored said Notices despite several opportunities given him
petitioner's insistence that he was denied due process. Where there was an
to file a protest and to thereafter appeal to the Court of Tax
opportunity to raise objections to government action, and such opportunity
Appeals, — the tax assessments subject of this case, upon
was disregarded, for no justifiable reason, the party claiming oppression then
which the levy and sale of properties were based, could no
becomes the oppressor of the orderly functions of government. He who
longer be contested (directly or indirectly) via this instant
comes to court must come with clean hands. Otherwise, he not only taints his
petition for certiorari. 20
name, but ridicules the very structure of established authority.

Petitioner argues that all the questioned Notices of Levy, however, must be
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The
nullified for having been issued without validly serving copies thereof to the
Decision of the Court of Appeals dated November 29, 1994 is hereby
petitioner. As a mandatory heir of the decedent, petitioner avers that he has
AFFIRMED in all respects.
an interest in the subject estate, and notices of levy upon its properties should
have been served upon him.
SO ORDERED.
We do not agree. In the case of notices of levy issued to satisfy the delinquent
estate tax, the delinquent taxpayer is the Estate of the decedent, and not
necessarily, and exclusively, the petitioner as heir of the deceased. In the
same vein, in the matter of income tax delinquency of the late president and
his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of
notices of levy in satisfaction of these tax delinquencies upon the petitioner is
not required by law, as under Section 213 of the NIRC, which pertinently states:

Atty. Santos, Taxation I Page 14


G.R. No. L-36181 October 23, 1982
MERALCO SECURITIES CORPORATION (now FIRST PHILIPPINE HOLDINGS
CORPORATION), petitioner,
vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et
al., as heirs of the late Juan G. Maniago, respondents.
G.R. No. L-36748 October 23, 1982
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et
al., as heirs of the late Juan G. Maniago, respondents.
G.R. No. L-36181
San Juan, Africa, Gonzales & San Agustin for petitioner.
Ramon A. Gonzales for respondents.
TEEHANKEE, J.:
These are original actions for certiorari to set aside and annul the writ of
mandamus issued by Judge Victorino A. Savellano of the Court of First
Instance of Manila in Civil Case No. 80830 ordering petitioner Meralco
Securities Corporation (now First Philippine Holdings Corporation) to pay, and
petitioner Commissioner of Internal Revenue to collect from the former, the
amount of P51,840,612.00, by way of alleged deficiency corporate income
tax, plus interests and surcharges due thereon and to pay private respondents
25% of the total amount collectible as informer's reward.
On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings
by his wife and children) submitted to petitioner Commissioner of Internal
Revenue confidential denunciation against the Meralco Securities
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Corporation for tax evasion for having paid income tax only on 25 % of the
dividends it received from the Manila Electric Co. for the years 1962-1966,
thereby allegedly shortchanging the government of income tax due from 75%
of the said dividends.
Petitioner Commissioner of Internal Revenue caused the investigation of the
denunciation after which he found and held that no deficiency corporate
income tax was due from the Meralco Securities Corporation on the dividends
it received from the Manila Electric Co., since under the law then prevailing
(section 24[a] of the National Internal Revenue Code) "in the case of
dividends received by a domestic or foreign resident corporation liable to
(corporate income) tax under this Chapter . . . .only twenty-five per centum
thereof shall be returnable for the purposes of the tax imposed under this
section." The Commissioner accordingly rejected Maniago's contention that
the Meralco from whom the dividends were received is "not a domestic
corporation liable to tax under this Chapter." In a letter dated April 5, 1968, the
Commissioner informed Maniago of his findings and ruling and therefore
denied Maniago's claim for informer's reward on a non-existent deficiency.
This action of the Commissioner was sustained by the Secretary of Finance in a
4th Indorsement dated May 11, 1971.
On August 28, 1970, Maniago filed a petition for mandamus, and subsequently
an amended petition for mandamus, in the Court of First Instance of Manila,
docketed therein as Civil Case No. 80830, against the Commissioner of
Internal Revenue and the Meralco Securities Corporation to compel the
Commissioner to impose the alleged deficiency tax assessment on the
Meralco Securities Corporation and to award to him the corresponding
informer's reward under the provisions of R.A. 2338.
On October 28, 1978, the Commissioner filed a motion to dismiss, arguing that
since in matters of issuance and non-issuance of assessments, he is clothed
under the National Internal Revenue Code and existing rules and regulations
with discretionary power in evaluating the facts of a case and since
mandamus win not lie to compel the performance of a discretionary power,
he cannot be compelled to impose the alleged tax deficiency assessment
against the Meralco Securities Corporation. He further argued that mandamus
may not lie against him for that would be tantamount to a usurpation of
executive powers, since the Office of the Commissioner of Internal Revenue is
undeniably under the control of the executive department.
Page 15

On the other hand, the Meralco Securities Corporation filed its answer, dated
January 15, 1971, interposing as special and/or affirmative defenses that the
petition states no cause of action, that the action is premature, that
mandamus win not lie to compel the Commissioner of Internal Revenue to
make an assessment and/or effect the collection of taxes upon a taxpayer,
that since no taxes have actually been recovered and/or collected, Maniago
has no right to recover the reward prayed for, that the action of petitioner
had already prescribed and that respondent court has no jurisdiction over the
subject matter as set forth in the petition, the same being cognizable only by
the Court of Tax Appeals.
On January 10, 1973, the respondent judge rendered a decision granting the
writ prayed for and ordering the Commissioner of Internal Revenue to assess
and collect from the Meralco Securities Corporation the sum of P51,840,612.00
as deficiency corporate income tax for the period 1962 to 1969 plus interests
and surcharges due thereon and to pay 25% thereof to Maniago as informer's
reward.
All parties filed motions for reconsideration of the decision but the same were
denied by respondent judge in his order dated April 6, 1973, with respondent
judge denying respondents' claim for attorneys fees and for execution of the
decision pending appeal.
Hence, the Commissioner filed a separate petition with this Court, docketed
as G.R. No. L-36748 praying that the decision of respondent judge dated
January 10, 1973 and his order dated April 6, 1973 be reconsidered for
respondent judge has no jurisdiction over the subject matter of the case and
that the issuance or non-issuance of a deficiency assessment is a prerogative
of the Commissioner of Internal Revenue not reviewable by mandamus.
The Meralco Securities Corporation (now First Philippine Holdings Corporation)
likewise appealed the same decision of respondent judge in G.R. No. L-36181
and in the Court's resolution dated June 13, 1973, the two cases were ordered
consolidated.
We grant the petitions.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Respondent judge has no jurisdiction to take cognizance of the case because
the subject matter thereof clearly falls within the scope of cases
now exclusively within the jurisdiction of the Court of Tax Appeals. Section 7 of
Republic Act No. 1125, enacted June 16, 1954, granted to the Court of Tax
Appeals exclusive appellate jurisdiction to review by appeal, among others,
decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of
Internal Revenue. The law transferred to the Court of Tax Appeals jurisdiction
over all cases involving said assessments previously cognizable by courts of first
instance, and even those already pending in said courts. 1 The question of
whether or not to impose a deficiency tax assessment on Meralco Securities
Corporation undoubtedly comes within the purview of the words "disputed
assessments" or of "other matters arising under the National Internal Revenue
Code . . . .In the case of Blaquera vs. Rodriguez, et al, 2 this Court ruled that
"the determination of the correctness or incorrectness of a tax assessment to
which the taxpayer is not agreeable, falls within the jurisdiction of the Court of
Tax Appeals and not of the Court of First Instance, for under the provisions of
Section 7 of Republic Act No. 1125, the Court of Tax Appeals
has exclusive appellate jurisdiction to review, on appeal, any decision of the
Collector of Internal Revenue in cases involving disputed assessments and
other matters arising under the National Internal Revenue Code or other law
or part of law administered by the Bureau of Internal Revenue."
Thus, even assuming arguendo that the right granted the taxpayers affected
to question and appeal disputed assessments, under section 7 of Republic Act
No. 1125, may be availed of by strangers or informers like the late Maniago,
the most that he could have done was to appeal to the Court of Tax Appeals
the ruling of petitioner Commissioner of Internal Revenue within thirty (30) days
from receipt thereof pursuant to section 11 of Republic Act No. 1125. 3 He
failed to take such an appeal to the tax court. The ruling is clearly final and no
longer subject to review by the courts. 4
It is furthermore a well-recognized rule that mandamus only lies to enforce the
performance of a ministerial act or duty 5 and not to control the performance
of a discretionary power. 6 Purely administrative and discretionary functions
may not be interfered with by the courts. 7 Discretion, as thus intended, means
the power or right conferred upon the office by law of acting officially under
Page 16

certain circumstances according to the dictates of his own judgment and
conscience and not controlled by the judgment or conscience of
others. 8 mandamus may not be resorted to so as to interfere with the
manner in which the discretion shall be exercised or to influence or coerce a
particular determination. 9
In an analogous case, where a petitioner sought to compel the Rehabilitation
Finance Corporation to accept payment of the balance of his indebtedness
with his backpay certificates, the Court ruled that "mandamus does not
compel the Rehabilitation Finance Corporation to accept backpay
certificates in payment of outstanding loans. Although there is no provision
expressly authorizing such acceptance, nor is there one prohibiting it, yet the
duty imposed by the Backpay Law upon said corporation as to the
acceptance or discount of backpay certificates is neither clear nor ministerial,
but discretionary merely, and such special civil action does not issue to control
the exercise of discretion of a public officer." 10 Likewise, we have held that
courts have no power to order the Commissioner of Customs to confiscate
goods imported in violation of the Import Control Law, R.A. 426, as said
forfeiture is subject to the discretion of the said official, 11 nor may courts
control the determination of whether or not an applicant for a visa has a non-
immigrant status or whether his entry into this country would be contrary to
public safety for it is not a simple ministerial function but an exercise of
discretion. 12
Moreover, since the office of the Commissioner of Internal Revenue is charged
with the administration of revenue laws, which is the primary responsibility of
the executive branch of the government, mandamus may not he against the
Commissioner to compel him to impose a tax assessment not found by him to
be due or proper for that would be tantamount to a usurpation of executive
functions. As we held in the case of Commissioner of Immigration vs.
Arca 13 anent this principle, "the administration of immigration laws is the
primary responsibility of the executive branch of the government. Extensions of
stay of aliens are discretionary on the part of immigration authorities, and
neither a petition for mandamus nor one for certiorari can compel the
Commissioner of Immigration to extend the stay of an alien whose period to
stay has expired.
Such discretionary power vested in the proper executive official, in the
absence of arbitrariness or grave abuse so as to go beyond the statutory
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
authority, is not subject to the contrary judgment or control of others. "
"Discretion," when applied to public functionaries, means a power or right
conferred upon them by law of acting officially, under certain circumstances,
uncontrolled by the judgment or consciences of others. A purely ministerial
act or duty in contradiction to a discretional act is one which an officer or
tribunal performs in a given state of facts, in a prescribed manner, in
obedience to the mandate of a legal authority, without regard to or the
exercise of his own judgment upon the propriety or impropriety of the act
done. If the law imposes a duty upon a public officer and gives him the right
to decide how or when the duty shall be performed, such duty is discretionary
and not ministerial. The duty is ministerial only when the discharge of the same
requires neither the exercise of official discretion or judgment." 14
Thus, after the Commissioner who is specifically charged by law with the task
of enforcing and implementing the tax laws and the collection of taxes had
after a mature and thorough study rendered his decision or ruling that no tax is
due or collectible, and his decision is sustained by the Secretary, now Minister
of Finance (whose act is that of the President unless reprobated), such
decision or ruling is a valid exercise of discretion in the performance of official
duty and cannot be controlled much less reversed by mandamus. A contrary
view, whereby any stranger or informer would be allowed to usurp and control
the official functions of the Commissioner of Internal Revenue would create
disorder and confusion, if not chaos and total disruption of the operations of
the government.
Considering then that respondent judge may not order by mandamus the
Commissioner to issue the assessment against Meralco Securities Corporation
when no such assessment has been found to be due, no deficiency taxes
may therefore be assessed and collected against the said corporation. Since
no taxes are to be collected, no informer's reward is due to private
respondents as the informer's heirs. Informer's reward is contingent upon the
payment and collection of unpaid or deficiency taxes. An informer is entitled
by way of reward only to a percentage of the taxes actually assessed and
collected. Since no assessment, much less any collection, has been made in
the instant case, respondent judge's writ for the Commissioner to pay
respondents 25% informer's reward is gross error and without factual nor legal
basis.
Page 17
 DUMAUAL, JEANNE PAULINE J. 2019-2020

WHEREFORE, the petitions are hereby granted and the questioned decision of
respondent judge dated January 10, 1973 and order dated April 6, 1973 are
hereby reversed and set aside. With costs against private respondents.

Atty. Santos, Taxation I Page 18


G.R. No. 147188 September 14, 2004
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-
administrators Lorna Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning
scheme adopted by a corporation constitutes tax evasion that would justify
an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31
January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision 2 of
the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held that the
respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency
income tax of Cibeles Insurance Corporation (CIC) in the amount of
₱79,099,999.22 for the year 1989, and ordered the cancellation and setting
aside of the assessment issued by Commissioner of Internal Revenue Liwayway
Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the
Commissioner of Internal Revenue for deficiency income tax arising from an
alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of
99.991% of its issued and outstanding capital stock, to sell the Cibeles Building
and the two parcels of land on which the building stands for an amount of not
less than ₱90 million.4
On 30 August 1989, Toda purportedly sold the property for ₱100 million to
Rafael A. Altonaga, who, in turn, sold the same property on the same day to
Royal Match Inc. (RMI) for ₱200 million. These two transactions were
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public.5
For the sale of the property to RMI, Altonaga paid capital gains tax in the
amount of ₱10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year
1989, declaring, among other things, its gain from the sale of real property in
the amount of ₱75,728.021. After crediting withholding taxes of ₱254,497.00, it
paid ₱26,341,2078 for its net taxable income of ₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa
for ₱12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 Three
and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment
notice10 and demand letter to the CIC for deficiency income tax for the year
1989 in the amount of ₱79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should
be directed against the old CIC, and not against the new CIC, which is
owned by an entirely different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special
co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice
of Assessment12 dated 9 January 1995 from the Commissioner of Internal
Revenue for deficiency income tax for the year 1989 in the amount of
₱79,099,999.22, computed as follows:
Income Tax – 1989
Net Income per return ₱75,987,725
Add: Additional gain on sale of real property taxable
under ordinary corporate income but were substituted 100,000,000
with individual capital gains(₱200M – 100M)
Page 19
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Total Net Taxable Income per investigation tax deficiency; that the inference of fraud of the sale of the properties is
₱175,987,725.00
unreasonable and unsupported; and that the right of the Commissioner to
Tax Due thereof at 35% ₱ 61,595,703.75 assess CIC had already prescribed.

Less: Payment already made

In his Answer16 and Amended Answer,17 the Commissioner argued that the
1. Per return ₱26,595,704.00 two transactions actually constituted a single sale of the property by CIC to
RMI, and that Altonaga was neither the buyer of the property from CIC nor
2. Thru Capital Gains Tax made the seller of the same property to RMI. The additional gain of ₱100 million (the
by R.A. Altonaga 10,000,000.00 36,595,704.00
differenceBalance
between of the
tax due
second simulated sale for ₱200 million and the first
simulated sale for ₱100 million) realized by CIC was taxed at the rate of only
5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35%
₱ 24,999,999.75
as corporate income tax of CIC. The income tax return filed by CIC for 1989
Add: 50% Surcharge 12,499,999.88 with intent to evade payment of the tax was thus false or fraudulent. Since
such falsity or fraud was discovered by the BIR only on 8 March 1991, the
25% Surcharge 6,249,999.94assessment issued on 9 January 1995 was well within the prescriptive period
prescribed by Section 223 (a) of the National Internal Revenue Code of 1986,
which provides that tax may be assessed within ten years from the discovery
Total ₱ 43,749,999.57
of the falsity or fraud. With the sale being tainted with fraud, the separate
Add: Interest 20% from corporate personality of CIC should be disregarded. Toda, being the
registered owner of the 99.991% shares of stock of CIC and the beneficial
4/16/90-4/30/94 (.808) 35,349,999.65 owner of the remaining 0.009% shares registered in the name of the individual
directors of CIC, should be held liable for the deficiency income tax,
especially because the gains realized from the sale were withdrawn by him as
TOTAL AMT. DUE & COLLECTIBLE ₱ 79,099,999.22
cash advances or paid to him as cash dividends. Since he is already dead, his
==============
estate shall answer for his liability.

The Estate thereafter filed a letter of protest.13
In the letter dated 19 October 1995,14 the Commissioner dismissed the protest,
stating that a fraudulent scheme was deliberately perpetuated by the CIC
wholly owned and controlled by Toda by covering up the additional gain of
₱100 million, which resulted in the change in the income structure of the
proceeds of the sale of the two parcels of land and the building thereon to an
individual capital gains, thus evading the higher corporate income tax rate of
35%.
On 15 February 1996, the Estate filed a petition for review 15 with the CTA
alleging that the Commissioner erred in holding the Estate liable for income
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed
to prove that CIC committed fraud to deprive the government of the taxes
due it. It ruled that even assuming that a pre-conceived scheme was
adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable period
for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986,
which is three years after the last day prescribed by law for the filing of the
return. Thus, the government’s right to assess CIC prescribed on 15 April 1993.
The assessment issued on 9 January 1995 was, therefore, no longer valid. The
CTA also ruled that the mere ownership by Toda of 99.991% of the capital
stock of CIC was not in itself sufficient ground for piercing the separate
corporate personality of CIC. Hence, the CTA declared that the Estate is not
liable for deficiency income tax of ₱79,099,999.22 and, accordingly,

Atty. Santos, Taxation I Page 20


cancelled and set aside the assessment issued by the Commissioner on 9
January 1995.
In its motion for reconsideration,19 the Commissioner insisted that the sale of
the property owned by CIC was the result of the connivance between Toda
and Altonaga. She further alleged that the latter was a representative,
dummy, and a close business associate of the former, having held his office in
a property owned by CIC and derived his salary from a foreign corporation
(Aerobin, Inc.) duly owned by Toda for representation services rendered. The
CTA denied20 the motion for reconsideration, prompting the Commissioner to
file a petition for review21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed
the decision of the CTA, reasoning that the CTA, being more advantageously
situated and having the necessary expertise in matters of taxation, is "better
situated to determine the correctness, propriety, and legality of the income
tax assessments assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed
the present petition invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE
OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE
CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR
THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and
insists that the sale by CIC of the Cibeles property was in connivance with its
dummy Rafael Altonaga, who was financially incapable of purchasing it. She
further points out that the documents themselves prove the fact of fraud in
that (1) the two sales were done simultaneously on the same date, 30 August
1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
ahead of the alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91,
Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I,
Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC
received ₱40 million from RMI, and not from Altonaga. The said amount was
debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles
Building. The substantial portion of ₱40 million was withdrawn by Toda through
the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present
the income tax return of Altonaga to prove that the latter is financially
incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are
pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year
1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax
of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by
taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a
scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be
achieved, i.e., the payment of less than that known by the taxpayer to be
Page 21

legally due, or the non-payment of tax when it is shown that a tax is due; (2)
an accompanying state of mind which is described as being "evil," in "bad
faith," "willfull," or "deliberate and not accidental"; and (3) a course of action
or failure of action which is unlawful.24
All these factors are present in the instant case. It is significant to note that as
early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC
to Altonaga on 30 August 1989, CIC received ₱40 million from RMI,25 and not
from Altonaga. That ₱40 million was debited by RMI and reflected in its trial
balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40
million was debited and reflected in RMI’s trial balance as "other inv. – Cibeles
Bldg." This would show that the real buyer of the properties was RMI, and not
the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close
business associate and one of the many trusted corporate executives of Toda.
This information was revealed by Mr. Boy Prieto, the assistant accountant of
CIC and an old timer in the company.27 But Mr. Prieto did not testify on this
matter, hence, that information remains to be hearsay and is thus inadmissible
in evidence. It was not verified either, since the letter-request for investigation
of Altonaga was unserved,28 Altonaga having left for the United States of
America in January 1990. Nevertheless, that Altonaga was a mere conduit
finds support in the admission of respondent Estate that the sale to him was
part of the tax planning scheme of CIC. That admission is borne by the
records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the
proceeds of sale. Admitted one hundred percent. But isn’t this
precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code
exists, allowing tax free transfers of property for stock, changing the
structure of the property and the tax to be paid. As long as it is done
legally, changing the structure of a transaction to achieve a lower tax
is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a
tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the
tax from 35% to 5%.29 [Underscoring supplied].
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The scheme resorted to by CIC in making it appear that there were two sales
of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga
to RMI cannot be considered a legitimate tax planning. Such scheme is
tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to
deceive, including all acts, omissions, and concealment involving a breach of
legal or equitable duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an undue and unconscionable advantage is
taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the
amount of tax to be paid especially that the transfer from him to RMI would
then subject the income to only 5% individual capital gains tax, and not the
35% corporate income tax. Altonaga’s sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax
shelter. Altonaga never controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was merely a tax ploy, a
sham, and without business purpose and economic substance. Doubtless, the
execution of the two sales was calculated to mislead the BIR with the end in
view of reducing the consequent income tax liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was
prompted more on the mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.31
Generally, a sale or exchange of assets will have an income tax incidence
only when it is consummated.32 The incidence of taxation depends upon the
substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means
employed to transfer legal title. Rather, the transaction must be viewed as a
whole, and each step from the commencement of negotiations to the
consummation of the sale is relevant. A sale by one person cannot be
transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the
transaction to be disguised by mere formalisms, which exist solely to alter tax
liabilities, would seriously impair the effective administration of the tax policies
of Congress.33
Page 22

To allow a taxpayer to deny tax liability on the ground that the sale was made
through another and distinct entity when it is proved that the latter was merely
a conduit is to sanction a circumvention of our tax laws. Hence, the sale to
Altonaga should be disregarded for income tax purposes.34 The two sale
transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC
of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated
as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic
corporations.- A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines,
and partnerships, no matter how created or organized but not
including general professional partnerships, in accordance with the
following:
Twenty-five percent upon the amount by which the taxable
net income does not exceed one hundred thousand pesos;
and
Thirty-five percent upon the amount by which the taxable net
income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in
1989. The 5% individual capital gains tax provided for in Section 34 (h) of the
NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997)
is inapplicable. Hence, the assessment for the deficiency income tax issued by
the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of
1997) read:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Sec. 269. Exceptions as to period of limitation of assessment and
collection of taxes.-(a) In the case of a false or fraudulent return with
intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court after the collection of such tax
may be begun without assessment, at any time within ten years after
the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action for
collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to
evade tax; and (3) failure to file a return, the period within which to assess tax
is ten years from discovery of the fraud, falsification or omission, as the case
may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel,
asked the Opinion of the BIR on the tax consequence of the two sale
transactions.36 Thus, the BIR was amply informed of the transactions even prior
to the execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the execution of public
documents and the declaration of taxes for 1989. However, these
circumstances do not negate the existence of fraud. As earlier discussed
those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax
return filed by CIC for the year 1989 was false. It did not reflect the true or
actual amount gained from the sale of the Cibeles property. Obviously, such
was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of
false returns is ten years from the discovery of the falsity. The false return was
filed on 15 April 1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.37 The assessment for the 1989 deficiency
income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the
correct assessment for deficiency income tax was well within the prescriptive
period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles
Insurance Corporation?
Page 23
 DUMAUAL, JEANNE PAULINE J. 2019-2020

A corporation has a juridical personality distinct and separate from the
persons owning or composing it. Thus, the owners or stockholders of a
corporation may not generally be made to answer for the liabilities of a
corporation and vice versa. There are, however, certain instances in which
personal liability may arise. It has been held in a number of cases that
personal liability of a corporate director, trustee, or officer along, albeit not
necessarily, with the corporation may validly attach when:
When the late Toda undertook and agreed "to hold the BUYER and Cibeles
free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988,
and 1989," he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CIC’s deficiency
income tax for the year 1989 by invoking the separate corporate personality
of CIC, since its obligation arose from Toda’s contractual undertaking, as
contained in the Deed of Sale of Shares of Stock.

1. He assents to the (a) patently unlawful act of the corporation, (b)
bad faith or gross negligence in directing its affairs, or (c) conflict of
interest, resulting in damages to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered down stocks or, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The
decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799
is REVERSED and SET ASIDE, and another one is hereby rendered ordering
respondent Estate of Benigno P. Toda Jr. to pay ₱79,099,999.22 as deficiency
income tax of Cibeles Insurance Corporation for the year 1989, plus legal
interest from 1 May 1994 until the amount is fully paid.

3. He agrees to hold himself personally and solidarily liable with the

corporation; or

4. He is made, by specific provision of law, to personally answer for his

corporate action.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T.
Choa, he knowingly and voluntarily held himself personally liable for all the tax
liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g
of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business,

Cibeles has no liabilities or obligations, contingent or otherwise, for
taxes, sums of money or insurance claims other than those reported in
its audited financial statement as of December 31, 1989, attached
hereto as "Annex B" and made a part hereof. The business of Cibeles
has at all times been conducted in full compliance with all applicable
laws, rules and regulations. SELLER undertakes and agrees to hold the
BUYER and Cibeles free from any and all income tax liabilities of
Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring
Supplied].

Atty. Santos, Taxation I Page 24


G.R. No. 81446 August 18, 1988
BONIFACIA SY PO, petitioner,
vs.
HONORABLE COURT OF TAX APPEALS AND HONORABLE COMMISSIONER OF
INTERNAL REVENUE, respondents.
Basilio E. Duaban for petitioner.
SARMIENTO, J.:
This is an appeal from the decision 1 of the respondent Court of Tax Appeals,
dated September 30,1987, which affirmed an earlier decision of the
correspondent Commissioner of Internal Revenue in assessment letters dated
August 16, 1972 and September 26, 1972, which ordered the payment by the
petitioner of deficiency income tax for 1966 to 1970 in the amount of
P7,154,685.16 and deficiency specific tax for January 2, 1964 to January 19,
1972, in the amount of P5,595,003.68.
We adopt the respondent court's finding of facts, to wit:
Petitioner is the widow of the late Mr. Po Bien Sing who died
on September 7, 1980. In the taxable years 1964 to 1972, the
deceased Po Bien Sing was the sole proprietor of Silver Cup
Wine Factory (Silver Cup for brevity), Talisay, Cebu. He was
engaged in the business of manufacture and sale of
compounded liquors, using alcohol and other ingredients as
raw materials.
On the basis of a denunciation against Silver Cup allegedly
"for tax evasion amounting to millions of pesos" the then
Secretary of Finance Cesar Virata directed the Finance-BIR--
NBI team constituted under Finance Department Order No.
13-70 dated February 19, 1971 (Exh- 3, pp. 532-553, Folder II,
BIR rec.) to conduct the corresponding investigation in a
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
memorandum dated April 2, 1971 (p. 528, Folder II, BIR rec.).
Accordingly, a letter and a subpoena duces tecum dated
April 13,1971 and May 3,1971, respectively, were issued
against Silver Cup requesting production of the accounting
records and other related documents for the examination of
the team. (Exh. 11, pp. 525-526, Folder II, BIR rec.). Mr. Po Bien
Sing did not produce his books of accounts as requested
(Affidavit dated December 24, 1971 of Mr. Generoso. Quinain
of the team, p. 525, Folder H, BIR rec.). This prompted the
team with the assistance of the PC Company, Cebu City, to
enter the factory bodega of Silver Cup and seized different
brands, consisting of 1,555 cases of alcohol products. (Exh. 22,
Memorandum Report of the Team dated June 5, 1971, pp.
491-492, Folder II, BIR rec.). The inventory lists of the seized
alcohol products are contained in Volumes I, II, III, IV and V
(Exhibits 14, 15, 16, 17, and 18, respectively, BIR rec.). On the
basis of the team's report of investigation, the respondent
Commissioner of Internal Revenue assessed Mr. Po Bien Sing
deficiency income tax for 1966 to 1970 in the amount of
P7,154,685.16 (Exh. 6 pp. 17-19, Folder I, BIR rec.) and for
deficiency specific tax for January 2,1964 to January 19, 1972
in the amount of P5,595,003.68 (Exh. 8, p. 107, Folder I, BIR
rec.).
Petitioner protested the deficiency assessments through
letters dated October 9 and October 30, 1972 (Exhs. 7 and 9,
pp. 27-28; pp. 152-159, respectively, BIR rec.), which protests
were referred for reinvestigation. The corresponding report
dated August 13, 1981 (Exh. 1 0, pp. 355, Folder I, BIR rec.)
recommended the reiteration of the assessments in view of
the taxpayer's persistent failure to present the books of
accounts for examination (Exh. 8, p. 107, Folder I, BIR rec.),
compelling respondent to issue warrants of distraint and levy
on September 10, 1981 (Exh. 11, p. 361, Folder I, BIR rec.).
The warrants were admittedly received by petitioner on
October 14, 1981 (Par. IX, Petition; admitted par. 2, Answer),
which petitioner deemed respondent's decision denying her
Page 25

protest on the subject assessments. Hence, petitioner's
appeal on October 29,1981. 2
The petitioner assigns the following errors:
I (b) Failure to submit required returns, statements, reports and
RESPONDENT INTENTIONALLY ERRED IN HOLDING THAT PETITIONER HAS NOT
PRESENTED ANY EVIDENCE OF RELEVANCE AND COMPETENCE REQUIRED TO
BASH THE TROUBLING DISCREPANCIES AND SQUARE THE ISSUE OF ILLEGALITY
POSITED ON THE SUBJECT ASSESSMENTS.
II
RESPONDENT COURT OF TAX APPEALS PALPABLY ERRED IN DECIDING THE CASE
IN A WAY CONTRARY TO THE DOCTRINES ALREADY LAID DOWN BY THIS COURT.
III
RESPONDENT COURT OF TAX APPEALS GRAVELY ERRED IN FINDING PO BEEN
SING TO HAVE INCURRED THE ALLEGED DEFICIENCY TAXES IN QUESTION. 3
We affirm.
Settled is the rule that the factual findings of the Court of Tax Appeals are
binding upon this Honorable Court and can only be disturbed on appeal if not
supported by substantial evidence.4
The assignments of errors boils down to a single issue previously raised before
the respondent Court, i.e., whether or not the assessments have valid and
legal bases.
The applicable legal provision is Section 16(b) of the National Internal
Revenue Code of 1977 as amended. It reads:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Sec. 16. Power of the Commissioner of Internal Revenue to
make assessments.—
xxx xxx xxx
other documents. - When a report required by law as a basis
for the assessment of an national internal revenue tax shall
not be forthcoming within the time fixed by law or regulation
or when there is reason to believe that any such report is
false, incomplete, or erroneous, the Commissioner of Internal
Revenue shall assess the proper tax on the best evidence
obtainable.
In case a person fails to file a required return or other
document at the time prescribed by law, or willfully or
otherwise, files a false or fraudulent return or other
documents, the Commissioner shall make or amend the
return from his own knowledge and from such information as
he can obtain through testimony or otherwise, which shall
be prima facie correct and sufficient for all legal purposes.
The law is specific and clear. The rule on the "best evidence obtainable"
applies when a tax report required by law for the purpose of assessment is not
available or when the tax report is incomplete or fraudulent.
In the instant case, the persistent failure of the late Po Bien Sing and the herein
petitioner to present their books of accounts for examination for the taxable
years involved left the Commissioner of Internal Revenue no other legal option
except to resort to the power conferred upon him under Section 16 of the Tax
Code.
The tax figures arrived at by the Commissioner of Internal Revenue are by no
means arbitrary. We reproduce the respondent court's findings, to wit:
As thus shown, on the basis of the quantity of bottles of wines
seized during the raid and the sworn statements of former
employees Messrs. Nelson S. Po and Alfonso Po taken on May
Page 26

26, and 27,1971, respectively, by the investigating team in
Cebu City (Exhs. 4 and 5, pp. 514-517, pp. 511-513, Folder 11,
BIR rec.), it was ascertained that the Silver Cup for the years
1964 to 1970, inclusive, utilized and consumed in the
manufacture of compounded liquours and other products
20,105 drums of alcohol as raw materials 81,288,787 proof
liters of alcohol. As determined, the total specific tax liability
of the taxpayer for 1964 to 1971 amounted to P5,593,003.68
(Exh. E, petition, p. 10, CTA rec.)
Likewise, the team found due from Silver Cup deficiency
income taxes for the years 1966 to 1970 inclusive in the
aggregate sum of P7,154,685.16, as follows:
1966 P207,636.24
1967 645,335.04
1968 1,683,588.48
1969 1,589,622.48
1970 3,028,502.92
Total amount due.
and collectible
P7,154,685.16
The 50% surcharge has been imposed, pursuant to Section 72 * of the Tax
Code and tax 1/2% monthly interest has likewise been imposed pursuant to
the provision of Section 51(d) ** of the Tax Code (Exh. O, petition). 5
The petitioner assails these assessments as wrong.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In the case of Collector of Internal Revenue vs. Reyes, 6 we ruled:
Where the taxpayer is appealing to the tax court on the
ground that the Collector's assessment is erroneous, it is
incumbent upon him to prove there what is the correct and
just liability by a full and fair disclosure of all pertinent data in
his possession. Otherwise, if the taxpayer confines himself to
proving that the tax assessment is wrong, the tax court
proceedings would settle nothing, and the way would be left
open for subsequent assessments and appeals in
interminable succession.
Tax assessments by tax examiners are presumed correct and made in good
faith. The taxpayer has the duty to prove otherwise. 7 In the absence of proof
of any irregularities in the performance of duties, an assessment duly made by
a Bureau of Internal Revenue examiner and approved by his superior officers
will not be disturbed. 8 All presumptions are in favor of the correctness of tax
assessments. 9
On the whole, we find that the fraudulent acts detailed in the decision under
review had not been satisfactorily rebutted by the petitioner. There are
indeed clear indications on the part of the taxpayer to deprive the
Government of the taxes due. The Assistant Factory Superintendent of Silver
Cup, Nelson Po gave the following testimony:
Annexes "A", "A-1 " to "A-17" show that from January to
December 1970, Silver Cup had used in production 189 drums
of untaxed distilled alcohol and 3,722 drums of untaxed
distilled alcohol. Can you tell us how could this be possible
with the presence of a revenue inspector in the premises of
Silver Cup during working hours?
Actually, the revenue inspector or
storekeeper comes around once a week on
the average. Sometimes, when the
storekeeper is around in the morning and Po
Bein Sing wants to operate with untaxed
alcohol as raw materials, Po Bien Sing tells
Page 27
 DUMAUAL, JEANNE PAULINE J. 2019-2020

the storekeeper to go home because the

factory is not going to operate for the day.
After the storekeeper leaves, the illegal
operation then begins. Untaxed alcohol is
brought in from Cebu Alcohol Plant into the
compound of Silver Cup sometimes at about
6:00 A.M. or at 12:00 noon or in the evening
or even at mid-night when the storekeeper is
not around. When the storekeeper comes,
he sees nothing because untaxed alcohol is
brought directly to, and stored at, a secret
tunnel within the bodega itself inside the
compound of Silver Cup.

In the same vein, the factory personnel manager testified that

false entries were entered in the official register book: thus,

A — As factory personnel manager and all-

around handy man of Po Bien Sing, owner of
Silver Cup, these labels were entrusted to
me to make the false entries in the official
register book of Silver Cup, which I did under
the direction of Po Bien Sing. (Sworn
statement, p. 512, Folder II, BIR
rec.) 10 (Emphasis ours)

The existence of fraud as found by the respondents can not be lightly set
aside absent substantial evidence presented by the petitioner to counteract
such finding. The findings of fact of the respondent Court of Tax Appeals are
entitled to the highest respect.11 We do not find anything in the questioned
decision that should disturb this long-established doctrine.

WHEREFORE, the Petition is DENIED. The Decision of the respondent Court of

Tax Appeals is hereby AFFIRMED. Costs against the petitioner.

Atty. Santos, Taxation I Page 28

 DUMAUAL, JEANNE PAULINE J. 2019-2020

[G.R. No. L-32409. February 27, 1971.] requesting the issuance of a search warrant against petitioners for violation of
Section 46(a) of the National Internal Revenue Code, in relation to all other
BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and
JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to
Internal Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO make and file the application for search warrant which was attached to the
VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, letter.
JOHN DOE, and JOHN DOE, Respondents.
In the afternoon of the following day, February 25, 1970, respondent De Leon
San Juan, Africa, Gonzales & San Agustin, for Petitioners. and his witness, respondent Arturo Logronio, went to the Court of First Instance
of Rizal. They brought with them the following papers: respondent Vera’s
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . aforesaid letter-request; an application for search warrant already filled up
Bautista, Solicitor Pedro A. Ramirez and Special Attorney Jaime M. Maza but still unsigned by respondent De Leon; an affidavit of respondent Logronio
for Respondents. subscribed before respondent De Leon; a deposition in printed form of
respondent Logronio already accomplished and signed by him but not yet
subscribed; and a search warrant already accomplished but still unsigned by
DECISION respondent Judge.

VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus, with prayer
for a writ of preliminary mandatory and prohibitory injunction. In their petition
Bache & Co. (Phil.), Inc., a corporation duly organized and existing under the
laws of the Philippines, and its President, Frederick E. Seggerman, pray this
Court to declare null and void Search Warrant No. 2-M-70 issued by
respondent Judge on February 25, 1970; to order respondents to desist from
enforcing the same and/or keeping the documents, papers and effects
seized by virtue thereof, as well as from enforcing the tax assessments on
petitioner corporation alleged by petitioners to have been made on the basis
of the said documents, papers and effects, and to order the return of the
latter to petitioners. We gave due course to the petition but did not issue the
writ of preliminary injunction prayed for therein.
The pertinent facts of this case, as gathered from record, are as
follows:chanrob1es virtual 1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal
Revenue, wrote a letter addressed to respondent Judge Vivencio M. Ruiz
At that time respondent Judge was hearing a certain case; so, by means of a
note, he instructed his Deputy Clerk of Court to take the depositions of
respondents De Leon and Logronio. After the session had adjourned,
respondent Judge was informed that the depositions had already been
taken. The stenographer, upon request of respondent Judge, read to him her
stenographic notes; and thereafter, respondent Judge asked respondent
Logronio to take the oath and warned him that if his deposition was found to
be false and without legal basis, he could be charged for perjury. Respondent
Judge signed respondent de Leon’s application for search warrant and
respondent Logronio’s deposition, Search Warrant No. 2-M-70 was then sign
by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR
agents served the search warrant petitioners at the offices of petitioner
corporation on Ayala Avenue, Makati, Rizal. Petitioners’ lawyers protested the
search on the ground that no formal complaint or transcript of testimony was
attached to the warrant. The agents nevertheless proceeded with their
search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance of
Rizal praying that the search warrant be quashed, dissolved or recalled, that
preliminary prohibitory and mandatory writs of injunction be issued, that the

Atty. Santos, Taxation I Page 29


search warrant be declared null and void, and that the respondents be
ordered to pay petitioners, jointly and severally, damages and attorney’s fees.
On March 18, 1970, the respondents, thru the Solicitor General, filed an answer
to the petition. After hearing, the court, presided over by respondent Judge,
issued on July 29, 1970, an order dismissing the petition for dissolution of the
search warrant. In the meantime, or on April 16, 1970, the Bureau of Internal
Revenue made tax assessments on petitioner corporation in the total sum of
P2,594,729.97, partly, if not entirely, based on the documents thus seized.
Petitioners came to this Court.
The petition should be granted for the following reasons:chanrob1es virtual
1aw library
1. Respondent Judge failed to personally examine the complainant and his
witness.
The pertinent provisions of the Constitution of the Philippines and of the
Revised Rules of Court are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses, papers and
effects against unreasonable searches and seizures shall not be violated, and
no warrants shall issue but upon probable cause, to be determined by the
judge after examination under oath or affirmation of the complainant and the
witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized." (Art. III, Sec. 1, Constitution.)
"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue
but upon probable cause in connection with one specific offense to be
determined by the judge or justice of the peace after examination under
oath or affirmation of the complainant and the witnesses he may produce,
and particularly describing the place to be searched and the persons or
things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. — The judge or justice of the peace
must, before issuing the warrant, personally examine on oath or affirmation the
complainant and any witnesses he may produce and take their depositions in
writing, and attach them to the record, in addition to any affidavits presented
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
to him." (Rule 126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce,
required by Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule
126 of the Revised Rules of Court, should be conducted by the judge himself
and not by others. The phrase "which shall be determined by the judge after
examination under oath or affirmation of the complainant and the witnesses
he may produce," appearing in the said constitutional provision, was
introduced by Delegate Francisco as an amendment to the draft submitted
by the Sub-Committee of Seven. The following discussion in the Constitutional
Convention (Laurel, Proceedings of the Philippine Constitutional Convention,
Vol. III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no se
frusten los fines de la justicia mediante el registro inmediato y la incautacion
del cuerpo del delito, no cree Su Señoria que causaria cierta demora el
procedimiento apuntado en su enmienda en tal forma que podria frustrar los
fines de la justicia o si Su Señoria encuentra un remedio para esto casos con
el fin de compaginar los fines de la justicia con los derechos del individuo en
su persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su
Señoria pregunta por la siguiente razon: el que solicita un mandamiento de
registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa del
Juez sin que alguien vaya el juez a presentar ese escrito o peticion de
sucuestro. Esa persona que presenta el registro puede ser el mismo
denunciante o alguna persona que solicita dicho mandamiento de registro.
Ahora toda la enmienda en esos casos consiste en que haya peticion de
registro y el juez no se atendra solamente a sea peticion sino que el juez
examiner a ese denunciante y si tiene testigos tambin examiner a los testigos.
"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese
denunciante por escrito siempre requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado
minimizamos en todo lo posible las vejaciones injustas con la expedicion
Page 30
 DUMAUAL, JEANNE PAULINE J. 2019-2020

arbitraria de los mandamientos de registro. Creo que entre dos males
debemos escoger. el menor.
x x x respondent Judge was at the sala hearing a case. After respondent Judge
"MR. LAUREL. . . . The reason why we are in favor of this amendment is because
we are incorporating in our constitution something of a fundamental
character. Now, before a judge could issue a search warrant, he must be
under the obligation to examine personally under oath the complainant and if
he has any witness, the witnesses that he may produce . . ."cralaw virtua1aw
library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more
emphatic and candid, for it requires the judge, before issuing a search
warrant, to "personally examine on oath or affirmation the complainant and
any witnesses he may produce . . ."cralaw virtua1aw library
respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court,
took the depositions of the complainant and his witness, and that
stenographic notes thereof were taken by Mrs. Gaspar. At that time
was through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar,
complainant De Leon and witness Logronio went to respondent Judge’s
chamber and informed the Judge that they had finished the depositions.
Respondent Judge then requested the stenographer to read to him her
stenographic notes. Special Deputy Clerk Gonzales testified as
follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the Honorable Judge
requested or instructed them, requested Mr. Logronio to raise his hand and
warned him if his deposition will be found to be false and without legal basis,
he can be charged criminally for perjury. The Honorable Court told Mr.
Logronio whether he affirms the facts contained in his deposition and the
affidavit executed before Mr. Rodolfo de Leon.

Personal examination by the judge of the complainant and his witnesses is "Q And thereafter?
necessary to enable him to determine the existence or non-existence of a
probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. "A And thereafter, he signed the deposition of Mr. Logronio.
3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of
warrants except "upon probable cause." The determination of whether or not "Q Who is this he?
a probable cause exists calls for the exercise of judgment after a judicial
appraisal of facts and should not be allowed to be delegated in the absence "A The Honorable Judge.
of any rule to the contrary.
"Q The deposition or the affidavit?
In the case at bar, no personal examination at all was conducted by
respondent Judge of the complainant (respondent De Leon) and his witness "A The affidavit, Your Honor."cralaw virtua1aw library
(respondent Logronio). While it is true that the complainant’s application for
search warrant and the witness’ printed-form deposition were subscribed and Thereafter, respondent Judge signed the search warrant.
sworn to before respondent Judge, the latter did not ask either of the two any
question the answer to which could possibly be the basis for determining The participation of respondent Judge in the proceedings which led to the
whether or not there was probable cause against herein petitioners. Indeed, issuance of Search Warrant No. 2-M-70 was thus limited to listening to the
the participants seem to have attached so little significance to the matter stenographer’s readings of her notes, to a few words of warning against the
that notes of the proceedings before respondent Judge were not even taken. commission of perjury, and to administering the oath to the complainant and
At this juncture it may be well to recall the salient facts. The transcript of his witness. This cannot be consider a personal examination. If there was an
stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at examination at all of the complainant and his witness, it was the one
the hearing of this case in the court below shows that per instruction of conducted by the Deputy Clerk of Court. But, as stated, the Constitution and

Atty. Santos, Taxation I Page 31


the rules require a personal examination by the judge. It was precisely on
account of the intention of the delegates to the Constitutional Convention to
make it a duty of the issuing judge to personally examine the complainant
and his witnesses that the question of how much time would be consumed by
the judge in examining them came up before the Convention, as can be
seen from the record of the proceedings quoted above. The reading of the
stenographic notes to respondent Judge did not constitute sufficient
compliance with the constitutional mandate and the rule; for by that manner
respondent Judge did not have the opportunity to observe the demeanor of
the complainant and his witness, and to propound initial and follow-up
questions which the judicial mind, on account of its training, was in the best
position to conceive. These were important in arriving at a sound inference on
the all-important question of whether or not there was probable cause.
2. The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the
National Internal Revenue Code in relation to all other pertinent provisions
thereof particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the said
search warrant issued "in connection with one specific offense," as required by
Sec. 3, Rule 126?
To arrive at the correct answer it is essential to examine closely the provisions
of the Tax Code referred to above. Thus we find the following:chanrob1es
virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns and for
rendering false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a
return or to supply the information required under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or
manufactures any article subject to a specific tax, without having paid the
privilege tax therefore, or who aids or abets in the conduct of illicit distilling,
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
rectifying, compounding, or illicit manufacture of any article subject to
specific tax . . .," and provides that in the case of a corporation, partnership, or
association, the official and/or employee who caused the violation shall be
responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or
gross value of output removed, or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses
under the Tax Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73
(the filing of income tax returns), which are interrelated. The second is the
violation of Sec. 53 (withholding of income taxes at source). The third is the
violation of Sec. 208 (unlawful pursuit of business or occupation); and the
fourth is the violation of Sec. 209 (failure to make a return of receipts, sales,
business or gross value of output actually removed or to pay the tax due
thereon). Even in their classification the six above-mentioned provisions are
embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II
(Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on
Business and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967
(20 SCRA 383), is not applicable, because there the search warrants were
issued for "violation of Central Bank Laws, Internal Revenue (Code) and
Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was issued for
violation of only one code, i.e., the National Internal Revenue Code. The
distinction more apparent than real, because it was precisely on account of
the Stonehill incident, which occurred sometime before the present Rules of
Court took effect on January 1, 1964, that this Court amended the former rule
by inserting therein the phrase "in connection with one specific offense," and
adding the sentence "No search warrant shall issue for more than one specific
offense," in what is now Sec. 3, Rule 126. Thus we said in
Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the
disputed search warrants, that this Court deemed it fit to amend Section 3 of
Rule 122 of the former Rules of Court that ‘a search warrant shall not issue but
upon probable cause in connection with one specific offense.’ Not satisfied
with this qualification, the Court added thereto a paragraph, directing that
‘no search warrant shall issue for more than one specific offense.’"
Page 32

3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in
Search Warrant No. 2-M-70 in this manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals, columnars,
receipts and disbursements books, customers ledgers); receipts for payments
received; certificates of stocks and securities; contracts, promissory notes and
deeds of sale; telex and coded messages; business communications,
accounting and business records; checks and check stubs; records of bank
deposits and withdrawals; and records of foreign remittances, covering the
years 1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the
Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, that the
warrant should particularly describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion,
said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for the
contested search warrants was compounded by the description therein
made of the effects to be searched for and seized, to wit:chanrob1es virtual
1aw library
‘Books of accounts, financial records, vouchers, journals, correspondence,
receipts, ledgers, portfolios, credit journals, typewriters, and other documents
and/or paper showing all business transactions including disbursement
receipts, balance sheets and related profit and loss statements.’
"Thus, the warrants authorized the search for and seizure of records pertaining
to all business transactions of petitioners herein, regardless of whether the
transactions were legal or illegal. The warrants sanctioned the seizure of all
records of the petitioners and the aforementioned corporations, whatever
their nature, thus openly contravening the explicit command of our Bill of
Rights — that the things to be seized be particularly described — as well as
tending to defeat its major objective: the elimination of general
warrants."cralaw virtua1aw library
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
While the term "all business transactions" does not appear in Search Warrant
No. 2-M-70, the said warrant nevertheless tends to defeat the major objective
of the Bill of Rights, i.e., the elimination of general warrants, for the language
used therein is so all-embracing as to include all conceivable records of
petitioner corporation, which, if seized, could possibly render its business
inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had
occasion to explain the purpose of the requirement that the warrant should
particularly describe the place to be searched and the things to be seized, to
wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97)
specifically require that a search warrant should particularly describe the
place to be searched and the things to be seized. The evident purpose and
intent of this requirement is to limit the things to be seized to those, and only
those, particularly described in the search warrant — to leave the officers of
the law with no discretion regarding what articles they shall seize, to the end
that ‘unreasonable searches and seizures’ may not be made, — that abuses
may not be committed. That this is the correct interpretation of this
constitutional provision is borne out by American authorities."cralaw virtua1aw
library
The purpose as thus explained could, surely and effectively, be defeated
under the search warrant issued in this case.
A search warrant may be said to particularly describe the things to be seized
when the description therein is as specific as the circumstances will ordinarily
allow (People v. Rubio; 57 Phil. 384); or when the description expresses a
conclusion of fact — not of law — by which the warrant officer may be
guided in making the search and seizure (idem., dissent of Abad Santos, J.,);
or when the things described are limited to those which bear direct relation to
the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised
Rules of Court). The herein search warrant does not conform to any of the
foregoing tests. If the articles desired to be seized have any direct relation to
an offense committed, the applicant must necessarily have some evidence,
other than those articles, to prove the said offense; and the articles subject of
search and seizure should come in handy merely to strengthen such
Page 33

evidence. In this event, the description contained in the herein disputed
warrant should have mentioned, at least, the dates, amounts, persons, and
other pertinent data regarding the receipts of payments, certificates of stocks
and securities, contracts, promissory notes, deeds of sale, messages and
communications, checks, bank deposits and withdrawals, records of foreign
remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to
file a motion for reconsideration of respondent Judge’s order of July 29, 1970.
The contention is without merit. In the first place, when the questions raised
before this Court are the same as those which were squarely raised in and
passed upon by the court below, the filing of a motion for reconsideration in
said court before certiorari can be instituted in this Court is no longer a
prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second
place, the rule requiring the filing of a motion for reconsideration before an
application for a writ of certiorari can be entertained was never intended to
be applied without considering the circumstances. (Matutina v. Buslon, Et Al.,
109 Phil., 140.) In the case at bar time is of the essence in view of the tax
assessments sought to be enforced by respondent officers of the Bureau of
Internal Revenue against petitioner corporation, On account of which
immediate and more direct action becomes necessary. (Matute v. Court of
Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this
case, the deprivation of petitioners’ fundamental right to due process taints
the proceeding against them in the court below not only with irregularity but
also with nullity. (Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to
protection against unreasonable search and seizures. Again, we find no merit
in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer
of a corporation which is charged with a violation of a statute of the state of
its creation, or of an act of Congress passed in the exercise of its constitutional
powers, cannot refuse to produce the books and papers of such corporation,
we do not wish to be understood as holding that a corporation is not entitled
to immunity, under the 4th Amendment, against unreasonable searches and
seizures. A corporation is, after all, but an association of individuals under an
assumed name and with a distinct legal entity. In organizing itself as a
collective body it waives no constitutional immunities appropriate to such
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
body. Its property cannot be taken without compensation. It can only be
proceeded against by due process of law, and is protected, under the 14th
Amendment, against unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43,
50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a
different rule applied to a corporation, the ground that it was not privileged
from producing its books and papers. But the rights of a corporation against
unlawful search and seizure are to be protected even if the same result might
have been achieved in a lawful way." (Silverthorne Lumber Company, Et. Al.
v. United States of America, 251 U.S. 385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the
right of a corporation to object against unreasonable searches and seizures,
thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of
action to assail the legality of the contested warrants and of the seizures
made in pursuance thereof, for the simple reason that said corporations have
their respective personalities, separate and distinct from the personality of
herein petitioners, regardless of the amount of shares of stock or the interest of
each of them in said corporations, whatever, the offices they hold therein
may be. Indeed, it is well settled that the legality of a seizure can be
contested only by the party whose rights have been impaired thereby, and
that the objection to an unlawful search and seizure is purely personal and
cannot be availed of by third parties. Consequently, petitioners herein may
not validly object to the use in evidence against them of the documents,
papers and things seized from the offices and premises of the corporations
adverted to above, since the right to object to the admission of said papers in
evidence belongs exclusively to the corporations, to whom the seized effects
belong, and may not be invoked by the corporate officers in proceedings
against them in their individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose
offices documents, papers and effects were searched and seized were the
petitioners. In the case at bar, the corporation to whom the seized documents
belong, and whose rights have thereby been impaired, is itself a petitioner. On
that score, petitioner corporation here stands on a different footing from the
corporations in Stonehill.
Page 34
 DUMAUAL, JEANNE PAULINE J. 2019-2020

The tax assessments referred to earlier in this opinion were, if not entirely — as
claimed by petitioners — at least partly — as in effect admitted by
respondents — based on the documents seized by virtue of Search Warrant
No. 2-M-70. Furthermore, the fact that the assessments were made some one
and one-half months after the search and seizure on February 25, 1970, is a
strong indication that the documents thus seized served as basis for the
assessments. Those assessments should therefore not be enforced.

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant

No. 2-M-70 issued by respondent Judge is declared null and void; respondents
are permanently enjoined from enforcing the said search warrant; the
documents, papers and effects seized thereunder are ordered to be returned
to petitioners; and respondent officials the Bureau of Internal Revenue and
their representatives are permanently enjoined from enforcing the
assessments mentioned in Annex "G" of the present petition, as well as other
assessments based on the documents, papers and effects seized under the
search warrant herein nullified, and from using the same against petitioners in
any criminal or other proceeding. No pronouncement as to costs.

Atty. Santos, Taxation I Page 35


G.R. No. 108358 January 20, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS PHILIPPINES, INC. and
THE HON. COURT OF TAX APPEALS, respondents.
VITUG, J.:
On 22 August 1986, during the period when the President of the Republic still
wielded legislative powers, Executive Order No. 41 was promulgated
declaring a one-time tax amnesty on unpaid income taxes, later amended to
include estate and donor's taxes and taxes on business, for the taxable years
1981 to 1985.
Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines,
Inc., filed, in October 1986 and November 1986, its Tax Amnesty Return No. 34-
F-00146-41 and Supplemental Tax Amnesty Return No. 34-F-00146-64-B,
respectively, and paid the corresponding amnesty taxes due.
Prior to this availment, petitioner Commissioner of Internal Revenue, in a
communication received by private respondent on 13 August 1986, assessed
the latter deficiency income and business taxes for its fiscal years ended 30
September 1981 and 30 September 1982 in an aggregate amount of
P1,410,157.71. The taxpayer wrote back to state that since it had been able to
avail itself of the tax amnesty, the deficiency tax notice should forthwith be
cancelled and withdrawn. The request was denied by the Commissioner, in his
letter of 22 November 1988, on the ground that Revenue Memorandum Order
No. 4-87, dated 09 February 1987, implementing Executive Order No. 41, had
construed the amnesty coverage to include only assessments issued by the
Bureau of Internal Revenue after the promulgation of the executive order on
22 August 1986 and not to assessments theretofore made. The invoked
provisions of the memorandum order read:
TO: All Internal Revenue Officers and Others Concerned:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
1.0. To give effect and substance to the immunity provisions
of the tax amnesty under Executive Order No. 41, as
expanded by Executive Order No. 64, the following
instructions are hereby issued:
xxx xxx xxx
1.02. A certification by the Tax Amnesty Implementation
Officer of the fact of availment of the said tax amnesty shall
be a sufficient basis for:
xxx xxx xxx
1.02.3. In appropriate cases, the cancellation/withdrawal
of assessment notices and letters of demand issued after
August 21, 1986 for the collection of income, business, estate
or donor's taxes due during the same taxable
years.1 (Emphasis supplied)
Private respondent appealed the Commissioner's denial to the Court of Tax
Appeals. Ruling for the taxpayer, the tax court said:
Respondent (herein petitioner Commissioner) failed to
present any case or law which proves that an assessment
can withstand or negate the force and effects of a tax
amnesty. This burden of proof on the petitioner (herein
respondent taxpayer) was created by the clear and express
terms of the executive order's intention — qualified availers of
the amnesty may pay an amnesty tax in lieu of said unpaid
taxes which are forgiven (Section 2, Section 5, Executive
Order No. 41, as amended). More specifically, the plain
provisions in the statute granting tax amnesty for unpaid taxes
for the period January 1, 1981 to December 31, 1985 shifted
the burden of proof on respondent to show how the issuance
of an assessment before the date of the promulgation of the
executive order could have a reasonable relation with the
objective periods of the amnesty, so as to make petitioner still
answerable for a tax liability which, through the statute,
Page 36

should have been erased with the proper availment of the
amnesty.
Additionally, the exceptions enumerated in Section 4 of
Executive Order No. 41, as amended, do not indicate any
reference to an assessment or pending investigation aside
from one arising from information furnished by an informer. . . .
Thus, we deem that the rule in Revenue Memorandum Order
No. 4-87 promulgating that only assessments issued after
August 21, 1986 shall be abated by the amnesty is beyond
the contemplation of Executive Order No. 41, as amended.2
On appeal by the Commissioner to the Court of Appeals, the decision of the
tax court was affirmed. The appellate court further observed:
In the instant case, examining carefully the words used in
Executive Order No. 41, as amended, we find nothing which
justifies petitioner Commissioner's ground for denying
respondent taxpayer's claim to the benefits of the amnesty
law. Section 4 of the subject law enumerates, in no uncertain
terms, taxpayers who may not avail of the amnesty granted,.
...
Admittedly, respondent taxpayer does not fall under any of
the . . . exceptions. The added exception urged by petitioner
Commissioner based on Revenue Memorandum Order No. 4-
87, further restricting the scope of the amnesty clearly
amounts to an act of administrative legislation quite contrary
to the mandate of the law which the regulation ought to
implement.
xxx xxx xxx
Lastly, by its very nature, a tax amnesty, being a general
pardon or intentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law, partakes of an absolute
forgiveness or waiver by the Government of its right to collect
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
what otherwise would be due it, and in this sense, prejudicial
thereto, particularly to give tax evaders, who wish to relent
and are willing to reform a chance to do so and thereby
become a part of the new society with a clean slate.
(Republic vs. Intermediate Appellate Court. 196 SCRA 335,
340 [1991] citing Commissioner of Internal Revenue vs.
Botelho Shipping Corp., 20 SCRA 487) To follow [the restrictive
application of Revenue Memorandum Order No. 4-87
pressed by petitioner Commissioner would be to work against
the raison d'etre of E.O. 41, as amended, i.e., to raise
government revenues by encouraging taxpayers to declare
their untaxed income and pay the tax due thereon. (E.O. 41,
first paragraph)]3
In this petition for review, the Commissioner raises these related issues:
1. WHETHER OR NOT REVENUE MEMORANDUM ORDER NO. 4-87,
PROMULGATED TO IMPLEMENT E.O. NO. 41, IS VALID;
2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS IN QUESTION WERE
EXTINGUISHED BY REASON OR PRIVATE RESPONDENT'S AVAILMENT OF
EXECUTIVE ORDER NO. 41 AS AMENDED BY EXECUTIVE ORDER NO. 64;
3. WHETHER OR NOT PRIVATE RESPONDENT HAS OVERCOME THE
PRESUMPTION OF VALIDITY OF ASSESSMENTS.4
The authority of the Minister of Finance (now the Secretary of Finance), in
conjunction with the Commissioner of Internal Revenue, to promulgate all
needful rules and regulations for the effective enforcement of internal
revenue laws cannot be controverted. Neither can it be disputed that such
rules and regulations, as well as administrative opinions and rulings, ordinarily
should deserve weight and respect by the courts. Much more fundamental
than either of the above, however, is that all such issuances must not override,
but must remain consistent and in harmony with, the law they seek to apply
and implement. Administrative rules and regulations are intended to carry out,
neither to supplant nor to modify, the law.
Page 37

The real and only issue is whether or not the position taken by the
Commissioner coincides with the meaning and intent of executive Order No.
41.
We agree with both the court of Appeals and court of Tax Appeals that
Executive Order No. 41 is quite explicit and requires hardly anything beyond a
simple application of its provisions. It reads:
Sec. 1. Scope of Amnesty. — A one-time tax amnesty
covering unpaid income taxes for the years 1981 to 1985 is
hereby declared.
Sec. 2. Conditions of the Amnesty. — A taxpayer who wishes
to avail himself of the tax amnesty shall, on or before October
31, 1986;
a) file a sworn statement declaring his net
worth as of December 31, 1985;
b) file a certified true copy of his statement
declaring his net worth as of December 31,
1980 on record with the Bureau of Internal
Revenue, or if no such record exists, file a
statement of said net worth therewith,
subject to verification by the Bureau of
Internal Revenue;
c) file a return and pay a tax equivalent to
ten per cent (10%) of the increase in net
worth from December 31, 1980 to December
31, 1985: Provided, That in no case shall the
tax be less than P5,000.00 for individuals and
P10,000.00 for judicial persons.
Sec. 3. Computation of Net Worth. — In computing the net
worths referred to in Section 2 hereof, the following rules shall
govern:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
a) Non-cash assets shall be valued at
acquisition cost.
b) Foreign currencies shall be valued at the
rates of exchange prevailing as of the date
of the net worth statement.
Sec. 4. Exceptions. — The following taxpayers may not avail
themselves of the amnesty herein granted:
a) Those falling under the provisions of
Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed
in Court as of the effectivity hereof;
c) Those with criminal cases involving
violations of the income tax already filed in
court as of the effectivity filed in court as of
the effectivity hereof;
d) Those that have withholding tax liabilities
under the National Internal Revenue Code,
as amended, insofar as the said liabilities are
concerned;
e) Those with tax cases pending investigation
by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information
furnished under Section 316 of the National
Internal Revenue Code, as amended;
f) Those with pending cases involving
unexplained or unlawfully acquired wealth
before the Sandiganbayan;
Page 38
 DUMAUAL, JEANNE PAULINE J. 2019-2020

g) Those liable under Title Seven, Chapter over the reigns of government following the successful revolution would
Three (Frauds, Illegal Exactions and promptly provide for abroad, and not a confined, tax amnesty.
Transactions) and Chapter Four
(Malversation of Public Funds and Property) Relative to the two other issued raised by the Commissioner, we need only
of the Revised Penal Code, as amended. quote from Executive Order No. 41 itself; thus:

xxx xxx xxx Sec. 6. Immunities and Privileges. — Upon full compliance with
the conditions of the tax amnesty and the rules and
Sec. 9. The Minister of finance, upon the recommendation of regulations issued pursuant to this Executive order, the
the Commissioner of Internal Revenue, shall promulgate the taxpayer shall enjoy the following immunities and privileges:
necessary rules and regulations to implement this Executive
Order. a) The taxpayer shall be relieved of any
income tax liability on any untaxed income
xxx xxx xxx from January 1, 1981 to December 31, 1985,
including increments thereto and penalties
Sec. 11. This Executive Order shall take effect immediately. on account of the non-payment of the said
tax. Civil, criminal or administrative liability
arising from the non-payment of the said tax,
DONE in the City of Manila, this 22nd day of August in the
which are actionable under the National
year of Our Lord, nineteen hundred and eighty-six.
Internal Revenue Code, as amended, are
likewise deemed extinguished.
The period of the amnesty was later extended to 05 December 1986 from 31
October 1986 by Executive Order No. 54, dated 04 November 1986, and, its
b) The taxpayer's tax amnesty declaration
coverage expanded, under Executive Order No. 64, dated 17 November
shall not be admissible in evidence in all
1986, to include estate and honors taxes and taxes on business.
proceedings before judicial, quasi-judicial or
administrative bodies, in which he is a
If, as the Commissioner argues, Executive Order No. 41 had not been intended defendant or respondent, and the same
to include 1981-1985 tax liabilities already assessed (administratively) prior to shall not be examined, inquired or looked
22 August 1986, the law could have simply so provided in its exclusionary into by any person, government official,
clauses. It did not. The conclusion is unavoidable, and it is that the executive bureau or office.
order has been designed to be in the nature of a general grant of tax
amnesty subject only to the cases specifically excepted by it.
c) The books of account and other records
of the taxpayer for the period from January
It might not be amiss to recall that the taxable periods covered by the 1, 1981 to December 31, 1985 shall not be
amnesty include the years immediately preceding the 1986 revolution during examined for income tax purposes: Provided,
which time there had been persistent calls, all too vivid to be easily forgotten, That the Commissioner of Internal Revenue
for civil disobedience, most particularly in the payment of taxes, to the martial may authorize in writing the examination of
law regime. It should be understandable then that those who ultimately took the said books of accounts and other

Atty. Santos, Taxation I Page 39

 DUMAUAL, JEANNE PAULINE J. 2019-2020

records to verify the validity or correctness of

a claim for grant of any tax refund, tax credit
(other than refund on credit of withheld taxes
on wages), tax incentives, and/or
exemptions under existing laws.

There is no pretension that the tax amnesty returns and due payments made
by the taxpayer did not conform with the conditions expressed in the amnesty
order.

WHEREFORE, the decision of the court of Appeals, sustaining that of the court
of Tax Appeals, is hereby AFFIRMED in toto. No costs.

Atty. Santos, Taxation I Page 40

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. 119761 August 29, 1996 BRAND AD VALOREM TAX RATE
E.O. 22 and E.O. 273 RA 6956
COMMISSIONER OF INTERNAL REVENUE, petitioner, 06-23-86 07-25-87 06-18-90
vs. 07-01-86 01-01-88 07-05-90
HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE
TOBACCO CORPORATION, respondents. Hope Luxury M. 100's
Sec. 142, (c), (2) 40% 45%
Hope Luxury M. King
Sec. 142, (c), (2) 40% 45%
More Premium M. 100's
VITUG, J.:p
Sec. 142, (c), (2) 40% 45%
More Premium International
The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 Sec. 142, (c), (2) 40% 45%
March 1995, of respondent Court of Appeals 1 affirming the 10th August 1994 Champion Int'l. M. 100's
decision and the 11th October 1994 resolution of the Court of Tax Sec. 142, (c), (2) 40% 45%
Appeals 2 ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco Champion M. 100's
Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of Sec. 142, (c), (2) 40% 45%
Internal Revenue." Champion M. King
Sec. 142, (c), last par. 15% 20%
The facts, by and large, are not in dispute. Champion Lights
Sec. 142, (c), last par. 15% 20% 5
Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the
manufacture of different brands of cigarettes. A bill, which later became Republic Act ("RA") No. 7654, 6 was
enacted, on 10 June 1993, by the legislature and signed into law, on
On various dates, the Philippine Patent Office issued to the corporation 14 June 1993, by the President of the Philippines. The new law
separate certificates of trademark registration over "Champion," "Hope," and became effective on 03 July 1993. It amended Section 142(c)(1) of
"More" cigarettes. In a letter, dated 06 January 1987, of then Commissioner of the National Internal Revenue Code ("NIRC") to read; as follows:
Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the
Presidential Commission on Good Government, "the initial position of the Sec. 142. Cigars and Cigarettes. —
Commission was to classify 'Champion,' 'Hope,' and 'More' as foreign brands
since they were listed in the World Tobacco Directory as belonging to foreign xxx xxx xxx
companies. However, Fortune Tobacco changed the names of 'Hope' to
'Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands
(c) Cigarettes packed by machine. — There shall be levied,
from the foreign brand category. Proof was also submitted to the Bureau (of
assessed and collected on cigarettes packed by machine a
Internal Revenue ['BIR']) that 'Champion' was an original Fortune Tobacco
tax at the rates prescribed below based on the constructive
Corporation register and therefore a local brand." 3 Ad Valorem taxes were
manufacturer's wholesale price or the actual manufacturer's
imposed on these brands, 4 at the following rates:
wholesale price, whichever is higher:

Atty. Santos, Taxation I Page 41

 DUMAUAL, JEANNE PAULINE J. 2019-2020

(1) On locally manufactured cigarettes which are currently

classified and taxed at fifty-five percent (55%) or the
exportation of which is not authorized by contract or
otherwise, fifty-five (55%) provided that the minimum tax shall REVENUE MEMORANDUM CIRCULAR NO. 37-93
not be less than Five Pesos (P5.00) per pack.
SUBJECT: Reclassification of Cigarettes Subject to Excise Tax
(2) On other locally manufactured cigarettes, forty-five
percent (45%) provided that the minimum tax shall not be less
TO: All Internal Revenue Officers and Others Concerned.
than Three Pesos (P3.00) per pack.

In view of the issues raised on whether "HOPE," "MORE" and

xxx xxx xxx
"CHAMPION" cigarettes which are locally manufactured are
appropriately considered as locally manufactured cigarettes
When the registered manufacturer's wholesale price or the bearing a foreign brand, this Office is compelled to review
actual manufacturer's wholesale price whichever is higher of the previous rulings on the matter.
existing brands of cigarettes, including the amounts intended
to cover the taxes, of cigarettes packed in twenties does not
Section 142 (c)(1) National Internal Revenue Code, as
exceed Four Pesos and eighty centavos (P4.80) per pack, the
amended by R.A. No. 6956, provides:
rate shall be twenty percent (20%). 7 (Emphasis supplied)

On locally manufactured cigarettes bearing

About a month after the enactment and two (2) days before the
a foreign brand, fifty-five percent (55%)
effectivity of RA 7654, Revenue Memorandum Circular No. 37-93
Provided, That this rate shall apply regardless
("RMC 37-93"), was issued by the BIR the full text of which expressed:
of whether or not the right to use or title to
the foreign brand was sold or transferred by
REPUBLIKA NG PILIPINAS its owner to the local manufacturer.
KAGAWARAN NG PANANALAPI Whenever it has to be determined whether
KAWANIHAN NG RENTAS INTERNAS or not a cigarette bears a foreign brand, the
listing of brands manufactured in foreign
J countries appearing in the current World
u Tobacco Directory shall govern.
l
y
Under the foregoing, the test for imposition of the 55% ad
valorem tax on cigarettes is that the locally manufactured
1 a foreign brand regardless of whether or not
cigarettes bear
the right to , use or title to the foreign brand was sold or
transferred by its owner to the local manufacturer. The brand
1
must be originally owned by a foreign manufacturer or
9
producer. If ownership of the cigarette brand is, however, not
definitely determinable, ". . . the listing of brands

Atty. Santos, Taxation I Page 42

 DUMAUAL, JEANNE PAULINE J. 2019-2020

manufactured in foreign countries appearing in the current

World Tobacco Directory shall govern. . . ."

"HOPE" is listed in the World Tobacco Directory as being

manufactured by (a) Japan Tobacco, Japan and (b) Fortune
Tobacco, Philippines. "MORE" is listed in the said directory as
being manufactured by: (a) Fills de Julia Reig, Andorra; (b)
Rothmans, Australia; (c) RJR-Macdonald Canada; (d) Rettig-
Strenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds,
Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco,
Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds,
Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland;
and (m) R.J. Reynolds, USA. "Champion" is registered in the
said directory as being manufactured by (a) Commonwealth
Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f)
Tabac Reunies, Switzerland.

Since there is no showing who among the above-listed

manufacturers of the cigarettes bearing the said brands are
the real owner/s thereof, then it follows that the same shall be
considered foreign brand for purposes of determining the ad
valorem tax pursuant to Section 142 of the National Internal
Revenue Code. As held in BIR Ruling No. 410-88, dated
August 24, 1988, "in cases where it cannot be established or
there is dearth of evidence as to whether a brand is foreign or
not, resort to the World Tobacco Directory should be made."

In view of the foregoing, the aforesaid brands of

cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being
manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on
cigarettes.

Any ruling inconsistent herewith is revoked or modified

accordingly.

Atty. Santos, Taxation I Page 43


e Respondent Commissioner of Internal Revenue is hereby
r enjoined from collecting the deficiency tax assessment made
On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor
A. Deoferio, Jr., sent via telefax a copy of RMC 37-93 to Fortune
Tobacco but it was addressed to no one in particular. On 15 July 1993,
Fortune Tobacco received, by ordinary mail, a certified xerox copy of
RMC 37-93.
In a letter, dated 19 July 1993, addressed to the appellate division of
the BIR, Fortune Tobacco requested for a review, reconsideration and
recall of RMC 37-93. The request was denied on 29 July 1993. The
following day, or on 30 July 1993, the CIR assessed Fortune Tobacco
for ad valorem tax deficiency amounting to P9,598,334.00.
On 03 August 1993, Fortune Tobacco filed a petition for review with
the CTA. 8
On 10 August 1994, the CTA upheld the position of Fortune Tobacco
and adjudged:
WHEREFORE, Revenue Memorandum Circular No. 37-93
reclassifying the brands of cigarettes, viz: "HOPE," "MORE" and
"CHAMPION" being manufactured by Fortune Tobacco
Corporation as locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on
cigarettes is found to be defective, invalid and
unenforceable, such that when R.A. No. 7654 took effect on
July 3, 1993, the brands in question were not CURRENTLY
CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1)
of the Tax Code, as amended by R.A. No. 7654 and were
therefore still classified as other locally manufactured
cigarettes and taxed at 45% or 20% as the case may be.
Accordingly, the deficiency ad valorem tax assessment
issued on petitioner Fortune Tobacco Corporation in the
amount of P9,598,334.00, exclusive of surcharge and interest,
is hereby canceled for lack of legal basis.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
and issued on petitioner in relation to the implementation of
RMC No. 37-93.
SO ORDERED. 9
In its resolution, dated 11 October 1994, the CTA dismissed for lack of
merit the motion for reconsideration.
The CIR forthwith filed a petition for review with the Court of Appeals,
questioning the CTA's 10th August 1994 decision and 11th October
1994 resolution. On 31 March 1993, the appellate court's Special
Thirteenth Division affirmed in all respects the assailed decision and
resolution.
In the instant petition, the Solicitor General argues: That —
I. RMC 37-93 IS A RULING OR OPINION OF THE
COMMISSIONER OF INTERNAL REVENUE
INTERPRETING THE PROVISIONS OF THE TAX
CODE.
II. BEING AN INTERPRETATIVE RULING OR
OPINION, THE PUBLICATION OF RMC 37-93,
FILING OF COPIES THEREOF WITH THE UP LAW
CENTER AND PRIOR HEARING ARE NOT
NECESSARY TO ITS VALIDITY, EFFECTIVITY AND
ENFORCEABILITY.
III. PRIVATE RESPONDENT IS DEEMED TO HAVE
BEEN NOTIFIED OR RMC 37-93 ON JULY 2,
1993.
IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE
IT APPLIES TO ALL LOCALLY MANUFACTURED
Page 44

CIGARETTES SIMILARLY SITUATED AS "HOPE,"
"MORE" AND "CHAMPION" CIGARETTES.
V. PETITIONER WAS NOT LEGALLY PROSCRIBED
FROM RECLASSIFYING "HOPE," "MORE" AND
"CHAMPION" CIGARETTES BEFORE THE
EFFECTIVITY OF R.A. NO. 7654.
VI. SINCE RMC 37-93 IS AN INTERPRETATIVE
RULE, THE INQUIRY IS NOT INTO ITS VALIDITY,
EFFECTIVITY OR ENFORCEABILITY BUT INTO ITS
CORRECTNESS OR PROPRIETY; RMC 37-93 IS
CORRECT. 10
In fine, petitioner opines that RMC 37-93 is merely an interpretative
ruling of the BIR which can thus become effective without any prior
need for notice and hearing, nor publication, and that its issuance is
not discriminatory since it would apply under similar circumstances to
all locally manufactured cigarettes.
The Court must sustain both the appellate court and the tax court.
Petitioner stresses on the wide and ample authority of the BIR in the
issuance of rulings for the effective implementation of the provisions of
the National Internal Revenue Code. Let it be made clear that such
authority of the Commissioner is not here doubted. Like any other
government agency, however, the CIR may not disregard legal
requirements or applicable principles in the exercise of its quasi-
legislative powers.
Let us first distinguish between two kinds of administrative issuances —
a legislative rule and an interpretative rule.
In Misamis Oriental Association of Coco Traders, Inc., vs. Department
of Finance Secretary, 11 the Court expressed:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
. . . a legislative rule is in the nature of subordinate legislation,
designed to implement a primary legislation by providing the
details thereof . In the same way that laws must have the
benefit of public hearing, it is generally required that before a
legislative rule is adopted there must be hearing. In this
connection, the Administrative Code of 1987 provides:
Public Participation. — If not otherwise required by law, an
agency shall, as far as practicable, publish or circulate
notices of proposed rules and afford interested parties the
opportunity to submit their views prior to the adoption of any
rule.
(2) In the fixing of rates, no rule or final order shall be valid
unless the proposed rates shall have been published in a
newspaper of general circulation at least two (2) weeks
before the first hearing thereon.
(3) In case of opposition, the rules on contested cases shall be
observed.
In addition such rule must be published. On the other
hand, interpretative rules are designed to provide guidelines
to the law which the administrative agency is in charge of
enforcing. 12
It should be understandable that when an administrative rule is merely
interpretative in nature, its applicability needs nothing further than its
bare issuance for it gives no real consequence more than what the
law itself has already prescribed. When, upon the other hand, the
administrative rule goes beyond merely providing for the means that
can facilitate or render least cumbersome the implementation of the
law but substantially adds to or increases the burden of those
governed, it behooves the agency to accord at least to those directly
affected a chance to be heard, and thereafter to be duly informed,
before that new issuance is given the force and effect of law.
Page 45
 DUMAUAL, JEANNE PAULINE J. 2019-2020

A reading of RMC 37-93, particularly considering the circumstances is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New
under which it has been issued, convinces us that the circular cannot Civil Code).
be viewed simply as a corrective measure (revoking in the process
the previous holdings of past Commissioners) or merely as construing In order that there shall be a just enforcement of rules and
Section 142(c)(1) of the NIRC, as amended, but has, in fact and most regulations, in conformity with the basic element of due
importantly, been made in order to place "Hope Luxury," "Premium process, the following procedures are hereby prescribed for
More" and "Champion" within the classification of locally the drafting, issuance and implementation of the said
manufactured cigarettes bearing foreign brands and to thereby have Revenue Tax Issuances:
them covered by RA 7654. Specifically, the new law would have its
amendatory provisions applied to locally manufactured cigarettes
(1) This Circular shall apply only to (a)
which at the time of its effectivity were not so classified as bearing
Revenue Regulations; (b) Revenue Audit
foreign brands. Prior to the issuance of the questioned circular, "Hope
Memorandum Orders; and (c) Revenue
Luxury," "Premium More," and "Champion" cigarettes were in the
Memorandum Circulars and Revenue
category of locally manufactured cigarettes not bearing foreign
Memorandum Orders bearing on internal
brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the
revenue tax rules and regulations.
enactment of RA 7654, would have had no new tax rate
consequence on private respondent's products. Evidently, in order to
place "Hope Luxury," "Premium More," and "Champion" cigarettes (2) Except when the law otherwise expressly
within the scope of the amendatory law and subject them to an provides, the aforesaid internal revenue tax
increased tax rate, the now disputed RMC 37-93 had to be issued. In issuances shall not begin to be operative until
so doing, the BIR not simply intrepreted the law; verily, it legislated after due notice thereof may be fairly
under its quasi-legislative authority. The due observance of the presumed.
requirements of notice, of hearing, and of publication should not
have been then ignored. Due notice of the said issuances may be
fairly presumed only after the following
Indeed, the BIR itself, in its RMC 10-86, has observed and provided: procedures have been taken;

RMC NO. 10-86 xxx xxx xxx

Effectivity of Internal Revenue Rules and Regulations
(5) Strict compliance with the foregoing
It has been observed that one of the problem areas bearing procedures is
on compliance with Internal Revenue Tax rules and enjoined. 13
regulations is lack or insufficiency of due notice to the tax
paying public. Unless there is due notice, due compliance Nothing on record could tell us that it was either impossible or
therewith may not be reasonably expected. And most impracticable for the BIR to observe and comply with the above
importantly, their strict enforcement could possibly suffer from requirements before giving effect to its questioned circular.
legal infirmity in the light of the constitutional provision on
"due process of law" and the essence of the Civil Code
provision concerning effectivity of laws, whereby due notice

Atty. Santos, Taxation I Page 46

 DUMAUAL, JEANNE PAULINE J. 2019-2020

Not insignificantly, RMC 37-93 might have likewise infringed on 3. Locally manufactured by LA PERLA INDUSTRIES, INC.
uniformity of taxation.
(a) "WHITE HORSE" is listed as being
Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates manufactured by Rothman's, Malaysia
taxation to be uniform and equitable. Uniformity requires that all (Exhibit "U")
subjects or objects of taxation, similarly situated, are to be treated
alike or put on equal footing both in privileges and liabilities. 14 Thus, all (b) "RIGHT" is listed as being manufactured
taxable articles or kinds of property of the same class must be taxed by SVENSKA, Tobaks, Sweden (Exhibit "V-1")
at the same rate 15 and the tax must operate with the same force and
effect in every place where the subject may be found.
4. Locally manufactured by MIGHTY CORPORATION

Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium

(a) "WHITE HORSE" is listed as being
More" and "Champion" cigarettes and, unless petitioner would be
manufactured by Rothman's, Malaysia
willing to concede to the submission of private respondent that the
(Exhibit "U-1")
circular should, as in fact my esteemed colleague Mr. Justice Bellosillo
so expresses in his separate opinion, be considered adjudicatory in
nature and thus violative of due process following the Ang 5. Locally manufactured by STERLING TOBACCO
Tibay 16 doctrine, the measure suffers from lack of uniformity of CORPORATION
taxation. In its decision, the CTA has keenly noted that other
cigarettes bearing foreign brands have not been similarly included (a) "UNION" is listed as being manufactured
within the scope of the circular, such as — by Sumatra Tobacco, Indonesia and Brown
and Williamson, USA (Exhibit "U-3")
1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.
(b) "WINNER" is listed as being manufactured
(a) "PALM TREE" is listed as manufactured by by Alpha Tobacco, Bangladesh; Nangyang,
office of Monopoly, Korea (Exhibit "R") Hongkong; Joo Lan, Malaysia; Pakistan
Tobacco Co., Pakistan; Premier Tobacco,
Pakistan and Haggar, Sudan (Exhibit "U-4"). 17
2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE
COMPANY
The court quoted at length from the transcript of the hearing
conducted on 10 August 1993 by the Committee on Ways and Means
(a) "GOLDEN KEY" is listed being
of the House of Representatives; viz:
manufactured by United Tobacco, Pakistan
(Exhibit "S")
THE CHAIRMAN. So you have specific information on Fortune
Tobacco alone. You don't have specific information on other
(b) "CANNON" is listed as being
tobacco manufacturers. Now, there are other brands which
manufactured by Alpha Tobacco,
are similarly situated. They are locally manufactured bearing
Bangladesh (Exhibit "T")
foreign brands. And may I enumerate to you all these brands,

Atty. Santos, Taxation I Page 47


which are also listed in the World Tobacco Directory . . . Why
were these brand not reclassified at 55 if your want to give a
level playing filed to foreign manufacturers?
MS. CHATO. Mr. Chairman, in fact, we have already
prepared a Revenue Memorandum Circular that was
supposed to come after RMC No. 37-93 which have really
named specifically the list of locally manufactured cigarettes
bearing a foreign brand for excise tax purposes and includes
all these brands that you mentioned at 55 percent except
that at that time, when we had to come up with this, we
were forced to study the brands of Hope, More and
Champion because we were given documents that would
indicate the that these brands were actually being claimed
or patented in other countries because we went by Revenue
Memorandum Circular 1488 and we wanted to give some
rationality to how it came about but we couldn't find the
rationale there. And we really found based on our own
interpretation that the only test that is given by that existing
law would be registration in the World Tobacco Directory. So
we came out with this proposed revenue memorandum
circular which we forwarded to the Secretary of Finance
except that at that point in time, we went by the Republic
Act 7654 in Section 1 which amended Section 142, C-1, it
said, that on locally manufactured cigarettes which are
currently classified and taxed at 55 percent. So we were
saying that when this law took effect in July 3 and if we are
going to come up with this revenue circular thereafter, then I
think our action would really be subject to question but we
feel that . . . Memorandum Circular Number 37-93 would
really cover even similarly situated brands. And in fact, it was
really because of the study, the short time that we were given
to study the matter that we could not include all the rest of
the other brands that would have been really classified as
foreign brand if we went by the law itself. I am sure that by
the reading of the law, you would without that ruling by
Commissioner Tan they would really have been included in
the definition or in the classification of foregoing brands.
These brands that you referred to or just read to us and in fact
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
just for your information, we really came out with a proposed
revenue memorandum circular for those brands. (Emphasis
supplied)
(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).
xxx xxx xxx
MS. CHATO. . . . But I do agree with you now that it cannot
and in fact that is why I felt that we . . . I wanted to come up
with a more extensive coverage and precisely why I asked
that revenue memorandum circular that would cover all
those similarly situated would be prepared but because of
the lack of time and I came out with a study of RA 7654, it
would not have been possible to really come up with the
reclassification or the proper classification of all brands that
are listed there. . . (emphasis supplied) (Exhibit "FF-2d," page
IX-1)
xxx xxx xxx
HON. DIAZ. But did you not consider that there are similarly
situated?
MS. CHATO. That is precisely why, Sir, after we have come up
with this Revenue Memorandum Circular No. 37-93, the other
brands came about the would have also clarified RMC 37-93
by I was saying really because of the fact that I was just
recently appointed and the lack of time, the period that was
allotted to us to come up with the right actions on the matter,
we were really caught by the July 3 deadline. But in fact, We
have already prepared a revenue memorandum circular
clarifying with the other . . . does not yet, would have been a
list of locally manufactured cigarettes bearing a foreign
brand for excise tax purposes which would include all the
other brands that were mentioned by the Honorable
Chairman. (Emphasis supplied) (Exhibit "FF-2-d," par. IX-4). 18
Page 48

All taken, the Court is convinced that the hastily promulgated RMC 37-93 has
fallen short of a valid and effective administrative issuance.
WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court
of Tax Appeals, is AFFIRMED. No costs.
SO ORDERED.
Kapunan, J., concurs.
Separate Opinions
BELLOSILLO, J.: separate opinion:
RA 7654 was enacted by Congress on 10 June 1993, signed into law by the
President on 14 June 1993, and took effect 3 July 1993. It amended partly Sec.
142, par. (c), of the National Internal Revenue Code (NIRC) to read —
Sec. 142. Cigars and cigarettes. — . . . . (c) Cigarettes packed
by machine. — There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the rates
prescribed below based on the constructive manufacturer's
wholesale price or the actual manufacturer's wholesale price,
whichever is higher.
(1) On locally manufactured cigarettes which are currently
classified and taxed at fifty-five percent (55%) or the
exportation of which is not authorized by contract or
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
otherwise, fifty-five percent (55%) provided that the minimum
tax shall not be less than Five Pesos (P5.00) per pack
(emphasis supplied).
(2) On other locally manufactured cigarettes, forty-five
percent (45%) provided that the minimum tax shall not be less
than Three Pesos (P3.00) per pack.
Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium
More and Champion were considered local brands subjected to an ad
valorem tax at the rate of 20-45%. However, on 1 July 1993 or two (2) days
before RA 7654 took effect, petitioner Commissioner of Internal Revenue
issued RMC 37-93 reclassifying "Hope, More and Champion being
manufactured by Fortune Tobacco Corporation . . . . (as) locally
manufactured cigarettes bearing a foreign brand subject to the 55% ad
valorem tax on cigarettes." 1 RMC 37-93 in effect subjected Hope
Luxury, Premium More and Champion cigarettes to the provisions of Sec. 142,
par. (c), subpar. (1), NIRC, as amended by RA 7654, imposing upon these
cigarette brands an ad valorem tax of "fifty-five percent (55%) provided that
the minimum tax shall not be less than Five Pesos (P5.00) per pack."
On 2 July 1993, Friday, at about five-fifty in the afternoon, or a few hours
before the effectivity of RA 7654, a copy of RMC 37-93 with a cover letter
signed by Deputy Commissioner Victor A. Deoferio of the Bureau of Internal
Revenue was sent by facsimile to the factory of respondent corporation in
Parang, Marikina, Metro Manila. It appears that the letter together with a
copy of RMC 37-93 did not immediately come to the knowledge of private
respondent as it was addressed to no one in particular. It was only when the
reclassification of respondent corporation's cigarette brands was reported in
the column of Fil C. Sionil in Business Bulletin on 4 July 1993 that the president of
respondent corporation learned of the matter, prompting him to inquire into
its veracity and to request from petitioner a copy of RMC 37-93. On 15 July
1993 respondent corporation received by ordinary mail a certified machine
copy of RMC 37-93.
Respondent corporation sought a review, reconsideration and recall of RMC
37-93 but was forthwith denied by the Appellate Division of the Bureau of
Internal Revenue. As a consequence, on 30 July 1993 private respondent was
Page 49

assessed an ad valorem tax deficiency amounting to P9,598,334.00.
Respondent corporation went to the Court of Tax Appeals (CTA) on a petition
for review.
On 10 August 1994, after due hearing, the CTA found the petition meritorious
and ruled —
Revenue Memorandum Circular No. 37-93 reclassifying the
brands of cigarettes, viz: Hope, More and Champion being
manufactured by Fortune Tobacco Corporation as locally
manufactured cigarettes bearing a foreign brand subject to
the 55% ad valorem tax on cigarettes is found to be
defective, invalid and unenforceable . . . . Accordingly, the
deficiency ad valorem tax assessment issued on petitioner
Fortune Tobacco Corporation in the amount of P9,598,334.00,
exclusive of surcharge and interest, is hereby cancelled for
lack of legal basis. 2
The CTA held that petitioner Commissioner of Internal Revenue failed
to observe due process of law in issuing RMC 37-93 as there was no
prior notice and hearing, and that RMC 37-93 was in itself
discriminatory. The motion to reconsider its decision was denied by
the CTA for lack of merit. On 31 March 1995 respondent Court of
Appeals affirmed in toto the decision of the CTA. 3 Hence, the instant
petition for review.
Petitioner now submits through the Solicitor General that RMC 37-93
reclassifying Hope Luxury, Premium More and Champion as locally
manufactured cigarettes bearing brands is merely an interpretative ruling
which needs no prior notice and hearing as held in Misamis Oriental
Association of Coco Traders, Inc. v. Department of Finance Secretary. 4 It
maintains that neither is the assailed revenue memorandum circular
discriminatory as it merely "lays down the test in determining whether or not a
locally manufactured cigarette bears a foreign brand using (only) the
cigarette brands Hope, More and Champion as specific examples." 5
Respondent corporation on the other hand contends that RMC 37-93 is not a
mere interpretative ruling but is adjudicatory in nature where prior notice and
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
hearing are mandatory, and that Misamis Oriental Association of Coco
Traders, Inc. v. Department of Finance Secretary on which the Solicitor
General relies heavily is not applicable. Respondent Fortune Tobacco
Corporation also argues that RMC 37-93 discriminates against its cigarette
brands since those of its competitors which are similarly situated have not
been reclassified.
The main issues before us are (a) whether RMC 37-93 is merely an
interpretative rule the issuance of which needs no prior notice and hearing, or
an adjudicatory ruling which calls for the twin requirements of prior notice and
hearing, and, (b) whether RMC 37-93 is discriminatory in nature.
A brief discourse on the powers and functions of administrative bodies may be
instructive.
Administrative agencies posses quasi-legislative or rule making powers and
quasi-judicial or administrative adjudicatory powers. Quasi-legislative or rule
making power is the power to make rules and regulations which results
in delegated legislation that is within the confines of the granting statute and
the doctrine of nondelegability and separability of powers.
Interpretative rule, one of the three (3) types of quasi-legislative or rule making
powers of an administrative agency (the other two being supplementary or
detailed legislation, and contingent legislation), is promulgated by the
administrative agency to interpret, clarify or explain statutory regulations
under which the administrative body operates. The purpose or objective of an
interpretative rule is merely to construe the statute being administered. It
purports to do no more than interpret the statute. Simply, the rule tries to say
what the statute means. Generally, it refers to no single person or party in
particular but concerns all those belonging to the same class which may be
covered by the said interpretative rule. It need not be published and neither is
a hearing required since it is issued by the administrative body as an incident
of its power to enforce the law and is intended merely to clarify statutory
provisions for proper observance by the people. In Tañada v. Tuvera, 6 this
Court expressly said that "[i]interpretative regulations . . . . need not be
published."
Page 50

Quasi-judicial or administrative adjudicatory power on the other hand is the
power of the administrative agency to adjudicate the rights of persons before
it. It is the power to hear and determine questions of fact to which the
legislative policy is to apply and to decide in accordance with the standards
laid down by the law itself in enforcing and administering the same law. 7 The
administrative body exercises its quasi-judicial power when it performs in a
judicial manner an act which is essentially of an executive or administrative
nature, where the power to act in such manner is incidental to or reasonably
necessary for the performance of the executive or administrative duty
entrusted to it. 8 In carrying out their quasi-judicial functions the administrative
officers or bodies are required to investigate facts or ascertain the existence
of facts, hold hearings, weigh evidence, and draw conclusions from them as
basis for their official action and exercise of discretion in a judicial nature.
Since rights of specific persons are affected it is elementary that in the proper
exercise of quasi-judicial power due process must be observed in the conduct
of the proceedings.
The importance of due process cannot be underestimated. Too basic is the
rule that no person shall be deprived of life, liberty or property without due
process of law. Thus when an administrative proceeding is quasi-judicial in
character, notice and fair open hearing are essential to the validity of the
proceeding. The right to reasonable prior notice and hearing embraces not
only the right to present evidence but also the opportunity to know the claims
of the opposing party and to meet them. The right to submit arguments
implies that opportunity otherwise the right may as well be considered
impotent. And those who are brought into contest with government in a
quasi-judicial proceeding aimed at the control of their activities are entitled to
be fairy advised of what the government proposes and to be heard upon its
proposal before it issues its final command.
There are cardinal primary rights which must be respected in administrative
proceedings. The landmark case of Ang Tibay v. The Court of Industrial
Relations 9 enumerated these rights: (1) the right to a hearing, which includes
the right of the party interested or affected to present his own case and
submit evidence in support thereof; (2) the tribunal must consider the
evidence presented; (3) the decision must have something to support itself; (4)
the evidence must be substantial; (5) the decision must be rendered on the
evidence presented at the hearing, or at least contained in the record and
disclosed to the parties affected; (6) the tribunal or any of its judges must act
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
on its or his own independent consideration of the law and facts of the
controversy, and not simply accept the views of a subordinate in arriving at a
decision; and, (7) the tribunal should in all controversial questions render its
decision in such manner that the parties to the proceeding may know the
various issues involved and the reasons for the decision rendered.
In determining whether RMC No. 37-93 is merely an interpretative rule which
requires no prior notice and hearing, or an adjudicatory rule which demands
the observance of due process, a close examination of RMC 37-93 is in order.
Noticeably, petitioner Commissioner of Internal Revenue at first interprets Sec.
142, par. (c), subpar. (1), of the NIRC, as amended, by citing the law and
clarifying or explaining what it means —
Section 142 (c) (1), National Internal Revenue Code, as
amended by R.A. No. 6956, provides: On locally
manufactured cigarettes bearing a foreign brand, fifty-five
percent (55%) Provided, That this rate shall apply regardless of
whether or not the right to use or title to the foreign brand
was sold or transferred by its owner to the local manufacturer.
Whenever it has to be determined whether or not a cigarette
bears a foreign brand, the listing of brands manufactured in
foreign countries appearing in the current World Tobacco
Directory shall govern.
Under the foregoing, the test for imposition of the 55% ad
valorem tax on cigarettes is that the locally manufactured
cigarettes bear a foreign brand regardless of whether or not
the right to use or title to the foreign brand was sold or
transferred by its owner to the local manufacturer. The brand
must be originally owned by a foreign manufacturer or
producer. If ownership of the cigarette brand is, however, not
definitely determinable,
". . . the listing of brands manufactured in foreign countries
appearing in the current World Tobacco Directory shall
govern . . ."
Page 51

Then petitioner makes a factual finding by declaring that Hope (Luxury),
(Premium) More and Champion are manufactured by other foreign
manufacturers —
Hope is listed in the World Tobacco Directory as being
manufactured by (a) Japan Tobacco, Japan and (b) Fortune
Tobacco, Philippines. More is listed in the said directory as
being manufactured by: (a) Fills de Julia Reig, Andorra; (b)
Rothmans, Australia; (c) RJR-MacDonald, Canada; (d) Rettig-
Strenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds,
Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco,
Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds,
Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland;
and (m) R.J. Reynolds, USA. "Champion" is registered in the
said directory as being manufactured by: (a) Commonwealth
Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f)
Tabac Reunies, Switzerland.
From this finding, petitioner thereafter formulates an inference that since it
cannot be determined who among the manufacturers are the real owners of
the brands in question, then these cigarette brands should be considered
foreign brands —
Since there is no showing who among the above-listed
manufacturers of the cigarettes bearing the said brands are
the real owner/s thereof, then it follows that the same shall be
considered foreign brand for purposes of determining the ad
valorem tax pursuant to Section 142 of the National Internal
Revenue Code. As held in BIR Ruling No. 410-88, dated
August 24, 1988, "in cases where it cannot be established or
there is dearth of evidence as to whether a brand is foreign or
not, resort to the World Tobacco Directory should be made."
Finally, petitioner caps RMC 37-93 with a disposition specifically directed at
respondent corporation reclassifying its cigarette brands as locally
manufactured bearing foreign brands —
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In view of the foregoing, the aforesaid brands of
cigarettes, viz: Hope, More and Champion being
manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on
cigarettes.
Any ruling inconsistent herewith is revoked or modified
accordingly.
It is evident from the foregoing that in issuing RMC 37-93 petitioner
Commissioner of Internal Revenue was exercising her quasi-judicial or
administrative adjudicatory power. She cited and interpreted the law, made
a factual finding, applied the law to her given set of facts, arrived at a
conclusion, and issued a ruling aimed at a specific individual. Consequently
prior notice and hearing are required. It must be emphasized that even the
text alone of RMC 37-93 implies that reception of evidence during a hearing is
appropriate if not necessary since it invokes BIR Ruling No. 410-88, dated
August 24, 1988, which provides that "in cases where it cannot be established
or there is dearth of evidence as to whether a brand is foreign or not . . . ."
Indeed, it is difficult to determine whether a brand is foreign or not if it is not
established by, or there is dearth of, evidence because no hearing has been
called and conducted for the reception of such evidence. In fine, by no
stretch of the imagination can RMC 37-93 be considered purely as an
interpretative rule — requiring no previous notice and hearing and simply
interpreting, construing, clarifying or explaining statutory regulations being
administered by or under which the Bureau of Internal Revenue operates.
It is true that both RMC 47-91 in Misamis Oriental Association of Coco Traders
v. Department of Finance Secretary, and RMC 37-93 in the instant case
reclassify certain products for purposes of taxation. But the similarity between
the two revenue memorandum circulars ends there. For in properly
determining whether a revenue memorandum circular is merely an
interpretative rule or an adjudicatory rule, its very tenor and text, and the
circumstances surrounding its issuance will have no to be considered.
We quote RMC 47-91 promulgated 11 June 1991 —
Page 52
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Revenue Memorandum Circular No. 47-91 a

SUBJECT : Taxability of Copra E

TO : All Revenue Officials and Employees and Others .
Concerned.
R
e
For the information and guidance of all officials and
y
employees and others concerned, quoted hereunder in its
e
entirety is VAT Ruling No. 190-90 dated August 17, 1990:
s

COCOFED MARKETING RESEARCH V

CORPORATION i
6th Floor Cocofed Building c
144 Amorsolo Street e
Legaspi Village, Makati
Metro Manila P
r
A e
t s
t i
e d
n e
t n
i t
o
n —
:
F
M i
s n
. a
n
E c
s e
m
y Sirs:
r
n

Atty. Santos, Taxation I Page 53

 DUMAUAL, JEANNE PAULINE J. 2019-2020

This has reference to your letter dated

January 16, 1990 wherein you represented
that inspite of your VAT registration of your
copra trading company, you are supposed
to be exempt from VAT on the basis of BIR
Ruling dated January 8, 1988 which
considered copra as an agricultural food
product in its original state. In this
connection, you request for a confirmation
of your opinion as aforestated.

In reply, please be informed that copra,

being an agricultural non-food product, is
exempt from VAT only if sale is made by the
primary producer pursuant to Section 103 (a)
of the Tax Code, as amended. Thus as a
trading company and a subsequent seller,
your sale of copra is already subject to VAT
pursuant to Section 9(b) (1) of Revenue
Regulations 5-27.

This revokes VAT Ruling Nos. 009-88 and 279-

88.

V
e
r
y

t
r
u
l
y

y
o
u
r

Atty. Santos, Taxation I Page 54

 DUMAUAL, JEANNE PAULINE J. 2019-2020

n
t
e
r
n
a
l

R
e
v
e
n
u
e

As a clarification, this is the present and official stand of this

Office unless sooner revoked or amended. All revenue
officials and employees are enjoined to give this Circular as
wide a publicity as possible.

(
S
g
d
.
)

J
O
S
E

U
Quite obviously,
. the very text of RMC 47-91 itself shows that it is merely an
interpretative rule as it simply quotes a VAT Ruling and reminds those
concerned that
O the ruling is the present and official stand of the Bureau of
Internal Revenue.
N Unlike in RMC 37-93 where petitioner Commissioner
manifestly exercised
G her quasi-judicial or administrative adjudicatory power, in

Atty. Santos, Taxation I Page 55


RMC 47-91 there were no factual findings, no application of laws to a given
set of facts, no conclusions of law, and no dispositive portion directed at any
particular party.
Another difference is that in the instant case, the issuance of the assailed
revenue memorandum circular operated to subject the taxpayer to the new
law which was yet to take effect, while in Misamis, the disputed revenue
memorandum circular was issued simply to restate and then clarify the
prevailing position and ruling of the administrative agency, and no new law
yet to take effect was involved. It merely interpreted an existing law which
had already been in effect for some time and which was not set to be
amended. RMC 37-93 is thus prejudicial to private respondent alone.
A third difference, and this likewise resolves the issue of discrimination, is that
RMC 37-93 was ostensibly issued to subject the cigarette brands of respondent
corporation to a new law as it was promulgated two days before the
expiration of the old law and a few hours before the effectivity of the new
law. That RMC 37-93 is particularly aimed only at respondent corporation and
its three (3) cigarette brands can be seen from the dispositive portion of the
assailed revenue memorandum circular —
In view of the foregoing, the aforesaid brands of
cigarettes, viz: Hope, More, and Champion being
manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on
cigarettes.
Any ruling inconsistent herewith is revoked or modified
accordingly.
Thus the argument of the Solicitor General that RMC 37-93 is not discriminatory
as "[i]t merely lays down the test in determining whether or not a locally
manufactured cigarette bears a foreign brand using the cigarette
brands Hope, More and Champion as specific examples," cannot be
accepted, much less sustained. Without doubt, RMC 37-93 has a tremendous
effect on respondent corporation — and solely on respondent corporation —
as its deficiency ad valorem tax assessment on its removals
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
of Hope, Luxury, Premium More, and Champion cigarettes for six (6) hours
alone, i.e., from six o'clock in the evening of 2 July 1993 which is presumably
the time respondent corporation was supposed to have received the
facsimile message sent by Deputy Commissioner Victor A. Deoferio, until
twelve o'clock midnight upon the effectivity of the new law, was already
P9,598,334.00. On the other hand, RMC 47-91 was issued with no purpose
except to state and declare what has been the official stand of the
administrative agency on the specific subject matter, and was indiscriminately
directed to all copra traders with no particular individual in mind.
That petitioner Commissioner of Internal Revenue is an expert in her filed is not
attempted to be disputed; hence, we do not question the wisdom of her act
in reclassifying the cigarettes. Neither do we deny her the exercise of her
quasi-legislative or quasi-judicial powers. But most certainly, by constitutional
mandate, the Court must check the exercise of these powers and ascertain
whether petitioner has gone beyond the legitimate bounds of her authority.
In the final analysis, the issue before us in not the expertise, the authority to
promulgate rules, or the wisdom of petitioner as Commissioner of Internal
Revenue is reclassifying the cigarettes of private respondents. It is simply the
faithful observance by government by government of the basic constitutional
right of a taxpayer to due process of law and equal protection of the laws.
This is what distresses me no end — the manner and the circumstances under
which the cigarettes of private respondent were reclassified and
correspondingly taxed under RMC 37-93, and adjudicatory rule which
therefore requires reasonable notice and hearing before its issuance. It should
not be confused with RMC 47-91, which is a mere interpretative rule.
In the earlier case of G.R. No. 119322, which practically involved the same
opposing interests, I also voted to uphold the constitutional right of the
taxpayer concerned to due process and equal protection of the laws. By a
vote of 3-2, that view prevailed. In sequela, we in the First Division who
constituted the majority found ourselves unjustly drawn into the vortex of a
nightmarish episode. The strong ripples whipped up by my opinion expressed
therein — and of the majority — have yet to varnish when we are again in the
imbroglio of a similar dilemma. The unpleasant experience should be reason
enough to simply steer clear of this controversy and surf on a pretended loss of
judicial objectivity. Such would have been an easy way out, a gracious exit,
so to speak, albeit lame. But to camouflage my leave with a sham excuse
Page 56

would be to turn away from a professional vow I keep at all times; I would not
be true to myself, and to the people I am committed to serve. Thus, as I have
earlier expressed, if placed under similar circumstances in some future time, I
shall have to brave again the prospect of another vilification and a tarnished
image if only to show proudly to the whole world that under the present
dispensation judicial independence in our country is a true component of our
democracy.
In fine, I am greatly perturbed by the manner RMC No. 37-93 was issued as
well as the effect of such issuance. For it cannot be denied that the
circumstances clearly demonstrate that it was hastily issued — without prior
notice and hearing, and singling out private respondent alone — when two
days before a new tax law was to take effect petitioner reclassified and taxed
the cigarette brands of private respondent at a higher rate. Obviously, this
was to make it appear that even before the anticipated date of effectivity of
the statute — which was undeniably priorly known to petitioner — these
brands were already currently classified and taxed at fifty-five percent (55%),
thus shoving them into the purview of the law that was to take effect two days
after!
For sure, private respondent was not properly informed before the issuance of
the questioned memorandum circular that its cigarette brands Hope
Luxury, Premium More and Champion were being reclassified and subjected
to a higher tax rate. Naturally, the result would be to lose financially because
private respondent was still selling its cigarettes at a price based on the old,
lower tax rate. Had there been previous notice and hearing, as claimed by
private respondent, it could have very well presented its side, either by
opposing the reclassification, or by acquiescing thereto but increasing the
price of its cigarettes to adjust to the higher tax rate. The reclassification and
the ensuing imposition of a tax rate increase therefore could not be anything
but confiscatory if we are also to consider the claim of private respondent
that the new tax is even higher than the cost of its cigarettes.
Accordingly, I vote to deny the petition.
HERMOSISIMA, JR., J.: dissenting
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Private respondent Fortune Tobacco Corporation in the instant case disputes
its liability for deficiency ad valorem excise taxes on its removals of "Hope,"
"More," and "Champion" cigarettes from 6:00 p.m. to 12:00 midnight of July 2,
1993, in the total amount of P9,598,334.00. It claims that the circular, upon
which the assessment was based and made, is defective, invalid and
unenforceable for having been issued without notice and hearing and in
violation of the equal protection clause guaranteed by the Constitution.
The majority upholds these claims of private respondent, convinced that the
Circular in question, in the first place, did not give prior notice and hearing,
and so, it could not have been valid and effective. It proceeds to affirm the
factual findings of the Court of Tax Appeals, which findings were considered
correct by respondent Court of Appeals, to the effect that the petitioner
Commissioner of Internal Revenue had indeed blatantly failed to comply with
the said twin requirements of notice and hearing, thereby rendering the
issuance of the questioned Circular to be in violation of the due process
clause of the Constitution. It is also its dominant opinion that the questioned
Circular discriminates against private respondent Fortune Tobacco
Corporation insofar as it seems to affect only its "Hope," "More," and
"Champion" cigarettes, to the exclusion of other cigarettes apparently of the
same kind or classification as these cigarettes manufactured by private
respondent.
With all due respect, I disagree with the majority in its disquisition of the issues
and its resulting conclusions.
Section 245 of the National Internal Revenue Code,
as amended, empowers the Commissioner of Internal
Revenue to issue the questioned Circular
Section 245 of the National Internal Revenue Code, as amended, provides:
Sec. 245. Authority of Secretary of Finance to promulgate
rules and regulations. — The Secretary of Finance, upon
recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of
the provisions of this Code . . . without prejudice to the power
of the Commissioner of Internal Revenue to make rulings or
Page 57

opinions in connection with the implementation of the
provisions of internal revenue laws, including rulings on the
classification of articles for sales tax and similar purposes.
The subject of the questioned Circular is the reclassification of cigarettes
subject to excise taxes. It was issued in connection with Section 142 (c) (1) of
the National Internal Revenue Code, as amended, which imposes ad
valorem excise taxes on locally manufactured cigarettes bearing a foreign
brand. The same provision prescribes the ultimate criterion that determines
which cigarettes are to be considered "locally manufactured cigarettes
bearing a foreign brand." It provides:
. . . Whenever it has to be determined whether or not a
cigarette bears a foreign brand, the listing of brands
manufactured in foreign countries appearing in the current
World Tobacco Directory shall govern.
There is only one World Tobacco Directory for a given current year,
and the same is mandated by law to be the BIR Commissioner's
controlling basis for determining whether or not a particular locally
manufactured cigarette is one bearing a foreign brand. In so making
a determination, petitioner should inquire into the entries in the World
Tobacco Directory for the given current year and shall be held bound
by such entries therein. She is not required to subject the results of her
inquiries to feedback from the concerned cigarette manufacturers,
and it is doubtlessly not desirable nor managerially sound to court
dispute thereon when the law does not, in the first place, require
debate or hearing thereon. Petitioner may make such a
determination because she is the Chief Executive Officer of the
administrative agency that is the Bureau of Internal Revenue in which
are vested quasi-legislative powers entrusted to it by the legislature in
recognition of its more encompassing and unequalled expertise in the
field of taxation.
The vesture of quasi-legislative and quasi-judicial powers in
administrative bodies is not unconstitutional, unreasonable
and oppressive. It has been necessitated by "the growing
complexity of the modern society" (Solid Homes, Inc. vs.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Payawal, 177 SCRA 72, 79). More and more administrative
bodies are necessary to help in the regulation of society's
ramified activities. "Specialized in the particular field assigned
to them, they can deal with the problems thereof with more
expertise and dispatch than can be expected from the
legislature or the courts of justice" . . . 1
Statutorily empowered to issue rulings or opinions embodying the proper
determination in respect to classifying articles, including cigarettes, for
purposes of tax assessment and collection, petitioner was acting well within
her prerogatives when she issued the questioned Circular. And in the exercise
of such prerogatives under the law, she has in her favor the presumption of
regular performance of official duty which must be overcome by clearly
persuasive evidence of stark error and grave abuse of discretion in order to be
overturned and disregarded.
It is irrelevant that the Court of Tax Appeals makes much of the effect of the
passing of Republic Act No. 7654 2 on petitioner's power to classify cigarettes.
Although the decisions assailed and sought to be reviewed, as well as the
pleadings of private respondent, are replete with alleged admissions of our
legislators to the effect that the said Act was intended to freeze the current
classification of cigarettes and make the same an integral part of the said
Act, certainly the repeal, if any, of petitioner's power to classify cigarettes must
be reckoned from the effectivity of the said Act and not before. Suffice it to
say that indisputable is the plain fact that the questioned Circular was issued
on July 1, 1993, while the said Act took effect on July 3, 1993.
The contents of the questioned circular have not
been proven to be erroneous or illegal as to render
issuance thereof an act of grave abuse of
discretion on the part of petitioner Commissioner
Prior to the effectivity of R.A. No. 7654, Section 142 (c) (1) of the National
Internal Revenue Code, as amended, levies the following ad valorem taxes
on cigarettes in accordance with their predetermined classifications as
established by the Commissioner of Internal Revenue:
. . . based on the manufacturer's registered wholesale price:
Page 58

(1) On locally manufactured cigarettes bearing a foreign
brand, fifty-five percent (55%) Provided, That this rate shall
apply regardless of whether or not the right to use or title to
the foreign brand was sold or transferred by its owner to the
local manufacturer. Whenever it has to be determined
whether or not a cigarette bears a foreign brand, the listing of
brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.
(2) Other locally manufactured cigarettes, forty five percent
(45%).
xxx xxx xxx
Prior to the issuance of the questioned Circular, assessed against and paid by
private respondent as ad valorem excise taxes on their removals of "Hope,"
"More," and "Champion" cigarettes were amounts based on paragraph (2)
above, i.e., the tax rate made applicable on the said cigarettes was 45% at
the most. The reason for this is that apparently, petitioner's predecessors have
all made determinations to the effect that the said cigarettes were to be
considered "other locally manufactured cigarettes" and not "locally
manufactured cigarettes bearing a foreign brand." Even petitioner, until her
issuance of the questioned Circular, adhered to her predecessors'
determination as to the proper classification of the above-mentioned
cigarettes for purposes of ad valorem excise taxes. Apparently, the past
determination that the said cigarettes were to be classified as "other locally
manufactured cigarettes" was based on private respodnent's convenient
move of changing the names of "Hope" to "Hope Luxury" and "More" to
"Premium More." It also submitted proof that "Champion" was an original
Fortune Tobacco Corporation register and, therefore, a local brand. Having
registered these brands with the Philippine Patent Office and with
corresponding evidence to the effect, private respondent paid ad
valorem excise taxes computed at the rate of not more than 45% which is the
rate applicable to cigarettes considered as locally manufactured brands.
How these past determinations pervaded notwithstanding their erroneous
basis is only tempered by their innate quality of being merely errors in
interpretative ruling, the formulation of which does not bind the government.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Advantage over such errors may precipitously be withdrawn from those who
have been benefiting from them once the same have been discovered and
rectified.
Petitioner correctly emphasizes that:
. . . the registration of said brands in the name of private
respondent is proof only that it is the exclusive owner thereof
in the Philippines; it does not necessarily follow, however, that
it is the exclusive owner thereof in the whole world. Assuming
arguendo that private respondent is the exclusive owner of
said brands in the Philippines, it does not mean that they are
local. Otherwise, they would not have been listed in the WTD
as international brands manufactured by different entities in
different countries. Moreover, it cannot be said that the
brands registered in the names of private respondent are not
the same brands listed in the WTD because private
respondent is one of the manufacturers of said brands listed
in the WTD. 3
Private respondent attempts to cast doubt on the determination made by
petitioner in the questioned Circular that Japan is a manufacturer of "Hope"
cigarettes. Private respondent's own inquiry into the World Tobacco Directory
reveals that Japan is not a manufacturer of "Hope" cigarettes. In pointing this
out, private respondent concludes that the entire Circular is erroneous and
makes such error the principal proof of its claim that the nature of the
determination embodied in the questioned Circular requires a hearing on the
facts and a debate on the applicable law. Such a determination is
adjudicatory in nature and, therefore, requires notice and hearing. Private
respondent is, however, apparently only eager to show error on the part of
petitioner for acting with grave abuse of discretion. Private respondent
conveniently forgets that petitioner, equipped with the expertise in taxation,
recognized in that expertise by the legislature that vested in her the power to
make rules respecting classification of articles for taxation purposes, and
presumed to have regularly exercised her prerogatives within the scope of her
statutory power to issue determinations specifically under Section 142 (c) (1) in
relation to Section 245 of the National Internal Revenue Code, as amended,
simply followed the law as she understood it. Her task was to determine which
cigarette brands were foreign, and she was directed by the law to look into
Page 59

the World Tobacco Directory. Foreign cigarette brands were legislated to be
taxed at higher rates because of their more extensive public exposure and
international reputation; their competitive edge against local brands may
easily be checked by imposition of higher tax rates. Private respondent makes
a mountain of the mole hill circumstance that "Hope" is listed, not as being
"manufactured" by Japan but as being "used" by Japan. Whether
manufactured or used by Japan, however, "Hope" remains a cigarette brand
that can not be said to be limited to local manufacture in the Philippines. The
undeniable fact is that it is a foreign brand the sales in the Philippines of which
are greatly boosted by its international exposure and reputation. The
petitioner was well within her prerogatives, in the exercise of her rule-making
power, to classify articles for taxation purposes, to interpret the laws which she
is mandated to administer. In interpreting the same, petitioner must, in
general, be guided by the principles underlying taxation, i.e., taxes are the
lifeblood of Government, and revenue laws ought to be interpreted in favor of
the Government, for Government can not survive without the funds to
underwrite its varied operational expenses in pursuit of the welfare of the
society which it serves and protects.
Private respondent claims that its business will be destroyed by the imposition
of additional ad valorem taxes as a result of the effectivity of the questioned
Circular. It claims that under the vested rights theory, it cannot now be made
to pay higher taxes after having been assessed for less in the past. Of course
private respondent will trumpet its losses, its interests, after all, being its sole
concern. What private respondent fails to see is the loss of revenue by the
Government which, because of erroneous determinations made by its past
revenue commissioners, collected lesser taxes than what it was entitled to in
the first place. It is every citizen's duty to pay the correct amount of taxes.
Private respondent will not be shielded by any vested rights, for there are not
vested rights to speak of respecting a wrong construction of the law by
administrative officials, and such wrong interpretation does not place the
Government in estoppel to correct or overrule the same. 4
The Questioned Circular embodies an interpretative
ruling of petitioner Commissioner which as such does
not require notice and hearing
As one of the public offices of the Government, the Bureau of Internal
Revenue, through its Commissioner, has grown to be a typical administrative
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
agency vested with a fusion of different governmental powers: the power to
investigate, initiate action and control the range of investigation, the power to
promulgate rules and regulations to better carry out statutory policies, and the
power to adjudicate controversies within the scope of their activities. 5 In the
realm of administrative law, we understand that such an empowerment of
administrative agencies was evolved in response to the needs of a changing
society. This development arose as the need for broad social control over
complex conditions and activities became more and more pressing, and such
complexity could no longer be dealt with effectivity and directly by the
legislature or the judiciary. The theory which underlies the empowerment of
administrative agencies like the Bureau of Internal Revenue, is that the issues
with which such agencies deal ought to be decided by experts, and not be a
judge, at least not in the first instance or until the facts have been sifted and
arranged. 6
One of the powers of administrative agencies like the Bureau of Internal
Revenue, is the power to make rules. The necessity for vesting administrative
agencies with this power stems from the impracticability of the lawmakers
providing general regulations for various and varying details pertinent to a
particular legislation. 7
The rules that administrative agencies may promulgate may either be
legislative or interpretative. The former is a form of subordinate legislation
whereby the administrative agency is acting in a legislative capacity,
supplementing the statute, filling in the details, pursuant to a specific
delegation of legislative power. 8
Interpretative rules, on the other hand, are "those which purport to do no
more than interpret the statute being administered, to say what it means." 9
There can be no doubt that there is a distinction between an
administrative rule or regulation and an administrative
interpretation of a law whose enforcement is entrusted to an
administrative body. When an administrative agency
promulgates rules and regulations, it "makes" a new law with
the force and effect of a valid law, while when it renders an
opinion or gives a statement of policy, it merely interprets a
pre-existing law (Parker, Administrative Law, p. 197; Davis
Page 60

Administrative Law, p. 194). Rules and regulations when
promulgated in pursuance of the procedure or authority
conferred upon the administrative agency by law, partake of
the nature of a statute, and compliance therewith may be
enforced by a penal sanction provided in the law. This is so
because statutes are usually couched in general terms, after
expressing the policy, purposes, objectives, remedies and
sanctions intended by the legislature. The details and the
manner of carrying out the law are often times left to the
administrative agency entrusted with its enforcement. In this
sense, it has been said that rules and regulations are the
product of a delegated power to create new or additional
legal provisions that have the effect of law. (Davis, op. cit. p.
194.)
A rule is binding on the courts as long as the procedure fixed
for its promulgation is followed and its scope is within the
statutory authority granted by the legislature, even if the
courts are not in agreement with the policy stated therein or
its innate wisdom (Davis, op. cit. pp. 195-197). On the other
hand, administrative interpretation of the law is at best merely
advisory, for it is the courts that finally determine what the law
means. 10
"Whether a given statutory delegation authorizes legislative or interpretative
regulations depends upon whether the statute places specific 'sanctions'
behind the regulations authorized, as for example, by making it a criminal
offense to disobey them, or by making conformity with their provisions a
condition of the exercise of legal privileges." 11 This is because interpretative
regulations are by nature simply statutory interpretations, which have behind
them no statutory sanction. Such regulations, whether so expressly authorized
by statute or issued only as an incident of statutory administration, merely
embody administrative findings of law which are always subject to judicial
determination as to whether they are erroneous or not, even when their
issuance is authorized by statute.
The questioned Circular has undisputedly been issued by petitioner in
pursuance of her rule-making powers under Section 245 of the National
Internal Revenue Code, as amended. Exercising such powers, petitioner re-
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
classified "Hope," "More" and "Champion" cigarettes as locally manufactured
cigarettes bearing foreign brands. The re-classification, as previously
explained, is the correct interpretation of Section 142 (c) (1) of the said Code.
The said legal provision is not accompanied by any penal sanction, and no
detail had to be filled in by petitioner. The basis for the classification of
cigarettes has been provided for by the legislature, and all petitioner has to
do, on behalf of the government agency she heads, is to proceed to make
the proper determination using the criterion stipulated by the lawmaking
body. In making the proper determination, petitioner gave it a liberal
construction consistent with the rule that revenue laws are to be construed in
favor of the Government whose survival depends on the contributions that
taxpayers give to the public coffers that finance public services and other
governmental operations.
The Bureau of Internal Revenue which petitioner heads, is the government
agency charged with the enforcement of the laws pertinent to this case and
so, the opinion of the Commissioner of Internal Revenue, in the absence of a
clear showing that it is plainly wrong, is entitled to great weight. Private
respondent claims that its rights under previous interpretations of Section 142
(c) (1) may not abruptly be cut by a new interpretation of the said section,
but precisely the said section is subject to various and changing construction,
and hence, any ruling issued by petitioner thereon is necessarily interpretative
and not legislative. Private respondent insists that the questioned circular is
adjudicatory in nature because it determined the rights of private respondent
in a controversy involving his tax liability. It also asseverates that the
questioned circular involved administrative action that is particular and
immediate, thereby rendering it subject to the requirements of notice and
hearing in compliance with the due process clause of the Constitution.
We find private respondent's arguments to be rather strained.
Petitioner made a determination as to the classification of cigarettes as
mandated by the aforecited provisions in the National Internal Revenue
Code, as amended. Such determination was an interpretation by petitioner of
the said legal provisions. If in the course of making the interpretation and
embodying the same in the questioned circular which the petitioner
subsequently issued after making such a determination, private respondent's
cigarettes products, by their very nature of being foreign brands as evidenced
by their enlistment in the World Tobacco Directory, which is the controlling
Page 61

basis for the proper classification of cigarettes as stipulated by the law itself,
have come to be classified as locally manufactured cigarettes bearing
foreign brands and as such subject to a tax rate higher than what was
previously imposed thereupon based on past rulings of other revenue
commissioners, such a situation is simply a consequence of the performance
by petitioner of here duties under the law. No adjudication took place, much
less was there any controversy ripe for adjudication. The natural
consequences of making a classification in accordance with law may not be
used by private respondent in arguing that the questioned circular is in fact
adjudicatory in nature. Such an exercise in driving home a point is illogical as it
is fallacious and misplaced.
Private respondent concedes that under general rules of administrative law,
"a ruling which is merely 'interpretative' in character may not require prior
notice to affected parties before its issuance as well as a hearing" and "for this
reason, in most instances, interpretative regulations are not given the force of
law." 12 Indeed, "interpretative regulations and those merely internal in nature
. . . need not be published." 13 And it is now settled that only legislative
regulations and not interpretative rulings must have the benefit of public
hearing. 14
Because (1) the questioned circular merely embodied an interpretation or a
way of reading and giving meaning to Section 142 (c) (1) of the National
Internal Revenue Code, as amended; (2) petitioner did not fill in any details in
the aforecited section but only classified cigarettes on the basis of the World
Tobacco Directory in the light of the paramount principle of construing
revenue laws in favor of the Government to the end that Government collects
as much tax money as it is entitled to in order to fulfill its public purposes for the
general good of its citizens; (3) no penal sanction is provided in the aforecited
section that was construed by petitioner in the questioned circular; and (4) a
similar circular declassifying copra from being an agricultural food to non-food
product for purposes of the value added tax laws, resulting in the revocation
of an exemption previously enjoyed by copra traders, has been ruled by us to
be merely an interpretative ruling and not a legislative, much less, an
adjudicatory, action on the part of the revenue commissioner, 15 this Court
must not be blind to the fact that the questioned Circular is indeed an
interpretative ruling not subject to notice and hearing.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Neither is the questioned Circular tainted by a
violation of the equal protection clause under the
Constitution
Private respondent anchors its claim of violation of its equal protection rights
upon the too obvious fact that only its cigarette brands, i.e., "Hope," "More"
and "Champion," are mentioned in the questioned circular. Because only the
cigarettes that they manufacture are enumerated in the questioned circular,
private respondent proceeded to attack the same as being discriminatory
against it. On the surface, private respondent seems to have a point there. A
scrutiny of the questioned Circular, however, will show that it is undisputedly
one of general application for all cigarettes that are similarly situated as
private respondent's brands. The new interpretation of Section 142 (1) (c) has
been well illustrated in its application upon private respondent's brands, which
illustration is properly a subject of the questioned Circular. Significantly,
indicated as the subject of the questioned circular is the "reclassification of
cigarettes subject to excise taxes." The reclassification resulted in the
foregrounding of private respondent's cigarette brands, which incidentally is
largely due to the controversy spawned no less by private respondent's own
action of conveniently changing its brand names to avoid falling under a
classification that would subject it to higher ad valorem tax rates. This caused
then Commissioner Bienvenido Tan to depart from his initial determination that
private respondent's cigarette brands are foreign brands. The consequent
specific mention of such brands in the questioned Circular, does not change
the fact that the questioned Circular has always been intended for and did
cover, all cigarettes similarly situated as "Hope," "More" and "Champion."
Petitioner is thus correct in stating that:
. . . RMC 37-93 is not discriminatory. It lays down the test in
determining whether or not a locally manufactured cigarette
bears a foreign brand using the cigarette brands "Hope,"
More and "Champion" as specific examples. Such test applies
to all locally manufactured cigarette brands similarly situated
as the cigarette brands aforementioned. While it is true that
only "Hope," "More" and "Champion" cigarettes are actually
determined as locally manufactured cigarettes bearing a
foreign brand, RMC 37-93 does not state that ONLY cigarettes
fall under such classification to the exclusion of other
cigarettes similarly situated. Otherwise stated, RMC 37-93
Page 62

does not exclude the coverage of other cigarettes similarly
situated. Otherwise stated, RMC 37-93 does not exclude the
coverage of other cigarettes similarly situated as locally
manufactured cigarettes bearing a foreign brand. Hence, in
itself, RMC 37-93 is not discriminatory. 16
Both the respondent Court of Appeals and the Court of Tax Appeals held that
the questioned Circular reclassifying "Hope," "More" and "Champion"
cigarettes, is defective, invalid and unenforceable and has rendered the
assessment against private respondent of deficiency ad valorem excise taxes
to be without legal basis. The majority agrees with private respondent and
respondent Courts. As the foregoing opinion chronicles the fatal flaws in
private respondent's arguments, it becomes more apparent that the
questioned Circular is in fact a valid and subsisting interpretative ruling that
the petitioner had power to promulgate and enforce.
WHEREFORE, I vote to grant the petition and set aside the decisions of the
Court of Tax Appeals and the Court of Appeals, respectively, and to reinstate
the decision of petitioner Commissioner of Internal Revenue denying private
respondent's request for a review, reconsideration and recall of Revenue
Memorandum Circular No. 37-93 dated July 1, 1993.
Padilla, J., concurs.
Separate Opinions
BELLOSILLO, J.: separate opinion:
RA 7654 was enacted by Congress on 10 June 1993, signed into law by the
President on 14 June 1993, and took effect 3 July 1993. It amended partly Sec.
142, par. (c), of the National Internal Revenue Code (NIRC) to read —
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Sec. 142. Cigars and cigarettes. — . . . . (c) Cigarettes packed
by machine. — There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the rates
prescribed below based on the constructive manufacturer's
wholesale price or the actual manufacturer's wholesale price,
whichever is higher.
(1) On locally manufactured cigarettes which are currently
classified and taxed at fifty-five percent (55%) or the
exportation of which is not authorized by contract or
otherwise, fifty-five percent (55%) provided that the minimum
tax shall not be less than Five Pesos (P5.00) per pack
(emphasis supplied).
(2) On other locally manufactured cigarettes, forty-five
percent (45%) provided that the minimum tax shall not be less
than Three Pesos (P3.00) per pack.
Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium
More and Champion were considered local brands subjected to an ad
valorem tax at the rate of 20-45%. However, on 1 July 1993 or two (2) days
before RA 7654 took effect, petitioner Commissioner of Internal Revenue
issued RMC 37-93 reclassifying "Hope, More and Champion being
manufactured by Fortune Tobacco Corporation . . . . (as) locally
manufactured cigarettes bearing a foreign brand subject to the 55% ad
valorem tax on cigarettes." 1 RMC 37-93 in effect subjected Hope
Luxury, Premium More and Champion cigarettes to the provisions of Sec. 142,
par. (c), subpar. (1), NIRC, as amended by RA 7654, imposing upon these
cigarette brands an ad valorem tax of "fifty-five percent (55%) provided that
the minimum tax shall not be less than Five Pesos (P5.00) per pack."
On 2 July 1993, Friday, at about five-fifty in the afternoon, or a few hours
before the effectivity of RA 7654, a copy of RMC 37-93 with a cover letter
signed by Deputy Commissioner Victor A. Deoferio of the Bureau of Internal
Revenue was sent by facsimile to the factory of respondent corporation in
Parang, Marikina, Metro Manila. It appears that the letter together with a
copy of RMC 37-93 did not immediately come to the knowledge of private
respondent as it was addressed to no one in particular. It was only when the
Page 63

reclassification of respondent corporation's cigarette brands was reported in
the column of Fil C. Sionil in Business Bulletin on 4 July 1993 that the president of
respondent corporation learned of the matter, prompting him to inquire into
its veracity and to request from petitioner a copy of RMC 37-93. On 15 July
1993 respondent corporation received by ordinary mail a certified machine
copy of RMC 37-93.
Respondent corporation sought a review, reconsideration and recall of RMC
37-93 but was forthwith denied by the Appellate Division of the Bureau of
Internal Revenue. As a consequence, on 30 July 1993 private respondent was
assessed an ad valorem tax deficiency amounting to P9,598,334.00.
Respondent corporation went to the Court of Tax Appeals (CTA) on a petition
for review.
On 10 August 1994, after due hearing, the CTA found the petition meritorious
and ruled —
Revenue Memorandum Circular No. 37-93 reclassifying the
brands of cigarettes, viz: Hope, More and Champion being
manufactured by Fortune Tobacco Corporation as locally
manufactured cigarettes bearing a foreign brand subject to
the 55% ad valorem tax on cigarettes is found to be
defective, invalid and unenforceable . . . . Accordingly, the
deficiency ad valorem tax assessment issued on petitioner
Fortune Tobacco Corporation in the amount of P9,598,334.00,
exclusive of surcharge and interest, is hereby cancelled for
lack of legal basis. 2
The CTA held that petitioner Commissioner of Internal Revenue failed
to observe due process of law in issuing RMC 37-93 as there was no
prior notice and hearing, and that RMC 37-93 was in itself
discriminatory. The motion to reconsider its decision was denied by
the CTA for lack of merit. On 31 March 1995 respondent Court of
Appeals affirmed in toto the decision of the CTA. 3 Hence, the instant
petition for review.
Petitioner now submits through the Solicitor General that RMC 37-93
reclassifying Hope Luxury, Premium More and Champion as locally
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
manufactured cigarettes bearing brands is merely an interpretative ruling
which needs no prior notice and hearing as held in Misamis Oriental
Association of Coco Traders, Inc. v. Department of Finance Secretary. 4 It
maintains that neither is the assailed revenue memorandum circular
discriminatory as it merely "lays down the test in determining whether or not a
locally manufactured cigarette bears a foreign brand using (only) the
cigarette brands Hope, More and Champion as specific examples." 5
Respondent corporation on the other hand contends that RMC 37-93 is not a
mere interpretative ruling but is adjudicatory in nature where prior notice and
hearing are mandatory, and that Misamis Oriental Association of Coco
Traders, Inc. v. Department of Finance Secretary on which the Solicitor
General relies heavily is not applicable. Respondent Fortune Tobacco
Corporation also argues that RMC 37-93 discriminates against its cigarette
brands since those of its competitors which are similarly situated have not
been reclassified.
The main issues before us are (a) whether RMC 37-93 is merely an
interpretative rule the issuance of which needs no prior notice and hearing, or
an adjudicatory ruling which calls for the twin requirements of prior notice and
hearing, and, (b) whether RMC 37-93 is discriminatory in nature.
A brief discourse on the powers and functions of administrative bodies may be
instructive.
Administrative agencies posses quasi-legislative or rule making powers and
quasi-judicial or administrative adjudicatory powers. Quasi-legislative or rule
making power is the power to make rules and regulations which results
in delegated legislation that is within the confines of the granting statute and
the doctrine of nondelegability and separability of powers.
Interpretative rule, one of the three (3) types of quasi-legislative or rule making
powers of an administrative agency (the other two being supplementary or
detailed legislation, and contingent legislation), is promulgated by the
administrative agency to interpret, clarify or explain statutory regulations
under which the administrative body operates. The purpose or objective of an
interpretative rule is merely to construe the statute being administered. It
purports to do no more than interpret the statute. Simply, the rule tries to say
Page 64

what the statute means. Generally, it refers to no single person or party in
particular but concerns all those belonging to the same class which may be
covered by the said interpretative rule. It need not be published and neither is
a hearing required since it is issued by the administrative body as an incident
of its power to enforce the law and is intended merely to clarify statutory
provisions for proper observance by the people. In Tañada v. Tuvera, 6 this
Court expressly said that "[i]interpretative regulations . . . . need not be
published."
Quasi-judicial or administrative adjudicatory power on the other hand is the
power of the administrative agency to adjudicate the rights of persons before
it. It is the power to hear and determine questions of fact to which the
legislative policy is to apply and to decide in accordance with the standards
laid down by the law itself in enforcing and administering the same law. 7 The
administrative body exercises its quasi-judicial power when it performs in a
judicial manner an act which is essentially of an executive or administrative
nature, where the power to act in such manner is incidental to or reasonably
necessary for the performance of the executive or administrative duty
entrusted to it. 8 In carrying out their quasi-judicial functions the administrative
officers or bodies are required to investigate facts or ascertain the existence
of facts, hold hearings, weigh evidence, and draw conclusions from them as
basis for their official action and exercise of discretion in a judicial nature.
Since rights of specific persons are affected it is elementary that in the proper
exercise of quasi-judicial power due process must be observed in the conduct
of the proceedings.
The importance of due process cannot be underestimated. Too basic is the
rule that no person shall be deprived of life, liberty or property without due
process of law. Thus when an administrative proceeding is quasi-judicial in
character, notice and fair open hearing are essential to the validity of the
proceeding. The right to reasonable prior notice and hearing embraces not
only the right to present evidence but also the opportunity to know the claims
of the opposing party and to meet them. The right to submit arguments
implies that opportunity otherwise the right may as well be considered
impotent. And those who are brought into contest with government in a
quasi-judicial proceeding aimed at the control of their activities are entitled to
be fairy advised of what the government proposes and to be heard upon its
proposal before it issues its final command.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
There are cardinal primary rights which must be respected in administrative
proceedings. The landmark case of Ang Tibay v. The Court of Industrial
Relations 9 enumerated these rights: (1) the right to a hearing, which includes
the right of the party interested or affected to present his own case and
submit evidence in support thereof; (2) the tribunal must consider the
evidence presented; (3) the decision must have something to support itself; (4)
the evidence must be substantial; (5) the decision must be rendered on the
evidence presented at the hearing, or at least contained in the record and
disclosed to the parties affected; (6) the tribunal or any of its judges must act
on its or his own independent consideration of the law and facts of the
controversy, and not simply accept the views of a subordinate in arriving at a
decision; and, (7) the tribunal should in all controversial questions render its
decision in such manner that the parties to the proceeding may know the
various issues involved and the reasons for the decision rendered.
In determining whether RMC No. 37-93 is merely an interpretative rule which
requires no prior notice and hearing, or an adjudicatory rule which demands
the observance of due process, a close examination of RMC 37-93 is in order.
Noticeably, petitioner Commissioner of Internal Revenue at first interprets Sec.
142, par. (c), subpar. (1), of the NIRC, as amended, by citing the law and
clarifying or explaining what it means —
Section 142 (c) (1), National Internal Revenue Code, as
amended by R.A. No. 6956, provides: On locally
manufactured cigarettes bearing a foreign brand, fifty-five
percent (55%) Provided, That this rate shall apply regardless of
whether or not the right to use or title to the foreign brand
was sold or transferred by its owner to the local manufacturer.
Whenever it has to be determined whether or not a cigarette
bears a foreign brand, the listing of brands manufactured in
foreign countries appearing in the current World Tobacco
Directory shall govern.
Under the foregoing, the test for imposition of the 55% ad
valorem tax on cigarettes is that the locally manufactured
cigarettes bear a foreign brand regardless of whether or not
the right to use or title to the foreign brand was sold or
transferred by its owner to the local manufacturer. The brand
must be originally owned by a foreign manufacturer or
Page 65

producer. If ownership of the cigarette brand is, however, not
definitely determinable,
". . . the listing of brands manufactured in foreign countries
appearing in the current World Tobacco Directory shall
govern . . ."
Then petitioner makes a factual finding by declaring that Hope (Luxury),
(Premium) More and Champion are manufactured by other foreign
manufacturers —
Hope is listed in the World Tobacco Directory as being
manufactured by (a) Japan Tobacco, Japan and (b) Fortune
Tobacco, Philippines. More is listed in the said directory as
being manufactured by: (a) Fills de Julia Reig, Andorra; (b)
Rothmans, Australia; (c) RJR-MacDonald, Canada; (d) Rettig-
Strenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds,
Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco,
Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds,
Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland;
and (m) R.J. Reynolds, USA. "Champion" is registered in the
said directory as being manufactured by: (a) Commonwealth
Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f)
Tabac Reunies, Switzerland.
From this finding, petitioner thereafter formulates an inference that since it
cannot be determined who among the manufacturers are the real owners of
the brands in question, then these cigarette brands should be considered
foreign brands —
Since there is no showing who among the above-listed
manufacturers of the cigarettes bearing the said brands are
the real owner/s thereof, then it follows that the same shall be
considered foreign brand for purposes of determining the ad
valorem tax pursuant to Section 142 of the National Internal
Revenue Code. As held in BIR Ruling No. 410-88, dated
August 24, 1988, "in cases where it cannot be established or
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
there is dearth of evidence as to whether a brand is foreign or
not, resort to the World Tobacco Directory should be made."
Finally, petitioner caps RMC 37-93 with a disposition specifically directed at
respondent corporation reclassifying its cigarette brands as locally
manufactured bearing foreign brands —
In view of the foregoing, the aforesaid brands of
cigarettes, viz: Hope, More and Champion being
manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on
cigarettes.
Any ruling inconsistent herewith is revoked or modified
accordingly.
It is evident from the foregoing that in issuing RMC 37-93 petitioner
Commissioner of Internal Revenue was exercising her quasi-judicial or
administrative adjudicatory power. She cited and interpreted the law, made
a factual finding, applied the law to her given set of facts, arrived at a
conclusion, and issued a ruling aimed at a specific individual. Consequently
prior notice and hearing are required. It must be emphasized that even the
text alone of RMC 37-93 implies that reception of evidence during a hearing is
appropriate if not necessary since it invokes BIR Ruling No. 410-88, dated
August 24, 1988, which provides that "in cases where it cannot be established
or there is dearth of evidence as to whether a brand is foreign or not . . . ."
Indeed, it is difficult to determine whether a brand is foreign or not if it is not
established by, or there is dearth of, evidence because no hearing has been
called and conducted for the reception of such evidence. In fine, by no
stretch of the imagination can RMC 37-93 be considered purely as an
interpretative rule — requiring no previous notice and hearing and simply
interpreting, construing, clarifying or explaining statutory regulations being
administered by or under which the Bureau of Internal Revenue operates.
It is true that both RMC 47-91 in Misamis Oriental Association of Coco Traders
v. Department of Finance Secretary, and RMC 37-93 in the instant case
reclassify certain products for purposes of taxation. But the similarity between
Page 66
 DUMAUAL, JEANNE PAULINE J. 2019-2020

the two revenue memorandum circulars ends there. For in properly

determining whether a revenue memorandum circular is merely an E
interpretative rule or an adjudicatory rule, its very tenor and text, and the s
circumstances surrounding its issuance will have no to be considered. m
y
We quote RMC 47-91 promulgated 11 June 1991 — r
n
a
Revenue Memorandum Circular No. 47-91
E
SUBJECT : Taxability of Copra .
TO : All Revenue Officials and Employees and Others
Concerned. R
e
For the information and guidance of all officials and y
employees and others concerned, quoted hereunder in its e
entirety is VAT Ruling No. 190-90 dated August 17, 1990: s

COCOFED MARKETING RESEARCH V

CORPORATION i
6th Floor Cocofed Building c
144 Amorsolo Street e
Legaspi Village, Makati
Metro Manila P
r
e
A s
t i
t d
e e
n n
t t
i
o —
n
: F
i
M n
s a
.

Atty. Santos, Taxation I Page 67

 DUMAUAL, JEANNE PAULINE J. 2019-2020

n
c
e

Sirs:

This has reference to your letter dated

January 16, 1990 wherein you represented
that inspite of your VAT registration of your
copra trading company, you are supposed
to be exempt from VAT on the basis of BIR
Ruling dated January 8, 1988 which
considered copra as an agricultural food
product in its original state. In this
connection, you request for a confirmation
of your opinion as aforestated.

In reply, please be informed that copra,

being an agricultural non-food product, is
exempt from VAT only if sale is made by the
primary producer pursuant to Section 103 (a)
of the Tax Code, as amended. Thus as a
trading company and a subsequent seller,
your sale of copra is already subject to VAT
pursuant to Section 9(b) (1) of Revenue
Regulations 5-27.

This revokes VAT Ruling Nos. 009-88 and 279-

88.

V
e
r
y

t
r
u

Atty. Santos, Taxation I Page 68

 DUMAUAL, JEANNE PAULINE J. 2019-2020

e
r

o
f

I
n
t
e
r
n
a
l

R
e
v
e
n
u
e

As a clarification, this is the present and official stand of this

Office unless sooner revoked or amended. All revenue
officials and employees are enjoined to give this Circular as
wide a publicity as possible.

(
S
g
d
.
)

J
O
S
E

Atty. Santos, Taxation I Page 69


Quite obviously, the very text of RMC 47-91 itself shows that it is merely an
interpretative rule as it simply quotes a VAT Ruling and reminds those
concerned that the ruling is the present and official stand of the Bureau of
Internal Revenue. Unlike in RMC 37-93 where petitioner Commissioner
manifestly exercised her quasi-judicial or administrative adjudicatory power, in
RMC 47-91 there were no factual findings, no application of laws to a given
set of facts, no conclusions of law, and no dispositive portion directed at any
particular party.
Another difference is that in the instant case, the issuance of the assailed
revenue memorandum circular operated to subject the taxpayer to the new
law which was yet to take effect, while in Misamis, the disputed revenue
memorandum circular was issued simply to restate and then clarify the
prevailing position and ruling of the administrative agency, and no new law
yet to take effect was involved. It merely interpreted an existing law which
had already been in effect for some time and which was not set to be
amended. RMC 37-93 is thus prejudicial to private respondent alone.
A third difference, and this likewise resolves the issue of discrimination, is that
RMC 37-93 was ostensibly issued to subject the cigarette brands of respondent
corporation to a new law as it was promulgated two days before the
expiration of the old law and a few hours before the effectivity of the new
law. That RMC 37-93 is particularly aimed only at respondent corporation and
its three (3) cigarette brands can be seen from the dispositive portion of the
assailed revenue memorandum circular —
In view of the foregoing, the aforesaid brands of
cigarettes, viz: Hope, More, and Champion being
manufactured by Fortune Tobacco Corporation are hereby
considered locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on
cigarettes.
Any ruling inconsistent herewith is revoked or modified
accordingly.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Thus the argument
u of the Solicitor General that RMC 37-93 is not discriminatory
as "[i]t merelye lays down the test in determining whether or not a locally
manufactured cigarette bears a foreign brand using the cigarette
brands Hope, More and Champion as specific examples," cannot be
accepted, much less sustained. Without doubt, RMC 37-93 has a tremendous
effect on respondent corporation — and solely on respondent corporation —
as its deficiency ad valorem tax assessment on its removals
of Hope, Luxury, Premium More, and Champion cigarettes for six (6) hours
alone, i.e., from six o'clock in the evening of 2 July 1993 which is presumably
the time respondent corporation was supposed to have received the
facsimile message sent by Deputy Commissioner Victor A. Deoferio, until
twelve o'clock midnight upon the effectivity of the new law, was already
P9,598,334.00. On the other hand, RMC 47-91 was issued with no purpose
except to state and declare what has been the official stand of the
administrative agency on the specific subject matter, and was indiscriminately
directed to all copra traders with no particular individual in mind.
That petitioner Commissioner of Internal Revenue is an expert in her filed is not
attempted to be disputed; hence, we do not question the wisdom of her act
in reclassifying the cigarettes. Neither do we deny her the exercise of her
quasi-legislative or quasi-judicial powers. But most certainly, by constitutional
mandate, the Court must check the exercise of these powers and ascertain
whether petitioner has gone beyond the legitimate bounds of her authority.
In the final analysis, the issue before us in not the expertise, the authority to
promulgate rules, or the wisdom of petitioner as Commissioner of Internal
Revenue is reclassifying the cigarettes of private respondents. It is simply the
faithful observance by government by government of the basic constitutional
right of a taxpayer to due process of law and equal protection of the laws.
This is what distresses me no end — the manner and the circumstances under
which the cigarettes of private respondent were reclassified and
correspondingly taxed under RMC 37-93, and adjudicatory rule which
therefore requires reasonable notice and hearing before its issuance. It should
not be confused with RMC 47-91, which is a mere interpretative rule.
In the earlier case of G.R. No. 119322, which practically involved the same
opposing interests, I also voted to uphold the constitutional right of the
taxpayer concerned to due process and equal protection of the laws. By a
vote of 3-2, that view prevailed. In sequela, we in the First Division who
Page 70

constituted the majority found ourselves unjustly drawn into the vortex of a
nightmarish episode. The strong ripples whipped up by my opinion expressed
therein — and of the majority — have yet to varnish when we are again in the
imbroglio of a similar dilemma. The unpleasant experience should be reason
enough to simply steer clear of this controversy and surf on a pretended loss of
judicial objectivity. Such would have been an easy way out, a gracious exit,
so to speak, albeit lame. But to camouflage my leave with a sham excuse
would be to turn away from a professional vow I keep at all times; I would not
be true to myself, and to the people I am committed to serve. Thus, as I have
earlier expressed, if placed under similar circumstances in some future time, I
shall have to brave again the prospect of another vilification and a tarnished
image if only to show proudly to the whole world that under the present
dispensation judicial independence in our country is a true component of our
democracy.
In fine, I am greatly perturbed by the manner RMC No. 37-93 was issued as
well as the effect of such issuance. For it cannot be denied that the
circumstances clearly demonstrate that it was hastily issued — without prior
notice and hearing, and singling out private respondent alone — when two
days before a new tax law was to take effect petitioner reclassified and taxed
the cigarette brands of private respondent at a higher rate. Obviously, this
was to make it appear that even before the anticipated date of effectivity of
the statute — which was undeniably priorly known to petitioner — these
brands were already currently classified and taxed at fifty-five percent (55%),
thus shoving them into the purview of the law that was to take effect two days
after!
For sure, private respondent was not properly informed before the issuance of
the questioned memorandum circular that its cigarette brands Hope
Luxury, Premium More and Champion were being reclassified and subjected
to a higher tax rate. Naturally, the result would be to lose financially because
private respondent was still selling its cigarettes at a price based on the old,
lower tax rate. Had there been previous notice and hearing, as claimed by
private respondent, it could have very well presented its side, either by
opposing the reclassification, or by acquiescing thereto but increasing the
price of its cigarettes to adjust to the higher tax rate. The reclassification and
the ensuing imposition of a tax rate increase therefore could not be anything
but confiscatory if we are also to consider the claim of private respondent
that the new tax is even higher than the cost of its cigarettes.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Accordingly, I vote to deny the petition.
HERMOSISIMA, JR., J.: dissenting
Private respondent Fortune Tobacco Corporation in the instant case disputes
its liability for deficiency ad valorem excise taxes on its removals of "Hope,"
"More," and "Champion" cigarettes from 6:00 p.m. to 12:00 midnight of July 2,
1993, in the total amount of P9,598,334.00. It claims that the circular, upon
which the assessment was based and made, is defective, invalid and
unenforceable for having been issued without notice and hearing and in
violation of the equal protection clause guaranteed by the Constitution.
The majority upholds these claims of private respondent, convinced that the
Circular in question, in the first place, did not give prior notice and hearing,
and so, it could not have been valid and effective. It proceeds to affirm the
factual findings of the Court of Tax Appeals, which findings were considered
correct by respondent Court of Appeals, to the effect that the petitioner
Commissioner of Internal Revenue had indeed blatantly failed to comply with
the said twin requirements of notice and hearing, thereby rendering the
issuance of the questioned Circular to be in violation of the due process
clause of the Constitution. It is also its dominant opinion that the questioned
Circular discriminates against private respondent Fortune Tobacco
Corporation insofar as it seems to affect only its "Hope," "More," and
"Champion" cigarettes, to the exclusion of other cigarettes apparently of the
same kind or classification as these cigarettes manufactured by private
respondent.
With all due respect, I disagree with the majority in its disquisition of the issues
and its resulting conclusions.
Section 245 of the National Internal Revenue Code,
as amended, empowers the Commissioner of Internal
Revenue to issue the questioned Circular
Section 245 of the National Internal Revenue Code, as amended, provides:
Page 71

Sec. 245. Authority of Secretary of Finance to promulgate
rules and regulations. — The Secretary of Finance, upon
recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement of
the provisions of this Code . . . without prejudice to the power
of the Commissioner of Internal Revenue to make rulings or
opinions in connection with the implementation of the
provisions of internal revenue laws, including rulings on the
classification of articles for sales tax and similar purposes.
The subject of the questioned Circular is the reclassification of cigarettes
subject to excise taxes. It was issued in connection with Section 142 (c) (1) of
the National Internal Revenue Code, as amended, which imposes ad
valorem excise taxes on locally manufactured cigarettes bearing a foreign
brand. The same provision prescribes the ultimate criterion that determines
which cigarettes are to be considered "locally manufactured cigarettes
bearing a foreign brand." It provides:
. . . Whenever it has to be determined whether or not a
cigarette bears a foreign brand, the listing of brands
manufactured in foreign countries appearing in the current
World Tobacco Directory shall govern.
There is only one World Tobacco Directory for a given current year,
and the same is mandated by law to be the BIR Commissioner's
controlling basis for determining whether or not a particular locally
manufactured cigarette is one bearing a foreign brand. In so making
a determination, petitioner should inquire into the entries in the World
Tobacco Directory for the given current year and shall be held bound
by such entries therein. She is not required to subject the results of her
inquiries to feedback from the concerned cigarette manufacturers,
and it is doubtlessly not desirable nor managerially sound to court
dispute thereon when the law does not, in the first place, require
debate or hearing thereon. Petitioner may make such a
determination because she is the Chief Executive Officer of the
administrative agency that is the Bureau of Internal Revenue in which
are vested quasi-legislative powers entrusted to it by the legislature in
recognition of its more encompassing and unequalled expertise in the
field of taxation.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The vesture of quasi-legislative and quasi-judicial powers in
administrative bodies is not unconstitutional, unreasonable
and oppressive. It has been necessitated by "the growing
complexity of the modern society" (Solid Homes, Inc. vs.
Payawal, 177 SCRA 72, 79). More and more administrative
bodies are necessary to help in the regulation of society's
ramified activities. "Specialized in the particular field assigned
to them, they can deal with the problems thereof with more
expertise and dispatch than can be expected from the
legislature or the courts of justice" . . . 1
Statutorily empowered to issue rulings or opinions embodying the proper
determination in respect to classifying articles, including cigarettes, for
purposes of tax assessment and collection, petitioner was acting well within
her prerogatives when she issued the questioned Circular. And in the exercise
of such prerogatives under the law, she has in her favor the presumption of
regular performance of official duty which must be overcome by clearly
persuasive evidence of stark error and grave abuse of discretion in order to be
overturned and disregarded.
It is irrelevant that the Court of Tax Appeals makes much of the effect of the
passing of Republic Act No. 7654 2 on petitioner's power to classify cigarettes.
Although the decisions assailed and sought to be reviewed, as well as the
pleadings of private respondent, are replete with alleged admissions of our
legislators to the effect that the said Act was intended to freeze the current
classification of cigarettes and make the same an integral part of the said
Act, certainly the repeal, if any, of petitioner's power to classify cigarettes must
be reckoned from the effectivity of the said Act and not before. Suffice it to
say that indisputable is the plain fact that the questioned Circular was issued
on July 1, 1993, while the said Act took effect on July 3, 1993.
The contents of the questioned circular have not
been proven to be erroneous or illegal as to render
issuance thereof an act of grave abuse of
discretion on the part of petitioner Commissioner
Prior to the effectivity of R.A. No. 7654, Section 142 (c) (1) of the National
Internal Revenue Code, as amended, levies the following ad valorem taxes
Page 72

on cigarettes in accordance with their predetermined classifications as
established by the Commissioner of Internal Revenue:
. . . based on the manufacturer's registered wholesale price:
(1) On locally manufactured cigarettes bearing a foreign
brand, fifty-five percent (55%) Provided, That this rate shall
apply regardless of whether or not the right to use or title to
the foreign brand was sold or transferred by its owner to the
local manufacturer. Whenever it has to be determined
whether or not a cigarette bears a foreign brand, the listing of
brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.
(2) Other locally manufactured cigarettes, forty five percent
(45%).
xxx xxx xxx
Prior to the issuance of the questioned Circular, assessed against and paid by
private respondent as ad valorem excise taxes on their removals of "Hope,"
"More," and "Champion" cigarettes were amounts based on paragraph (2)
above, i.e., the tax rate made applicable on the said cigarettes was 45% at
the most. The reason for this is that apparently, petitioner's predecessors have
all made determinations to the effect that the said cigarettes were to be
considered "other locally manufactured cigarettes" and not "locally
manufactured cigarettes bearing a foreign brand." Even petitioner, until her
issuance of the questioned Circular, adhered to her predecessors'
determination as to the proper classification of the above-mentioned
cigarettes for purposes of ad valorem excise taxes. Apparently, the past
determination that the said cigarettes were to be classified as "other locally
manufactured cigarettes" was based on private respodnent's convenient
move of changing the names of "Hope" to "Hope Luxury" and "More" to
"Premium More." It also submitted proof that "Champion" was an original
Fortune Tobacco Corporation register and, therefore, a local brand. Having
registered these brands with the Philippine Patent Office and with
corresponding evidence to the effect, private respondent paid ad
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
valorem excise taxes computed at the rate of not more than 45% which is the
rate applicable to cigarettes considered as locally manufactured brands.
How these past determinations pervaded notwithstanding their erroneous
basis is only tempered by their innate quality of being merely errors in
interpretative ruling, the formulation of which does not bind the government.
Advantage over such errors may precipitously be withdrawn from those who
have been benefiting from them once the same have been discovered and
rectified.
Petitioner correctly emphasizes that:
. . . the registration of said brands in the name of private
respondent is proof only that it is the exclusive owner thereof
in the Philippines; it does not necessarily follow, however, that
it is the exclusive owner thereof in the whole world. Assuming
arguendo that private respondent is the exclusive owner of
said brands in the Philippines, it does not mean that they are
local. Otherwise, they would not have been listed in the WTD
as international brands manufactured by different entities in
different countries. Moreover, it cannot be said that the
brands registered in the names of private respondent are not
the same brands listed in the WTD because private
respondent is one of the manufacturers of said brands listed
in the WTD. 3
Private respondent attempts to cast doubt on the determination made by
petitioner in the questioned Circular that Japan is a manufacturer of "Hope"
cigarettes. Private respondent's own inquiry into the World Tobacco Directory
reveals that Japan is not a manufacturer of "Hope" cigarettes. In pointing this
out, private respondent concludes that the entire Circular is erroneous and
makes such error the principal proof of its claim that the nature of the
determination embodied in the questioned Circular requires a hearing on the
facts and a debate on the applicable law. Such a determination is
adjudicatory in nature and, therefore, requires notice and hearing. Private
respondent is, however, apparently only eager to show error on the part of
petitioner for acting with grave abuse of discretion. Private respondent
conveniently forgets that petitioner, equipped with the expertise in taxation,
Page 73

recognized in that expertise by the legislature that vested in her the power to
make rules respecting classification of articles for taxation purposes, and
presumed to have regularly exercised her prerogatives within the scope of her
statutory power to issue determinations specifically under Section 142 (c) (1) in
relation to Section 245 of the National Internal Revenue Code, as amended,
simply followed the law as she understood it. Her task was to determine which
cigarette brands were foreign, and she was directed by the law to look into
the World Tobacco Directory. Foreign cigarette brands were legislated to be
taxed at higher rates because of their more extensive public exposure and
international reputation; their competitive edge against local brands may
easily be checked by imposition of higher tax rates. Private respondent makes
a mountain of the mole hill circumstance that "Hope" is listed, not as being
"manufactured" by Japan but as being "used" by Japan. Whether
manufactured or used by Japan, however, "Hope" remains a cigarette brand
that can not be said to be limited to local manufacture in the Philippines. The
undeniable fact is that it is a foreign brand the sales in the Philippines of which
are greatly boosted by its international exposure and reputation. The
petitioner was well within her prerogatives, in the exercise of her rule-making
power, to classify articles for taxation purposes, to interpret the laws which she
is mandated to administer. In interpreting the same, petitioner must, in
general, be guided by the principles underlying taxation, i.e., taxes are the
lifeblood of Government, and revenue laws ought to be interpreted in favor of
the Government, for Government can not survive without the funds to
underwrite its varied operational expenses in pursuit of the welfare of the
society which it serves and protects.
Private respondent claims that its business will be destroyed by the imposition
of additional ad valorem taxes as a result of the effectivity of the questioned
Circular. It claims that under the vested rights theory, it cannot now be made
to pay higher taxes after having been assessed for less in the past. Of course
private respondent will trumpet its losses, its interests, after all, being its sole
concern. What private respondent fails to see is the loss of revenue by the
Government which, because of erroneous determinations made by its past
revenue commissioners, collected lesser taxes than what it was entitled to in
the first place. It is every citizen's duty to pay the correct amount of taxes.
Private respondent will not be shielded by any vested rights, for there are not
vested rights to speak of respecting a wrong construction of the law by
administrative officials, and such wrong interpretation does not place the
Government in estoppel to correct or overrule the same. 4
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The Questioned Circular embodies an interpretative
ruling of petitioner Commissioner which as such does
not require notice and hearing
As one of the public offices of the Government, the Bureau of Internal
Revenue, through its Commissioner, has grown to be a typical administrative
agency vested with a fusion of different governmental powers: the power to
investigate, initiate action and control the range of investigation, the power to
promulgate rules and regulations to better carry out statutory policies, and the
power to adjudicate controversies within the scope of their activities. 5 In the
realm of administrative law, we understand that such an empowerment of
administrative agencies was evolved in response to the needs of a changing
society. This development arose as the need for broad social control over
complex conditions and activities became more and more pressing, and such
complexity could no longer be dealt with effectivity and directly by the
legislature or the judiciary. The theory which underlies the empowerment of
administrative agencies like the Bureau of Internal Revenue, is that the issues
with which such agencies deal ought to be decided by experts, and not be a
judge, at least not in the first instance or until the facts have been sifted and
arranged. 6
One of the powers of administrative agencies like the Bureau of Internal
Revenue, is the power to make rules. The necessity for vesting administrative
agencies with this power stems from the impracticability of the lawmakers
providing general regulations for various and varying details pertinent to a
particular legislation. 7
The rules that administrative agencies may promulgate may either be
legislative or interpretative. The former is a form of subordinate legislation
whereby the administrative agency is acting in a legislative capacity,
supplementing the statute, filling in the details, pursuant to a specific
delegation of legislative power. 8
Interpretative rules, on the other hand, are "those which purport to do no
more than interpret the statute being administered, to say what it means." 9
There can be no doubt that there is a distinction between an
administrative rule or regulation and an administrative
Page 74

interpretation of a law whose enforcement is entrusted to an
administrative body. When an administrative agency
promulgates rules and regulations, it "makes" a new law with
the force and effect of a valid law, while when it renders an
opinion or gives a statement of policy, it merely interprets a
pre-existing law (Parker, Administrative Law, p. 197; Davis
Administrative Law, p. 194). Rules and regulations when
promulgated in pursuance of the procedure or authority
conferred upon the administrative agency by law, partake of
the nature of a statute, and compliance therewith may be
enforced by a penal sanction provided in the law. This is so
because statutes are usually couched in general terms, after
expressing the policy, purposes, objectives, remedies and
sanctions intended by the legislature. The details and the
manner of carrying out the law are often times left to the
administrative agency entrusted with its enforcement. In this
sense, it has been said that rules and regulations are the
product of a delegated power to create new or additional
legal provisions that have the effect of law. (Davis, op. cit. p.
194.)
A rule is binding on the courts as long as the procedure fixed
for its promulgation is followed and its scope is within the
statutory authority granted by the legislature, even if the
courts are not in agreement with the policy stated therein or
its innate wisdom (Davis, op. cit. pp. 195-197). On the other
hand, administrative interpretation of the law is at best merely
advisory, for it is the courts that finally determine what the law
means. 10
"Whether a given statutory delegation authorizes legislative or interpretative
regulations depends upon whether the statute places specific 'sanctions'
behind the regulations authorized, as for example, by making it a criminal
offense to disobey them, or by making conformity with their provisions a
condition of the exercise of legal privileges." 11 This is because interpretative
regulations are by nature simply statutory interpretations, which have behind
them no statutory sanction. Such regulations, whether so expressly authorized
by statute or issued only as an incident of statutory administration, merely
embody administrative findings of law which are always subject to judicial
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
determination as to whether they are erroneous or not, even when their
issuance is authorized by statute.
The questioned Circular has undisputedly been issued by petitioner in
pursuance of her rule-making powers under Section 245 of the National
Internal Revenue Code, as amended. Exercising such powers, petitioner re-
classified "Hope," "More" and "Champion" cigarettes as locally manufactured
cigarettes bearing foreign brands. The re-classification, as previously
explained, is the correct interpretation of Section 142 (c) (1) of the said Code.
The said legal provision is not accompanied by any penal sanction, and no
detail had to be filled in by petitioner. The basis for the classification of
cigarettes has been provided for by the legislature, and all petitioner has to
do, on behalf of the government agency she heads, is to proceed to make
the proper determination using the criterion stipulated by the lawmaking
body. In making the proper determination, petitioner gave it a liberal
construction consistent with the rule that revenue laws are to be construed in
favor of the Government whose survival depends on the contributions that
taxpayers give to the public coffers that finance public services and other
governmental operations.
The Bureau of Internal Revenue which petitioner heads, is the government
agency charged with the enforcement of the laws pertinent to this case and
so, the opinion of the Commissioner of Internal Revenue, in the absence of a
clear showing that it is plainly wrong, is entitled to great weight. Private
respondent claims that its rights under previous interpretations of Section 142
(c) (1) may not abruptly be cut by a new interpretation of the said section,
but precisely the said section is subject to various and changing construction,
and hence, any ruling issued by petitioner thereon is necessarily interpretative
and not legislative. Private respondent insists that the questioned circular is
adjudicatory in nature because it determined the rights of private respondent
in a controversy involving his tax liability. It also asseverates that the
questioned circular involved administrative action that is particular and
immediate, thereby rendering it subject to the requirements of notice and
hearing in compliance with the due process clause of the Constitution.
We find private respondent's arguments to be rather strained.
Page 75

Petitioner made a determination as to the classification of cigarettes as
mandated by the aforecited provisions in the National Internal Revenue
Code, as amended. Such determination was an interpretation by petitioner of
the said legal provisions. If in the course of making the interpretation and
embodying the same in the questioned circular which the petitioner
subsequently issued after making such a determination, private respondent's
cigarettes products, by their very nature of being foreign brands as evidenced
by their enlistment in the World Tobacco Directory, which is the controlling
basis for the proper classification of cigarettes as stipulated by the law itself,
have come to be classified as locally manufactured cigarettes bearing
foreign brands and as such subject to a tax rate higher than what was
previously imposed thereupon based on past rulings of other revenue
commissioners, such a situation is simply a consequence of the performance
by petitioner of here duties under the law. No adjudication took place, much
less was there any controversy ripe for adjudication. The natural
consequences of making a classification in accordance with law may not be
used by private respondent in arguing that the questioned circular is in fact
adjudicatory in nature. Such an exercise in driving home a point is illogical as it
is fallacious and misplaced.
Private respondent concedes that under general rules of administrative law,
"a ruling which is merely 'interpretative' in character may not require prior
notice to affected parties before its issuance as well as a hearing" and "for this
reason, in most instances, interpretative regulations are not given the force of
law." 12 Indeed, "interpretative regulations and those merely internal in nature
. . . need not be published." 13 And it is now settled that only legislative
regulations and not interpretative rulings must have the benefit of public
hearing. 14
Because (1) the questioned circular merely embodied an interpretation or a
way of reading and giving meaning to Section 142 (c) (1) of the National
Internal Revenue Code, as amended; (2) petitioner did not fill in any details in
the aforecited section but only classified cigarettes on the basis of the World
Tobacco Directory in the light of the paramount principle of construing
revenue laws in favor of the Government to the end that Government collects
as much tax money as it is entitled to in order to fulfill its public purposes for the
general good of its citizens; (3) no penal sanction is provided in the aforecited
section that was construed by petitioner in the questioned circular; and (4) a
similar circular declassifying copra from being an agricultural food to non-food
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
product for purposes of the value added tax laws, resulting in the revocation
of an exemption previously enjoyed by copra traders, has been ruled by us to
be merely an interpretative ruling and not a legislative, much less, an
adjudicatory, action on the part of the revenue commissioner, 15 this Court
must not be blind to the fact that the questioned Circular is indeed an
interpretative ruling not subject to notice and hearing.
Neither is the questioned Circular tainted by a
violation of the equal protection clause under the
Constitution
Private respondent anchors its claim of violation of its equal protection rights
upon the too obvious fact that only its cigarette brands, i.e., "Hope," "More"
and "Champion," are mentioned in the questioned circular. Because only the
cigarettes that they manufacture are enumerated in the questioned circular,
private respondent proceeded to attack the same as being discriminatory
against it. On the surface, private respondent seems to have a point there. A
scrutiny of the questioned Circular, however, will show that it is undisputedly
one of general application for all cigarettes that are similarly situated as
private respondent's brands. The new interpretation of Section 142 (1) (c) has
been well illustrated in its application upon private respondent's brands, which
illustration is properly a subject of the questioned Circular. Significantly,
indicated as the subject of the questioned circular is the "reclassification of
cigarettes subject to excise taxes." The reclassification resulted in the
foregrounding of private respondent's cigarette brands, which incidentally is
largely due to the controversy spawned no less by private respondent's own
action of conveniently changing its brand names to avoid falling under a
classification that would subject it to higher ad valorem tax rates. This caused
then Commissioner Bienvenido Tan to depart from his initial determination that
private respondent's cigarette brands are foreign brands. The consequent
specific mention of such brands in the questioned Circular, does not change
the fact that the questioned Circular has always been intended for and did
cover, all cigarettes similarly situated as "Hope," "More" and "Champion."
Petitioner is thus correct in stating that:
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

. . . RMC 37-93 is not discriminatory. It lays down the test in

determining whether or not a locally manufactured cigarette
bears a foreign brand using the cigarette brands "Hope,"
More and "Champion" as specific examples. Such test applies
to all locally manufactured cigarette brands similarly situated
as the cigarette brands aforementioned. While it is true that
only "Hope," "More" and "Champion" cigarettes are actually
determined as locally manufactured cigarettes bearing a
foreign brand, RMC 37-93 does not state that ONLY cigarettes
fall under such classification to the exclusion of other
cigarettes similarly situated. Otherwise stated, RMC 37-93
does not exclude the coverage of other cigarettes similarly
situated. Otherwise stated, RMC 37-93 does not exclude the
coverage of other cigarettes similarly situated as locally
manufactured cigarettes bearing a foreign brand. Hence, in
itself, RMC 37-93 is not discriminatory. 16

Both the respondent Court of Appeals and the Court of Tax Appeals held that
the questioned Circular reclassifying "Hope," "More" and "Champion"
cigarettes, is defective, invalid and unenforceable and has rendered the
assessment against private respondent of deficiency ad valorem excise taxes
to be without legal basis. The majority agrees with private respondent and
respondent Courts. As the foregoing opinion chronicles the fatal flaws in
private respondent's arguments, it becomes more apparent that the
questioned Circular is in fact a valid and subsisting interpretative ruling that
the petitioner had power to promulgate and enforce.

WHEREFORE, I vote to grant the petition and set aside the decisions of the
Court of Tax Appeals and the Court of Appeals, respectively, and to reinstate
the decision of petitioner Commissioner of Internal Revenue denying private
respondent's request for a review, reconsideration and recall of Revenue
Memorandum Circular No. 37-93 dated July 1, 1993.

Atty. Santos, Taxation I Page 77

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-66653 June 19, 1986 Net amount actually remitted..................................
P6,499,999.30
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. Claiming that the 15% profit remittance tax should have been computed on
BURROUGHS LIMITED AND THE COURT OF TAX APPEALS, respondents. the basis of the amount actually remitted (P6,499,999.30) and not on the
amount before profit remittance tax (P7,647,058.00), private respondent filed
Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent. on December 24, 1980, a written claim for the refund or tax credit of the
amount of P172,058.90 representing alleged overpaid branch profit
remittance tax, computed as follows:

Profits actually remitted .........................................P6,499,999.30

PARAS, J.:

Remittance tax rate .......................................................15%

Petition for certiorari to review and set aside the Decision dated June 27, 1983
of respondent Court of Tax Appeals in its C.T.A. Case No. 3204,
entitled "Burroughs Limited vs. Commissioner of Internal Revenue" which Branch profit remittance tax-
ordered petitioner Commissioner of Internal Revenue to grant in favor of
private respondent Burroughs Limited, tax credit in the sum of P172,058.90, due thereon ......................................................P 974,999.89
representing erroneously overpaid branch profit remittance tax.
Branch profit remittance
Burroughs Limited is a foreign corporation authorized to engage in trade or
business in the Philippines through a branch office located at De la Rosa tax paid .............................................................Pl,147,058.70
corner Esteban Streets, Legaspi Village, Makati, Metro Manila.
Less: Branch profit remittance
Sometime in March 1979, said branch office applied with the Central Bank for
authority to remit to its parent company abroad, branch profit amounting to
tax as above
P7,647,058.00. Thus, on March 14, 1979, it paid the 15% branch profit
computed................................................. 974,999.89
remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office
the amount of P6,499,999.30 computed as follows:
Total amount refundable........................................... P172,058.81
Amount applied for remittance................................
P7,647,058.00 On February 24, 1981, private respondent filed with respondent court, a
petition for review, docketed as C.T.A. Case No. 3204 for the recovery of the
above-mentioned amount of P172,058.81.
Deduct: 15% branch profit

On June 27, 1983, respondent court rendered its Decision, the dispositive
remittance tax ..............................................1,147,058.70
portion of which reads—

Atty. Santos, Taxation I Page 78


ACCORDINGLY, respondent Commission of Internal Revenue is hereby
ordered to grant a tax credit in favor of petitioner Burroughs Limited the
amount of P 172,058.90. Without pronouncement as to costs.
SO ORDERED.
Unable to obtain a reconsideration from the aforesaid decision, petitioner
filed the instant petition before this Court with the prayers as herein earlier
stated upon the sole issue of whether the tax base upon which the 15%
branch profit remittance tax shall be imposed under the provisions of section
24(b) of the Tax Code, as amended, is the amount applied for remittance on
the profit actually remitted after deducting the 15% profit remittance tax.
Stated differently is private respondent Burroughs Limited legally entitled to a
refund of the aforementioned amount of P172,058.90.
We rule in the affirmative. The pertinent provision of the National Revenue
Code is Sec. 24 (b) (2) (ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances. Any profit remitted
abroad by a branch to its head office shall be subject to a
tax of fifteen per cent (15 %) ...
In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting
Commissioner of Internal Revenue Hon. Efren I. Plana the aforequoted
provision had been interpreted to mean that "the tax base upon which the
15% branch profit remittance tax ... shall be imposed...(is) the profit actually
remitted abroad and not on the total branch profits out of which the
remittance is to be made. " The said ruling is hereinbelow quoted as follows:
In reply to your letter of November 3, 1978, relative to your
query as to the tax base upon which the 15% branch profits
remittance tax provided for under Section 24 (b) (2) of the
1977 Tax Code shall be imposed, please be advised that the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
15% branch profit tax shall be imposed on the branch profits
actually remitted abroad and not on the total branch profits
out of which the remittance is to be made.
Please be guided accordingly.
Applying, therefore, the aforequoted ruling, the claim of private respondent
that it made an overpayment in the amount of P172,058.90 which is the
difference between the remittance tax actually paid of Pl,147,058.70 and the
remittance tax that should have been paid of P974,999,89, computed as
follows
Profits actually remitted......................................... P6,499,999.30
Remittance tax rate.............................................................. 15%
Remittance tax due................................................... P974,999.89
is well-taken. As correctly held by respondent Court in its
assailed decision-
Respondent concedes at least that in his ruling dated
January 21, 1980 he held that under Section 24 (b) (2) of the
Tax Code the 15% branch profit remittance tax shall be
imposed on the profit actually remitted abroad and not on
the total branch profit out of which the remittance is to be
made. Based on such ruling petitioner should have paid only
the amount of P974,999.89 in remittance tax computed by
taking the 15% of the profits of P6,499,999.89 in remittance tax
actually remitted to its head office in the United States,
instead of Pl,147,058.70, on its net profits of P7,647,058.00.
Undoubtedly, petitioner has overpaid its branch profit
remittance tax in the amount of P172,058.90.
Petitioner contends that respondent is no longer entitled to a refund because
Memorandum Circular No. 8-82 dated March 17, 1982 had revoked and/or
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

repealed the BIR ruling of January 21, 1980. The said memorandum circular WHEREFORE, the assailed decision of respondent Court of Tax Appeals is
states— hereby AFFIRMED. No pronouncement as to costs.

Considering that the 15% branch profit remittance tax is

imposed and collected at source, necessarily the tax base
should be the amount actually applied for by the branch with
the Central Bank of the Philippines as profit to be remitted
abroad.

Petitioner's aforesaid contention is without merit. What is applicable in the

case at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in
question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17,
1982 cannot be given retroactive effect in the light of Section 327 of the
National Internal Revenue Code which provides-

Sec. 327. Non-retroactivity of rulings. Any revocation,

modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the
Commissioner shag not be given retroactive application if the
revocation, modification, or reversal will be prejudicial to the
taxpayer except in the following cases (a) where the
taxpayer deliberately misstates or omits material facts from his
return or in any document required of him by the Bureau of
Internal Revenue; (b) where the facts subsequently gathered
by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based, or (c) where the
taxpayer acted in bad faith. (ABS-CBN Broadcasting Corp. v.
CTA, 108 SCRA 151-152)

The prejudice that would result to private respondent Burroughs Limited by a

retroactive application of Memorandum Circular No. 8-82 is beyond question
for it would be deprived of the substantial amount of P172,058.90. And, insofar
as the enumerated exceptions are concerned, admittedly, Burroughs Limited
does not fall under any of them.

Atty. Santos, Taxation I Page 80

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. 112024 January 28, 1999 The facts on record show the antecedent circumstances pertinent to this
case.
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs. Petitioner, Philippine Bank of Communications (PBCom), a commercial
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF banking corporation duly organized under Philippine laws, filed its quarterly
APPEALS, respondent. income tax returns for the first and second quarters of 1985, reported profits,
and paid the total income tax of P5,016,954.00. The taxes due were settled by
applying PBCom's tax credit memos and accordingly, the Bureau of Internal
Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for
P3,401,701.00 and P1,615,253.00, respectively.
QUISUMBING, J.:

Subsequently, however, PBCom suffered losses so that when it filed its Annual
This petition for review assails the Resolution 1 of the Court of Appeals dated
Income Tax Returns for the year-ended December 31, 1986, the petitioner
September 22, 1993 affirming the Decision2 and a Resolution 3 of the Court Of
likewise reported a net loss of P14,129,602.00, and thus declared no tax
Tax Appeals which denied the claims of the petitioner for tax refund and tax
payable for the year.
credits, and disposing as follows:

But during these two years, PBCom earned rental income from leased
IN VIEW OF ALL, THE FOREGOING, the instant petition for
properties. The lessees withheld and remitted to the BIR withholding creditable
review, is DENIED due course. The Decision of the Court of Tax
taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
Appeals dated May 20, 1993 and its resolution dated July 20,
1993, are hereby AFFIRMED in toto.
On August 7, 1987, petitioner requested the Commissioner of Internal
Revenue, among others, for a tax credit of P5,016,954.00 representing the
SO ORDERED.4
overpayment of taxes in the first and second quarters of 1985.

The Court of Tax Appeals earlier ruled as follows:

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable
taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and
WHEREFORE, Petitioner's claim for refund/tax credits of in 1986 for P234,077.69.
overpaid income tax for 1985 in the amount of P5,299,749.95
is hereby denied for having been filed beyond the
Pending the investigation of the respondent Commissioner of Internal
reglementary period. The 1986 claim for refund amounting to
Revenue, petitioner instituted a Petition for Review on November 18, 1988
P234,077.69 is likewise denied since petitioner has opted and
before the Court of Tax Appeals (CTA). The petition was docketed as CTA
in all likelihood automatically credited the same to the
Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner
succeeding year. The petition for review is dismissed for lack
of Internal Revenue."
of merit.

The losses petitioner incurred as per the summary of petitioner's claims for
SO ORDERED.5
refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals,
are as follows:

Atty. Santos, Taxation I Page 81


1985 1986
——— ———
Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00 —
Tax Withheld at Source 282,795.50 234,077.69
———————— ———————
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax
claim as P5,299,749.95. A forty five centavo
difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset,
denied the request of petitioner for a tax refund or credit in the sum amount of
P5,299,749.95, on the ground that it was filed beyond the two-year
reglementary period provided for by law. The petitioner's claim for refund in
1986 amounting to P234,077.69 was likewise denied on the assumption that it
was automatically credited by PBCom against its tax payment in the
succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's
decision but the same was denied due course for lack of merit. 6
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Thereafter, PBCom filed a petition for review of said decision and resolution of
the CTA with the Court of Appeals. However on September 22, 1993, the Court
of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this
petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom — which relied in
good faith on the formal assurances of BIR in
RMC No. 7-85 and did not immediately file
with the CTA a petition for review asking for
the refund/tax credit of its 1985-86 excess
quarterly income tax payments — can be
prejudiced by the subsequent BIR rejection,
applied retroactivity, of its assurances in RMC
No. 7-85 that the prescriptive period for the
refund/tax credit of excess quarterly income
tax payments is not two years but ten (10).7
II. Whether the Court of Appeals seriously
erred in affirming the CTA decision which
denied PBCom's claim for the refund of
P234,077.69 income tax overpaid in 1986 on
the mere speculation, without proof, that
there were taxes due in 1987 and that
PBCom availed of tax-crediting that year.8
Simply stated, the main question is: Whether or not the Court of Appeals erred
in denying the plea for tax refund or tax credits on the ground of prescription,
despite petitioner's reliance on RMC No. 7-85, changing the prescriptive
period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred
by prescription relying on the applicability of Revenue Memorandum Circular
No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes
are not covered by the two-year prescriptive period under the tax Code and
that taxpayers may claim refund or tax credits for the excess quarterly income
Page 82
 DUMAUAL, JEANNE PAULINE J. 2019-2020

tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The In the above provision of the Regulations the corporation
pertinent portions of the circular reads: may request for the refund of the overpaid income tax or
claim for automatic tax credit. To insure prompt action on
REVENUE MEMORANDUM CIRCULAR NO. 7-85 corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes, this
Office has promulgated Revenue Memorandum Order No.
SUBJECT: PROCESSING OF
32-76 dated June 11, 1976, containing the procedure in
REFUND OR TAX CREDIT OF
processing said returns. Under these procedures, the returns
EXCESS CORPORATE
are merely pre-audited which consist mainly of checking
INCOME TAX RESULTING
mathematical accuracy of the figures of the return. After
FROM THE FILING OF THE
which, the refund or tax credit is granted, and, this procedure
FINAL ADJUSTMENT RETURN.
was adopted to facilitate immediate action on cases like this.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code
provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of
Revenue Regulations Nos. 10-77 which provide;
xxx xxx xxx
It has been observed, however, that because of the excess
tax payments, corporations file claims for recovery of
overpaid income tax with the Court of Tax Appeals within the
two-year period from the date of payment, in accordance
with sections 292 and 295 of the National Internal Revenue
Code. It is obvious that the filing of the case in court is to
preserve the judicial right of the corporation to claim the
refund or tax credit.
In this regard, therefore, there is no need to file petitions for
review in the Court of Tax Appeals in order to preserve the
right to claim refund or tax credit the two year period. As
already stated, actions hereon by the Bureau are immediate
after only a cursory pre-audit of the income tax returns.
Moreover, a taxpayer may recover from the Bureau of
Internal Revenue excess income tax paid under the provisions
of Section 86 of the Tax Code within 10 years from the date of
payment considering that it is an obligation created by law
(Article 1144 of the Civil Code).9 (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position
contrary to its declared circular if it would result to injustice to taxpayers.
Citing ABS CBN Broadcasting Corporation vs. Court of Tax
Appeals 10 petitioner claims that rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers, In ABS-CBN case, the Court held that the government
is precluded from adopting a position inconsistent with one previously taken
where injustice would result therefrom or where there has been a
misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code
It should he noted, however, that this is not a case of explicitly provides for this rules as follows:
erroneously or illegally paid tax under the provisions of
Sections 292 and 295 of the Tax Code.

Atty. Santos, Taxation I Page 83

 DUMAUAL, JEANNE PAULINE J. 2019-2020

Sec. 246 Non-retroactivity of rulings— Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the
taxpayers except in the following cases:
on November 18, 1988, the same was filed beyond the time fixed by law, and
such failure is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence on the
matter, we find that, contrary to the petitioner's contention, the relaxation of
revenue regulations by RMC 7-85 is not warranted as it disregards the two-year
prescriptive period set by law.

a). where the taxpayer
deliberately misstates or
omits material facts from his
return or in any document
required of him by the
Bureau of Internal Revenue;
b). where the facts
subsequently gathered by
the Bureau of Internal
Revenue are materially
different from the facts on
which the ruling is based;
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. 13 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. 14
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.

c). where the taxpayer
acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor General,
argues that the two-year prescriptive period for filing tax cases in court
concerning income tax payments of Corporations is reckoned from the date
of filing the Final Adjusted Income Tax Return, which is generally done on April
15 following the close of the calendar year. As precedents, respondent
Commissioner cited cases which adhered to this principle, to wit ACCRA
Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also states
that since the Final Adjusted Income Tax Return of the petitioner for the
taxable year 1985 was supposed to be filed on April 15, 1986, the latter had
only until April 15, 1988 to seek relief from the court. Further, respondent
Commissioner stresses that when the petitioner filed the case before the CTA
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229,
NIRC of 1997) provides for the prescriptive period for filing a court proceeding
for the recovery of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. —
No suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been
excessive or in any manner wrongfully collected, until a claim
for refund or credit has been duly filed with the Commissioner;
but such suit or proceeding may be maintained, whether or
not such tax, penalty, or sum has been paid under protest or
duress.

Atty. Santos, Taxation I Page 84


In any case, no such suit or proceedings shall begun after the
expiration of two years from the date of payment of the tax
or penalty regardless of any supervening cause that may
arise after payment; Provided however, That the
Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears
clearly to have been erroneously paid. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of tax,
before any suit in CTA is commenced. The two-year prescriptive period
provided, should be computed from the time of filing the Adjustment Return
and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance
Co., 15 this Court explained the application of Sec. 230 of 1977 NIRC, as
follows:
Clearly, the prescriptive period of two years should
commence to run only from the time that the refund is
ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case, this
date is April 16, 1984, and two years from this date would be
April 16, 1986. . . . As we have earlier said in the TMX Sales
case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate
Income Tax Payment and Section 321 should be considered
in conjunction with it 19
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
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
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. 20 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. 21
In the case of People vs. Lim, 22 it was held that rules and regulations issued by
administrative officials to implement a law cannot go beyond the terms and
provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void
because it is not only inconsistent with but is contrary to the
provisions and spirit of Act. No 4003 as amended, because
whereas the prohibition prescribed in said Fisheries Act was
for any single period of time not exceeding five years
duration, FAO No 37-1 fixed no period, that is to say, it
establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due
to an oversight on the part of Secretary of Agriculture and
Natural Resources. Of course, in case of discrepancy, the
basic Act prevails, for the reason that the regulation or rule
issued to implement a law cannot go beyond the terms and
provisions of the
latter. . . . In this connection, the attention of the technical
men in the offices of Department Heads who draft rules and
regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they
intended to implement, this to avoid any possible
misunderstanding or confusion as in the present case.23
Further, fundamental is the rule that the State cannot be put in estoppel by
the mistakes or errors of its officials or agents. 24 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
Page 85

provision of a statute. Hence, his interpretation could not be given weight for
to do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal
Revenue, after promulgating RMC No. 7-85, is estopped by
the principle of non-retroactively of BIR rulings. Again We do
not agree. The Memorandum Circular, stating that a taxpayer
may recover the excess income tax paid within 10 years from
date of payment because this is an obligation created by
law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the
taxpayer should still file a claim for a refund or tax credit and
corresponding petition fro review within the
two-year prescription period, and that the lengthening of the
period of limitation on refund from two to ten years would be
adverse to public policy and run counter to the positive
mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was not the
Commissioner of Internal Revenue who denied petitioner's
claim of refund or tax credit. Rather, it was the Court of Tax
Appeals who denied (albeit correctly) the claim and in
effect, ruled that the RMC No. 7-85 issued by the
Commissioner of Internal Revenue is an administrative
interpretation which is out of harmony with or contrary to the
express provision of a statute (specifically Sec. 230, NIRC),
hence, cannot be given weight for to do so would in effect
amend the statute.25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting
statutes as part of the legal system of the country. But administrative decisions
do not enjoy that level of recognition. A memorandum-circular of a bureau
head could not operate to vest a taxpayer with shield against judicial action.
For there are no vested rights to speak of respecting a wrong construction of
the law by the administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the
same. 27 Moreover, the non-retroactivity of rulings by the Commissioner of
Internal Revenue is not applicable in this case because the nullity of RMC No.
7-85 was declared by respondent courts and not by the Commissioner of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Internal Revenue. Lastly, it must be noted that, as repeatedly held by this
Court, a claim for refund is in the nature of a claim for exemption and should
be construed in strictissimi juris against the taxpayer.28
On the second issue, the petitioner alleges that the Court of Appeals seriously
erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax
overpaid in 1986), based on mere speculation, without proof, that PBCom
availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any
excess of the total quarterly payments over the actual income tax computed
in the adjustment or final corporate income tax return, shall either (a) be
refunded to the corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by
marking the option box provided in the BIR form) its intention, whether to
request for a refund or claim for an automatic tax credit for the succeeding
taxable year. To ease the administration of tax collection, these remedies are
in the alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in
1986 — the Court of Tax Appeals, after examining the
adjusted final corporate annual income tax return for taxable
year 1986, found out that petitioner opted to apply for
automatic tax credit. This was the basis used (vis-avis the fact
that the 1987 annual corporate tax return was not offered by
the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic
tax credit to the succeeding year, hence it can no longer ask
for refund, as to [sic] the two remedies of refund and tax
credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance with Sec.
69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is
a finding of fact which we must respect. Moreover, the 1987 annual corporate
Page 86
 DUMAUAL, JEANNE PAULINE J. 2019-2020

tax return of the petitioner was not offered as evidence to contovert said fact.
Thus, we are bound by the findings of fact by respondent courts, there being
no showing of gross error or abuse on their part to disturb our reliance
thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of

Appeals appealed from is AFFIRMED, with COSTS against the
petitioner.1âwphi1.nêt

Atty. Santos, Taxation I Page 87


G.R. No. L-52306 October 12, 1981
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the Court of Tax
Appeals in C.T.A. Case No. 2809, dated November 29, 1979, which affirmed
the assessment by the Commissioner of Internal Revenue, dated April 16, 1971,
of a deficiency withholding income tax against petitioner, ABS-CBN
Broadcasting Corporation, for the years 1965, 1966, 1967 and 1968 in the
respective amounts of P75,895.24, P99,239.18, P128,502.00 and P222, 260.64, or
a total of P525,897.06.
During the period pertinent to this case, petitioner corporation was engaged
in the business of telecasting local as well as foreign films acquired from
foreign corporations not engaged in trade or business within the Philippines.
for which petitioner paid rentals after withholding income tax of 30%of one-
half of the film rentals.
In so far as the income tax on non-resident corporations is concerned, section
24 (b) of the National Internal Revenue Code, as amended by Republic Act
No. 2343 dated June 20, 1959, used to provide:
(b) Tax on foreign corporations.—(1) Non-resident
corporations.— There shall be levied, collected, and paid for
each taxable year, in lieu of the tax imposed by the
preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within
the Philippines, from an sources within the Philippines, as
interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income,
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
a tax equal to thirty per centum of such amount. (Emphasis
supplied)
On April 12, 1961, in implementation of the aforequoted provision, the
Commissioner of Internal Revenue issued General Circular No. V-334 reading
thus:
In connection with Section 24 (b) of Tax Code, the
amendment introduced by Republic Act No. 2343, under
which an income tax equal to 30% is levied upon the amount
received by every foreign corporation not engaged in trade
or business within the Philippines from all sources within this
country as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or
periodical gains, profits, and income, it has been determined
that the tax is still imposed on income derived from capital, or
labor, or both combined, in accordance with the basic
principle of income taxation (Sec. 39, Income Tax
Regulations), and that a mere return of capital or investment
is not income (Par. 5,06, 1 Mertens Law of Federal 'Taxation).
Since according to the findings of the Special Team who
inquired into business of the non-resident foreign film
distributors, the distribution or exhibition right on a film is
invariably acquired for a consideration, either for a lump sum
or a percentage of the film rentals, whether from a parent
company or an independent outside producer, apart of the
receipts of a non-resident foreign film distributor derived from
said film represents, therefore, a return of investment.
xxx xxx xxx
4. The local distributor should withhold 30% of one-half of the
film rentals paid to the non-resident foreign film distributor and
pay the same to this office in accordance with law unless the
non- resident foreign film distributor makes a prior settlement
of its income tax liability. (Emphasis ours).
Page 88
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Pursuant to the foregoing, petitioner dutifully withheld and turned over to the
Bureau of Internal Revenue the amount of 30% of one-half of the film rentals
paid by it to foreign corporations not engaged in trade or business within the
Philippines. The last year that petitioner withheld taxes pursuant to the
foregoing Circular was in 1968.
Consequently, the ruling in General Circular No. V-334, dated
April 12, 1961, allowing the deduction of the proportionate
cost of production or exhibition of motion picture films from
the rental income of non- resident foreign corporations, is
erroneous for lack of legal basis.

On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax In view thereof, General Circular No. V-334, dated April 12,
Code increasing the tax rate from 30 % to 35 % and revising the tax basis from 1961, is hereby revoked and henceforth, local films distributors
"such amount" referring to rents, etc. to "gross income," as follows: and exhibitors shall deduct and withhold 35% of the entire
amount payable by them to non-resident foreign
(b) Tax on foreign corporations.—(1) Non-resident corporations, as film rental or royalty, or whatever such
corporations.—A foreign corporation not engaged in trade or payment may be denominated, without any deduction
business in the Philippines including a foreign life insurance whatever, pursuant to Section 24 (b), and pay the withheld
company not engaged in the life insurance business in the taxes in accordance with Section 54 of the Tax Code, as
Philippines shall pay a tax equal to thirty-five per cent of the amended.
gross income received during each taxable year from all
sources within the Philippines, as interests, dividends, rents, All rulings inconsistent with this Circular is likewise revoked.
royalties, salaries, wages, premiums, annuities, (Emphasis ours)
compensations, remunerations for technical services or
otherwise, emoluments or other fixed or determinable annual, On the basis of this new Circular, respondent Commissioner of Internal
periodical or casual gains, profits, and income, and capital Revenue issued against petitioner a letter of assessment and demand dated
gains, Provided however, That premiums shah not include April 15, 1971, but allegedly released by it and received by petitioner on April
reinsurance premiums. (Emphasis supplied) 12, 1971, requiring them to pay deficiency withholding income tax on the
remitted film rentals for the years 1965 through 1968 and film royalty as of the
On February 8, 1971, the Commissioner of Internal Revenue issued Revenue end of 1968 in the total amount of P525,897.06 computed as follows:
Memorandum Circular No. 4-71, revoking General Circular No. V-334, and
holding that the latter was "erroneous for lack of legal basis," because "the tax 1965
therein prescribed should be based on gross income without deduction
whatever," thus:
Total amount remitted P 511,059.48
After a restudy and analysis of Section 24 (b) of the National
Internal Revenue Code, as amended by Republic Act No. Withholding tax due 153,318.00
5431, and guided by the interpretation given by tax thereon
authorities to a similar provision in the Internal Revenue Code
of the United States, on which the aforementioned provision Less: Amount already 89,000.00
of our Tax Code was patterned, this Office has come to the assessed
conclusion that the tax therein prescribed should be based
on gross income without t deduction whatever. Balance P64,318.00

Atty. Santos, Taxation I Page 89

 DUMAUAL, JEANNE PAULINE J. 2019-2020

Add: 1/2% mo. int. fr. 4-16- 11,577.24 Add: 1/2% mo. int. fr. 4- 19,602.00
66 to 4-16-69 16-68 to 4-16-71

Total amount due & P 75,895.24 Total amount due & P128,502.00
collectible collectible

1966 1968

Total amount remitted P373,492.24 Total amount remitted P881,816.92

Withholding tax due 112,048.00 Withholding tax due 291,283.00

thereon thereon

Less: Amount already 27,947.00 Less: Amount already 92,886.00

assessed assessed

Balance 84,101.00 Balance P198,447.00

Add: 11/2%mo. int. fr. 4-16- 15,138.18 Add: 1/2% mo. int. fr. 4- 23,813.64
67 to 4-116-70 16-69 to 4-29-71

Total amount due & P99,239.18 Total amount due & P222,260.44 1
collectible collectible

1967 On May 5, 1971, petitioner requested for a reconsideration and withdrawal of

the assessment. However, without acting thereon, respondent, on April 6,
1976, issued a warrant of distraint and levy over petitioner's personal as well as
Total amount remitted P601,160.65 real properties. The petitioner then filed its Petition for Review with the Court of
Tax Appeals whose Decision, dated November 29, 1979, is, in turn, the subject
Withholding tax due 180,348.00 of this review. The Tax Court held:
thereon

Less: Amount already 71,448.00 For the reasons given, the Court finds the assessment issued
assessed by respondent on April 16, 1971 against petitioner in the
amounts of P75,895.24, P 99,239.18, P128,502.00 and
Balance 108,900.00 P222,260.64 or a total of P525,897.06 as deficiency
withholding income tax for the years 1965, 1966, 1967 and
1968, respectively, in accordance with law. As prayed for, the

Atty. Santos, Taxation I Page 90


petition for review filed in this case is dismissed, and petitioner
ABS-CBN Broadcasting Corporation is hereby ordered to pay
the sum of P525,897.06 to respondent Commissioner of
Internal Revenue as deficiency withholding income tax for
the taxable years 1965 thru 1968, plus the surcharge and
interest which have accrued thereon incident to delinquency
pursuant to Section 51 (e) of the National Internal Revenue
Code, as amended.
WHEREFORE, the decision appealed from is hereby affirmed
at petitioner's cost.
SO ORDERED. 2
The issues raised are two-fold:
I. Whether or not respondent can apply General Circular No.
4-71 retroactively and issue a deficiency assessment against
petitioner in the amount of P 525,897.06 as deficiency
withholding income tax for the years 1965, 1966, 1967 and
1968.
II. Whether or not the right of the Commissioner of Internal
Revenue to assess the deficiency withholding income tax for
the year 196,5 has prescribed. 3
Upon the facts and circumstances of the case, review is warranted.
In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic
Act No. 6110 on August 9, 1969, it provides:
Sec. 338-A. Non-retroactivity of rulings. — Any revocation,
modification, or reversal of and of the rules and regulations
promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the
Commissioner of Internal Revenue shall not be given
retroactive application if the relocation, modification, or
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
reversal will be prejudicial to the taxpayers, except in the
following cases: (a) where the taxpayer deliberately mis-
states or omits material facts from his return or any document
required of him by the Bureau of Internal Revenue: (b) where
the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the
ruling is based; or (c) where the taxpayer acted in bad faith.
(italics for emphasis)
It is clear from the foregoing that rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive application where to
so apply them would be prejudicial to taxpayers. The prejudice to petitioner of
the retroactive application of Memorandum Circular No. 4-71 is beyond
question. It was issued only in 1971, or three years after 1968, the last year that
petitioner had withheld taxes under General Circular No. V-334. The
assessment and demand on petitioner to pay deficiency withholding income
tax was also made three years after 1968 for a period of time commencing in
1965. Petitioner was no longer in a position to withhold taxes due from foreign
corporations because it had already remitted all film rentals and no longer
had any control over them when the new Circular was issued. And in so far as
the enumerated exceptions are concerned, admittedly, petitioner does not
fall under any of them.
Respondent claims, however, that the provision on non-retroactivity is
inapplicable in the present case in that General Circular No. V-334 is a nullity
because in effect, it changed the law on the matter. The Court of Tax Appeals
sustained this position holding that: "Deductions are wholly and exclusively
within the power of Congress or the law-making body to grant, condition or
deny; and where the statute imposes a tax equal to a specified rate or
percentage of the gross or entire amount received by the taxpayer, the
authority of some administrative officials to modify or change, much less
reduce, the basis or measure of the tax should not be read into
law." 4 Therefore, the Tax Court concluded, petitioner did not acquire any
vested right thereunder as the same was a nullity.
The rationale behind General Circular No. V-334 was clearly stated therein,
however: "It ha(d) been determined that the tax is still imposed on income
derived from capital, or labor, or both combined, in accordance with the
basic principle of income taxation ...and that a mere return of capital or
Page 91

investment is not income ... ." "A part of the receipts of a non-resident foreign
film distributor derived from said film represents, therefore, a return of
investment." The Circular thus fixed the return of capital at 50% to simplify the
administrative chore of determining the portion of the rentals covering the
return of capital." 5
Were the "gross income" base clear from Sec. 24 (b), perhaps, the
ratiocination of the Tax Court could be upheld. It should be noted, however,
that said Section was not too plain and simple to understand. The fact that
the issuance of the General Circular in question was rendered necessary leads
to no other conclusion than that it was not easy of comprehension and could
be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the
basis of General Circular No. V-334, was just one in a series of enactments
regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on
June 22, 1963 without changing the basis but merely adding a proviso (in bold
letters).
(b) Tax on foreign corporation.—(1) Non-resident
corporations. — There shall be levied, collected and paid for
each taxable year, in lieu of the tax imposed by the
preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as
interest, dividends, rents, salaries, wages, premiums annuities,
compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income,
a tax equal to thirty per centum of such amount: PROVIDED,
HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE
PREMIUMS. (double emphasis ours).
Republic Act No. 3841, dated likewise on June 22, 1963, followed after,
omitting the proviso and inserting some words (also in bold letters).
(b) Tax on foreign corporations.—(1) Non-resident
corporations.—There shall be levied, collected and paid for
each taxable year, in lieu of the tax imposed by the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as
interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical OR CASUAL gains, profits
and income, AND CAPITAL GAINS, a tax equal to thirty per
centum of such amount. 6 (double emphasis supplied)
The principle of legislative approval of administrative interpretation by re-
enactment clearly obtains in this case. It provides that "the re-enactment of a
statute substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction. 7 Note should be taken of the fact
that this case involves not a mere opinion of the Commissioner or ruling
rendered on a mere query, but a Circular formally issued to "all internal
revenue officials" by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which
became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24
(b) was amended to refer specifically to 35% of the "gross income."
This Court is not unaware of the well-entrenched principle that the
Government is never estopped from collecting taxes because of mistakes or
errors on the part of its
agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like other
principles of law, this also admits of exceptions in the interest of justice and
fairplay. The insertion of Sec. 338-A into the National Internal Revenue Code,
as held in the case of Tuason, Jr. vs. Lingad, 10 is indicative of legislative
intention to support the principle of good faith. In fact, in the United States,
from where Sec. 24 (b) was patterned, it has been held that the Commissioner
of Collector is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom, 11 or where there has
been a misrepresentation to the taxpayer. 12
We have also noted that in its Decision, the Court of Tax Appeals further
required the petitioner to pay interest and surcharge as provided for in Sec. 51
(e) of the Tax Code in addition to the deficiency withholding tax of P
525,897.06. This additional requirement is much less called for because the
Page 92
 DUMAUAL, JEANNE PAULINE J. 2019-2020

petitioner relied in good faith and religiously complied with no less than a
Circular issued "to all internal revenue officials" by the highest official of the
Bureau of Internal Revenue and approved by the then Secretary of
Finance. 13

With the foregoing conclusions arrived at, resolution of the issue of prescription
becomes unnecessary.

WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed,

and the questioned assessment set aside. No costs.

Atty. Santos, Taxation I Page 93

 DUMAUAL, JEANNE PAULINE J. 2019-2020

COMMISSIONER OF G.R. Nos. 134587 & 134588 This is a petition for the review of a consolidated Decision of the Former
Fourteenth Division of the Court of Appeals [1] ordering the Commissioner of
INTERNAL REVENUE, Internal Revenue to award tax credits to Benguet Corporation in the amount
corresponding to the input value added taxes that the latter had incurred in
relation to its sale of gold to the Central Bank during the period of 01 August
Petitioner, Present:
1989 to 31 July 1991.

PUNO, J.,
Petitioner is the Commissioner of Internal Revenue (petitioner') acting in his
official capacity as head of the Bureau of Internal Revenue (BIR), an attached
Chairman, agency of the Department of Finance, [2] with the authority, inter alia, to
determine claims for refunds or tax credits as provided by law. [3]
- versus' - AUSTRIA-MARTINEZ,

CALLEJO, SR.,
Respondent Benguet Corporation (respondent') is a domestic corporation
TINGA, and organized and existing by virtue of Philippine laws, engaged in the
exploration, development and operation of mineral resources, and the sale or
CHICO-NAZARIO, JJ. marketing thereof to various entities. [4] Respondent is a value added tax
(VAT) registered enterprise. [5]
BENGUET CORPORATION,
The transactions in question occurred during the period between 1988 and
1991. Under Sec. 99 of the National Internal Revenue Code (NIRC), [6] as
Respondent. amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person
who, in the course of trade or business, sells, barters or exchanges goods,
Promulgated: renders services, or engages in similar transactions and any person who
imports goods is liable for output VAT at rates of either 10% or 0% (zero-rated')
July 8, 2005 depending on the classification of the transaction under Sec. 100 of the NIRC.
Persons registered under the VAT system [7] are allowed to recognize input
VAT, or the VAT due from or paid by it in the course of its trade or business on
x-------------------------------------------------------------------x
importation of goods or local purchases of goods or service, including lease or
use of properties, from a VAT-registered person. [8]
DECISION

TINGA, J.:
In January of 1988, respondent applied for and was granted by the BIR zero-
rated status on its sale of gold to Central Bank. [9] On 28 August 1988, Deputy

Atty. Santos, Taxation I Page 94

 DUMAUAL, JEANNE PAULINE J. 2019-2020

Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 1. In general, for purposes of the term 'export sales' only direct
3788-88, which declared that '[t]he sale of gold to Central Bank is considered export sales and foreign currency denominated sales, shall
as export sale subject to zero-rate pursuant to Section 100[ [10]] of the Tax be qualified for zero-rating.
Code, as amended by Executive Order No. 273. The BIR came out with at
least six (6) other issuances [11] reiterating the zero-rating of sale of gold to the ....
Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14 February
1990. [12] 4. Local sales of goods, which by fiction of law are
considered export sales (e.g., the Export Duty Law
considers sales of gold to the Central Bank of the Philippines,
as export sale). This transaction shall not be considered as
export sale for VAT purposes.
Relying on its zero-rated status and the above issuances, respondent sold gold
to the Central Bank during the period of 1 August 1989 to 31 July 1991 and
....
entered into transactions that resulted in input VAT incurred in relation to the
[A]ll Orders and Memoranda issued by this Office inconsistent
subject sales of gold. It then filed applications for tax refunds/credits
herewith are considered withdrawn, modified or
corresponding to input VAT for the amounts [13] of P46,177,861.12, [14]
superseded. (Emphasis supplied)
P19,218,738.44, [15] and P84,909,247.96. [16] Respondent's applications were
either unacted upon or expressly disallowed by petitioner. [17] In addition,
petitioner issued a deficiency assessment against respondent when, after
applying respondent's creditable input VAT costs against the retroactive 10%
VAT levy, there resulted a balance of excess output VAT. [18]

The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue
Memorandum Order No. 22-92 which decreed that the revocation of VAT
The express disallowance of respondent's application for refunds/credits and Ruling No. 3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining
the issuance of deficiency assessments against it were based on a BIR companies and, thus, could be applied retroactively. [19]

Respondent filed three separate petitions for review with the Court of Tax
Appeals (CTA), docketed as CTA Case No. 4945, CTA Case No. 4627, and the
consolidated cases of CTA Case Nos. 4686 and 4829.

In the three cases, respondent argued that a retroactive application of BIR

VAT Ruling No. 008-92 would violate Sec. 246 of the NIRC, which mandates the
non-retroactivity of rulings or circulars issued by the Commissioner of Internal
Revenue that would operate to prejudice the taxpayer. Respondent then
discussed in detail the manner and extent by which it was prejudiced by this
retroactive application. [20] Petitioner on the other hand, maintained that BIR

Atty. Santos, Taxation I Page 95


VAT Ruling No. 008-92 is, firstly, not void and entitled to great respect, having
been issued by the body charged with the duty of administering the VAT law,
and secondly, it may validly be given retroactive effect since it was not
prejudicial to respondent.
In three separate decisions, [21] the CTA dismissed respondent's respective
petitions. It held, with Presiding Judge Ernesto D. Acosta dissenting, that no
prejudice had befallen respondent by virtue of the retroactive application of
BIR VAT Ruling No. 008-92, and that, consequently, the application did not
violate Sec. 246 of the NIRC. [22]
The CTA decisions were appealed by respondent to the Court of Appeals. The
cases were docketed therein as CA-G.R. SP Nos. 37205, 38958, and 39435, and
thereafter consolidated. The Court of Appeals, after evaluating the arguments
of the parties, rendered the questioned Decision reversing the Court of Tax
Appeals insofar as the latter had ruled that BIR VAT Ruling No. 008-92 did not
prejudice the respondent and that the same could be given retroactive
effect.
In its Decision, the appellate court held that respondent suffered financial
damage equivalent to the sum of the disapproved claims. It stated that had
respondent known that such sales were subject to 10% VAT, which rate was
not the prevailing rate at the time of the transactions, respondent would have
passed on the cost of the input taxes to the Central Bank. It also ruled that the
remedies which the CTA supposed would eliminate any resultant prejudice to
respondent were not sufficient palliatives as the monetary values provided in
the supposed remedies do not approximate the monetary values of the tax
credits that respondent lost after the implementation of the VAT ruling in
question. It cited
Manila Mining Corporation v. Commissioner of Internal Revenue , [23] in which
the Court of Appeals held [24] that BIR VAT Ruling No. 008-92 cannot be given
retroactive effect. Lastly, the Court of Appeals observed that R.A. 7716, the
'The New Expanded VAT Law, reveals the intent of the lawmakers with regard
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
to the treatment of sale of gold to the Central Bank since the amended
version therein of Sec. 100 of the NIRC expressly provides that the sale of gold
to the Bangko Sentral ng Pilipinas is an export sale subject to 0% VAT rate. The
appellate court thus allowed respondent's claims, decreeing in its dispositive
portion, viz:
WHEREFORE, the appealed decision is hereby REVERSED. The
respondent Commissioner of Internal Revenue is ordered to
award the following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 ' P49,611,914.00
2) in CA-G.R. SP No. 38958 - P19,218,738.44
3) in CA-G.R. SP No. 39435 - P84,909,247.96 [25]
Dissatisfied with the above ruling, petitioner filed the instant Petition for
Review questioning the determination of the Court of Appeals that the
retroactive application of the subject issuance was prejudicial to respondent
and could not be applied retroactively.
Apart from the central issue on the validity of the retroactive application of
VAT Ruling No. 008-92, the question of the validity of the issuance itself has
been touched upon in the pleadings, including a reference made by
respondent to a Court of Appeals Decision holding that the VAT Ruling had no
legal basis. [26] For its part, as the party that raised this issue, petitioner
spiritedly defends the validity of the issuance. [27] Effectively, however, the
question is a non-issue and delving into it would be a needless exercise for, as
respondent emphatically pointed out in its Comment, unlike petitioner's
formulation of the issues, the only real issue in this case is whether VAT Ruling
No. 008-92 which revoked previous rulings of the petitioner which respondent
heavily relied upon . . . may be legally applied retroactively to
respondent. [28] This Court need not invalidate the BIR issuances, which have
Page 96
 DUMAUAL, JEANNE PAULINE J. 2019-2020

the force and effect of law, unless the issue of validity is so crucially at the would suffer prejudice from the retroactive application of VAT Ruling No. 008-
heart of the controversy that the Court cannot resolve the case without 92.
having to strike down the issuances. Clearly, whether the subject VAT ruling
may validly be given retrospective effect is the lis mota in the case. Put in We agree with the Court of Appeals and the respondent.
another but specific fashion, the sole issue to be addressed is whether
respondent's sale of gold to the Central Bank during the period when such
To begin with, the determination of whether respondent had suffered
was classified by BIR issuances as zero-rated could be taxed validly at a 10%
prejudice is a factual issue. It is an established rule that in the exercise of its
rate after the consummation of the transactions involved.
power of review, the Supreme Court is not a trier of facts. Moreover, in the
exercise of the Supreme Court's power of review, the findings of facts of the
Court of Appeals are conclusive and binding on the Supreme Court. [32] An
exception to this rule is when the findings of fact a quo are conflicting, [33] as
In a long line of cases, [29] this Court has affirmed that the rulings, circular, is in this case.
rules and regulations promulgated by the Commissioner of Internal Revenue
would have no retroactive application if to so apply them would be
prejudicial to the taxpayers. In fact, both petitioner [30] and
respondent [31] agree that the retroactive application of VAT Ruling No. 008-
VAT is a percentage tax imposed at every stage of the distribution process on
92 is valid only if such application would not be prejudicial to the respondent
the sale, barter, exchange or lease of goods or properties and rendition of
pursuant to the explicit mandate under Sec. 246 of the NIRC, thus:
services in the course of trade or business, or the importation of goods. [34] It is
an indirect tax, which may be shifted to the buyer, transferee, or lessee of the
goods, properties, or services. [35] However, the party directly liable for the
payment of the tax is the seller. [36]
Sec. 246. Non-retroactivity of rulings.- Any revocation,
modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding
Section or any of the rulings or circulars promulgated by the
In transactions taxed at a 10% rate, when at the end of any given taxable
Commissioner shall not be given retroactive application if the
quarter the output VAT exceeds the input VAT, the excess shall be paid to the
revocation, modification or reversal will be prejudicial to the
government; when the input VAT exceeds the output VAT, the excess would
taxpayers except in the following cases: (a) where the
be carried over to VAT liabilities for the succeeding quarter or
taxpayer deliberately misstates or omits material facts from his
quarters. [37] On the other hand, transactions which are taxed at zero-rate do
return on any document required of him by the Bureau of
not result in any output tax. Input VAT attributable to zero-rated sales could be
Internal Revenue; (b) where the facts subsequently gathered
refunded or credited against other internal revenue taxes at the option of the
by the Bureau of Internal Revenue are materially different
taxpayer. [38]
form the facts on which the ruling is based; or (c) where the
taxpayer acted in bad faith. (Emphasis supplied)

In that regard, petitioner submits that respondent would not be prejudiced by

a retroactive application; respondent maintains the contrary. Consequently, To illustrate, in a zero-rated transaction, when a VAT-registered person
the determination of the issue of retroactivity hinges on whether respondent (taxpayer') purchases materials from his supplier at P80.00, P7.30 [39] of which

Atty. Santos, Taxation I Page 97


was passed on to him by his supplier as the latter's 10% output VAT, the
taxpayer is allowed to recover P7.30 from the BIR, in addition to other input
VAT he had incurred in relation to the zero-rated transaction, through tax
credits or refunds. When the taxpayer sells his finished product in a zero-rated
transaction, say, for P110.00, he is not required to pay any output VAT thereon.
In the case of a transaction subject to 10% VAT, the taxpayer is allowed to
recover both the input VAT of P7.30 which he paid to his supplier and his
output VAT of P2.70 (10% the P30.00 value he has added to the P80.00
material) by passing on both costs to the buyer. Thus, the buyer pays the total
10% VAT cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT cost
because in the zero-rated transaction, the taxpayer is allowed to recover
input tax from the BIR without need to pay output tax, while in 10% rated VAT,
the taxpayer is allowed to pass on both input and output VAT to the buyer.
Thus, there is an elemental similarity between the two types of VAT ratings in
that the taxpayer has the option not to take on any VAT payment for his
transactions by simply exercising his right to pass on the VAT costs in the
manner discussed above.
Proceeding from the foregoing, there appears to be no upfront economic
difference in changing the sale of gold to the Central Bank from a 0% to 10%
VAT rate provided that respondent would be allowed the choice to pass on its
VAT costs to the Central Bank. In the instant case, the retroactive application
of VAT Ruling No. 008-92 unilaterally forfeited or withdrew this option of
respondent. The adverse effect is that respondent became the unexpected
and unwilling debtor to the BIR of the amount equivalent to the total VAT cost
of its product, a liability it previously could have recovered from the BIR in a
zero-rated scenario or at least passed on to the Central Bank had it known it
would have been taxed at a 10% rate. Thus, it is clear that respondent suffered
economic prejudice when its consummated sales of gold to the Central Bank
were taken out of the zero-rated category. The change in the VAT rating of
respondent's transactions with the Central Bank resulted in the twin loss of its
exemption from payment of output VAT and its opportunity to recover input
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
VAT, and at the same time subjected it to the 10% VAT sans the option to pass
on this cost to the Central Bank, with the total prejudice in money terms being
equivalent to the 10% VAT levied on its sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing that 'the
deficiency 10% that may be assessable will only be equal to 1/11 th of the
amount billed to the [Central Bank] rather than 10% thereof. In short,
[respondent] may only be charged based on the tax amount actually and
technically passed on to the [Central Bank] as part of the invoiced
price. [40] To the Court, the aforequoted statement is a clear recognition that
respondent would suffer prejudice in the 'amount actually and technically
passed on to the [Central Bank] as part of the invoiced price. In determining
the prejudice suffered by respondent, it matters little how the amount
charged against respondent is computed, [41] the point is that the amount
(equal to 1/11th of the amount billed to the Central Bank) was charged
against respondent, resulting in damage to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling No. 008-92 is
stripped of any prejudicial effect when viewed in relation to several available
options to recoup whatever liabilities respondent may have incurred, i.e.,
respondent's input VAT may still be used (1) to offset its output VAT on the sales
of gold to the Central Bank or on its output VAT on other sales subject to 10%
VAT, and (2) as deductions on its income tax under Sec. 29 of the Tax
Code. [42]
On petitioner's first suggested recoupment modality, respondent counters that
its other sales subject to 10% VAT are so minimal that this mode is of little value.
Indeed, what use would a credit be where there is nothing to set it off
against? Moreover, respondent points out that after having been imposed
with 10% VAT sans the opportunity to pass on the same to the Central Bank, it
was issued a deficiency tax assessment because its input VAT tax credits were
not enough to offset the retroactive 10% output VAT. The prejudice then
experienced by respondent lies in the fact that the tax refunds/credits that it
expected to receive had effectively disappeared by virtue of its newfound
Page 98

output VAT liability against which petitioner had offset the expected
refund/credit. Additionally, the prejudice to respondent would not simply
disappear, as petitioner claims, when a liability (which liability was not there to
begin with) is imposed concurrently with an opportunity to reduce, not totally
eradicate, the newfound liability. In sum, contrary to petitioner's suggestion,
respondent's net income still decreased corresponding to the amount it
expected as its refunds/credits and the deficiency assessments against it,
which when summed up would be the total cost of the 10% retroactive VAT
levied on respondent.
Respondent claims to have incurred further prejudice. In computing its
income taxes for the relevant years, the input VAT cost that respondent had
paid to its suppliers was not treated by respondent as part of its cost of goods
sold, which is deductible from gross income for income tax purposes, but as
an asset which could be refunded or applied as payment for other internal
revenue taxes. In fact, Revenue Regulation No. 5-87 (VAT Implementing
Guidelines), requires input VAT to be recorded not as part of the cost of
materials or inventory purchased but as a separate entry called input taxes,
which may then be applied against output VAT, other internal revenue taxes,
or refunded as the case may be. [43] In being denied the opportunity to
deduct the input VAT from its gross income, respondent's net income was
overstated by the amount of its input VAT. This overstatement was assessed
tax at the 32% corporate income tax rate, resulting in respondent's
overpayment of income taxes in the corresponding amount. Thus, respondent
not only lost its right to refund/ credit its input VAT and became liable for
deficiency VAT, it also overpaid its income tax in the amount of 32% of its input
VAT.
This leads us to the second recourse that petitioner has suggested to offset
any resulting prejudice to respondent as a consequence of giving retroactive
effect to BIR VAT Ruling No. 008-92. Petitioner submits that granting that
respondent has no other sale subject to 10% VAT against which its input taxes
may be used in payment, then respondent is constituted as the final entity
against which the costs of the tax passes-on shall legally stop; hence, the input
taxes may be converted as costs available as deduction for income tax
purposes. [44]
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Even assuming that the right to recover respondent's excess payment of
income tax has not yet prescribed, this relief would only address respondent's
overpayment of income tax but not the other burdens discussed above.
Verily, this remedy is not a feasible option for respondent because the very
reason why it was issued a deficiency tax assessment is that its input VAT was
not enough to offset its retroactive output VAT. Indeed, the burden of having
to go through an unnecessary and cumbersome refund process is prejudice
enough. Moreover, there is in fact nothing left to claim as a deduction from
income taxes.
From the foregoing it is clear that petitioner's suggested options by which
prejudice would be eliminated from a retroactive application of VAT Ruling
No. 008-92 are either simply inadequate or grossly unrealistic.
At the time when the subject transactions were consummated, the prevailing
BIR regulations relied upon by respondent ordained that gold sales to the
Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC in
relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the
Central Bank shall be considered export and therefore shall be subject to the
export and premium duties. In coming out with this interpretation, the BIR also
considered Sec. 169 of Central Bank Circular No. 960 which states that all sales
of gold to the Central Bank are considered constructive
exports. [45] Respondent should not be faulted for relying on the BIR's
interpretation of the said laws and regulations. [46] While it is true, as petitioner
alleges, that government is not estopped from collecting taxes which remain
unpaid on account of the errors or mistakes of its agents and/or officials and
there could be no vested right arising from an erroneous interpretation of law,
these principles must give way to exceptions based on and in keeping with
the interest of justice and fairplay, as has been done in the instant matter. For,
it is primordial that every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith. [47]
Page 99
 DUMAUAL, JEANNE PAULINE J. 2019-2020

The case of ABS-CBN Broadcasting Corporation v. Court of Tax

Appeals [48] involved a similar factual milieu. There the Commissioner of
Internal Revenue issued Memorandum Circular No. 4-71 revoking an earlier
circular for being erroneous for lack of legal basis. When the prior circular was
still in effect, petitioner therein relied on it and consummated its transactions
on the basis thereof. We held, thus:

. . . .Petitioner was no longer in a position to withhold taxes

due from foreign corporations because it had already
remitted all film rentals and no longer had any control over
them when the new Circular was issued. . . .

....

This Court is not unaware of the well-entrenched principle

that the [g]overnment is never estopped from collecting
taxes because of mistakes or errors on the part of its agents.
But, like other principles of law, this also admits of exceptions
in the interest of justice and fairplay. . . .In fact, in the United
States, . . . it has been held that the Commissioner [of Internal
Revenue] is precluded from adopting a position inconsistent
with one previously taken where injustice would result
therefrom or where there has been a misrepresentation to the
taxpayer. [49]

Respondent, in this case, has similarly been put on the receiving end of a
grossly unfair deal. Before respondent was entitled to tax refunds or credits
based on petitioner's own issuances. Then suddenly, it found itself instead
being made to pay deficiency taxes with petitioner's retroactive change in
the VAT categorization of respondent's transactions with the Central Bank. This
is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the
NIRC abhors and forbids.

WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court
of Appeals is AFFIRMED. No pronouncement as to costs.

Atty. Santos, Taxation I Page 100

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. 153205 January 22, 2007 BWSC-Denmark established [respondent] which subcontracted the actual
operation and maintenance of NAPOCOR’s two power barges as well as the
COMMISSIONER OF INTERNAL REVENUE, Petitioner, performance of other duties and acts which necessarily have to be done in
vs. the Philippines.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO,
INC., Respondent. NAPOCOR paid capacity and energy fees to the Consortium in a mixture of
currencies (Mark, Yen, and Peso). The freely convertible non-Peso component
DECISION is deposited directly to the Consortium’s bank accounts in Denmark and
Japan, while the Peso-denominated component is deposited in a separate
and special designated bank account in the Philippines. On the other hand,
CARPIO, J.:
the Consortium pays [respondent] in foreign currency inwardly remitted to the
Philippines through the banking system.
The Case
In order to ascertain the tax implications of the above transactions,
This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the [respondent] sought a ruling from the BIR which responded with BIR Ruling No.
Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses
Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the to register as a VAT person and the consideration for its services is paid for in
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate acceptable foreign currency and accounted for in accordance with the rules
for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall
Mindanao, Inc. (respondent). be subject to VAT at zero-rate.

The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as
follows:
[Respondent] is a domestic corporation duly organized and existing under
and by virtue of the laws of the Philippines with principal address located at
Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the
Certificate of Registration bearing RDO Control No. 95-113-007556 was issued
in favor of [respondent] by the Revenue District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax
Returns reflecting, among others, a total zero-rated sales of P147,317,189.62
with VAT input taxes of P3,361,174.14, detailed as follows:

Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax

It is represented that a foreign consortium composed of Burmeister and Wain
Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and
Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the
1st E 04-18-96 P 33,019,651.07 P608,953.48
National Power Corporation (NAPOCOR) for the operation and maintenance
of [NAPOCOR’s] two power barges. The Consortium appointed BWSC- 2nd F 07-16-96 37,108,863.33 756,802.66
Denmark as its coordination manager.
3rd G 10-14-96 34,196,372.35 930,279.14

Atty. Santos, Taxation I Page 101


4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14
On December 29, 1997, [respondent] availed of the Voluntary Assessment
Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No.
5-96 dated February 20, 1996 to be applicable to its case. Revenue
Regulations No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are
hereby amended to read as follows:
Section 4.102-2(b)(2) – "Services other than processing, manufacturing or
repacking for other persons doing business outside the Philippines for goods
which are subsequently exported, as well as services by a resident to a non-
resident foreign client such as project studies, information services,
engineering and architectural designs and other similar services, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP."
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent]
subjected its sale of services to the Consortium to the 10% VAT in the total
amount of P103,558,338.11 representing April to December 1996 sales since
said Revenue Regulations No. 5-96 became effective only on April 1996. The
sum of P43,893,951.07, representing January to March 1996 sales was
subjected to zero rate. Consequently, [respondent] filed its 1996 amended
VAT return consolidating therein the VAT output and input taxes for the four
calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR’s
collecting agent, PCIBank, as its output tax liability for the year 1996,
computed as follows:
Amount subject to 10% VAT P103,558,338.11
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99
from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95
"insofar as it held that the services being rendered by BWSCMI is subject to VAT
at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on April 22,1999,
filed a claim for the issuance of a tax credit certificate with Revenue District
No. 113 of the BIR. [Respondent] believed that it erroneously paid the output
VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP)
of the BIR.4
On 27 December 1999, respondent filed a petition for review with the CTA in
order to toll the running of the two-year prescriptive period under the Tax
Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit
certificate for P6,994,659.67 in favor of respondent. The CTA’s ruling stated:
[Respondent’s] sale of services to the Consortium [was] paid for in acceptable
foreign currency inwardly remitted to the Philippines and accounted for in
accordance with the rules and regulations of Bangko Sentral ng Pilipinas.
These were established by various BPI Credit Memos showing remittances in
Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices
billed by [respondent] to the consortium. These remittances were further
certified by the Branch Manager x x x of BPI-Davao Lanang Branch to
represent payments for sub-contract fees that came from Den Danske
Aktieselskab Bank-Denmark for the account of [respondent]. Clearly,
Page 102

[respondent’s] sale of services to the Consortium is subject to VAT at 0%
pursuant to Section 108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondent’s] sale of services to the Consortium was even
confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995,
and later by VAT Ruling No. 003-99 dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by
[respondent] were indeed subject to VAT at zero percent, it follows that it
mistakenly availed of the Voluntary Assessment Program by paying output tax
for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the return of
what has been delivered by mistake, the [petitioner] is obligated to issue the
tax credit certificate prayed for by [respondent]. x x x 5
Petitioner filed a petition for review with the Court of Appeals, which dismissed
the petition for lack of merit and affirmed the CTA decision.6
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the CTA, the Court of Appeals rejected petitioner’s view that since
respondent’s services are not destined for consumption abroad, they are not
of the same nature as project studies, information services, engineering and
architectural designs, and other similar services mentioned in Section 4.102-
2(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according
to petitioner, respondent’s services cannot legally qualify for 0% VAT but are
subject to the regular 10% VAT.8
The Court of Appeals found untenable petitioner’s contention that under VAT
Ruling No. 040-98, respondent’s services should be destined for consumption
abroad to enjoy zero-rating. Contrary to petitioner’s interpretation, there are
two kinds of transactions or services subject to zero percent VAT under VAT
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Ruling No. 040-98. These are (a) services other than repacking goods for other
persons doing business outside the Philippines which goods are subsequently
exported; and (b) services by a resident to a non-resident foreign client, such
as project studies, information services, engineering and architectural designs
and other similar services, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).9
The Court of Appeals stated that "only the first classification is required by the
provision to be consumed abroad in order to be taxed at zero rate. In x x x the
absence of such express or implied stipulation in the statute, the second
classification need not be consumed abroad."10
The Court of Appeals further held that assuming petitioner’s interpretation of
Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such
administrative provision is void being an amendment to the Tax Code.
Petitioner went beyond merely providing the implementing details by adding
another requirement to zero-rating. "This is indicated by the additional phrase
‘as well as services by a resident to a non-resident foreign client, such as
project studies, information services and engineering and architectural
designs and other similar services.’ In effect, this phrase adds not just one but
two requisites: (a) services must be rendered by a resident to a non-resident;
and (b) these must be in the nature of project studies, information services,
etc."11
The Court of Appeals explained that under Section 108(b)(2) of the Tax
Code,12 for services which were performed in the Philippines to enjoy zero-
rating, these must comply only with two requisites, to wit: (1) payment in
acceptable foreign currency and (2) accounted for in accordance with the
rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that
services must be "destined for consumption abroad" in order to be VAT zero-
rated.13
The Court of Appeals disagreed with petitioner’s argument that our VAT law
generally follows the destination principle (i.e., exports exempt, imports
taxable).14 The Court of Appeals stated that "if indeed the ‘destination
principle’ underlies and is the basis of the VAT laws, then petitioner’s proper
remedy would be to recommend an amendment of Section 108(b)(2) to
Page 103

Congress. Without such amendment, however, petitioner should apply the
terms of the basic law. Petitioner could not resort to administrative legislation,
as what [he] had done in this case."15
The Issue
The lone issue for resolution is whether respondent is entitled to the refund
of P6,994,659.67 as erroneously paid output VAT for the year 1996.16
The Ruling of the Court
We deny the petition.
At the outset, the Court declares that the denial of the instant petition is not
on the ground that respondent’s services are subject to 0% VAT. Rather, it is
based on the non-retroactivity of the prejudicial revocation of BIR Ruling No.
023-9517 and VAT Ruling No. 003-99,18 which held that respondent’s services
are subject to 0% VAT and which respondent invoked in applying for refund of
the output VAT.
Section 102(b) of the Tax Code,19 the applicable provision in 1996 when
respondent rendered the services and paid the VAT in question, enumerates
which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding sub-
paragraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero rate;
(4) Services rendered to vessels engaged exclusively in international
shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it
complied with the requirements of the Tax Code for zero rating under the
second paragraph of Section 102(b). Respondent asserts that (1) the payment
of its service fees was in acceptable foreign currency, (2) there was inward
remittance of the foreign currency into the Philippines, and (3) accounting of
such remittance was in accordance with BSP rules. Moreover, respondent
contends that its services which "constitute the actual operation and
management of two (2) power barges in Mindanao" are not "even remotely
similar to project studies, information services and engineering and
architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No.
5-96." As such, respondent’s services need not be "destined to be consumed
abroad in order to be VAT zero-rated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be
in acceptable foreign currency accounted for in accordance with BSP rules.
Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the second
paragraph of Section 102(b), this is clearly provided in the first paragraph of
Section 102(b) where the listed services must be "for other persons doing
business outside the Philippines." The phrase "for other persons doing business
outside the Philippines" not only refers to the services enumerated in the first
paragraph of Section 102(b), but also pertains to the general term "services"
Page 104

appearing in the second paragraph of Section 102(b). In short, services other
than processing, manufacturing, or repacking of goods must likewise be
performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider
and recipient of the "other services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant. Otherwise, those subject to the
regular VAT under Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-recipient of services
doing business in the Philippines is to make the payment of the regular VAT
under Section 102(a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or avoid it by
stipulating payment in foreign currency inwardly remitted by the payer-
recipient. Such interpretation removes Section 102(a) as a tax measure in the
Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory
exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency"
under BSP rules, the law clearly envisions the payer-recipient of services to be
doing business outside the Philippines. Only those not doing business in the
Philippines can be required under BSP rules20 to pay in acceptable foreign
currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any party to make
payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales
since the payer-recipient of services is doing business outside the Philippines.
Under BSP rules,21 the proceeds of export sales must be reported to the
Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency
proceeds to the BSP. The same rationale does not apply if the provider and
recipient of the services are both doing business in the Philippines since their
transaction is not in the nature of an export sale even if payment is
denominated in foreign currency.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Further, when the provider and recipient of services are both doing business in
the Philippines, their transaction falls squarely under Section 102(a) governing
domestic sale or exchange of services. Indeed, this is a purely local sale or
exchange of services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned
in the preceding subparagraph," the legislative intent is that only the services
are different between subparagraphs 1 and 2. The requirements for zero-
rating, including the essential condition that the recipient of services is doing
business outside the Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the
present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are "[s]ervices other than those mentioned in
the [first] paragraph [of Section 108(b)] rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the BSP."
In this case, the payer-recipient of respondent’s services is the Consortium
which is a joint-venture doing business in the Philippines. While the
Consortium’s principal members are non-resident foreign corporations, the
Consortium itself is doing business in the Philippines. This is shown clearly in BIR
Ruling No. 023-95 which states that the contract between the Consortium and
NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of
the tax implications of a contract between a consortium composed of
Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering &
Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
hereinafter as the "Consortium", and the National Power Corporation
("NAPOCOR") for the operation and maintenance of two 100-Megawatt power
barges ("Power Barges") acquired by NAPOCOR for a 15-year
term.23 (Emphasis supplied)
Page 105

Considering this length of time, the Consortium’s operation and maintenance
of NAPOCOR’s power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which
requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondent’s services to the Consortium, not
being supplied to a person doing business outside the Philippines, cannot
legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains
NAPOCOR’s power barges in the Philippines. NAPOCOR pays the Consortium,
through its non-resident partners, partly in foreign currency outwardly remitted.
In turn, the Consortium pays respondent also in foreign currency inwardly
remitted and accounted for in accordance with BSP rules. This payment
scheme does not entitle respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch),24 the place of payment is immaterial, much less is the
place where the output of the service is ultimately used. An essential condition
for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient
of the services is a person doing business outside the Philippines. In this case,
the recipient of the services is the Consortium, which is doing business not
outside, but within the Philippines because it has a 15-year contract to
operate and maintain NAPOCOR’s two 100-megawatt power barges in
Mindanao.
The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are taxed).
However, as the Court stated in American Express, there is an exception to this
rule.25 This exception refers to the 0% VAT on services enumerated in Section
102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing
business outside the Philippines. Thus, to be exempt from the destination
principle under Section 102(b)(1) and (2), the services must be (a) performed
in the Philippines; (b) for a person doing business outside the Philippines; and
(c) paid in acceptable foreign currency accounted for in accordance with
BSP rules.
Respondent’s reliance on the ruling in American Express 26 is misplaced. That
case involved a recipient of services, specifically American Express
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
International, Inc. (Hongkong Branch), doing business outside the Philippines.
There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-
registered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client [American Express International,
Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in accordance with BSP rules
and regulations. x x x x27 (Emphasis supplied)
In contrast, this case involves a recipient of services – the Consortium – which is
doing business in the Philippines. Hence, American Express’ services were
subject to 0% VAT, while respondent’s services should be subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on
VAT Ruling No. 003-99,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it
held that the services being rendered by BWSCMI is subject to VAT at zero
percent (0%)." Respondent’s reliance on these BIR rulings binds petitioner.
Petitioner’s filing of his Answer before the CTA challenging respondent’s claim
for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR
Ruling No. 023-95. However, such revocation cannot be given retroactive
effect since it will prejudice respondent. Changing respondent’s status will
deprive respondent of a refund of a substantial amount representing excess
output tax.30 Section 246 of the Tax Code provides that any revocation of a
ruling by the Commissioner of Internal Revenue shall not be given retroactive
application if the revocation will prejudice the taxpayer. Further, there is no
showing of the existence of any of the exceptions enumerated in Section 246
of the Tax Code for the retroactive application of such revocation.
However, upon the filing of petitioner’s Answer dated 2 March 2000 before the
CTA contesting respondent’s claim for refund, respondent’s services shall be
subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT
Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
Page 106

INCOME TAXATION ( SECS. 22 – 83 )
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British
Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari
of the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373
and 2561, dated 26 January 1983, which set aside petitioner's assessment of
deficiency income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
respectively, as well as its Resolution of 18 November, 1983 denying
reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing
under the laws of the United Kingdom It is engaged in the international airline
business and is a member-signatory of the Interline Air Transport Association
(IATA). As such it operates air transportation service and sells transportation
tickets over the routes of the other airline members. During the periods
covered by the disputed assessments, it is admitted that BOAC had no
landing rights for traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the Philippines
by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in
1961 and partly in 1962, when it was granted a temporary landing permit by
the CAB. Consequently, it did not carry passengers and/or cargo to or from
the Philippines, although during the period covered by the assessments, it
maintained a general sales agent in the Philippines — Wamer Barnes and
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Company, Ltd., and later Qantas Airways — which was responsible for selling
BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income
taxes covering the years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of
P858,307.79, which claim was denied by the CIR on 16 February 1972. But
before said denial, BOAC had already filed a petition for review with the Tax
Court on 27 January 1972, assailing the assessment and praying for the refund
of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests,
and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate
amount of P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties for violation of Section 46 (requiring the
filing of corporation returns) penalized under Section 74 of the National
Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972, however,
the CIR not only denied the BOAC request for refund in the First Case but also
re-issued in the Second Case the deficiency income tax assessment for
P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code. BOAC's request for reconsideration
was denied by the CIR on 24 August 1973. This prompted BOAC to file the
Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
Page 107

On 26 January 1983, the Tax Court rendered the assailed joint Decision
reversing the CIR. The Tax Court held that the proceeds of sales of BOAC
passage tickets in the Philippines by Warner Barnes and Company, Ltd., and
later by Qantas Airways, during the period in question, do not constitute
BOAC income from Philippine sources "since no service of carriage of
passengers or freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax. The CTA position
was that income from transportation is income from services so that the place
where services are rendered determines the source. Thus, in the dispositive
portion of its Decision, the Tax Court ordered petitioner to credit BOAC with
the sum of P858,307.79, and to cancel the deficiency income tax assessments
against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to
1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues,
thus:
1. Whether or not the revenue derived by private respondent
British Overseas Airways Corporation (BOAC) from sales of
tickets in the Philippines for air transportation, while having no
landing rights here, constitute income of BOAC from
Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a
resident foreign corporation doing business in the Philippines
or has an office or place of business in the Philippines.
3. In the alternative that private respondent may not be
considered a resident foreign corporation but a non-resident
foreign corporation, then it is liable to Philippine income tax at
the rate of thirty-five per cent (35%) of its gross income
received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(h) the term resident foreign corporation engaged in trade or
business within the Philippines or having an office or place of
business therein.
(i) The term "non-resident foreign corporation" applies to a
foreign corporation not engaged in trade or business within
the Philippines and not having any office or place of business
therein
It is our considered opinion that BOAC is a resident foreign corporation. There
is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization. 2 "In order that a foreign
corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a
general sales agent in the Philippines, That general sales agent, from 1959 to
1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips — each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." 4 Those activities were in exercise of the functions which are
normally incident to, and are in progressive pursuit of, the purpose and object
of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local
agent during the period covered by the assessments. Accordingly, it is a
resident foreign corporation subject to tax upon its total net income received
in the preceding taxable year from all sources within the Philippines. 5
Page 108

Sec. 24. Rates of tax on corporations. — ...
(b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation organized,
authorized, or existing under the laws of any foreign country,
except a foreign fife insurance company, engaged in trade
or business within the Philippines, shall be taxable as provided
in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within
the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from
sales of tickets by BOAC in the Philippines constitutes income from Philippine
sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived
from salaries, wages or compensation for personal service of
whatever kind and in whatever form paid, or from profession,
vocations, trades, business, commerce, sales, or dealings in
property, whether real or personal, growing out of the
ownership or use of or interest in such property; also from
interests, rents, dividends, securities, or the transactions of any
business carried on for gain or profile, or gains, profits,
and income derived from any source whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of
transport documents. "The words 'income from any source whatever' disclose
a legislative policy to include all income not expressly exempted within the
class of taxable income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific
time ...; it means something distinct from principal or capital. For, while capital
is a fund, income is a flow. As used in our income tax law, "income" refers to
the flow of wealth. 6
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The records show that the Philippine gross income of BOAC for the fiscal years
1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the
income. 8 For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments
for fares were also made here in Philippine currency. The site of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a
common carrier, it constitutes the contract between the ticket-holder and the
carrier. It gives rise to the obligation of the purchaser of the ticket to pay the
fare and the corresponding obligation of the carrier to transport the
passenger upon the terms and conditions set forth thereon. The ordinary ticket
issued to members of the traveling public in general embraces within its terms
all the elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income
from sources within the Philippines, namely: (1) interest, (21) dividends, (3)
service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income
from sources within the Philippines. Section 37, by its language, does not
intend the enumeration to be exclusive. It merely directs that the types of
income listed therein be treated as income from sources within the Philippines.
A cursory reading of the section will show that it does not state that it is an all-
inclusive enumeration, and that no other kind of income may be so
considered. " 10
Page 109

BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where the
services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income
tax laws. The Tax Court upholds that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not
determinative of the source of income or the site of income taxation.
Admittedly, BOAC was an off-line international airline at the time pertinent to
this case. The test of taxability is the "source"; and the source of an income is
that activity ... which produced the income. 11 Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a activity regularly pursued within the Philippines.
business a And even if the BOAC tickets sold covered the "transport of
passengers and cargo to and from foreign cities", 12 it cannot alter the fact
that income from the sale of tickets was derived from the Philippines. The word
"source" conveys one essential idea, that of origin, and the origin of the
income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply
only to the fiscal years covered by the questioned deficiency income tax
assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For,
pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972,
international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a
tax of 2-½ per cent on their cross Philippine billings. (Sec. 24[b]
[21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a
statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized
from uplifts anywhere in the world by any international carrier
doing business in the Philippines of passage documents sold
therein, whether for passenger, excess baggage or mail
provided the cargo or mail originates from the Philippines. ...
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The foregoing provision ensures that international airlines are taxed on their
income from Philippine sources. The 2-½ % tax on gross Philippine billings is an
income tax. If it had been intended as an excise or percentage tax it would
have been place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of
merit by this Court of the appeal in JAL vs. Commissioner of Internal
Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present
case. The ruling by the Tax Court in that case was to the effect that the mere
sale of tickets, unaccompanied by the physical act of carriage of
transportation, does not render the taxpayer therein subject to the common
carrier's tax. As elucidated by the Tax Court, however, the common carrier's
tax is an excise tax, being a tax on the activity of transporting, conveying or
removing passengers and cargo from one place to another. It purports to tax
the business of transportation. 14 Being an excise tax, the same can be levied
by the State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject matter of the
case under consideration is income tax, a direct tax on the income of persons
and other entities "of whatever kind and in whatever form derived from any
source." Since the two cases treat of a different subject matter, the decision in
one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby
SET ASIDE. Private respondent, the British Overseas Airways Corporation
(BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency
income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years
in accordance with the Tax Code. The BOAC claim for refund in the amount
of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.
Page 110

G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the
ground that it is erroneous. We have carefully studied it and find it is not; on
the contrary, it is supported by law and doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with
several Japanese shipbuilding companies for the construction of twelve
ocean-going vessels. 1 The purchase price was to come from the proceeds of
bonds issued by the Central Bank. 2 Initial payments were made in cash and
through irrevocable letters of credit. 3 Fourteen promissory notes were signed
for the balance by the NDC and, as required by the shipbuilders, guaranteed
by the Republic of the Philippines. 4 Pursuant thereto, the remaining payments
and the interests thereon were remitted in due time by the NDC to Tokyo. The
vessels were eventually completed and delivered to the NDC in Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of
US$4,066,580.70 as interest on the balance of the purchase price. No tax was
withheld. The Commissioner then held the NDC liable on such tax in the total
sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon
served on the NDC a warrant of distraint and levy to enforce collection of the
claimed amount. 6 The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax
deficiency in the sum of P900.00, representing the compromise penalty. 7 The
NDC then came to this Court in a petition for certiorari.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to them
under Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross
income from sources within the Philippines. — The following items of
gross income shall be treated as gross income from sources within the
Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax
under the above provision because all the related activities — the signing of
the contract, the construction of the vessels, the payment of the stipulated
price, and their delivery to the NDC — were done in Tokyo. 8 The law,
however, does not speak of activity but of "source," which in this case is the
NDC. This is a domestic and resident corporation with principal offices in
Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's
right to levy and collect income tax on interest received by foreign
corporations not engaged in trade or business within the Philippines is
not planted upon the condition that 'the activity or labor — and the
sale from which the (interest) income flowed had its situs' in the
Philippines. The law specifies: 'Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise.' Nothing there speaks
of the 'act or activity' of non-resident corporations in the Philippines, or
place where the contract is signed. The residence of the obligor who
pays the interest rather than the physical location of the securities,
bonds or notes or the place of payment, is the determining factor of
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the source of interest income. (Mertens, Law of Federal Income
Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77;
Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA
867.) Accordingly, if the obligor is a resident of the Philippines the
interest payment paid by him can have no other source than within
the Philippines. The interest is paid not by the bond, note or other
interest-bearing obligations, but by the obligor. (See mertens, Id., Vol.
8, p. 124.)
Here in the case at bar, petitioner National Development Company,
a corporation duly organized and existing under the laws of the
Republic of the Philippines, with address and principal office at Calle
Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay
the Japanese shipbuilders, as obligor in fourteen (14) promissory notes
for each vessel, the balance of the contract price of the twelve (12)
ocean-going vessels purchased and acquired by it from the
Japanese corporations, including the interest on the principal sum at
the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13",
pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And
pursuant to the terms and conditions of these promisory notes, which
are duly signed by its Vice Chairman and General Manager,
petitioner remitted to the Japanese shipbuilders in Japan during the
years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and
$1,541.031.00, respectively, as interest on the unpaid balance of the
purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial
Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence
of the obligor which paid the interest under consideration, petitioner
herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a
corporation duly organized and existing under the laws of the
Philippines, it is a domestic corporation, resident of the Philippines.
(Sec. 84(c), National Internal Revenue Code.) The interest paid by
petitioner, which is admittedly a resident of the Philippines, is on the
promissory notes issued by it. Clearly, therefore, the interest remitted to
the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the
unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the Philippines subject
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
to income tax under the then Section 24(b)(1) of the National Internal
Revenue Code. 9
There is no basis for saying that the interest payments were obligations of the
Republic of the Philippines and that the promissory notes of the NDC were
government securities exempt from taxation under Section 29(b)[4] of the Tax
Code, reading as follows:
SEC. 29. Gross Income. — xxxx xxx xxx xxx
(b) Exclusion from gross income. — The following items shall not be
included in gross income and shall be exempt from taxation under this
Title:
xxx xxx xxx
(4) Interest on Government Securities. — Interest upon the obligations
of the Government of the Republic of the Philippines or any political
subdivision thereof, but in the case of such obligations issued after
approval of this Code, only to the extent provided in the act
authorizing the issue thereof. (As amended by Section 6, R.A. No. 82;
emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of securities is
R.A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended
by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not
exempt from taxes the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not
collect taxes on the interest remitted because of the undertaking signed by
the Secretary of Finance in each of the promissory notes that:
Upon authority of the President of the Republic of the Philippines, the
undersigned, for value received, hereby absolutely and
unconditionally guarantee (sic), on behalf of the Republic of the
Philippines, the due and punctual payment of both principal and
interest of the above note.10
Page 112

There is nothing in the above undertaking exempting the interests from taxes.
Petitioner has not established a clear waiver therein of the right to tax interests.
Tax exemptions cannot be merely implied but must be categorically and
unmistakably expressed. 11 Any doubt concerning this question must be
resolved in favor of the taxing power. 12
Nowhere in the said undertaking do we find any inhibition against the
collection of the disputed taxes. In fact, such undertaking was made by the
government in consonance with and certainly not against the following
provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. — All persons, corporations and
general co-partnership (companies colectivas), in whatever capacity
acting, including lessees or mortgagors of real or personal capacity,
executors, administrators, receivers, conservators, fiduciaries,
employers, and all officers and employees of the Government of the
Philippines having control, receipt, custody; disposal or payment of
interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or
determinable annual or categorical gains, profits and income of any
nonresident alien individual, not engaged in trade or business within
the Philippines and not having any office or place of business therein,
shall (except in the cases provided for in subsection (a) of this section)
deduct and withhold from such annual or periodical gains, profits and
income a tax to twenty (now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the case
of foreign corporations subject to taxation under this Title not
engaged in trade or business within the Philippines and not having
any office or place of business therein, there shall be deducted and
withheld at the source in the same manner and upon the same items
as is provided in section fifty-three a tax equal to thirty (now 35%) per
centum thereof, and such tax shall be returned and paid in the same
manner and subject to the same conditions as provided in that
section:....
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Manifestly, the said undertaking of the Republic of the Philippines merely
guaranteed the obligations of the NDC but without diminution of its taxing
power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the
Republic of the Philippines, the petitioner closes its eyes to the nature of this
entity as a corporation. As such, it is governed in its proprietary activities not
only by its charter but also by the Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax
was due on the interests earned by the Japanese shipbuilders. It was the
income of these companies and not the Republic of the Philippines that was
subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is
a penalty for its failure to withhold the same from the Japanese shipbuilders.
Such liability is imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to
deduct and withhold any tax under this section shall make return
thereof, in duplicate, on or before the fifteenth day of April of each
year, and, on or before the time fixed by law for the payment of the
tax, shall pay the amount withheld to the officer of the Government
of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims
and demands of any person for the amount of any payments made
in accordance with the provisions of this section. (As amended by
Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the
Court of Tax Appeals, 13 the Court quoted with approval the following
regulation of the BIR on the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be
addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal Revenue
Page 113

decides that the income paid to an individual is not subject to
withholding, the withholding agent may thereupon remit the amount
of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he
could be released from liability," so said Justice Jose P. Bengson, who wrote
the decision. "Generally, the law frowns upon exemption from taxation;
hence, an exempting provision should be construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the withholding
agent of the government an so should be held liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement
as to costs. It is so ordered.
G.R. No. L-17518 October 30, 1922
FREDERICK C. FISHER, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.
Fisher and De Witt and Antonio M. Opisso for appellants.
Acting Attorney-General Tuason for appellee.
JOHNSON, J.:
The only question presented by this appeal is: Are the "stock dividends" in the
present case "income" and taxable as such under the provisions of section 25
of Act No. 2833? While the appellant presents other important questions,
under the view which we have taken of the facts and the law applicable to
the present case, we deem it unnecessary to discuss them now.
The defendant demurred to the petition in the lower court. The facts are
therefore admitted. They are simple and may be stated as follows:
That during the year 1919 the Philippine American Drug Company was a
corporation duly organized and existing under the laws of the Philippine
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Islands, doing business in the City of Manila; that he appellant was a
stockholder in said corporation; that said corporation, as result of the business
for that year, declared a "stock dividend"; that the proportionate share of said
stock divided of the appellant was P24,800; that the stock dividend for that
amount was issued to the appellant; that thereafter, in the month of March,
1920, the appellant, upon demand of the appellee, paid under protest, and
voluntarily, unto the appellee the sum of P889.91 as income tax on said stock
dividend. For the recovery of that sum (P889.91) the present action was
instituted. The defendant demurred to the petition upon the ground that it did
not state facts sufficient to constitute cause of action. The demurrer was
sustained and the plaintiff appealed.
To sustain his appeal the appellant cites and relies on some decisions of the
Supreme Court of the United States as will as the decisions of the supreme
court of some of the states of the Union, in which the questions before us,
based upon similar statutes, was discussed. Among the most important
decisions may be mentioned the following: Towne vs. Eisner, 245 U.S., 418;
Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189;
Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville
Woolen Mills, 93 Va., 673.
In each of said cases an effort was made to collect an "income tax" upon
"stock dividends" and in each case it was held that "stock dividends" were
capital and not an "income" and therefore not subject to the "income tax"
law.
The appellee admits the doctrine established in the case of Eisner vs.
Macomber (252 U.S., 189) that a "stock dividend" is not "income" but argues
that said Act No. 2833, in imposing the tax on the stock dividend, does not
violate the provisions of the Jones Law. The appellee further argues that the
statute of the United States providing for tax upon stock dividends is different
from the statute of the Philippine Islands, and therefore the decision of the
Supreme Court of the United States should not be followed in interpreting the
statute in force here.
For the purpose of ascertaining the difference in the said statutes ( (United
States and Philippine Islands), providing for an income tax in the United States
as well as that in the Philippine Islands, the two statutes are here quoted for
Page 114

the purpose of determining the difference, if any, in the language of the two
statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides
for the collection of an "income tax." Section 2 of said Act attempts to define
what is an income. The definition follows:
That the term "dividends" as used in this title shall be held to mean any
distribution made or ordered to made by a corporation, . . . which
stock dividend shall be considered income, to the amount of its cash
value.
Act No. 2833 of the Philippine Legislature is an Act establishing "an income
tax." Section 25 of said Act attempts to define the application of the income
tax. The definition follows:
The term "dividends" as used in this Law shall be held to mean any
distribution made or ordered to be made by a corporation, . . . out of
its earnings or profits accrued since March first, nineteen hundred and
thirteen, and payable to its shareholders, whether in cash or in stock
of the corporation, . . . . Stock dividend shall be considered income,
to the amount of the earnings or profits distributed.
It will be noted from a reading of the provisions of the two laws above quoted
that the writer of the law of the Philippine Islands must have had before him
the statute of the United States. No important argument can be based upon
the slight different in the wording of the two sections.
It is further argued by the appellee that there are no constitutional limitations
upon the power of the Philippine Legislature such as exist in the United States,
and in support of that contention, he cites a number of decisions. There is no
question that the Philippine Legislature may provide for the payment of an
income tax, but it cannot, under the guise of an income tax, collect a tax on
property which is not an "income." The Philippine Legislature can not impose a
tax upon "property" under a law which provides for a tax upon "income" only.
The Philippine Legislature has no power to provide a tax upon "automobiles"
only, and under that law collect a tax upon a carreton or bull cart.
Constitutional limitations, that is to say, a statute expressly adopted for one
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
purpose cannot, without amendment, be applied to another purpose which is
entirely distinct and different. A statute providing for an income tax cannot be
construed to cover property which is not, in fact income. The Legislature
cannot, by a statutory declaration, change the real nature of a tax which it
imposes. A law which imposes an important tax on rice only cannot be
construed to an impose an importation tax on corn.
It is true that the statute in question provides for an income tax and contains a
further provision that "stock dividends" shall be considered income and are
therefore subject to income tax provided for in said law. If "stock dividends"
are not "income" then the law permits a tax upon something not within the
purpose and intent of the law.
It becomes necessary in this connection to ascertain what is an "income in
order that we may be able to determine whether "stock dividends" are
"income" in the sense that the word is used in the statute. Perhaps it would be
more logical to determine first what are "stock dividends" in order that we may
more clearly understand their relation to "income." Generally speaking, stock
dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period. They are used to
show the increased interest or proportional shares in the capital of each
stockholder. In other words, the inventory of the property of the corporation,
etc., for particular period shows an increase in its capital, so that the stock
theretofore issued does not show the real value of the stockholder's interest,
and additional stock is issued showing the increase in the actual capital, or
property, or assets of the corporation, etc.
To illustrate: A and B form a corporation with an authorized capital of P10,000
for the purpose of opening and conducting a drug store, with assets of the
value of P2,000, and each contributes P1,000. Their entire assets are invested in
drugs and put upon the shelves in their place of business. They commence
business without a cent in the treasury. Every dollar contributed is invested.
Shares of stock to the amount of P1,000 are issued to each of the
incorporators, which represent the actual investment and entire assets of the
corporation. Business for the first year is good. Merchandise is sold, and
purchased, to meet the demands of the growing trade. At the end of the first
year an inventory of the assets of the corporation is made, and it is then
ascertained that the assets or capital of the corporation on hand amount to
P4,000, with no debts, and still not a cent in the treasury. All of the receipts
Page 115

during the year have been reinvested in the business. Neither of the
stockholders have withdrawn a penny from the business during the year. Every
peso received for the sale of merchandise was immediately used in the
purchase of new stock — new supplies. At the close of the year there is not a
centavo in the treasury, with which either A or B could buy a cup of coffee or
a pair of shoes for his family. At the beginning of the year they were P2,000,
and at the end of the year they were P4,000, and neither of the stockholders
have received a centavo from the business during the year. At the close of
the year, when it is discovered that the assets are P4,000 and not P2,000,
instead of selling the extra merchandise on hand and thereby reducing the
business to its original capital, they agree among themselves to increase the
capital they agree among themselves to increase the capital issued and for
that purpose issue additional stock in the form of "stock dividends" or
additional stock of P1,000 each, which represents the actual increase of the
shares of interest in the business. At the beginning of the year each
stockholder held one-half interest in the capital. At the close of the year, and
after the issue of the said stock dividends, they each still have one-half interest
in the business. The capital of the corporation increased during the year, but
has either of them received an income? It is not denied, for the purpose of
ordinary taxation, that the taxable property of the corporation at the
beginning of the year was P2,000, that at the close of the year it was P4,000,
and that the tax rolls should be changed in accordance with the changed
conditions in the business. In other words, the ordinary tax should be increased
by P2,000.
Another illustration: C and D organized a corporation for agricultural purposes
with an authorized capital stock of P20,000 each contributing P5,000. With that
capital they purchased a farm and, with it, one hundred head of cattle. Every
peso contributed is invested. There is no money in the treasury. Much time and
labor was expanded during the year by the stockholders on the farm in the
way of improvements. Neither received a centavo during the year from the
farm or the cattle. At the beginning of the year the assets of the corporation,
including the farm and the cattle, were P10,000, and at the close of the year
and inventory of the property of the corporation is made and it is then found
that they have the same farm with its improvements and two hundred head
of cattle by natural increase. At the end of the year it is also discovered that,
by reason of business changes, the farm and the cattle both have increased
in value, and that the value of the corporate property is now P20,000 instead
of P10,000 as it was at the beginning of the year. The incorporators instead of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
reducing the property to its original capital, by selling off a part of its, issue to
themselves "stock dividends" to represent the proportional value or interest of
each of the stockholders in the increased capital at the close of the year.
There is still not a centavo in the treasury and neither has withdrawn a peso
from the business during the year. No part of the farm or cattle has been sold
and not a single peso was received out of the rents or profits of the capital of
the corporation by the stockholders.
Another illustration: A, an individual farmer, buys a farm with one hundred
head of cattle for the sum of P10,000. At the end of the first year, by reason of
business conditions and the increase of the value of both real estate and
personal property, it is discovered that the value of the farm and the cattle is
P20,000. A, during the year, has received nothing from the farm or the cattle.
His books at the beginning of the year show that he had property of the value
of P10,000. His books at the close of the year show that he has property of the
value of P20,000. A is not a corporation. The assets of his business are not
shown therefore by certificates of stock. His books, however, show that the
value of his property has increased during the year by P10,000, under any
theory of business or law, be regarded as an "income" upon which the farmer
can be required to pay an income tax? Is there any difference in law in the
condition of A in this illustration and the condition of A and B in the
immediately preceding illustration? Can the increase of the value of the
property in either case be regarded as an "income" and be subjected to the
payment of the income tax under the law?
Each of the foregoing illustrations, it is asserted, is analogous to the case
before us and, in view of that fact, let us ascertain how lexicographers and
the courts have defined an "income." The New Standard Dictionary, edition of
1915, defines an income as "the amount of money coming to a person or
corporation within a specified time whether as payment or corporation within
a specified time whether as payment for services, interest, or profit from
investment." Webster's International Dictionary defines an income as "the
receipt, salary; especially, the annual receipts of a private person or a
corporation from property." Bouvier, in his law dictionary, says that an "income"
in the federal constitution and income tax act, is used in its common or
ordinary meaning and not in its technical, or economic sense. (146
Northwestern Reporter, 812) Mr. Black, in his law dictionary, says "An income is
the return in money from one's business, labor, or capital invested; gains, profit
Page 116

or private revenue." "An income tax is a tax on the yearly profits arising from
property , professions, trades, and offices."
The Supreme Court of the United States, in the case o Gray vs. Darlington (82
U.S., 653), said in speaking of income that mere advance in value in no sense
constitutes the "income" specified in the revenue law as "income" of the owner
for the year in which the sale of the property was made. Such advance
constitutes and can be treated merely as an increase of capital. (In
re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.)
Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United
States and now Secretary of State of the United States, in his argument before
the Supreme Court of the United States in the case of Towne vs. Eisner, supra,
defined an "income" in an income tax law, unless it is otherwise specified, to
mean cash or its equivalent. It does not mean choses in action or unrealized
increments in the value of the property, and cites in support of the definition,
the definition given by the Supreme Court in the case of Gray vs.
Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the
court, said: "Notwithstanding the thoughtful discussion that the case received
below, we cannot doubt that the dividend was capital as well for the
purposes of the Income Tax Law. . . . 'A stock dividend really takes nothing
from the property of the corporation, and adds nothing to the interests of the
shareholders. Its property is not diminished and their interest are not increased.
. . . The proportional interest of each shareholder remains the same. . . .' In
short, the corporation is no poorer and the stockholder is no richer then they
were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan County vs.
U.S., 169 U.S., 255, 261).
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney,
speaking for the court, said that the act employs the term "income" in its
natural and obvious sense, as importing something distinct from principal or
capital and conveying the idea of gain or increase arising from corporate
activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again
speaking for the court said: "An income may be defined as the gain derived
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
from capital, from labor, or from both combined, provided it be understood to
include profit gained through a sale or conversion of capital assets."
For bookkeeping purposes, when stock dividends are declared, the
corporation or company acknowledges a liability, in form, to the stockholders,
equivalent to the aggregate par value of their stock, evidenced by a "capital
stock account." If profits have been made by the corporation during a
particular period and not divided, they create additional bookkeeping
liabilities under the head of "profit and loss," "undivided profits," "surplus
account," etc., or the like. None of these, however, gives to the stockholders
as a body, much less to any one of them, either a claim against the going
concern or corporation, for any particular sum of money, or a right to any
particular portion of the asset, or any shares sells or until the directors conclude
that dividends shall be made a part of the company's assets segregated from
the common fund for that purpose. The dividend normally is payable in
money and when so paid, then only does the stockholder realize a profit or
gain, which becomes his separate property, and thus derive an income from
the capital that he has invested. Until that, is done the increased assets
belong to the corporation and not to the individual stockholders.
When a corporation or company issues "stock dividends" it shows that the
company's accumulated profits have been capitalized, instead of distributed
to the stockholders or retained as surplus available for distribution, in money or
in kind, should opportunity offer. Far from being a realization of profits of the
stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from surplus to assets, and
no longer is available for actual distribution. The essential and controlling fact
is that the stockholder has received nothing out of the company's assets for his
separate use and benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and accumulations resulting
from employment of his money and that of the other stockholders in the
business of the company, still remains the property of the company, and
subject to business risks which may result in wiping out of the entire investment.
Having regard to the very truth of the matter, to substance and not to form,
the stockholder by virtue of the stock dividend has in fact received nothing
that answers the definition of an "income." (Eisner vs. Macomber, 252 U.S., 189,
209, 211.)
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The stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation. There
has been no separation or segregation of his interest. All the property or
capital of the corporation still belongs to the corporation. There has been no
separation of the interest of the stockholder from the general capital of the
corporation. The stockholder, by virtue of the stock dividend, has no separate
or individual control over the interest represented thereby, further than he had
before the stock dividend was issued. He cannot use it for the reason that it is
still the property of the corporation and not the property of the individual
holder of stock dividend. A certificate of stock represented by the stock
dividend is simply a statement of his proportional interest or participation in the
capital of the corporation. For bookkeeping purposes, a corporation, by
issuing stock dividend, acknowledges a liability in form to the stockholders,
evidenced by a capital stock account. The receipt of a stock dividend in no
way increases the money received of a stockholder nor his cash account at
the close of the year. It simply shows that there has been an increase in the
amount of the capital of the corporation during the particular period, which
may be due to an increased business or to a natural increase of the value of
the capital due to business, economic, or other reasons. We believe that the
Legislature, when it provided for an "income tax," intended to tax only the
"income" of corporations, firms or individuals, as that term is generally used in
its common acceptation; that is that the income means money received,
coming to a person or corporation for services, interest, or profit from
investments. We do not believe that the Legislature intended that a mere
increase in the value of the capital or assets of a corporation, firm, or
individual, should be taxed as "income." Such property can be reached under
the ordinary from of taxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in
discussing the difference between "capital" and "income": "That the
fundamental relation of 'capital' to 'income' has been much discussed by
economists, the former being likened to the tree or the land, the latter to the
fruit or the crop; the former depicted as a reservoir supplied from springs; the
latter as the outlet stream, to be measured by its flow during a period of time."
It may be argued that a stockholder might sell the stock dividend which he
had acquired. If he does, then he has received, in fact, an income and such
income, like any other profit which he realizes from the business, is an income
and he may be taxed thereon.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
There is a clear distinction between an extraordinary cash dividend, no matter
when earned, and stock dividends declared, as in the present case. The one
is a disbursement to the stockholder of accumulated earnings, and the
corporation at once parts irrevocably with all interest thereon. The other
involves no disbursement by the corporation. It parts with nothing to the
stockholder. The latter receives, not an actual dividend, but certificate of
stock which simply evidences his interest in the entire capital, including such
as by investment of accumulated profits has been added to the original
capital. They are not income to him, but represent additions to the source of
his income, namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63
L.R.A. 587). Such a person is in the same position, so far as his income is
concerned, as the owner of young domestic animal, one year old at the
beginning of the year, which is worth P50 and, which, at the end of the year,
and by reason of its growth, is worth P100. The value of his property has
increased, but has had an income during the year? It is true that he had
taxable property at the beginning of the year of the value of P50, and the
same taxable property at another period, of the value of P100, but he has
had no income in the common acceptation of that word. The increase in the
value of the property should be taken account of on the tax duplicate for the
purposes of ordinary taxation, but not as income for he has had none.
The question whether stock dividends are income, or capital, or assets has
frequently come before the courts in another form — in cases of inheritance.
A is a stockholder in a large corporation. He dies leaving a will by the terms of
which he give to B during his lifetime the "income" from said stock, with a
further provision that C shall, at B's death, become the owner of his share in
the corporation. During B's life the corporation issues a stock dividend. Does
the stock dividend belong to B as an income, or does it finally belong to C as
a part of his share in the capital or assets of the corporation, which had been
left to him as a remainder by A? While there has been some difference of
opinion on that question, we believe that a great weight of authorities hold
that the stock dividend is capital or assets belonging to C and not an income
belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was
held that stock dividends in such cases were regarded as capital and not
as income (Gibbons vs. Mahon, 136 U.S., 549.)
In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction
between the title of a corporation, and the interest of its members or
stockholders in the property of the corporation, is familiar and well settled. The
Page 118

ownership of that property is in the corporation, and not in the holders of
shares of its stock. The interest of each stockholder consists in the right to a
proportionate part of the profits whenever dividends are declared by the
corporation, during its existence, under its charter, and to a like proportion of
the property remaining, upon the termination or dissolution of the corporation,
after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs. Equitable
Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205 Ill
,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a
corporate profit set aside, declared, and ordered by the directors to be paid
to the stockholders on demand or at a fixed time. Until the dividend is
declared, these corporate profits belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness.
There is a clear distinction between an extraordinary cash dividend, no matter
when earned, and stock dividends declared. The one is a disbursement to the
stockholders of accumulated earning, and the corporation at once parts
irrevocably with all interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholders. The latter receives, not
an actual dividend, but certificates of stock which evidence in a new
proportion his interest in the entire capital. When a cash becomes the
absolute property of the stockholders and cannot be reached by the
creditors of the corporation in the absence of fraud. A stock dividend
however, still being the property of the corporation and not the stockholder, it
may be reached by an execution against the corporation, and sold as a part
of the property of the corporation. In such a case, if all the property of the
corporation is sold, then the stockholder certainly could not be charged with
having received an income by virtue of the issuance of the stock dividend.
Until the dividend is declared and paid, the corporate profits still belong to the
corporation, not to the stockholders, and are liable for corporate
indebtedness. The rule is well established that cash dividend, whether large or
small, are regarded as "income" and all stock dividends, as capital or assets
(Cook on Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152
Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed.,
p. 738.)
If the ownership of the property represented by a stock dividend is still in the
corporation and to in the holder of such stock, then it is difficult to understand
how it can be regarded as income to the stockholder and not as a part of the
capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
stockholder has received nothing but a representation of an interest in the
property of the corporation and, as a matter of fact, he may never receive
anything, depending upon the final outcome of the business of the
corporation. The entire assets of the corporation may be consumed by
mismanagement, or eaten up by debts and obligations, in which case the
holder of the stock dividend will never have received an income from his
investment in the corporation. A corporation may be solvent and prosperous
today and issue stock dividends in representation of its increased assets, and
tomorrow be absolutely insolvent by reason of changes in business conditions,
and in such a case the stockholder would have received nothing from his
investment. In such a case, if the holder of the stock dividend is required to
pay an income tax on the same, the result would be that he has paid a tax
upon an income which he never received. Such a conclusion is absolutely
contradictory to the idea of an income. An income subject to taxation under
the law must be an actual income and not a promised or prospective
income.
The appelle argues that there is nothing in section 25 of Act No 2833 which
contravenes the provisions of the Jones Law. That may be admitted. He
further argues that the Act of Congress (U.S. Revenue Act of 1918) expressly
authorized the Philippine Legislatures to provide for an income tax. That fact
may also be admitted. But a careful reading of that Act will show that, while it
permitted a tax upon income, the same provided that income shall include
gains, profits, and income derived from salaries, wages, or compensation for
personal services, as well as from interest, rent, dividends, securities, etc. The
appellee emphasizes the "income from dividends." Of course, income
received as dividends is taxable as an income but an income from "dividends"
is a very different thing from receipt of a "stock dividend." One is an actual
receipt of profits; the other is a receipt of a representation of the increased
value of the assets of corporation.
In all of the foregoing argument we have not overlooked the decisions of a
few of the courts in different parts of the world, which have reached a
different conclusion from the one which we have arrived at in the present
case. Inasmuch, however, as appeals may be taken from this court to the
Supreme Court of the United States, we feel bound to follow the same
doctrine announced by that court.
Page 119

Having reached the conclusion, supported by the great weight of the
authority, that "stock dividends" are not "income," the same cannot be taxes
under that provision of Act No. 2833 which provides for a tax upon income.
Under the guise of an income tax, property which is not an income cannot be
taxed. When the assets of a corporation have increased so as to justify the
issuance of a stock dividend, the increase of the assets should be taken
account of the Government in the ordinary tax duplicates for the purposes of
assessment and collection of an additional tax. For all of the foregoing
reasons, we are of the opinion, and so decide, that the judgment of the lower
court should be revoked, and without any finding as to costs, it is so ordered.
Araullo, C.J. Avanceña, Villamor and Romualdez, JJ., concur.
Separate Opinions
STREET, J., concurring:
I agree that the trial court erred in sustaining the demurrer, and the judgment
must be reversed. Instead of demurring the defendant should have answered
and alleged, if such be the case, that the stock dividend which was the
subject of taxation represents the amount of earnings or profits distributed by
means of the issuance of said stock dividend; and the case should have been
tried on that question of fact.
In this connection it will be noted that section 25 (a) of Act No. 2833, of the
Philippine Legislature, under which this tax was imposed, does not levy a tax
generally on stock dividends to the extend of the part of the stock nor even to
the extend of its value, but declares that stock dividends shall be considered
as income to the amount of the earnings or profits distributed. Under provision,
before the tax can be lawfully assessed and collected, it must appear that he
stock dividend represents earning or profits distributed; and the burden of
proof is on the Collector of Internal Revenue to show this.
The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has been cited
as authority for the proposition that it is incompetent for the Legislature to tax
as income any property which by nature is really capital — as a stock
dividend is there said to be. In that case the Supreme Court of the United
States held that a Congressional Act taxing stock dividends as income was
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
repugnant to that provision of the Constitution of the United States which
required that direct taxes upon property shall be apportioned for collection
among the several states according to population and that the Sixteenth
Amendment, in authorizing the imposition by Congress of taxes upon income,
had not vested Congress with the power to levy direct taxes, on property
under the guise of income taxes. But the resolution embodied in that decision
was evidently reached because of the necessity of harmonizing two different
provisions of the Constitution of the United States, as amended. In this
jurisdiction our Legislature has full authority to levy both taxes on property and
income taxes; and there is no organic provision here in force similar to that
which, under the Constitution of the United States, requires direct taxes on
property to be levied in a particular way.
It results, under the statute here in force, there being no constitutional
restriction upon the action of the law making body, that the case before us
presents merely a question of statutory construction. That the problem should
be viewed in this light, in a case where there is no restriction upon the
legislative body, is pointed our in Eisner vs. Macomber, supra, where in the
course of his opinion Mr. Justice Pitney refers to the cases of the Swan Brewery
Co. vs. Rex ([1914] A. C. 231), and Tax Commissioner vs. Putnam (227 Mass.,
522), as being distinguished from Eisner vs. Macomber by the very
circumstance that in those cases the law making body, or bodies were under
no restriction as to the method of levying taxes. Such is the situation here.
OSTRAND, J., dissenting:
In its final analysis the opinion of the court rests principally, if not entirely on the
decision of the United States Supreme Court in the case of Eisner vs.
Macomber (252 U.S., 189), a decision which, for at least two reasons, is entirely
inapplicable to the present case.
In the first place, there is a radical difference between the definition of a
taxable stock dividend given in the United States Income Tax Law of
September 8, 1916, construed in the case of Eisner vs. Macomber, and that
given in Act No. 2833 of the Philippine Legislature, the Act with which we are
concerned in the present case. The former provides that "stock dividend shall
be considered income, to the amount of its cash value;" the Philippine Act
provides that "Stock dividend shall be considered income, to the amount of
Page 120

the earnings or profits distributed." The United State statute made stock
dividends based upon an advance in the value of the property or investment
taxable as income whether resulting from earning or not; our statute make
stock dividends taxable only to the amount of the earning and profits
distributed, and stock dividends based on the increment income and are not
taxable. Though the difference would seem sufficiently obvious, we will
endeavor to make it still clearer by borrowing one of the illustrations with
which the opinion of the court is provided. The court says:
A, an individual farmer, buys a farm with one hundred head of cattle
for the sum of P10,000. At the end of the first year, by reason of
business conditions and the increase of the value of both real estate
and personal property, it is discovered that the value of the farm and
the cattle is P20,000. A, during the year has received nothing from the
farm or the cattle. His books at the beginning of the year show that he
had property of the value of P10,000. His books at the close of the
year show that he has property of the value of P20,000. A is not a
corporation. The assets of his business are not shown therefore by
certificate of stock. His books, however, show that the value of his
property has increased during the year by P10,000. Can the P10,000,
under any theory of business or law, be regarded as an "income"
upon which the farmer can be required to pay an income tax? Is
there any difference in law in the conditions of A in this illustration and
the conditions of A and B in the immediately preceding illustration?
Can the increase of the value of the property in either case be
regarded as an 'income' and be subjected to the payment of the
income tax under the law?
I answer no. And while the increment if in the form of a stock dividend would
have been regarded as income under the United States statute and taxes as
such, it is not regarded as income and cannot be so taxes under our statute
because it is not based on earnings or profits. That is precisely the difference
between the two statutes and that is the reason the illustration is not in point in
this case, though it would have been entirely appropriate in the Eisner vs.
Macomber case. It is also one of the reasons why that case is inapplicable
here and why most of the arguments in the majority opinion are beside the
mark.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
But let us suppose that A had sold the products of the farm during the year for
P10,000 over and above his expense, and had invested the money in buildings
and improvements on the farm, thus increasing its value to P20,000. Why
would not the P10,000 earned during the year and so invested in
improvements still be income for the year? And why would not a tax on these
earnings be an income tax under the definition given in Black's Law
Dictionary, and quoted with approval in the decision of the court, that "An
income tax is a tax on the yearly profits arising from the property, professions,
trades, and offices?" There can be but one answer. There is no reason
whatever why the gains derived from the sale of the products of the farm
should not be regarded as income whether reinvested in improvements upon
the farm or not and there is no reason way a tax levied thereon cannot be
considered an income tax.
Moreover, to constitute income, profits, or earnings need not necessarily be
converted into cash. Black's Law Dictionary says — and I am again quoting
from the decision of the court — "An income is the return in money from one's
business, labor, or capital invested; gains profits, or private revenue." As will be
seen in the secondary sense of the word, income need not consist in money;
upon this point there is no divergence of view among the lexicographers. If a
farmer stores the gain produced upon his farm without selling, it may none the
less be regarded as income.
In the Eisner vs. Macomber case, the United States supreme Court felt bound
to give the word "income" a strict interpretation. Under article 1, paragraph 2,
clause 3, and paragraph 9, clause 4 of the original Constitution of the United
States, Congress could not impose direct taxes without apportioning them
among the States according to population. As it was thought desirable to
impose Federal taxes upon incomes and as a levy of such taxes by
appointment among the States in proportion to population would lead to an
unequal distribution of the tax with reference to the amount of taxable
incomes, the Sixteenth Amendment was adopted and which provided that
"The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among the several states,
and without regard to any census or enumeration."
The United States Supreme Court therefore says in the Eisner vs. Macomber
case:
Page 121

A proper regard for its generis, as well as its very clear language,
requires also that this Amendment shall not be extended by loose
construction, so as to repeal or modify, except as applied to income,
those provisions of the Constitution that require an apportionment
according to population for direct taxes upon property, real and
personal. This limitation still has an appropriate and important
functions, and is not to be overridden by Congress or disregarded by
the courts.
In order, therefore, that the clauses cited from Article I of the
constitution may have proper force and effect, save only as modified
by the Amendment, and that the latter also may have proper effect,
it becomes essential to distinguish between what is and what is not
"income," as the term is there used; and to apply the distinction as
cases arise, according to truth and substance, without regard to form.
Congress cannot by any definition it may adopt conclude the matter,
since it cannot by legislation alter the Constitution, from which alone it
derives its power to legislate, and within whose limitations alone that
power can be lawfully exercised.
That, in the absence of the peculiar restrictions placed by the Constitution
upon taxing power of Congress, the decision of the court might have been
different is clearly indicated by the following language:
Two recent decisions, proceeding from courts of high jurisdiction, are
cited in support of the position of the Government.
Sean Brewery Co. vs. Rex ([1914] A. C., 231), arose under the Dividend
Duties Act of Western Australia, which provided that "dividend" should
include "every dividend, profit, advantage, or gain intended to be
paid or credited to or distributed among any members or director of
any company," except etc. There was a stock dividend, the new
shares being alloted among the shareholders pro rata; and the
question was whether this was a distribution of a dividend within the
meaning of the act. The Judicial Committee of the Privy Council
sustained the dividend duty upon the ground that, although "in
ordinary language the new shares would not be distribution of a
dividend," yet within the meaning of the act, such new share were an
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"advantage" to the recipients. There being no constitutional restriction
upon the action of the lawmaking body, the case presented merely a
question of statutory construction, and manifestly the decision is not a
precedent for the guidance of this court when acting under a duty to
test an act of Congress by the limitations of a written Constitution
having superior force.
In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it was held
that the 44th Amendment to the constitution of Massachusetts, which
conferred upon the legislature full power to tax incomes, "must be
interpreted as including every item which by any reasonable
understanding can fairly be regarded as income" (pp. 526, 531); and
that under it a stock dividend was taxable as income. . . . Evidently, in
order to give a sufficiently broad sweep to the new taxing provision, it
was deemed necessary to take the symbol for the substance,
accumulation for distribution, capital accretion for its opposite; while
a case where money is paid into the hand of the stockholder with an
option to buy new shares with it, followed by acceptance of the
option, was regarded as identical in substance with a case where the
stockholder receives no money and has no option. The Massachusetts
court was not under an obligation, like the one which binds us, of
applying a constitutional provisions that stand in the way of extending
it by construction.
The Philippine Legislature has full power to levy taxes both on capital or
property and on income, subject only to the provisions of the Organic Act that
"the rule of taxation shall be uniform." In providing for the income tax the
Legislature is therefore entirely free to employ the term "income" in its widest
sense and is in nowise limited or hampered by organic limitations such as
those imposed upon Congress by the Constitution of the United States. This is
the second reason why the rule laid down in Eisner vs. Macomber has no
application here.
The majority opinion in discussing this question, says:
There is no question that the Philippine Legislature may provide for the
payment of an income tax, but it cannot, under the guise of an
income tax, collect a tax on property which is not an "income." The
Page 122
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Philippine Legislature cannot impose a tax upon "income" only . The instead of in money. Would it be seriously contended that he had received no
Philippine Legislature has no power to provide a tax upon fee and that his efforts had brought no income?1awph!l.net
"automobiles," only, and under that law collect a tax upon
a carreton or bull cart. Constitutional limitations upon the power of Some of the members of the court agree that stock dividends based on
the Legislature are not stronger than statutory limitations, that is to say, earnings or profits may be taxed as income, but take the view that in an
a statute expressly adopted for one purpose cannot, without action against the Collector of the Internal Revenue for recovering back taxes
amendment, be applied to another purpose which is entirely distinct paid on non-taxable stock dividends, the plaintiff need not allege that the
and different. A statute providing for an income tax cannot be stock dividends are not base on earnings or profits distributed, but that
construed to cover property which is not, in fact, income. The question of the taxability or non-taxability of the stock dividends is a matter of
Legislature cannot, by a statutory declaration, change the real of a defense and should be set up by the defendant by way of answer.
nature of a tax which it imposes. A law which imposes an importation
tax on rice only cannot be construed to impose an importation tax on
I think this view is erroneous. If some stock dividends are taxable and others
corn.
are not, an allegation that stock dividends in general have been taxed is not
sufficient and does not state a cause of action. the presumption is that the tax
These assertions while in the main true are, perhaps, a little to broadly stated; has been legally collected and the burden is upon the plaintiff both to allege
much will depend on the circumstances of each particular case. If the and prove facts showing that the collection is unlawfully or irregular. (Code of
Legislature cannot do the things enumerate it must be by reason of the Civil Procedure, sec. 334, subsec. 14 and 31.)
limitation imposed by the Organic Act, "That no bill which may be enacted
into law shall embrace more than on subject, and that subject shall be
expressed in the title of the bill." Similar provisions are contained in most State
Constitutions, their object being to prevent "log-rolling" and the passing of
undesirable measures without their being brought properly to the attention of
the legislators. Where the prevention of this mischief is not involved, the courts
have uniformly given such provisions a very liberal construction and there are
few, if any, cases where a statute has been declared unconstitutional for
dealing with several cognate subjects in the same Act and under the same
title. (Lewis Sutherland on Statutory Construction, 2d ed., pars 109 et seq.:
Government of the Philippine Island vs. Municipality of Binalonan and Roman
Catholic Bishop of Nueva Segovia, 32, Phil., 634). Certainly no income tax
statute would be declared unconstitutional on that ground for treating
dividends as income and providing for their taxation as such.

Reverting to the question of the nature of income, it is argued that a stock

certificate has no intrinsic value and that, therefore, even it is based on
earnings instead of increment in capital it cannot be regarded as income. But
neither has a bank check or a time deposit certificate any intrinsic value, yet it
may be negotiated, or sold, or assigned and it represents a cash value. So
also does a stock certificate. A lawyer might take his fee in stock certificates

Atty. Santos, Taxation I Page 123


G.R. No. L-12287 August 7, 1918
VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.
Gregorio Araneta for appellants.
Assistant Attorney Round for appellees.
MALCOLM, J.:
This appeal calls for consideration of the Income Tax Law, a law of American
origin, with reference to the Civil Code, a law of Spanish origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married prior to January 1,
1914. The marriage was contracted under the provisions of law concerning
conjugal partnerships (sociedad de gananciales). On February 25, 1915,
Vicente Madrigal filed sworn declaration on the prescribed form with the
Collector of Internal Revenue, showing, as his total net income for the year
1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that
the said P296,302.73 did not represent his income for the year 1914, but was in
fact the income of the conjugal partnership existing between himself and his
wife Susana Paterno, and that in computing and assessing the additional
income tax provided by the Act of Congress of October 3, 1913, the income
declared by Vicente Madrigal should be divided into two equal parts, one-
half to be considered the income of Vicente Madrigal and the other half of
Susana Paterno. The general question had in the meantime been submitted
to the Attorney-General of the Philippine Islands who in an opinion dated
March 17, 1915, held with the petitioner Madrigal. The revenue officers being
still unsatisfied, the correspondence together with this opinion was forwarded
to Washington for a decision by the United States Treasury Department. The
United States Commissioner of Internal Revenue reversed the opinion of the
Attorney-General, and thus decided against the claim of Madrigal.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
After payment under protest, and after the protest of Madrigal had been
decided adversely by the Collector of Internal Revenue, action was begun by
Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of
the city of Manila against Collector of Internal Revenue and the Deputy
Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged
to have been wrongfully and illegally collected by the defendants from the
plaintiff, Vicente Madrigal, under the provisions of the Act of Congress known
as the Income Tax Law. The burden of the complaint was that if the income
tax for the year 1914 had been correctly and lawfully computed there would
have been due payable by each of the plaintiffs the sum of P2,921.09, which
taken together amounts of a total of P5,842.18 instead of P9,668.21,
erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with
the result that plaintiff Madrigal has paid as income tax for the year 1914,
P3,786.08, in excess of the sum lawfully due and payable.
The answer of the defendants, together with an analysis of the tax
declaration, the pleadings, and the stipulation, sets forth the basis of
defendants' stand in the following way: The income of Vicente Madrigal and
his wife Susana Paterno of the year 1914 was made up of three items: (1)
P362,407.67, the profits made by Vicente Madrigal in his coal and shipping
business; (2) P4,086.50, the profits made by Susana Paterno in her embroidery
business; (3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop
company. The sum of these three items is P383,181.97, the gross income of
Vicente Madrigal and Susana Paterno for the year 1914. General deductions
were claimed and allowed in the sum of P86,879.24. The resulting net income
was P296,302.73. For the purpose of assessing the normal tax of one per cent
on the net income there were allowed as specific deductions the following:
(1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000,
the specific exemption granted to Vicente Madrigal and Susana Paterno,
husband and wife. The remainder, P271,614.93 was the sum upon which the
normal tax of one per cent was assessed. The normal tax thus arrived at was
P2,716.15.
The dispute between the plaintiffs and the defendants concerned the
additional tax provided for in the Income Tax Law. The trial court in an
exhausted decision found in favor of defendants, without costs.
ISSUES.
Page 124

The contentions of plaintiffs and appellants having to do solely with the
additional income tax, is that is should be divided into two equal parts,
because of the conjugal partnership existing between them. The learned
argument of counsel is mostly based upon the provisions of the Civil Code
establishing the sociedad de gananciales. The counter contentions of
appellees are that the taxes imposed by the Income Tax Law are as the name
implies taxes upon income tax and not upon capital and property; that the
fact that Madrigal was a married man, and his marriage contracted under
the provisions governing the conjugal partnership, has no bearing on income
considered as income, and that the distinction must be drawn between the
ordinary form of commercial partnership and the conjugal partnership of
spouses resulting from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers
have been given the course of history. The final stage has been the selection
of income as the norm of taxation. (See Seligman, "The Income Tax,"
Introduction.) The Income Tax Law of the United States, extended to the
Philippine Islands, is the result of an effect on the part of the legislators to put
into statutory form this canon of taxation and of social reform. The aim has
been to mitigate the evils arising from inequalities of wealth by a progressive
scheme of taxation, which places the burden on those best able to pay. To
carry out this idea, public considerations have demanded an exemption
roughly equivalent to the minimum of subsistence. With these exceptions, the
income tax is supposed to reach the earnings of the entire non-governmental
property of the country. Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential
difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any
other benefit rendered by a fund of capital in relation to such fund through a
period of time is called an income. Capital is wealth, while income is the
service of wealth. (See Fisher, "The Nature of Capital and Income.") The
Supreme Court of Georgia expresses the thought in the following figurative
language: "The fact is that property is a tree, income is the fruit; labor is a tree,
income the fruit; capital is a tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"Income," as here used, can be defined as "profits or gains." (London County
Council vs. Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N.
S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax,
second edition [1915], Chapter IV; Black on Income Taxes, second edition
[1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and
Towne vs. Eisner, decided by the United States Supreme Court, January 7,
1918.)
A regulation of the United States Treasury Department relative to returns by the
husband and wife not living apart, contains the following:
The husband, as the head and legal representative of the household and
general custodian of its income, should make and render the return of the
aggregate income of himself and wife, and for the purpose of levying the
income tax it is assumed that he can ascertain the total amount of said
income. If a wife has a separate estate managed by herself as her own
separate property, and receives an income of more than $3,000, she may
make return of her own income, and if the husband has other net income,
making the aggregate of both incomes more than $4,000, the wife's return
should be attached to the return of her husband, or his income should be
included in her return, in order that a deduction of $4,000 may be made from
the aggregate of both incomes. The tax in such case, however, will be
imposed only upon so much of the aggregate income of both shall exceed
$4,000. If either husband or wife separately has an income equal to or in
excess of $3,000, a return of annual net income is required under the law, and
such return must include the income of both, and in such case the return must
be made even though the combined income of both be less than $4,000. If
the aggregate net income of both exceeds $4,000, an annual return of their
combined incomes must be made in the manner stated, although neither one
separately has an income of $3,000 per annum. They are jointly and
separately liable for such return and for the payment of the tax. The single or
married status of the person claiming the specific exemption shall be
determined as one of the time of claiming such exemption which return is
made, otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the
Philippine Islands, we turn for a moment to consider the provisions of the Civil
Code dealing with the conjugal partnership. Recently in two elaborate
decisions in which a long line of Spanish authorities were cited, this court in
Page 125

speaking of the conjugal partnership, decided that "prior to the liquidation the
interest of the wife and in case of her death, of her heirs, is an interest
inchoate, a mere expectancy, which constitutes neither a legal nor an
equitable estate, and does not ripen into title until there appears that there
are assets in the community as a result of the liquidation and settlement."
(Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the
property of her husband Vicente Madrigal during the life of the conjugal
partnership. She has an interest in the ultimate property rights and in the
ultimate ownership of property acquired as income after such income has
become capital. Susana Paterno has no absolute right to one-half the income
of the conjugal partnership. Not being seized of a separate estate, Susana
Paterno cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As she has no
estate and income, actually and legally vested in her and entirely distinct
from her husband's property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax. Moreover,
the Income Tax Law does not look on the spouses as individual partners in an
ordinary partnership. The husband and wife are only entitled to the exemption
of P8,000 specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be partially
defeated by reliance on provisions in our Civil Code dealing with the conjugal
partnership and having no application to the Income Tax Law. The aims and
purposes of the Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-
General of the Philippine Islands and the United States Treasury Department.
The decision of the latter overruling the opinion of the Attorney-General is as
follows:
TREASURY
DEPARTMENT, Washington.
Income Tax.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915, transmitting
copy of correspondence "from the Philippine authorities relative to the
method of submission of income tax returns by marred person."
You advise that "The Governor-General, in forwarding the papers to
the Bureau, advises that the Insular Auditor has been authorized to
suspend action on the warrants in question until an authoritative
decision on the points raised can be secured from the Treasury
Department."
From the correspondence it appears that Gregorio Araneta, married
and living with his wife, had an income of an amount sufficient to
require the imposition of the net income was properly computed and
then both income and deductions and the specific exemption were
divided in half and two returns made, one return for each half in the
names respectively of the husband and wife, so that under the returns
as filed there would be an escape from the additional tax; that
Araneta claims the returns are correct on the ground under the
Philippine law his wife is entitled to half of his earnings; that Araneta
has dominion over the income and under the Philippine law, the right
to determine its use and disposition; that in this case the wife has no
"separate estate" within the contemplation of the Act of October 3,
1913, levying an income tax.
It appears further from the correspondence that upon the foregoing
explanation, tax was assessed against the entire net income against
Gregorio Araneta; that the tax was paid and an application for
refund made, and that the application for refund was rejected,
whereupon the matter was submitted to the Attorney-General of the
Islands who holds that the returns were correctly rendered, and that
the refund should be allowed; and thereupon the question at issue is
submitted through the Governor-General of the Islands and Bureau of
Insular Affairs for the advisory opinion of this office.
Page 126
 DUMAUAL, JEANNE PAULINE J. 2019-2020

By paragraph M of the statute, its provisions are extended to the

Philippine Islands, to be administered as in the United States but by
the appropriate internal-revenue officers of the Philippine
Government. You are therefore advised that upon the facts as stated,
this office holds that for the Federal Income Tax (Act of October 3,
1913), the entire net income in this case was taxable to Gregorio
Araneta, both for the normal and additional tax, and that the
application for refund was properly rejected.
The separate estate of a married woman within the contemplation of
the Income Tax Law is that which belongs to her solely and separate
and apart from her husband, and over which her husband has no
right in equity. It may consist of lands or chattels.
The statute and the regulations promulgated in accordance
therewith provide that each person of lawful age (not excused from
so doing) having a net income of $3,000 or over for the taxable year
shall make a return showing the facts; that from the net income so
shown there shall be deducted $3,000 where the person making the
return is a single person, or married and not living with consort, and
$1,000 additional where the person making the return is married and
living with consort; but that where the husband and wife both make
returns (they living together), the amount of deduction from the
aggregate of their several incomes shall not exceed $4,000.
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few basic
ideas. The Income Tax Law was drafted by the Congress of the United States
and has been by the Congress extended to the Philippine Islands. Being thus a
law of American origin and being peculiarly intricate in its provisions, the
authoritative decision of the official who is charged with enforcing it has
peculiar force for the Philippines. It has come to be a well-settled rule that
great weight should be given to the construction placed upon a revenue law,
whose meaning is doubtful, by the department charged with its execution.
(U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2
Phil., 630; Government of the Philippine Islands vs. Municipality of Binalonan,
and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We
conclude that the judgment should be as it is hereby affirmed with costs
against appellants. So ordered.

The only occasion for a wife making a return is where she has income
from a sole and separate estate in excess of $3,000, but together they
have an income in excess of $4,000, in which the latter event either
the husband or wife may make the return but not both. In all instances
the income of husband and wife whether from separate estates or
not, is taken as a whole for the purpose of the normal tax. Where the
wife has income from a separate estate makes return made by her
husband, while the incomes are added together for the purpose of
the normal tax they are taken separately for the purpose of the
additional tax. In this case, however, the wife has no separate income
within the contemplation of the Income Tax Law.

Respectfully,

Atty. Santos, Taxation I Page 127


G.R. No. 48532 August 31, 1992
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A.
RIALP, LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME
E. DY-LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D.
HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O.
MICIANO, EDUARDO A. RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.
NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent
Court of Tax Appeals, promulgated September 26, 19771 denying petitioners'
claim for tax refunds, and order the Commissioner of Internal Revenue to
refund to them their income taxes which they claim to have been erroneously
or illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and
Gamble, Philippine Manufacturing Corporation, with offices
at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said
corporation is a subsidiary of Procter & Gamble, a foreign
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
corporation based in Cincinnati, Ohio, U.S.A. During the years
1970 and 1971 petitioners were assigned, for certain periods,
to other subsidiaries of Procter & Gamble, outside of the
Philippines, during which petitioners were paid U.S. dollars as
compensation for services in their foreign assignments.
(Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511
and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A.
Case No. 2511 filed their income tax returns for the year 1970,
they computed the tax due by applying the dollar-to-peso
conversion on the basis of the floating rate ordained under
B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the
conversion rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at
the conversion rate of P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above
conversion rate in converting their dollar income for 1971 to
Philippine peso. However, on February 8, 1973 and October 8,
1973, petitioners in said cases filed with the office of the
respondent Commissioner, amended income tax returns for
the above-mentioned years, this time using the par value of
the peso as prescribed in Section 48 of Republic Act No. 265
in relation to Section 6 of Commonwealth Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as the
basis for converting their respective dollar income into
Philippine pesos for purposes of computing and paying the
corresponding income tax due from them. The aforesaid
computation as shown in the amended income tax returns
resulted in the alleged overpayments, refund and/or tax
credit. Accordingly, claims for refund of said over-payments
were filed with respondent Commissioner. Without awaiting
the resolution of the Commissioner of the Internal Revenue on
their claims, petitioners filed their petitioner for review in the
above-mentioned cases.
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 DUMAUAL, JEANNE PAULINE J. 2019-2020
Respondent Commissioner filed his Answer to petitioners'
petition for review in C.T.A. Case No. 2511 on July 31, 1973,
while his Answer in C.T.A. Case No. 2594 was filed on August 7,
1974.
Upon joint motion of the parties on the ground that these two
cases involve common question of law and facts, that
respondent Court of Tax Appeals heard the cases jointly. In its
decision dated September 26, 1977, the respondent Court of
Tax Appeals held that the proper conversion rate for the
purpose of reporting and paying the Philippine income tax on
the dollar earnings of petitioners are the rates prescribed
under Revenue Memorandum Circulars Nos. 7-71 and 41-71.
Accordingly, the claim for refund and/or tax credit of
petitioners in the above-entitled cases was denied and the
petitions for review dismissed, with costs against petitioners.
Hence, this petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange
transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax
purposes in the prevailing free market rate of exchange and not the par value
of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar
earnings for tax purposes into Philippine pesos is "unrealistic" and, therefore,
the prevailing free market rate should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes
petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these
After a careful examination of the records, the laws involved and the
two cases are Philippine income tax for the calendar years
jurisprudence on the matter, We are inclined to agree with respondents Court
1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and,
therefore, should be governed by the provisions of the
Atty. Santos, Taxation I
National Internal Revenue Code and its implementing rules
and regulations, and not by the provisions of Central Bank
Circular No. 42 dated May 21, 1953, as contended by
petitioners.
Section 21 of the National Internal Revenue Code, before its
amendment by Presidential Decrees Nos. 69 and 323 which
took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income
received during each taxable year from all sources by a
citizen of the Philippines, whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing
abroad by virtue of their employment. Thus, in their tax returns
for the period involved herein, they gave their legal
residence/address as c/o Procter & Gamble PMC, Ayala
Ave., Makati, Rizal (Annexes "A" to "A-8" and Annexes "C" to
"C-8", Petition for Review, CTA Nos. 2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar
earnings should be converted into Philippine pesos in
computing the income tax due therefrom, in accordance
with the provisions of Revenue Memorandum Circular No. 7-
71 dated February 11, 1971 for 1970 income and Revenue
Memorandum Circular No. 41-71 dated December 21, 1971
for 1971 income, which reiterated BIR Ruling No. 70-027 dated
May 4, 1970, to wit:
For internal revenue tax purposes, the free
marker rate of conversion (Revenue Circulars
Nos. 7-71 and 41-71) should be applied in
order to determine the true and correct
value in Philippine pesos of the income of
petitioners. 3
Page 129

of Tax Appeals and Commissioner of Internal Revenue and thus vote to deny
the petition.
This basically an income tax case. For the proper resolution of these cases
income may be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest
or profit from investment. Unless otherwise specified, it means cash or its
equivalent. 4 Income can also be though of as flow of the fruits of one's
labor. 5
Petitioners are correct as to their claim that their dollar earnings are not
receipts derived from foreign exchange transactions. For a foreign exchange
transaction is simply that — a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of another." 6 When
petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO spending in
said currency. There was no conversion, therefore, from one currency to
another.
Public respondent Court of Tax Appeals did err when it concluded that the
dollar incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular
No. 42. 7
The issue now is, what exchange rate should be used to determine the peso
equivalent of the foreign earnings of petitioners for income tax purposes.
Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there occurred no actual
inward remittances, and, therefore, they are not included in the coverage of
Central Bank Circular No. 289 which provides for the specific instances when
the par value of the peso shall not be the conversion rate used. They
conclude that their earnings should be converted for income tax purposes
using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts
for export products, receipts of sale of foreign exchange or foreign borrowings
and investments but not income tax. He also claims that he had to use the
prevailing free market rate of exchange in these cases because of the need
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
to ascertain the true and correct amount of income in Philippine peso of
dollar earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters
involved therein are export products, invisibles, receipts of foreign exchange,
foreign exchange payments, new foreign borrowing and
investments — nothing by way of income tax payments. Thus, petitioners are in
error by concluding that since C.B. Circular No. 289 does not apply to them,
the par value of the peso should be the guiding rate used for income tax
purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which
came to them within a specified period of time of two yeas as payment for
their services.
Section 21 of the National Internal Revenue Code, amended up to August 4,
1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. — A tax is hereby
imposed upon the taxable net income received during each
taxable year from all sources by every individual, whether a
citizen of the Philippines residing therein or abroad or an alien
residing in the Philippines, determined in accordance with the
following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal
Revenue Code, Section 338 thereof empowers the Secretary of Finance to
"promulgate all needful rules and regulations" to effectively enforce its
provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-
71 11 were issued to prescribed a uniform rate of exchange from US dollars to
Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and
1971, respectively. Said revenue circulars were a valid exercise of the authority
given to the Secretary of Finance by the Legislature which enacted the
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

Internal Revenue Code. And these are presumed to be a valid interpretation

of said code until revoked by the Secretary of Finance himself. 12

Petitioners argue that since there were no remittances and acceptances of

their salaries and wages in US dollars into the Philippines, they are exempt from
the coverage of such circulars. Petitioners forget that they are citizens of the
Philippines, and their income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as amended, does not
brook any exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under
the uniform rate of exchange prescribed under the aforestated Revenue
Memorandum Circulars, there is no reason for respondent Commissioner to
refund any taxes to petitioner as said Revenue Memorandum Circulars, being
of long standing and not contrary to law, are valid. 13

Although it has become a worn-out cliche, the fact still remains that "taxes are
the lifeblood of the government" and one of the duties of a Filipino citizen is to
pay his income tax.

WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the
respondent Court of Tax Appeals of petitioners' claims for tax refunds for the
income tax period for 1970 and 1971 is AFFIRMED. Costs against petitioners.

Atty. Santos, Taxation I Page 131

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-48194 March 15, 1990 I, LEONARDO A. TIRO, of legal age, married and a resident of
Medina, Misamis Oriental, for and in consideration of the sum
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners, of ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00),
vs. Philippine Currency, do by these presents, ASSIGN, TRANSFER
COURT OF APPEALS and LEONARDO TIRO, respondents. AND CONVEY, absolutely and forever unto JOSE M. JAVIER
and ESTRELLA F. JAVIER, spouses, of legal age and a resident
(sic) of 2897 F.B. Harrison, Pasay City, my shares of stocks in
Eddie Tamondong for petitioners.
the TIMBERWEALTH CORPORATION in the total amount of
P120,000.00, payment of which shall be made in the following
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent. manner:

1. Twenty thousand (P20,000.00) Pesos upon

signing of this contract;
REGALADO, J.:
2. The balance of P100,000.00 shall be paid
Petitioners pray for the reversal of the decision of respondent Court of Appeals P10,000.00 every shipment of export logs
in CA-G.R. No. 52296-R, dated March 6, 1978, 1 the dispositive portion whereof actually produced from the forest
decrees: concession of Timberwealth Corporation.

WHEREFORE, the judgment appealed from is hereby set aside
and another one entered ordering the defendants-appellees,
jointly and solidarily, to pay plaintiff-appellant the sum of
P79,338.15 with legal interest thereon from the filing of the
complaint, plus attorney's fees in the amount of P8,000.00.
Costs against defendants-appellees.2
As found by respondent court or disclosed by the records, 3 this case was
generated by the following antecedent facts.
Private respondent is a holder of an ordinary timber license issued by the
Bureau of Forestry covering 2,535 hectares in the town of Medina, Misamis
Oriental. On February 15, 1966 he executed a "Deed of Assignment" 4 in favor
of herein petitioners the material parts of which read as follows:
That I hereby agree to sign and endorse the stock certificate
in favor of Mr. & Mrs. Jose M. Javier, as soon as stock
certificates are issued.
xxx xxx xxx
At the time the said deed of assignment was executed, private respondent
had a pending application, dated October 21, 1965, for an additional forest
concession covering an area of 2,000 hectares southwest of and adjoining the
area of the concession subject of the deed of assignment. Hence, on
February 28, 1966, private respondent and petitioners entered into another
"Agreement" 5 with the following stipulations:
xxx xxx xxx

xxx xxx xxx 1. That LEONARDO TIRO hereby agrees and binds himself to
transfer, cede and convey whatever rights he may acquire,
absolutely and forever, to TIMBERWEALTH CORPORATION, a
corporation duly organized and existing under the laws of the

Atty. Santos, Taxation I Page 132


Philippines, over a forest concession which is now pending
application and approval as additional area to his existing
licensed area under O.T. License No. 391-103166, situated at
Medina, Misamis Oriental;
2. That for and in consideration of the aforementioned
transfer of rights over said additional area to TIMBERWEALTH
CORPORATION, ESTRELLA F. JAVIER and JOSE M. JAVIER, both
directors and stockholders of said corporation, do hereby
undertake to pay LEONARDO TIRO, as soon as said additional
area is approved and transferred to TIMBERWEALTH
CORPORATION the sum of THIRTY THOUSAND PESOS
(P30,000.00), which amount of money shall form part of their
paid up capital stock in TIMBERWEALTH CORPORATION;
3. That this Agreement is subject to the approval of the
members of the Board of Directors of the TIMBERWEALTH
CORPORATION.
xxx xxx xxx
On November 18, 1966, the Acting Director of Forestry wrote private
respondent that his forest concession was renewed up to May 12, 1967 under
O.T.L. No. 391-51267, but since the concession consisted of only 2,535
hectares, he was therein informed that:
In pursuance of the Presidential directive of May 13, 1966, you
are hereby given until May 12, 1967 to form an organization
such as a cooperative, partnership or corporation with other
adjoining licensees so as to have a total holding area of not
less than 20,000 hectares of contiguous and compact territory
and an aggregate allowable annual cut of not less than
25,000 cubic meters, otherwise, your license will not be further
renewed. 6
Consequently, petitioners, now acting as timber license holders by virtue of
the deed of assignment executed by private respondent in their favor,
entered into a Forest Consolidation Agreement 7 on April 10, 1967 with other
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
ordinary timber license holders in Misamis Oriental, namely, Vicente L. De Lara,
Jr., Salustiano R. Oca and Sanggaya Logging Company. Under this
consolidation agreement, they all agreed to pool together and merge their
respective forest concessions into a working unit, as envisioned by the
aforementioned directives. This consolidation agreement was approved by
the Director of Forestry on May 10, 1967. 8 The working unit was subsequently
incorporated as the North Mindanao Timber Corporation, with the petitioners
and the other signatories of the aforesaid Forest Consolidation Agreement as
incorporators. 9
On July 16, 1968, for failure of petitioners to pay the balance due under the
two deeds of assignment, private respondent filed an action against
petitioners, based on the said contracts, for the payment of the amount of
P83,138.15 with interest at 6% per annum from April 10, 1967 until full payment,
plus P12,000.00 for attorney's fees and costs.
On September 23, 1968, petitioners filed their answer admitting the due
execution of the contracts but interposing the special defense of nullity
thereof since private respondent failed to comply with his contractual
obligations and, further, that the conditions for the enforceability of the
obligations of the parties failed to materialize. As a counterclaim, petitioners
sought the return of P55,586.00 which private respondent had received from
them pursuant to an alleged management agreement, plus attorney's fees
and costs.
On October 7, 1968, private respondent filed his reply refuting the defense of
nullity of the contracts in this wise:
What were actually transferred and assigned to the
defendants were plaintiff's rights and interest in a logging
concession described in the deed of assignment, attached to
the complaint and marked as Annex A, and agreement
Annex E; that the "shares of stocks" referred to in paragraph II
of the complaint are terms used therein merely to designate
or identify those rights and interests in said logging
concession. The defendants actually made use of or enjoyed
not the "shares of stocks" but the logging concession itself;
that since the proposed Timberwealth Corporation was
Page 133

owned solely and entirely by defendants, the personalities of
the former and the latter are one and the same. Besides,
before the logging concession of the plaintiff or the latter's
rights and interests therein were assigned or transferred to
defendants, they never became the property or assets of the
Timberwealth Corporation which is at most only an
association of persons composed of the defendants. 10
and contending that the counterclaim of petitioners in the amount of
P55,586.39 is actually only a part of the sum of P69,661.85 paid by the latter to
the former in partial satisfaction of the latter's claim. 11
After trial, the lower court rendered judgment dismissing private respondent's
complaint and ordering him to pay petitioners the sum of P33,161.85 with legal
interest at six percent per annum from the date of the filing of the answer until
complete payment. 12
As earlier stated, an appeal was interposed by private respondent to the
Court of Appeals which reversed the decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in respondent court for extension
of time to file a motion for reconsideration, for the reason that they needed to
change counsel. 13 Respondent court, in its resolution dated March 31, 1978,
gave petitioners fifteen (15) days from March 28, 1978 within which to file said
motion for reconsideration, provided that the subject motion for extension was
filed on time. 14 On April 11, 1978, petitioners filed their motion for
reconsideration in the Court of Appeals. 15 On April 21, 1978, private
respondent filed a consolidated opposition to said motion for reconsideration
on the ground that the decision of respondent court had become final on
March 27, 1978, hence the motion for extension filed on March 28, 1978 was
filed out of time and there was no more period to extend. However, this was
not acted upon by the Court of Appeals for the reason that on April 20, 1978,
prior to its receipt of said opposition, a resolution was issued denying
petitioners' motion for reconsideration, thus:
The motion for reconsideration filed on April 11, 1978 by
counsel for defendants-appellees is denied. They did not file
any brief in this case. As a matter of fact this case was
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
submitted for decision without appellees' brief. In their said
motion, they merely tried to refute the rationale of the Court
in deciding to reverse the appealed judgment. 16
Petitioners then sought relief in this Court in the present petition for review
on certiorari. Private respondent filed his comment, reiterating his stand that
the decision of the Court of Appeals under review is already final and
executory.
Petitioners countered in their reply that their petition for review presents
substantive and fundamental questions of law that fully merit judicial
determination, instead of being suppressed on technical and insubstantial
reasons. Moreover, the aforesaid one (1) day delay in the filing of their motion
for extension is excusable, considering that petitioners had to change their
former counsel who failed to file their brief in the appellate court, which
substitution of counsel took place at a time when there were many successive
intervening holidays.
On July 26, 1978, we resolved to give due course to the petition.
The one (1) day delay in the filing of the said motion for extension can
justifiably be excused, considering that aside from the change of counsel, the
last day for filing the said motion fell on a holiday following another holiday,
hence, under such circumstances, an outright dismissal of the petition would
be too harsh. Litigations should, as much as possible, be decided on their
merits and not on technicalities. In a number of cases, this Court, in the
exercise of equity jurisdiction, has relaxed the stringent application of
technical rules in order to resolve the case on its merits. 17 Rules of procedure
are intended to promote, not to defeat, substantial justice and, therefore,
they should not be applied in a very rigid and technical sense.
We now proceed to the resolution of this case on the merits.
The assignment of errors of petitioners hinges on the central issue of whether
the deed of assignment dated February 15, 1966 and the agreement of
February 28, 1966 are null and void, the former for total absence of
consideration and the latter for non-fulfillment of the conditions stated therein.
Page 134

Petitioners contend that the deed of assignment conveyed to them the shares
of stocks of private respondent in Timberwealth Corporation, as stated in the
deed itself. Since said corporation never came into existence, no share of
stocks was ever transferred to them, hence the said deed is null and void for
lack of cause or consideration.
We do not agree. As found by the Court of Appeals, the true cause or
consideration of said deed was the transfer of the forest concession of private
respondent to petitioners for P120,000.00. This finding is supported by the
following considerations, viz:
1. Both parties, at the time of the execution of the deed of assignment knew
that the Timberwealth Corporation stated therein was non-existent. 18
2. In their subsequent agreement, private respondent conveyed to petitioners
his inchoate right over a forest concession covering an additional area for his
existing forest concession, which area he had applied for, and his application
was then pending in the Bureau of Forestry for approval.
3. Petitioners, after the execution of the deed of assignment, assumed the
operation of the logging concessions of private respondent. 19
4. The statement of advances to respondent prepared by petitioners stated:
"P55,186.39 advances to L.A. Tiro be applied to succeeding shipments. Based
on the agreement, we pay P10,000.00 every after (sic) shipment. We had only
2 shipments" 20
5. Petitioners entered into a Forest Consolidation Agreement with other holders
of forest concessions on the strength of the questioned deed of assignment. 21
The aforesaid contemporaneous and subsequent acts of petitioners and
private respondent reveal that the cause stated in the questioned deed of
assignment is false. It is settled that the previous and simultaneous and
subsequent acts of the parties are properly cognizable indica of their true
intention. 22 Where the parties to a contract have given it a practical
construction by their conduct as by acts in partial performance, such
construction may be considered by the court in construing the contract,
determining its meaning and ascertaining the mutual intention of the parties
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
at the time of contracting. 23 The parties' practical construction of their
contract has been characterized as a clue or index to, or as evidence of, their
intention or meaning and as an important, significant, convincing, persuasive,
or influential factor in determining the proper construction of the
agreement. 24
The deed of assignment of February 15, 1966 is a relatively simulated contract
which states a false cause or consideration, or one where the parties conceal
their true agreement. 25 A contract with a false consideration is not null and
void per se. 26 Under Article 1346 of the Civil Code, a relatively simulated
contract, when it does not prejudice a third person and is not intended for
any purpose contrary to law, morals, good customs, public order or public
policy binds the parties to their real agreement.
The Court of Appeals, therefore, did not err in holding petitioners liable under
the said deed and in ruling that —
. . . In view of the analysis of the first and second assignment
of errors, the defendants-appellees are liable to the plaintiff-
appellant for the sale and transfer in their favor of the latter's
forest concessions. Under the terms of the contract, the
parties agreed on a consideration of P120,000.00. P20,000.00
of which was paid, upon the signing of the contract and the
balance of P100,000.00 to be paid at the rate of P10,000.00
for every shipment of export logs actually produced from the
forest concessions of the appellant sold to the appellees.
Since plaintiff-appellant's forest concessions were
consolidated or merged with those of the other timber license
holders by appellees' voluntary act under the Forest
Consolidation Agreement (Exhibit D), approved by the
Bureau of Forestry (Exhibit D-3), then the unpaid balance of
P49,338.15 (the amount of P70,661.85 having been received
by the plaintiff-appellant from the defendants-appellees)
became due and demandable. 27
As to the alleged nullity of the agreement dated February 28, 1966, we agree
with petitioners that they cannot be held liable thereon. The efficacy of said
deed of assignment is subject to the condition that the application of private
Page 135
 DUMAUAL, JEANNE PAULINE J. 2019-2020

respondent for an additional area for forest concession be approved by the

Bureau of Forestry. Since private respondent did not obtain that approval, said
deed produces no effect. When a contract is subject to a suspensive
condition, its birth or effectivity can take place only if and when the event
which constitutes the condition happens or is fulfilled. 28 If the suspensive
condition does not take place, the parties would stand as if the conditional
obligation had never existed. 29

The said agreement is a bilateral contract which gave rise to reciprocal

obligations, that is, the obligation of private respondent to transfer his rights in
the forest concession over the additional area and, on the other hand, the
obligation of petitioners to pay P30,000.00. The demandability of the
obligation of one party depends upon the fulfillment of the obligation of the
other. In this case, the failure of private respondent to comply with his
obligation negates his right to demand performance from petitioners. Delivery
and payment in a contract of sale, are so interrelated and intertwined with
each other that without delivery of the goods there is no corresponding
obligation to pay. The two complement each other. 30

Moreover, under the second paragraph of Article 1461 of the Civil Code, the
efficacy of the sale of a mere hope or expectancy is deemed subject to the
condition that the thing will come into existence. In this case, since private
respondent never acquired any right over the additional area for failure to
secure the approval of the Bureau of Forestry, the agreement executed
therefor, which had for its object the transfer of said right to petitioners, never
became effective or enforceable.

WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED.

The agreement of the parties dated February 28, 1966 is declared without
force and effect and the amount of P30,000.00 is hereby ordered to be
deducted from the sum awarded by respondent court to private respondent.
In all other respects, said decision of respondent court is affirmed.

Atty. Santos, Taxation I Page 136

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-21570 July 26, 1966 Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue
conducted an investigation of petitioner's 1956 and 1957 income tax returns
LIMPAN INVESTMENT CORPORATION, petitioner, and, in the course thereof, they discovered and ascertained that petitioner
vs. had underdeclared its rental incomes by P20,199.00 and P81,690.00 during
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents. these taxable years and had claimed excessive depreciation of its buildings in
the sums of P4,260.00 and P16,336.00 covering the same period. On the basis
of these findings, respondent Commissioner of Internal Revenue issued its
Vicente L. San Luis for petitioner.
letter-assessment and demand for payment of deficiency income tax and
Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B.
surcharge against petitioner corporation, computed as follows:
Rosete, Solicitor A. B. Afurong and Atty. V. G. Saldajeno for respondents.

REYES, J.B.L., J.: 90-AR-C-348-58/56

Net income per audited return P 3,287.81

Appeal interposed by petitioner Limpan Investment Corporation against a
decision of the Court of Tax Appeals, in its CTA Case No. 699, holding and Add: Unallowable deductions:
ordering it (petitioner) to pay respondent Commissioner of Internal Revenue
the sums of P7,338.00 and P30,502.50, representing deficiency income taxes, Undeclared Rental Receipt
plus 50% surcharge and 1% monthly interest from June 30, 1959 to the date of
payment, with cost. (Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00

Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . .

The facts of this case are: P24,459.00
4,260.00

Petitioner, a domestic corporation duly registered since June 21, 1955, is Net income per investigation P27,746.00
engaged in the business of leasing real properties. It commenced actual
business operations on July 1, 1955. Its principal stockholders are the spouses Tax due thereon P5,549.00
Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control ninety-
nine per cent (99%) of its total paid-up capital. Its president and chairman of Less: Amount already assessed 657.00
the board is the same Isabelo P. Lim.1äwphï1.ñët
Balance P4,892.00

Its real properties consist of several lots and buildings, mostly situated in Manila Add: 50% Surcharge 2,446.00
and in Pasay City, all of which were acquired from said Isabelo P. Lim and his
mother, Vicente Pantangco Vda. de Lim. DEFICIENCY TAX DUE P7,338.00

90-AR-C-1196-58/57
Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting
therein net incomes of P3,287.81 and P11,098.36, respectively, for which it paid Net income per audited return P11,098.00
the corresponding taxes therefor in the sums of P657.00 and P2,220.00.
Add: Unallowable deductions:

Atty. Santos, Taxation I Page 137


Undeclared Rental Receipt (Sched. A) . . . . . . . .
P81,690.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . .
P98,028.00
16,338.00
Net income per investigation P109,126.00
Tax due thereon P22,555.00
Less: Amount already assessed 2,220.00
Balance 20,335.00
Add: 50% Surcharge 10,167.50
DEFICIENCY TAX DUE P30,502.50
Petitioner corporation requested respondent Commissioner of Internal
Revenue to reconsider the above assessment but the latter denied said
request and reiterated its original assessment and demand, plus 5% surcharge
and the 1% monthly interest from June 30, 1959 to the date of payment;
hence, the corporation filed its petition for review before the Tax Appeals
court, questioning the correctness and validity of the above assessment of
respondent Commissioner of Internal Revenue. It disclaimed having received
or collected the amount of P20,199.00, as unreported rental income for 1956,
or any part thereof, reasoning out that 'the previous owners of the leased
building has (have) to collect part of the total rentals in 1956 to apply to their
payment of rental in the land in the amount of P21,630.00" (par. 11, petition). It
also denied having received or collected the amount of P81,690.00, as
unreported rental income for 1957, or any part thereof, explaining that part of
said amount totalling P31,380.00 was not declared as income in its 1957 tax
return because its president, Isabelo P. Lim, who collected and received
P13,500.00 from certain tenants, did not turn the same over to petitioner
corporation in said year but did so only in 1959; that a certain tenant (Go
Tong) deposited in court his rentals amounting to P10,800.00, over which the
corporation had no actual or constructive control; and that a sub-tenant paid
P4,200.00 which ought not be declared as rental income.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Petitioner likewise alleged in its petition that the rates of depreciation applied
by respondent Commissioner of its buildings in the above assessment are
unfair and inaccurate.
Sole witness for petitioner corporation in the Tax Court was its Secretary-
Treasurer, Vicente G. Solis, who admitted that it had omitted to report the sum
of P12,100.00 as rental income in its 1956 tax return and also the sum of
P29,350.00 as rental income in its 1957 tax return. However, with respect to the
difference between this omitted income (P12,100.00) and the sum
(P20,199.00) found by respondent Commissioner as undeclared in 1956,
petitioner corporation, through the same witness (Solis), tried to establish that it
did not collect or receive the same because, in view of the refusal of some
tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco
Vda. de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as
president of petitioner corporation, on the other, had verbally agreed in 1956
to turn over to petitioner corporation six per cent (6%) of the value of all its
properties, computed at P21,630.00, in exchange for whatever rentals the Lims
may collect from the tenants. And, with respect to the difference between
the admittedly undeclared sum of P29,350.00 and that found by respondent
Commissioner as unreported rental income, (P81,690.00) in 1957, the same
witness Solis also tried to establish that petitioner corporation did not receive
or collect the same but that its president, Isabelo P. Lim, collected part thereof
and may have reported the same in his own personal income tax return; that
same Isabelo P. Lim collected P13,500.00, which he turned over to petitioner in
1959 only; that a certain tenant (Go Tong deposited in court his rentals
(P10,800.00), over which the corporation had no actual or constructive control
and which were withdrawn only in 1958; and that a sub-tenant paid P4,200.00
which ought not be declared as rental income in 1957.
With regard to the depreciation which respondent disallowed and deducted
from the returns filed by petitioner, the same witness tried to establish that
some of its buildings are old and out of style; hence, they are entitled to higher
rates of depreciation than those adopted by respondent in his assessment.
Isabelo P. Lim was not presented as witness to corroborate the above
testimony of Vicente G. Solis.
Page 138

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who
personally conducted the investigation of the 1956 and 1957 income tax
returns of petitioner corporation, testified for the respondent that he personally
interviewed the tenants of petitioner and found that these tenants had been
regularly paying their rentals to the collectors of either petitioner or its
president, Isabelo P. Lim, but these payments were not declared in the
corresponding returns; and that in applying rates of depreciation to
petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal
Revenue Service.
On the basis of the evidence, the Tax Court upheld respondent
Commissioner's assessment and demand for deficiency income tax which, as
above stated in the beginning of this opinion, petitioner has appealed to this
Court.
Petitioner corporation pursues, the same theory advocated in the court below
and assigns the following alleged errors of the trial court in its brief, to wit:
I. The respondent Court erred in holding that the petitioner had an
unreported rental income of P20,199.00 for the year 1956.
II. The respondent Court erred in holding that the petitioner had an
unreported rental income of P81,690.00 for the year 1957.
III. The respondent Court erred in holding that the depreciation in the
amount of P20,598.00 claimed by petitioner for the years 1956 and
1957 was excessive.
and prays that the appealed decision be reversed.
This appeal is manifestly unmeritorious. Petitioner having admitted, through its
own witness (Vicente G. Solis), that it had undeclared more than one-half
(1/2) of the amount (P12,100.00 out of P20,199.00) found by the BIR examiners
as unreported rental income for the year 1956 and more than one-third (1/3)
of the amount (P29,350.00 out of P81,690.00) ascertained by the same
examiners as unreported rental income for the year 1957, contrary to its
original claim to the revenue authorities, it was incumbent upon it to establish
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
the remainder of its pretensions by clear and convincing evidence, that in the
case is lacking.
With respect to the balance, which petitioner denied having unreported in
the disputed tax returns, the excuse that Isabelo P. Lim and Vicenta
Pantangco Vda. de Lim retained ownership of the lands and only later
transferred or disposed of the ownership of the buildings existing thereon to
petitioner corporation, so as to justify the alleged verbal agreement whereby
they would turn over to petitioner corporation six percent (6%) of the value of
its properties to be applied to the rentals of the land and in exchange for
whatever rentals they may collect from the tenants who refused to recognize
the new owner or vendee of the buildings, is not only unusual but
uncorroborated by the alleged transferors, or by any document or unbiased
evidence. Hence, the first assigned error is without merit.
As to the second assigned error, petitioner's denial and explanation of the
non-receipt of the remaining unreported income for 1957 is not substantiated
by satisfactory corroboration. As above noted, Isabelo P. Lim was not
presented as witness to confirm accountant Solis nor was his 1957 personal
income tax return submitted in court to establish that the rental income which
he allegedly collected and received in 1957 were reported therein.
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental
income is no sufficient justification for the non-declaration of said income in
1957, since the deposit was resorted to due to the refusal of petitioner to
accept the same, and was not the fault of its tenants; hence, petitioner is
deemed to have constructively received such rentals in 1957. The payment by
the sub-tenant in 1957 should have been reported as rental income in said
year, since it is income just the same regardless of its source.
On the third assigned error, suffice it to state that this Court has already held
that "depreciation is a question of fact and is not measured by theoretical
yardstick, but should be determined by a consideration of actual facts", and
the findings of the Tax Court in this respect should not be disturbed when not
shown to be arbitrary or in abuse of discretion (Commissioner of Internal
Revenue vs. Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner
has not shown any arbitrariness or abuse of discretion in the part of the Tax
Court in finding that petitioner claimed excessive depreciation in its returns. It
Page 139
 DUMAUAL, JEANNE PAULINE J. 2019-2020

appearing that the Tax Court applied rates of depreciation in accordance

with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court
pronounced as having strong persuasive effect in this jurisdiction, for having
been the result of scientific studies and observation for a long period in the
United States, after whose Income Tax Law ours is patterned (M. Zamora vs.
Collector of internal Revenue & Collector of Internal Revenue vs. M. Zamora;
E. Zamora vs. Collector of Internal Revenue and Collector of Internal Revenue
vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963), the
foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With

costs against petitioner-appellant, Limpan Investment Corporation.

Atty. Santos, Taxation I Page 140

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-21551 September 30, 1969 Rafael Dinglasan for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong
FERNANDEZ HERMANOS, INC., petitioner, and Special Attorney Virgilio G. Saldajeno for respondent.
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX L-21557:
APPEALS, respondents.
Office of the Solicitor General for petitioner.
----------------------------- Rafael Dinglasan for respondent Fernandez Hermanos, Inc.

G.R. No. L-21557 September 30, 1969 L-24972:

COMMISSIONER OF INTERNAL REVENUE, petitioner, Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General
vs. Felicisimo R. Rosete and Special Attorney Virgilio G. Saldajeno for petitioner.
FERNANDEZ HERMANOS, INC., and COURT OF TAX APPEALS, respondents. Rafael Dinglasan for respondent Fernandez Hermanos, Inc.

----------------------------- L-24978:

G.R. No. L-24972 September 30, 1969 Rafael Dinglasan for petitioner.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General
COMMISSIONER OF INTERNAL REVENUE, petitioner, Antonio G. Ibarra and Special Attorney Virgilio G. Saldajeno for respondent.
vs.
FERNANDEZ HERMANOS INC., and the COURT OF TAX APPEALS, respondents.

-----------------------------
TEEHANKEE, J.:
G.R. No. L-24978 September 30, 1969
These four appears involve two decisions of the Court of Tax Appeals
FERNANDEZ HERMANOS, INC., petitioner, determining the taxpayer's income tax liability for the years 1950 to 1954 and
vs. for the year 1957. Both the taxpayer and the Commissioner of Internal
THE COMMISSIONER OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, Revenue, as petitioner and respondent in the cases a quo respectively,
COURT OF TAX APPEALS, respondents. appealed from the Tax Court's decisions, insofar as their respective
contentions on particular tax items were therein resolved against them. Since
the issues raised are interrelated, the Court resolves the four appeals in this
L-21551:
joint decision.

Cases L-21551 and L-21557

Atty. Santos, Taxation I Page 141

 DUMAUAL, JEANNE PAULINE J. 2019-2020

The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized 1952 7,621.73
for the principal purpose of engaging in business as an "investment company"
with main office at Manila. Upon verification of the taxpayer's income tax
returns for the period in question, the Commissioner of Internal Revenue 2. Excessive depreciation of Houses —
assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00,
P6,887.00 and P14,451.00 as alleged deficiency income taxes for the years 1950 P 8,180.40
1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the result 1951 8,768.11
of alleged discrepancies found upon the examination and verification of the
taxpayer's income tax returns for the said years, summarized by the Tax Court 1952 18,002.16
in its decision of June 10, 1963 in CTA Case No. 787, as follows: 1953 13,655.25
1954 29,314.98
1. Losses —
3. Taxable increase in net worth —
a. Losses in Mati Lumber Co. (1950) P 8,050.00
1950 P 30,050.00
b. Losses in or bad debts of Palawan Manganese Mines, Inc.
1951 1,382.85
(1951) 353,134.25

c. Losses in Balamban Coal Mines — 4. Gain realized from sale of real property in 1950 P
11,147.2611

1950 8,989.76
The Tax Court sustained the Commissioner's disallowances of Item 1,
1951 27,732.66 sub-items (b) and (e) and Item 2 of the above summary, but
overruled the Commissioner's disallowances of all the remaining items.
d. Losses in Hacienda Dalupiri — It therefore modified the deficiency assessments accordingly, found
the total deficiency income taxes due from the taxpayer for the years
under review to amount to P123,436.00 instead of P166,063.00 as
1950 17,418.95 originally assessed by the Commissioner, and rendered the following
1951 29,125.82 judgment:
1952 26,744.81
1953 21,932.62 RESUME
1954 42,938.56
1950 P2,748.00
e. Losses in Hacienda Samal — 1951 108,724.00
1952 3,600.00
1951 8,380.25 1953 2,501.00

Atty. Santos, Taxation I Page 142


1954 5,863.00
Total P123,436.00
WHEREFORE, the decision appealed from is hereby modified, and
petitioner is ordered to pay the sum of P123,436.00 within 30 days from
the date this decision becomes final. If the said amount, or any part
thereof, is not paid within said period, there shall be added to the
unpaid amount as surcharge of 5%, plus interest as provided in
Section 51 of the National Internal Revenue Code, as amended. With
costs against petitioner. (Pp. 75, 76, Taxpayer's Brief as appellant)
Both parties have appealed from the respective adverse rulings against them
in the Tax Court's decision. Two main issues are raised by the parties: first, the
correctness of the Tax Court's rulings with respect to the disputed items of
disallowances enumerated in the Tax Court's summary reproduced above,
and second, whether or not the government's right to collect the deficiency
income taxes in question has already prescribed.
On the first issue, we will discuss the disputed items of disallowances seriatim.
1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). — The Commissioner of
Internal Revenue questions the Tax Court's allowance of the taxpayer's writing
off as worthless securities in its 1950 return the sum of P8,050.00 representing
the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on
January 1, 1948, on the ground that the worthlessness of said stock in the year
1950 had not been clearly established. The Commissioner contends that
although the said Company was no longer in operation in 1950, it still had its
sawmill and equipment which must be of considerable value. The Court,
however, found that "the company ceased operations in 1949 when its
Manager and owner, a certain Mr. Rocamora, left for Spain ,where he
subsequently died. When the company eased to operate, it had no assets, in
other words, completely insolvent. This information as to the insolvency of the
Company — reached (the taxpayer) in 1950," when it properly claimed the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
loss as a deduction in its 1950 tax return, pursuant to Section 30(d) (4) (b) or
Section 30 (e) (3) of the National Internal Revenue Code. 2
We find no reason to disturb this finding of the Tax Court. There was adequate
basis for the writing off of the stock as worthless securities. Assuming that the
Company would later somehow realize some proceeds from its sawmill and
equipment, which were still existing as claimed by the Commissioner, and that
such proceeds would later be distributed to its stockholders such as the
taxpayer, the amount so received by the taxpayer would then properly be
reportable as income of the taxpayer in the year it is received.
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines,
Inc. (1951). — The taxpayer appeals from the Tax Court's disallowance of its
writing off in 1951 as a loss or bad debt the sum of P353,134.25, which it had
advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's
findings on this item follow:
Sometime in 1945, Palawan Manganese Mines, Inc., the controlling
stockholders of which are also the controlling stockholders of
petitioner corporation, requested financial help from petitioner to
enable it to resume it mining operations in Coron, Palawan. The
request for financial assistance was readily and unanimously
approved by the Board of Directors of petitioner, and thereafter a
memorandum agreement was executed on August 12, 1945,
embodying the terms and conditions under which the financial
assistance was to be extended, the pertinent provisions of which are
as follows:
"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted
on August 10, 1945, has agreed to extend to the SECOND
PARTY the requested financial help by way of
accommodation advances and for this purpose has
authorized its President, Mr. Ramon J. Fernandez to cause the
release of funds to the SECOND PARTY.
"WHEREAS, to compensate the FIRST PARTY for the advances
that it has agreed to extend to the SECOND PARTY, the latter
Page 143

has agreed to pay to the former fifteen per centum (15%) of
its net profits.
"NOW THEREFORE, for and in consideration of the above
premises, the parties hereto have agreed and covenanted
that in consideration of the financial help to be extended by
the FIRST PARTY to the SECOND PARTY to enable the latter to
resume its mining operations in Coron, Palawan, the SECOND
PARTY has agreed and undertaken as it hereby agrees and
undertakes to pay to the FIRST PARTY fifteen per centum (15%)
of its net profits." (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan
Manganese Mines, Inc. yearly advances starting from 1945, which advances
amounted to P587,308.07 by the end of 1951. Despite these advances and
the resumption of operations by Palawan Manganese Mines, Inc., it continued
to suffer losses. By 1951, petitioner became convinced that those advances
could no longer be recovered. While it continued to give advances, it
decided to write off as worthless the sum of P353,134.25. This amount "was
arrived at on the basis of the total of advances made from 1945 to 1949 in the
sum of P438,981.39, from which amount the sum of P85,647.14 had to be
deducted, the latter sum representing its pre-war assets. (t.s.n., pp. 136-
139, Id)." (Page 4, Memorandum for Petitioner.) Petitioner decided to maintain
the advances given in 1950 and 1951 in the hope that it might be able to
recover the same, as in fact it continued to give advances up to 1952. From
these facts, and as admitted by petitioner itself, Palawan Manganese Mines,
Inc., was still in operation when the advances corresponding to the years 1945
to 1949 were written off the books of petitioner. Under the circumstances, was
the sum of P353,134.25 properly claimed by petitioner as deduction in its
income tax return for 1951, either as losses or bad debts?
It will be noted that in giving advances to Palawan Manganese Mine Inc.,
petitioner did not expect to be repaid. It is true that some testimonial
evidence was presented to show that there was some agreement that the
advances would be repaid, but no documentary evidence was presented to
this effect. The memorandum agreement signed by the parties appears to be
very clear that the consideration for the advances made by petitioner was
15% of the net profits of Palawan Manganese Mines, Inc. In other words, if
there were no earnings or profits, there was no obligation to repay those
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
advances. It has been held that the voluntary advances made without
expectation of repayment do not result in deductible losses. 1955 PH Fed.
Taxes, Par. 13, 329, citing W. F. Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR
395; George B. Markle, 17 TC. 1593.
Is the said amount deductible as a bad debt? As already stated, petitioner
gave advances to Palawan Manganese Mines, Inc., without expectation of
repayment. Petitioner could not sue for recovery under the memorandum
agreement because the obligation of Palawan Manganese Mines, Inc. was to
pay petitioner 15% of its net profits, not the advances. No bad debt could
arise where there is no valid and subsisting debt.
Again, assuming that in this case there was a valid and subsisting debt and
that the debtor was incapable of paying the debt in 1951, when petitioner
wrote off the advances and deducted the amount in its return for said year,
yet the debt is not deductible in 1951 as a worthless debt. It appears that the
debtor was still in operation in 1951 and 1952, as petitioner continued to give
advances in those years. It has been held that if the debtor corporation,
although losing money or insolvent, was still operating at the end of the
taxable year, the debt is not considered worthless and therefore not
deductible. 3
The Tax Court's disallowance of the write-off was proper. The Solicitor General
has rightly pointed out that the taxpayer has taken an "ambiguous position "
and "has not definitely taken a stand on whether the amount involved is
claimed as losses or as bad debts but insists that it is either a loss or a bad
debt." 4 We sustain the government's position that the advances made by the
taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to
P587,308,07 as of 1951 were investments and not loans. 5 The evidence on
record shows that the board of directors of the two companies since August,
1945, were identical and that the only capital of Palawan Manganese Mines,
Inc. is the amount of P100,000.00 entered in the taxpayer's balance sheet as its
investment in its subsidiary company. 6 This fact explains the liberality with
which the taxpayer made such large advances to the subsidiary, despite the
latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its subsidiary as
against the Tax Court's finding that under their memorandum agreement, the
Page 144

taxpayer did not expect to be repaid, since if the subsidiary had no earnings,
there was no obligation to repay those advances, becomes immaterial, in the
light of our resolution of the question. The Tax Court correctly held that the
subsidiary company was still in operation in 1951 and 1952 and the taxpayer
continued to give it advances in those years, and, therefore, the alleged debt
or investment could not properly be considered worthless and deductible in
1951, as claimed by the taxpayer. Furthermore, neither under Section 30 (d)
(2) of our Tax Code providing for deduction by corporations of losses actually
sustained and charged off during the taxable year nor under Section 30 (e)
(1) thereof providing for deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year, can there be a partial
writing off of a loss or bad debt, as was sought to be done here by the
taxpayer. For such losses or bad debts must be ascertained to be so and
written off during the taxable year, are therefore deductible in full or not at all,
in the absence of any express provision in the Tax Code authorizing partial
deductions.
The Tax Court held that the taxpayer's loss of its investment in its subsidiary
could not be deducted for the year 1951, as the subsidiary was still in
operation in 1951 and 1952. The taxpayer, on the other hand, claims that its
advances were irretrievably lost because of the staggering losses suffered by
its subsidiary in 1951 and that its advances after 1949 were "only limited to the
purpose of salvaging whatever ore was already available, and for the
purpose of paying the wages of the laborers who needed help." 7 The
correctness of the Tax Court's ruling in sustaining the disallowance of the write-
off in 1951 of the taxpayer's claimed losses is borne out by subsequent events
shown in Cases L-24972 and L-24978 involving the taxpayer's 1957 income tax
liability. (Infra, paragraph 6.) It will there be seen that by 1956, the obligation of
the taxpayer's subsidiary to it had been reduced from P587,398.97 in 1951 to
P442,885.23 in 1956, and that it was only on January 1, 1956 that the subsidiary
decided to cease operations. 8
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). — The
Court sustains the Tax Court's disallowance of the sums of P8,989.76 and
P27,732.66 spent by the taxpayer for the operation of its Balamban coal mines
in Cebu in 1950 and 1951, respectively, and claimed as losses in the taxpayer's
returns for said years. The Tax Court correctly held that the losses "are
deductible in 1952, when the mines were abandoned, and not in 1950 and
1951, when they were still in operation." 9 The taxpayer's claim that these
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
expeditions should be allowed as losses for the corresponding years that they
were incurred, because it made no sales of coal during said years, since the
promised road or outlet through which the coal could be transported from the
mines to the provincial road was not constructed, cannot be sustained. Some
definite event must fix the time when the loss is sustained, and here it was the
event of actual abandonment of the mines in 1952. The Tax Court held that
the losses, totalling P36,722.42 were properly deductible in 1952, but the
appealed judgment does not show that the taxpayer was credited therefor in
the determination of its tax liability for said year. This additional deduction of
P36,722.42 from the taxpayer's taxable income in 1952 would result in the
elimination of the deficiency tax liability for said year in the sum of P3,600.00 as
determined by the Tax Court in the appealed judgment.
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and
Hacienda Samal (1951-1952). — The Tax Court overruled the Commissioner's
disallowance of these items of losses thus:
Petitioner deducted losses in the operation of its Hacienda Dalupiri
the sums of P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952,
P21,932.62 in 1953, and P42,938.56 in 1954. These deductions were
disallowed by respondent on the ground that the farm was operated
solely for pleasure or as a hobby and not for profit. This conclusion is
based on the fact that the farm was operated continuously at a
loss.1awphîl.nèt
From the evidence, we are convinced that the Hacienda Dalupiri was
operated by petitioner for business and not pleasure. It was mainly a
cattle farm, although a few race horses were also raised. It does not
appear that the farm was used by petitioner for entertainment, social
activities, or other non-business purposes. Therefore, it is entitled to
deduct expenses and losses in connection with the operation of said
farm. (See 1955 PH Fed. Taxes, Par. 13, 63, citing G.C.M. 21103, CB
1939-1, p.164)
Section 100 of Revenue Regulations No. 2, otherwise known as the
Income Tax Regulations, authorizes farmers to determine their gross
income on the basis of inventories. Said regulations provide:
Page 145

"If gross income is ascertained by inventories, no deduction
can be made for livestock or products lost during the year,
whether purchased for resale, produced on the farm, as such
losses will be reflected in the inventory by reducing the
amount of livestock or products on hand at the close of the
year."
Evidently, petitioner determined its income or losses in the operation
of said farm on the basis of inventories. We quote from the
memorandum of counsel for petitioner:
"The Taxpayer deducted from its income tax returns for the
years from 1950 to 1954 inclusive, the corresponding yearly
losses sustained in the operation of Hacienda Dalupiri, which
losses represent the excess of its yearly expenditures over the
receipts; that is, the losses represent the difference between
the sales of livestock and the actual cash disbursements or
expenses." (Pages 21-22, Memorandum for Petitioner.)
As the Hacienda Dalupiri was operated by petitioner for business and
since it sustained losses in its operation, which losses were determined
by means of inventories authorized under Section 100 of Revenue
Regulations No. 2, it was error for respondent to have disallowed the
deduction of said losses. The same is true with respect to loss sustained
in the operation of the Hacienda Samal for the years 1951 and
1952. 10
The Commissioner questions that the losses sustained by the taxpayer were
properly based on the inventory method of accounting. He concedes,
however, "that the regulations referred to does not specify how the inventories
are to be made. The Tax Court, however, felt satisfied with the evidence
presented by the taxpayer ... which merely consisted of an alleged physical
count of the number of the livestock in Hacienda Dalupiri for the years
involved." 11 The Tax Court was satisfied with the method adopted by the
taxpayer as a farmer breeding livestock, reporting on the basis of receipts and
disbursements. We find no Compelling reason to disturb its findings.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
2. Disallowance of excessive depreciation of buildings (1950-1954). — During
the years 1950 to 1954, the taxpayer claimed a depreciation allowance for its
buildings at the annual rate of 10%. The Commissioner claimed that the
reasonable depreciation rate is only 3% per annum, and, hence, disallowed
as excessive the amount claimed as depreciation allowance in excess of 3%
annually. We sustain the Tax Court's finding that the taxpayer did not submit
adequate proof of the correctness of the taxpayer's claim that the
depreciable assets or buildings in question had a useful life only of 10 years so
as to justify its 10% depreciation per annum claim, such finding being
supported by the record. The taxpayer's contention that it has many zero or
one-peso assets, 12 representing very old and fully depreciated assets serves
but to support the Commissioner's position that a 10% annual depreciation
rate was excessive.
3. Taxable increase in net worth (1950-1951). — The Tax Court set aside the
Commissioner's treatment as taxable income of certain increases in the
taxpayer's net worth. It found that:
For the year 1950, respondent determined that petitioner had an
increase in net worth in the sum of P30,050.00, and for the year 1951,
the sum of P1,382.85. These amounts were treated by respondent as
taxable income of petitioner for said years.
It appears that petitioner had an account with the Manila Insurance
Company, the records bearing on which were lost. When its records
were reconstituted the amount of P349,800.00 was set up as its liability
to the Manila Insurance Company. It was discovered later that the
correct liability was only 319,750.00, or a difference of P30,050.00, so
that the records were adjusted so as to show the correct liability. The
correction or adjustment was made in 1950. Respondent contends
that the reduction of petitioner's liability to Manila Insurance
Company resulted in the increase of petitioner's net worth to the
extent of P30,050.00 which is taxable. This is erroneous. The principle
underlying the taxability of an increase in the net worth of a taxpayer
rests on the theory that such an increase in net worth, if unreported
and not explained by the taxpayer, comes from income derived from
a taxable source. (See Perez v. Araneta, G.R. No. L-9193, May 29,
1957; Coll. vs. Reyes, G.R. Nos. L- 11534 & L-11558, Nov. 25, 1958.) In this
case, the increase in the net worth of petitioner for 1950 to the extent
Page 146

of P30,050.00 was not the result of the receipt by it of taxable income.
It was merely the outcome of the correction of an error in the entry in
its books relating to its indebtedness to the Manila Insurance
Company. The Income Tax Law imposes a tax on income; it does not
tax any or every increase in net worth whether or not derived from
income. Surely, the said sum of P30,050.00 was not income to
petitioner, and it was error for respondent to assess a deficiency
income tax on said amount.
The same holds true in the case of the alleged increase in net worth of
petitioner for the year 1951 in the sum of P1,382.85. It appears that certain
items (all amounting to P1,382.85) remained in petitioner's books as
outstanding liabilities of trade creditors. These accounts were discovered in
1951 as having been paid in prior years, so that the necessary adjustments
were made to correct the errors. If there was an increase in net worth of the
petitioner, the increase in net worth was not the result of receipt by petitioner
of taxable income." 13 The Commissioner advances no valid grounds in his
brief for contesting the Tax Court's findings. Certainly, these increases in the
taxpayer's net worth were not taxable increases in net worth, as they were not
the result of the receipt by it of unreported or unexplained taxable income,
but were shown to be merely the result of the correction of errors in its entries
in its books relating to its indebtednesses to certain creditors, which had been
erroneously overstated or listed as outstanding when they had in fact been
duly paid. The Tax Court's action must be affirmed.
4. Gain realized from sale of real property (1950). — We likewise sustain as
being in accordance with the evidence the Tax Court's reversal of the
Commissioner's assessment on all alleged unreported gain in the sum of
P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As
found by the Tax Court, the evidence shows that this property was acquired in
1926 for P11,852.74, and was sold in 1950 for P60,000.00, apparently, resulting in
a gain of P48,147.26. 14 The taxpayer reported in its return a gain of P37,000.00,
or a discrepancy of P11,147.26. 15 It was sufficiently proved from the taxpayer's
books that after acquiring the property, the taxpayer had made
improvements totalling P11,147.26, 16 accounting for the apparent
discrepancy in the reported gain. In other words, this figure added to the
original acquisition cost of P11,852.74 results in a total cost of P23,000.00, and
the gain derived from the sale of the property for P60,000.00 was correctly
reported by the taxpayer at P37,000.00.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
On the second issue of prescription, the taxpayer's contention that the
Commissioner's action to recover its tax liability should be deemed to have
prescribed for failure on the part of the Commissioner to file a complaint for
collection against it in an appropriate civil action, as contradistinguished from
the answer filed by the Commissioner to its petition for review of the
questioned assessments in the case a quo has long been rejected by this
Court. This Court has consistently held that "a judicial action for the collection
of a tax is begun by the filing of a complaint with the proper court of first
instance, or where the assessment is appealed to the Court of Tax Appeals, by
filing an answer to the taxpayer's petition for review wherein payment of the
tax is prayed for." 17 This is but logical for where the taxpayer avails of the right
to appeal the tax assessment to the Court of Tax Appeals, the said Court is
vested with the authority to pronounce judgment as to the taxpayer's liability
to the exclusion of any other court. In the present case, regardless of whether
the assessments were made on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by the taxpayer, the
government's right to collect the taxes due has clearly not prescribed, as the
taxpayer's appeal or petition for review was filed with the Tax Court on May 4,
1960, with the Commissioner filing on May 20, 1960 his Answer with a prayer for
payment of the taxes due, long before the expiration of the five-year period
to effect collection by judicial action counted from the date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for the year 1957. Upon
examination of its corresponding income tax return, the Commissioner
assessed it for deficiency income tax in the amount of P38,918.76, computed
as follows:
Net income per return P29,178.70
Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri 89,547.33
(2) Amortization of Contractual right claimed as an
expense under Mines Operations 48,481.62
1
Net income per investigation P167,297.65 8
Page 147

Tax due thereon 38,818.00
Less: Amount already assessed 5,836.00
Balance P32,982.00
Add: 1/2% monthly interest from 6-20-59 to 6-20-62 5,936.76
TOTAL AMOUNT DUE AND COLLECTIBLE P38,918.76
The Tax Court overruled the Commissioner's disallowance of the taxpayer's
losses in the operation of its Hacienda Dalupiri in the sum of P89,547.33 but
sustained the disallowance of the sum of P48,481.62, which allegedly
represented 1/5 of the cost of the "contractual right" over the mines of its
subsidiary, Palawan Manganese Mines, Inc. which the taxpayer had acquired.
It found the taxpayer liable for deficiency income tax for the year 1957 in the
amount of P9,696.00, instead of P32,982.00 as originally assessed, and
rendered the following judgment:
WHEREFORE, the assessment appealed from is hereby modified.
Petitioner is hereby ordered to pay to respondent the amount of
P9,696.00 as deficiency income tax for the year 1957, plus the
corresponding interest provided in Section 51 of the Revenue Code. If
the deficiency tax is not paid in full within thirty (30) days from the
date this decision becomes final and executory, petitioner shall pay a
surcharge of five per cent (5%) of the unpaid amount, plus interest at
the rate of one per cent (1%) a month, computed from the date this
decision becomes final until paid, provided that the maximum
amount that may be collected as interest shall not exceed the
amount corresponding to a period of three (3) years. Without
pronouncement as to costs. 19
Both parties again appealed from the respective adverse rulings against them
in the Tax Court's decision.
5. Allowance of losses in Hacienda Dalupiri (1957). — The Tax Court cited its
previous decision overruling the Commissioner's disallowance of losses suffered
by the taxpayer in the operation of its Hacienda Dalupiri, since it was
convinced that the hacienda was operated for business and not for pleasure.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
And in this appeal, the Commissioner cites his arguments in his appellant's brief
in Case No. L-21557. The Tax Court, in setting aside the Commissioner's
principal objections, which were directed to the accounting method used by
the taxpayer found that:
It is true that petitioner followed the cash basis method of reporting
income and expenses in the operation of the Hacienda Dalupiri and
used the accrual method with respect to its mine operations. This
method of accounting, otherwise known as the hybrid method,
followed by petitioner is not without justification.
... A taxpayer may not, ordinarily, combine the cash and
accrual bases. The 1954 Code provisions permit, however, the
use of a hybrid method of accounting, combining a cash
and accrual method, under circumstances and requirements
to be set out in Regulations to be issued. Also, if a taxpayer is
engaged in more than one trade or business he may use a
different method of accounting for each trade or business.
And a taxpayer may report income from a business on
accrual basis and his personal income on the cash basis.'
(See Mertens, Law of Federal Income Taxation, Zimet &
Stanley Revision, Vol. 2, Sec. 12.08, p. 26.) 20
The Tax Court, having satisfied itself with the adequacy of the
taxpayer's accounting method and procedure as properly reflecting
the taxpayer's income or losses, and the Commissioner having failed
to show the contrary, we reiterate our ruling [supra, paragraph 1 (d)
and (e)] that we find no compelling reason to disturb its findings.
6. Disallowance of amortization of alleged "contractual rights." — The reasons
for sustaining this disallowance are thus given by the Tax Court:
It appears that the Palawan Manganese Mines, Inc., during a special
meeting of its Board of Directors on January 19, 1956, approved a
resolution, the pertinent portions of which read as follows:
"RESOLVED, as it is hereby resolved, that the corporation's
current assets composed of ores, fuel, and oil, materials and
Page 148

supplies, spare parts and canteen supplies appearing in the
inventory and balance sheet of the Corporation as of
December 31, 1955, with an aggregate value of P97,636.98,
contractual rights for the operation of various mining claims in
Palawan with a value of P100,000.00, its title on various mining
claims in Palawan with a value of P142,408.10 or a total value
of P340,045.02 be, as they are hereby ceded and transferred
to Fernandez Hermanos, Inc., as partial settlement of the
indebtedness of the corporation to said Fernandez Hermanos
Inc. in the amount of P442,895.23." (Exh. E, p. 17, CTA rec.)
On March 29, 1956, petitioner's corporation accepted the above offer
of transfer, thus:
"WHEREAS, the Palawan Manganese Mines, Inc., due to its
yearly substantial losses has decided to cease operation on
January 1, 1956 and in order to satisfy at least a part of its
indebtedness to the Corporation, it has proposed to transfer
its current assets in the amount of NINETY SEVEN THOUSAND
SIX HUNDRED THIRTY SIX PESOS & 98/100 (P97,636.98) as per its
balance sheet as of December 31, 1955, its contractual rights
valued at ONE HUNDRED THOUSAND PESOS (P100,000.00) and
its title over various mining claims valued at ONE HUNDRED
FORTY TWO THOUSAND FOUR HUNDRED EIGHT PESOS & 10/100
(P142,408.10) or a total evaluation of THREE HUNDRED FORTY
THOUSAND FORTY FIVE PESOS & 08/100 (P340,045.08) which
shall be applied in partial settlement of its obligation to the
Corporation in the amount of FOUR HUNDRED FORTY TWO
THOUSAND EIGHT HUNDRED EIGHTY FIVE PESOS & 23/100
(P442,885.23)," (Exh. E-1, p. 18, CTA rec.)
Petitioner determined the cost of the mines at P242,408.10 by adding
the value of the contractual rights (P100,000.00) and the value of its
mining claims (P142,408.10). Respondent disallowed the deduction on
the following grounds: (1) that the Palawan Manganese Mines, Inc.
could not transfer P242,408.10 worth of assets to petitioner because
the balance sheet of the said corporation for 1955 shows that it had
only current as worth P97,636.96; and (2) that the alleged amortization
of "contractual rights" is not allowed by the Revenue Code.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The law in point is Section 30(g) (1) (B) of the Revenue Code, before
its amendment by Republic Act No. 2698, which provided in part:
"(g) Depletion of oil and gas wells and mines.:
"(1) In general. — ... (B) in the case of mines, a reasonable
allowance for depletion thereof not to exceed the market
value in the mine of the product thereof, which has been
mined and sold during the year for which the return and
computation are made. The allowances shall be made under
rules and regulations to be prescribed by the Secretary of
Finance: Provided, That when the allowances shall equal the
capital invested, ... no further allowance shall be made."
Assuming, arguendo, that the Palawan Manganese Mines, Inc. had
assets worth P242,408.10 which it actually transferred to the petitioner
in 1956, the latter cannot just deduct one-fifth (1/5) of said amount
from its gross income for the year 1957 because such deduction in the
form of depletion charge was not sanctioned by Section 30(g) (1) (B)
of the Revenue Code, as above-quoted.
xxx xxx xxx
The sole basis of petitioner in claiming the amount of P48,481.62 as a
deduction was the memorandum of its mining engineer (Exh. 1, pp.
31-32, CTA rec.), who stated that the ore reserves of the Busuange
Mines (Mines transferred by the Palawan Manganese Mines, Inc. to
the petitioner) would be exhausted in five (5) years, hence, the claim
for P48,481.62 or one-fifth (1/5) of the alleged cost of the mines
corresponding to the year 1957 and every year thereafter for a period
of 5 years. The said memorandum merely showed the estimated ore
reserves of the mines and it probable selling price. No evidence
whatsoever was presented to show the produced mine and for how
much they were sold during the year for which the return and
computation were made. This is necessary in order to determine the
amount of depletion that can be legally deducted from petitioner's
gross income. The method employed by petitioner in making an
outright deduction of 1/5 of the cost of the mines is not authorized
Page 149
 DUMAUAL, JEANNE PAULINE J. 2019-2020

under Section 30(g) (1) (B) of the Revenue Code. Respondent's

disallowance of the alleged "contractual rights" amounting to
P48,481.62 must therefore be sustained. 21

The taxpayer insists in this appeal that it could use as a method for depletion
under the pertinent provision of the Tax Code its "capital investment,"
representing the alleged value of its contractual rights and titles to mining
claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of this
"capital investment" every year. regardless of whether it had actually mined
the product and sold the products. The very authorities cited in its brief give
the correct concept of depletion charges that they "allow for the exhaustion
of the capital value of the deposits by production"; thus, "as the cost of the
raw materials must be deducted from the gross income before the net
income can be determined, so the estimated cost of the reserve used up is
allowed." 22 The alleged "capital investment" method invoked by the taxpayer
is not a method of depletion, but the Tax Code provision, prior to its
amendment by Section 1, of Republic Act No. 2698, which took effect on
June 18, 1960, expressly provided that "when the allowances shall equal the
capital invested ... no further allowances shall be made;" in other words, the
"capital investment" was but the limitation of the amount of depletion that
could be claimed. The outright deduction by the taxpayer of 1/5 of the cost
of the mines, as if it were a "straight line" rate of depreciation, was correctly
held by the Tax Court not to be authorized by the Tax Code.

ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the

appeals in Cases Nos. L-21551 and L-21557, as modified by the crediting of the
losses of P36,722.42 disallowed in 1951 and 1952 to the taxpayer for the year
1953 as directed in paragraph 1 (c) of this decision, is hereby affirmed. The
judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972
and L-24978 is affirmed in toto. No costs. So ordered.

Atty. Santos, Taxation I Page 150


RUTKIN V. US, 343 US 130
The principal issue before us is whether money obtained by extortion is income
taxable to the extortioner under § 22(a) of the Internal Revenue Code.
[Footnote 1] For the reasons hereafter stated, we hold that it is.
The petitioner, Rutkin, was indicted under 26 U.S.C. § 145(b) [Footnote 2] for
willfully attempting to evade and defeat a large part of his income and
victory taxes for 1943. He was charged with filing a false and fraudulent return
stating his net income to be $18,966.64, whereas he knew that it was
$268,622.04. That difference, which would increase his tax liability from
$6,843.93 to $222,408.32, was due largely to his omission from his original return
Page 343 U. S. 132
of $250,000 received by him in cash from Joseph Reinfeld. The United States
claims that this sum was obtained by petitioner by extortion, and, as such, was
taxable income. Petitioner contests both the fact that the money was
obtained by extortion and the conclusion of law that it was taxable income if
so obtained. He contends also that he did not willfully attempt to evade or
defeat the tax. Petitioner was found guilty by a jury in the United States District
Court for the District of New Jersey, fined $10,000 and sentenced to four years
in prison. The Court of Appeals affirmed, one judge dissenting. 189 F.2d 431.
We granted certiorari, 342 U.S. 808, so as to pass upon the alleged conflict
between that decision and the decision in Commissioner v. Wilcox, 327 U. S.
404.
The facts are unusual, but there can be no doubt that, under the instructions
given the jury, we must regard its verdict as reflecting its conclusion that the
$250,000 was obtained by petitioner by extortion. [Footnote 3] There was
substantial evidence supporting that result. Reinfeld's first association with
petitioner was in 1929 with several others in a bootlegging operation known as
the "High seas venture." It was accomplished through the use of a ship in the
sale of whiskey at sea more than 12 miles from shore. Reinfeld testified that
petitioner contributed no money to the enterprise, but was taken in because
Reinfeld's associates were afraid that otherwise they would get "interference
Page 343 U. S. 133
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DUMAUAL, JEANNE PAULINE J. 2019-2020
and trouble" from petitioner. His interest was recognized to be 6% but, when
the venture was liquidated in 1933, he already was overdrawn, and no
distribution was made to him. Without including petitioner, the others then
organized Browne Vintners Co., Inc., a New York corporation, to engage in the
liquor business. In 1936, petitioner, without making an investment, claimed a
6% interest in Browne Vintners. Despite Reinfeld's denial of petitioner's claim,
Reinfeld paid him $60,000 and took from him an assignment of "any and all of
such shares of capital stock in the said Browne Vintners Co. Inc., that I am
entitled to." In 1940, all the Browne Vintners stock was sold for $7,500,000 to a
purchaser, who also assumed $8,000,000 of the company's debts. The shares
of stock when sold stood in the names of, and were transferred by, "nominees"
so as to conceal the identity of Reinfeld and the other beneficial owners. A
capital gains tax upon the profits from these sales was paid by the respective
nominees. [Footnote 4] Petitioner was neither a stockholder
Page 343 U. S. 134
of record nor a beneficial owner of any of the stock of the company at any
time.
In 1941, in response to petitioner's request, Reinfeld gave him about $10,000 to
help buy a tavern. When petitioner used the money for other purposes,
Reinfeld refused to finance him further, and his "trouble" with petitioner began.
In 1942, petitioner again claimed that he had had an interest in Browne
Vintners Company and that Reinfeld must give him $100,000 to help him pay
his debts. Upon Reinfeld's refusal, petitioner threatened to kill him. From that
time on, the record presents a lurid story of petitioner's unsatisfied demands
upon Reinfeld for various sums up to $500,000, petitioner's threatening use of a
gun, and his repeated statements that he would kill Reinfeld and Reinfeld's
family unless his demands were met. Finally, on May 11, 1943, in New Jersey,
Reinfeld paid petitioner $250,000 in cash. [Footnote 5]
Throughout this melodrama, petitioner asserted that he was entitled to the
payments he demanded from Reinfeld because of petitioner's alleged former
interest in Browne Vinters Company. That interest never was identified by
petitioner. Reinfeld and others testified positively that petitioner never had any
such interest. Nevertheless, on May 11, Reinfeld handed to petitioner $250,000
in cash at the same time that Reinfeld paid $358,000 to Zwillman and Stacher
Page 151

representing their conceded interest in the proceeds of Browne Vintners stock.
Petitioner, with Zwillman and Stacher, thereupon signed a "general release." It
did not state the amounts paid, but it did
Page 343 U. S. 135
purport to release Reinfeld, Browne Vintners Company and others from all
claims the signers had against them.
Under the jury's verdict, we accept the fact to be that petitioner had no basis
for his claim to this $250,000, and that he obtained it by extortion. Accordingly,
if proceeds of extortion constitute income taxable to the extortioner, his
omission of it from his tax return was unlawful. The further factual issue whether,
under all the surrounding circumstances, petitioner's omission of the $250,000
from his tax return amounted to a willful attempt to evade and defeat the tax
is not open to review here. That issue is settled by the verdict of the jury
supported by substantial evidence. [Footnote 6] It remains for us to determine
the legal issue of whether money obtained by extortion is taxable to the
extortioner under § 22(a).
Page 343 U. S. 136
Under the instructions to the jury, extortion here meant that the $250,000 was
paid to petitioner in response to his false claim thereto, his harassing demands
therefor, and his repeated threats to kill Reinfeld and Reinfeld's family unless
the payment were made. [Footnote 7] Petitioner was unable to induce
Reinfeld to believe petitioner's false and fraudulent claims to the money to be
true. He induced Reinfeld to consent to pay the money by creating a fear in
Reinfeld that harm otherwise would come to him and to his family. Reinfeld
thereupon delivered his own money to petitioner. Petitioner's control over the
cash so received was such that, in the absence of Reinfeld's unlikely
repudiation of the transaction and demand for
Page 343 U. S. 137
the money's return, petitioner could enjoy its use as fully as though his title to it
were unassailable.
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DUMAUAL, JEANNE PAULINE J. 2019-2020
An unlawful gain, as well as a lawful one, constitutes taxable income when its
recipient has such control over it that, as a practical matter, he derives readily
realizable economic value from it. Burnet v. Wells, 289 U. S. 670, 289 U. S.
678; Corliss v. Bowers, 281 U. S. 376, 281 U. S. 378. That occurs when cash, as
here, is delivered by its owner to the taxpayer in a manner which allows the
recipient freedom to dispose of it at will, even though it may have been
obtained by fraud and his freedom to use it may be assailable by someone
with a better title to it.
Such gains are taxable in the yearly period during which they are realized. This
statutory policy is invoked in the interest of orderly administration.
"[C]ollection of the revenue cannot be delayed, nor should the Treasury be
compelled to decide when a possessor's claims are without legal warrant."
National City Bank v. Helvering, 98 F.2d 93, 96. There is no adequate reason
why assailable unlawful gains should be treated differently in this respect from
assailable lawful gains. Certainly there is no reason for treating them more
leniently. United States v. Sullivan, 274 U. S. 259, 274 U. S. 263.
There has been a widespread and settled administrative and judicial
recognition of the taxability of unlawful gains of many kinds under § 22(a).
[Footnote 8] The application of
Page 343 U. S. 138
this section to unlawful gains is obvious from its legislative history. Section II,
subd. B of the Income Tax Act of 1913 provided that
"the net income of a taxable person shall include gains, profits, and income . .
. from . . . the transaction of any lawful business carried on for gain or profit, or
gains or profits and income derived from any source whatever. . . ."
(Emphasis supplied.) 38 Stat. 167. In 1916, this was amended by omitting the
one word "lawful" with the obvious intent thereafter to tax unlawful as well as
lawful gains, profits or income derived from any source whatever. [Footnote 9]
Page 152

There is little doubt now that, where unlawful gains are secured by the fraud of
the taxpayer, they are taxable. [Footnote 10] In the instant case, it is not
questioned that the $250,000 would have been taxable to petitioner if he had
obtained it by fraudulently inducing Reinfeld to believe petitioner's false claims
to be true. That being so, it would be an extraordinary result to hold here that
petitioner is to be tax free because his fraud was so transparent that it did not
mislead his victim and his victim paid him the money because of fear, instead
of fraud.
We do not reach in this case the factual situation involved in Commissioner v.
Wilcox, 327 U. S. 404. We limit that case to its facts. There, embezzled funds
were held not to constitute taxable income to the embezzler under § 22(a).
The issue here is whether money extorted from a victim with his consent
induced solely by harassing demands and threats of violence is included in
the definition of gross income under § 22(a). We think the power of Congress
to tax these receipts as income
Page 343 U. S. 139
under the Sixteenth Amendment is unquestionable. The broad language of §
22(a) supports the declarations of this Court that Congress, in enacting that
section, exercised its full power to tax income. [Footnote 11] We therefore
conclude that § 22(a) reaches these receipts.
We have considered the other contentions of petitioner, but find them without
merit sufficient to justify a reversal or remand of the case.
The judgment of the Court of Appeals accordingly is
Affirmed.
[Footnote 1]
"SEC. 22. GROSS INCOME."
"(a) GENERAL DEFINITION. -- 'Gross income' includes gains, profits, and income
derived from salaries, wages, or compensation for personal service . . . of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
whatever kind and in whatever form paid, or from professions, vocations,
trades, businesses, commerce, or sales, or dealings in property, whether real or
personal, growing out of the ownership or use of or interest in such property;
also from interest, rent, dividends, securities, or the transaction of any business
carried on for gain or profit, or gains or profits and income derived from any
source whatever. . . ."
(Emphasis supplied.) 53 Stat. 9, 53 Stat. 574, 26 U.S.C. § 22(a).
[Footnote 2]
"SEC. 145. PENALTIES."
"* * * *"
"(b) . . . ATTEMPT TO DEFEAT OR EVADE TAX. -- . . . any person who willfully
attempts in any manner to evade or defeat any tax imposed by this chapter
or the payment thereof shall, in addition to other penalties provided by law,
be guilty of a felony and, upon conviction thereof, be fined not more than
$10,000, or imprisoned for not more than five years, or both, together with the
costs of prosecution."
53 Stat. 62-63, 26 U.S.C. § 145(b).
[Footnote 3]
The instructions included the following:
"That somebody lied and committed perjury is perfectly patent, because
contradictory stories have been told, and you must say where the truth lies,
and the problem of determining that truth is solely and peculiarly yours. . . ."
"* * * *"
"But then we come to the admitted payment of $250,000. Rutkin says that that
$250,000 was a final settlement of his claim in Browne Vintners, and if that is
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so -- and the government does not contend that the capital gains tax was not
paid -- he would not be obliged to report that income. But Reinfeld says no,
'that was the result of extortion. He got that money out of me by threatening
me and my family,' and he told the instances where those threats were made.
There is one piece of corroboration of that, and that is from one of the six or
seven people who were present in Holtz's cellar. . . ."
"If that money was extorted and was paid as a result of threats, then it was
taxable income, and Rutkin was under the duty of reporting that tax. . . ."
"* * * *"
". . . There is no contention here that the defendant didn't know he got the
$250,000; the whole point is whether he got it by extortion or whether he got it
properly. If he got it properly, the tax was already paid."
(Emphasis supplied.)
[Footnote 4]
The United States concedes that although, on a strict construction of the
Internal Revenue Code, it may be that the proceeds of the sales should have
been reported by the beneficial, rather than by the record, owners, their
failure to so report the proceeds does not provide a satisfactory basis for a
charge against them of a willful attempt to evade and defeat the tax in
violation of § 145(b).
[Footnote 5]
Reinfeld testified:
"Q. And did you think that their (your family's) lives were in danger?"
"A. I thought so, yes."
"Q. Did you do anything to protect their lives?"
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"A. I paid off."
"Q. You thought that would protect them from a gunning man?"
"A. I hoped so."
[Footnote 6]
That issue was presented to the jury in conformity with the views of this Court
expressed in Spies v. United States, 317 U. S. 492, 317 U. S. 499. The charge
included the following:
"If that money was extorted and was paid as a result of threats, then it was
taxable income, and Rutkin was under the duty of reporting that tax. But, as I
indicated to you before, the mere failure to report it doesn't satisfy the
requirements of the law with regard to the violation of this statute; there must
be something else which will indicate the willful intent to defeat and evade
the tax. You may consider other elements that appear in the evidence -- the
fact that this money was paid over in cash; that no record of any kind was
made of the receipt of that money; that the money was split, and $100,000 of
it sent to the sister-n-aw of the defendant to be placed in her vault or 'wault'
as it has been called here, and that the other $150,000 was placed in the
defendant's own vault. You may consider these as factors surrounding the
whole transaction."
"Rutkin says that he kept no books; kept no books at that time nor at any other
time; kept no books when he received his profit, sixty, seventy, eighty
thousand dollars a year, I think it was, from the bootlegging, and admits that
he paid no tax; kept no books when he got this $250,000. These are all things
that you may consider as circumstances surrounding the whole procedure.
The payment of $250,000 was made in the presence of other people, these
people being Zwillman, as I recall it, and Stacher, who were there with Rutkin
and the lawyers. Well, neither the lawyers nor any of these people, it seems to
me, would be inclined to go out and publish it."
There is no suggestion that petitioner relied at any time upon any defense for
his omission of the $250,000 from his tax return other than his false claim that it
represented his beneficial interest in Browne Vintners stock and that the
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stockholding nominees had paid a capital gains tax on that interest when it
was sold in 1940. When this claim was proved to have been false, and
necessarily known by petitioner to have been false, that proof not only
destroyed petitioner's claim to the money itself, but it also demonstrated the
willfulness of his attempt to evade or defeat paying any tax on the $250,000.
[Footnote 7]
In the New Jersey statute, in effect in 1943, extortion was defined as follows:
"Any person who, with intent to extort from any person any money or other
thing of value . . . shall directly or indirectly threaten to kill or to do any bodily
injury to any man, woman or child unless a sum of money be paid, shall be
guilty of a high misdemeanor and punished by imprisonment at hard labor for
a term not exceeding thirty years, or by a fine not exceeding five thousand
dollars, or both."
N.J.S.A. 2:127-4.
See also the federal statute, now in effect, relating to extortion affecting
interstate commerce:
"The term 'extortion' means the obtaining of property from another, with his
consent, induced by wrongful use of actual or threatened force, violence, or
fear, or under color of official right."
60 Stat. 420, 18 U.S.C. § 420e-1(c) (Revised section 1951(b)(2)).
[Footnote 8]
Johnson v. United States, 318 U. S. 189 (money paid to a political leader as
protection against police interference with gambling); United States v.
Sullivan, 274 U. S. 259 (illicit traffic in liquor); Humphreys v. Commissioner, 125
F.2d 340 (protection payments to racketeer and ransom paid to
kidnapper); Chadick v. United States, 77 F.2d 961 (graft); United States v.
Commerford, 64 F.2d 28 (bribes); Patterson v. Anderson, 20 F.Supp. 799
(unlawful insurance policies); Petit v. Commissioner, 10 T.C. 1253 (black market
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
gains); Droge v. Commissioner, 35 B.T.A. 829 (lotteries); Rickard v.
Commissioner, 15 B.T.A. 316 (illegal prize fight pictures); McKenna v.
Commissioner, 1 B.T.A. 326 (race track bookmaking).
[Footnote 9]
For further discussion, see dissent in Commissioner v. Wilcox, 327 U. S. 404, 327
U. S. 410-411.
[Footnote 10]
For example, see Akers v. Scofield, 167 F.2d 718. There, the taxpayer swindled
a wealthy widow out of substantial funds with which he was to conduct
fraudulently represented treasure hunts. He was required to pay taxes on
those funds.
[Footnote 11]
Helvering v. Bruun, 309 U. S. 461, 309 U. S. 468; Helvering v. Clifford, 309 U. S.
331, 309 U. S. 334; Helvering v. Midland Mutual Life Ins. Co., 300 U. S. 216, 300 U.
S. 223; United States v. Safety Car Heating & Lighting Co., 297 U. S. 88, 297 U. S.
93; Douglas v. Willcuts, 296 U. S. 1, 296 U. S. 9; Helvering v. Stockholms Enskilda
Bank, 293 U. S. 84, 293 U. S. 89; Bowers v. Kerbaugh-mpire Co., 271 U. S. 170, 271
U. S. 174; Irwin v. Gavit, 268 U. S. 161, 268 U. S. 166; Eisner v. Macomber, 252 U.
S. 189, 252 U. S. 203. The scope of § 22(a) in some instances is limited by
specific provisions, e.g., § 22(b)(9) (income from discharge of indebtedness), §
22(b)(13) (compensation of members of armed forces), but no such provisions
apply here.
MR. JUSTICE BLACK, with whom MR. JUSTICE REED, MR. JUSTICE FRANKFURTER,
and MR. JUSTICE DOUGLAS concur, dissenting.
In Commissioner v. Wilcox, 327 U. S. 404, decided February, 1946, we held that
embezzled money did not constitute taxable income to the embezzler under
§ 22(a) of the Internal Revenue Code. We there pointed out that the
embezzler had no bona fide legal or equitable claim to the money, was under
a definite legal obligation to return it to its rightful owner, and consequently
Page 155

had no more received the kind of "gain" or "income" which Congress has
taxed than if he had merely borrowed money. One who extorts money not
owed him stands in this precise situation. He has neither legal nor equitable
claim to the extorted money, and is under a continuing
Page 343 U. S. 140
obligation to return it to its owner. See, e.g., 31 U. S. Bank of Washington, 6 Pet.
8, 31 U. S. 19; Miller v. Eisele, 111 N.J.L. 268, 168 A. 426; 2 N.J.S.A. 2:73-1. A
comparison of MR. JUSTICE BURTON's opinion in this case with his dissent in
the Wilcox case reveals beyond doubt that the Court today adopts the
reasoning of his prior dissent, thereby rejecting the Wilcox interpretation of §
22(a). A tax interpretation which Congress has left in effect for six years is thus
altered largely as a consequence of a change in the Court's personnel. I think
that our former interpretation was right, and do not believe that the
Government is suffering because of a failure to collect income taxes from
embezzlers and extortioners. Indeed, further considerations strengthen my
support of our Wilcox holding.
I fully agree that earnings from businesses such as gambling and bootlegging
are subject to the income tax law even though these earnings are derived
from illegal transactions. United States v. Sullivan, 274 U. S. 259. The majority
seems to think that the Wilcox case holds otherwise because some states
have laws which, under special circumstances, permit some particular groups
to assert a legal claim for recovery of gambling losses or money paid for
bootleg liquor. But these state laws vary far too much in their scope and
operation to justify saying that these businessmen never have a bona
fide legal or equitable claim to monies paid them. And
". . . we must generally assume, in the absence of a plain indication to the
contrary, that Congress, when it enacts a statute, is not making the
application of the federal act dependent on state law."
Jerome v. United States, 318 U. S. 101, 318 U. S. 104. Moreover, even if we were
to take these state recoupment laws into consideration, the sums recovered
under them would do no more than decrease the yearly net earnings of such
questionable businesses. To all intents and purposes, bootleggers and
gamblers are engaged in going businesses,
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Page 343 U. S. 141
and make regular business profits which should be taxed in the same manner
as profits made through more legitimate endeavor. However, in my judgment,
it stretches previous tax interpretations too far to classify the sporadic loot of
an embezzler, an extortioner, or a robber as taxable earnings derived from a
business, trade, or a profession. I just do not think Congress intended to treat
the plunder of such criminals as theirs.
It seems illusory to believe, as the majority apparently does, that the burden
on honest American taxpayers will be lightened by a governmental policy of
pursuing extortioners in futile efforts to collect income taxes. I venture the
guess that this one trial has cost United States taxpayers more money than the
Government will collect in taxes from extortioners in the next twenty-ive years.
If this statute is to be interpreted on the basis of what is financially best for
honest taxpayers, it probably should be construed so as to save money by
eliminating federal prosecutions of state crimes under the guise of punishing
tax evaders.
Since it seems pretty clear that the Government can never collect substantial
amounts of money from extortioners, there must be another reason for
applying the tax law to money they extract from others. The Government's
brief is suggestive of the only other reason that occurs to me -- to give
Washington more and more power to punish purely local crimes such as
embezzlement and extortion. Today's decision illustrates an expansion of
federal criminal jurisdiction into fields of law enforcement heretofore wholly
left to states and local communities. I doubt if this expansion is wise from the
standpoint of the United States or the states.
Insofar as the United States is concerned, many think that taking over
enforcement of local criminal laws lowers the prestige of the federal system of
justice. It certainly tends to make the federal system top-eavy. Of supreme
Page 343 U. S. 142
importance is the fact that the United States cannot perform the monumental
tasks which lie beyond state power if the time, energy, and funds of federal
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institutions are expended in the field of state criminal law enforcement.
[Footnote 2/1]
Federal encroachment upon local criminal jurisdiction can also be very
injurious to the states. Extortion, robbery, embezzlement, and offenses of that
nature are traditionally matters of local concern. [Footnote 2/2] The precise
elements of these offenses, as well as the problems underlying them, vary from
state to state. Federal assumption of the job of enforcing these laws must, of
necessity, tend to free the states from a sense of responsibility for their own
local conditions. [Footnote 2/3] Even when states attempt
Page 343 U. S. 143
to play their traditional role in the field of law enforcement, the overriding
federal authority forces them to surrender control over the manner and policy
of construing and applying their own laws. State courts not only lose control
over the interpretation of their own laws, [Footnote 2/4] but also are deprived
of the chance to use the discretion vested in them by state legislatures to
impose sentences in accordance with local ideas. Moreover, state
prosecutors are deprived of the all-mportant function of deciding what local
offenders should be prosecuted. Final authority to make these important
decisions becomes located in the distant city of Washington, D.C. Here, as
elsewhere, too many cooks may spoil the broth.
Moreover, I doubt if this expansion of federal criminal jurisdiction can be
carried on in a manner consistent with our traditional ideas of what constitutes
a fair trial in criminal cases. There is the question of the wisdom and fairness of
subjecting a person to double and even triple prosecutions for the same
conduct, since the nation, state, and municipality might make this one
mistake or wrong punishable as a crime.
"That consideration gives additional weight to the view that, where Congress is
creating offenses which duplicate or build upon state law, courts should be
reluctant to expand the defined offenses beyond the clear requirements of
the terms of the statute.
Page 343 U. S. 144
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DUMAUAL, JEANNE PAULINE J. 2019-2020
Jerome v. United States, supra, at 318 U. S. 105. Of course, looked at
technically, multiple prosecutions for the same conduct could be avoided by
national prosecution of one part of the conduct, state prosecution of another
part, and municipal prosecution of a third part. This would still leave a
defendant faced with the burden of defending three separate prosecutions."
Expansion of federal criminal jurisdiction entails many other unfair and
complicating factors. Criminal rules of substance and of procedure vary
widely among the jurisdictions. [Footnote 2/5] Punishment is frequently
different. In fact, the same kind of conduct may be ignored as not worth
criminal punishment by one jurisdiction while considered a serious criminal
offense by another. For example, under the Federal White Slave Law, men
can be imprisoned five years for conduct which many states would not hold
criminal at all. Schwartz, Federal Criminal Jurisdiction and Prosecutors'
Discretion, 13 Law and Contemporary Problems 64, 72. When faced with
specific federal legislation, such differences in treatment may be inevitable,
but I do not think the tax laws should be judicially extended for the purpose of
taking from local officials the responsibility for prosecuting local offenses.
Page 343 U. S. 145
When the Government takes over a case like the one before us, the resulting
confusion of issues is manifestly prejudicial to the defendant. Here, for
instance, it can hardly be said that Rutkin was tried for tax evasion. Most of the
900 printed pages of oral testimony in the two week's trial are devoted to
proof of things other than an attempt to evade the tax. Four pages deal with
Rutkin's allegedly false 1943 tax return; three pages deal with the amount of
tax Rutkin would have owed if he had received $250,000 more income than
he actually reported; six pages contain testimony of Rutkin tending to show
willful evasion of the tax laws so as to bring the case within Spies v. United
States, 317 U. S. 492. A mere reference to the contents of the remaining 887
pages shows what a great threat there was that Rutkin would be convicted
because he was a "bad man" ("scoundrel" to use the trial court's title)
regardless of whether he was guilty or innocent of the tax evasion charged.
Most of the evidence dealt with the following aspects of Rutkin's past life and
associations: back in prohibition days, Rutkin had joined one Reinfeld and
others in a bootlegging scheme called the "High seas venture." The
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organization made millions. About 1940, some time after prohibition ended,
Reinfeld, apparently acting for the group, sold the business establishment for
about $7,500,000 net. Reinfeld's accounting methods and management of
the proceeds were not satisfactory to his associates. They claimed that
Reinfeld held back more than his share of the millions. Reinfeld claimed that
some of his former associates, including Rutkin, were "overdrawn" and entitled
to nothing out of the $7,500,000. This quarrel went on for several years, during
which time Reinfeld was required to pay hundreds of thousands of dollars to
former partners as a result of their claims that he had swindled them. Rutkin
was one of them. Rutkin's $250,000 was paid to him by lawyers whose
reputations
Page 343 U. S. 146
seem to have been above reproach. It was paid openly. And it was some
eight years later, when Rutkin sued Reinfeld for more millions, that Reinfeld,
apparently for the first time, charged that Rutkin had extorted the $250,000
under threats of death. Yet he has been convicted here of federal tax evasion
on the theory that he was guilty of the crime of "extortion." [Footnote 2/6]
From the beginning to the end, the evidence in this case was devoted to
showing the lawless life Rutkin, Reinfeld, and their associates led from the
1920's to 1950, ranging from bootlegging to bribery to gambling. The charge
of the court largely emphasized and reemphasized the iniquity of the criminal
conduct shown by the testimony. Early in his charge, the trial court told the
jury:
"You are not deciding which is the bigger scoundrel, Reinfeld or Rutkin; they
have both blandly admitted on the stand that they prostituted justice in this
country; that they paid public servants to close their eyes to law violation, and
that is a canker which eats away at the body public. But you are not passing
upon respective degrees of scoundrelism between any two people. The
bland way in which we were told that the Reinfelds and the Rutkins and the
Zwillmans and all of the others prostituted justice should give us cause for
pause, but we are not passing on that question now."
In concluding his charge, the trial court told the jury:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"The Government of the United States doesn't ask you to sacrifice anybody to
prove its might. It asks you to do justice. That's all that Rutkin has a right to ask
you to do, and that's what the government of the United States asks you to
do. It asks you to
Page 343 U. S. 147
remember its rights too, remembering that unpunished crime, undetected
crime, are threats to the majesty and dignity of our government, and that
unpunished crime undermines our government. We all of us must do that
which is our duty, and do it without fear or favor."
My study of this record leads me to believe that the fantastic story of
supposed extortion told here would probably never have been accepted by
a jury if presented in a trial uncolored by the manifold other inflammatory
matters which took up 887 of the 900 pages in this "tax evasion" case.
If we are going to depart from the Wilcox holding, I think this is a poor case in
which to do so. I would reverse this judgment.
[Footnote 2/1]
In opposing certain anti-heft legislation, Attorney General Mitchell wrote
Senator Norris that,
". . . The machinery now provided by the Federal Government for the
prosecution and punishment of crime is overtaxed."
"Earnest efforts are being made to devise methods for the relief of those
Federal courts which are congested and to increase the capacity of our
prisons to satisfy present requirements. Until we have dealt adequately with
the troubles which now confront us, we ought not to be adding to the burden
of the law enforcement machinery by enacting legislation of this kind."
72 Cong.Rec. 6214. Along this line, it has been said that
Page 158

"It will be a long time before the few hundred agents of the Department of
Justice can expand enough to do the work now given to 130,000 peace
officers in the United States. . . ."
Broad Program Needed for Crime Control, 20 J.Am.Jud.Soc.196, 200.
[Footnote 2/2]
In 1950 and 1951, the Senate Crime Committee conducted investigations of
organized crime. In its Third Interim Report, the Committee stated,
"Any program for controlling organized crime must take into account the
fundamental nature of our governmental system. The enforcement of the
criminal law is primarily a State and local responsibility."
S.Rep.No.307, 82d Cong., 1st Sess. 5.
[Footnote 2/3]
Commenting on this fact, Attorney General Mitchell said,
"Experience has shown that, when Congress enacts criminal legislation of this
type, the tendency is for the State authorities to cease their efforts toward
punishing the offenders and to leave it to the Federal authorities and the
Federal courts. That has been the experience under the Dyer Act."
72 Cong.Rec. 6214. See also Boudin, The Place of the Anti-acketeering Act in
our Constitutional-egal System, 28 Cornell L.Q. 261, 270 et seq.
United States v. Lanza, 260 U. S. 377, held that a defendant could be
subjected to federal prosecution for violation of federal prohibition laws
despite the fact that he had already been convicted under New York law for
the same conduct. New York's repeal of her prohibition laws six months later
highlights the loss of state responsibility for enforcing the criminal law after the
Federal Government has entered the field. N.Y.Laws 1923, c. 871.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
[Footnote 2/4]
See n 5, infra.
[Footnote 2/5]
Enforcement of all or some of these rules in the federal courts injects an
element of uncertainty into criminal trials. Questions arise as to how much law
of what state applies. Then the federal court must attempt to decide what the
state law actually is, and how it applies to the particular conduct alleged to
be criminal. Moreover, an opportunity to obtain an authoritative decision on a
matter of state law from the highest state court is denied. Thus, all the
uncertain problems involved in Erie R. Co. v. Tompkins, 304 U. S. 64, are thrust
upon those accused of crime in the federal courts.
"And a statute which either forbids or requires the doing of an act in terms so
vague that men of common intelligence must necessarily guess at its meaning
and differ as to its application violates the first essential of due process of law."
Connally v. General Const. Co., 269 U. S. 385, 269 U. S. 391
[Footnote 2/6]
The majority leave me in doubt as to whether the "extortion" was a state or
federal crime. See n 5, supra..
Page 159

Eisner v. Macomber
No. 318
Argued April 16, 1919
Restored to docket for reargument May 19, 1919
Reargued October 17, 20, 1919
Decided March 8, 1920
252 U.S. 189
ERROR TO THE DISTRICT COURT OF THE UNITED STATES
FOR THE SOUTHERN DISTRICT OF NEW YORK
Syllabus
Congress was not empowered by the Sixteenth Amendment to tax, as income
of the stockholder, without apportionment, a stock dividend made lawfully
and in good faith against profits accumulated by the corporation since March
1, 1913. P. 252 U. S. 201. Towne v. Eisner, 245 U. S. 418.
The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756, plainly evinces the
purpose of Congress to impose such taxes, and is to that extent in conflict with
Art. I, § 2, cl. 3, and Art. I, § 9, cl. 4, of the Constitution. Pp. 252 U. S. 199, 252 U.
S. 217.
These provisions of the Constitution necessarily limit the extension, by
construction, of the Sixteenth Amendment. P. 252 U. S. 205.
What is or is not "income" within the meaning of the Amendment must be
determined in each case according to truth and substance, without regard to
form. P. 252 U. S. 206.
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DUMAUAL, JEANNE PAULINE J. 2019-2020
Income may be defined as the gain derived from capital, from labor, or from
both combined, including profit gained through sale or conversion of capital.
P. 252 U. S. 207.
Mere growth or increment of value in a capital investment is not income;
income is essentially a gain or profit, in itself, of exchangeable value,
proceeding from capital, severed from it, and derived or received by the
taxpayer for his separate use, benefit, and disposal. Id.
A stock dividend, evincing merely a transfer of an accumulated surplus to the
capital account of the corporation, takes nothing from the property of the
corporation and adds nothing to that of the shareholder; a tax on such
dividends is a tax an capital increase, and not on income, and, to be valid
under the Constitution, such taxes must be apportioned according to
population in the several states. P. 252 U. S. 208.
Affirmed.
Page 252 U. S. 190
The case is stated in the opinion.
Page 252 U. S. 199
MR. JUSTICE PITNEY delivered the opinion of the Court.
This case presents the question whether, by virtue of the Sixteenth
Amendment, Congress has the power to tax, as income of the stockholder
and without apportionment, a stock dividend made lawfully and in good faith
against profits accumulated by the corporation since March 1, 1913.
It arises under the Revenue Act of September 8, 1916, 39 Stat. 756 et
seq., which, in our opinion (notwithstanding a contention of the government
that will be
Page 252 U. S. 200
Page 160

noticed), plainly evinces the purpose of Congress to tax stock dividends as
income. *
The facts, in outline, are as follows:
On January 1, 1916, the Standard Oil Company of California, a corporation of
that state, out of an authorized capital stock of $100,000,000, had shares of
stock outstanding, par value $100 each, amounting in round figures to
$50,000,000. In addition, it had surplus and undivided profits invested in plant,
property, and business and required for the purposes of the corporation,
amounting to about $45,000,000, of which about $20,000,000 had been
earned prior to March 1, 1913, the balance thereafter. In January, 1916, in
order to readjust the capitalization, the board of directors decided to issue
additional shares sufficient to constitute a stock dividend of 50 percent of the
outstanding stock, and to transfer from surplus account to capital stock
account an amount equivalent to such issue. Appropriate resolutions were
adopted, an amount equivalent to the par value of the proposed new stock
was transferred accordingly, and the new stock duly issued against it and
divided among the stockholders.
Defendant in error, being the owner of 2,200 shares of the old stock, received
certificates for 1, 100 additional
Page 252 U. S. 201
shares, of which 18.07 percent, or 198.77 shares, par value $19,877, were
treated as representing surplus earned between March 1, 1913, and January
1, 1916. She was called upon to pay, and did pay under protest, a tax
imposed under the Revenue Act of 1916, based upon a supposed income of
$19,877 because of the new shares, and, an appeal to the Commissioner of
Internal Revenue having been disallowed, she brought action against the
Collector to recover the tax. In her complaint, she alleged the above facts
and contended that, in imposing such a tax the Revenue Act of 1916 violated
article 1, § 2, cl. 3, and Article I, § 9, cl. 4, of the Constitution of the United
States, requiring direct taxes to be apportioned according to population, and
that the stock dividend was not income within the meaning of the Sixteenth
Amendment. A general demurrer to the complaint was overruled upon the
authority of Towne v. Eisner, 245 U. S. 418, and, defendant having failed to
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
plead further, final judgment went against him. To review it, the present writ of
error is prosecuted.
The case was argued at the last term, and reargued at the present term, both
orally and by additional briefs.
We are constrained to hold that the judgment of the district court must be
affirmed, first, because the question at issue is controlled by Towne v. Eisner,
supra; secondly, because a reexamination of the question with the additional
light thrown upon it by elaborate arguments has confirmed the view that the
underlying ground of that decision is sound, that it disposes of the question
here presented, and that other fundamental considerations lead to the same
result.
In Towne v. Eisner, the question was whether a stock dividend made in 1914
against surplus earned prior to January 1, 1913, was taxable against the
stockholder under the Act of October 3, 1913, c. 16, 38 Stat. 114, 166, which
provided (§ B, p. 167) that net income should include "dividends," and also
"gains or profits and income derived
Page 252 U. S. 202
from any source whatever." Suit having been brought by a stockholder to
recover the tax assessed against him by reason of the dividend, the district
court sustained a demurrer to the complaint. 242 F. 702. The court treated the
construction of the act as inseparable from the interpretation of the Sixteenth
Amendment; and, having referred to Pollock v. Farmers' Loan & Trust Co., 158
U. S. 601, and quoted the Amendment, proceeded very properly to say (p.
704):
"It is manifest that the stock dividend in question cannot be reached by the
Income Tax Act and could not, even though Congress expressly declared it to
be taxable as income, unless it is in fact income."
It declined, however, to accede to the contention that, in Gibbons v.
Mahon, 136 U. S. 549, "stock dividends" had received a definition sufficiently
clear to be controlling, treated the language of this Court in that case
as obiter dictum in respect of the matter then before it (p. 706), and examined
Page 161

the question as res nova, with the result stated. When the case came here,
after overruling a motion to dismiss made by the government upon the
ground that the only question involved was the construction of the statute,
and not its constitutionality, we dealt upon the merits with the question of
construction only, but disposed of it upon consideration of the essential nature
of a stock dividend disregarding the fact that the one in question was based
upon surplus earnings that accrued before the Sixteenth Amendment took
effect. Not only so, but we rejected the reasoning of the district court, saying
(245 U.S. 245 U. S. 426):
"Notwithstanding the thoughtful discussion that the case received below we
cannot doubt that the dividend was capital as well for the purposes of the
Income Tax Law as for distribution between tenant for life and remainderman.
What was said by this Court upon the latter question is equally true for the
former."
"A stock dividend really takes nothing from the property of the corporation,
and adds nothing to the
Page 252 U. S. 203
interests of the shareholders. Its property is not diminished, and their interests
are not increased. . . . The proportional interest of each shareholder remains
the same. The only change is in the evidence which represents that interest,
the new shares and the original shares together representing the same
proportional interest that the original shares represented before the issue of
the new ones."
"Gibbons v. Mahon, 136 U. S. 549, 136 U. S. 559-560. In short, the corporation is
no poorer and the stockholder is no richer than they were before. Logan
County v. United States, 169 U. S. 255, 169 U. S. 261. If the plaintiff gained any
small advantage by the change, it certainly was not an advantage of
$417,450, the sum upon which he was taxed. . . . What has happened is that
the plaintiff's old certificates have been split up in effect and have diminished
in value to the extent of the value of the new."
This language aptly answered not only the reasoning of the district court, but
the argument of the Solicitor General in this Court, which discussed the
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DUMAUAL, JEANNE PAULINE J. 2019-2020
essential nature of a stock dividend. And if, for the reasons thus expressed,
such a dividend is not to be regarded as "income" or "dividends" within the
meaning of the Act of 1913, we are unable to see how it can be brought
within the meaning of "incomes" in the Sixteenth Amendment, it being very
clear that Congress intended in that act to exert its power to the extent
permitted by the amendment. In Towne v. Eisner, it was not contended that
any construction of the statute could make it narrower than the constitutional
grant; rather the contrary.
The fact that the dividend was charged against profits earned before the Act
of 1913 took effect, even before the amendment was adopted, was neither
relied upon nor alluded to in our consideration of the merits in that case. Not
only so, but had we considered that a stock dividend constituted income in
any true sense, it would have been held taxable under the Act of 1913
notwithstanding it was
Page 252 U. S. 204
based upon profits earned before the amendment. We ruled at the same
term, in Lynch v. Hornby, 247 U. S. 339, that a cash dividend extraordinary in
amount, and in Peabody v. Eisner, 247 U. S. 347, that a dividend paid in stock
of another company, were taxable as income although based upon earnings
that accrued before adoption of the amendment. In the former case,
concerning "corporate profits that accumulated before the act took effect,"
we declared (pp. 247 U. S. 343-344):
"Just as we deem the legislative intent manifest to tax the stockholder with
respect to such accumulations only if and when, and to the extent that, his
interest in them comes to fruition as income, that is, in dividends declared, so
we can perceive no constitutional obstacle that stands in the way of carrying
out this intent when dividends are declared out of a preexisting surplus. . . .
Congress was at liberty under the amendment to tax as income, without
apportionment, everything that became income, in the ordinary sense of the
word, after the adoption of the amendment, including dividends received in
the ordinary course by a stockholder from a corporation, even though they
were extraordinary in amount and might appear upon analysis to be a mere
realization in possession of an inchoate and contingent interest that the
stockholder had in a surplus of corporate assets previously existing."
Page 162

In Peabody v. Eisner, 247 U. S. 349, 247 U. S. 350, we observed that the decision
of the district court in Towne v. Eisner had been reversed
"only upon the ground that it related to a stock dividend which in fact took
nothing from the property of the corporation and added nothing to the
interest of the shareholder, but merely changed the evidence which
represented that interest,"
and we distinguished the Peabody case from the Towne case upon the
ground that "the dividend of Baltimore & Ohio shares was not a stock dividend
but a distribution in specie of a portion of the assets of the Union Pacific."
Therefore, Towne v. Eisner cannot be regarded as turning
Page 252 U. S. 205
upon the point that the surplus accrued to the company before the act took
effect and before adoption of the amendment. And what we have quoted
from the opinion in that case cannot be regarded as obiter dictum, it having
furnished the entire basis for the conclusion reached. We adhere to the view
then expressed, and might rest the present case there not because that case
in terms decided the constitutional question, for it did not, but because the
conclusion there reached as to the essential nature of a stock dividend
necessarily prevents its being regarded as income in any true sense.
Nevertheless, in view of the importance of the matter, and the fact that
Congress in the Revenue Act of 1916 declared (39 Stat. 757) that a "stock
dividend shall be considered income, to the amount of its cash value," we will
deal at length with the constitutional question, incidentally testing the
soundness of our previous conclusion.
The Sixteenth Amendment must be construed in connection with the taxing
clauses of the original Constitution and the effect attributed to them before
the amendment was adopted. In Pollock v. Farmers' Loan & Trust Co., 158 U. S.
601, under the Act of August 27, 1894, c. 349, § 27, 28 Stat. 509, 553, it was held
that taxes upon rents and profits of real estate and upon returns from
investments of personal property were in effect direct taxes upon the property
from which such income arose, imposed by reason of ownership, and that
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DUMAUAL, JEANNE PAULINE J. 2019-2020
Congress could not impose such taxes without apportioning them among the
states according to population, as required by Article I, § 2, cl. 3, and § 9, cl. 4,
of the original Constitution.
Afterwards, and evidently in recognition of the limitation upon the taxing
power of Congress thus determined, the Sixteenth Amendment was adopted,
in words lucidly expressing the object to be accomplished:
"The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among
Page 252 U. S. 206
the several states and without regard to any census or enumeration."
As repeatedly held, this did not extend the taxing power to new subjects, but
merely removed the necessity which otherwise might exist for an
apportionment among the states of taxes laid on income. Brushaber v. Union
Pacific R. Co., 240 U. S. 1, 240 U. S. 17-19; Stanton v. Baltic Mining Co., 240 U. S.
103, 240 U. S. 112 et seq.; Peck & Co. v. Lowe, 247 U. S. 165, 247 U. S. 172-173.
A proper regard for its genesis, as well as its very clear language, requires also
that this amendment shall not be extended by loose construction, so as to
repeal or modify, except as applied to income, those provisions of the
Constitution that require an apportionment according to population for direct
taxes upon property, real and personal. This limitation still has an appropriate
and important function, and is not to be overridden by Congress or
disregarded by the courts.
In order, therefore, that the clauses cited from Article I of the Constitution may
have proper force and effect, save only as modified by the amendment, and
that the latter also may have proper effect, it becomes essential to distinguish
between what is and what is not "income," as the term is there used, and to
apply the distinction, as cases arise, according to truth and substance,
without regard to form. Congress cannot by any definition it may adopt
conclude the matter, since it cannot by legislation alter the Constitution, from
which alone it derives its power to legislate, and within whose limitations alone
that power can be lawfully exercised.
Page 163

The fundamental relation of "capital" to "income" has been much discussed by
economists, the former being likened to the tree or the land, the latter to the
fruit or the crop; the former depicted as a reservoir supplied from springs, the
latter as the outlet stream, to be measured by its flow during a period of time.
For the present purpose, we require only a clear definition of the term
"income,"
Page 252 U. S. 207
as used in common speech, in order to determine its meaning in the
amendment, and, having formed also a correct judgment as to the nature of
a stock dividend, we shall find it easy to decide the matter at issue.
After examining dictionaries in common use (Bouv. L.D.; Standard Dict.;
Webster's Internat. Dict.; Century Dict.), we find little to add to the succinct
definition adopted in two cases arising under the Corporation Tax Act of 1909
(Stratton's Independence v. Howbert, 231 U. S. 399, 231 U. S. 415; Doyle v.
Mitchell Bros. Co., 247 U. S. 179, 247 U. S. 185), "Income may be defined as the
gain derived from capital, from labor, or from both combined," provided it be
understood to include profit gained through a sale or conversion of capital
assets, to which it was applied in the Doyle case, pp. 247 U. S. 183-185.
Brief as it is, it indicates the characteristic and distinguishing attribute of
income essential for a correct solution of the present controversy. The
government, although basing its argument upon the definition as quoted,
placed chief emphasis upon the word "gain," which was extended to include
a variety of meanings; while the significance of the next three words was
either overlooked or misconceived. "Derived from capital;" "the gain derived
from capital," etc. Here, we have the essential matter: not a gain accruing to
capital; not a growth or increment of value in the investment; but a gain, a
profit, something of exchangeable value, proceeding from the
property, severed from the capital, however invested or employed,
and coming in, being "derived" -- that is, received or drawn by the recipient
(the taxpayer) for his separate use, benefit and disposal -- that is income
derived from property. Nothing else answers the description.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The same fundamental conception is clearly set forth in the Sixteenth
Amendment -- "incomes, from whatever source derived" -- the essential
thought being expressed
Page 252 U. S. 208
with a conciseness and lucidity entirely in harmony with the form and style of
the Constitution.
Can a stock dividend, considering its essential character, be brought within
the definition? To answer this, regard must be had to the nature of a
corporation and the stockholder's relation to it. We refer, of course, to a
corporation such as the one in the case at bar, organized for profit, and
having a capital stock divided into shares to which a nominal or par value is
attributed.
Certainly the interest of the stockholder is a capital interest, and his certificates
of stock are but the evidence of it. They state the number of shares to which
he is entitled and indicate their par value and how the stock may be
transferred. They show that he or his assignors, immediate or remote, have
contributed capital to the enterprise, that he is entitled to a corresponding
interest proportionate to the whole, entitled to have the property and business
of the company devoted during the corporate existence to attainment of the
common objects, entitled to vote at stockholders' meetings, to receive
dividends out of the corporation's profits if and when declared, and, in the
event of liquidation, to receive a proportionate share of the net assets, if any,
remaining after paying creditors. Short of liquidation, or until dividend
declared, he has no right to withdraw any part of either capital or profits from
the common enterprise; on the contrary, his interest pertains not to any part,
divisible or indivisible, but to the entire assets, business, and affairs of the
company. Nor is it the interest of an owner in the assets themselves, since the
corporation has full title, legal and equitable, to the whole. The stockholder
has the right to have the assets employed in the enterprise, with the incidental
rights mentioned; but, as stockholder, he has no right to withdraw, only the
right to persist, subject to the risks of the enterprise, and looking only to
dividends for his return. If he desires to dissociate himself
Page 252 U. S. 209
Page 164

from the company, he can do so only by disposing of his stock.
For bookkeeping purposes, the company acknowledges a liability in form to
the stockholders equivalent to the aggregate par value of their stock,
evidenced by a "capital stock account." If profits have been made and not
divided, they create additional bookkeeping liabilities under the head of
"profit and loss," "undivided profits," "surplus account," or the like. None of
these, however, gives to the stockholders as a body, much less to any one of
them, either a claim against the going concern for any particular sum of
money or a right to any particular portion of the assets or any share in them
unless or until the directors conclude that dividends shall be made and a part
of the company's assets segregated from the common fund for the purpose.
The dividend normally is payable in money, under exceptional circumstances
in some other divisible property, and when so paid, then only (excluding, of
course, a possible advantageous sale of his stock or winding-up of the
company) does the stockholder realize a profit or gain which becomes his
separate property, and thus derive income from the capital that he or his
predecessor has invested.
In the present case, the corporation had surplus and undivided profits
invested in plant, property, and business, and required for the purposes of the
corporation, amounting to about $45,000,000, in addition to outstanding
capital stock of $50,000,000. In this, the case is not extraordinary. The profits of
a corporation, as they appear upon the balance sheet at the end of the year,
need not be in the form of money on hand in excess of what is required to
meet current liabilities and finance current operations of the company. Often,
especially in a growing business, only a part, sometimes a small part, of the
year's profits is in property capable of division, the remainder having been
absorbed in the acquisition of increased plant,
Page 252 U. S. 210
equipment, stock in trade, or accounts receivable, or in decrease of
outstanding liabilities. When only a part is available for dividends, the balance
of the year's profits is carried to the credit of undivided profits, or surplus, or
some other account having like significance. If thereafter the company finds
itself in funds beyond current needs, it may declare dividends out of such
surplus or undivided profits; otherwise it may go on for years conducting a
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
successful business, but requiring more and more working capital because of
the extension of its operations, and therefore unable to declare dividends
approximating the amount of its profits. Thus, the surplus may increase until it
equals or even exceeds the par value of the outstanding capital stock. This
may be adjusted upon the books in the mode adopted in the case at bar --
by declaring a "stock dividend." This, however, is no more than a book
adjustment, in essence -- not a dividend, but rather the opposite; no part of
the assets of the company is separated from the common fund, nothing
distributed except paper certificates that evidence an antecedent increase
in the value of the stockholder's capital interest resulting from an
accumulation of profits by the company, but profits so far absorbed in the
business as to render it impracticable to separate them for withdrawal and
distribution. In order to make the adjustment, a charge is made against surplus
account with corresponding credit to capital stock account, equal to the
proposed "dividend;" the new stock is issued against this and the certificates
delivered to the existing stockholders in proportion to their previous holdings.
This, however, is merely bookkeeping that does not affect the aggregate
assets of the corporation or its outstanding liabilities; it affects only the form,
not the essence, of the "liability" acknowledged by the corporation to its own
shareholders, and this through a readjustment of accounts on one side of the
balance sheet only, increasing "capital stock" at the expense of
Page 252 U. S. 211
"surplus"; it does not alter the preexisting proportionate interest of any
stockholder or increase the intrinsic value of his holding or of the aggregate
holdings of the other stockholders as they stood before. The new certificates
simply increase the number of the shares, with consequent dilution of the
value of each share.
A "stock dividend" shows that the company's accumulated profits have been
capitalized, instead of distributed to the stockholders or retained as surplus
available for distribution in money or in kind should opportunity offer. Far from
being a realization of profits of the stockholder, it tends rather to postpone
such realization, in that the fund represented by the new stock has been
transferred from surplus to capital, and no longer is available for actual
distribution.
Page 165

The essential and controlling fact is that the stockholder has received nothing
out of the company's assets for his separate use and benefit; on the contrary,
every dollar of his original investment, together with whatever accretions and
accumulations have resulted from employment of his money and that of the
other stockholders in the business of the company, still remains the property of
the company, and subject to business risks which may result in wiping out the
entire investment. Having regard to the very truth of the matter, to substance
and not to form, he has received nothing that answers the definition of
income within the meaning of the Sixteenth Amendment.
Being concerned only with the true character and effect of such a dividend
when lawfully made, we lay aside the question whether, in a particular case,
a stock dividend may be authorized by the local law governing the
corporation, or whether the capitalization of profits may be the result of
correct judgment and proper business policy on the part of its management,
and a due regard for the interests of the stockholders. And we are considering
the taxability of bona fide stock dividends only.
Page 252 U. S. 212
We are clear that not only does a stock dividend really take nothing from the
property of the corporation and add nothing to that of the shareholder, but
that the antecedent accumulation of profits evidenced thereby, while
indicating that the shareholder is the richer because of an increase of his
capital, at the same time shows he has not realized or received any income in
the transaction.
It is said that a stockholder may sell the new shares acquired in the stock
dividend, and so he may, if he can find a buyer. It is equally true that, if he
does sell, and in doing so realizes a profit, such profit, like any other, is income,
and, so far as it may have arisen since the Sixteenth Amendment, is taxable by
Congress without apportionment. The same would be true were he to sell
some of his original shares at a profit. But if a shareholder sells dividend stock,
he necessarily disposes of a part of his capital interest, just as if he should sell a
part of his old stock, either before or after the dividend. What he retains no
longer entitles him to the same proportion of future dividends as before the
sale. His part in the control of the company likewise is diminished. Thus, if one
holding $60,000 out of a total $100,000 of the capital stock of a corporation
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
should receive in common with other stockholders a 50 percent stock
dividend, and should sell his part, he thereby would be reduced from a
majority to a minority stockholder, having six-fifteenths instead of six-tenths of
the total stock outstanding. A corresponding and proportionate decrease in
capital interest and in voting power would befall a minority holder should he
sell dividend stock, it being in the nature of things impossible for one to dispose
of any part of such an issue without a proportionate disturbance of the
distribution of the entire capital stock and a like diminution of the seller's
comparative voting power -- that "right preservative of rights" in the control of
a corporation.
Page 252 U. S. 213
Yet, without selling, the shareholder, unless possessed of other resources, has
not the wherewithal to pay an income tax upon the dividend stock. Nothing
could more clearly show that to tax a stock dividend is to tax a capital
increase, and not income, than this demonstration that, in the nature of
things, it requires conversion of capital in order to pay the tax.
Throughout the argument of the government, in a variety of forms, runs the
fundamental error already mentioned -- a failure to appraise correctly the
force of the term "income" as used in the Sixteenth Amendment, or at least to
give practical effect to it. Thus, the government contends that the tax "is
levied on income derived from corporate earnings," when in truth the
stockholder has "derived" nothing except paper certificates, which, so far as
they have any effect, deny him present participation in such earnings. It
contends that the tax may be laid when earnings "are received by the
stockholder," whereas he has received none; that the profits are "distributed
by means of a stock dividend," although a stock dividend distributes no profits;
that, under the Act of 1916, "the tax is on the stockholder's share in corporate
earnings," when in truth a stockholder has no such share, and receives none in
a stock dividend; that "the profits are segregated from his former capital, and
he has a separate certificate representing his invested profits or gains,"
whereas there has been no segregation of profits, nor has he any separate
certificate representing a personal gain, since the certificates, new and old,
are alike in what they represent -- a capital interest in the entire concerns of
the corporation.
Page 166

We have no doubt of the power or duty of a court to look through the form of
the corporation and determine the question of the stockholder's right in order
to ascertain whether he has received income taxable by Congress without
apportionment. But, looking through the form,
Page 252 U. S. 214
we cannot disregard the essential truth disclosed, ignore the substantial
difference between corporation and stockholder, treat the entire organization
as unreal, look upon stockholders as partners when they are not such, treat
them as having in equity a right to a partition of the corporate assets when
they have none, and indulge the fiction that they have received and realized
a share of the profits of the company which in truth they have neither
received nor realized. We must treat the corporation as a substantial entity
separate from the stockholder not only because such is the practical fact, but
because it is only by recognizing such separateness that any dividend -- even
one paid in money or property -- can be regarded as income of the
stockholder. Did we regard corporation and stockholders as altogether
identical, there would be no income except as the corporation acquired it,
and while this would be taxable against the corporation as income under
appropriate provisions of law, the individual stockholders could not be
separately and additionally taxed with respect to their several shares even
when divided, since, if there were entire identity between them and the
company, they could not be regarded as receiving anything from it, any
more than if one's money were to be removed from one pocket to another.
Conceding that the mere issue of a stock dividend makes the recipient no
richer than before, the government nevertheless contends that the new
certificates measure the extent to which the gains accumulated by the
corporation have made him the richer. There are two insuperable difficulties
with this. In the first place, it would depend upon how long he had held the
stock whether the stock dividend indicated the extent to which he had been
enriched by the operations of the company; unless he had held it throughout
such operations, the measure would not hold true. Secondly, and more
important for present purposes, enrichment through increase in value
Page 252 U. S. 215
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DUMAUAL, JEANNE PAULINE J. 2019-2020
of capital investment is not income in any proper meaning of the term.
The complaint contains averments respecting the market prices of stock such
as plaintiff held, based upon sales before and after the stock dividend,
tending to show that the receipt of the additional shares did not substantially
change the market value of her entire holdings. This tends to show that, in this
instance, market quotations reflected intrinsic values -- a thing they do not
always do. But we regard the market prices of the securities as an unsafe
criterion in an inquiry such as the present, when the question must be not what
will the thing sell for, but what is it in truth and in essence.
It is said there is no difference in principle between a simple stock dividend
and a case where stockholders use money received as cash dividends to
purchase additional stock contemporaneously issued by the corporation. But
an actual cash dividend, with a real option to the stockholder either to keep
the money for his own or to reinvest it in new shares, would be as far removed
as possible from a true stock dividend, such as the one we have under
consideration, where nothing of value is taken from the company's assets and
transferred to the individual ownership of the several stockholders and thereby
subjected to their disposal.
The government's reliance upon the supposed analogy between a dividend
of the corporation's own shares and one made by distributing shares owned
by it in the stock of another company calls for no comment beyond the
statement that the latter distributes assets of the company among the
shareholders, while the former does not, and for no citation of authority
except Peabody v. Eisner, 247 U. S. 347, 247 U. S. 349-350.
Two recent decisions, proceeding from courts of high jurisdiction, are cited in
support of the position of the government.
Page 252 U. S. 216
Swan Brewery Co., Ltd. v. Rex, [1914] A.C. 231, arose under the Dividend
Duties Act of Western Australia, which provided that "dividend" should include
"every dividend, profit, advantage, or gain intended to be paid or credited to
or distributed among any members or directors of any company," except, etc.
There was a stock dividend, the new shares being allotted among the
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shareholders pro rata, and the question was whether this was a distribution of
a dividend within the meaning of the act. The Judicial Committee of the Privy
Council sustained the dividend duty upon the ground that, although "in
ordinary language the new shares would not be called a dividend, nor would
the allotment of them be a distribution of a dividend," yet, within the meaning
of the act, such new shares were an "advantage" to the recipients. There
being no constitutional restriction upon the action of the lawmaking body, the
case presented merely a question of statutory construction, and manifestly
the decision is not a precedent for the guidance of this Court when acting
under a duty to test an act of Congress by the limitations of a written
Constitution having superior force.
In Tax Commissioner v. Putnam, (1917) 227 Mass. 522, it was held that the Forty-
Fourth amendment to the Constitution of Massachusetts, which conferred
upon the legislature full power to tax incomes, "must be interpreted as
including every item which by any reasonable understanding can fairly be
regarded as income" (pp. 526, 531), and that under it, a stock dividend was
taxable as income, the court saying (p. 535):
"In essence, the thing which has been done is to distribute a symbol
representing an accumulation of profits, which, instead of being paid out in
cash, is invested in the business, thus augmenting its durable assets. In this
aspect of the case, the substance of the transaction is no different from what
it would be if a cash dividend had been declared with the privilege of
subscription to an equivalent amount of new shares. "
Page 252 U. S. 217
We cannot accept this reasoning. Evidently, in order to give a sufficiently
broad sweep to the new taxing provision, it was deemed necessary to take
the symbol for the substance, accumulation for distribution, capital accretion
for its opposite, while a case where money is paid into the hand of the
stockholder with an option to buy new shares with it, followed by acceptance
of the option, was regarded as identical in substance with a case where the
stockholder receives no money and has no option. The Massachusetts court
was not under an obligation, like the one which binds us, of applying a
constitutional amendment in the light of other constitutional provisions that
stand in the way of extending it by construction.
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DUMAUAL, JEANNE PAULINE J. 2019-2020
Upon the second argument, the government, recognizing the force of the
decision in Towne v. Eisner, supra, and virtually abandoning the contention
that a stock dividend increases the interest of the stockholder or otherwise
enriches him, insisted as an alternative that, by the true construction of the Act
of 1916, the tax is imposed not upon the stock dividend, but rather upon the
stockholder's share of the undivided profits previously accumulated by the
corporation, the tax being levied as a matter of convenience at the time such
profits become manifest through the stock dividend. If so construed, would
the act be constitutional?
That Congress has power to tax shareholders upon their property interests in
the stock of corporations is beyond question, and that such interests might be
valued in view of the condition of the company, including its accumulated
and undivided profits, is equally clear. But that this would be taxation of
property because of ownership, and hence would require apportionment
under the provisions of the Constitution, is settled beyond peradventure by
previous decisions of this Court.
The government relies upon Collector v. Hubbard, (1870)
Page 252 U. S. 218
12 Wall. 1, which arose under § 117 of the Act of June 30, 1864, c. 173, 13 Stat.
223, 282, providing that
"The gains and profits of all companies, whether incorporated or partnership,
other than the companies specified in that section, shall be included in
estimating the annual gains, profits, or income of any person, entitled to the
same, whether divided or otherwise."
The court held an individual taxable upon his proportion of the earnings of a
corporation although not declared as dividends and although invested in
assets not in their nature divisible. Conceding that the stockholder for certain
purposes had no title prior to dividend declared, the court nevertheless said
(p. 79 U. S. 18):
"Grant all that, still it is true that the owner of a share of stock in a corporation
holds the share with all its incidents, and that among those incidents is the
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right to receive all future dividends -- that is, his proportional share of all profits
not then divided. Profits are incident to the share to which the owner at once
becomes entitled provided he remains a member of the corporation until a
dividend is made. Regarded as an incident to the shares, undivided profits are
property of the shareholder, and as such are the proper subject of sale, gift, or
devise. Undivided profits invested in real estate, machinery, or raw material for
the purpose of being manufactured are investments in which the stockholders
are interested, and when such profits are actually appropriated to the
payment of the debts of the corporation, they serve to increase the market
value of the shares, whether held by the original subscribers or by assignees."
Insofar as this seems to uphold the right of Congress to tax without
apportionment a stockholder's interest in accumulated earnings prior to
dividend declared, it must be regarded as overruled by Pollock v. Farmers'
Loan & Trust Co., 158 U. S. 601, 158 U. S. 627-628, 158 U. S. 637.
Conceding Collector v. Hubbard was inconsistent with the doctrine of that
case, because it sustained a direct tax upon property not apportioned
Page 252 U. S. 219
among the states, the government nevertheless insists that the sixteenth
Amendment removed this obstacle, so that now the Hubbard case is authority
for the power of Congress to levy a tax on the stockholder's share in the
accumulated profits of the corporation even before division by the
declaration of a dividend of any kind. Manifestly this argument must be
rejected, since the amendment applies to income only, and what is called
the stockholder's share in the accumulated profits of the company is capital,
not income. As we have pointed out, a stockholder has no individual share in
accumulated profits, nor in any particular part of the assets of the corporation,
prior to dividend declared.
Thus, from every point of view, we are brought irresistibly to the conclusion that
neither under the Sixteenth Amendment nor otherwise has Congress power to
tax without apportionment a true stock dividend made lawfully and in good
faith, or the accumulated profits behind it, as income of the stockholder. The
Revenue Act of 1916, insofar as it imposes a tax upon the stockholder
because of such dividend, contravenes the provisions of Article I, § 2, cl. 3,
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DUMAUAL, JEANNE PAULINE J. 2019-2020
and Article I, § 9, cl. 4, of the Constitution, and to this extent is invalid
notwithstanding the Sixteenth Amendment.
Judgment affirmed.
*
"Title I. -- Income Tax"
"Part I. -- On Individuals"
"Sec. 2. (a) That, subject only to such exemptions and deductions as are
hereinafter allowed, the net income of a taxable person shall include gains,
profits, and income derived, . . . also from interest, rent, dividends, securities, or
the transaction of any business carried on for gain or profit, or gains or profits
and income derived from any source whatever: Provided, that the term
'dividends' as used in this title shall be held to mean any distribution made or
ordered to be made by a corporation, . . . out of its earnings or profits
accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether, in cash or in stock of the corporation, . . . which stock
dividend shall be considered income, to the amount of its cash value."
MR. JUSTICE HOLMES, dissenting.
I think that Towne v. Eisner, 245 U. S. 418, was right in its reasoning and result,
and that, on sound principles, the stock dividend was not income. But it was
clearly intimated in that case that the construction of the statute then before
the Court might be different from that of the Constitution. 245 U.S. 245 U. S.
425. I think that the word "incomes" in the Sixteenth Amendment should be
read in
Page 252 U. S. 220
"a sense most obvious to the common understanding at the time of its
adoption." Bishop v. State, 149 Ind. 223, 230; State v. Butler, 70 Fla. 102, 133. For
it was for public adoption that it was proposed. McCulloch v. Maryland, 4
Wheat. 316, 17 U. S. 407. The known purpose of this Amendment was to get rid
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of nice questions as to what might be direct taxes, and I cannot doubt that
most people not lawyers would suppose when they voted for it that they put a
question like the present to rest. I am of opinion that the Amendment justifies
the tax. See Tax Commissioner v. Putnam, 227 Mass. 522, 532, 533.
MR. JUSTICE DAY concurs in this opinion.
MR. JUSTICE BRANDEIS delivered the following opinion, in which MR. JUSTICE
CLARKE concurred.
Financiers, with the aid of lawyers, devised long ago two different methods by
which a corporation can, without increasing its indebtedness, keep for
corporate purposes accumulated profits, and yet, in effect, distribute these
profits among its stockholders. One method is a simple one. The capital stock
is increased; the new stock is paid up with the accumulated profits, and the
new shares of paid-up stock are then distributed among the stockholders pro
rata as a dividend. If the stockholder prefers ready money to increasing his
holding of the stock in the company, he sells the new stock received as a
dividend. The other method is slightly more complicated. .arrangements are
made for an increase of stock to be offered to stockholders pro rata at par,
and at the same time for the payment of a cash dividend equal to the
amount which the stockholder will be required to pay to
Page 252 U. S. 221
the company, if he avails himself of the right to subscribe for his pro rata of the
new stock. If the stockholder takes the new stock, as is expected, he may
endorse the dividend check received to the corporation, and thus pay for the
new stock. In order to ensure that all the new stock so offered will be taken,
the price at which it is offered is fixed far below what it is believed will be its
market value. If the stockholder prefers ready money to an increase of his
holdings of stock, he may sell his right to take new stock pro rata, which is
evidenced by an assignable instrument. In that event the purchaser of the
rights repays to the corporation, as the subscription price of the new stock, an
amount equal to that which it had paid as a cash dividend to the
stockholder.
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DUMAUAL, JEANNE PAULINE J. 2019-2020
Both of these methods of retaining accumulated profits while in effect
distributing them as a dividend had been in common use in the United States
for many years prior to the adoption of the Sixteenth Amendment. They were
recognized equivalents. Whether a particular corporation employed one or
the other method was determined sometimes by requirements of the law
under which the corporation was organized; sometimes it was determined by
preferences of the individual officials of the corporation, and sometimes by
stock market conditions. Whichever method was employed, the resultant
distribution of the new stock was commonly referred to as a stock dividend.
How these two methods have been employed may be illustrated by the
action in this respect (as reported in Moody's Manual, 1918 Industrial, and the
Commercial and Financial Chronicle) of some of the Standard Oil companies
since the disintegration pursuant to the decision of this Court in 1911. Standard
Oil Co. v. United States, 221 U. S. 1.
(a) Standard Oil Co. (of Indiana), an Indiana corporation. It had on December
31, 1911, $1,000,000 capital stock (all common), and a large surplus. On May
15,
Page 252 U. S. 222
1912, it increased its capital stock to $30,000,000, and paid a simple stock
dividend of 2,900 percent in stock. [Footnote 1]
(b) Standard Oil Co. (of Nebraska), a Nebraska corporation. It had on
December 31, 1911, $600,000 capital stock (all common), and a substantial
surplus. On April 15, 1912, it paid a simple stock dividend of 33 1/3 percent,
increasing the outstanding capital to $800,000. During the calendar year 1912,
it paid cash dividends aggregating 20 percent, but it earned considerably
more, and had at the close of the year again a substantial surplus. On June
20, 1913, it declared a further stock dividend of 25 percent, thus increasing the
capital to $1,000,000. [Footnote 2]
(c) The Standard Oil Co. (of Kentucky), a Kentucky corporation. It had on
December 31, 1913, $1,000,000 capital stock (all common) and $3,701,710
surplus. Of this surplus, $902,457 had been earned during the calendar year
1913, the net profits of that year having been $1,002,457 and the dividends
paid only $100,000 (10 percent). On December 22, 1913, a cash dividend of
Page 170

$200 per share was declared payable on February 14, 1914, to stockholders of
record January 31, 1914, and these stockholders were offered the right to
subscribe for an equal amount of new stock at par and to apply the cash
dividend in payment therefor. The outstanding stock was thus increased to
$3,000,000. During the calendar years 1914, 1915, and 1916, quarterly
dividends were paid on this stock at an annual rate of between 15 percent
and 20 percent, but the company's surplus increased by $2,347,614, so that,
on December 31, 1916, it had a large surplus over its $3,000,000 capital stock.
On December 15, 1916, the company issued a circular to the stockholders,
saying:
"The company's business for this year has shown a
Page 252 U. S. 223
very good increase in volume and a proportionate increase in profits, and it is
estimated that, by January 1, 1917, the company will have a surplus of over
$4,000,000. The board feels justified in stating that, if the proposition to increase
the capital stock is acted on favorably, it will be proper in the near future to
declare a cash dividend of 100 percent and to allow the stockholders the
privilege pro rata according to their holdings, to purchase the new stock at
par, the plan being to allow the stockholders, if they desire, to use their cash
dividend to pay for the new stock."
The increase of stock was voted. The company then paid a cash dividend of
100 percent, payable May 1, 1917, again offering to such stockholders the
right to subscribe for an equal amount of new stock at par and to apply the
cash dividend in payment therefor.
Moody's Manual, describing the transaction with exactness, says first that the
stock was increased from $3,000,000 to $6,000,000, "a cash dividend of 100
percent, payable May 1, 1917, being exchanged for one share of new stock,
the equivalent of a 100 percent stock dividend." But later in the report giving,
as customary in the Manual, the dividend record of the company, the Manual
says: "A stock dividend of 200 percent was paid February 14, 1914, and one of
100 percent on May 1, 1197." And, in reporting specifically the income
account of the company for a series of years ending December 31, covering
net profits, dividends paid, and surplus for the year, it gives, as the aggregate
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
of dividends for the year 1917, $660,000 (which was the aggregate paid on
the quarterly cash dividend -- 5 percent January and April; 6 percent July and
October), and adds in a note: "In addition, a stock dividend of 100 percent
was paid during the year." [Footnote 3] The Wall Street Journal of
Page 252 U. S. 224
May 2, 1917, p. 2, quotes the 1917 "high" price for Standard Oil of Kentucky as
"375 ex stock dividend."
It thus appears that, among financiers and investors, the distribution of the
stock, by whichever method effected, is called a stock dividend; that the two
methods by which accumulated profits are legally retained for corporate
purposes and at the same time distributed as dividends are recognized by
them to be equivalents, and that the financial results to the corporation and
to the stockholders of the two methods are substantially the same, unless a
difference results from the application of the federal income tax law.
Mrs. Macomber, a citizen and resident of New York, was, in the year 1916, a
stockholder in the Standard Oil Company (of California), a corporation
organized under the laws of California and having its principal place of
business in that state. During that year, she received from the company a
stock dividend representing profits earned since March 1, 1913. The dividend
was paid by direct issue of the stock to her according to the simple method
described above, pursued also by the Indiana and Nebraska companies. In
1917, she was taxed under the federal law on the stock dividend so received
at its par value of $100 a share, as income received during the year 1916.
Such a stock dividend is income, as distinguished from capital, both under the
law of New York and under the law of California, because in both states every
dividend representing profits is deemed to be income, whether paid in cash
or in stock. It had been so held in New York, where the question arose as
between life tenant and remainderman, Lowry v. Farmers' Loan & Trust
Co., 172 N.Y. 137; Matter of Osborne, 209 N.Y. 450, and also, where the
question arose in matters of taxation, People v. Glynn,
Page 252 U. S. 225
Page 171

130 App.Div. 332, 198 N.Y. 605. It has been so held in California, where the
question appears to have arisen only in controversies between life tenant and
remainderman. Estate of Duffill, 58 Cal.Dec. 97, 180 Cal. 748.
It is conceded that, if the stock dividend paid to Mrs. Macomber had been
made by the more complicated method pursued by the Standard Oil
Company of Kentucky -- that is, issuing rights to take new stock pro rata and
paying to each stockholder simultaneously a dividend in cash sufficient in
amount to enable him to pay for this pro rata of new stock to be purchased --
the dividend so paid to him would have been taxable as income, whether he
retained the cash or whether he returned it to the corporation in payment for
his pro rata of new stock. But it is contended that, because the simple method
was adopted of having the new stock issued direct to the stockholders as
paid-up stock, the new stock is not to be deemed income, whether she
retained it or converted it into cash by sale. If such a different result can flow
merely from the difference in the method pursued, it must be because
Congress is without power to tax as income of the stockholder either the stock
received under the latter method or the proceeds of its sale, for Congress has,
by the provisions in the Revenue Act of 1916, expressly declared its purpose to
make stock dividends, by whichever method paid, taxable as income.
The Sixteenth Amendment, proclaimed February 25, 1913, declares:
"The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among the several states,
and without regard to any census or enumeration."
The Revenue Act of September 8, 1916, c. 463, § 2a, 39 Stat. 756, 757,
provided:
"That the term 'dividends' as used in this title shall
Page 252 U. S. 226
be held to mean any distribution made or ordered to be made by a
corporation, . . . out of its earnings or profits accrued since March first,
nineteen hundred and thirteen, and payable to its shareholders, whether in
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
cash or in stock of the corporation, . . . which stock dividend shall be
considered income, to the amount of its cash value."
Hitherto, powers conferred upon Congress by the Constitution have been
liberally construed, and have been held to extend to every means
appropriate to attain the end sought. In determining the scope of the power,
the substance of the transaction, not its form, has been regarded. Martin v.
Hunter, 1 Wheat. 304, 14 U. S. 326; McCulloch v. Maryland, 4 Wheat. 316, 17 U.
S. 407, 17 U. S. 415; Brown v. Maryland, 12 Wheat. 419, 25 U. S. 446; Craig v.
Missouri, 4 Pet. 410, 29 U. S. 433; Jarrolt v. Moberly, 103 U. S. 580, 103 U. S. 585-
587; Legal Tender Case, 110 U. S. 421, 110 U. S. 444; Lithograph Co. v.
Sarony, 111 U. S. 53, 111 U. S. 58; United States v. Realty Co., 163 U. S. 427, 163
U. S. 440-442; South Carolina v. United States, 199 U. S. 437, 199 U. S. 448-449. Is
there anything in the phraseology of the Sixteenth Amendment or in the
nature of corporate dividends which should lead to a departure from these
rules of construction and compel this Court to hold that Congress is powerless
to prevent a result so extraordinary as that here contended for by the
stockholder?
First. The term "income," when applied to the investment of the stockholder in
a corporation, had, before the adoption of the Sixteenth Amendment, been
commonly understood to mean the returns from time to time received by the
stockholder from gains or earnings of the corporation. A dividend received by
a stockholder from a corporation may be either in distribution of capital assets
or in distribution of profits. Whether it is the one or the other is in no way
affected by the medium in which it is paid, nor by the method or means
through which the particular thing distributed as a dividend was procured. If
the
Page 252 U. S. 227
dividend is declared payable in cash, the money with which to pay it is
ordinarily taken from surplus cash in the treasury. But (if there are profits legally
available for distribution and the law under which the company was
incorporated so permits) the company may raise the money by discounting
negotiable paper, or by selling bonds, scrip or stock of another corporation
then in the treasury, or by selling its own bonds, scrip or stock then in the
treasury, or by selling its own bonds, scrip or stock issued expressly for that
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purpose. How the money shall be raised is wholly a matter of financial
management. The manner in which it is raised in no way affects the question
whether the dividend received by the stockholder is income or capital, nor
can it conceivably affect the question whether it is taxable as income.
Likewise whether a dividend declared payable from profits shall be paid in
cash or in some other medium is also wholly a matter of financial
management. If some other medium is decided upon, it is also wholly a
question of financial management whether the distribution shall be, for
instance, in bonds, scrip or stock of another corporation or in issues of its own.
And if the dividend is paid in its own issues, why should there be a difference in
result dependent upon whether the distribution was made from such securities
then in the treasury or from others to be created and issued by the company
expressly for that purpose? So far as the distribution may be made from its own
issues of bonds, or preferred stock created expressly for the purpose, it clearly
would make no difference, in the decision of the question whether the
dividend was a distribution of profits, that the securities had to be created
expressly for the purpose of distribution. If a dividend paid in securities of that
nature represents a distribution of profits, Congress may, of course, tax it as
income of the stockholder. Is the result different where the security distributed
is common stock?
Page 252 U. S. 228
Suppose that a corporation having power to buy and sell its own stock
purchases, in the interval between its regular dividend dates, with moneys
derived from current profits, some of its own common stock as a temporary
investment, intending at the time of purchase to sell it before the next
dividend date and to use the proceeds in paying dividends, but later,
deeming it inadvisable either to sell this stock or to raise by borrowing the
money necessary to pay the regular dividend in cash, declares a dividend
payable in this stock; can anyone doubt that, in such a case, the dividend in
common stock would be income of the stockholder and constitutionally
taxable as such? See Green v. Bissell, 79 Conn. 547; Leland v. Hayden, 102
Mass. 542. And would it not likewise be income of the stockholder subject to
taxation if the purpose of the company in buying the stock so distributed had
been from the beginning to take it off the market and distribute it among the
stockholders as a dividend, and the company actually did so? And,
proceeding a short step further, suppose that a corporation decided to
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
capitalize some of its accumulated profits by creating additional common
stock and selling the same to raise working capital, but after the stock has
been issued and certificates therefor are delivered to the bankers for sale,
general financial conditions make it undesirable to market the stock, and the
company concludes that it is wiser to husband, for working capital, the cash
which it had intended to use in paying stockholders a dividend, and, instead,
to pay the dividend in the common stock which it had planned to sell; would
not the stock so distributed be a distribution of profits, and hence, when
received, be income of the stockholder and taxable as such? If this be
conceded, why should it not be equally income of the stockholder, and
taxable as such, if the common stock created by capitalizing profits had been
originally created for the express purpose of being distributed
Page 252 U. S. 229
as a dividend to the stockholder who afterwards received it?
Second. It has been said that a dividend payable in bonds or preferred stock
created for the purpose of distributing profits may be income and taxable as
such, but that the case is different where the distribution is in common stock
created for that purpose. Various reasons are assigned for making this
distinction. One is that the proportion of the stockholder's ownership to the
aggregate number of the shares of the company is not changed by the
distribution. But that is equally true where the dividend is paid in its bonds or in
its preferred stock. Furthermore, neither maintenance nor change in the
proportionate ownership of a stockholder in a corporation has any bearing
upon the question here involved. Another reason assigned is that the value of
the old stock held is reduced approximately by the value of the new stock
received, so that the stockholder, after receipt of the stock dividend, has no
more than he had before it was paid. That is equally true whether the
dividend be paid in cash or in other property -- for instance, bonds, scrip, or
preferred stock of the company. The payment from profits of a large cash
dividend, and even a small one, customarily lowers the then market value of
stock because the undivided property represented by each share has been
correspondingly reduced. The argument which appears to be most strongly
urged for the stockholders is that, when a stock dividend is made, no portion
of the assets of the company is thereby segregated for the stockholder. But
does the issue of new bonds or of preferred stock created for use as a
dividend result in any segregation of assets for the stockholder? In each case,
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he receives a piece of paper which entitles him to certain rights in the
undivided property. Clearly, segregation of assets in a physical sense is not an
essential of income. The year's gains of a partner is taxable as income
although there likewise no
Page 252 U. S. 230
segregation of his share in the gains from that of his partners is had.
The objection that there has been no segregation is presented also in another
form. It is argued that, until there is a segregation, the stockholder cannot
know whether he has really received gains, since the gains may be invested in
plant or merchandise or other property, and perhaps be later lost. But is not
this equally true of the share of a partner in the year's profits of the firm or,
indeed, of the profits of the individual who is engaged in business alone? And
is it not true also when dividends are paid in cash? The gains of a business,
whether conducted by an individual, by a firm, or by a corporation are
ordinarily reinvested in large part. Many a cash dividend honestly declared as
a distribution of profits proves later to have been paid out of capital because
errors in forecast prevent correct ascertainment of values. Until a business
adventure has been completely liquidated, it can never be determined with
certainty whether there have been profits unless the returns at least exceeded
the capital originally invested. Businessmen, dealing with the problem
practically, fix necessarily periods and rules for determining whether there
have been net profits -- that is, income or gains. They protect themselves from
being seriously misled by adopting a system of depreciation charges and
reserves. Then they act upon their own determination whether profits have
been made. Congress, in legislating, has wisely adopted their practices as its
own rules of action.
Third. The government urges that it would have been within the power of
Congress to have taxed as income of the stockholder his pro rata share of
undistributed profits earned even if no stock dividend representing it had
been paid. Strong reasons may be assigned for such a view. See Collector v.
Hubbard, 12 Wall. 1. The undivided share of a partner in the year's
undistributed profits of his firm
Page 252 U. S. 231
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
is taxable as income of the partner although the share in the gain is not
evidenced by any action taken by the firm. Why may not the stockholder's
interest in the gains of the company? The law finds no difficulty in disregarding
the corporate fiction whenever that is deemed necessary to attain a just
result. Linn Timber Co. v. United States, 236 U. S. 574. See Morawetz on
Corporations, 2d ed., §§ 227-231; Cook on Corporations, 7th ed., §§ 663, 664.
The stockholder's interest in the property of the corporation differs not
fundamentally, but in form only, from the interest of a partner in the property
of the firm. There is much authority for the proposition that, under our law, a
partnership or joint stock company is just as distinct and palpable an entity in
the idea of the law, as distinguished from the individuals composing it, as is a
corporations. [Footnote 4] No reason appears, why Congress, in legislating
under a grant of power so comprehensive as that authorizing the levy of an
income tax, should be limited by the particular view of the relation of the
stockholder to the corporation and its property which may, in the absence of
legislation, have been taken by this Court. But we have no occasion to
decide the question whether Congress might have taxed to the stockholder
his undivided share of the corporation's earnings. For Congress has in this act
limited the income tax to that share of the stockholder in the earnings which is,
in effect, distributed by means of the stock dividend paid. In other words, to
render the stockholder taxable, there must be both earnings made and a
dividend paid. Neither earnings without dividend nor a dividend without
earnings subjects the
Page 252 U. S. 232
stockholder to taxation under the Revenue Act of 1916.
Fourth. The equivalency of all dividends representing profits, whether paid of
all dividends in stock, is so complete that serious question of the taxability of
stock dividends would probably never have been made if Congress had
undertaken to tax only those dividends which represented profits earned
during the year in which the dividend was paid or in the year preceding. But
this Court, construing liberally not only the constitutional grant of power but
also the revenue Act of 1913, held that Congress might tax, and had taxed, to
the stockholder dividends received during the year, although earned by the
company long before, and even prior to the adoption of the Sixteenth
Amendment. Lynch v. Hornby, 247 U. S. 339. [Footnote 5] That rule, if
indiscriminatingly applied to all stock dividends representing profits earned,
Page 174

might, in view of corporate practice, have worked considerable hardship and
have raised serious questions. Many corporations, without legally capitalizing
any part of their profits, had assigned definitely some part or all of the annual
balances remaining after paying the usual cash dividends to the uses to which
permanent capital is ordinarily applied. Some of the corporations doing this
transferred such balances on their books to "surplus" account -- distinguishing
between such permanent "surplus" and the "undivided profits" account. Other
corporations, without this formality, had assumed that the annual
accumulating balances carried as undistributed profits were to be treated as
capital permanently invested in the business. And still others, without definite
assumption of any kind, had
Page 252 U. S. 233
so used undivided profits for capital purposes. To have made the revenue law
apply retroactively so as to reach such accumulated profits, if and whenever
it should be deemed desirable to capitalize them legally by the issue of
additional stock distributed as a dividend to stockholders, would have worked
great injustice. Congress endeavored in the Revenue Act of 1916 to guard
against any serious hardship which might otherwise have arisen from making
taxable stock dividends representing accumulated profits. It did not limit the
taxability to stock dividends representing profits earned within the tax year or
in the year preceding, but it did limit taxability to such dividends representing
profits earned since March 1, 1913. Thereby stockholders were given notice
that their share also in undistributed profits accumulating thereafter was at
some time to be taxed as income. And Congress sought by § 3 to discourage
the postponement of distribution for the illegitimate purpose of evading
liability to surtaxes.
Fifth. The decision of this Court that earnings made before the adoption of the
Sixteenth Amendment, but paid out in cash dividend after its adoption, were
taxable as income of the stockholder involved a very liberal construction of
the amendment. To hold now that earnings both made and paid out after the
adoption of the Sixteenth Amendment cannot be taxed as income of the
stockholder, if paid in the form of a stock dividend, involves an exceedingly
narrow construction of it. As said by Mr. Chief Justice Marshall in Brown v.
Maryland, 12 Wheat. 419, 25 U. S. 446:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"To construe the power so as to impair its efficacy would tend to defeat an
object in the attainment of which the American public took, and justly took,
that strong interest which arose from a full conviction of its necessity."
No decision heretofore rendered by this Court requires us to hold that
Congress, in providing for the taxation of
Page 252 U. S. 234
stock dividends, exceeded the power conferred upon it by the Sixteenth
Amendment. The two cases mainly relied upon to show that this was beyond
the power of Congress are Towne v. Eisner, 245 U. S. 418, which involved a
question not of constitutional power, but of statutory construction,
and Gibbons v. Mahon, 136 U. S. 549, which involved a question arising
between life tenant and remainderman. So far as concerns Towne v.
Eisner, we have only to bear in mind what was there said (p. 245 U. S. 425): "But
it is not necessarily true that income means the same thing in the Constitution
and the [an] act." [Footnote 6] Gibbons v. Mahon is even less an authority for
a narrow construction of the power to tax incomes conferred by the Sixteenth
Amendment. In that case, the court was required to determine how, in the
administration of an estate in the District of Columbia, a stock dividend,
representing profits, received after the decedent's death, should be disposed
of as between life tenant and remainderman. The question was, in essence,
what shall the intention of the testator be presumed to have been? On this
question, there was great diversity of opinion and practice in the courts of
English-speaking countries. Three well defined rules were then competing for
acceptance. Two of these involves an arbitrary rule of distribution, the third
equitable apportionment. See Cook on Corporations, 7th ed., §§ 552-558.
1. The so-called English rule, declared in 1799 by Brander v. Brander, 4 Ves. Jr.
800, that a dividend representing
Page 252 U. S. 235
profits, whether in cash, stock or other property, belongs to the life tenant if it
was a regular or ordinary dividend, and belongs to the remainderman if it was
an extraordinary dividend.
Page 175

2. The so-called Massachusetts rule, declared in 1868 by Minot v. Paine, 99
Mass. 101, that a dividend representing profits, whether regular, ordinary, or
extraordinary, if in cash belongs to the life tenant, and if in stock belongs to
the remainderman.
3. The so-called Pennsylvania rule, declared in 1857 by Earp's Appeal, 28 Pa.
368, that, where a stock dividend is paid, the court shall inquire into the
circumstances under which the fund had been earned and accumulated out
of which the dividend, whether a regular, an ordinary, or an extraordinary
one, was paid. If it finds that the stock dividend was paid out of profits earned
since the decedent's death, the stock dividend belongs to the life tenant; if
the court finds that the stock dividend was paid from capital or from profits
earned before the decedent's death, the stock dividend belongs to the
remainderman.
This Court adopted in Gibbons v. Mahon as the rule of administration for the
District of Columbia the so-called Massachusetts rule, the opinion being
delivered in 1890 by Mr. Justice Gray. Since then, the same question has come
up for decision in many of the states. The so-called Massachusetts rule,
although approved by this Court, has found favor in only a few states. The so-
called Pennsylvania rule, on the other hand, has been adopted since by so
many of the states (including New York and California) that it has come to be
known as the "American rule." Whether, in view of these facts and the
practical results of the operation of the two rules as shown by the experience
of the 30 years which have elapsed since the decision in Gibbons v. Mahon, it
might be desirable for this Court to reconsider the question there decided, as
Page 252 U. S. 236
some other courts have done (see 29 Harvard Law Review 551), we have no
occasion to consider in this case. For, as this Court there pointed out (p. 136 U.
S. 560), the question involved was one "between the owners of successive
interests in particular shares," and not, as in Bailey v. Railroad Co., 22 Wall. 604,
a question
"between the corporation and the government, and [which] depended upon
the terms of a statute carefully framed to prevent corporations from evading
payment of the tax upon their earnings."
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
We have, however, not merely argument; we have examples which should
convince us that "there is no inherent, necessary and immutable reason why
stock dividends should always be treated as capital." Tax Commissioner v.
Putnam, 227 Mass. 522, 533. The Supreme Judicial Court of Massachusetts has
steadfastly adhered, despite ever-renewed protest, to the rule that every
stock dividend is, as between life tenant and remainderman, capital, and not
income. But, in construing the Massachusetts Income Tax Amendment, which
is substantially identical with the federal amendment, that court held that the
legislature was thereby empowered to levy an income tax upon stock
dividends representing profits. The courts of England have, with some
relaxation, adhered to their rule that every extraordinary dividend is, as
between life tenant and remainderman, to be deemed capital. But, in 1913,
the Judicial Committee of the Privy Council held that a stock dividend
representing accumulated profits was taxable like an ordinary cash
dividend, Swan Brewery Co., Ltd. v. Rex, [1914] A.C. 231. In dismissing the
appeal, these words of the Chief Justice of the Supreme Court of Western
Australia were quoted (p. 236), which show that the facts involved were
identical with those in the case at bar:
"Had the company distributed the �101,450 among the shareholders, and
had the shareholders repaid such sums to the company as the price of the 81,
160 new shares, the duty on the �101,450
Page 252 U. S. 237
would clearly have been payable. Is not this virtually the effect of what was
actually done? I think it is."
Sixth. If stock dividends representing profits are held exempt from taxation
under the Sixteenth Amendment, the owners of the most successful businesses
in America will, as the facts in this case illustrate, be able to escape taxation
on a large part of what is actually their income. So far as their profits are
represented by stock received as dividends, they will pay these taxes not
upon their income, but only upon the income of their income. That such a
result was intended by the people of the United States when adopting the
Sixteenth Amendment is inconceivable. Our sole duty is to ascertain their
intent as therein expressed. [Footnote 7] In terse, comprehensive language
befitting the Constitution, they empowered Congress "to lay and collect taxes
Page 176

on incomes from whatever source derived." They intended to include thereby
everything which by reasonable understanding can fairly be regarded as
income. That stock dividends representing profits are so regarded not only by
the plain people, but by investors and financiers and by most of the courts of
the country, is shown beyond peradventure by their acts and by their
utterances. It seems to me clear, therefore, that Congress possesses the power
which it exercised to make dividends representing profits taxable as income
whether the medium in which the dividend is paid be cash or stock, and that
it may define, as it has done, what dividends representing
Page 252 U. S. 238
profits shall be deemed income. It surely is not clear that the enactment
exceeds the power granted by the Sixteenth Amendment. And, as this Court
has so often said, the high prerogative of declaring an act of Congress invalid
should never be exercised except in a clear case. [Footnote 8]
"It is but a decent respect due to the wisdom, the integrity, and the patriotism
of the legislative body by which any law is passed to presume in favor of its
validity until its violation of the Constitution is proved beyond all reasonable
doubt."
Ogden v. Saunders, 12 Wheat. 213, 25 U. S. 269.
MR. JUSTICE CLARKE concurs in this opinion.
[Footnote 1]
Moody's p. 1544; Commercial and Financial Chronicle, Vol. 94, p. 831; Vol. 98,
pp. 1005, 1076.
[Footnote 2]
Moody's, p. 1548; Commercial and Financial Chronicle, Vol. 94, p. 771; Vol. 96,
p. 1428; Vol. 97, p. 1434; Vol. 98, p. 1541.
[Footnote 3]
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Moody's, p. 1547; Commercial and Financial Chronicle, Vol. 97, pp. 1589, 1827,
1903; Vol. 98, pp. 76, 457; Vol. 103, p. 2348. Poor's Manual of Industrials (1918),
p. 2240, in giving the "comparative income account" of the company,
describes the 1914 dividend as "stock dividend paid (200 percent) --
$2,000,000," and describes the 1917 dividend as "$3,000,000 special cash
dividend."
[Footnote 4]
See Some Judicial Myths, by Francis M. Burdick, 22 Harvard Law Review, 393,
394-396; The Firm as a Legal Person, by William Hamilton Cowles, 57 Cent.L.J.
343, 348; The Separate Estates of Non-Bankrupt Partners, by J. D. Brannan, 20
Harvard Law Review, 589-592. Compare Harvard Law Review, Vol. 7, p. 426;
Vol. 14, p. 222; Vol. 17, p. 194.
[Footnote 5]
The hardship supposed to have resulted from such a decision has been
removed in the Revenue Act of 1916 as amended, by providing in § 31b that
such cash dividends shall thereafter be exempt from taxation if, before they
are made, all earnings made since February 28, 1913, shall have been
distributed. Act Oct. 3, 1917, c. 63, § 1211, 40 Stat. 338, Act Feb. 24, 1919, c. 18,
§ 201(b), 40 Stat. 1059.
[Footnote 6]
Compare Rugg, C.J., in Tax Commissioner v. Putnam, 227 Mass. 522, 533:
"However strong such an argument might be when urged as to the
interpretation of a statute, it is not of prevailing force as to the broad
considerations involved in the interpretation of an amendment to the
Constitution adopted under the conditions preceding and attendant upon
the ratification of the forty-fourth amendment."
[Footnote 7]
Compare Rugg, C.J., Tax Commissioner v. Putnam, 227 Mass. 522, 524:
Page 177
 DUMAUAL, JEANNE PAULINE J. 2019-2020

"It is a grant from the sovereign people, and not the exercise of a delegated
power. It is a statement of general principles, and not a specification of
details. Amendments to such a charter of government ought to be construed
in the same spirit and according to the same rules as the original. It is to be
interpreted as the Constitution of a state, and not as a statute or an ordinary
piece of legislation. Its words must be given a construction adapted to carry
into effect its purpose."

[Footnote 8]

"It is our duty, when required in the regular course of judicial proceedings, to
declare an act of Congress void if not within the legislative power of the
United States; but this declaration should never be made except in a clear
case. Every possible presumption is in favor of the validity of a statute, and this
continues until the contrary is shown beyond a rational doubt. One branch of
the government cannot encroach on the domain of another without danger.
The safety of our institutions depends in no small degree on a strict
observance of this salutary rule."

The Sinking Fund Cases, 99 U. S. 700, 99 U. S. 718 (1878). See also Legal Tender
Cases, 12 Wall. 457, 79 U. S. 531 (1870); Trade-Mark Cases, 100 U. S. 82, 100 U. S.
96 (1879). See American Doctrine of Constitutional Law by James B. Thayer, 7
Harvard Law Review 129, 142.

"With the exception of the extraordinary decree rendered in the Dred

Scott case, . . . all of the acts or the portions of the acts of Congress
invalidated by the courts before 1868 related to the organization of courts.
Denying the power of Congress to make notes legal tender seems to be the
first departure from this rule."

Haines, American Doctrine of Judicial Supremacy, p. 288. The first legal tender
decision was overruled in part two years later (1870), Legal Tender Cases, 12
Wall. 457, and again in 1883, Legal Tender Case, 110 U. S. 421.

Atty. Santos, Taxation I Page 178


Helvering v. Horst
No. 27
Argued October 25, 1940
Decided November 25, 1940
311 U.S. 112
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE SECOND CIRCUIT
Syllabus
1. Where, in 1934 and 1935, an owner of negotiable bonds, who reported
income on the cash receipts basis, detached from the bonds negotiable
interest coupons before their due date and delivered them as a gift to his son,
who, in the same year, collected them at maturity, held that, under § 22 of
the Revenue Act of 1934, and in the year that the interest payments were
made, there was a realization of income, in the amount of such payments,
taxable to the donor. P. 311 U. S. 117.
2. The dominant purpose of the income tax laws is the taxation of income to
those who earn or otherwise create the right to receive it and who enjoy the
benefit of it when paid. P. 311 U. S. 119.
3. The tax laid by the 1934 Revenue Act upon income "derived from . . . wages
or compensation for personal service, of whatever kind and in whatever form
paid . . . ; also from interest . . . " cannot fairly be interpreted as not applying to
income derived from interest or compensation when he who is entitled to
receive it makes use of his power to dispose of it in procuring satisfactions
which he would otherwise procure only by the use of the money when
received. P. 311 U. S. 119.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
4. This case distinguished from Blair v. Commissioner, 300 U. S. 5, and
compared with Lucas v. Earl, 281 U. S. 111, and Burnet v. Leininger, 285 U. S.
136. Pp. 311 U. S. 118-120.
107 F.2d 906, reversed.
Certiorari, 309 U.S. 650, to review the reversal of an order of the Board of Tax
Appeals, 39 B.T.A. 757, sustaining a determination of a deficiency in income
tax.
Page 311 U. S. 114
MR. JUSTICE STONE delivered the opinion of the Court.
The sole question for decision is whether the gift, during the donor's taxable
year, of interest coupons detached from the bonds, delivered to the donee
and later in the year paid at maturity, is the realization of income taxable to
the donor.
In 1934 and 1935, respondent, the owner of negotiable bonds, detached from
them negotiable interest coupons shortly before their due date and delivered
them as a gift to his son, who, in the same year, collected them at maturity.
The Commissioner ruled that, under the applicable § 22 of the Revenue Act of
1934, 48 Stat. 680, 686, the interest payments were taxable, in the years when
paid, to the respondent donor, who reported his income on the cash receipts
basis. The circuit court of appeals reversed the order of the Board of Tax
Appeals sustaining the tax. 107 F.2d 906; 39 B.T.A. 757. We granted certiorari,
309 U.S. 650, because of the importance of the question in the administration
of the revenue laws and because of an asserted conflict in principle of the
decision below with that of Lucas v. Earl, 281 U. S. 111, and with that of
decisions by other circuit courts of appeals. See Bishop v. Commissioner, 54
F.2d 298; Dickey v. Burnet, 56 F.2d 917, 921; Van Meter v. Commissioner, 61
F.2d 817.
The court below thought that, as the consideration for the coupons had
passed to the obligor, the donor had, by the gift, parted with all control over
them and their payment, and for that reason the case was distinguishable
Page 179

Page 311 U. S. 115
from Lucas v. Earl, supra, and Burnet v. Leininger, 285 U. S. 136, where the
assignment of compensation for services had preceded the rendition of the
services, and where the income was held taxable to the donor.
The holder of a coupon bond is the owner of two independent and separable
kinds of right. One is the right to demand and receive at maturity the principal
amount of the bond representing capital investment. The other is the right to
demand and receive interim payments of interest on the investment in the
amounts and on the dates specified by the coupons. Together, they are an
obligation to pay principal and interest given in exchange for money or
property which was presumably the consideration for the obligation of the
bond. Here respondent, as owner of the bonds, had acquired the legal right
to demand payment at maturity of the interest specified by the coupons and
the power to command its payment to others which constituted an economic
gain to him.
Admittedly not all economic gain of the taxpayer is taxable income. From the
beginning, the revenue laws have been interpreted as defining "realization" of
income as the taxable event, rather than the acquisition of the right to
receive it. And "realization" is not deemed to occur until the income is paid.
But the decisions and regulations have consistently recognized that receipt in
cash or property is not the only characteristic of realization of income to a
taxpayer on the cash receipts basis. Where the taxpayer does not receive
payment of income in money or property, realization may occur when the last
step is taken by which he obtains the fruition of the economic gain which has
already accrued to him. Old Colony Trust Co. v. Commissioner, 279 U. S.
716; Corliss v. Bowers, 281 U. S. 376, 281 U. S. 378. Cf. Burnet v. Wells, 289 U. S.
670.
In the ordinary case the taxpayer who acquires the right to receive income is
taxed when he receives it, regardless of the time when his right to receive
payment
Page 311 U. S. 116
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
accrued. But the rule that income is not taxable until realized has never been
taken to mean that the taxpayer, even on the cash receipts basis, who has
fully enjoyed the benefit of the economic gain represented by his right to
receive income can escape taxation because he has not himself received
payment of it from his obligor. The rule, founded on administrative
convenience, is only one of postponement of the tax to the final event of
enjoyment of the income, usually the receipt of it by the taxpayer, and not
one of exemption from taxation where the enjoyment is consummated by
some event other than the taxpayer's personal receipt of money or
property. Cf. Aluminum Castings Co. v. Routzahn, 282 U. S. 92, 282 U. S. 98. This
may occur when he has made such use or disposition of his power to receive
or control the income as to procure in its place other satisfactions which are of
economic worth. The question here is whether, because one who in fact
receives payment for services or interest payments is taxable only on his
receipt of the payments, he can escape all tax by giving away his right to
income in advance of payment. If the taxpayer procures payment directly to
his creditors of the items of interest or earnings due him, see Old Colony Trust
Co. v. Commissioner, supra; Bowers v. Kerbaugh-Empire Co., 271 U. S.
170; United States v. Kirby Lumber Co., 284 U. S. 1, or if he sets up a revocable
trust with income payable to the objects of his bounty, §§ 166, 167, Corliss v.
Bowers, supra; cf. Dickey v. Burnet, 56 F.2d 917, 921, he does not escape
taxation because he did not actually receive the money. Cf. Douglas v.
Willcuts, 296 U. S. 1; Helvering v. Clifford, 309 U. S. 331.
Underlying the reasoning in these cases is the thought that income is "realized"
by the assignor because he, who owns or controls the source of the income,
also controls the disposition of that which he could have
Page 311 U. S. 117
received himself and diverts the payment from himself to others as the means
of procuring the satisfaction of his wants. The taxpayer has equally enjoyed
the fruits of his labor or investment and obtained the satisfaction of his desires
whether he collects and uses the income to procure those satisfactions or
whether he disposes of his right to collect it as the means of procuring
them. Cf. Burnet v. Wells, supra.
Page 180

Although the donor here, by the transfer of the coupons, has precluded any
possibility of his collecting them himself, he has nevertheless, by his act,
procured payment of the interest, as a valuable gift to a member of his family.
Such a use of his economic gain, the right to receive income, to procure a
satisfaction which can be obtained only by the expenditure of money or
property would seem to be the enjoyment of the income whether the
satisfaction is the purchase of goods at the corner grocery, the payment of his
debt there, or such nonmaterial satisfactions as may result from the payment
of a campaign or community chest contribution, or a gift to his favorite son.
Even though he never receives the money, he derives money's worth from the
disposition of the coupons which he has used as money or money's worth in
the procuring of a satisfaction which is procurable only by the expenditure of
money or money's worth. The enjoyment of the economic benefit accruing to
him by virtue of his acquisition of the coupons is realized as completely as it
would have been if he had collected the interest in dollars and expended
them for any of the purposes named. Burnet v. Wells, supra.
In a real sense, he has enjoyed compensation for money loaned or services
rendered, and not any the less so because it is his only reward for them. To say
that one who has made a gift thus derived from interest or earnings paid to his
donee has never enjoyed or realized the fruits of his investment or labor
because he has assigned
Page 311 U. S. 118
them instead of collecting them himself and then paying them over to the
donee is to affront common understanding and to deny the facts of common
experience. Common understanding and experience are the touchstones for
the interpretation of the revenue laws.
The power to dispose of income is the equivalent of ownership of it. The
exercise of that power to procure the payment of income to another is the
enjoyment, and hence the realization, of the income by him who exercises it.
We have had no difficulty in applying that proposition where the assignment
preceded the rendition of the services, Lucas v. Earl, supra; Burnet v. Leininger,
supra, for it was recognized in the Leininger case that, in such a case, the
rendition of the service by the assignor was the means by which the income
was controlled by the donor, and of making his assignment effective. But it is
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
the assignment by which the disposition of income is controlled when the
service precedes the assignment, and, in both cases, it is the exercise of the
power of disposition of the interest or compensation, with the resulting
payment to the donee, which is the enjoyment by the donor of income
derived from them.
This was emphasized in Blair v. Commissioner, 300 U. S. 5, on which respondent
relies, where the distinction was taken between a gift of income derived from
an obligation to pay compensation and a gift of income-producing property.
In the circumstances of that case, the right to income from the trust property
was thought to be so identified with the equitable ownership of the property
from which alone the beneficiary derived his right to receive the income and
his power to command disposition of it that a gift of the income by the
beneficiary became effective only as a gift of his ownership of the property
producing it. Since the gift was deemed to be a gift of the property, the
income from it was held to be the income of the owner of the property,
Page 311 U. S. 119
who was the donee, not the donor, a refinement which was unnecessary if
respondent's contention here is right, but one clearly inapplicable to gifts of
interest or wages. Unlike income thus derived from an obligation to pay
interest or compensation, the income of the trust was regarded as no more
the income of the donor than would be the rent from a lease or a crop raised
on a farm after the leasehold or the farm had been given away. Blair v.
Commissioner, supra, 300 U. S. 12-13, and cases cited. See also Reinecke v.
Smith, 289 U. S. 172, 289 U. S. 177. We have held without deviation that, where
the donor retains control of the trust property, the income is taxable to him
although paid to the donee. Corliss v. Bowers, supra. Cf. Helvering v. Clifford,
supra.
The dominant purpose of the revenue laws is the taxation of income to those
who earn or otherwise create the right to receive it and enjoy the benefit of it
when paid. See Corliss v. Bowers, supra, 281 U. S. 378; Burnet v.
Guggenheim, 288 U. S. 280, 288 U. S. 283. The tax laid by the 1934 Revenue Act
upon income "derived from . . . wages, or compensation for personal service,
of whatever kind and in whatever form paid . . . ; also from interest . . ."
therefore cannot fairly be interpreted as not applying to income derived from
Page 181

interest or compensation when he who is entitled to receive it makes use of his
power to dispose of it in procuring satisfactions which he would otherwise
procure only by the use of the money when received.
It is the statute which taxes the income to the donor although paid to his
donee. Lucas v. Earl, supra; Burnet v. Leininger, supra. True, in those cases, the
service which created the right to income followed the assignment, and it was
arguable that, in point of legal theory, the right to the compensation vested
instantaneously in the assignor when paid, although he never received it,
while here, the right of the assignor to receive the income
Page 311 U. S. 120
antedated the assignment which transferred the right, and thus precluded
such an instantaneous vesting. But the statute affords no basis for such
"attenuated subtleties." The distinction was explicitly rejected as the basis of
decision in Lucas v. Earl. It should be rejected here, for no more than in
the Earl case can the purpose of the statute to tax the income to him who
earns or creates and enjoys it be escaped by "anticipatory arrangements . . .
however skilfully devised" to prevent the income from vesting even for a
second in the donor.
Nor is it perceived that there is any adequate basis for distinguishing between
the gift of interest coupons here and a gift of salary or commissions. The owner
of a negotiable bond and of the investment which it represents, if not the
lender, stands in the place of the lender. When, by the gift of the coupons, he
has separated his right to interest payments from his investment and procured
the payment of the interest to his donee, he has enjoyed the economic
benefits of the income in the same manner and to the same extent as though
the transfer were of earnings, and, in both cases, the import of the statute is
that the fruit is not to be attributed to a different tree from that on which it
grew. See Lucas v. Earl, supra, 281 U. S. 115.
Reversed.
The separate opinion of MR. JUSTICE McREYNOLDS.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The facts were stipulated. In the opinion of the court below (107 F.2d 907), the
issues are thus adequately stated:
"The petitioner owned a number of coupon bonds. The coupons represented
the interest on the bonds and were payable to bearer. In 1934, he detached
unmatured coupons of face value of $25,182.50 and transferred them by
manual delivery to his son as a gift. The coupons matured later on in the same
year, and the son collected the face amount, $25,182.50, as his own property.
There
Page 311 U. S. 121
was a similar transaction in 1935. The petitioner kept his books on a cash basis.
He did not include any part of the moneys collected on the coupons in his
income tax returns for these two years. The son included them in his returns.
The Commissioner added the moneys collected on the coupons to the
petitioner's taxable income and determined a tax deficiency for each year.
The Board of Tax Appeals, three members dissenting, sustained the
Commissioner, holding that the amounts collected on the coupons were
taxable as income to the petitioner."
The decision of the Board of Tax Appeals was reversed, and properly so, I
think.
The unmatured coupons given to the son were independent negotiable
instruments, complete in themselves. Through the gift, they became at once
the absolute property of the donee, free from the donor's control and in no
way dependent upon ownership of the bonds. No question of actual fraud or
purpose to defraud the revenue is presented.
Neither Lucas v. Earl, 281 U. S. 111, nor Burnet v. Leininger, 285 U. S. 136,
supports petitioner's view. Blair v. Commissioner, 300 U. S. 5, 300 U. S. 11-12,
shows that neither involved an unrestricted completed transfer of property.
Helvering v. Clifford, 309 U. S. 331, 309 U. S. 335-336, decided after the opinion
below, is much relied upon by petitioner, but involved facts very different from
those now before us. There, no separate thing was absolutely transferred and
Page 182
 DUMAUAL, JEANNE PAULINE J. 2019-2020

put beyond possible control by the transferor. The court affirmed that Clifford,
both conveyor and trustee,

"retained the substance of full enjoyment of all the rights which previously he
had in the property. . . . In substance, his control over the corpus was in all
essential respects the same after the trust was created, as before. . . . With
that control in his hands, he would keep direct

Page 311 U. S. 122

command over all that he needed to remain in substantially the same

financial situation as before."

The general principles approved in Blair v. Commissioner, 300 U. S. 5, are

applicable and controlling. The challenged judgment should be affirmed.

THE CHIEF JUSTICE and MR. JUSTICE ROBERTS concur in this opinion.

Atty. Santos, Taxation I Page 183

 DUMAUAL, JEANNE PAULINE J. 2019-2020

INCOME TAX; Income tax paid or accrued (now incurred) by a company based on gross receipts derived from the business covered by the law
within a taxable year not allowed as deduction - (a) BIR is prohibited from granting the franchise. (BIR Ruling No. 029-98 dated March 19, 1998)
issuing further comments on Questions Nos. 1, 2, 3, 7 and 8 issued by the
Energy Regulatory Board in relation to ERB Case No. 93-118 entitled "Meralco
vs. Energy Regulatory Board, et. al." in so far as the rate fixing issue is
concerned considering that the issues are all sub judice pending before the
Court of Appeals. With regard to the question of whether the appraisal
increase of property, plant and equipment of electric utilities is taxable, the
general rule is that, mere increase in the value of property without actual
realization, either through sale or other disposition, is not taxable. However, if
by reason of appraisal, the cost basis of property is increased and the resulting
basis is used as the new tax base for purposes of computing the allowable
depreciation expense, the net difference between the original cost basis and
new basis due to appraisal is taxable under the economic benefit principle.

(b) BIR is not following American Laws on taxation because we have

our tax laws, including rules and regulations implementing our tax
laws. However, under the doctrine of precedent, a court may apply
American Laws or Court Decisions.

(c) The amendments introduced by EO No. 37 to then Section 21(c)(2)

of the Tax Code of 1997 provides that dividend received by a citizen
or resident alien from a domestic corporation is subject to income tax
at the rate of 15% in 1986, 10% effective January 1, 1987, 5% effective
January 1, 1988 and 0% effective January 1, 1989. However, Sec. 22
(a) and (b) of the same Code provides that dividends received by a
non-resident alien individual, whether engaged or not in trade or
business in the Philippines, from a domestic corporation is subject to
final withholding tax of 30% of such dividend income.

(d) For purposes of computing the taxable income of domestic

corporation derived form within and without the Philippines, the
allowable deductions are limited to those provided under Section 29
of the Tax Code of 1997 for taxable year 1997 and prior years but for
taxable year 1998, Section 34 of the Tax Code of 1997 governs.

(e) Pursuant to then Section 117 of the Tax Code of 1997, as amended
by RA 8241, the 2% franchise tax of electric, gas and water utilities is

Atty. Santos, Taxation I Page 184

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. Nos. L-18169, L-18262 & L-21434 July 31, 1964 April 1959 as CTA Case No. 646, which is now G. R. No. L-18286 in the Supreme
Court.
COMMISSIONER OF INTERNAL REVENUES, petitioner,
vs. G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the
V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents. amount of P150,269.00, as alleged overpaid income tax for 1955, the facts of
which are as follows:
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents. On 28 February 1956, the same respondents-spouses filed their domestic
income tax return for 1955, reporting a gross income of P1,771,124.63 and a
REYES, J.B.L., J.: net income of P1,052,550.67. On 19 April 1956, they filed an amended income
tax return, the amendment upon the original being a lesser net income of
P1,012,554.51, and, on the basis of this amended return, they paid P570,252.00,
The above-captioned cases were elevated to this Court under separate
inclusive of withholding taxes. After audit, the petitioner determined a
petitions by the Commissioner for review of the corresponding decisions of the
deficiency of P16,116.00, which amount, the respondents paid on 5
Court of Tax Appeals. Since these cases involve the same parties and issues
December 1956.
akin to each case presented, they are herein decided jointly.

Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue
The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and
Agent in Manila their federal income tax return for the years 1947, 1951, 1952,
wife, respectively, both American citizens residing in the Philippines, and have
1953, and 1954 on income from Philippine sources on a cash basis. Payment of
derived all their income from Philippine sources for the taxable years in
these federal income taxes, including penalties and delinquency interest in
question.
the amount of P264,588.82, were made in 1955 to the U.S. Director of Internal
Revenue, Baltimore, Maryland, through the National City Bank of New York,
In compliance with local law, the aforesaid respondents, on 27 March 1957, Manila Branch. Exchange and bank charges in remitting payment totaled
filed their income tax return for 1956, reporting therein a gross income of P4,143.91.
P1,017,287. 65 and a net income of P733,809.44 on which the amount of
P317,395.4 was assessed after deducting P4,805.59 as withholding tax.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts
Pursuant to the petitioner's assessment notice, the respondents paid the total
be admitted and approved by this Honorable Court, without prejudice to the
amount of P326,247.41, inclusive of the withheld taxes, on 15 April 1957.
parties adducing other evidence to prove their case not covered by this
stipulation of facts. 1äwphï1.ñët
On 17 March 1959, the respondents Lednickys filed an amended income tax
return for 1956. The amendment consists in a claimed deduction of
On 11 August 1958, the said respondents amended their Philippine income tax
P205,939.24 paid in 1956 to the United States government as federal income
return for 1955 to include the following deductions:
tax for 1956. Simultaneously with the filing of the amended return, the
respondents requested the refund of P112,437.90.
U.S. Federal income taxes P471,867.32
When the petitioner Commissioner of Internal Revenue failed to answer the
claim for refund, the respondents filed their petition with the Tax Court on 11 Interest accrued up to May 15, 1955 40,333.92

Atty. Santos, Taxation I Page 185

 DUMAUAL, JEANNE PAULINE J. 2019-2020

Exchange and bank charges 4,143.91 (1) In general. — Taxes paid or accrued within the
taxable year, except —

Total P516,345.15 (A) The income tax provided for under this
Title;

and therewith filed a claim for refund of the sum of P166,384.00, which was
(B) Income, war-profits, and excess profits
later reduced to P150,269.00.
taxes imposed by the authority of any foreign
country; but this deduction shall be allowed
The respondents Lednicky brought suit in the Tax Court, which was docketed in the case of a taxpayer who does not
therein as CTA Case No. 570. signify in his return his desire to have to any
extent the benefits of paragraph (3) of this
In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to subsection (relating to credit for foreign
respondents Lednickys' income tax return for 1957, filed on 28 February 1958, countries);
and for which respondents paid a total sum of P196,799.65. In 1959, they filed
an amended return for 1957, claiming deduction of P190,755.80, representing (C) Estate, inheritance and gift taxes; and
taxes paid to the U.S. Government on income derived wholly from Philippine
sources. On the strength thereof, respondents seek refund of P90 520.75 as
(D) Taxes assessed against local benefits of a
overpayment. The Tax Court again decided for respondents.
kind tending to increase the value of the
property assessed. (Emphasis supplied)
The common issue in all three cases, and one that is of first impression in this
jurisdiction, is whether a citizen of the United States residing in the Philippines,
The Tax Court held that they may be deducted because of the
who derives income wholly from sources within the Republic of the Philippines,
undenied fact that the respondent spouses did not "signify" in their
may deduct from his gross income the income taxes he has paid to the United
income tax return a desire to avail themselves of the benefits of
States government for the taxable year on the strength of section 30 (C-1) of
paragraph 3 (B) of the subsection, which reads:
the Philippine Internal Revenue Code, reading as follows:

Par. (c) (3) Credits against tax for taxes of foreign countries. —
SEC. 30. Deduction from gross income. — In computing net income
If the taxpayer signifies in his return his desire to have the
there shall be allowed as deductions —
benefits of this paragraph, the tax imposed by this Title shall
be credited with —
(a) ...
(A) ...;
(b) ...
(B) Alien resident of the Philippines. — In the case of
(c) Taxes: an alien resident of the Philippines, the amount of
any such taxes paid or accrued during the taxable
year to any foreign country, if the foreign country of

Atty. Santos, Taxation I Page 186

 DUMAUAL, JEANNE PAULINE J. 2019-2020

which such alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to citizens
of the Philippines residing in such country;
It is well to note that the tax credit so authorized is limited under
paragraph 4 (A and B) of the same subsection, in the following terms:
Par. (c) (4) Limitation on credit. — The amount of the credit
taken under this section shall be subject to each of the
following limitations:
(A) The amount of the credit in respect to the tax
paid or accrued to any country shall not exceed the
same proportion of the tax against which such credit
is taken, which the taxpayer's net income from
sources within such country taxable under this Title
bears to his entire net income for the same taxable
year; and
(B) The total amount of the credit shall not exceed
the same proportion of the tax against which such
credit is taken, which the taxpayer's net income from
sources without the Philippines taxable under this Title
bears to his entire net income for the same taxable
SEC. 30. Deduction from gross income. — In computing net income
year.
there shall be allowed as deductions —
the benefits of paragraph (3) (relating to credits for taxes
paid to foreign countries), the statute assumes that the
taxpayer in question also may signify his desire to claim a tax
credit and waive the deduction; otherwise, the foreign taxes
would always be deductible, and their mention in the list of
non-deductible items in Section 30(c) might as well have
been omitted, or at least expressly limited to taxes on income
from sources outside the Philippine Islands.
Had the law intended that foreign income taxes could be
deducted from gross income in any event, regardless of the
taxpayer's right to claim a tax credit, it is the latter right that
should be conditioned upon the taxpayer's waiving the
deduction; in which Case the right to reduction under
subsection (c-1-B) would have been made absolute or
unconditional (by omitting foreign taxes from the
enumeration of non-deductions), while the right to a tax
credit under subsection (c-3) would have been expressly
conditioned upon the taxpayer's not claiming any deduction
under subsection (c-1). In other words, if the law had been
intended to operate as contended by the respondent
taxpayers and by the Court of Tax Appeals section 30
(subsection (c-1) instead of providing as at present:

We agree with appellant Commissioner that the Construction

(a) ...
and wording of Section 30 (c) (1) (B) of the Internal Revenue
Act shows the law's intent that the right to deduct income
taxes paid to foreign government from the taxpayer's gross (b) ...
income is given only as an alternative or substitute to his right
to claim a tax credit for such foreign income taxes under (c) Taxes:
section 30 (c) (3) and (4); so that unless the alien resident has
a right to claim such tax credit if he so chooses, he is (1) In general. — Taxes paid or accrued within the
precluded from deducting the foreign income taxes from his taxable year, except —
gross income. For it is obvious that in prescribing that such
deduction shall be allowed in the case of a taxpayer who
(A) The income tax provided for under this
does not signify in his return his desire to have to any extent
Title;

Atty. Santos, Taxation I Page 187


(B) Income, war-profits, and excess profits
taxes imposed by the authority of any foreign
country; but this deduction shall be allowed
in the case of a taxpayer who does not
signify in his return his desire to have to any
extent the benefits of paragraph (3) of this
subsection (relating to credit for taxes of
foreign countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed.
would have merely provided:
SEC. 30. Decision from grow income. — In computing net income
there shall be allowed as deductions:
(a) ...
(b) ...
(c) Taxes paid or accrued within the taxable year, EXCEPT —
(A) The income tax provided for in this Title;
(B) Omitted or else worded as follows:
Income, war profits and excess profits taxes imposed by
authority of any foreign country on income earned within the
Philippines if the taxpayer does not claim the benefits under
paragraph 3 of this subsection;
(C) Estate, inheritance or gift taxes;
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.
while subsection (c-3) would have been made conditional in the following or
equivalent terms:
(3) Credits against tax for taxes of foreign countries. — If the
taxpayer has not deducted such taxes from his gross income
but signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by Title shall be credited with ... (etc.).
Petitioners admit in their brief that the purpose of the law is to prevent the
taxpayer from claiming twice the benefits of his payment of foreign taxes, by
deduction from gross income (subs. c-1) and by tax credit (subs. c-3). This
danger of double credit certainly can not exist if the taxpayer can not claim
benefit under either of these headings at his option, so that he must be
entitled to a tax credit (respondent taxpayers admittedly are not so entitled
because all their income is derived from Philippine sources), or the option to
deduct from gross income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers are not
allowed to deduct the income taxes they are required to pay to the
government of the United States in their return for Philippine income tax, they
would be subjected to double taxation. What respondents fail to observe is
that double taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity (cf. Manila vs.
Interisland Gas Service, 52 Off. Gaz. 6579; Manuf. Life Ins. Co. vs. Meer, 89 Phil.
357). In the present case, while the taxpayers would have to pay two taxes on
the same income, the Philippine government only receives the proceeds of
one tax. As between the Philippines, where the income was earned and
where the taxpayer is domiciled, and the United States, where that income
was not earned and where the taxpayer did not reside, it is indisputable that
justice and equity demand that the tax on the income should accrue to the
benefit of the Philippines. Any relief from the alleged double taxation should
come from the United States, and not from the Philippines, since the former's
right to burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed.
Page 188
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Aside from not conforming to the fundamental doctrine of income taxation

that the right of a government to tax income emanates from its partnership in
the production of income, by providing the protection, resources, incentive,
and proper climate for such production, the interpretation given by the
respondents to the revenue law provision in question operates, in its
application, to place a resident alien with only domestic sources of income in
an equal, if not in a better, position than one who has both domestic and
foreign sources of income, a situation which is manifestly unfair and short of
logic.

Finally, to allow an alien resident to deduct from his gross income whatever
taxes he pays to his own government amounts to conferring on the latter the
power to reduce the tax income of the Philippine government simply by
increasing the tax rates on the alien resident. Everytime the rate of taxation
imposed upon an alien resident is increased by his own government, his
deduction from Philippine taxes would correspondingly increase, and the
proceeds for the Philippines diminished, thereby subordinating our own taxes
to those levied by a foreign government. Such a result is incompatible with the
status of the Philippines as an independent and sovereign state.

IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals are
reversed, and, the disallowance of the refunds claimed by the respondents
Lednicky is affirmed, with costs against said respondents-appellees.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes,

Regala and Makalintal, JJ., concur.

Atty. Santos, Taxation I Page 189


G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30,
2005 Decision1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the
February 26, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No.
5211, which cancelled and set aside the Assessment Notices for deficiency
income tax and expanded withholding tax issued by the Bureau of Internal
Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation,
received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-
86-90-000681 for deficiency expanded withholding tax in the amount of
P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for
professional and security services billed to and paid by ICC in 1986, to
wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the
year ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees]
of the law firm Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson for the years 1984 and 1985.5
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three
promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest
and surcharge) was allegedly due to the failure of ICC to withhold 1%
expanded withholding tax on its claimed P244,890.00 deduction for security
services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments.
On February 9, 1995, however, it received a final notice before seizure
demanding payment of the amounts stated in the said notices. Hence, it
brought the case to the CTA which held that the petition is premature
because the final notice of assessment cannot be considered as a final
decision appealable to the tax court. This was reversed by the Court of
Appeals holding that a demand letter of the BIR reiterating the payment of
deficiency tax, amounts to a final decision on the protested assessment and
may therefore be questioned before the CTA. This conclusion was sustained
by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded
to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting
aside the assessment notices issued against ICC. It held that the claimed
deductions for professional and security services were properly claimed by
ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services
were rendered to ICC in 1984 or 1985, it could not declare the same as
deduction for the said years as the amount thereof could not be determined
at that time.
The CTA also held that ICC did not understate its interest income on the
subject promissory notes. It found that it was the BIR which made an
overstatement of said income when it compounded the interest income
receivable by ICC from the promissory notes of Realty Investment, Inc.,
despite the absence of a stipulation in the contract providing for a
Page 190

compounded interest; nor of a circumstance, like delay in payment or breach
of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding
tax on its claimed deduction for security services as shown by the various
payment orders and confirmation receipts it presented as evidence. The
dispositive portion of the CTA’s Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-
000680 for deficiency income tax in the amount of P333,196.86, and
Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and
interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed
the CTA decision,10 holding that although the professional services (legal and
auditing services) were rendered to ICC in 1984 and 1985, the cost of the
services was not yet determinable at that time, hence, it could be considered
as deductible expenses only in 1986 when ICC received the billing statements
for said services. It further ruled that ICC did not understate its interest income
from the promissory notes of Realty Investment, Inc., and that ICC properly
withheld and remitted taxes on the payments for security services for the
taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant
petition contending that since ICC is using the accrual method of accounting,
the expenses for the professional services that accrued in 1984 and 1985,
should have been declared as deductions from income during the said years
and the failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986. As to the alleged deficiency interest
income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the
BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained
the deduction of the expenses for professional and security services from
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
ICC’s gross income; and (2) held that ICC did not understate its interest
income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security
services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are:
(a) the expense must be ordinary and necessary; (b) it must have been paid
or incurred during the taxable year; (c) it must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) it must be supported
by receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is
further qualified by Section 45 of the National Internal Revenue Code (NIRC)
which states that: "[t]he deduction provided for in this Title shall be taken for
the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent
upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining
when and how to report income and deductions.12 In the instant case, the
accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the
accrual method of accounting, expenses not being claimed as deductions
by a taxpayer in the current year when they are incurred cannot be claimed
as deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for
the current year but failed to do so cannot deduct the same for the next
year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue
where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of
payment.14
Page 191

For a taxpayer using the accrual method, the determinative question is, when
do the facts present themselves in such a manner that the taxpayer must
recognize income or expense? The accrual of income and expense is
permitted when the all-events test has been met. This test requires: (1) fixing of
a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events
test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew,
or could reasonably be expected to have known, at the closing of its books
for the taxable year.[16] Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the
taxing authority; and one who claims an exemption must be able to justify the
same by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. And
since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for
legal and auditing services. The expenses for legal services pertain to the 1984
and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of
said firm in connection with ICC’s tax problems for the year 1984. As testified
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
by the Treasurer of ICC, the firm has been its counsel since the 1960’s. 19 From
the nature of the claimed deductions and the span of time during which the
firm was retained, ICC can be expected to have reasonably known the
retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the
taxable year when they could have been claimed as deductions cannot thus
be attributed solely to the delayed billing of these liabilities by the firm. For
one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual
method of accounting. For another, it could have reasonably determined the
amount of legal and retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact
and that the taxpayer bears the burden of establishing the accrual of an
expense or income. However, ICC failed to discharge this burden. As to when
the firm’s performance of its services in connection with the 1984 tax problems
were completed, or whether ICC exercised reasonable diligence to inquire
about the amount of its liability, or whether it does or does not possess the
information necessary to compute the amount of said liability
with reasonable accuracy, are questions of fact which ICC never established.
It simply relied on the defense of delayed billing by the firm and the company,
which under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses for legal
and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense
deductions in 1986. This is so because ICC failed to present evidence showing
that even with only "reasonable accuracy," as the standard to ascertain its
liability to SGV & Co. in the year 1985, it cannot determine the professional
fees which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the
taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-
2000, they cannot be validly deducted from its gross income for the said year
and were therefore properly disallowed by the BIR.
Page 192
 DUMAUAL, JEANNE PAULINE J. 2019-2020

As to the expenses for security services, the records show that these expenses SO ORDERED.
were incurred by ICC in 198620 and could therefore be properly claimed as
deductions for the said year.

Anent the purported understatement of interest income from the promissory

notes of Realty Investment, Inc., we sustain the findings of the CTA and the
Court of Appeals that no such understatement exists and that only simple
interest computation and not a compounded one should have been applied
by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest.21 Under Article 1959 of the Civil Code,
unless there is a stipulation to the contrary, interest due should not further earn
interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly
withheld the required withholding tax from its claimed deductions for security
services and remitted the same to the BIR is supported by payment order and
confirmation receipts.22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of

P333,196.86 for deficiency income tax should be cancelled and set aside but
only insofar as the claimed deductions of ICC for security services. Said
Assessment is valid as to the BIR’s disallowance of ICC’s expenses for
professional services. The Court of Appeal’s cancellation of Assessment Notice
No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded
withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005

Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which
disallowed the expense deduction of Isabela Cultural Corporation for
professional and security services, is declared valid only insofar as the
expenses for the professional fees of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The
decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural
Corporation’s liability under Assessment Notice No. FAS-1-86-90-000680.

Atty. Santos, Taxation I Page 193

 DUMAUAL, JEANNE PAULINE J. 2019-2020

TAX BASE AND TAX RATES FOR INDIVIDUALS
G.R. No. 109289 October 3, 1994
RUFINO R.
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) — Every bill passed by the Congress
TAN, petitioner, shall embrace only one subject which shall be expressed in
the title thereof.
Article VI, Section 28(1) — The rule of taxation shall be uniform
and equitable. The Congress shall evolve a progressive
system of taxation.

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, Article III, Section 1 — No person shall be deprived of . . .
MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, property without due process of law, nor shall any person be
JR., petitioners, denied the equal protection of the laws.
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No.
U. ONG, in his capacity as COMMISSIONER OF INTERNAL 2-93, argue that public respondents have exceeded their rule-making
REVENUE, respondents. authority in applying SNIT to general professional partnerships.

Rufino R. Tan for and in his own behalf. The Solicitor General espouses the position taken by public respondents.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446. The Court has given due course to both petitions. The parties, in compliance
with the Court's directive, have filed their respective memoranda.

G.R. No. 109289

VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R.
No. 109289, the constitutionality of Republic Act No. 7496, also commonly
known as the Simplified Net Income Taxation Scheme ("SNIT"), amending
certain provisions of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93,
promulgated by public respondents pursuant to said law.
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic
Act No. 7496, is a misnomer or, at least, deficient for being merely entitled,
"Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R.
No. 109289).
The full text of the title actually reads:

Petitioners claim to be taxpayers adversely affected by the continued An Act Adopting the Simplified Net Income Taxation Scheme
implementation of the amendatory legislation. For The Self-Employed and Professionals Engaged In The

Atty. Santos, Taxation I Page 194

 DUMAUAL, JEANNE PAULINE J. 2019-2020

Practice of Their Profession, Amending Sections 21 and 29 of
the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National
Internal Revenue Code, as now amended, provide:
Sec. 21. Tax on citizens or residents. —
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or
Professionals Engaged in the Practice of Profession. — A tax is
hereby imposed upon the taxable net income as determined
in Section 27 received during each taxable year from all
sources, other than income covered by paragraphs (b), (c),
(d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the
Philippines who is self-employed or practices his profession
herein, determined in accordance with the following
schedule:
Not over P10,000 3%
and (c); and 25 (a)(1), there shall be allowed as deductions
the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable
income subject to tax under Section 21 (f) in the case of
individuals engaged in business or practice of profession, only
the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the
course of or pursuant to the business or practice of their
profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited
relief organizations for the rehabilitation of calamity stricken
areas declared by the President; and

Over P10,000 P300 + 9% (g) Interest paid or accrued within a taxable year on loans
but not over P30,000 of excess over P10,000 contracted from accredited financial institutions which must
be proven to have been incurred in connection with the
Over P30,000 P2,100 + 15% conduct of a taxpayer's profession, trade or business.
but not over P120,00 of excess over P30,000
For individuals whose cost of goods sold and direct costs are
Over P120,000 P15,600 + 20% difficult to determine, a maximum of forty per cent (40%) of
but not over P350,000 of excess over P120,000 their gross receipts shall be allowed as deductions to answer
for business or professional expenses as the case may be.
Over P350,000 P61,600 + 30%
of excess over P350,000 On the basis of the above language of the law, it would be difficult to accept
petitioner's view that the amendatory law should be considered as having
Sec. 29. Deductions from gross income. — In computing now adopted a gross income, instead of as having still retained
taxable income subject to tax under Sections 21(a), 24(a), (b) the net income, taxation scheme. The allowance for deductible items, it is

Atty. Santos, Taxation I Page 195


true, may have significantly been reduced by the questioned law in
comparison with that which has prevailed prior to the amendment; limiting,
however, allowable deductions from gross income is neither discordant with,
nor opposed to, the net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential, continue to be
well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to
prevent log-rolling legislation intended to unite the members of the legislature
who favor any one of unrelated subjects in support of the whole act, (b) to
avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the
people, through such publications of its proceedings as are usually made, of
the subjects of legislation.1 The above objectives of the fundamental law
appear to us to have been sufficiently met. Anything else would be to require
a virtual compendium of the law which could not have been the intendment
of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional
requirement that taxation "shall be uniform and equitable" in that the law
would now attempt to tax single proprietorships and professionals differently
from the manner it imposes the tax on corporations and partnerships. The
contention clearly forgets, however, that such a system of income taxation
has long been the prevailing rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely
requires that all subjects or objects of taxation, similarly situated, are to be
treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary, (2)
the categorization is germane to achieve the legislative purpose, (3) the law
applies, all things being equal, to both present and future conditions, and (4)
the classification applies equally well to all those belonging to the same class
(Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is
the legislative intent to increasingly shift the income tax system towards the
schedular approach2 in the income taxation of individual taxpayers and to
maintain, by and large, the present global treatment3 on taxable
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
corporations. We certainly do not view this classification to be arbitrary and
inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating,
in the process, what he believes to be an imbalance between the tax
liabilities of those covered by the amendatory law and those who are not.
With the legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) and situs (place) of
taxation. This court cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment. Of course, where a tax
measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for, despite all
its plenitude, the power to tax cannot override constitutional proscriptions. This
stage, however, has not been demonstrated to have been reached within
any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law
declared unconstitutional for being violative of due process must perforce fail.
The due process clause may correctly be invoked only when there is a clear
contravention of inherent or constitutional limitations in the exercise of the tax
power. No such transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question
of whether or not public respondents have exceeded their authority in
promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic
Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership — The general
professional partnership (GPP) and the partners comprising
the GPP are covered by R. A. No. 7496. Thus, in determining
the net profit of the partnership, only the direct costs
mentioned in said law are to be deducted from partnership
income. Also, the expenses paid or incurred by partners in
their individual capacities in the practice of their profession
Page 196

which are not reimbursed or paid by the partnership but are
not considered as direct cost, are not deductible from his
gross income.
The real objection of petitioners is focused on the administrative interpretation
of public respondents that would apply SNIT to partners in general professional
partnerships. Petitioners cite the pertinent deliberations in Congress during its
enactment of Republic Act No. 7496, also quoted by the Honorable
Hernando B. Perez, minority floor leader of the House of Representatives, in the
latter's privilege speech by way of commenting on the questioned
implementing regulation of public respondents following the effectivity of the
law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like
to get the correct impression of this bill. Do
we speak here of individuals who are
earning, I mean, who earn through business
enterprises and therefore, should file an
income tax return?
MR. PEREZ. That is correct, Mr. Speaker. This
does not apply to corporations. It applies
only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15
P.M.; Emphasis ours).
Other deliberations support this position, to
wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear
the Gentleman from Batangas say that this
bill is intended to increase collections as far
as individuals are concerned and to make
collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal
Tamano on the Senate version of the SNITS, it is categorically
stated, thus:
This bill, Mr. President, is not applicable to
business corporations or to partnerships; it is
only with respect to individuals and
professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that
general professional partnerships are subject to the payment of income tax or
that there is a difference in the tax treatment between individuals engaged in
business or in the practice of their respective professions and partners in
general professional partnerships. The fact of the matter is that a general
professional partnership, unlike an ordinary business partnership (which is
treated as a corporation for income tax purposes and so subject to the
corporate income tax), is not itself an income taxpayer. The income tax is
imposed not on the professional partnership, which is tax exempt, but on the
partners themselves in their individual capacity computed on their distributive
shares of partnership profits. Section 23 of the Tax Code, which has not been
amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional
partnerships. — (a) Persons exercising a common profession in
general partnership shall be liable for income tax only in their
individual capacity, and the share in the net profits of the
general professional partnership to which any taxable partner
would be entitled whether distributed or otherwise, shall be
returned for taxation and the tax paid in accordance with
the provisions of this Title.
(b) In determining his distributive share in the net income of
the partnership, each partner —
(1) Shall take into account separately his
distributive share of the partnership's income,
Page 197

gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this
Code, and
(2) Shall be deemed to have elected the
itemized deductions, unless he declares his
distributive share of the gross income
undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person
who practices his profession alone or individually and one who does it through
partnership (whether registered or not) with others in the exercise of a
common profession. Indeed, outside of the gross compensation income tax
and the final tax on passive investment income, under the present income tax
system all individuals deriving income from any source whatsoever are treated
in almost invariably the same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were
to consider Republic Act No. 7496 as an entirely independent, not merely as
an amendatory, piece of legislation. The view can easily become myopic,
however, when the law is understood, as it should be, as only forming part of,
and subject to, the whole income tax concept and precepts long obtaining
under the National Internal Revenue Code. To elaborate a little, the phrase
"income taxpayers" is an all embracing term used in the Tax Code, and it
practically covers all persons who derive taxable income. The law, in levying
the tax, adopts the most comprehensive tax situs of nationality and residence
of the taxpayer (that renders citizens, regardless of residence, and resident
aliens subject to income tax liability on their income from all sources) and of
the generally accepted and internationally recognized income taxable base
(that can subject non-resident aliens and foreign corporations to income tax
on their income from Philippine sources). In the process, the Code classifies
taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3)
Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both
as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt
partnerships." Ordinarily, partnerships, no matter how created or organized,
are subject to income tax (and thus alluded to as "taxable partnerships")
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for
few variances, such as in the application of the "constructive receipt rule" in
the derivation of income, the income tax approach is alike to both juridical
persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed
out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are
independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as
corporations nor even considered as independent taxable entities for income
tax purposes. A general professional partnership is such an example.4 Here,
the partners themselves, not the partnership (although it is still obligated to file
an income tax return [mainly for administration and data]), are liable for the
payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax
liability, a partner does so as an individual, and there is no choice on the
matter. In fine, under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or
a flow-through entity in the generation of income by, and the ultimate
distribution of such income to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed,
the above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable
to all individual income taxpayers on their non-compensation income. There is
no evident intention of the law, either before or after the amendatory
legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general professional
partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
Page 198
 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-12954 February 28, 1961 Amount subject to tax P27,073.79
.......................................
COLLECTOR OF INTERNAL REVENUE, petitioner, 1949:
vs.
ARTHUR HENDERSON, respondent. Net Income P31,817.66
.......................................................
x---------------------------------------------------------x Less:Personal Exemption 2,500.00
..............................
G.R. No. L-13049 February 28, 1961 Amount subject to tax P29,317.66
.......................................
ARTHUR HENDERSON, petitioner, 1950:
vs.
COLLECTOR OF INTERNAL REVENUE, respondent. Net Income P34,815.74
.......................................................

Office of the Solicitor General for petitioner. Less:Personal Exemption 3,000.00

Formilleza & Latorre for respondent. ..............................
Amount subject to tax P31,815.74
PADILLA, J.: .......................................
1951:
These are petitioner filed by the Collector of Internal Revenue (G.R. No. L-
Net Income P32,605.83
12954) and by Arthur Henderson (G.R. No. L-13049) under the provisions of
........................................................
section 18, Republic Act No. 1125, for review of a judgment dated 26 June
1957 and a resolution dated 28 September 1957 rendered and adopted by Less:Personal Exemption 3,000.00
the Court of Tax Appeals in Case No. 237. ..............................
Amount subject to tax P29,605.83
The spouses Artuhur Henderson and Marie B. Henderson (later referred to as .......................................
the taxpayers) filed with the Bureau of Internal Revenue returns of annual net
1952:
income for the years 1948 to 1952, inclusive, where the following net incomes,
personal exemptions and amounts subject to tax appear: Net Income P36,780.11
.......................................................

1948: Less:Personal Exemption 3,000.00

..............................
Net Income P29,573.79
....................................................... Amount subject to tax P33,780.11
.......................................
Less:Personal Exemption 2,500.00
..............................

Atty. Santos, Taxation I Page 199

 DUMAUAL, JEANNE PAULINE J. 2019-2020

(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers received from the Net income per return ..................................……………………… P29,573.79
Bureau of Internal Revenue assessment notices Nos. 15804-48, 25450-49, 15255-
50, 25705-51 and 22527-52 and paid the amounts assessed as follows: Add:
Rent expense .........................................................…….. 7,200.00
1948: Additional bonus for 1947 received May 13, 1948 .……… 6,500.00
14 May 1949, O.R. No. 52991, Exhibit B ....……….. P2,068.12 Other income:
12 September 1950, O.R. No. 160473, Exhibit B-1 . 2,068.11 Manager's residential expense (2/29/48 a/c/#4.51) 1,400.00
Total Paid ......................................................... P4,136.23 Manager's residential expense (refer to 1948 P & L) .. 1,849.32
1949: Entrance fee — Marikina Gun & Country Club ..…….. 200.00
13 May 1950, O.R. No. 232366, Exhibit G ...........… P2,314.95 Net income per investigation .........................................………... P46,723.11
15 September 1950, O.R. No. 247918, Exhibit G-1 . 2,314.94 Less: Personal exemption ...............................................………. 2,500.00
Total Paid ......................................................... P4,629.89 Net taxable income ..........................................................……… P44,223.11
1950: Tax due thereon ...............................................................……… P8,562.47
27 April 1951, O.R. No. 323173, Exhibit K ...………. P7,273.00 Less: Amount of tax already paid per OR #52991 & 160473
..……………………………………………………… 4,136.23
1951:
Deficiency tax still due & assessable ............................ P4,426.24
Amount withheld from salary and paid by employer . P5,780.40
15 May 1952, O.R. No. 33250, Exhibit O ................. 360.50
1949:
15 August 1952, O.R. No. 383318, Exhibit O-1 ..….. 361.20
Net income per return ..................................……………………… P31,817.66
Total Paid ......................................................... P6,502.10
Add: disallowances —
1952:
Capital loss (no capital gain) ................... P3,248.84
Amount withheld from salary and paid by employer . P5,660.40
Undeclared bonus ...................………….. 3,857.75
18 May 1953, O.R. No. 438026, Exhibit T ..………… 1,160.30
Rental allowance from A.I.U. ................... 1,800.00
13 August 1953, O.R. No. 443483, Exhibit T-1 ...….. 1,160.30
Subsistence allowance from A.I.U. .…….. 6,051.30 14,958.09
Total Paid ......................................................... P7,981.00
Net income per investigation .........................................………... P46,775.75
Less: Personal exemption ...............................................……….. 2,500.00
On 28 November 1953, after investigation and verification, the Bureay of
Internal Revenue reassessed the taxpayers'income for the years 1948 to 1952, Amount of income subject to tax ..................................…………. 43,275.75
inclusive, as follows: Tax due thereon ...............................................................………. P8,292.21
Less: tax already assessed & paid per OR Nos. 232366 & 247918 4,629.89
1948:

Atty. Santos, Taxation I Page 200


Deficiency tax due ............................................................……….
(Should be) ......................................................................
1950:
Net income per return ..................................………………………
Add:
Rent, electricity, water allowances .......................………..
Net income per investigation .........................................………...
Less: Personal exemption ...............................................………..
Net taxable income ..........................................................………..
Tax due thereon ...............................................................……….
Less: tax already paid per OR No. #323173
Deficiency tax due & assessable .................……………………..
1951:
Net income per return ..................................………………………
Add: house rental allowance from AIU
Net income per investigation .........................................………...
Less: Personal exemption ...............................................………..
Amount of income subject to tax ..................................…………..
Tax due thereon ...............................................................……….
Less: tax already assessed and paid per O.R. Nos. A33250
& 383318 .......................………………………………………
Deficiency tax due .................……………………………………….
1952:
Net income per return ..................................………………………
Add:
Withholding tax paid by company .....................................
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
P3,662.23 Travelling allowances ....................................................... 3,247.40
3,662.32 Allowances for rent, telephone, water, electricity, etc. ..... 7,044.67
Net income per investigation .........................................………... P47,672.18
Less: Personal exemption ...............................................……….. 3,000.00
P34,815.74
Net taxable income ..................................………………………… P44,672.18
Tax due thereon ...............................................................………. P12,089.00
8,373.73
Less: Tax already withheld P5,660.40
P43,189.47
Tax already paid per O.R. Nos. #438026, 443484 2,320.60 7,981.00
3,000.00
Deficiency tax still due & collectible ...............................………… P4,108.00
P40,189.47
P10,296.00 (Exhibits 2, 4, 6, 8, 10) and demanded payment of thedeficiency taxes on or
7,273.00 before 28 February 1954 with respectto those due for the years 1948, 1949,
1950 and 1952and on or before 15 February 1954 with respect to thatdue for
P3,023.00 the year 1951 (Exhibits B-2, H, L, P, S).
In the foregoing assessments, the Bureau of InternalRevenue considered as
P32,605.83 part of their taxable income thetaxpayer-husband's allowances for rental,
residential expenses,subsistence, water, electricity and telephone; bonuspaid
5,782.91 to him; withholding tax and entrance fee to the Marikinagun and Country Bluc
P83,388.74 paid by his employer for hisaccount; and travelling allowance of his wife. On
26 and27 January 1954 the taxpayers asked for reconsiderationof the
3,000.00 foregoing assessment (pp. 29, 31, BIR rec.) andon 11 Februayr 1954 and 28
P35,388.74 February 1955 stated thegrounds and reasons in support of their request for
reconsideration (pp. 36-38, 62-66, BIR rec.). The claimthat as regards the
P 8,560.00
husband-taxpayer's allowances forrental and utilities such as water, electricity
and telephone,he did not receive the money for said allowances, but
6,502.00 thatthey lieved in the apartment furnished and paid for byhis employer for its
P2,058.00 convenience; that they had no choicebut live in the said apartment furnished
by his employer,otherwise they would have lived in a less expensive one;that
as regards his allowances for rental of P7,200 andresidential expenses of
P1,400 and P1,849.32 in 1948, rentalof P1,800 and subsistence of P6,051.50 (the
P36,780.11 latter merelyconsisting of allowances for rent and utilities such as light,water,
telephone, etc.) in 1949 rental, electricity and waterof P8,373.73 in 1950, rental
of P5,782.91 in 1951 and rental,telephone, water, electricity, etc. of P7,044.67
600.00 in 1952, onlythe amount of P3,900 for each year, which is the amountthey
Page 201

would have spent for rental of an apartment includingutilities, should be
taxed; that as regards the amount ofP200 representing entrance fee to the
Marikina Gun andCountry Club paid for him by his employer in 1948, thesame
should not be considered as part of their income forit was an expense of his
employer and his membershiptherein was merely incidental to his duties of
increasingand sustaining the business of his employer; and that asregards the
wife-taxpayer's travelling allowance of P3,247.40 in 1952, it should not be
considered as part of theirincome because she merely accompanied him in
his businesstrip to New York as his secretary and, at the behestof her husband's
employer, to study and look into the detailsof the plans and decorations of
the building intendedto be constructed byn his employer in its property at
DeweyBoulevard. On 15 and 27 February 1954, the taxpayerspaid the
deficiency taxes assessed under Official ReceiptsNos. 451841, 451842, 451843,
451748 and 451844 (ExhibitsC, I, M, Q, and Y). After hearing conducted by
theConference Staff of the Bureau of Internal Revenue on5 October 1954 (pp.
74-85, BIR rec.), on 27 May 1955the Staff recommended to the Collector of
Internal Revenuethat the assessments made on 28 November 1953 (Exhibits2,
4, 6, 8, 10) be sustained except that the amountof P200 as entrance fee to the
Marikina Gun and CountryClub paid for the husband-taxpayer's account by
his employerin 1948 should not be considered as part of thetaxpayers' taxable
income for that year (pp. 95-107, BIRrec.). On 14 July 1955, in line with the
recommendationof the Conference Staff, the Collector of Internal
Revenuedenied the taxpayers' request for reconsideration, exceptas regards
the assessment of their income tax due for theyear 1948, which was modified
as follows:
Net income per return P29,573.79
Add: Rent expense 7,200.00
Additional bonus for 1947 received
on May 13, 1948 6,500.00
Manager's residential expense
(2/29/48 a/c #4.41) 1,400.00
Manager's residential expense (1948
profit and loss) 1,849.32
Net income per investigation P46,523.11
Less: Personal exemption 2,500.00
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Net taxable income P44,023.11
Tax due thereon P 8,506.47
Less; Amount already paid 4,136.23
Deficiency tax still due P 4,370.24
and demanded payment of the deficiency taxes of P4,370.24for 1948,
P3,662.23 for 1949, P3,023 for 1950, P2,058 for1951 and P4,108 for 1952, 5%
surcharge and 1% monthlyinterest thereon from 1 March 1954 to the date of
paymentand P80 as administrative penalty for late payment,to the City
Treasurer of Manila not later than 31 July1955 (Exhibit 14). On 30 January 1956
the taxpayersagain sought a reconsideration of the denial of their requestfor
reconsideration and offered to settle the case ona more equitable basis by
increasing the amount of thetaxable portion of the husband-taxpayer's
allowances forrental, etc. from P3,000 yearly to P4,800 yearly, which "isthe
value to the employee of the benefits he derived therefrommeasured by
what he had saved on account thereof'in the ordinary course of his life ... for
which hewould have spent in any case'". The taxpayers also reiteratedtheir
previous stand regarding the transportationallowance of the wife-taxpayer of
P3,247.40 in 1952 andrequested the refund of the amounts of P3,477.18,
P569.33,P1,294, P354 and P2,164, or a total of P7,858.51, (Exhibit Z). On 10
February 1956 the taxpayers again requestedthe Collector of Internal
Revenue to refund to them theamounts allegedly paid in excess as income
taxes for theyears 1948 to 1952, inclusive (Exhibit Z-1). The Collectorof Internal
Revenue did not take any action on the taxpayers'request for refund.
On 15 February 1956 the taxpayers filed in the Courtof Tax Appeals a petition
to review the decision of theCollector of Internal Revenue (C.T.A. Case No.
237). Afterhearing, on 26 June 1957 the Court rendered judgmentholding "that
the inherent nature of petitioner's(the husband-taxpayer) employment as
president of theAmerican International Underwriters as president of
theAmerican International Underwriters of the Philippines,Inc. does not require
him to occupy the apartments suppliedby his employer-corporation;" that,
however, onlythe amount of P4,800 annually, the ratable value to him ofthe
quarters furnished constitutes a part of taxable income;that since the
taxpayers did not receive any benefitout of the P3,247.40 traveling expense
allowance grantedin 1952 to the wife-taxpayer and that she merely
undertookthe trip abroad at the behest of her husband's employer,the same
Page 202

could not be considered as income; andthat even if it were considered as
such, still it could not besubject to tax because it was deductible as travel
expense;and ordering the Collector of Internal Revenue to refundto the
taxpayers the amount of P5,109.33 with interestfrom 27 February 1954, without
pronouncement as tocosts. The taxpayers filed a motion for
reconsiderationclaiming that the amount of P5,986.61 is the amount
refundableto them because the amounts of P1,400 and P1,849.32 as
manager's residential expenses in 1948 shouldnot be included in their taxable
net income for the reasonthat they are of the same nature as the rentals for
theapartment, they being mainly expenses for utilities aslight, water and
telephone in the apartment furnished bythe husbant-taxpayer's employer. The
Collector of InternalRevenue filed an opposition to their motion for
reconsideration.He also filed a separate motion for reconsiderationof the
decision claiming that his assessmentunder review was correct and should
have been affirmed.The taxpayers filed an opposition to this motion for
reconsiderationof the Collector of Internal Revenue; thelatter, a reply thereto.
On 28 September 1957 the Courtdenied both motions for reconsideration. On
7 October1957 the Collector of Internal Revenue filed a notice ofappeal in
the Court of Tax Appeals and on 21 October1957, within the extension of time
previously granted bythis Court, a petition for review (G.R. No. L-12954). On29
October 1957 the taxpayers filed a notice of appealin the Court of Tax
Appeals and a petition for review inthis Court (G.R. No. L-13049).
The Collector of Internal Revenue had assigned the followingerrors allegedly
committed by the Court of TaxAppeals:
I. The Court of Tax Appeals erred in finding that theherein respondent
did not have any choice in the selection ofthe living quarters
occupied by him.
II. The Court of Tax Appeals erred in not consideringthe fact that
respondent is not a minor company official butthe President of his
employer-corporation, in the appreciationof respondent's alleged
lack of choice in the matter of the selectionof the quarters occupied
by him.
III. The Court of Tax Appeals erred in giving full weightand credence
to respondent's allegation, a self-serving and unsupported
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
declaration that the ratable value to him of the living quarters and
subsistence allowance was only P400.00 a month.
IV. The Court of Tax Appeals erred in holding that only the ratable
value of P4,800.00 per annum, or P400.00 a month constitutes income
to respondent.
V. The Court of Tax Appeals erred in arbitrarily fixing the amount of
P4,800.00 per annum, or P400.00 a month as the only amount taxable
aganst respondent during the five tax years in question.
VI. The Court of Tax Appeals erred in not finding that travelling
allowance in the amount of P3,247.40 constituted income to
respondent and, therefore, subject to the income tax.
VII. The Court of Tax Appeals erred in ordering the refund of the sum of
P5,109.33 with interest from February 17, 1954. (G.R. No. L-12954.)
The taxpayers have assigned the following errors allegedly committed by the
Court of Tax Appeals:
I. The Court of Tax Appeals erred in its computation of the 1948
income tax and consequently in the amount that should be refunded
for that year.
II. The Court of Tax Appeals erred in denying our motion for
reconsideration as contained in its resolution dated September 28,
1957. (G.R. No. L-13049.)
The Government's appeal:
The Collector of Internal Revenue raises questions of fact. He claims that the
evidence is not sufficient to support the findings and conclusion of the Court
of Tax Appeals that the quarters occupied by the taxpayers were not of their
choice but that of the husband-taxpayer's employer; that it did not take into
consideration the fact that the husband-taxpayer is not a mere minor
company official, but the highest executive of his employer-corporation; and
Page 203

that the wife-taxpayer's trip abroad in 1952 was not, as found by the Court, a
business but a vacation trip. In Collector of Internal Revenue vs. Aznar, 56, Off.
Gaz. 2386, this Court held that in petitions for review under section 18,
Republic Act No. 1125, it may review the findings of fact of the Court of Tax
Appeals.
The determination of the main issue in the case requires a review of the
evidence. Are the allowances for rental of the apartment furnished by the
husband-taxpayer's employer-corporation, including utilities such as light,
water, telephone, etc. and the allowance for travel expenses given by his
employer-corporation to his wife in 1952 part of taxable income? Section 29,
Commonwealth Act No. 466, National Internal Revenue Code, provides:
"Gross income" includes gains, profits, and income derived from
salaries, wages, or compensation for personal service of whatever
kind and in whatever form paid, or from professions, vocations, trades,
businesses, commerce, sales, or dealings in property, whether real or
personal, growing out of the ownership or use of or interest in such
property; also from interest, rents dividend, securities, or the
transaction of any business carried on for gain or profit, or gains,
profits, and income derived from any source whatever. (Emphasis
ours.)
The Court of Tax Appeals found that the husband-taxpayer "is the president of
the American International Underwriters for the Philippines, Inc., a domestic
corporation engaged in insurance business;" that the taxpayers "entertained
officials, guests and customers of his employer-corporation, in apartments
furnished by the latter and successively occupied by him as president thereof;
that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V.
Starr, chairman of the parent corporation of the American International
Underwriters for the Philippines, Inc., undertook a trip to New York in
connection with the purchase of a lot in Dewey Boulevardby petitioner's
employer-corporatio, the construction of a building thereon, the drawing of
prospectus and plans for said building, and other related matters."
Arthur H. Henderson testified that he is the President of American International
Underwriters for the Philippines, Inc., which representa a group of American
insurance companies engagad in the business of general insurance except
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
life insurance; that he receives a basic annual salary of P30,000 and
allowance for house rental and utilities like light, water, telephone, etc.; that
he and his wife are childless and are the only two in the family; that during the
years 1948 to 1952, they lived in apartments chosen by his employer; that from
1948 to the early part of 1950, they lived at the Embassy Apartments on
Dakota Street, Manila, where they had a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and from the early part of
1950 to 1952, they lived at the Rosaria Apartments on the same street where
they had a kitchen, sala, dining room two bedrooms and bathroom; that
despite the fact that they were the only two in the family, they had to live in
apartments of the size beyond their personal needs because as president of
the corporation, he and his wife had to entertain and put up houseguests;
that during all those years of 1948 to 1952, inclusive, they entertained and put
up houseguests of his company's officials, guests and customers such as the
president of C, V. Starr & Company, Inc., who spent four weeks in his
apartment, Thomas Cocklin, a lawyer from Washington, D.C., and Manuel
Elizalde, a stockholder of AIUPI; that were he not required by his employer to
live in those apartments furnished to him, he and his wife would have chosen
an apartment only large enough for them and spend from P300 to P400
monthly for rental; that of the allowances granted to him, only the amount of
P4,800 annually, the maximum they would have spent for rental, should be
considered as taxable income and the excess treated as expense of the
company; and that the trip to New York undertaken by his wife in 1952, for
which she was granted by his employer-corporation travelling expense
allowance of P3,247.40, was made at the behest of his employer to assist its
architect in the preparation of the plans for a proposed building in Manila and
procurement of supplies and materials for its use, hence the said amount
should not be considered as part of taxable income. In support of his claim,
letters written by his wife while in New York concerning the proposed building,
inquiring about the progress made in the acquisition of the lot, and informing
him of the wishes of Mr. C. V. Starr, chairman of the board of directors of the
parent-corporation (Exhibits U-1, U-1-A, V, V-1 and W) and a letter written by
the witness to Mr. C. V. Starr concerning the proposed building (Exhibits X, X-1)
were presented in evidence.
Mrs. Marie Henderson testified that for almost three years, she and her
husband gave parties every Friday night at their apartment for about 18 to 20
people; that their guests were officials of her husband's employer-corporation
and other corporations; that during those parties movies for the entertainment
Page 204

of the guests were shown after dinner; that they also entertained during
luncheons and breakfasts; that these involved and necessitated the services
of additional servants; and that in 1952 she was asked by Mr. C. V. Starr to
come to New York to take up problems concerning the proposed building
and entertainment because her husband could not make the trip himself, and
because "the woman of the family is closer to those problems."
The evidence presented at the hearing of the case substantially supports the
findings of the Court of Tax Appeals. The taxpayers are childless and are the
only two in the family. The quarters, therefore, that they occupied at the
Embassy Apartments consisting of a large sala, three bedrooms, dining room,
two bathrooms, kitchen and a large porch, and at the Rosaria Apartments
consisting of a kitchen, sala dining room, two bedrooms and a bathroom,
exceeded their personal needs. But the exigencies of the husband-taxpayer's
high executive position, not to mention social standing, demanded and
compelled them to live in amore spacious and pretentious quarters like the
ones they had occupied. Although entertaining and putting up houseguests
and guests of the husbnad-taxpayer's employer-corporation were not his
predominand occupation as president, yet he and his wife had to entertain
and put up houseguests in their apartments. That is why his employer-
corporation had to grant him allowances for rental and utilities in addition to
his annual basic salary to take care of those extra expenses for rental and
utilities in excess of their personal needs. Hence, the fact that the taxpayers
had to live or did not have to live in the apartments chosen by the husband-
taxpayer's employer-corporation is of no moment, for no part of the
allowances in question redounded to their personal benefit or was retained by
them. Their bills for rental and utilities were paid directly by the employer-
corporation to the creditors (Exhibit AA to DDD, inclusive; pp. 104, 170-193,
t.s.n.). Neverthelss, as correctly held by the Court of Tax Appeals, the
taxpayers are entitled only to a ratable value of the allowances in question,
and only the amount of P4,800 annually, the reasonable amount they would
have spent for house rental and utilities such as light, water, telephone, etc.,
should be the amount subject to tax, and the excess considered as expenses
of the corporation.
Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had
to make the trip to New York at the behest of her husband's employer-
corporation to help in drawing up the plans and specificatins of a proposed
building, is also supported by the evidence. The parts of the letters written by
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
the wife-taxpayer to her husband while in New York and the letter written by
the husband-taxpayer to Mr. C. V. Starr support the said findings (Exhibits U-2,
V-1, W-1, X). No part of the allowance for travellking expenses redounded to
the benefit of the taxpayers. Neither was a part thereof retained by them. The
fact that she had herself operated on for tumors while in New York wsa but
incidental to her stay there and she must have merely taken advantage of
her presence in that city to undergo the operation.
The taxpayers' appeal:
The taxpayers claim that the Court of Tax Appeals erred in considering the
amounts of P1,400 and P1,849.32, or a total of P3,249.32, for "manager's
residential expense" in 1948 as taxable income despite the fact "that they
were of the same nature as the rentals for the apartment, they being
expenses for utilities, such as light, water and telephone necessarily incidental
to the apartment furnished to him by his employer."
Mrs. Crescencia Perez Ramos, an examiner of the Bureau of Internal Revenue
who examined the books of accound of the American International
Underwriters for the Philippines, Inc., testified that he total amount of P3,249.32
was reflected in its books as "living expenses of Mr. and Mrs. Arthur Henderson
in the quarters they occupied in 1948;" and that "the amount of P1,400 was
included as manager's residential expense while the amount of P1,849.32 was
entered as profit and loss account."
Buenaventura Loberiza, acting head of the accouting department of the
American International Underwriters for the Philippines, Inc., testified that
rentals, utilities, water, telephone and electric bills of executives of the
corporation were entered in the books of account as "subsistence allowances
and expenses;" that there was a separate account for salaries and wages of
employees and officers; and that expenses for rentals and other utilities were
not charged to salary accounts.
The taxpayers' claim is supported by the evidence. The total amount of
P3,249.32 "for manager's residential expense" in 1948 should be treated as
rentals for apartments and utilities and should not form part of the ratable
value subject to tax.
Page 205
 DUMAUAL, JEANNE PAULINE J. 2019-2020

The computation made by the taxpayers is correct. Adding to the amount of

P29,573.79, their net income per return, the amount of P6,500, the bonus
received in 1948, and P4,800, the taxable ratable value of the allowances,
brings up their gross income to P40,873.79. Deducting therefrom the amount
of P2,500 for personal exemption, the amount of P38,373.79 is the amount
subject to income tax. The income tax due on this amount is P6,957.19 only.
Deducting the amount of income tax due, P6,957.19, from the amount
already paid, P8,562.47 (Exhibits B, B-1, C), the amount of P1,605.28 is the
amount refundable to the taxpayers. Add this amount to P563.33, P1,294.00,
P354.00 and P2,154.00, refundable to the taxpayers for 1949, 1950, 1951 and
1952 and the total is P5,986.61.

The judgment under review is modified as above indicated. The Collector of

Internal Revenue is ordered to refund to the taxpayers the sum of P5,986.61,
without pronouncement as to costs.

Atty. Santos, Taxation I Page 206

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-17509 January 30, 1970 undivided portion also for the same price. Prior to the purchase, the sugar
quota of 79,211.17 piculs was registered in the names of the vendors, Julio
COMMISSIONER OF INTERNAL REVENUE, Petitioner, Ledesma and Florentina de Ledesma, under Plantation Audit No. 38-101 of the
vs. milling district of San Carlos Milling Co., Ltd. By virtue of the purchase
CARLOS LEDESMA, JULIETA LEDESMA, VICENTE GUSTILO. JR. and AMPARO Plantation Audit No. 58-101 was cancelled, and during the sugar crop year
LEDESMA DE GUSTILO, respondents. 1948-1949 the said sugar quota of 79,211.17 piculs was transferred to,
apportioned among, and separately registered in the names of, the
respondents, as follows: one-third to Vicente Gustilo, Jr. and Amparo Ledesma
Assistant Solicitor General Jose P. Alejandro and Special Attorneys Priscilla R.
de Gustilo, under Plantation Audit No. 38-246; one-third to Carlos Ledesma,
Gonzales and Librada del Rosario-Natividad for petitioner.
under Plantation Audit No. 38-247; and one-third to Julieta Ledesma under
Plantation Audit No. 38248.
Angel S. Gamboa for respondent.
After their purchase of the plantation, herein respondents took over the sugar
cane farming on the plantation beginning with the crop year 1948-1949. For
the crop year 1948- 1949 the San Carlos Milling Co., Ltd. credited the
respondents with their shares in the gross sugar production, as follows:
ZALDIVAR, J.:
Gross Production:
Appeal by petitioner Commissioner of Internal Revenue — hereinafter referred
to as Commissioner — from the decision of the Court of Tax Appeals, in its CTA Amparo Ledesma and
Case No. 226, declaring as not in accordance with law the assessment of Vicente Gustilo, Jr. 21,308.30 piculs
corporate income tax made by said Commissioner in the sum of P15,777.26 on Carlos Ledesma 21,308.30 "
the income of the co-partnership named "Hacienda Fortuna" during the Julieta Ledesma 21,308.30 "
period from January 1 to July 13, 1949, of which co-partnership herein
respondents Carlos Ledesma, Julieta Ledesma, Amparo Ledesma de Gustilo
TOTAL 63,924.90 piculs
and Vicente Gustilo, Jr. are its members.1 The undisputed facts, as shown in
the record, are as follows:
Planters' Share:
On July 9, 1949 herein respondents, Carlos Ledesma, Julieta Ledesma and the
spouses Amparo Ledesma and Vicente Gustilo, Jr., purchased from their Amparo Ledesma and
parents, Julio Ledesma and Florentina de Ledesma, the sugar plantation Vicente Gustilo, Jr. 13,317.70 piculs
known as "Hacienda Fortuna," consisting of 36 parcels of land, situated in the Carlos Ledesma 13,317.70 "
municipality of San Carlos, province of Negros Occidental, with an area of Julieta Ledesma 13,317.70 "
approximately 1,202 hectares and with a sugar quota of 79,211.17 piculs,
which sugar quota was included in the sale. By virtue of the purchase, Carlos TOTAL 39,953.10 piculs
Ledesma acquired the one-third undivided portion of the plantation for the
price of P144,043.00; Julieta Ledesma acquired another one-third undivided The respondents shared equally the expenses of production, on the basis of
portion of the plantation for the same price; and respondents Amparo their respective one-third undivided portions of the plantation. The San Carlos
Ledesma de Gustilo and Vicente Gustilo, Jr. acquired the remaining one-third

Atty. Santos, Taxation I Page 207


Milling Co., Ltd. issued to respondents separate quedans for the sugar
produced, based on the quota under the plantation audits respectively issued
to them. In their individual income tax returns for the year 1949 the
respondents included as part of their income their respective net profits
derived from their individual sugar production from the "Hacienda Fortuna," as
herein-above stated.
On July 11, 1949, the respondents organized themselves into a general co-
partnership under the firm name "Hacienda Fortuna", for the "production of
sugar cane for conversion into sugar, palay and corn and such other products
as may profitably be produced on said hacienda, which products shall be
sold or otherwise disposed of for the purpose of realizing profit for the
partnership."2 The articles of general co-partnership were registered in the
commercial register of the office of the Register of Deeds in Bacolod City,
Negros Occidental, on July 14, 1949. Paragraph 14 of the articles of general
partnership provides that the agreement shall have retroactive effect as of
January 1, 1949.
On March 22, 1959 the Commissioner assessed against the partnership
"Hacienda Fortuna" corporate income tax for the calendar year 1949, under
Section 24 of the National Internal Revenue Code, in the sum of P23,704.22.
The respondents contested the assessment upon the ground that the
"Hacienda Fortuna" was a registered general co-partnership and requested
for the cancellation of the assessment. In a letter, dated March 12, 1955, the
Commissioner advised respondents that inasmuch as the articles of general
co-partnership of the "Hacienda Fortuna" were registered on July 14, 1949, the
income realized by the partnership prior to the registration cannot be, exempt
from the payment of corporate income tax. In a letter, also dated March 12,
1955, the Commissioner instructed the provincial revenue agent of Negros
Occidental to investigate the income of "Hacienda Fortuna" for the period
from January 1, 1959 to July 13, 1949, being the portion of the year 1949 which
was prior to July 14, 1949, the date of the registration of the articles of general
co-partnership of "Hacienda Fortuna." The provincial revenue agent reported
that during the period from January 1, 1959 to July 13, 1949 the "Hacienda
Fortuna" had a net profit amounting to P131,477.20, and that the income tax
due on said net profit, at the rate of 12%, was P15,777.26. It thus resulted that
the original assessment of P23,704.22, as corporate income tax on the income
for the entire calendar year 1949, was reduced to P15,777.26 after deducting
the corporate income tax due on the net profits derived by the "Hacienda
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Fortuna" for the period from July 14 to December 31, 1949, based on the
theory that the co-partnership "Hacienda Fortuna" was exempt from the
payment of corporate income tax on its income from the day its articles of
general co-partnership were registered in the mercantile registry. Herein
respondents accepted the correctness of the figures contained in the report
of the provincial revenue agent, but denied their liability to pay the corporate
income tax of P15,777.26 assessed against the "Hacienda Fortuna" as a
general co-partnership.
On April 2, 1955 the respondents, through counsel, wrote a letter to the
Commissioner asking for the reconsideration of his ruling of March 12, 1955,
upon the ground that during the period from January 1 to July 13, 1949 the
respondents were operating merely as co-owners of the plantation known as
"Hacienda Fortuna", so that the case of the "Hacienda Fortuna" was really one
of co-ownership and not that of an unregistered co-partnership which was
subject to corporate tax. That request for reconsideration was denied by the
Commissioner on October 25, 1955. The respondents filed a second request for
reconsideration, dated November 4, 1955, but the Commissioner in a letter
dated December 6, 1955, which was received by respondents on December
20, 1955, denied said second request for reconsideration. Thereupon,
respondents, on January 3, 1956, filed a petition for review with the Court of
Tax Appeals, by way of an appeal from the ruling of the Commissioner of
March 12, 1955 and from the denial of the requests for reconsideration of said
ruling. The case was docketed in the Court of Tax Appeals as CTA Case No.
226.
In the meantime, on March 22, 1955, exactly 5 years from and after the date
of the assessment on March 22, 1950, and before the expiration of the thirty-
day period within which the respondents could ask for a reconsideration of
the ruling of the Commissioner of March 12, 1955, or appeal to the Court of
Tax Appeals, the Provincial Fiscal of Negros Occidental, upon the request of
the Commissioner, filed a complaint against herein respondents for the
collection of the alleged income tax assessed against the "Hacienda Fortuna."
The said action, entitled "The Collector of Internal Revenue vs. Carlos
Ledesma, Julieta Ledesma, Vicente Gustilo, Jr. and Amparo Ledesma de
Gustilo" was docketed in the Court of First Instance of Negros Occidental as
Civil Case No. 3373.
Page 208

It happened, therefore, that before respondents could bring the case on
appeal to the Court of Tax Appeals a complaint for the Collection of the
alleged income tax due on the "Hacienda Fortuna" was filed against them in
the Court of First Instance of Negros Occidental. Upon motion of the
Commissioner, in CTA Case No. 226, the Court of Tax Appeals, on July 31, 1956,
dismissed the petition for review upon the ground that the Court of First
Instance of Negros Occidental had already acquired jurisdiction over the
controverted assessment prior to the institution of the appeal, and the
judgment in Civil Case No. 3373 of the Court of First Instance of Negros
Occidental would constitute res adjudicata between the same parties. Herein
respondents filed in the Supreme Court a petition for mandamus to compel
the Court of Tax Appeals to annul the resolution of July 31, 1956 dismissing the
petition in CTA Case No. 226 and to proceed with the case. The Supreme
Court set aside the resolution of the Court of Tax Appeals of July 31, 1956 and
directed said court to proceed with the determination of the appeal of herein
respondents in CTA Case No. 226.3 This Court held that the Court of Tax
Appeals had exclusive jurisdiction over the disputed assessment, to the
exclusion of the Court of First Instance of Negros Occidental. Subsequently,
the Court of First Instance of Negros Occidental dismissed Civil Case No. 3373.
After the dismissal of Civil Case No. 3373 of the Court of First Instance of
Negros Occidental, and before the hearing of CTA Case No. 226 in the Court
of Tax Appeals, herein respondents filed a supplement petition for review
alleging, as an additional ground for appeal, that the action of the
Government to collect the tax assessed against the "Hacienda Fortuna" had
prescribed. During the hearing before the Court of Tax Appeals, the parties
submitted a stipulation of facts and their respective documentary evidence.
Two issues were raised before the Court of Tax Appeals, to wit: (1) whether or
not the right of the Government to collect the income tax against the
"Hacienda Fortune" as an unregistered general co-partnership for the year
1949, had prescribed; and (2) whether or not the income tax in question was
validly assessed against the "Hacienda Fortuna."
The Court of Tax Appeals, on August 15, 1960, rendered a decision, declaring
that the right of the Government to collect the income tax in question had not
prescribed, but holding that the assessment of the corporate income tax
against the "Hacienda Fortuna" is not in accordance with law. The Court of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Tax Appeals, therefore, reversed the rulings of the Commissioner of Internal
Revenue, appealed from.
Herein respondents did not appeal from the decision of the Court of Tax
Appeals, but in the brief that they filed before this Court, as appellees, they
claim that the Court of Tax Appeals erred in holding that prior to the execution
of the articles of general co-partnership on July 11, 1949 the respondents had
operated the "Hacienda Fortuna" as a general partnership; and that the Court
of Tax Appeals erred in not holding that the right of the Government to collect
the income tax in question had prescribed. In this connection, suffice it to say
that the conclusion of the Court of Tax Appeals that the respondents
operated the "Hacienda Fortuna" as a partnership prior to the execution of
the articles of general co-partnership is based on findings of fact, and We find
no reason in the record to disturb the findings of the tax court on this matter.
On the contrary, the intention of the respondents to operate the "Hacienda
Fortuna" as a partnership, before July 11, 1949, is clearly shown in paragraph
14 of the articles of general co-partnership which provides that the partnership
agreement "shall be retroactive as of January 1, 1949." We also find no merit in
the contention of the respondents that the Court of Tax Appeals erred in not
holding that the right of the Government to collect the income tax in question
had prescribed.
We shall now occupy ourselves with the errors assigned by the Commissioner,
as follows:
(1) The Court of Tax Appeals erred in holding that herein
respondents, as partners of the general co-partnership
"Hacienda Fortuna", are not subject to corporate income tax
prior to its registration or for the period from January 1 to July
13, 1949.
(2) The Court of Tax Appeals erred in holding that the
registration of the articles or general co-partnership of the
"Hacienda Fortuna" on July 14, 1949 operated to exempt said
partnership from the corporate income tax for the year 1949
and not only for the period from July 14, 1949 to December
31, 1949.
Page 209

The Solicitor General, as counsel for the Commissioner, considers these two
assigned errors as interrelated and discusses them together.
The sole question to be decided in this appeal is whether or not the
partnership known as "Hacienda Fortuna" which was organized by
respondents on July 11, 1949, whose articles of general partnership provided
that the partnership agreement should retroact as of January 1, 1949, and
which articles of general co-partnership were registered on July 14, 1949,
should pay corporate income tax as an unregistered partnership on its net
income received during the period from January 1, 1949 to July 13, 1949, the
period in the year 1949 prior to the date of said registration.
The provision of law that is relevant to this question is, that portion of Section 24
of the National Internal Revenue Code which reads as follows:
Sec. 24. Rate of tax on corporation. — (a) Tax on domestic
corporations. — In general, there shall be levied, collected,
and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation
organized in, or existing under the laws of, the Philippines, no
matter how created or organized, but not including duly
registered general co-partnerships (compañias colectivas),
domestic life insurance companies and foreign life insurance
companies doing business in the Philippines, a tax upon such
income equal to the sum of the following: (Italics supplied.).
xxx xxx xxx
It is the contention of the Commissioner that it is only from the date of the
registration of the articles of general co- partnership in the mercantile register
when a co-partnership is exempt from the payment of corporate income tax
under Section 24 of the Tax Code. It is the position of the Commissioner, in the
present case, that the partnership known as "Hacienda Fortuna" is exempt
from the payment of corporate income tax due only on income received
from July 14, 1949, the date of the registration of its articles of general co-
partnership. In other words, from January 1 to July 13, 1949 the partnership
"Hacienda Fortune" should be considered still an unregistered co-partnership
for the purposes of the assessment of the corporate income tax,
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
notwithstanding the fact that paragraph 14 of its articles of co-partnership
provides that the partnership agreement should retroact to January 1, 1949.
Thus, as stated at the earlier part of this decision, the Commissioner instructed
the provincial revenue agent in Negros Occidental to determine the net
income of the "Hacienda Fortuna" for the period from January 1 to July 13,
1949, said agent having reported that the net income of the partnership
during that period amounted to P131,477.20, and that the corporate income
tax due on that net income was P15,777.26. It is this amount of P15,777.26
which the Commissioner insists in collecting from the respondents.
On the other hand, the respondents contend that prior to July 14, 1949 they
were operating the sugar plantation that they bought from their parents
under a system of co-ownership, and not as a partnership, so that they were
not under obligation to pay the corporate income tax assessed by the
Commissioner on the alleged income of the partnership "Hacienda Fortuna"
from January 1 to July 13, 1949. The respondents further contend that even
assuming that they were operating the sugar plantation as a partnership the
registration of the articles of general co-partnership on July 14, 1949 had
operated to exempt said partnership from corporate income tax on its net
income during the entire taxable year, from January 1 to December 31, 1949.
The Court of Tax Appeals made a finding that the respondents had actually
operated the "Hacienda Fortuna" as a general partnership from January 1,
1949, and that when its articles of general partnership were registered on July
14, 1949 that registration had the effect of giving the partnership the status of
a registered co-partnership which places it under the purview of Section 24 of
the Tax Code as exempt from the payment of corporate income tax during
the entire taxable year of 1949. The pertinent portion of the decision of the
Court of Tax Appeals reads as follows:
Although petitioners acquired undivided shares in the
Hacienda Fortuna, from the evidence of record it appears to
us that the intention of the parties was to form, and that they
did operate the hacienda as, a general partnership. That this
was their intention is confirmed by the fact that they actually
organized a general co-partnership on July 11, 1949. And the
Articles of General Co-partnership which was registered on
July 14, 1949 provides that the agreement shall be retroactive
as of January 1, 1949. The sole question to be decided is,
Page 210

therefore, whether the partnership is entitled to exemption for
the entire year of 1949, or whether it is taxable as an
unregistered partnership before its articles of partnership was
actually registered.
Section 24 of the Revenue Code imposes an income tax on
corporations. The term "corporation" includes unregistered
general co-partnerships. (See. 84 [b]). Section 26 provides
that persons carrying on business in general co-partnership
duly registered in the mercantile registry shall be liable for
income tax only in their individual capacity. There is no
specific provision of law or regulations as to the date of
commencement of the exemption of a registered general
co-partnership. We find, however, that the Bureau of Internal
Revenue as far back as 1924, issued a ruling which was
published in the Official Gazette to the effect that 'the status
or form of organization of a partnership at the end of the
taxable year will determine its income tax liability for that
year.' We quote:
A & S Co. had been paying income tax for
years as non-registered partnership. On July,
1922, it registered its partnership agreement.
Should it file a return for the period from
January to July of the year of its registration ?
HELD: That it need not do so. For purposes of
the Income Tax Law, the status or form of
organization of a partnership at the end of
the taxable year will determine its income
tax liability for that year. (September 4,
1924.)' (Ruling No. 30, 22 O.G. 3451.) 4
Ruling No. 30 of the Bureau of Internal Revenue, dated
September 4, 1924, does not appear to have been revoked
or even revised or amended. In fact, the same opinion was
reiterated in a ruling dated November 4, 1948. Again, we
quote:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In answer to your letter dated October 15,
1948, requesting opinion whether or not a
commercial partnership, intended to be
registered as evidenced by the partnership
agreement formally executed by the parties
at the time it commenced to do business,
but which was not registered until after the
lapse of several months, should be required
to file two (2) separate returns — one
corresponding to the unregistered period
and another for the period after its
registration, you are informed that, if a
general partnership registers its articles of
partnership within the same taxable year,
which may either be calendar or fiscal year,
in which it commenced business, it is required
to file only one income tax return covering its
income for the period from the date of its
business operation to the end of the taxable
year. However, where the registration takes
place after the end of the taxable year in
which the partnership commenced business,
separate returns should be filed, one
corresponding to the taxable year in which
the partnership did business as an
unregistered partnership, and another
covering the taxable year in which it
operated as a registered partnership. (B. I. R.
ruling, dated November 5, 1948, contained in
a letter addressed to Provincial Examiner
Amante Astudillo, Surigao, Surigao.)
The rule enunciated above that the status of a general
partnership as a registered or unregistered general co-
partnership at the end of the taxable year determines its
liability or exemption from income tax for the entire taxable
year is a sound rule. It does not run counter to any specific
provision of law or regulation. On the other hand, it appears
to us to be in harmony with the intent and purpose of the law
Page 211

to grant exemption to registered general co-partnership and
to tax the partners only in their individual capacity. We note
that when the attention of respondent was called to the
existence of the Bureau's ruling of November 5, 1948, he
merely stated that he was not inclined to reconsider his
decision and would prefer 'to have a judicial pronouncement
on the matter.' (See p. 222, B.I.R. records.)
Moreover, the old Income Tax Law (Act No. 2833, as
amended) contained the same provisions regarding the
exemption from income tax of registered general co-
partnerships as the present law. The practice of the Bureau of
Internal Revenue exempting general co-partnerships from
income tax for the entire year so long as it was registered
within that year continued to be the prevailing rule in 1939,
when the National Internal Revenue Code, Commonwealth
Act No. 466, was enacted. The law governing general co-
partnership contained in the old law was merely reenacted in
the new Code. It is reasonable to suppose that a long
standing administrative practice, if contrary to the intention of
the legislature, would be specifically corrected by it. (1 USTC,
Par. 259; see also 1 USTC, Par. 293). That Congress merely
reenacted the old law in the face of the long continued
practice of the Bureau of Internal Revenue which it published
in the Official Gazette is a strong indication that such
practice has received congressional approval. We find no
justification to deviate from the rule.
We are in accord with the views expressed by the Court of Tax Appeals in the
afore-quoted portion of its decision. The Bureau of Internal Revenue, in the
exercise of its powers relative to the collection of internal revenue taxes, fees
and charges, may make, and has in fact issued, administrative rules and
rulings in connection with the enforcement of the provisions of the National
Internal Revenue Code. There are rulings of the Bureau of Internal Revenue
where the "status-at-the-end-of-the-taxable-year" rule has been applied in
determining the taxpayer's income tax liability during the taxable year. In the
book, "Rules and Rulings on the Philippine Income Tax", a compilation by
Francisco Tantuico, Sr. and Francisco Tantuico Jr. of the rulings of the Bureau
of Internal Revenue, We read:5
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
A child born or adopted during the first fifteen days of
October, if wholly dependent upon the head of the family for
support on December 31 of the year, entitles the latter to an
additional exemption of P600.00 (amount amended) in
accordance with subsections (c) and (d) of section 23 of the
National Internal Revenue Code (Ruling of February 8, 1952).
[p. 65]
A child who becomes 21 years of age during the last 15 days
of June, unless incapable of support for being mentally or
physically defective, does not entitle his parents to any
additional exemption (Rule of February 8, 1952). [pages 65-
66]
A father is entitled to P600.00 (amount amended) additional
exemption for his child born on December 31 of the taxable
year, but not for a child who became of age on September
15, unless the latter is incapable of self-support because he is
physically or mentally defective. (Ruling of July 29, 1948).
[page 66]
A person who married during the first fifteen days of July, if not
legally separated from his spouse on December 31 of that
year is granted the full exemption of P3,000 for said year.
(Ruling of February 8, 1952). [page 58]
Under Section 23 of the National Internal Revenue Code, as
amended by Republic Act 590, a person who marries on
December 31 is entitled to the full exemption of P3,000.00 for
said calendar year; and a child born or Legally adopted on
December 31, wholly dependent upon the taxpayer can be
claimed as an additional exemption of P600 (amount
amended) for the said year. (BIR Ruling of June 19, 1952, p.
58). [page 58]
The Court of Tax Appeals, in its decision, has pointed out that as early as 1924
the Bureau of Internal Revenue had applied the "status-at-the-end-of-the-
taxable-year" rule in determining the income tax liability of a partnership, such
Page 212

that a partnership is considered a registered partnership for the entire taxable
year even if its articles of co-partnership are registered only at the middle of
the taxable year, or in the last month of the taxable year. We agree with the
Court of Tax Appeals that the ruling is a sound one, and it is in consonance
with the purpose of the law in requiring the registration of partnerships. The
policy of the law is to encourage persons doing business under a partnership
agreement to have the partnership agreement, or the articles of partnership,
registered in the mercantile registry, so that the public may know who the real
partners of the partnership are, the capital stock of the partnership, the
interest or contribution of each partner in the capital stock, the proportionate
share of each partner in the profits, and the earnings or salaries of the partner
or partners who render service for the partnership.6 It is precisely in the share of
the profits and the salaries or wages that the partners would receive that the
government is interested in, because it is on these incomes that the
assessment of the income tax is based. It can happen that the profits realized
by an unregistered partnership may be distributed to other persons in addition
to those who appear to the public as the partners. The government may not
be able to trace exactly to whom the profits of an unregistered partnership
go, nor can the government determine the precise participation of the
apparent partners in the profits of the partnership. It is for this reason that the
government imposes a corporate income tax against an unregistered
partnership as an entity, and an individual income tax against the apparent
members thereof. But once the partnership is duly registered, the names of all
the partners are known, the proportional interest of the partners in the business
of the partnership is known, and the government can very well assess the
income tax on the respective income of the partners whose names appear in
the articles of co-partnership. Once the partnership is registered its operation
during the taxable year may be ascertained in all matters regarding its
management, its expenditures, its earnings, and the participation of the
partners in the net profits. If it can be ascertained that the profits of the
partnership have actually been given, or credited, to the partners, then there
is no reason why the partnership should be made to pay a corporate income
tax on the profits realized by the partnership, and at the same time assess an
income tax on the income that the partners had received from the
partnership. And so, We believe that it is a fair and sound application of
Section 24 of the tax code that once a partnership is registered during a
taxable year that partnership should be considered as registered "partnership
exempt from the payment of corporate income tax during that taxable year,
and only the partners thereof should be made to pay income tax on the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
profits of the partnership that were divided among them. Section 26 of the tax
code provides as follows:
SEC. 26 — Tax liability of members of duly registered co-
partnership.—Persons carrying on business in general co-
partnership (compañia colectiva) duly registered in the
mercantile registry, or those exercising a common profession
in general partnership, shall be liable for income tax only in
their individual capacity, and the share in the profits of the
registered general co-partnership (compañia colectiva) or in
the general professional partnership to which any taxable
partner should be entitled, whether distributed or otherwise
shall be returned for taxation and the tax paid in accordance
with the provisions of this title.
It may thus be said that a premium is given to a partnership that is registered
by exempting it from the payment of corporate income tax, and making only
the individual partners pay income tax on the basis of their respective shares
in the partnership profits. On the other hand, the partnership that is not
registered is being penalized by making it pay corporate income tax on the
profits it realizes during a taxable year and at the same time making the
partners thereof pay their individual income tax based on their respective
shares in the profits of the partnership. In other words, there is double
assessment of income tax against the partners of the unregistered partnership,
but only one assessment against the partners of registered partnership.
The exclusion of a registered partnership from the entities subject to the
payment of corporate income tax under Section 24 of the tax code should be
made to cover the entire taxable year, regardless of whether the registration
takes place at the middle, or towards the last days, of the taxable year. This is
so because, after all, the taxable status of the taxpayer, for the purposes of
the payment of income tax, is determined as of the end of the taxable year,
and the income tax is collected after the end of the taxable year. Since it is
the policy of the government to encourage a partnership to register its articles
of co-partnership in order that the government can better ascertain the profits
of the partnership and the distribution of said profits among the partner, this
benefit of exclusion from paying corporate income tax arising from registration
should be liberally extended to registered, or registering, partnerships in order
that the purpose of the government may be attained. The provision of Section
Page 213

24 of the tax code excluding "registered general co-partnership" from the
payment of corporate income tax is not an exemption clause but a
classification clause which must be construed liberally in favor of the taxpayer.
A classification statute, or one which specifies the persons or
property subject and not subject to a tax, is not an exemption
statute and the general rule ... that a tax statute will be
construed in favor of the taxpayer applies. (84 C.J.S., Section
277, page 443)
Any doubt as to the person or property intended to be
included in a tax statute will be resolved in favor of the
taxpayer. (51 Am. Jur., Section 409, page 433).
Once the articles of partnership are registered, the collecting agents of the
government can very well trace the operations of the partnership during the
period of the taxable year prior to the date of registration — that is, if the
partnership had operated as an unregistered partnership prior to the date of
its registration, and require the partners to declare the true income that they
derived from the operations of the partnership during the period prior to the
date of registration and after the date of registration.
We hold that the administrative construction of Section 24 of the tax code
made by the Bureau of Internal Revenue as early as 1924, reiterated in 1948,
as pointed out by the Court of Tax Appeals, being of long standing, not shown
to be contrary to law, and not having been modified up to the time when the
case at bar came up, should be upheld. Considering that most of our tax laws
are patterned after the tax laws of the United States of America, the following
authority is pertinent:
Considerable weight is given to the Treasury Department's
administrative construction of a tax provision and to its
regulations. The Supreme Court at one time said: 'Treasury
regulations and interpretations long continued without
substantial change, applied to unamended or substantially
re-enacted statutes are deemed to have received
congressional approval and have the effect of law ...
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Treasury Department rules and regulations will not be
disturbed except for cogent reasons or unless contrary to the
statute or exceeding departmental authority, and they are
binding on the Commissioner and taxpayer alike. When a
particular construction has been operative over a long period
and has acquired the sanction of usage it is entitled to
"respectful consideration" specially if rights have been
adjusted and determined by it for many years, as a change
may result in inequitable treatment of similarly situated
taxpayers and may occur after many persons have acted
upon the faith of the regulation. The rule is also, perhaps,
particularly applicable where a change in the administrative
construction would produce great administrative
inconvenience or irregularity. Particular weight will be given
to an administrative construction where much latitude for
discretion has been given to the Treasury. Where the basic
provision of the Code is couched in general language an
interpretative regulation is appropriate. Where the statutory
provision is ambiguous the Supreme Court has sustained the
administrative construction particularly where the Congress
did not interfere with the interpretation claimed by the
administrative agency. ("The Law of Federal Income Taxation"
by Jacob Mertens, Jr., Volume 1, 1962 Revision, Section 320,
pages 32-35).
WHEREFORE, the decision of the Court of Tax Appeals appealed from is
affirmed. No pronouncement as to costs. It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Fernando
and Teehankee, JJ., concur.
Barredo and Villamor, JJ., took no part.
Page 214

G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue;
ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS
TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA,
Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit,
and CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or
prohibition proceeding 1 on the validity of Section I of Batas Pambansa Blg.
135 depends upon a showing of its constitutional infirmity. The assailed
provision further amends Section 21 of the National Internal Revenue Code of
1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other
winnings, (d) interest from bank deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar arrangements,
(e) dividends and share of individual partner in the net profits of taxable
partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that
by virtue thereof, "he would be unduly discriminated against by the imposition
of higher rates of tax upon his income arising from the exercise of his
profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. 4 He characterizes the above sction as arbitrary
amounting to class legislation, oppressive and capricious in character 5 For
petitioner, therefore, there is a transgression of both the equal protection and
due process clauses 6 of the Constitution as well as of the rule requiring
uniformity in taxation. 7
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The Court, in a resolution of January 26, 1982, required respondents to file an
answer within 10 days from notice. Such an answer, after two extensions were
granted the Office of the Solicitor General, was filed on May 28, 1982. 8 The
facts as alleged were admitted but not the allegations which to their mind are
"mere arguments, opinions or conclusions on the part of the petitioner, the
truth [for them] being those stated [in their] Special and Affirmative
Defenses." 9 The answer then affirmed: "Batas Pambansa Big. 135 is a valid
exercise of the State's power to tax. The authorities and cases cited while
correctly quoted or paraghraph do not support petitioner's stand." 10 The
prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider
scope, The reason was so clearly set forth by retired Chief Justice Makalintal
thus: "The areas which used to be left to private enterprise and initiative and
which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is
any private individual or group of individuals,' continue to lose their well-
defined boundaries and to be absorbed within activities that the government
must undertake in its sovereign capacity if it is to meet the increasing social
challenges of the times." 11 Hence the need for more revenues. The power to
tax, an inherent prerogative, has to be availed of to assure the performance
of vital state functions. It is the source of the bulk of public funds. To praphrase
a recent decision, taxes being the lifeblood of the government, their prompt
and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute
of sovereignty. It is the strongest of all the powers of of government." 13 It is, of
course, to be admitted that for all its plenitude 'the power to tax is not
unconfined. There are restrictions. The Constitution sets forth such limits .
Adversely affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to invalidate
in appropriate cases a revenue measure. if it were otherwise, there would -be
truth to the 1803 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." 14 In a separate opinion in Graves v. New
York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark
characterized it as "a flourish of rhetoric [attributable to] the intellectual
fashion of the times following] a free use of absolutes." 16 This is merely to
Page 215

emphasize that it is riot and there cannot be such a constitutional mandate.
Justice Frankfurter could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice
Holmess pen: 'The power to tax is not the power to destroy while this Court
sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental
law overrides any legislative or executive, act that runs counter to it. In any
case therefore where it can be demonstrated that the challenged statutory
provision — as petitioner here alleges — fails to abide by its command, then
this Court must so declare and adjudge it null. The injury thus is centered on
the question of whether the imposition of a higher tax rate on taxable net
income derived from business or profession than on compensation is
constitutionally infirm.
4, The 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 or its face, he has not made out a
case. This is merely to adhere to the authoritative doctrine that were the due
process and equal protection clauses are invoked, considering that they arc
not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail. 18
5. 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. 19
6. Now for equal protection. The applicable standard to avoid the charge
that there is a denial of this constitutional mandate whether the assailed act is
in the exercise of the lice power or the power of eminent domain is to
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
demonstrated that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility, or
at the very least, discrimination that finds no support in reason. It suffices then
that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the
conditions not being different, both in the privileges conferred and the
liabilities imposed. Favoritism and undue preference cannot be allowed. For
the principle is that equal protection and security shall be given to every
person under circumtances which if not Identical are analogous. If law be
looked upon in terms of burden or charges, those that fall within a class should
be treated in the same fashion, whatever restrictions cast on some in the
group equally binding on the rest." 20 That same formulation applies as well to
taxation measures. The equal protection clause is, of course, inspired by the
noble concept of approximating the Ideal of the laws benefits being
available to all and the affairs of men being governed by that serene and
impartial uniformity, which is of the very essence of the Idea of law. There is,
however, wisdom, as well as realism in these words of Justice Frankfurter: "The
equality at which the 'equal protection' clause aims is not a disembodied
equality. The Fourteenth Amendment enjoins 'the equal protection of the
laws,' and laws are not abstract propositions. They do not relate to abstract
units A, B and C, but are expressions of policy arising out of specific difficulties,
address to the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or opinion to be
treated in law as though they were the same." 21 Hence the constant
reiteration of the view that classification if rational in character is allowable. As
a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through
Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the
power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional
limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to
the Constitution: "The rule of taxation shag be uniform and equitable." 24 This
requirement is met according to Justice Laurel in Philippine Trust Company v.
Yatco,25 decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found. " 26 He likewise added:
"The rule of uniformity does not call for perfect uniformity or perfect equality,
because this is hardly attainable." 27 The problem of classification did not
Page 216
 DUMAUAL, JEANNE PAULINE J. 2019-2020

present itself in that case. It did not arise until nine years later, when the reasonableness of the distinction between compensation and taxable net
Supreme Court held: "Equality and uniformity in taxation means that all income of professionals and businessman certainly not a suspect classification,
taxable articles or kinds of property of the same class shall be taxed at the
same rate. The taxing power has the authority to make reasonable and WHEREFORE, the petition is dismissed. Costs against petitioner.
natural classifications for purposes of taxation, ... . 28 As clarified by Justice
Tuason, where "the differentiation" complained of "conforms to the practical
dictates of justice and equity" it "is not discriminatory within the meaning of this
clause and is therefore uniform." 29 There is quite a similarity then to the
standard of equal protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in similar situation." 30

8. Further on this point. Apparently, what misled petitioner is his failure to take
into consideration the distinction between a tax rate and a tax base. There is
no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate.
Taxpayers may be classified into different categories. To repeat, it. is enough
that the classification must rest upon substantial distinctions that make real
differences. In the case of the gross income taxation embodied in Batas
Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of
the income to the application of generalized rules removing all deductible
items for all taxpayers within the class and fixing a set of reduced tax rates to
be applied to all of them. Taxpayers who are recipients of compensation
income are set apart as a class. As there is practically no overhead expense,
these taxpayers are e not entitled to make deductions for income tax
purposes because they are in the same situation more or less. On the other
hand, in the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the
same tax rates on the basis of gross income. There is ample justification then
for the Batasang Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net income taxation as
regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit,
considering the (1) lack of factual foundation to show the arbitrary character
of the assailed provision; 31 (2) the force of controlling doctrines on due
process, equal protection, and uniformity in taxation and (3) the

Atty. Santos, Taxation I Page 217


G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER
OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and
mandamus,1 petitioner Chamber of
Real Estate and Builders’ Associations, Inc. is questioning the constitutionality
of Section 27 (E) of Republic Act (RA) 8424 2 and the revenue regulations (RRs)
issued by the Bureau of Internal Revenue (BIR) to implement said provision and
those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo, then
acting Secretary of Finance Juanita D. Amatong and then Commissioner of
Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income
tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of
real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is
implemented by RR 9-98. Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001)
and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of CWT on the sale of
real properties categorized as ordinary assets. Petitioner contends that these
revenue regulations are contrary to law for two reasons: first, they ignore the
different treatment by RA 8424 of ordinary assets and capital assets
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
and second, respondent Secretary of Finance has no authority to collect CWT,
much less, to base the CWT on the gross selling price or fair market value of
the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the
government collects income tax even when the net income has not yet been
determined. They contravene the equal protection clause as well because
the CWT is being levied upon real estate enterprises but not on other business
enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present
case;
(2) whether or not the imposition of the MCIT on domestic
corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real
properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-
2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of
operation, is assessed an MCIT of 2% of its gross income when such MCIT is
greater than the normal corporate income tax imposed under Section
27(A).4 If the regular income tax is higher than the MCIT, the corporation does
not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried
forward and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is hereby
Page 218

imposed on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of
this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT]
over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal
income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The Secretary of
Finance is hereby authorized to suspend the imposition of the [MCIT]
on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate
business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
regulations that shall define the terms and conditions under which he
may suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. – For purposes of applying the [MCIT]
provided under Subsection (E) hereof, the term ‘gross income’ shall
mean gross sales less sales returns, discounts and allowances and cost
of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their
present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold including insurance
while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall
include all costs of production of finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight cost, insurance premiums
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
and other costs incurred to bring the raw materials to the factory or
warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means
gross receipts less sales returns, allowances, discounts and cost of services.
"Cost of services" shall mean all direct costs and expenses necessarily incurred
to provide the services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and
cost of supplies: Provided, however, that in the case of banks, "cost of
services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the
recommendation of the Commissioner of Internal Revenue (CIR),
promulgated RR 9-98 implementing Section 27(E).5 The pertinent portions
thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as
of the end of the taxable year (whether calendar or fiscal year, depending on
the accounting period employed) is hereby imposed upon any domestic
corporation beginning the fourth (4th) taxable year immediately following the
taxable year in which such corporation commenced its business operations.
The MCIT shall be imposed whenever such corporation has zero or negative
taxable income or whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the
income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code
xxx at 32% effective January 1, 2000 and thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal
income tax as computed under Sec. 27(A) of the Code shall be carried
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

forward on an annual basis and credited against the normal income tax for
the three (3) immediately succeeding taxable years. With selling price of more than two 5.0%
million pesos (₱2,000,000.00)
xxx xxx xxx
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of
respondent CIR, promulgated RR 2-98 implementing certain provisions of RA Gross selling price shall mean the consideration stated in the sales document
8424 involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98, or the fair market value determined in accordance with Section 6 (E) of the
income payments from the sale, exchange or transfer of real property, other Code, as amended, whichever is higher. In an exchange, the fair market
than capital assets, by persons residing in the Philippines and habitually value of the property received in exchange, as determined in the Income Tax
engaged in the real estate business were subjected to CWT: Regulations shall be used.

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to
the seller/owner for the sale, exchange or transfer of. – Real property, other
than capital assets, sold by an individual, corporation, estate, trust, trust fund
or pension fund and the seller/transferor is habitually engaged in the real
estate business in accordance with the following schedule –
Where the consideration or part thereof is payable on installment, no
withholding tax is required to be made on the periodic installment payments
where the buyer is an individual not engaged in trade or business. In such a
case, the applicable rate of tax based on the entire consideration shall be
withheld on the last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation
or otherwise, the tax shall be deducted and withheld by the buyer on every
installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Those which are exempt from a Exempt
withholding tax at source as prescribed
in Sec. 2.57.5 of these regulations. Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

With a selling price of five hundred
thousand pesos (₱500,000.00) or less.
With a selling price of more than five
hundred thousand pesos (₱500,000.00)
but not more than two million pesos
(₱2,000,000.00).
1.5%
(J) Gross selling price or total amount of consideration or its equivalent paid to
the seller/owner for the sale, exchange or transfer of real property classified as
3.0%
ordinary asset. - A [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in accordance with Section
6(E) of the Code, whichever is higher, paid to the seller/owner for the sale,
transfer or exchange of real property, other than capital asset, shall be
imposed upon the withholding agent,/buyer, in accordance with the
following schedule:

Atty. Santos, Taxation I Page 220


Where the seller/transferor is exempt from [CWT] in accordance Exempt
with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the
seller/transferor is habitually engaged in the real estate business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand Pesos 3.0%
(₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).
xxx xxx xxx
Gross selling price shall remain the consideration stated in the sales document
or the fair market value determined in accordance with Section 6 (E) of the
Code, as amended, whichever is higher. In an exchange, the fair market
value of the property received in exchange shall be considered as the
consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a corporation
or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in
the year of sale do not exceed 25% of the selling price), the tax shall be
deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment
sale not on the installment plan" (that is, payments in the year of sale exceed
25% of the selling price), the buyer shall withhold the tax based on the gross
selling price or fair market value of the property, whichever is higher, on the
first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the
buyer unless the [CWT] due on the sale, transfer or exchange of real property
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
other than capital asset has been fully paid. (Underlined amendments in the
original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that
any sale, barter or exchange subject to the CWT will not be recorded by the
Registry of Deeds until the CIR has certified that such transfers and
conveyances have been reported and the taxes thereof have been duly
paid:7
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances
of land or land and building/improvement thereon arising from sales, barters,
or exchanges subject to the creditable expanded withholding tax shall not be
recorded by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfers and conveyances have been
reported and the expanded withholding tax, inclusive of the documentary
stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the
guidelines in determining whether a particular real property is a capital or an
ordinary asset for purposes of imposing the MCIT, among others. The pertinent
portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of
real properties shall, unless otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens,
and non-resident aliens engaged in trade or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as ordinary
assets, shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-
98], as amended, based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec.
Page 221

24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net
taxable income.
xxx xxx xxx
c. In the case of domestic corporations. –
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless
of the classification thereof, all of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of
the Code. In lieu of the ordinary income tax, however, domestic corporations
may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is
applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the
following requisites are satisfied: (1) there must be an actual case calling for
the exercise of judicial review; (2) the question before the court must be ripe
for adjudication; (3) the person challenging the validity of the act must have
standing to do so; (4) the question of constitutionality must have been raised
at the earliest opportunity and (5) the issue of constitutionality must be the
very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case.
According to them, there is no actual case calling for the exercise of judicial
power and it is not yet ripe for adjudication because
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
[petitioner] did not allege that CREBA, as a corporate entity, or any of its
members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on
sales of real property. Neither did petitioner allege that its members have shut
down their businesses as a result of the payment of the MCIT or CWT. Petitioner
has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and
revenue regulations have actually and adversely affected it. Lacking
empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise, adjudication would be
no different from the giving of advisory opinion that does not really settle legal
issues.10
An actual case or controversy involves a conflict of legal rights or an assertion
of opposite legal claims which is susceptible of judicial resolution as
distinguished from a hypothetical or abstract difference or dispute.11 On the
other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until petitioner’s
members have shut down their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As we stated in Didipio
Earth-Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the
challenged act, the dispute is said to have ripened into a judicial controversy
even without any other overt act. Indeed, even a singular violation of the
Constitution and/or the law is enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time
than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Page 222

Petitioner is an association of some of the real estate developers and builders
in the Philippines. Petitioners did not allege that [it] itself is in the real estate
business. It did not allege any material interest or any wrong that it may suffer
from the enforcement of [the assailed provisions].15
Legal standing or locus standi is a party’s personal and substantial interest in a
case such that it has sustained or will sustain direct injury as a result of the
governmental act being challenged.16 In Holy Spirit Homeowners Association,
Inc. v. Defensor,17 we held that the association had legal standing because its
members stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx.
There is no dispute that the individual members of petitioner association are
residents of the NGC. As such they are covered and stand to be either
benefited or injured by the enforcement of the IRR, particularly as regards the
selection process of beneficiaries and lot allocation to qualified beneficiaries.
Thus, petitioner association may assail those provisions in the IRR which it
believes to be unfavorable to the rights of its members. xxx Certainly,
petitioner and its members have sustained direct injury arising from the
enforcement of the IRR in that they have been disqualified and eliminated
from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which
does not satisfy the requirements of an actual case, ripeness or legal standing
when paramount public interest is involved.19 The questioned MCIT and CWT
affect not only petitioners but practically all domestic corporate taxpayers in
our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance
of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424
to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of
corporations.21 It was devised as a relatively simple and effective revenue-
raising instrument compared to the normal income tax which is more difficult
to control and enforce. It is a means to ensure that everyone will make some
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
minimum contribution to the support of the public sector. The congressional
deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the
payment of taxes, and thus avoid sharing in the cost of government. In this
regard, the Tax Reform Act introduces for the first time a new concept called
the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in
the country and for administrative convenience. … This will go a long way in
ensuring that corporations will pay their just share in supporting our public life
and our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do
business to the government. They also benefit from the efforts of the
government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to
make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while
having large turn-overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through under-declaration
of income or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why
they have proposed the [MCIT]. Because from experience too, you have
corporations which have been losing year in and year out and paid no tax.
So, if the corporation has been losing for the past five years to ten years, then
that corporation has no business to be in business. It is dead. Why continue if
you are losing year in and year out? So, we have this provision to avoid this
type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued
and repeated losses after operations of a corporation or consistent reports of
minimal net income render its financial statements and its tax payments
suspect. For sure, certain tax avoidance schemes resorted to by corporations
are allowed in our jurisdiction. The MCIT serves to put a cap on such tax
shelters. As a tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful manipulations
Page 223

of deductions and other stratagems. Since the tax base was broader, the tax
rate was lowered.
To further emphasize the corrective nature of the MCIT, the following
safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need to
recoup initial major capital expenditures, the imposition of the MCIT
commences only on the fourth taxable year immediately following the year in
which the corporation commenced its operations.25 This grace period allows a
new business to stabilize first and make its ventures viable before it is subjected
to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid
over the normal income tax which shall be credited against the normal
income tax for the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses, the
law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation
system, several other countries already had their own system of minimum
corporate income taxation. Our lawmakers noted that most developing
countries, particularly Latin American and Asian countries, have the same
form of safeguards as we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course
quite a bit of room for underdeclaration of gross receipts have this same form
of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of income
tax of half a percent (0.5%) of gross assessable income. In Korea a 25% of
taxable income before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The other thing you’ll notice is the preponderance of Latin American countries
that employed this method. Okay, those are additional Latin American
countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama
and Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and confiscatory
which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the
cost of goods sold and other direct expenses; other major expenditures, such
as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account.31 Thus, pegging the tax
base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not
"realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government
can neither exist nor endure. The exercise of taxing power derives its source
from the very existence of the State whose social contract with its citizens
obliges it to promote public interest and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely
legislative.35 Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation.36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on
persons or things within its jurisdiction. In other words, the legislature wields the
power to define what tax shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
Page 224

As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against
its abuse is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it.37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no]
person shall be deprived of life, liberty or property without due process of law."
In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may
properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property.40 But in the same
case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the
authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a
need for proof of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital. 44 Income
means all the wealth which flows into the taxpayer other than a mere return
on capital. Capital is a fund or property existing at one distinct point in time
while income denotes a flow of wealth during a definite period of
time.45 Income is gain derived and severed from capital.46 For income to be
taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital
because capital is not income. In other words, it is income, not capital, which
is subject to income tax. However, the MCIT is not a tax on capital.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of
goods48 and other direct expenses from gross sales. Clearly, the capital is not
being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in
lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net income tax
due from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or taxable income
by eliminating all deductible items and at the same time reducing the
applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular
corporations are found in many jurisdictions. Tax thereon is generally held to
be within the power of a state to impose; or constitutional, unless it interferes
with interstate commerce or violates the requirement as to uniformity of
taxation.50
The United States has a similar alternative minimum tax (AMT) system which is
generally characterized by a lower tax rate but a broader tax base.51 Since
our income tax laws are of American origin, interpretations by American
courts of our parallel tax laws have persuasive effect on the interpretation of
these laws.52 Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are comparable. On
the question of the AMT’s constitutionality, the United States Court of Appeals
for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general
taxpayer distrust of the system growing from large numbers of taxpayers with
large incomes who were yet paying no taxes.
xxx xxx xxx
Page 225

We thus join a number of other courts in upholding the constitutionality of the
[AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and
therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.55
American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive at the
net that it chooses to tax.56 This is because deductions are a matter of
legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of
net income, as the tax base of the MCIT, taken with the reduction of the tax
rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical data to
show that the implementation of the MCIT resulted in the confiscation of their
property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation
that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law
as unconstitutional simply because of its yokes.58 Taxation is necessarily
burdensome because, by its nature, it adversely affects property rights.59 The
party alleging the law’s unconstitutionality has the burden to demonstrate the
supposed violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process
of law because the MCIT is being imposed and collected even when there is
actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
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DUMAUAL, JEANNE PAULINE J. 2019-2020
(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of
[MCIT] is greater than the normal income tax due from such corporation.
(Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation
has zero or negative taxable income, merely defines the coverage of Section
27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject
to an MCIT of 2% of its gross income. This is consistent with the law which
imposes the MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is greater
than the normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a zero or
negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including
income taxes) are collected.61 Under Section 57 of RA 8424, the types of
income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the
second category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary assets are
unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary
assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98
and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave
abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioner’s
conclusion is based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real estate as basis
for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per
transaction basis, i.e., upon consummation of the sale via the CWT, contrary to
Page 226

RA 8424 which calls for the payment of the net income at the end of the
taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets
differently, respondents cannot disregard the distinctions set by the legislators
as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of
Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the
authority to promulgate the necessary rules and regulations for the effective
enforcement of the provisions of the law. Such authority is subject to the
limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement.64 It
is well-settled that an administrative agency cannot amend an act of
Congress.65
We have long recognized that the method of withholding tax at source is a
procedure of collecting income tax which is sanctioned by our tax laws.66 The
withholding tax system was devised for three primary reasons: first, to provide
the taxpayer a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding returns and
third, to improve the government’s cash flow.67 This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies
and reduction of governmental effort to collect taxes through more
complicated means and remedies.68
Respondent Secretary has the authority to require the withholding of a tax on
items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which
provides:
SEC. 57. Withholding of Tax at Source. –
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate of not less than
one percent (1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer for the
taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority
given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is
between the 1%-32% range; the withholding tax is imposed on the income
payable and the tax is creditable against the income tax liability of the
taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations
Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base
of a real estate business’ income tax from net income to GSP or FMV of the
property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer
in order to extinguish its possible tax obligation. 69 They are installments on the
annual tax which may be due at the end of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property
classified as ordinary assets remains to be the entity’s net income imposed
under Section 24 (resident individuals) or Section 27 (domestic corporations) in
relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.
The CWT is to be deducted from the net income tax payable by the taxpayer
at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-
2003 reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income:
Page 227

Section 4. – Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of
real properties shall unless otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts), resident
aliens, and non-resident aliens engaged in trade or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as ordinary
assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-
98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or
25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless
of the classification thereof, all of which are located in the Philippines, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of
the Code. In lieu of the ordinary income tax, however, domestic corporations
may become subject to the [MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax
return and credit the taxes withheld (by the withholding agent/buyer) against
its tax due. If the tax due is greater than the tax withheld, then the taxpayer
shall pay the difference. If, on the other hand, the tax due is less than the tax
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly,
the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to withhold the tax does not know,
nor is he privy to, how much the taxpayer/seller will have as its net income at
the end of the taxable year. Instead, said withholding agent’s knowledge and
privity are limited only to the particular transaction in which he is a party. In
such a case, his basis can only be the GSP or FMV as these are the only factors
reasonably known or knowable by him in connection with the performance of
his duties as a withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the
real property categorized as ordinary assets. On the other hand, Section
27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain
presumed to be realized from the sale of a capital asset based on its GSP or
FMV. This final tax is also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and
final, show that ordinary assets are not treated in the same manner as capital
assets. Final withholding tax (FWT) and CWT are distinguished as follows:
FWT CWT
a) The amount of income tax withheld by a) Taxes withheld on certain
the withholding agent is constituted as a full payments are intended to equal o
and final payment of the income tax due approximate the tax due of the p
from the payee on the said income. said income.
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

Petitioner submits that only passive income can be subjected to withholding

b)The liability for payment of the tax rests tax, whether
b) Payee of income is required to report the final or creditable. According to petitioner, the whole of Section
primarily on the payor as a withholding 57
income and/or pay the difference between governs the withholding of income tax on passive income. The
agent. enumeration
the tax withheld and the tax due on the in Section 57(A) refers to passive income being subjected to FWT.
It follows
income. The payee also has the right to ask that Section 57(B) on CWT should also be limited to passive income:
for a refund if the tax withheld is more than
the tax due. SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules

c) The payee is not required to file an c) The income recipient is still required to file
income tax return for the particular an income tax return, as prescribed in Sec.
income. 73 51 and Sec. 52 of the NIRC, as amended.
As previously stated, FWT is imposed on the sale of capital assets. On the other
hand, CWT is imposed on the sale of ordinary assets. The inherent and
substantial differences between FWT and CWT disprove petitioner’s contention
that ordinary assets are being lumped together with, and treated similarly as,
capital assets in contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of
transaction are contrary to the provisions of RA 8424 on the manner and time
of filing of the return, payment and assessment of income tax involving
ordinary assets. 75
The fact that the tax is withheld at source does not automatically mean that it
is treated exactly the same way as capital gains. As aforementioned, the
mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyer’s act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the
withholding tax method of tax collection.
No Rule that Only Passive
and regulations, the [Secretary] may promulgate, upon the
recommendation of the [CIR], requiring the filing of income tax return
by certain income payees, the tax imposed or prescribed by Sections
74
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5),
28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code
on specified items of income shall be withheld by payor-corporation
and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. — The [Secretary] may,
upon the recommendation of the [CIR], require the withholding of
a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided
for by law, at the rate of not less than one percent (1%) but not more
than thirty-two percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year. (Emphasis
supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of
income and enumerates these as passive income. The BIR defines passive
income by stating what it is not:

Incomes Can Be Subject to CWT …if the income is generated in the active pursuit and performance of the
corporation’s primary purposes, the same is not passive income…76

Atty. Santos, Taxation I Page 229


It is income generated by the taxpayer’s assets. These assets can be in the
form of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a
CWT on "income payable to natural or juridical persons, residing in the
Philippines." There is no requirement that this income be passive income. If that
were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while
Section 57(B) pertains to CWT. The former covers the kinds of passive income
enumerated therein and the latter encompasses any income other than those
listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A)
and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or
deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a
statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to
carry out its functions.77 Similarly, considering that the law uses the general
term "income," the Secretary and CIR may specify the kinds of income the
rules will apply to based on what is feasible. In addition, administrative rules
and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate
them and their specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate
classified as ordinary assets deprives its members of their property without due
process of law because, in their line of business, gain is never assured by mere
receipt of the selling price. As a result, the government is collecting tax from
net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the
seller of the property at the end of the taxable year. The seller will be able to
claim a tax refund if its net income is less than the taxes withheld. Nothing is
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process
requirement applies to the power to tax.79 The CWT does not impose new
taxes nor does it increase taxes.80 It relates entirely to the method and time of
payment.
Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort to
litigation before they are granted a refund.81 This argument is misleading. The
practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the
tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been
used by the enterprise to pay labor wages, materials, cost of money and
other expenses which can then save the entity from having to obtain loans
entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge
investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front"
regulatory fees from at least 20 government agencies.82
Petitioner’s lamentations will not support its attack on the constitutionality of
the CWT. Petitioner’s complaints are essentially matters of policy best
addressed to the executive and legislative branches of the government.
Besides, the CWT is applied only on the amounts actually received or
receivable by the real estate entity. Sales on installment are taxed on a per-
installment basis.83 Petitioner’s desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a practical
business option but it is not a fundamental right which can be demanded
from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing enterprises
Page 230

are not similarly imposed a CWT on their sales, even if their manner of doing
business is not much different from that of a real estate enterprise. Like a
manufacturing concern, a real estate business is involved in a continuous
process of production and it incurs costs and expenditures on a regular basis.
The only difference is that "goods" produced by the real estate business are
house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or
class of persons shall be deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same place and in like
circumstances."85 Stated differently, all persons belonging to the same class
shall be taxed alike. It follows that the guaranty of the equal protection of the
laws is not violated by legislation based on a reasonable classification.
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.86
The taxing power has the authority to make reasonable classifications for
purposes of taxation.87 Inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no constitutional
limitation.88 The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes the real
estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of their
goods sold and the number of transactions involved. The income from the sale
of a real property is bigger and its frequency of transaction limited, making it
less cumbersome for the parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every month
involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
and unmanageable system of taxation and may well defeat the purpose of
the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items
are also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance
and other capital goods yet these are not similarly subjected to the CWT.89 As
already discussed, the Secretary may adopt any reasonable method to carry
out its functions.90 Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s
argument is not accurate. The sales of manufacturers who have clients within
the top 5,000 corporations, as specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the
Registry of Deeds should not effect the regisration of any document
transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to strike
down this rule except to rely on its contention that the CWT is unconstitutional.
We have ruled that it is not. Furthermore, this provision uses almost exactly the
same wording as Section 58(E) of RA 8424 and is unquestionably in
accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any document
transferring real property shall be effected by the Register of Deeds unless the
[CIR] or his duly authorized representative has certified that such transfer has
been reported, and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject to the
penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

The renowned genius Albert Einstein was once quoted as saying "[the] hardest
thing in the world to understand is the income tax." 92 When a party questions
the constitutionality of an income tax measure, it has to contend not only with
Einstein’s observation but also with the vast and well-established jurisprudence
in support of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Atty. Santos, Taxation I Page 232

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. 137377 December 18, 2001 commercial broker's taxes. Respondent questioned this assessment in a letter
dated June 5, 1986.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. On August 27, 1986, respondent corporation received a letter dated August
MARUBENI CORPORATION, respondent. 15, 1986 from petitioner assessing respondent several deficiency taxes. The
assessed deficiency internal revenue taxes, inclusive of surcharge and interest,
PUNO, J.: were as follows:

In this petition for review, the Commissioner of Internal Revenue assails the I. DEFICIENCY INCOME TAX
decision dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. FY ended March 31, 1985
42518 which affirmed the decision dated July 29, 1996 of the Court of Tax
Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Undeclared gross income (Philphos and NDC
Internal Revenue to desist from collecting the 1985 deficiency income, branch construction projects) P967,269,811.14
profit remittance and contractor's taxes from Marubeni Corporation after Less: Cost and expenses (50%) 483,634,905.57
finding the latter to have properly availed of the tax amnesty under Executive
Net undeclared income 483,634,905.57
Orders Nos. 41 and 64, as amended.
Income tax due thereon 169,272,217.00
Respondent Marubeni Corporation is a foreign corporation organized and Add: 50% surcharge 84,636,108.50
existing under the laws of Japan. It is engaged in general import and export
20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90
trading, financing and the construction business. It is duly registered to
engage in such business in the Philippines and maintains a branch office in TOTAL AMOUNT DUE P290,583,972.40
Manila. II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
FY ended March 31, 1985
Sometime in November 1985, petitioner Commissioner of Internal Revenue
issued a letter of authority to examine the books of accounts of the Manila Undeclared gross income from Philphos and
branch office of respondent corporation for the fiscal year ending March NDC construction projects P483,634,905.57
1985. In the course of the examination, petitioner found respondent to have Less: Income tax thereon 169,272,217.00
undeclared income from two (2) contracts in the Philippines, both of which
were completed in 1984. One of the contracts was with the National Amount subject to Tax 314,362,688.57
Development Company (NDC) in connection with the construction and Tax due thereon 47,154,403.00
installation of a wharf/port complex at the Leyte Industrial Development
Add: 50% surcharge 23,577,201.50
Estate in the municipality of Isabel, province of Leyte. The other contract was
with the Philippine Phosphate Fertilizer Corporation (Philphos) for the 20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66
construction of an ammonia storage complex also at the Leyte Industrial TOTAL AMOUNT DUE P83,036,965.16
Development Estate.
III. DEFICIENCY CONTRACTOR'S TAX
On March 1, 1986, petitioner's revenue examiners recommended an FY ended March 31, 1985
assessment for deficiency income, branch profit remittance, contractor's and

Atty. Santos, Taxation I Page 233

 DUMAUAL, JEANNE PAULINE J. 2019-2020

Undeclared gross receipts/gross income from same was petitioner's final decision and that if respondent disagreed with it,
Philphos and NDC construction projects P967,269,811.14 respondent may file an appeal with the Court of Tax Appeals within thirty (30)
days from receipt of the assessment.
Contractor's tax due thereon (4%) 38,690,792.00
Add: 50% surcharge for non-declaration 19,345,396.00 On September 26, 1986, respondent filed two (2) petitions for review with the
20% surcharge for late payment 9,672,698.00 Court of Tax Appeals. The first petition, CTA Case No. 4109, questioned the
deficiency income, branch profit remittance and contractor's tax assessments
Sub-total 67,708,886.00
in petitioner's assessment letter. The second, CTA Case No. 4110, questioned
Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46 the deficiency commercial broker's assessment in the same letter.
TOTAL AMOUNT DUE P85,563,625.46
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
amnesty covering unpaid income taxes for the years 1981 to 1985 was issued.
FY ended March 31, 1985 Under this E.O., a taxpayer who wished to avail of the income tax amnesty
Undeclared share from commission income should, on or before October 31, 1986: (a) file a sworn statement declaring his
(denominated as "subsidy from Home Office") P24,683,114.50 net worth as of December 31, 1985; (b) file a certified true copy of his
statement declaring his net worth as of December 31, 1980 on record with the
Tax due thereon 1,628,569.00 Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of
Add: 50% surcharge for non-declaration 814,284.50 said net worth subject to verification by the BIR; and (c) file a return and pay a
tax equivalent to ten per cent (10%) of the increase in net worth from
20% surcharge for late payment 407,142.25
December 31, 1980 to December 31, 1985.
Sub-total 2,849,995.75
Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 751,539.98 In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty
return dated October 30, 1986 and attached thereto its sworn statement of
TOTAL AMOUNT DUE P3,600,535.68
assets and liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986. The
return was received by the BIR on November 3, 1986 and respondent paid the
The 50% surcharge was imposed for your client's failure to report for tax amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth
purposes the aforesaid taxable revenues while the 25% surcharge was increase between 1981 and 1986.
imposed because of your client's failure to pay on time the above deficiency
percentage taxes. The period of the amnesty in E.O. No. 41 was later extended from October 31,
1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986.
xxx xxx xxx"1
On November 17, 1986, the scope and coverage of E.O. No. 41 was
Petitioner found that the NDC and Philphos contracts were made on a "turn- expanded by Executive Order (E.O.) No. 64. In addition to the income tax
key" basis and that the gross income from the two projects amounted to amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 3
P967,269,811.14. Each contract was for a piece of work and since the projects included estate and donor's taxes under Title III and the tax on business under
called for the construction and installation of facilities in the Philippines, the Chapter II, Title V of the National Internal Revenue Code, also covering the
entire income therefrom constituted income from Philippine sources, hence, years 1981 to 1985. E.O. No. 64 further provided that the immunities and
subject to internal revenue taxes. The assessment letter further stated that the privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and

Atty. Santos, Taxation I Page 234


the period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already filed their
amnesty return under E.O. No. 41, as amended, could avail themselves of the
benefits, immunities and privileges under the new E.O. by filing an amended
return and paying an additional 5% on the increase in net worth to cover
business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by
E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return
under the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to
the BIR equivalent to five percent (5%) of the increase of its net worth
between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax
Appeals rendered a decision in CTA Case No. 4109. The tax court found that
respondent had properly availed of the tax amnesty under E.O. Nos. 41 and
64 and declared the deficiency taxes subject of said case as deemed
cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is
hereby ORDERED to DESIST from collecting the 1985 deficiency taxes it
had assessed against petitioner and the same are deemed
considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order
No. 41, as amended."4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No.
42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed
the decision of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"(1) Whether or not the Court of Appeals erred in affirming the
Decision of the Court of Tax Appeals which ruled that herein
respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders Nos. 41
and 64.
(2) Whether or not respondent is liable to pay the income, branch
profit remittance, and contractor's taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to
the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of
taxes involved herein — income tax, branch profit remittance tax and
contractor's tax. These taxes are covered by the amnesties granted by E.O.
Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the exception in
Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the
amnesty granted thereunder, viz:
"Sec. 4. Exceptions. — The following taxpayers may not avail
themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and
14;
b) Those with income tax cases already filed in Court as of the
effectivity hereof;
c) Those with criminal cases involving violations of the income tax law
already filed in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National
Internal Revenue Code, as amended, insofar as the said liabilities are
concerned;
Page 235

e) Those with tax cases pending investigation by the Bureau of
Internal Revenue as of the effectivity hereof as a result of information
furnished under Section 316 of the National Internal Revenue Code,
as amended;
f) Those with pending cases involving unexplained or unlawfully
acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal
Exactions and Transactions) and Chapter Four (Malversation of Public
Funds and Property) of the Revised Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax amnesty on
October 30, 1986, CTA Case No. 4109 had already been filed and was
pending; before the Court of Tax Appeals. Respondent therefore fell under
the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear
and unambiguous. It excepts from income tax amnesty those taxpayers "with
income tax cases already filed in court as of the effectivity hereof." The point
of reference is the date of effectivity of E.O. No. 41. The filing of income tax
cases in court must have been made before and as of the date
of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under
Section 4 (b) there must have been no income tax cases filed in court against
him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed
for income tax amnesty, provided of course he files it on or before the
deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the
1985 deficiency income, branch profit remittance and contractor's tax
assessments was filed by respondent with the Court of Tax Appeals on
September 26, 1986. When E.O. No. 41 became effective on August 22, 1986,
CTA Case No. 4109 had not yet been filed in court. Respondent corporation
did not fall under the said exception in Section 4 (b), hence, respondent was
not disqualified from availing of the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax
assessment. A branch profit remittance tax is defined and imposed in Section
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue Code. 6 In the
tax code, this tax falls under Title II on Income Tax. It is a tax on income.
Respondent therefore did not fall under the exception in Section 4 (b) when it
filed for amnesty of its deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractor's tax assessment and
respondent's availment of the amnesty under E.O. No. 64. E.O. No. 64
expanded the coverage of E.O. No. 41 by including estate and donor's taxes
and tax on business. Estate and donor's taxes fall under Title III of the Tax Code
while business taxes fall under Chapter II, Title V of the same. The contractor's
tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined
and imposed under the title on business taxes, and is therefore a tax on
business.7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate and donor's
taxes. Instead, Section 8 of E.O. No. 64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are
not contrary to or inconsistent with this amendatory Executive Order
shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not
contrary to or inconsistent with the amendatory act were reenacted in E.O.
No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage
also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this
provision excepts from tax amnesty coverage a taxpayer who has "income
tax cases already filed in court as of the effectivity hereof." As to what
Executive Order the exception refers to, respondent argues that because of
the words "income" and "hereof," they refer to Executive Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be
construed to refer to E.O. No. 41 and its date of effectivity. The general rule is
that an amendatory act operates prospectively.9 While an amendment is
generally construed as becoming a part of the original act as if it had always
been contained therein,10 it may not be given a retroactive effect unless it is
so provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired.11
Page 236

There is nothing in E.O. No. 64 that provides that it should retroact to the date
of effectivity of E.O. No. 41, the original issuance. Neither is it necessarily
implied from E.O. No. 64 that it or any of its provisions should apply
retroactively. Executive Order No. 64 is a substantive amendment of E.O. No.
41. It does not merely change provisions in E.O. No. 41. It supplements the
original act by adding other taxes not covered in the first.12 It has been held
that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to
subject to tax past transactions not subject to tax under the original act.13 In
an amendatory act, every case of doubt must be resolved against its
retroactive effect.14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a
general pardon or intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a
revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who
wish to relent a chance to start with a clean slate.16 A tax amnesty, much like
a tax exemption, is never favored nor presumed in law. 17 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.18 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.19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No.
64 should therefore be construed strictly against the taxpayer. The term
"income tax cases" should be read as to refer to estate and donor's taxes and
taxes on business while the word "hereof," to E.O. No. 64. Since Executive
Order No. 64 took effect on November 17, 1986, consequently, insofar as the
taxes in E.O. No. 64 are concerned, the date of effectivity referred to in
Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No.
64 took effect on November 17, 1986, CTA Case No. 4109 was already filed
and pending in court. By the time respondent filed its supplementary tax
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
amnesty return on December 15, 1986, respondent already fell under the
exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from
availing of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the
amnesty under the two Executive Orders, it is still not liable for the deficiency
contractor's tax because the income from the projects came from the
"Offshore Portion" of the contracts. The two contracts were divided into two
parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the "Offshore Portion" were manufactured
and completed in Japan, not in the Philippines, and are therefore not subject
to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the
background of the two contracts, examine their pertinent provisions and
implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as
the corporate investment arm of the Philippine Government, established the
Philphos to engage in the large-scale manufacture of phosphatic fertilizer for
the local and foreign markets.20 The Philphos plant complex which was
envisioned to be the largest phosphatic fertilizer operation in Asia, and among
the largest in the world, covered an area of 180 hectares within the 435-
hectare Leyte Industrial Development Estate in the municipality of Isabel,
province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install
a modern, reliable, efficient and integrated wharf/port complex at the Leyte
Industrial Development Estate. The wharf/port complex was intended to be
one of the major facilities for the industrial plants at the Leyte Industrial
Development Estate. It was to be specifically adapted to the site for the
handling of phosphate rock, bagged or bulk fertilizer products, liquid materials
and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar),21 and other industrial plants within the Estate. The
bidding was participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and
respondent entered into an agreement entitled "Turn-Key Contract for Leyte
Page 237

Industrial Estate Port Development Project Between National Development
Company and Marubeni Corporation."22 The Port Development Project would
consist of a wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and service buildings,
offsite facilities, harbor service vessels, navigational aid system, fire-fighting
system, area lighting, mobile equipment, spare parts and other related
facilities.23 The scope of the works under the contract covered turn-key supply,
which included grants of licenses and the transfer of technology and know-
how,24 and:
". . . the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing
and commissioning of the Wharf-Port Complex as set forth in Annex I
of this Contract, as well as the coordination of tie-ins at boundaries
and schedule of the use of a part or the whole of the Wharf/Port
Complex through the Owner, with the design and construction of
other facilities around the site. The scope of works shall also include
any activity, work and supply necessary for, incidental to or
appropriate under present international industrial port practice, for
the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned
Annex I."25
The contract price for the wharf/port complex was ¥12,790,389,000.00 and
P44,327,940.00. In the contract, the price in Japanese currency was broken
down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen
Portion II, while the price in Philippine currency was referred to as the
Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in
two (2) ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni
from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of
Finance of Japan extended by the Japanese government as assistance to
foreign governments to promote economic development.26 The OECF
extended to the Philippine Government a loan of ¥7,560,000,000.00 for the
Leyte Industrial Estate Port Development Project and authorized the NDC to
implement the same.27 The other type of financing is an indirect type where
the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of
Japan to advance payment to its sub-contractors.28
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Under the financing schemes, the Japanese Yen Portions I and II and the
Philippine Pesos Portion were further broken down and subdivided according
to the materials, equipment and services rendered on the project. The price
breakdown and the corresponding materials, equipment and services were
contained in a list attached as Annex III to the contract.29
A few months after execution of the NDC contract, Philphos opened for
public bidding a project to construct and install two ammonia storage tanks in
Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that
participated in and won the bidding. Thus, on May 2, 1982, Philphos and
respondent corporation entered into an agreement entitled "Turn-Key
Contract for Ammonia Storage Complex Between Philippine Phosphate
Fertilizer Corporation and Marubeni Corporation."30 The object of the contract
was to establish and place in operating condition a modern, reliable, efficient
and integrated ammonia storage complex adapted to the site for the receipt
and storage of liquid anhydrous ammonia31 and for the delivery of ammonia
to an integrated fertilizer plant adjacent to the storage complex and to
vessels at the dock.32 The storage complex was to consist of ammonia storage
tanks, refrigeration system, ship unloading system, transfer pumps, ammonia
heating system, fire-fighting system, area lighting, spare parts, and other
related facilities.33 The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of licenses
and transfer of technology and know-how,34 and:
". . . the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing
and commissioning of the Ammonia Storage Complex as set forth in
Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and
construction of other facilities at and around the Site. The scope of
works shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial
practice, for the timely and successful implementation of the object
of this Contract, whether or not expressly referred to in the
abovementioned Annex I."35
The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00.
Like the NDC contract, the price was divided into three portions. The price in
Page 238

Japanese currency was broken down into the Japanese Yen Portion I and
Japanese Yen Portion II while the price in Philippine currency was classified as
the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed
by supplier's credit from the Export-Import Bank of Japan. The price stated in
the three portions were further broken down into the corresponding materials,
equipment and services required for the project and their individual prices.
Like the NDC contract, the breakdown in the Philphos contract is contained in
a list attached to the latter as Annex III.36
The division of the price into Japanese Yen Portions I and II and the Philippine
Pesos Portion under the two contracts corresponds to the two parts into which
the contracts were classified — the Foreign Offshore Portion and the Philippine
Onshore Portion. In both contracts, the Japanese Yen Portion I corresponds to
the Foreign Offshore Portion.37 Japanese Yen Portion II and the Philippine
Pesos Portion correspond to the Philippine Onshore Portion.38
Under the Philippine Onshore Portion, respondent does not deny its liability for
the contractor's tax on the income from the two projects. In fact respondent
claims, which petitioner has not denied, that the income it derived from the
Onshore Portion of the two projects had been declared for tax purposes and
the taxes thereon already paid to the Philippine government.39 It is with regard
to the gross receipts from the Foreign Offshore Portion of the two contracts
that the liabilities involved in the assessments subject of this case arose.
Petitioner argues that since the two agreements are turn-key,40 they call for
the supply of both materials and services to the client, they are contracts for a
piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done
and completed within the territorial jurisdiction of the
Philippines.41 Accordingly, respondent's entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials
should be subjected to contractor's tax in accordance with the ruling
in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co.42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as
follows:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"Sec. 205. Contractors, proprietors or operators of dockyards, and
others. —A contractor's tax of four percent of the gross receipts is
hereby imposed on proprietors or operators of the following business
establishments and/or persons engaged in the business of selling or
rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty
contractors, as defined in Republic Act No. 4566;
xxx xxx xxx
(q) Other independent contractors. The term "independent
contractors" includes persons (juridical or natural) not
enumerated above (but not including individuals subject to
the occupation tax under the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties
of such contractors or their employees. It does not include
regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives,
and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications
and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.
xxx xxx xxx43
Under the afore-quoted provision, an independent contractor is a person
whose activity consists essentially of the sale of all kinds of services for a fee,
regardless of whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such contractors or their
employees. The word "contractor" refers to a person who, in the pursuit of
independent business, undertakes to do a specific job or piece of work for
other persons, using his own means and methods without submitting himself to
control as to the petty details.44
Page 239

A contractor's tax is a tax imposed upon the privilege of engaging in
business.45 It is generally in the nature of an excise tax on the exercise of a
privilege of selling services or labor rather than a sale on products;46 and is
directly collectible from the person exercising the privilege.47 Being an excise
tax, it can be levied by the taxing authority only when the acts, privileges or
business are done or performed within the jurisdiction of said authority. 48 Like
property taxes, it cannot be imposed on an occupation or privilege outside
the taxing district.49
In the case at bar, it is undisputed that respondent was an independent
contractor under the terms of the two subject contracts. Respondent,
however, argues that the work therein were not all performed in the
Philippines because some of them were completed in Japan in accordance
with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials
and equipment to be made and the works and services to be performed by
respondent are indeed classified into two. The first part, entitled "Breakdown of
Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided
according to discrete portions of materials and equipment which will
be shipped to Leyte as units and lots. This subdivision of price is to be
used by owner to verify invoice for Progress Payments under Article
19.2.1 of the Contract. The agreed subdivision of Japanese Yen
Portion I is as follows:
xxx xxx xxx50
The subdivision of Japanese Yen Portion I covers materials and equipment
while Japanese Yen Portion II and the Philippine Pesos Portion enumerate
other materials and equipment and the construction and installation work on
the project. In other words, the supplies for the project are listed under Portion
I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant
Section II of the Industrial Plant Department of Marubeni Corporation in Japan
who supervised the implementation of the two projects, testified that all the
machines and equipment listed under Japanese Yen Portion I in Annex III were
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
manufactured in Japan.51 The machines and equipment were designed,
engineered and fabricated by Japanese firms sub-contracted by Marubeni
from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and
supplies to Kawasaki Steel Corporation which did the design, fabrication,
engineering and manufacture thereof;53 Yashima & Co. Ltd. which
manufactured the mobile equipment; Bridgestone which provided the rubber
fenders of the mobile equipment;54 and B.S. Japan for the supply of radio
equipment.55 The engineering and design works made by Kawasaki Steel
Corporation included the lay-out of the plant facility and calculation of the
design in accordance with the specifications given by respondent. 56 All sub-
contractors and manufacturers are Japanese corporations and are based in
Japan and all engineering and design works were performed in that
country.57
The materials and equipment under Portion I of the NDC Port Project is
primarily composed of two (2) sets of ship unloader and loader; several boats
and mobile equipment.58 The ship unloader unloads bags or bulk products
from the ship to the port while the ship loader loads products from the port to
the ship. The unloader and loader are big steel structures on top of each is a
large crane and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the
specifications of the project. After manufacture, they were rolled on to a
barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the unloader
and loader were rolled off the barge and pulled to the pier to the spot where
they were installed.60 Their installation simply consisted of bolting them onto
the pier.61
Like the ship unloader and loader, the three tugboats and a line boat were
completely manufactured in Japan. The boats sailed to Isabel on their own
power. The mobile equipment, consisting of three to four sets of tractors,
cranes and dozers, trailers and forklifts, were also manufactured and
completed in Japan. They were loaded on to a shipping vessel and unloaded
at the Isabel Port. These pieces of equipment were all on wheels and self-
propelled. Once unloaded at the port, they were ready to be driven and
perform what they were designed to do.62
In addition to the foregoing, there are other items listed in Japanese Yen
Portion I in Annex III to the NDC contract. These other items consist of supplies
Page 240

and materials for five (5) berths, two (2) roads, a causeway, a warehouse, a
transit shed, an administration building and a security building. Most of the
materials consist of steel sheets, steel pipes, channels and beams and other
steel structures, navigational and communication as well as electrical
equipment.63
In connection with the Philphos contract, the major pieces of equipment
supplied by respondent were the ammonia storage tanks and refrigeration
units.64 The steel plates for the tank were manufactured and cut in Japan
according to drawings and specifications and then shipped to Isabel. Once
there, respondent's employees put the steel plates together to form the
storage tank. As to the refrigeration units, they were completed and
assembled in Japan and thereafter shipped to Isabel. The units were simply
installed there. 65 Annex III to the Philphos contract lists down under the
Japanese Yen Portion I the materials for the ammonia storage tank, incidental
equipment, piping facilities, electrical and instrumental apparatus, foundation
material and spare parts.
All the materials and equipment transported to the Philippines were inspected
and tested in Japan prior to shipment in accordance with the terms of the
contracts.66 The inspection was made by representatives of respondent
corporation, of NDC and Philphos. NDC, in fact, contracted the services of a
private consultancy firm to verify the correctness of the tests on the machines
and equipment67 while Philphos sent a representative to Japan to inspect the
storage equipment.68
The sub-contractors of the materials and equipment under Japanese Yen
Portion I were all paid by respondent in Japan. In his deposition upon oral
examination, Kenjiro Yamakawa, formerly the Assistant General Manager and
Manager of the Steel Plant Marketing Department, Engineering &
Construction Division, Kawasaki Steel Corporation, testified that the equipment
and supplies for the two projects provided by Kawasaki under Japanese Yen
Portion I were paid by Marubeni in Japan. Receipts for such payments were
duly issued by Kawasaki in Japanese and English.69 Yashima & Co. Ltd. and
B.S. Japan were likewise paid by Marubeni in Japan.70
Between Marubeni and the two Philippine corporations, payments for all
materials and equipment under Japanese Yen Portion I were made to
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Marubeni by NDC and Philphos also in Japan. The NDC, through the Philippine
National Bank, established letters of credit in favor of respondent through the
Bank of Tokyo. The letters of credit were financed by letters of commitment
issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon
respondent's submission of pertinent documents, released the amount in the
letters of credit in favor of respondent and credited the amount therein to
respondent's account within the same bank.71
Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of
testing and commissioning, coordination. . . "72 of the two projects involved
two taxing jurisdictions. These acts occurred in two countries — Japan and the
Philippines. While the construction and installation work were completed
within the Philippines, the evidence is clear that some pieces of equipment
and supplies were completely designed and engineered in Japan. The two
sets of ship unloader and loader, the boats and mobile equipment for the
NDC project and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished products when
shipped to the Philippines. The other construction supplies listed under the
Offshore Portion such as the steel sheets, pipes and structures, electrical and
instrumental apparatus, these were not finished products when shipped to the
Philippines. They, however, were likewise fabricated and manufactured by the
sub-contractors in Japan. All services for the design, fabrication, engineering
and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were rendered
outside the taxing jurisdiction of the Philippines and are therefore not subject
to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co73 is not in point. In that case, the Court
found that Engineering Equipment, although an independent contractor, was
not engaged in the manufacture of air conditioning units in the Philippines.
Engineering Equipment designed, supplied and installed centralized air-
conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system.
It imported some items for the system it designed and installed.74 The issues in
that case dealt with services performed within the local taxing jurisdiction.
There was no foreign element involved in the supply of materials and services.
Page 241
 DUMAUAL, JEANNE PAULINE J. 2019-2020

With the foregoing discussion, it is unnecessary to discuss the other issues raised
by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518
is affirmed.

SO ORDERED.

Atty. Santos, Taxation I Page 242


G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to set aside the decision of the Court of Appeals dated November 7,
1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals
in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed,
to wit:
[Respondent], a domestic corporation organized and
operating under the 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 (Exh. "A").
For the use of the trademark or technology, [respondent] was
obliged to pay SC Johnson and Son, USA royalties based on a
percentage of net sales and subjected the same to 25%
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
withholding tax on royalty payments which [respondent] paid
for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International
Tax Affairs Division (ITAD) of the BIR a claim for refund of
overpaid withholding tax on royalties arguing that, "the
antecedent facts attending [respondent's] case fall squarely
within the same circumstances under which said MacGeorge
and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential
tax rate of 10% should apply to the [respondent]. We
therefore submit that royalties paid by the [respondent] 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 [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-
West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for
Review [filed with the Court of Appeals], par. 12).
[Respondent's] claim for there fund of P963,266.00 was
computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
——— ——— ——— ——— ———
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
Page 243
 DUMAUAL, JEANNE PAULINE J. 2019-2020

November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
This petition for review was filed by the Commissioner of Internal Revenue
raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON
AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION"
TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US
TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX
TREATY.

March 547,253 136,813 54,725 82,088

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty,
which is known as the "most favored nation" clause, the lowest rate of the
April 660,810 165,203 66,081 99,122 Philippine tax at 10% may be imposed on royalties derived by a resident of the
United States from sources within the Philippines only if the circumstances of
May 603,076 150,769 60,308 90,461 the resident of the United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no "matching credit" provision
———— ———— ———— ——— as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax
on royalties under the RP-US Tax Treaty is not paid under similar circumstances
as those obtaining in the RP-West Germany Tax Treaty. Even assuming that the
P6,421,770 P1,605,443 P642,177 P963,2661 phrase "paid under similar circumstances" refers to the payment of royalties,
and not taxes, as held by the Court of Appeals, still, the "most favored nation"
======== ======== ======== ======== clause cannot be invoked for the reason that when a tax treaty contemplates
circumstances attendant to the payment of a tax, or royalty remittances for
The Commissioner did not act on said claim for refund. Private respondent S.C. that matter, these must necessarily refer to circumstances that are tax-related.
Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Finally, petitioner argues that since S.C. Johnson's invocation of the "most
Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. favored nation" clause is in the nature of a claim for exemption from the
5136, to claim a refund of the overpaid withholding tax on royalty payments application of the regular tax rate of 25% for royalties, the provisions of the
from July 1992 to May 1993. treaty must be construed strictly against it.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C.
Johnson and ordered the Commissioner of Internal Revenue to issue a tax
credit certificate in the amount of P963,266.00 representing overpaid
withholding tax on royalty payments, beginning July, 1992 to May, 1993.2
The Commissioner of Internal Revenue thus filed a petition for review with the
Court of Appeals which rendered the decision subject of this appeal on
November 7, 1996 finding no merit in the petition and affirming in toto the CTA
ruling.3
In its Comment, private respondent S.C. Johnson avers that the instant petition
should be denied (1) because it contains a defective certification against
forum shopping as required under SC Circular No. 28-91, that is, the
certification was not executed by the petitioner herself but by her counsel;
and (2) that the "most favored nation" clause under the RP-US Tax Treaty refers
to royalties paid under similar circumstances as those royalties subject to tax in
other treaties; that the phrase "paid under similar circumstances" does not
refer to payment of the tax but to the subject matter of the tax, that is,
royalties, because the "most favored nation" clause is intended to allow the
taxpayer in one state to avail of more liberal provisions contained in another
tax treaty wherein the country of residence of such taxpayer is also a party

Atty. Santos, Taxation I Page 244

 DUMAUAL, JEANNE PAULINE J. 2019-2020

thereto, subject to the basic condition that the subject matter of taxation in FOR
that other tax treaty is the same as that in the original tax treaty under which PETITIONS
the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the FILED WITH
same kind paid under similar circumstances". S.C. Johnson also contends that THE
the Commissioner is estopped from insisting on her interpretation that the SUPREME
phrase "paid under similar circumstances" refers to the manner in which the COURT AND
tax is paid, for the reason that said interpretation is embodied in Revenue THE COURT
Memorandum Circular ("RMC") 39-92 which was already abandoned by the OF APPEALS
Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling TO PREVENT
No. 052-95 which stated that royalties paid to an American licensor are FORUM
subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax SHOPPING
Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be OR
given retroactive effect except if such is prejudicial to the taxpayer pursuant MULTIPLE
to Section 246 of the National Internal Revenue Code. FILING OF
PETITIONS
Petitioner filed Reply alleging that the fact that the certification against forum AND
shopping was signed by petitioner's counsel is not a fatal defect as to warrant COMPLAINT
the dismissal of this petition since Circular No. 28-91 applies only to original S
actions and not to appeals, as in the instant case. Moreover, the requirement
that the certification should be signed by petitioner and not by counsel does TO: xxx xxx
not apply to petitioner who has only the Office of the Solicitor General as xxx
statutory counsel. Petitioner reiterates that even if the phrase "paid under
similar circumstances" embodied in the most favored nation clause of the RP- The attention of the Court has been called to the filing of
US Tax Treaty refers to the payment of royalties and not taxes, still the multiple petitions and complaints involving the same issues in
presence or absence of a "matching credit" provision in the said RP-US Tax the Supreme Court, the Court of Appeals or other tribunals or
Treaty would constitute a material circumstance to such payment and would agencies, with the result that said courts, tribunals or agencies
be determinative of the said clause's application.1âwphi1.nêt have to resolve the same issues.

We address first the objection raised by private respondent that the (1) To avoid the foregoing, in every petition filed with the
certification against forum shopping was not executed by the petitioner Supreme Court or the Court of Appeals, the petitioner aside
herself but by her counsel, the Office of the Solicitor General (O.S.G.) through from complying with pertinent provisions of the Rules of Court
one of its Solicitors, Atty. Tomas M. Navarro. and existing circulars, must certify under oath to all of the
following facts or undertakings: (a) he has not theretofore
SC Circular No. 28-91 provides: commenced any other action or proceeding involving the
same issues in the Supreme Court, the Court of Appeals, or
SUBJECT: any tribunal or
ADDITIONAL agency; . . .
REQUISITES

Atty. Santos, Taxation I Page 245

 DUMAUAL, JEANNE PAULINE J. 2019-2020

(2) Any violation of this revised Circular will entail the following gross amount of the
sanctions: (a) it shall be a cause for the summary dismissal of royalties, and
the multiple petitions or complaints; . . .
b) In the case of the
The circular expressly requires that a certificate of non-forum shopping should Philippines, the least of:
be attached to petitions filed before this Court and the Court of Appeals.
Petitioner's allegation that Circular No. 28-91 applies only to original actions (i) 25
and not to appeals as in the instant case is not supported by the text nor by percent of
the obvious intent of the Circular which is to prevent multiple petitions that will the gross
result in the same issue being resolved by different courts. amount of
the
Anent the requirement that the party, not counsel, must certify under oath royalties;
that he has not commenced any other action involving the same issues in this
Court or the Court of Appeals or any other tribunal or agency, we are inclined (ii) 15
to accept petitioner's submission that since the OSG is the only lawyer for the percent of
petitioner, which is a government agency mandated under Section 35, the gross
Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to be amount of
represented only by the Solicitor General, the certification executed by the the
OSG in this case constitutes substantial compliance with Circular No. 28-91. royalties,
where the
With respect to the merits of this petition, the main point of contention in this royalties are
appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty paid by a
regarding the rate of tax to be imposed by the Philippines upon royalties corporation
received by a non-resident foreign corporation. The provision states insofar as registered
pertinent with the
that — Philippine
Board of
1) Royalties derived by a resident of one of Investments
the Contracting States from sources within and
the other Contracting State may be taxed engaged in
by both Contracting States. preferred
areas of
activities;
2) However, the tax imposed by that
and
Contracting State shall not exceed.

(iii) the
a) In the case of the United
lowest rate
States, 15 percent of the
of Philippine

Atty. Santos, Taxation I Page 246

 DUMAUAL, JEANNE PAULINE J. 2019-2020

tax that equipment, or for

may be information concerning
imposed on industrial, commercial or
royalties of scientific experience.
the same
kind paid For as long as the transfer of technology, under Philippine law,
under is subject to approval, the limitation of the tax rate mentioned
similar under b) shall, in the case of royalties arising in the Republic of
circumstan the Philippines, only apply if the contract giving rise to such
ces to a royalties has been approved by the Philippine competent
resident of authorities.
a third
State.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of
20 percent of the gross amount of such royalties against German income and
xxx xxx xxx corporation tax for the taxes payable in the Philippines on such royalties
where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24
(emphasis supplied) of the RP-Germany Tax Treaty states —

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted 1) Tax shall be determined in the case of a
provision, it is entitled to the concessional tax rate of 10 percent on royalties resident of the Federal Republic of Germany
based on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides: as follows:

(2) However, such royalties may also be xxx xxx xxx

taxed in the Contracting State in which they
arise, and according to the law of that State, b) Subject to the provisions
but the tax so charged shall not exceed: of German tax law
regarding credit for foreign
xxx xxx xxx tax, there shall be allowed
as a credit against German
b) 10 percent of the gross income and corporation tax
amount of royalties arising payable in respect of the
from the use of, or the right following items of income
to use, any patent, arising in the Republic of the
trademark, design or model, Philippines, the tax paid
plan, secret formula or under the laws of the
process, or from the use of or Philippines in accordance
the right to use, industrial, with this Agreement on:
commercial, or scientific

Atty. Santos, Taxation I Page 247

 DUMAUAL, JEANNE PAULINE J. 2019-2020

xxx xxx xxx xxx xxx xxx

dd) According to petitioner, the taxes upon royalties under the RP-US Tax Treaty
royalties, as are not paid under circumstances similar to those in the RP-West Germany Tax
defined in Treaty since there is no provision for a 20 percent matching credit in the former
paragraph convention and private respondent cannot invoke the concessional tax rate
3 of Article on the strength of the most favored nation clause in the RP-US Tax Treaty.
12; Petitioner's position is explained thus:

xxx xxx xxx Under the foregoing provision of the RP-West Germany Tax
Treaty, the Philippine tax paid on income from sources within
c) For the purpose of the the Philippines is allowed as a credit against German income
credit referred in and corporation tax on the same income. In the case of
subparagraph; b) the royalties for which the tax is reduced to 10 or 15 percent
Philippine tax shall be according to paragraph 2 of Article 12 of the RP-West
deemed to be Germany Tax Treaty, the credit shall be 20% of the gross
amount of such royalty. To illustrate, the royalty income of a
German resident from sources within the Philippines arising
xxx xxx xxx
from the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, is taxed at
cc) in the 10% of the gross amount of said royalty under certain
case of conditions. The rate of 10% is imposed if credit against the
royalties for German income and corporation tax on said royalty is
which the allowed in favor of the German resident. That means the rate
tax is of 10% is granted to the German taxpayer if he is similarly
reduced to granted a credit against the income and corporation tax of
10 or 15 per West Germany. The clear intent of the "matching credit" is to
cent soften the impact of double taxation by different jurisdictions.
according
to
The RP-US Tax Treaty contains no similar "matching credit" as
paragraph
that provided under the RP-West Germany Tax Treaty. Hence,
2 of Article
the tax on royalties under the RP-US Tax Treaty is not paid
12, 20
under similar circumstances as those obtaining in the RP-West
percent of
Germany Tax Treaty. Therefore, the "most favored nation"
the gross
clause in the RP-West Germany Tax Treaty cannot be availed
amount of
of in interpreting the provisions of the RP-US Tax Treaty.5
such
royalties.
The petition is meritorious.

Atty. Santos, Taxation I Page 248


We are unable to sustain the position of the Court of Tax Appeals, which was
upheld by the Court of Appeals, that the phrase "paid under similar
circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be
interpreted to refer to payment of royalty, and not to the payment of the tax,
for the reason that the phrase "paid under similar circumstances" is followed
by the phrase "to a resident of a third state". The respondent court held that
"Words are to be understood in the context in which they are used", and since
what is paid to a resident of a third state is not a tax but a royalty "logic
instructs" that the treaty provision in question should refer to royalties of the
same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure
but fails to take into account the purpose animating the treaty provisions in
point. To begin with, we are not aware of any law or rule pertinent to the
payment of royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar circumstances. The tax
rates on royalties and the circumstances of payment thereof are the same for
all the recipients of such royalties and there is no disparity based on nationality
in the circumstances of such payment.6 On the other hand, a cursory reading
of the various tax treaties will show that there is no similarity in the provisions on
relief from or avoidance of double taxation7 as this is a matter of negotiation
between the contracting parties.8 As will be shown later, this dissimilarity is true
particularly in the treaties between the Philippines and the United States and
between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation. 9 The
purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. 10 More precisely, the tax
conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods. 11 The apparent rationale for doing
away with double taxation is of encourage the free flow of goods and
services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic
economies. 12 Foreign investments will only thrive in a fairly predictable and
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate. 13
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. 14
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. 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. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is
that the Philippines will give up a part of the tax in the expectation that the tax
given up for this particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid
under similar circumstances" in the most favored nation clause of the US-RP
Tax Treaty necessarily contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the royalties
are paid for the right to use property or rights, i.e. trademarks, patents and
Page 249

technology, located within the Philippines. 17 The United States is the state of
residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there.
Under the RP-US Tax Treaty, the state of residence and the state of source are
both permitted to tax the royalties, with a restraint on the tax that may be
collected by the state of source. 18 Furthermore, the method employed to
give relief from double taxation is the allowance of a tax credit to citizens or
residents of the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United States tax, but
such amount shall not exceed the limitations provided by United States law for
the taxable year. 19 Under Article 13 thereof, the Philippines may impose one
of three rates — 25 percent of the gross amount of the royalties; 15 percent
when the royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of activities; or the
lowest rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most
favored nation clause, the concessional tax rate of 10 percent provided for in
the RP-Germany Tax Treaty should apply only if the taxes imposed upon
royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid
under similar circumstances. This would mean that private respondent must
prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the
United States in respect of the taxes imposable upon royalties earned from
sources within the Philippines as those allowed to their German counterparts
under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra,
expressly allows crediting against German income and corporation tax of 20%
of the gross amount of royalties paid under the law of the Philippines. On the
other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart
provision with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Double taxation of income shall be avoided in the following
manner:
1) In accordance with the provisions and
subject to the limitations of the law of the
United States (as it may be amended from
time to time without changing the general
principle thereof), the United States shall
allow to a citizen or resident of the United
States as a credit against the United States
tax the appropriate amount of taxes paid or
accrued to the Philippines and, in the case
of a United States corporation owning at
least 10 percent of the voting stock of a
Philippine corporation from which it receives
dividends in any taxable year, shall allow
credit for the appropriate amount of taxes
paid or accrued to the Philippines by the
Philippine corporation paying such dividends
with respect to the profits out of which such
dividends are paid. Such appropriate
amount shall be based upon the amount of
tax paid or accrued to the Philippines, but
the credit shall not exceed the limitations (for
the purpose of limiting the credit to the
United States tax on income from sources
within the Philippines or on income from
sources outside the United States) provided
by United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as
used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is
anchored upon a logical reading of the text in the light of the fundamental
purpose of such treaty which is to grant an incentive to the foreign investor by
lowering the tax and at the same time crediting against the domestic tax
abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere
compositions, but have ends to be achieved and that the general purpose is
Page 250

a more important aid to the meaning of a law than any rule which grammar
may lay down. 20 It is the duty of the courts to look to the object to be
accomplished, the evils to be remedied, or the purpose to be subserved, and
should give the law a reasonable or liberal construction which will best
effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states
that a treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their context and in
the light of its object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to
encourage foreign investors to invest in the Philippines — a crucial economic
goal for developing countries. 23 The goal of double taxation conventions
would be thwarted if such treaties did not provide for effective measures to
minimize, if not completely eliminate, the tax burden laid upon the income or
capital of the investor. Thus, if the rates of tax are lowered by the state of
source, in this case, by the Philippines, there should be a concomitant
commitment on the part of the state of residence to grant some form of tax
relief, whether this be in the form of a tax credit or exemption. 24 Otherwise,
the tax which could have been collected by the Philippine government will
simply be collected by another state, defeating the object of the tax treaty
since the tax burden imposed upon the investor would remain unrelieved. If
the state of residence does not grant some form of tax relief to the investor, no
benefit would redound to the Philippines, i.e., increased investment resulting
from a favorable tax regime, should it impose a lower tax rate on the royalty
earnings of the investor, and it would be better to impose the regular rate
rather than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on "relief
from double taxation" in the two tax treaties in question should be considered
in light of the purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting
party treatment not less favorable than that which has been or may be
granted to the "most favored" among other countries. 25 The most favored
nation clause is intended to establish the principle of equality of international
treatment by providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of the most
favored nation. 26 The essence of the principle is to allow the taxpayer in one
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
state to avail of more liberal provisions granted in another tax treaty to which
the country of residence of such taxpayer is also a party provided that the
subject matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US
Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-
quoted, speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms despite the absence
of a matching credit (20% for royalties) would derogate from the design
behind the most grant equality of international treatment since the tax burden
laid upon the income of the investor is not the same in the two countries. The
similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the need
for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not
give a matching tax credit of 20 percent for the taxes paid to the Philippines
on royalties as allowed under the RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the 10 percent rate granted under
the latter treaty for the reason that there is no payment of taxes on royalties
under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they
are regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the
exemption. 27 The burden of proof is upon him who claims the exemption in his
favor and he must be able to justify his claim by the clearest grant of organic
or statute law. 28 Private respondent is claiming for a refund of the alleged
overpayment of tax on royalties; however, there is nothing on record to
support a claim that the tax on royalties under the RP-US Tax Treaty is paid
under similar circumstances as the tax on royalties under the RP-West
Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision
dated May 7, 1996 of the Court of Tax Appeals and the decision dated
November 7, 1996 of the Court of Appeals are hereby SET ASIDE.
SO ORDERED.
Page 251
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Atty. Santos, Taxation I Page 252


G.R. No. L-66838 December 2, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE
COURT OF TAX APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975
ending 30 June 1975, private respondent Procter and Gamble Philippine
Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its
parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount
of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at
source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner
Commissioner of Internal Revenue a claim for refund or tax credit in the
amount of P4,832,989.26 claiming, among other things, that pursuant to
Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as
amended by Presidential Decree No. 369, the applicable rate of withholding
tax on the dividends remitted was only fifteen percent (15%) (and not thirty-
five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil.,
on 13 July 1977, filed a petition for review with public respondent Court of Tax
Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
CTA rendered a decision ordering petitioner Commissioner to refund or grant
the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division
reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper
party to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax
Code that allows a credit against the US tax due from P&G-USA of
taxes deemed to have been paid in the Philippines equivalent to
twenty percent (20%) which represents the difference between the
regular tax of thirty-five percent (35%) on corporations and the tax of
fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions
necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the
preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and
we will deal with them seriatim in this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of
P&G-Phil. to bring the present claim for refund or tax credit, which need to be
examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the
Commissioner on the administrative level, and neither was it raised by him
before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed
to defeat an otherwise valid claim for refund by raising this question of alleged
incapacity for the first time on appeal before this Court. This is clearly a matter
Page 253

of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in
the claim for refund, is likely to run away, as it were, with the refund instead of
transmitting such refund or tax credit to its parent and sole stockholder. It is
commonplace that in the absence of explicit statutory provisions to the
contrary, the government must follow the same rules of procedure which bind
private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the
same way that private litigants are held to such compliance, save only in
respect of the matter of filing fees from which the Republic of the Philippines is
exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike
any other litigant, be allowed to raise for the first time on appeal questions
which had not been litigated either in the lower court or on the administrative
level. For, if petitioner had at the earliest possible opportunity, i.e., at the
administrative level, demanded that P&G-Phil. produce an express
authorization from its parent corporation to bring the claim for refund, then
P&G-Phil. would have been able forthwith to secure and produce such
authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has
substantive dimensions as well which, as will be seen below, also ultimately
relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for
recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. — No suit
or proceeding shall be maintained in any court for the recovery of
any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum
alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with
the Commissioner of Internal Revenue; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to
Refund Taxes.—The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty. (As amended by P.D. No. 69)
(Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is
P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer"
is defined in our NIRC as referring to "any person subject to tax imposed by the
Title [on Tax on Income]." 2 It thus becomes important to note that under
Section 53 (c) of the NIRC, the withholding agent who is "required to deduct
and withhold any tax" is made " personally liable for such tax" and indeed is
indemnified against any claims and demands which the stockholder might
wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The
withholding agent, P&G-Phil., is directly and independently liable 3 for the
correct amount of the tax that should be withheld from the dividend
remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the
tax withheld be finally found to be less than the amount that should have
been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." 4 The terms liable for tax" and "subject to tax"
both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable
Page 254

for tax" as not "subject to tax." By any reasonable standard, such a person
should be regarded as a party in interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he believes were illegally collected
from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, 5 this Court pointed out that a withholding agent is in fact the agent
both of the government and of the taxpayer, and that the withholding agent
is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding
agent to attach. The reason is to compel the withholding agent to
withhold the tax under all circumstances. In effect, the responsibility
for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of
both the Government and the taxpayer. With respect to the
collection and/or withholding of the tax, he is the Government's
agent. In regard to the filing of the necessary income tax return and
the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held personally
liable for the tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by law. 6 (Emphasis
supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the
dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax
to the government, such authority may reasonably be held to include the authority to file a claim for refund and to
bring an action for recovery of such claim. This implied authority is especially warranted where, is in the instant case,
the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or
telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual
payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is
petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any
deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not
demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government
should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer"
within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to
recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to
P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.—
(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the
Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all
sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from a
domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall
be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the
country in which the non-resident foreign corporation, is domiciled shall allow a credit against the tax
due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%) on corporations and
the tax (15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate
stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign
stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines,"
applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words,
in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-
USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC
specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount
equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent
(35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
Page 255

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit
for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax
rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-
corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only
requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20)
percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal
Revenue Code ("Tax Code") are the following:
Sec. 901 — Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed
by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts
provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes
deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be
made or changed at any time before the expiration of the period prescribed for making a claim for
credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed
against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the
additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under
section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding
company tax imposed by section 541.
(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be
allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. — In the case of a citizen of the United States and
of a domestic corporation, the amount of any income, war profits, and excess profits taxes
paid or accrued during the taxable year to any foreign country or to any possession of the
United States; and
xxx xxx xxx
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Sec. 902. — Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a
domestic corporation which owns at least 10 percent of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall —
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation out of accumulated
profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a
less developed country corporation, be deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid or deemed to be paid by such foreign
corporation to any foreign country or to any possession of the United States on or with
respect to such accumulated profits, which the amount of such dividends bears to the
amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. — For purposes of this section, the term "accumulated
profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits,
or income computed without reduction by the amount of the income, war
profits, and excess profits taxes imposed on or with respect to such profits or
income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits,
or income in excess of the income, war profits, and excess profits taxes
imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated
profits of what year or years such dividends were paid, treating dividends paid in the first 20
days of any year as having been paid from the accumulated profits of the preceding year
or years (unless to his satisfaction shows otherwise), and in other respects treating dividends
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

as having been paid from the most recently accumulated gains, profits, or earning. . . . In order to determine whether US tax law complies with the requirements for applicability of the reduced
(Emphasis supplied) or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the
Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;

Close examination of the above quoted provisions of the US Tax Code 7
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit
for the amount of the dividend tax actually paid
(i.e., withheld) from the dividend remittances to P&G-USA;
shows the following:
b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to
P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least
equal to the amount of the dividend tax waived by the Philippine Government.

b. US law (Section 902, US Tax Code) grants to P&G-USA a

"deemed paid' tax credit 8 for a proportionate part of the corporate income Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically
tax actually paid to the Philippines by P&G-Phil. determined in the following manner:

P100.00 — Pretax net corporate income earned by P&G-Phil.

x 35% — Regular Philippine corporate income tax rate
———
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income
tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This P35.00 — Paid to the BIR by P&G-Phil. as Philippine

"deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was corporate income tax.

in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable
as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it P100.00
came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business -35.00
operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under US ———
law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes P65.00 — Available for remittance as dividends to P&G-USA
actually paid here by P&G-Phil., which are very real indeed.

P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii)
the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by
P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These P65.00 — Dividends remittable to P&G-USA
tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
same income stream. 9 ———
P9.75 — Reduced dividend tax

Atty. Santos, Taxation I Page 257

 DUMAUAL, JEANNE PAULINE J. 2019-2020

P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to
-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine
——— corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC. Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount Section 24 (b) (1), NIRC.
(a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is
to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC. 3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is
identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.
Section 902, Tax Code, may be computed arithmetically as follows:

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of
Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the
provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your
P65.00 — Dividends remittable to P&G-USA contention that our computation of the credit which the U.S. tax law allows in such cases is
- 9.75 — Dividend tax withheld at the reduced (15%) rate erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of
——— credit against the U.S. tax by the recipient of dividends includes a portion of the amount of
P55.25 — Dividends actually remitted to P&G-USA income tax paid by the corporation declaring the dividend in addition to the tax withheld
from the dividend remitted. In other words, the U.S. government will allow a credit to the U.S.

P35.00 — Philippine corporate income tax paid by P&G-Phil. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a

to the BIR portion of the income tax paid by the corporation declaring the dividend. Thus, if a
Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it
will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax
Code. The net income, after income tax, which is P75,000, will then be declared as dividend
to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the
Dividends actually aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the
remitted by P&G-Phil.
dividend can utilize as credit against its U.S. tax payable on said dividends the amount of
to P&G-USA P55.25
P30,000 composed of:
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as
profits earned by
follows:
P&G-Phil. in excess
of income tax
P75,000 x P25,000 = P18,750
———
100,000 **

Atty. Santos, Taxation I Page 258


(2) The amount of 15% of
P75,000 withheld = 11,250
———
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the
dividends received by the U.S. corporation from a Philippine subsidiary is clearly more than
20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be
remitted under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby
amended in the sense that the dividends to be remitted by your client to its parent company
shall be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of
the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked, amended and
modified, the effect of which will reduce the percentage of tax deemed paid and
creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S.
corporation. (Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In
other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was
pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in
Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which
Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United
States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be
allowed as deductions — . . .
(c) Taxes. — . . .
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his
desire to have the benefits of this paragraphs, the tax imposed by this Title shall be credited
with . . .
(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of
domestic corporation, the amount of net income, war profits or excess profits, taxes paid or
accrued during the taxable year to any foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for
taxes actually paid by it to the US government—e.g., for taxes collected by the US government on
dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section
901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as
follows:
(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation
which owns a majority of the voting stock of a foreign corporation from which it receives
dividends in any taxable year shall be deemed to have paid the same proportion of any
income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign
country, upon or with respect to the accumulated profits of such foreign corporation from
which such dividends were paid, which the amount of such dividends bears to the amount
of such accumulated profits: Provided, That the amount of tax deemed to have been paid
under this subsection shall in no case exceed the same proportion of the tax against which
credit is taken which the amount of such dividends bears to the amount of the entire net
income of the domestic corporation in which such dividends are included. The
term "accumulated profits" when used in this subsection reference to a foreign corporation,
means the amount of its gains, profits, or income in excess of the income, war-profits, and
excess-profits taxes imposed upon or with respect to such profits or income; and the
Commissioner of Internal Revenue shall have full power to determine from the accumulated
profits of what year or years such dividends were paid; treating dividends paid in the first sixty
days of any year as having been paid from the accumulated profits of the preceding year
or years (unless to his satisfaction shown otherwise), and in other respects treating dividends
as having been paid from the most recently accumulated gains, profits, or earnings. In the
case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are
determined on the basis of an accounting period of less than one year, the word "year" as
Page 259

used in this subsection shall be construed to mean such accounting period. (Emphasis
supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent
corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a
Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our
NIRC to have paid a proportionate part of the US corporate income tax paid by its US subsidiary,
although such US tax was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is
the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-
owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no
more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the
regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had
failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit
in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions of
administrative implementation arising after the legal question has been answered. The basic legal issue is of course,
this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the
reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax authorities
a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable
reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have
actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen
percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA
"shall allow a credit against
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision
nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes
applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision
which specifies when a particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical problem of
administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until
the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal
Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless
dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here
It is this practical or operating circularity
applicable, was actually imposed and collected. 11
that is in fact avoided by our BIR when it issues rulings that the tax laws of
particular foreign jurisdictions (e.g., Republic of
Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set
out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax
rate. Once such a ruling is rendered, the Philippine subsidiary begins to
withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly
imposed as a condition for the applicability, as a matter of law, of a particular
tax rate. Upon the other hand, upon the determination or recognition of the
applicability of the reduced tax rate, there is nothing to prevent the BIR from
issuing implementing regulations that would require P&G Phil., or any Philippine
corporation similarly situated, to certify to the BIR the amount of the "deemed
paid" tax credit actually subsequently granted by the US tax authorities to
P&G-USA or a US parent corporation for the taxable year involved. Since the
US tax laws can and do change, such implementing regulations could also
provide that failure of P&G-Phil. to submit such certification within a certain
period of time, would result in the imposition of a deficiency assessment for the
twenty (20) percentage points differential. The task of this Court is to settle
which tax rate is applicable, considering the state of US law at a given time.
We should leave details relating to administrative implementation where they
properly belong — with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the
the
government is not, for that reason alone, necessarily the correct reading of
the statute. There are many tax statutes or provisions which are designed, not
Page 260
 DUMAUAL, JEANNE PAULINE J. 2019-2020

to trigger off an instant surge of revenues, but rather to achieve longer-term "deemed paid" tax credit at least equal in amount to the twenty (20)
and broader-gauge fiscal and economic objectives. The task of our Court is to percentage points of dividend tax foregone by the Philippines, in the
give effect to the legislative design and objectives as they are written into the assumption that a positive incentive effect would thereby be felt by the
statute even if, as in the case at bar, some revenues have to be foregone in investor.
that process.
The net effect upon the foreign investor may be shown arithmetically in the
The economic objectives sought to be achieved by the Philippine following manner:
Government by reducing the thirty-five percent (35%) dividend rate to fifteen
percent (15%) are set out in the preambular clauses of P.D. No. 369 which P65.00 — Dividends remittable to P&G-USA (please
amended Section 24 (b) (1), NIRC, into its present form: see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
WHEREAS, it is imperative to adopt measures responsive to ———
the requirements of a developing economy foremost of which is P55.25 — Dividends actually remitted to P&G-USA
the financing of economic development programs;
P55.25
WHEREAS, nonresident foreign corporations with investments in the x 46% — Maximum US corporate income tax rate
Philippines are taxed on their earnings from dividends at the rate of ———
35%; P25.415—US corporate tax payable by P&G-USA
without tax credits
WHEREAS, in order to encourage more capital investment for large
projects an appropriate tax need be imposed on dividends received P25.415
by non-resident foreign corporations in the same manner as the tax - 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
imposed on interest on foreign loans; at 15% (Section 901, US Tax Code)
———
xxx xxx xxx P15.66 — US corporate income tax payable after Section 901
——— tax credit.
(Emphasis supplied)
P55.25
- 15.66
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of
———
foreign equity investment in the Philippines by reducing the tax cost of earning
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
profits here and thereby increasing the net dividends remittable to the
===== taxes without "deemed paid" tax credit.
investor. The foreign investor, however, would not benefit from the reduction
of the Philippine dividend tax rate unless its home country gives it some relief
from double taxation (i.e., second-tier taxation) (the home country would P25.415
simply have more "post-R.P. tax" income to subject to its own taxing power) by - 29.75 — "Deemed paid" tax credit under Section 902 US
allowing the investor additional tax credits which would be applicable against ——— Tax Code (please see page 18 above)
the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a

Atty. Santos, Taxation I Page 261


- 0 - — US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 — Amount received by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US
Tax Code, could offset the US corporate income tax payable on the dividends
remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US
tax credits, still wind up with P55.25, the full amount of the dividends remitted
to P&G-USA net of Philippine taxes. In the calculation of the Philippine
Government, this should encourage additional investment or re-investment in
the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention
"With Respect to Taxes on Income," 15 the Philippines, by a treaty
commitment, reduced the regular rate of dividend tax to a maximum of
twenty percent (20%) of the gross amount of dividends paid to US parent
corporations:
Art 11. — Dividends
xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on
dividends derived from sources within that Contracting State by a
resident of the other Contracting State shall not exceed —
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross
amount of the dividend if during the part of the paying corporation's
taxable year which precedes the date of payment of the dividend
and during the whole of its prior taxable year (if any), at least 10
percent of the outstanding shares of the voting stock of the paying
corporation was owned by the recipient corporation.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the
part of the United States that it "shall allow" to a US parent corporation
receiving dividends from its Philippine subsidiary "a [tax] credit for the
appropriate amount of taxes paid or accrued to the Philippines by the
Philippine [subsidiary] —. 16 This is, of course, precisely the "deemed paid" tax
credit provided for in Section 902, US Tax Code, discussed above. Clearly,
there is here on the part of the Philippines a deliberate undertaking to reduce
the regular dividend tax rate of twenty percent (20%) is a maximum rate, there
is still a differential or additional reduction of five (5) percentage points which
compliance of US law (Section 902) with the requirements of Section 24 (b) (1),
NIRC, makes available in respect of dividends from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or
tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private
respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the
Decision of the and Division of the Court promulgated on 15 April 1988, and in
lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals
in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.
Page 262
 DUMAUAL, JEANNE PAULINE J. 2019-2020

[G.R. No. 108067. January 20, 2000.]

per investigation 110,399.37
CYANAMID PHILIPPINES, INC., Petitioner, v. THE COURT OF APPEALS, THE COURT
OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents. Total Adjustment 152,477.00

DECISION Net income per Investigation 14,727,687.00

Less: Personal and additional exemptions ——————

QUISUMBING, J.:
Amount subject to tax 14,727,687.00

Petitioner disputes the decision 1 of the Court of Appeals which affirmed the Income tax due thereon 25% Surtax 2,385,231.50 3,237,495.00
decision 2 of the Court of Tax Appeals, ordering petitioner to pay respondent
Commissioner of Internal Revenue the amount of three million, seven hundred Less: Amount already assessed 5,161,788.00
seventy-four thousand, eight hundred sixty seven pesos and fifty centavos
(P3,774,867.50) as 25% surtax on improper accumulation of profits for 1981, plus BALANCE 75,709.00
10% surcharge and 20% annual interest from January 30, 1985 to January 30,
1987, under Sec. 25 of the National Internal Revenue Code.chanrobles.com : monthly interest from 1,389,636.00 44,108.00
red
——————
The Court of Tax Appeals made the following factual findings:chanrob1es
virtual 1aw library Compromise penalties ——————

Petitioner, Cyanamid Philippines, Inc., a corporation organized under TOTAL AMOUNT DUE 3,774,867.50 119,817.00" 3
Philippine laws, is a wholly owned subsidiary of American Cyanamid Co.
based in Maine, USA. It is engaged in the manufacture of pharmaceutical On March 4, 1985, petitioner protested the assessments particularly, (1) the
products and chemicals, a wholesaler of imported finished goods, and an 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income
importer/indentor. Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment of
P8,846.72. 4 Petitioner, through its external accountant, Sycip, Gorres, Velayo
On February 7, 1985, the CIR sent an assessment letter to petitioner and & Co., claimed, among others, that the surtax for the undue accumulation of
demanded the payment of deficiency income tax of one hundred nineteen earnings was not proper because the said profits were retained to increase
thousand eight hundred seventeen (P119,817.00) pesos for taxable year 1981, petitioner’s working capital and it would be used for reasonable business
as follows:jgc:chanrobles.com.ph needs of the company. Petitioner contended that it availed of the tax
amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and
"Net income disclosed by the return as audited 14,575,210.00 criminal prosecution granted by the law.

Add: Discrepancies:chanrob1es virtual 1aw library On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to
allow the cancellation of the assessment notices and rendered its resolution,
Professional fees/yr. 17018 262,877.00 as follows:jgc:chanrobles.com.ph

Atty. Santos, Taxation I Page 263

 DUMAUAL, JEANNE PAULINE J. 2019-2020

individual income taxes by petitioner’s accumulation of earnings and profits,

"It appears that your client availed of Executive Order No. 41 under File No. instead of distribution of the same.
32A-F-000455-41B as certified and confirmed by our Tax Amnesty
Implementation Office on October 6, 1987. In denying the petition, the Court of Tax Appeals made the following
pronouncements:jgc:chanrobles.com.ph
In reply thereto, I have the honor to inform you that the availment of the tax
amnesty under Executive Order No. 41, as amended is sufficient basis, in "Petitioner contends that it did not declare dividends for the year 1981 in order
appropriate cases, for the cancellation of the assessment issued after August to use the accumulated earnings as working capital reserve to meet its
21, 1986. (Revenue Memorandum Order No. 4-87) Said availment does not, "reasonable business needs." The law permits a stock corporation to set aside
therefore, result in cancellation of assessments issued before August 21, 1986, a portion of its retained earnings for specified purposes (citing Section 43,
as in the instant case. In other words, the assessments in this case issued on paragraph 2 of the Corporation Code of the Philippines). In the case at bar,
January 30, 1985 despite your client’s availment of the tax amnesty under however, petitioner’s purpose for accumulating its earnings does not fall within
Executive Order No. 41, as amended still subsist. the ambit of any of these specified purposes.

Such being the case, you are therefore, requested to urge your client to pay
this Office the aforementioned deficiency income tax and surtax on undue
accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty (30)
days from receipt hereof, otherwise this office will be constrained to enforce
collection thereof thru summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter." 5
Petitioner appealed to the Court of Tax Appeals. During the pendency of the
case, however, both parties agreed to compromise the 1981 deficiency
income tax assessment of P119,817.00. Petitioner paid a reduced amount —
twenty-six thousand, five hundred seventy-seven pesos (P26,577.00) — as
compromise settlement. However, the surtax on improperly accumulated
profits remained unresolved.
More compelling is the finding that there was no need for petitioner to set
aside a portion of its retained earnings as working capital reserve as it claims
since it had considerable liquid funds. A thorough review of petitioner’s
financial statement (particularly the Balance Sheet, p. 127, BIR Records)
reveals that the corporation had considerable liquid funds consisting of cash
accounts receivable, inventory and even its sales for the period is adequate
to meet the normal needs of the business. This can be determined by
computing the current asset to liability ratio of the company:chanrobles virtual
lawlibrary
current ratio = current assets/current liabilities
= P47,052,535.00/P21,275,544.00
= 2.21:1

Petitioner claimed that CIR’s assessment representing the 25% surtax on its ======
accumulated earnings for the year 1981 had no legal basis for the following
reasons: (a) petitioner accumulated its earnings and profits for reasonable The significance of this ratio is to serve as a primary test of a company’s
business requirements to meet working capital needs and retirement of solvency to meet current obligations from current assets as a going concern
indebtedness; (b) petitioner is a wholly owned subsidiary of American or a measure of adequacy of working capital.
Cyanamid Company, a corporation organized under the laws of the State of
Maine, in the United States of America, whose shares of stock are listed and x x x
traded in New York Stock Exchange. This being the case, no individual
shareholder of petitioner could have evaded or prevented the imposition of

Atty. Santos, Taxation I Page 264

 DUMAUAL, JEANNE PAULINE J. 2019-2020

We further reject petitioner’s argument that "the accumulated earnings tax
does not apply to a publicly-held corporation" citing American jurisprudence
to support its position. The reference finds no application in the case at bar
because under Section 25 of the NIRC as amended by Section 5 of P.D. No.
1379 [1739] (dated September 17, 1980), the exceptions to the accumulated
earnings tax are expressly enumerated, to wit: Bank, non-bank financial
intermediaries, corporations organized primarily, and authorized by the
Central Bank of the Philippines to hold shares of stock of banks, insurance
companies, or personal holding companies, whether domestic or foreign. The
law on the matter is clear and specific. Hence, there is no need to resort to
applicable cases decided by the American Federal Courts for guidance and
enlightenment as to whether the provision of Section 25 of the NIRC should
apply to petitioner.
Equally clear and specific are the provisions of E.O. 41 particularly with respect
to its effectivity and coverage . .
. . . Said availment does not result in cancellation of assessments issued before
August 21, 1986 as petitioner seeks to do in the case at bar. Therefore, the
assessments in this case, issued on January 30, 1985 despite petitioner’s
availment of the tax amnesty under E.O. 41 as amended, still subsist."cralaw
virtua1aw library
x x x
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay
respondent Commissioner of Internal Revenue the sum of P3,774,867.50
representing 25% surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January 30, 1987."
6 medium of permitting its gains and profits to accumulate instead of being
Petitioner appealed the Court of Tax Appeal’s decision to the Court of
Appeals. Affirming the CTA decision, the appellate court
said:jgc:chanrobles.com.ph
"In reviewing the instant petition and the arguments raised herein, We find no
compelling reason to reverse the findings of the respondent Court. The
respondent Court’s decision is supported by evidence, such as petitioner
corporation’s financial statement and balance sheets (p. 127, BIR Records).
On the other hand the petitioner corporation could only come up with an
alternative formula lifted from a decision rendered by a foreign court (Bardahl
Mfg. Corp. v. Commissioner, 24 T.C.M. [CCH] 1030). Applying said formula to its
particular financial position, the petitioner corporation attempts to justify its
accumulated surplus earnings. To Our mind, the petitioner corporation’s
alternative formula cannot overturn the persuasive findings and conclusion of
the respondent Court based, as it is, on the applicable laws and
jurisprudence, as well as standards in the computation of taxes and penalties
practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED
and the decision of the Court of Tax Appeals dated August 6, 1992 in C.T.A.
Case No. 4250 is AFFIRMED in toto." 7
. Hence, petitioner now comes before us and assigns as sole issue:chanrob1es
virtual 1aw library
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER IS
LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR THE YEAR 1981. 8
Section 25 9 of the old National Internal Revenue Code of 1977
states:jgc:chanrobles.com.ph
"SECTION 25. Additional tax on corporation improperly accumulating profits or
surplus. —
"(a) Imposition of tax. — If any corporation is formed or availed of for the
purpose of preventing the imposition of the tax upon its shareholders or
members or the shareholders or members of another corporation, through the
divided or distributed, there is levied and assessed against such corporation,
for each taxable year, a tax equal to twenty-five per-centum of the
undistributed portion of its accumulated profits or surplus which shall be in
addition to the tax imposed by section twenty-four, and shall be computed,
collected and paid in the same manner and subject to the same provisions of
law, including penalties, as that tax.
"(b) Prima facie evidence. — The fact that any corporation is mere holding

Atty. Santos, Taxation I Page 265


company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or indirectly,
by one person.
"(c) Evidence determinative of purpose. — The fact that the earnings or profits
of a corporation are permitted to accumulate beyond the reasonable needs
of the business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.
"(d) Exception — The provisions of this sections shall not apply to banks, non-
bank financial intermediaries, corporation organized primarily, and authorized
by the Central Bank of the Philippines to hold shares of stock of banks,
insurance companies, whether domestic or foreign.chanroblesvirtuallawlibrary
The provision discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income taxes
are not paid on the undeclared dividends received by the shareholders. The
tax on improper accumulation of surplus is essentially a penalty tax designed
to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that
the accumulated earnings tax does not apply to Cyanamid, a wholly owned
subsidiary of a publicly owned company. 10 Specifically, petitioner cites
Golconda Mining Corp. v. Commissioner, 507 F .2d 594, whereby the U.S. Ninth
Circuit Court of Appeals had taken the position that the accumulated
earnings tax could only apply to a closely held corporation.
A review of American taxation history on accumulated earnings tax will show
that the application of the accumulated earnings tax to publicly held
corporations has been problematic. Initially, the Tax Court and the Court of
Claims held that the accumulated earnings tax applies to publicly held
corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that
the accumulated earnings tax could only apply to closely held corporations.
Despite Golconda, the Internal Revenue Service asserted that the tax could
be imposed on widely held corporations including those not controlled by a
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
few shareholders or groups of shareholders. The Service indicated it would not
follow the Ninth Circuit regarding publicly held corporations. 11 In 1984,
American legislation nullified the Ninth Circuit’s Golconda ruling and made it
clear that the accumulated earnings tax is not limited to closely held
corporations. 12 Clearly, Golconda is no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739,
enumerated the corporations exempt from the imposition of improperly
accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c)
insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold shares of stocks of
banks. Petitioner does not fall among those exempt classes. Besides, the rule
on enumeration is that the express mention of one person, thing, act, or
consequence is construed to exclude all others. 13 Laws granting exemption
from tax are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. 14 Taxation is the rule and exemption is the
exception. 15 The burden of proof rests upon the party claiming exemption to
prove that it is, in fact, covered by the exemption so claimed, 16 a burden
which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is that
increase of working capital by a corporation justifies accumulating income.
Petitioner asserts that respondent court erred in concluding that Cyanamid
need not infuse additional working capital reserve because it had
considerable liquid funds based on the 2.21:1 ratio of current assets to current
liabilities. Petitioner relies on the so-called "Bardahl" formula, which allowed
retention, as working capital reserve, sufficient amounts of liquid assets to
carry the company through one operating cycle. The "Bardahl" 17 formula
was developed to measure corporate liquidity. The formula requires an
examination of whether the taxpayer has sufficient liquid assets to pay all of its
current liabilities and any extraordinary expenses reasonably anticipated, plus
enough to operate the business during one operating cycle. Operating cycle
is the period of time it takes to convert cash into raw materials, raw materials
into inventory, and inventory into sales, including the time it takes to collect
payment for the sales. 18
Using this formula, petitioner contends, Cyanamid needed at least
P33,763,624.00 pesos as working capital. As of 1981, its liquid asset was only
P25,776,991.00. Thus, petitioner asserts that Cyanamid had a working capital
Page 266

deficit of P7,986,633.00. 19 Therefore, the P9,540,926.00 accumulated income
as of 1981 may be validly accumulated to increase the petitioner’s working
capital for the succeeding year.
We note, however, that the companies where the "Bardahl" formula was
applied, had operating cycles much shorter than that of petitioner. In Atlas
Tool Co., Inc. v. CIR, 20 the company’s operating cycle was only 3.33 months
or 27.75% of the year. In Cataphote Corp. of Mississippi v. United States, 21 the
corporation’s operating cycle was only 56.87 days, or 15.58% of the year. In
the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a
year, reflecting that petitioner will need sufficient liquid funds, of at least three
quarters of the year, to cover the operating costs of the business. There are
variations in the application of the "Bardahl" formula, such as average
operating cycle or peak operating cycle. In times when there is no recurrence
of a business cycle, the working capital needs cannot be predicted with
accuracy. As stressed by American authorities, although the "Bardahl" formula
is well-established and routinely applied by the courts, it is not a precise rule. It
is used only for administrative convenience. 22 Petitioner’s application of the
"Bardahl" formula merely creates a false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets to current liabilities
and the adoption of the industry standard. 23 The ratio of current assets to
current liabilities is used to determine the sufficiency of working capital.
Ideally, the working capital should equal the current liabilities and there must
be 2 units of current assets for every unit of current liability, hence the so-
called "2 to 1" rule. 24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than
twice its current liabilities. That current ratio of Cyanamid, therefore, projects
adequacy in working capital. Said working capital was expected to increase
further when more funds were generated from the succeeding year’s sales.
Available income covered expenses or indebtedness for that year, and there
appeared no reason to expect an impending ‘working capital deficit’ which
could have necessitated an increase in working capital, as rationalized by
petitioner.
In Basilan Estates, Inc. v. Commissioner of Internal Revenue, 25 we held
that:jgc:chanrobles.com.ph
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
". . . [T]here is no need to have such a large amount at the beginning of the
following year because during the year, current assets are converted into
cash and with the income realized from the business as the year goes, these
expenses may well be taken care of. [Citation omitted]. Thus, it is erroneous to
say that the taxpayer is entitled to retain enough liquid net assets in amounts
approximately equal to current operating needs for the year to cover ‘cost of
goods sold and operating expenses:’ for ‘it excludes proper consideration of
funds generated by the collection of notes receivable as trade accounts
during the course of the year." 26
If the CIR determined that the corporation avoided the tax on shareholders by
permitting earnings or profits to accumulate, and the taxpayer contested
such a determination, the burden of proving the determination wrong,
together with the corresponding burden of first going forward with evidence,
is on the taxpayer. This applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable accumulation of
earnings or profits. 27
In order to determine whether profits are accumulated for the reasonable
needs of the business to avoid the surtax upon shareholders, it must be shown
that the controlling intention of the taxpayer is manifested at the time of
accumulation, not intentions declared subsequently, which are mere
afterthoughts. 28 Furthermore, the accumulated profits must be used within a
reasonable time after the close of the taxable year. In the instant case,
petitioner did not establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the
business.chanrobles.com : law library
In Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue, 29 we
ruled:jgc:chanrobles.com.ph
"To determine the ‘reasonable needs’ of the business in order to justify an
accumulation of earnings, the Courts of the United States have invented the
so-called ‘Immediacy Test’ which construed the words ‘reasonable needs of
the business’ to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for
the reasonable needs of the business, and the penalty tax would apply.
(Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103). 30
Page 267
 DUMAUAL, JEANNE PAULINE J. 2019-2020

In the present case, the Tax Court opted to determine the working capital
sufficiency by using the ratio between current assets to current liabilities. The
working capital needs of a business depend upon the nature of the business,
its credit policies, the amount of inventories, the rate of turnover, the amount
of accounts receivable, the collection rate, the availability of credit to the
business, and similar factors. Petitioner, by adhering to the "Bardahl" formula,
failed to impress the tax court with the required definiteness envisioned by the
statute. We agree with the tax court that the burden of proof to establish that
the profits accumulated were not beyond the reasonable needs of the
company, remained on the taxpayer. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very nature of
its function, is dedicated exclusively to the consideration of tax problems and
has necessarily developed an expertise on the subject, unless there has been
an abuse or improvident exercise of authority. 31 Unless rebutted, all
presumptions generally are indulged in favor of the correctness of the CIR’s
assessment against the taxpayer. With petitioner’s failure to prove the CIR
incorrect, clearly and conclusively, this Court is constrained to uphold the
correctness of tax court’s ruling as affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of
Appeals, sustaining that of the Court of Tax Appeals, is hereby AFFIRMED.
Costs against petitioner.

SO ORDERED.chanrobles.com : virtual law library

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

Atty. Santos, Taxation I Page 268


G.R. No. 157264 January 31, 2008
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CARPIO MORALES, J.:
Petitioner, the Philippine Long Distance Telephone Company (PLDT), claiming
that it terminated in 1995 the employment of several rank-and-file, supervisory,
and executive employees due to redundancy; that in compliance with labor
law requirements, it paid those separated employees separation pay and
other benefits; and that as employer and withholding agent, it deducted from
the separation pay withholding taxes in the total amount of P23,707,909.20
which it remitted to the Bureau of Internal Revenue (BIR), filed on November
20, 1997 with the BIR a claim for tax credit or refund of the P23,707,909.20,
invoking Section 28(b)(7)(B) of the 1977 National Internal Revenue
Code1 which excluded from gross income
[a]ny amount received by an official or employee or by his heirs from
the employer as a consequence of separation of such official or
employee from the service of the employer due to death, sickness or
other physical disability or for any cause beyond the control of the
said official or employee.2 (Underscoring supplied)
As the BIR took no action on its claim, PLDT filed a claim for judicial refund
before the Court of Tax Appeals (CTA).
In its Answer,3 respondent, the Commissioner of Internal Revenue, contended
that PLDT failed to show proof of payment of separation pay and remittance
of the alleged withheld taxes.4
PLDT later manifested on March 19, 1998 that it was reducing its claim
to P16,439,777.61 because a number of the separated employees opted to
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
file their respective claims for refund of taxes erroneously withheld from their
separation pay.5
PLDT thereafter retained Sycip Gorres Velayo and Company (SGV) to conduct
a special audit examination of various receipts, invoices and other long
accounts, and moved to avail of the procedure laid down in CTA Circular No.
1-95, as amended by CTA Circular No. 10-97, allowing the presentation of a
certification of an independent certified public accountant in lieu of
voluminous documents.6 The CTA thereupon appointed Amelia Cabal
(Cabal) of SGV as Commissioner of the court.7 Cabal's audit report, which
formed part of PLDT's evidence,8 adjusted PLDT's claim to P6,679,167.72.9
By Decision10 of July 25, 2000, the CTA denied PLDT's claim on the ground that
it "failed to sufficiently prove that the terminated employees received
separation pay and that taxes were withheld therefrom and remitted to the
BIR."11
PLDT filed a Motion for New Trial/Reconsideration, praying for an opportunity
to present the receipts and quitclaims executed by the employees and prove
that they received their separation pay.12 Justifying its motion, PLDT alleged
that
x x x [t]hese Receipts and Quitclaims could not be presented during
the course of the trial despite diligent efforts, the files having been
misplaced and were only recently found. Through excusable mistake
or inadvertence, undersigned counsel relied on the audit of SGV &
Co. of the voluminous cash salary vouchers, and was thus not made
wary of the fact that the cash salary vouchers for the rank and file
employees do not have acknowledgement receipts, unlike the cash
salary vouchers for the supervisory and executive employees. If
admitted in evidence, these Receipts and Quitclaims, together with
the cash salary vouchers, will prove that the rank and file employees
received their separation pay from petitioner.13 (Underscoring
supplied)
The CTA denied PLDT's motion.14
Page 269

PLDT thus filed a Petition for Review15 before the Court of Appeals which, by
Decision16 of February 11, 2002, dismissed the same. PLDT's Motion for
Reconsideration17 having been denied,18 it filed the present Petition for Review
on Certiorari,19 faulting the appellate court to have committed grave abuse
of discretion
A.
. . . WHEN IT HELD THAT PROOF OF PAYMENT OF SEPARATION PAY TO
THE EMPLOYEES IS REQUIRED IN ORDER TO AVAIL OF REFUND OF TAXES
ERRONEOUSLY PAID TO THE BUREAU OF INTERNAL REVENUE.
B.
. . . WHEN IT HELD THAT PETITIONER FAILED TO ESTABLISH THAT
PETITIONER'S EMPLOYEES RECEIVED THEIR SEPARATION PAY.
C.
. . . IN DISREGARDING THE CERTIFICA-TION/REPORT OF SGV & CO.,
WHICH CERTIFIED THAT PETITIONER IS ENTITLED TO A REFUND OF THE
AMOUNT OF P6,679,167.72.
D.
. . . IN NOT ORDERING A NEW TRIAL TO ALLOW PETITIONER TO PRESENT
ADDITIONAL EVIDENCE IN SUPPORT THEREOF.20
PLDT argues against the need for proof that the employees received their
separation pay and proffers the issue in the case in this wise:
It is not essential to prove that the separation pay benefits were
actually received by the terminated employees. This issue is not for
the CTA, nor the Court of Appeals to resolve, but is a matter that falls
within the competence and exclusive jurisdiction of the Department
of Labor and Employment and/or the National Labor Relations
Commission. x x x
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Proving, or submitting evidence to prove, receipt of separation pay
would have been material, relevant and necessary if its deductibility
as a business expense has been put in issue. But this has never been
an issue in the instant case. The issue is whether or not the withholding
taxes, which Petitioner remitted to the BIR, should be refunded for
having been erroneously withheld and paid to the latter.
For as long as there is no legal basis for the payment of taxes to the
BIR, the taxpayer is entitled to claim a refund therefore. Hence, any
taxes withheld from separation benefits and paid to the BIR constitute
erroneous payment of taxes and should therefore, be
refunded/credited to the taxpayer/withholding agent, regardless of
whether or not separation pay was actually paid to the concerned
employees.21 (Emphasis in the original; underscoring supplied)
PLDT's position does not lie. Tax refunds, like tax exemptions, are construed
strictly against the taxpayer and liberally in favor of the taxing authority, and
the taxpayer bears the burden of establishing the factual basis of his claim for
a refund.22
Under the earlier quoted portion of Section 28 (b)(7)(B) of the National Internal
Revenue Code of 1977 (now Section 32(B)6(b) of the National Internal
Revenue Code of 1997), it is incumbent on PLDT as a claimant for refund on
behalf of each of the separated employees to show that each employee did
x x x reflect in his or its own return the income upon which any
creditable tax is required to be withheld at the source. Only when
there is an excess of the amount of tax so withheld over the tax due
on the payee's return can a refund become possible.
A taxpayer must thus do two things to be able to successfully make a
claim for the tax refund: (a) declare the income payments it received
as part of its gross income and (b) establish the fact of withholding.
On this score, the relevant revenue regulation provides as follows:
"Section 10. Claims for tax credit or refund. - Claims for tax
credit or refund of income tax deducted and withheld on
income payments shall be given due course only when it is
Page 270

shown on the return that the income payment received was
declared as part of the gross income and the fact of
withholding is established by a copy of the statement duly
issued by the payer to the payee (BIR Form No. 1743.1)
showing the amount paid and the amount of tax withheld
therefrom."23 (Underscoring supplied)
In fine, PLDT must prove that the employees received the income payments as
part of gross income and the fact of withholding.
The CTA found that PLDT failed to establish that the redundant employees
actually received separation pay and that it withheld taxes therefrom and
remitted the same to the BIR, thus:
With respect to the redundant rank and file employees' final
payment/terminal pay x x x, the cash salary vouchers relative thereto
have no payment acknowledgement receipts. Inasmuch as
these cash vouchers were not signed by the respective employees to
prove actual receipt of payment, the same merely serves as proofs of
authorization for payment and not actual payment by the Petitioner
of the redundant rank and file employees' separation pay and other
benefits. In other words, Petitioner failed to prove that the rank and
file employees were actually paid separation pay and other benefits.
To establish that the withholding taxes deducted from the redundant
employees' separation pay/other benefits were actually remitted to
the BIR, therein petitioner submitted the following:
Exhibit
a) Monthly Remittance Return of Income Taxes D
Withheld for December 1995
b) Revised SGV & Co. Certification E to E-3-d
c) Annual Information Return of Income Tax E-6
Withheld on Compensation, Expanded and Final
Withholding Taxes for the year 1995
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
d) Summary of Income Taxes Withheld for the E-6-a
calendar year ended December 31, 1995
e) Summary of Gross Compensation and Tax E-6-b to E-6-e
Withheld
However, it cannot be determined from the above documents
whether or not Petitioner actually remitted the total income taxes
withheld from the redundant employees' taxable compensation
(inclusive of the separation pay/other benefits) for the year 1995. The
amounts of total taxes withheld for each redundant employees (Exhs.
E-4, E-5, E-7, inclusive) cannot be verified against the "Summary of
Gross Compensation and Tax Withheld for 1995" (Exhs. E-6-b to E-6-e,
inclusive) due to the fact that this summary enumerates the amounts
of income taxes withheld from Petitioner's employees on per
district/area basis. The only schedule (with names, corresponding
gross compensation, and withholding taxes) attached to the
summary was for the withholding taxes on service terminal pay (Exh. E-
6-e). However, the names listed thereon were not among the names
of the redundant separated employees being claimed by petitioner.
xxxx
It is worthy to note that Respondent presented a witness in the person
of Atty. Rodolfo L. Salazar, Chief of the BIR Appellate Division, who
testified that a portion of the Petitioner's original claim for refund of
P23,706,908.20 had already been granted. He also testified that out of
769 claimants, who opted to file directly with the BIR, 766 had been
processed and granted. In fact, x x x three claims were not processed
because the concerned taxpayer failed to submit the income tax
returns and withholding tax certificates. Considering that no
documentary evidence was presented to bolster said testimony, We
have no means of counter checking whether the 766 alleged to have
been already granted by the Respondent pertained to the
P16,439,777.61 claim for refund withdrawn by the Petitioner from the
instant petition or to the remaining balance of P6,679,167.72 which is
the subject of this claim.24 (Emphasis and underscoring supplied)
Page 271

The appellate court affirmed the foregoing findings of the CTA. Apropos is this
Court's ruling in Far East Bank and Trust Company v. Court of Appeals:25
The findings of fact of the CTA, a special court exercising particular
expertise on the subject of tax, are generally regarded as final,
binding, and conclusive upon this Court, especially if these are
substantially similar to the findings of the C[ourt of] A[ppeals] which is
normally the final arbiter of questions of fact.26 (Underscoring
supplied)
While SGV certified that it had "been able to trace the remittance of the
withheld taxes summarized in the C[ash] S[alary] V[ouchers] to the Monthly
Remittance Return of Income Taxes Withheld for the appropriate period
covered by the final payment made to the concerned executives,
supervisors, and rank and file staff members of PLDT,"27 the same cannot be
appreciated in PLDT's favor as the courts cannot verify such claim. While the
records of the case contain the Alphabetical List of Employee from Whom
Taxes Were Withheld for the year 1995 and the Monthly Remittance Returns of
Income Taxes Withheld for December 1995, the documents from which SGV
"traced" the former to the latter have not been presented. Failure to present
these documents is fatal to PLDT's case. For the relevant portions of CTA
Circular 1-95 instruct:
1. The party who desires to introduce as evidence such voluminous
documents must, after motion and approval by the Court, present:
(a) a Summary containing, among others, a chronological listing of
the numbers, dates and amounts covered by the invoices or receipts
and the amount/s of tax paid; and (b) a Certification of an
independent Certified Public Accountant attesting to the correctness
of the contents of the summary after making an examination,
evaluation and audit of the voluminous receipts and invoices x x x
2. The method of individual presentation of each and every receipt,
invoice or account for marking, identification and comparison with
the originals thereof need not be done before the Court or Clerk of
Court anymore after the introduction of the summary and CPA
certification. It is enough that the receipts, invoices, vouchers or other
documents covering the said accounts or payment to be introduced
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
in evidence must be pre-marked by the party concerned and
submitted to the Court in order to be made accessible to the adverse
party who desires to check and verify the correctness of the summary
and CPA certification. Likewise the originals of the voluminous
receipts, invoices and accounts must be ready for verification and
comparison in case of doubt on the authenticity thereof is raised
during the hearing or resolution of the formal offer of evidence.
(Emphasis and underscoring supplied)
Atlas Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue,28 citing Commissioner of Internal Revenue v. Manila Mining
Corporation29 explains the need for the promulgation of the immediately-
cited CTA Circular and its effect:
x x x The circular, in the interest of speedy administration of justice,
was promulgated to avoid the time-consuming procedure of
presenting, identifying and marking of documents before the Court. It
does not relieve respondent of its imperative
task of premarking photocopies of sales receipts and invoices
and submitting the same to the court after the independent CPA shall
have examined and compared them with the originals. Without
presenting these pre-marked documents as evidence - from which
the summary and schedules were based, the court cannot verify the
authenticity and veracity of the independent auditor's conclusions.
(Italics in the original; Emphasis and underscoring supplied).30
On the denial of PLDT's motion for new trial: new trial may be granted on
either of these grounds:
a) Fraud, accident, mistake or excusable negligence which ordinary
prudence could not have guarded against and by reason of which
such aggrieved party has probably been impaired in his rights; or
b) Newly discovered evidence, which he could not, with reasonable
diligence, have discovered and produced at the trial, and which if
presented would probably alter the result.31
Page 272

Newly discovered evidence as a basis of a motion for new trial should be
supported by affidavits of the witnesses by whom such evidence is expected
to be given, or by duly authenticated documents which are proposed to be
introduced in evidence.32 And the grant or denial of a new trial is, generally
speaking, addressed to the sound discretion of the court which cannot be
interfered with unless a clear abuse thereof is shown.33 PLDT has not shown any
such abuse, however.
The affirmance by the appellate court of the CTA's denial of PLDT's motion for
new trial on the ground of "newly discovered evidence," viz:
xxxx
The petitioner appended to its "Motion for New Trial", etc. ,
unnotarized copies of "Receipts, Release and Quitclaim" bearing the
signatures purportedly of those employees for whom the Petitioner
filed the "Petition" before the CTA, dated December 28, 1995 x x x[.]34
xxxx
Although the Rules require the appendage, by the Petitioner, of
the "Affidavits of Witnesses" it intends to present in a new trial, the
Petitioner failed to append to its "Motion for New Trial" any affidavits
of said witnesses. The "Receipts, Releases, and Quitclaims" appended
to the Petition are not authenticated. Indeed, the said deeds were
not notarized, despite their having been signed, allegedly by the
employees, as early as December 28, 1995, or approximately two (2)
years before the Petitioner filed the Petition before the CTA. It
behooved the Petitioner to have appended the Affidavits of the
separated employees to authenticate the "Receipts, Releases and
Quitclaims" purportedly executed by them, respectively. The
petitioner did not.
The Petitioner wanted the CTA to believe that the employees
executed the aforesaid "Receipts, Releases and Quitclaims" as early
as December 28, 1995, and kept the same in its possession and
custody. However, the petitioner divulged the existence of said
Receipts, etc., only when it filed its "Motion for New Trial, etc." on
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
August 18, 2000, or an interregnum of almost five (5) years. None of
the responsible officers of the Petitioner, especially the custodian of
said Receipts, etc., executed an "Affidavit" explaining why the same
(a) were not notarized on or about December 28, 1995; (b) whether
the said deeds were turned over to its counsel when it filed the
Petition at bench; (c) why it failed to present the said Receipts to the
SGV & Co., while the latter was conducting its examination and/or
audit of the records of the Petitioner. It is incredible that, if it is true, as
claimed by Petitioner, the employees, indeed, signed the said
Receipts on December 28, 1995, the Petitioner, one of the biggest
corporations in the Philippines and laden with competent execu-
tives/officers/employees, did not bother having the same notarized
on or about December 28, 1995. For sure, when the Petitioner
endorsed the preparation and filing of the Petition to its counsel, it
should have collated all the documents necessary to support its
Petition and submit the same to its counsel. If the Petitioner did, its
counsel has not explained why it failed to present the same before
the Commissioner and/or adduce the same in evidence during the
hearing of the Petition on its merits with the CTA. We are convinced
that the said Receipts, etc. were antedated and executed only after
the CTA rendered its Decision and only in anticipation of the "Motion
for New Trial, etc." filed by the Petitioner.35 (Emphasis and
underscoring in the original),
is thus in order.
Finally, on PLDT's plea for a liberal application of the rules of
procedure,36 Commissioner of Internal Revenue v. A. Soriano
Corporation37 furnishes a caveat on the matter:
Perhaps realizing that under the Rules the said report cannot be
admitted as newly discovered evidence, the petitioner invokes a
liberal application of the Rules. He submits that Section 8 of the Rules
of the Court of Tax Appeals declaring that the latter shall not be
governed strictly by technical rules of evidence mandates a
relaxation of the requirements of new trial on the basis of newly
discovered evidence. This is a dangerous proposition and one which
we refuse to countenance. We cannot agree more with the Court of
Appeals when it stated thus,
Page 273
 DUMAUAL, JEANNE PAULINE J. 2019-2020

"To accept the contrary view of the petitioner would give rise
to a dangerous precedent in that there would be no end to a
hearing before respondent court because, every time a party
is aggrieved by its decision, he can have it set aside by asking
to be allowed to present additional evidence without having
to comply with the requirements of a motion for new trial
based on newly discovered evidence. Rule 13, Section 5 of
the Rules of the Court of Tax Appeals should not be ignored
at will and at random to the prejudice of the orderly
presentation of issues and their resolution. To do so would
affect, to a considerable extent, the stability of judicial
decisions."

We are left with no recourse but to conclude that this is a simple case
of negligence on the part of the petitioner. For this act of negligence,
the petitioner cannot be allowed to seek refuge in a liberal
application of the Rules. For it should not be forgotten that the first
and fundamental concern of the rules of procedure is to secure a just
determination of every action. In the case at bench, a liberal
application of the rules of procedure to suit the petitioner's purpose
would clearly pave the way for injustice as it would be rewarding an
act of negligence with undeserved tolerance.38 (Underscoring
supplied)

At all events, the alleged "newly discovered evidence" that PLDT seeks to offer
does not suffice to establish its claim for refund, as it would still have to comply
with Revenue Regulation 6-85 by proving that the redundant employees, on
whose behalf it filed the claim for refund, declared the separation pay
received as part of their gross income. Furthermore, the same Revenue
Regulation requires that "the fact of withholding is established by a copy of
the statement duly issued by the payor to the payee (BIR Form No. 1743.1)
showing the amount paid and the amount of tax withheld therefrom."

Atty. Santos, Taxation I Page 274


G.R. Nos. 141104 & 148763 June 8, 2007
ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court are the consolidated cases involving the unsuccessful claims
of herein petitioner Atlas Consolidated Mining and Development Corporation
(petitioner corporation) for the refund/credit of the input Value Added Tax
(VAT) on its purchases of capital goods and on its zero-rated sales in the
taxable quarters of the years 1990 and 1992, the denial of which by the Court
of Tax Appeals (CTA), was affirmed by the Court of Appeals.
Petitioner corporation is engaged in the business of mining, production, and
sale of various mineral products, such as gold, pyrite, and copper
concentrates. It is a VAT-registered taxpayer. It was initially issued VAT
Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register
anew with the appropriate revenue district office (RDO) of the Bureau of
Internal Revenue (BIR) when it moved its principal place of business, and it was
re-issued VAT Registration No. 32-0-004622, dated 15 August 1990.1
G.R. No. 141104
Petitioner corporation filed with the BIR its VAT Return for the first quarter of
1992.2 It alleged that it likewise filed with the BIR the corresponding application
for the refund/credit of its input VAT on its purchases of capital goods and on
its zero-rated sales in the amount of P26,030,460.00.3 When its application for
refund/credit remained unresolved by the BIR, petitioner corporation filed on
20 April 1994 its Petition for Review with the CTA, docketed as CTA Case No.
5102. Asserting that it was a "zero-rated VAT person," it prayed that the CTA
order herein respondent Commissioner of Internal Revenue (respondent
Commissioner) to refund/credit petitioner corporation with the amount
of P26,030,460.00, representing the input VAT it had paid for the first quarter of
1992. The respondent Commissioner opposed and sought the dismissal of the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
petition for review of petitioner corporation for failure to state a cause of
action. After due trial, the CTA promulgated its Decision 4 on 24 November
1997 with the following disposition –
WHEREFORE, in view of the foregoing, the instant claim for refund is
hereby DENIED on the ground of prescription, insufficiency of
evidence and failure to comply with Section 230 of the Tax Code, as
amended. Accordingly, the petition at bar is hereby DISMISSED for
lack of merit.
The CTA denied the motion for reconsideration of petitioner corporation in a
Resolution5 dated 15 April 1998.
When the case was elevated to the Court of Appeals as CA-G.R. SP No.
47607, the appellate court, in its Decision,6 dated 6 July 1999, dismissed the
appeal of petitioner corporation, finding no reversible error in the CTA
Decision, dated 24 November 1997. The subsequent motion for
reconsideration of petitioner corporation was also denied by the Court of
Appeals in its Resolution,7 dated 14 December 1999.
Thus, petitioner corporation comes before this Court, via a Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court, assigning the
following errors committed by the Court of Appeals –
I
THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF
REVENUE REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF
THE [BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST
OF EXPORTS FOR ZERO-RATING TO APPLY.
II
THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED
TO SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT
PHOTOCOPIES OF VAT INVOICES AND RECEIPTS IS NOT A FATAL
DEFECT.
Page 275
 DUMAUAL, JEANNE PAULINE J. 2019-2020

III
Date Filed Period Covered CTA Case No.

THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM 20 July 1992 2nd Quarter, 1990 4831
WAS FILED BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL
CLAIM WAS FILED WITHIN TWO (2) YEARS FROM THE FILING OF THE VAT
9 October 1992 3rd Quarter, 1990 4859
RETURN.

14 January 1993 4th Quarter, 1990 4944

IV

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE
RE-OPENING OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL
EVIDENCE.8
G.R. No. 148763
G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104
presented above, except that it relates to the claims of petitioner corporation
for refund/credit of input VAT on its purchases of capital goods and on its zero-
rated sales made in the last three taxable quarters of 1990.
Petitioner corporation filed with the BIR its VAT Returns for the second, third,
and fourth quarters of 1990, on 20 July 1990, 18 October 1990, and 20 January
1991, respectively. It submitted separate applications to the BIR for the
refund/credit of the input VAT paid on its purchases of capital goods and on
its zero-rated sales, the details of which are presented as follows –
Date of Application Period Covered Amount Applied For
21 August 1990 2nd Quarter, 1990 P 54,014,722.04
which were eventually consolidated. The respondent Commissioner contested
the foregoing Petitions and prayed for the dismissal thereof. The CTA ruled in
favor of respondent Commissioner and in its Decision,9 dated 30 October
1997, dismissed the Petitions mainly on the ground that the prescriptive periods
for filing the same had expired. In a Resolution,10 dated 15 January 1998, the
CTA denied the motion for reconsideration of petitioner corporation since the
latter presented no new matter not already discussed in the court's prior
Decision. In the same Resolution, the CTA also denied the alternative prayer of
petitioner corporation for a new trial since it did not fall under any of the
grounds cited under Section 1, Rule 37 of the Revised Rules of Court, and it
was not supported by affidavits of merits required by Section 2 of the same
Rule.
Petitioner corporation appealed its case to the Court of Appeals, where it was
docketed as CA-G.R. SP No. 46718. On 15 September 2000, the Court of
Appeals rendered its Decision,11 finding that although petitioner corporation
timely filed its Petitions for Review with the CTA, it still failed to substantiate its
claims for the refund/credit of its input VAT for the last three quarters of 1990. In
its Resolution,12 dated 27 June 2001, the appellate court denied the motion for
reconsideration of petitioner corporation, finding no cogent reason to reverse
its previous Decision.

21 November 1990 3rd Quarter, 1990 75,304,774.77 Aggrieved, petitioner corporation filed with this Court another Petition for
Review on Certiorari under Rule 45 of the Revised Rules of Court, docketed as
19 February 1991 4th Quarter, 1990 43,829,766.10 G.R. No. 148763, raising the following issues –

A.
When the BIR failed to act on its applications for refund/credit, petitioner
corporation filed with the CTA the following petitions for review –

Atty. Santos, Taxation I Page 276


WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-
88 AND 3-88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR
ZERO-RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL
BASIS FOR THE INSTANT CLAIM.
B.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT
THERE IS NO BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.
There being similarity of parties, subject matter, and issues, G.R. Nos. 141104
and 148763 were consolidated pursuant to a Resolution, dated 4 September
2006, issued by this Court. The ruling of this Court in these cases hinges on how
it will resolve the following key issues: (1) prescription of the claims of petitioner
corporation for input VAT refund/credit; (2) validity and applicability of
Revenue Regulations No. 2-88 imposing upon petitioner corporation, as a
requirement for the VAT zero-rating of its sales, the burden of proving that the
buyer companies were not just BOI-registered but also exporting 70% of their
total annual production; (3) sufficiency of evidence presented by petitioner
corporation to establish that it is indeed entitled to input VAT refund/credit;
and (4) legal ground for granting the motion of petitioner corporation for re-
opening of its cases or holding of new trial before the CTA so it could be given
the opportunity to present the required evidence.
Prescription
The prescriptive period for filing an application for tax refund/credit of input
VAT on zero-rated sales made in 1990 and 1992 was governed by Section
106(b) and (c) of the Tax Code of 1977, as amended, which provided that –
SEC. 106. Refunds or tax credits of input tax. – x x x.
(b) Zero-rated or effectively zero-rated sales. – Any person, except
those covered by paragraph (a) above, whose sales are zero-rated
may, within two years after the close of the quarter when such sales
were made, apply for the issuance of a tax credit certificate or refund
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
of the input taxes attributable to such sales to the extent that such
input tax has not been applied against output tax.
xxxx
(e) Period within which refund of input taxes may be made by the
Commissioner. – The Commissioner shall refund input taxes within 60
days from the date the application for refund was filed with him or his
duly authorized representative. No refund of input taxes shall be
allowed unless the VAT-registered person files an application for
refund within the period prescribed in paragraphs (a), (b) and (c) as
the case may be.
By a plain reading of the foregoing provision, the two-year prescriptive period
for filing the application for refund/credit of input VAT on zero-rated sales shall
be determined from the close of the quarter when such sales were made.
Petitioner contends, however, that the said two-year prescriptive period
should be counted, not from the close of the quarter when the zero-rated
sales were made, but from the date of filing of the quarterly VAT return and
payment of the tax due 20 days thereafter, in accordance with Section 110(b)
of the Tax Code of 1977, as amended, quoted as follows –
SEC. 110. Return and payment of value-added tax. – x x x.
(b) Time for filing of return and payment of tax. – The return shall be
filed and the tax paid within 20 days following the end of each
quarter specifically prescribed for a VAT-registered person under
regulations to be promulgated by the Secretary of Finance: Provided,
however, That any person whose registration is cancelled in
accordance with paragraph (e) of Section 107 shall file a return within
20 days from the cancellation of such registration.
It is already well-settled that the two-year prescriptive period for instituting a
suit or proceeding for recovery of corporate income tax erroneously or illegally
paid under Section 23013 of the Tax Code of 1977, as amended, was to be
counted from the filing of the final adjustment return. This Court already set out
Page 277

in ACCRA Investments Corporation v. Court of Appeals, 14 the rationale for
such a rule, thus –
Clearly, there is the need to file a return first before a claim for refund
can prosper inasmuch as the respondent Commissioner by his own
rules and regulations mandates that the corporate taxpayer opting to
ask for a refund must show in its final adjustment return the income it
received from all sources and the amount of withholding taxes
remitted by its withholding agents to the Bureau of Internal Revenue.
The petitioner corporation filed its final adjustment return for its 1981
taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in
the case of Commissioner of Internal Revenue v. Asia Australia
Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive
period within which to claim a refund commences to run, at the
earliest, on the date of the filing of the adjusted final tax return.
Hence, the petitioner corporation had until April 15, 1984 within which
to file its claim for refund.
Considering that ACCRAIN filed its claim for refund as early as
December 29, 1983 with the respondent Commissioner who failed to
take any action thereon and considering further that the non-
resolution of its claim for refund with the said Commissioner prompted
ACCRAIN to reiterate its claim before the Court of Tax Appeals
through a petition for review on April 13, 1984, the respondent
appellate court manifestly committed a reversible error in affirming
the holding of the tax court that ACCRAIN's claim for refund was
barred by prescription.
It bears emphasis at this point that the rationale in computing the two-
year prescriptive period with respect to the petitioner corporation's
claim for refund from the time it filed its final adjustment return is the
fact that it was only then that ACCRAIN could ascertain whether it
made profits or incurred losses in its business operations. The "date of
payment", therefore, in ACCRAIN's case was when its tax liability, if
any, fell due upon its filing of its final adjustment return on April 15,
1982.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this
Court further expounded on the same matter –
A re-examination of the aforesaid minute resolution of the Court in
the Pacific Procon case is warranted under the circumstances to lay
down a categorical pronouncement on the question as to when the
two-year prescriptive period in cases of quarterly corporate income
tax commences to run. A full-blown decision in this regard is rendered
more imperative in the light of the reversal by the Court of Tax
Appeals in the instant case of its previous ruling in the Pacific
Procon case.
Section 292 (now Section 230) of the National Internal Revenue Code
should be interpreted in relation to the other provisions of the Tax
Code in order to give effect the legislative intent and to avoid an
application of the law which may lead to inconvenience and
absurdity. In the case of People vs. Rivera (59 Phil. 236 [1933]), this
Court stated that statutes should receive a sensible construction, such
as will give effect to the legislative intention and so as to avoid an
unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS
SEMPER FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM.
Where there is ambiguity, such interpretation as will avoid
inconvenience and absurdity is to be adopted. Furthermore, courts
must give effect to the general legislative intent that can be
discovered from or is unraveled by the four corners of the statute, and
in order to discover said intent, the whole statute, and not only a
particular provision thereof, should be considered. (Manila Lodge No.
761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every
section, provision or clause of the statute must be expounded by
reference to each other in order to arrive at the effect contemplated
by the legislature. The intention of the legislator must be ascertained
from the whole text of the law and every part of the act is to be taken
into view. (Chartered Bank vs. Imperial, 48 Phil. 931 [1921]; Lopez vs. El
Hoger Filipino, 47 Phil. 249, cited in Aboitiz Shipping Corporation vs.
City of Cebu, 13 SCRA 449 [1965]).
Thus, in resolving the instant case, it is necessary that we consider not
only Section 292 (now Section 230) of the National Internal Revenue
Code but also the other provisions of the Tax Code, particularly
Page 278

Sections 84, 85 (now both incorporated as Section 68), Section 86
(now Section 70) and Section 87 (now Section 69) on Quarterly
Corporate Income Tax Payment and Section 321 (now Section 232)
on keeping of books of accounts. All these provisions of the Tax Code
should be harmonized with each other.
xxxx
Therefore, the filing of a quarterly income tax returns required in
Section 85 (now Section 68) and implemented per BIR Form 1702-Q
and payment of quarterly income tax should only be considered
mere installments of the annual tax due. These quarterly tax payments
which are computed based on the cumulative figures of gross
receipts and deductions in order to arrive at a net taxable income,
should be treated as advances or portions of the annual income tax
due, to be adjusted at the end of the calendar or fiscal year. This is
reinforced by Section 87 (now Section 69) which provides for the filing
of adjustment returns and final payment of income tax. Consequently,
the two-year prescriptive period provided in Section 292 (now Section
230) of the Tax Code should be computed from the time of filing the
Adjustment Return or Annual Income Tax Return and final payment of
income tax.
In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA
1007 [1961]), this Court held that when a tax is paid in installments, the
prescriptive period of two years provided in Section 306 (Section 292)
of the National Internal Revenue Code should be counted from the
date of the final payment. This ruling is reiterated in Commissioner of
Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this
Court stated that where the tax account was paid on installment, the
computation of the two-year prescriptive period under Section 306
(Section 292) of the Tax Code, should be from the date of the last
installment.
In the instant case, TMX Sales, Inc. filed a suit for a refund on March
14, 1984. Since the two-year prescriptive period should be counted
from the filing of the Adjustment Return on April 15,1982, TMX Sales,
Inc. is not yet barred by prescription.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The very same reasons set forth in the afore-cited cases concerning the two-
year prescriptive period for claims for refund of illegally or erroneously
collected income tax may also apply to the Petitions at bar involving the
same prescriptive period for claims for refund/credit of input VAT on zero-
rated sales.
It is true that unlike corporate income tax, which is reported and paid on
installment every quarter, but is eventually subjected to a final adjustment at
the end of the taxable year, VAT is computed and paid on a purely quarterly
basis without need for a final adjustment at the end of the taxable year.
However, it is also equally true that until and unless the VAT-registered
taxpayer prepares and submits to the BIR its quarterly VAT return, there is no
way of knowing with certainty just how much input VAT 16 the taxpayer may
apply against its output VAT;17 how much output VAT it is due to pay for the
quarter or how much excess input VAT it may carry-over to the following
quarter; or how much of its input VAT it may claim as refund/credit. It should
be recalled that not only may a VAT-registered taxpayer directly apply
against his output VAT due the input VAT it had paid on its importation or local
purchases of goods and services during the quarter; the taxpayer is also given
the option to either (1) carry over any excess input VAT to the succeeding
quarters for application against its future output VAT liabilities, or (2) file an
application for refund or issuance of a tax credit certificate covering the
amount of such input VAT.18 Hence, even in the absence of a final adjustment
return, the determination of any output VAT payable necessarily requires that
the VAT-registered taxpayer make adjustments in its VAT return every quarter,
taking into consideration the input VAT which are creditable for the present
quarter or had been carried over from the previous quarters.
Moreover, when claiming refund/credit, the VAT-registered taxpayer must be
able to establish that it does have refundable or creditable input VAT, and the
same has not been applied against its output VAT liabilities – information
which are supposed to be reflected in the taxpayer's VAT returns. Thus, an
application for refund/credit must be accompanied by copies of the
taxpayer's VAT return/s for the taxable quarter/s concerned.
Lastly, although the taxpayer's refundable or creditable input VAT may not be
considered as illegally or erroneously collected, its refund/credit is a privilege
extended to qualified and registered taxpayers by the very VAT system
adopted by the Legislature. Such input VAT, the same as any illegally or
Page 279
 DUMAUAL, JEANNE PAULINE J. 2019-2020

erroneously collected national internal revenue tax, consists of monetary
amounts which are currently in the hands of the government but must
rightfully be returned to the taxpayer. Therefore, whether claiming
refund/credit of illegally or erroneously collected national internal revenue tax,
or input VAT, the taxpayer must be given equal opportunity for filing and
pursuing its claim.
petitioner corporation for refund/credit of its input VAT for the first quarter of
1992 was not only unsigned by its supposed authorized representative, Ma.
Paz R. Semilla, Manager-Finance and Treasury, but it was not dated, stamped,
and initialed by the BIR official who purportedly received the same. The CTA,
in its Decision,19 dated 24 November 1997, in CTA Case No. 5102, made the
following observations –

For the foregoing reasons, it is more practical and reasonable to count the This Court, likewise, rejects any probative value of the Application for
two-year prescriptive period for filing a claim for refund/credit of input VAT on Tax Credit/Refund of VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally
zero-rated sales from the date of filing of the return and payment of the tax offered in evidence by the petitioner on account of the fact that it
due which, according to the law then existing, should be made within 20 days does not bear the BIR stamp showing the date when such application
from the end of each quarter. Having established thus, the relevant dates in was filed together with the signature or initial of the receiving officer
the instant cases are summarized and reproduced below – of respondent's Bureau. Worse still, it does not show the date of
application and the signature of a certain Ma. Paz R. Semilla
indicated in the form who appears to be petitioner's authorized filer.
Period Covered Date of Date of Date of Filing (Case
Filing (Return w/ Filing (Application w/ w/ CTA)
A review of the records reveal that the original of the aforecited
BIR) BIR)
application was lost during the time petitioner transferred its office
(TSN, p. 6, Hearing of December 9, 1994). Attempt was made to prove
2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992
that petitioner exerted efforts to recover the original copy, but to no
3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992avail. Despite this, however, We observe that petitioner completely
failed to establish the missing dates and signatures abovementioned.
4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993On this score, said application has no probative value in
demonstrating the fact of its filing within two years after the [filing of
1st Quarter, 1992 20 April 1992 -- 20 April 1994 the VAT return for the quarter] when petitioner's sales of goods were
made as prescribed under Section 106(b) of the Tax Code. We
believe thus that petitioner failed to file an application for refund in
The above table readily shows that the administrative and judicial claims of due form and within the legal period set by law at the administrative
petitioner corporation for refund of its input VAT on its zero-rated sales for the level. Hence, the case at bar has failed to satisfy the requirement on
last three quarters of 1990 were all filed within the prescriptive period. the prior filing of an application for refund with the respondent before
the commencement of a judicial claim for refund, as prescribed
However, the same cannot be said for the claim of petitioner corporation for under Section 230 of the Tax Code. This fact constitutes another one
refund of its input VAT on its zero-rated sales for the first quarter of 1992. Even of the many reasons for not granting petitioner's judicial claim.
though it may seem that petitioner corporation filed in time its judicial claim
with the CTA, there is no showing that it had previously filed an administrative As pointed out by the CTA, in serious doubt is not only the fact of whether
claim with the BIR. Section 106(e) of the Tax Code of 1977, as amended, petitioner corporation timely filed its administrative claim for refund of its input
explicitly provided that no refund of input VAT shall be allowed unless the VAT- VAT for the first quarter of 1992, but also whether petitioner corporation
registered taxpayer filed an application for refund with respondent actually filed such administrative claim in the first place. For failing to prove
Commissioner within the two-year prescriptive period. The application of that it had earlier filed with the BIR an application for refund/credit of its input

Atty. Santos, Taxation I Page 280


VAT for the first quarter of 1992, within the period prescribed by law, then the
case instituted by petitioner corporation with the CTA for the refund/credit of
the very same tax cannot prosper.
Revenue Regulations No. 2-88 and the 70% export requirement
Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was
imposed on the gross selling price or gross value in money of goods sold,
bartered or exchanged. Yet, the same provision subjected the following sales
made by VAT-registered persons to 0% VAT –
(1) Export sales; and
(2) Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory
effectively subjects such sales to zero-rate.
"Export Sales" means the sale and shipment or exportation of goods
from the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported, or
foreign currency denominated sales. "Foreign currency denominated
sales", means sales to nonresidents of goods assembled or
manufactured in the Philippines, for delivery to residents in the
Philippines and paid for in convertible foreign currency remitted
through the banking system in the Philippines.
These are termed zero-rated sales. A zero-rated sale is still considered a
taxable transaction for VAT purposes, although the VAT rate applied is 0%. A
sale by a VAT-registered taxpayer of goods and/or services taxed at 0% shall
not result in any output VAT, while the input VAT on its purchases of goods or
services related to such zero-rated sale shall be available as tax credit or
refund.20
Petitioner corporation questions the validity of Revenue Regulations No. 2-88
averring that the said regulations imposed additional requirements, not found
in the law itself, for the zero-rating of its sales to Philippine Smelting and
Refining Corporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS), both
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
of which are registered not only with the BOI, but also with the then Export
Processing Zone Authority (EPZA).21
The contentious provisions of Revenue Regulations No. 2-88 read –
SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered
exporters. – Sales of raw materials to export-oriented BOI-registered
enterprises whose export sales, under rules and regulations of the
Board of Investments, exceed seventy percent (70%) of total annual
production, shall be subject to zero-rate under the following
conditions:
"(1) The seller shall file an application with the BIR, ATTN.:
Division, applying for zero-rating for each and every separate
buyer, in accordance with Section 8(d) of Revenue
Regulations No. 5-87. The application should be
accompanied with a favorable recommendation from the
Board of Investments."
"(2) The raw materials sold are to be used exclusively by the
buyer in the manufacture, processing or repacking of his own
registered export product;
"(3) The words "Zero-Rated Sales" shall be prominently
indicated in the sales invoice. The exporter (buyer) can no
longer claim from the Bureau of Internal Revenue or any
other government office tax credits on their zero-rated
purchases;
(b) Sales of raw materials to foreign buyer. – Sales of raw materials to
a nonresident foreign buyer for delivery to a resident local export-
oriented BOI-registered enterprise to be used in manufacturing,
processing or repacking of the said buyer's goods and paid for in
foreign currency, inwardly remitted in accordance with Central Bank
rules and regulations shall be subject to zero-rate.
It is the position of the respondent Commissioner, affirmed by the CTA and the
Court of Appeals, that Section 2 of Revenue Regulations No. 2-88 should be
Page 281

applied in the cases at bar; and to be entitled to the zero-rating of its sales to
PASAR and PHILPHOS, petitioner corporation, as a VAT-registered seller, must
be able to prove not only that PASAR and PHILPHOS are BOI-registered
corporations, but also that more than 70% of the total annual production of
these corporations are actually exported. Revenue Regulations No. 2-88
merely echoed the requirement imposed by the BOI on export-oriented
corporations registered with it.
While this Court is not prepared to strike down the validity of Revenue
Regulations No. 2-88, it finds that its application must be limited and placed in
the proper context. Note that Section 2 of Revenue Regulations No. 2-88
referred only to the zero-rated sales of raw materials to export-oriented BOI-
registered enterprises whose export sales, under BOI rules and regulations,
should exceed seventy percent (70%) of their total annual production.
Section 2 of Revenue Regulations No. 2-88, should not have been applied to
the zero-rating of the sales made by petitioner corporation to PASAR and
PHILPHOS. At the onset, it must be emphasized that PASAR and PHILPHOS, in
addition to being registered with the BOI, were also registered with the EPZA
and located within an export-processing zone. Petitioner corporation does not
claim that its sales to PASAR and PHILPHOS are zero-rated on the basis that
said sales were made to export-oriented BOI-registered corporations, but
rather, on the basis that the sales were made to EPZA-registered enterprises
operating within export processing zones. Although sales to export-oriented
BOI-registered enterprises and sales to EPZA-registered enterprises located
within export processing zones were both deemed export sales, which, under
Section 100(a) of the Tax Code of 1977, as amended, shall be subject to 0%
VAT distinction must be made between these two types of sales because
each may have different substantiation requirements.
The Tax Code of 1977, as amended, gave a limited definition of export sales,
to wit: "The sale and shipment or exportation of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may be
agreed upon which may influence or determine the transfer of ownership of
the goods so exported, or foreign currency denominated sales." Executive
Order No. 226, otherwise known as the Omnibus Investments Code of 1987 -
which, in the years concerned (i.e., 1990 and 1992), governed enterprises
registered with both the BOI and EPZA, provided a more comprehensive
definition of export sales, as quoted below:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value,
determined from invoices, bills of lading, inward letters of credit,
landing certificates, and other commercial documents, of export
products exported directly by a registered export producer or the net
selling price of export product sold by a registered export producer or
to an export trader that subsequently exports the same: Provided,
That sales of export products to another producer or to an export
trader shall only be deemed export sales when actually exported by
the latter, as evidenced by landing certificates of similar commercial
documents: Provided, further, That without actual exportation the
following shall be considered constructively exported for purposes of
this provision: (1) sales to bonded manufacturing warehouses of
export-oriented manufacturers; (2) sales to export processing zones;
(3) sales to registered export traders operating bonded trading
warehouses supplying raw materials used in the manufacture of
export products under guidelines to be set by the Board in
consultation with the Bureau of Internal Revenue and the Bureau of
Customs; (4) sales to foreign military bases, diplomatic missions and
other agencies and/or instrumentalities granted tax immunities, of
locally manufactured, assembled or repacked products whether paid
for in foreign currency or not: Provided, further, That export sales of
registered export trader may include commission income; and
Provided, finally, That exportation of goods on consignment shall not
be deemed export sales until the export products consigned are in
fact sold by the consignee.
Sales of locally manufactured or assembled goods for household and
personal use to Filipinos abroad and other non-residents of the
Philippines as well as returning Overseas Filipinos under the Internal
Export Program of the government and paid for in convertible foreign
currency inwardly remitted through the Philippine banking systems
shall also be considered export sales. (Underscoring ours.)
The afore-cited provision of the Omnibus Investments Code of 1987 recognizes
as export sales the sales of export products to another producer or to an
export trader, provided that the export products are actually exported. For
purposes of VAT zero-rating, such producer or export trader must be registered
with the BOI and is required to actually export more than 70% of its annual
production.
Page 282

Without actual exportation, Article 23 of the Omnibus Investments Code of
1987 also considers constructive exportation as export sales. Among other
types of constructive exportation specifically identified by the said provision
are sales to export processing zones. Sales to export processing zones are
subjected to special tax treatment. Article 77 of the same Code establishes
the tax treatment of goods or merchandise brought into the export processing
zones. Of particular relevance herein is paragraph 2, which provides that
"Merchandise purchased by a registered zone enterprise from the customs
territory and subsequently brought into the zone, shall be considered as export
sales and the exporter thereof shall be entitled to the benefits allowed by law
for such transaction."
Such tax treatment of goods brought into the export processing zones are only
consistent with the Destination Principle and Cross Border Doctrine to which
the Philippine VAT system adheres. According to the Destination
Principle,22 goods and services are taxed only in the country where these are
consumed. In connection with the said principle, the Cross Border
Doctrine23 mandates that no VAT shall be imposed to form part of the cost of
the goods destined for consumption outside the territorial border of the taxing
authority. Hence, actual export of goods and services from the Philippines to a
foreign country must be free of VAT, while those destined for use or
consumption within the Philippines shall be imposed with 10% VAT. 24 Export
processing zones25 are to be managed as a separate customs territory from
the rest of the Philippines and, thus, for tax purposes, are effectively
considered as foreign territory. For this reason, sales by persons from the
Philippine customs territory to those inside the export processing zones are
already taxed as exports.
Plainly, sales to enterprises operating within the export processing zones are
export sales, which, under the Tax Code of 1977, as amended, were subject to
0% VAT. It is on this ground that petitioner corporation is claiming refund/credit
of the input VAT on its zero-rated sales to PASAR and PHILPHOS.
The distinction made by this Court in the preceding paragraphs between the
zero-rated sales to export-oriented BOI-registered enterprises and zero-rated
sales to EPZA-registered enterprises operating within export processing zones is
actually supported by subsequent development in tax laws and regulations. In
Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
amended,26 the BIR defined with more precision what are zero-rated export
sales –
(1) The sale and actual shipment of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may
be agreed upon which may influence or determine the transfer of
ownership of the goods so exported paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) The sale of raw materials or packaging materials to a non-resident
buyer for delivery to a resident local export-oriented enterprise to be
used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer's goods and paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) The sale of raw materials or packaging materials to an export-
oriented enterprise whose export sales exceed seventy percent (70%)
of total annual production;
Any enterprise whose export sales exceed 70% of the total annual
production of the preceding taxable year shall be considered an
export-oriented enterprise upon accreditation as such under the
provisions of the Export Development Act (R.A. 7844) and its
implementing rules and regulations;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Articles 23 and 77 of
Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic Act
No. 7227, otherwise known as the Bases Conversion and Development
Act of 1992.
The Tax Code of 1997, as amended,27 later adopted the foregoing definition
of export sales, which are subject to 0% VAT.
Page 283

This Court then reiterates its conclusion that Section 2 of Revenue Regulations
No. 2-88, which applied to zero-rated export sales to export-oriented BOI-
registered enterprises, should not be applied to the applications for
refund/credit of input VAT filed by petitioner corporation since it based its
applications on the zero-rating of export sales to enterprises registered with the
EPZA and located within export processing zones.
Sufficiency of evidence
There can be no dispute that the taxpayer-claimant has the burden of
proving the legal and factual bases of its claim for tax credit or refund, but
once it has submitted all the required documents, it is the function of the BIR to
assess these documents with purposeful dispatch.28 It therefore falls upon
herein petitioner corporation to first establish that its sales qualify for VAT zero-
rating under the existing laws (legal basis), and then to present sufficient
evidence that said sales were actually made and resulted in refundable or
creditable input VAT in the amount being claimed (factual basis).
It would initially appear that the applications for refund/credit filed by
petitioner corporation cover only input VAT on its purportedly zero-rated sales
to PASAR and PHILPHOS; however, a more thorough perusal of its applications,
VAT returns, pleadings, and other records of these cases would reveal that it is
also claiming refund/credit of its input VAT on purchases of capital goods and
sales of gold to the Central Bank of the Philippines (CBP).
This Court finds that the claims for refund/credit of input VAT of petitioner
corporation have sufficient legal bases.
As has been extensively discussed herein, Section 106(b)(2), in relation to
Section 100(a)(2) of the Tax Code of 1977, as amended, allowed the
refund/credit of input VAT on export sales to enterprises operating within
export processing zones and registered with the EPZA, since such export sales
were deemed to be effectively zero-rated sales.29 The fact that PASAR and
PHILPHOS, to whom petitioner corporation sold its products, were operating
inside an export processing zone and duly registered with EPZA, was never
raised as an issue herein. Moreover, the same fact was already judicially
recognized in the case Atlas Consolidated Mining & Development
Corporation v. Commissioner of Internal Revenue.30 Section 106(c) of the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
same Code likewise permitted a VAT-registered taxpayer to apply for
refund/credit of the input VAT paid on capital goods imported or locally
purchased to the extent that such input VAT has not been applied against its
output VAT. Meanwhile, the effective zero-rating of sales of gold to the CBP
from 1989 to 199131 was already affirmed by this Court in Commissioner of
Internal Revenue v. Benguet Corporation,32 wherein it ruled that –
At the time when the subject transactions were consummated, the
prevailing BIR regulations relied upon by respondent ordained that
gold sales to the Central Bank were zero-rated. The BIR interpreted
Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which
prescribed that gold sold to the Central Bank shall be considered
export and therefore shall be subject to the export and premium
duties. In coming out with this interpretation, the BIR also considered
Sec. 169 of Central Bank Circular No. 960 which states that all sales of
gold to the Central Bank are considered constructive exports. x x x.
This Court now comes to the question of whether petitioner corporation has
sufficiently established the factual bases for its applications for refund/credit of
input VAT. It is in this regard that petitioner corporation has failed, both in the
administrative and judicial level.
Applications for refund/credit of input VAT with the BIR must comply with the
appropriate revenue regulations. As this Court has already ruled, Revenue
Regulations No. 2-88 is not relevant to the applications for refund/credit of
input VAT filed by petitioner corporation; nonetheless, the said applications
must have been in accordance with Revenue Regulations No. 3-88,
amending Section 16 of Revenue Regulations No. 5-87, which provided as
follows –
SECTION 16. Refunds or tax credits of input tax. –
xxxx
(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund
of Value-Added Tax Paid (BIR Form No. 2552) shall be filed with the
Revenue District Office of the city or municipality where the principal
Page 284

place of business of the applicant is located or directly with the
Commissioner, Attention: VAT Division.
A photocopy of the purchase invoice or receipt evidencing the value
added tax paid shall be submitted together with the application. The
original copy of the said invoice/receipt, however, shall be presented
for cancellation prior to the issuance of the Tax Credit Certificate or
refund. In addition, the following documents shall be attached
whenever applicable:
xxxx
"3. Effectively zero-rated sale of goods and services.
"i) photo copy of approved application for zero-rate
if filing for the first time.
"ii) sales invoice or receipt showing name of the
person or entity to whom the sale of goods or services
were delivered, date of delivery, amount of
consideration, and description of goods or services
delivered.
"iii) evidence of actual receipt of goods or services.
"4. Purchase of capital goods.
"i) original copy of invoice or receipt showing the
date of purchase, purchase price, amount of value-
added tax paid and description of the capital
equipment locally purchased.
"ii) with respect to capital equipment imported, the
photo copy of import entry document for internal
revenue tax purposes and the confirmation receipt
issued by the Bureau of Customs for the payment of
the value-added tax.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"5. In applicable cases,
where the applicant's zero-rated transactions are regulated by
certain government agencies, a statement therefrom showing the
amount and description of sale of goods and services, name of
persons or entities (except in case of exports) to whom the goods or
services were sold, and date of transaction shall also be submitted.
In all cases, the amount of refund or tax credit that may be granted
shall be limited to the amount of the value-added tax (VAT) paid
directly and entirely attributable to the zero-rated transaction during
the period covered by the application for credit or refund.
Where the applicant is engaged in zero-rated and other taxable and
exempt sales of goods and services, and the VAT paid (inputs) on
purchases of goods and services cannot be directly attributed to any
of the aforementioned transactions, the following formula shall be
used to determine the creditable or refundable input tax for zero-
rated sale:
Amount of Zero-rated Sale
Total Sales
X
Total Amount of Input Taxes
=
Amount Creditable/Refundable
In case the application for refund/credit of input VAT was denied or remained
unacted upon by the BIR, and before the lapse of the two-year prescriptive
period, the taxpayer-applicant may already file a Petition for Review before
the CTA. If the taxpayer's claim is supported by voluminous documents, such
as receipts, invoices, vouchers or long accounts, their presentation before the
CTA shall be governed by CTA Circular No. 1-95, as amended, reproduced in
full below –
In the interest of speedy administration of justice, the Court hereby
promulgates the following rules governing the presentation of
Page 285

voluminous documents and/or long accounts, such as receipts,
invoices and vouchers, as evidence to establish certain facts pursuant
to Section 3(c), Rule 130 of the Rules of Court and the doctrine
enunciated in Compania Maritima vs. Allied Free Workers Union (77
SCRA 24), as well as Section 8 of Republic Act No. 1125:
1. The party who desires to introduce as evidence such voluminous
documents must, after motion and approval by the Court, present:
(a) a Summary containing, among others, a chronological
listing of the numbers, dates and amounts covered by the
invoices or receipts and the amount/s of tax paid; and (b) a
Certification of an independent Certified Public Accountant
attesting to the correctness of the contents of the summary
after making an examination, evaluation and audit of the
voluminous receipts and invoices. The name of the
accountant or partner of the firm in charge must be stated in
the motion so that he/she can be commissioned by the Court
to conduct the audit and, thereafter, testify in Court relative
to such summary and certification pursuant to Rule 32 of the
Rules of Court.
2. The method of individual presentation of each and every receipt,
invoice or account for marking, identification and comparison with
the originals thereof need not be done before the Court or Clerk of
Court anymore after the introduction of the summary and CPA
certification. It is enough that the receipts, invoices, vouchers or other
documents covering the said accounts or payments to be introduced
in evidence must be pre-marked by the party concerned and
submitted to the Court in order to be made accessible to the adverse
party who desires to check and verify the correctness of the summary
and CPA certification. Likewise, the originals of the voluminous
receipts, invoices or accounts must be ready for verification and
comparison in case doubt on the authenticity thereof is raised during
the hearing or resolution of the formal offer of evidence.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before
the CTA when the said Circular was issued, then petitioner corporation must
have complied therewith during the course of the trial of the said cases.
In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court
denied the claim of therein respondent, Manila Mining Corporation, for refund
of the input VAT on its supposed zero-rated sales of gold to the CBP because it
was unable to substantiate its claim. In the same case, this Court emphasized
the importance of complying with the substantiation requirements for claiming
refund/credit of input VAT on zero-rated sales, to wit –
For a judicial claim for refund to prosper, however, respondent must
not only prove that it is a VAT registered entity and that it filed its
claims within the prescriptive period. It must substantiate the input VAT
paid by purchase invoices or official receipts.
This respondent failed to do.
Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-
87 provides the requirements in claiming tax credits/refunds.
xxxx
Under Section 8 of RA1125, the CTA is described as a court of record.
As cases filed before it are litigated de novo, party litigants should
prove every minute aspect of their cases. No evidentiary value can
be given the purchase invoices or receipts submitted to the BIR as the
rules on documentary evidence require that these documents must
be formally offered before the CTA.
This Court thus notes with approval the following findings of the CTA:
x x x [S]ale of gold to the Central Bank should not be subject
to the 10% VAT-output tax but this does not ipso fact mean
that [the seller] is entitled to the amount of refund sought as it
is required by law to present evidence showing the input
taxes it paid during the year in question. What is being
Page 286

claimed in the instant petition is the refund of the input taxes
paid by the herein petitioner on its purchase of goods and
services. Hence, it is necessary for the Petitioner to show proof
that it had indeed paid the input taxes during the year 1991.
In the case at bar, Petitioner failed to discharge this duty. It
did not adduce in evidence the sales invoice, receipts or
other documents showing the input value added tax on the
purchase of goods and services.
xxx
Section 8 of Republic Act 1125 (An Act Creating the Court of Tax
Appeals) provides categorically that the Court of Tax Appeals shall be
a court of record and as such it is required to conduct a formal trial
(trial de novo) where the parties must present their evidence
accordingly if they desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)
A "sales or commercial invoice" is a written account of goods sold or
services rendered indicating the prices charged therefor or a list by
whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer
goods and services.
A "receipt" on the other hand is a written acknowledgment of the fact
of payment in money or other settlement between seller and buyer of
goods, debtor or creditor, or person rendering services and client or
customer.
These sales invoices or receipts issued by the supplier are necessary to
substantiate the actual amount or quantity of goods sold and their
selling price, and taken collectively are the best means to prove the
input VAT payments.36
Although the foregoing decision focused only on the proof required for the
applicant for refund/credit to establish the input VAT payments it had made
on its purchases from suppliers, Revenue Regulations No. 3-88 also required it
to present evidence proving actual zero-rated VAT sales to qualified buyers,
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
such as (1) photocopy of the approved application for zero-rate if filing for the
first time; (2) sales invoice or receipt showing the name of the person or entity
to whom the goods or services were delivered, date of delivery, amount of
consideration, and description of goods or services delivered; and (3) the
evidence of actual receipt of goods or services.
Also worth noting in the same decision is the weight given by this Court to the
certification by the independent certified public accountant (CPA), thus –
Respondent contends, however, that the certification of the
independent CPA attesting to the correctness of the contents of the
summary of suppliers' invoices or receipts which were examined,
evaluated and audited by said CPA in accordance with CTA Circular
No. 1-95 as amended by CTA Circular No. 10-97 should substantiate its
claims.
There is nothing, however, in CTA Circular No. 1-95, as amended by
CTA Circular No. 10-97, which either expressly or impliedly suggests
that summaries and schedules of input VAT payments, even if certified
by an independent CPA, suffice as evidence of input VAT payments.
xxxx
The circular, in the interest of speedy administration of justice, was
promulgated to avoid the time-consuming procedure of presenting,
identifying and marking of documents before the Court. It does not
relieve respondent of its imperative task of pre-marking photocopies
of sales receipts and invoices and submitting the same to the
court after the independent CPA shall have examined and
compared them with the originals. Without presenting these pre-
marked documents as evidence – from which the summary and
schedules were based, the court cannot verify the authenticity and
veracity of the independent auditor's conclusions.
There is, moreover, a need to subject these invoices or receipts to
examination by the CTA in order to confirm whether they are VAT
invoices. Under Section 21 of Revenue Regulation, No. 5-87, all
Page 287

purchases covered by invoices other than a VAT invoice shall not be
entitled to a refund of input VAT.
xxxx
While the CTA is not governed strictly by technical rules of evidence,
as rules of procedure are not ends in themselves but are primarily
intended as tools in the administration of justice, the presentation of
the purchase receipts and/or invoices is not mere procedural
technicality which may be disregarded considering that it is the only
means by which the CTA may ascertain and verify the truth of the
respondent's claims.
The records further show that respondent miserably failed to
substantiate its claims for input VAT refund for the first semester of
1991. Except for the summary and schedules of input VAT payments
prepared by respondent itself, no other evidence was adduced in
support of its claim.
As for respondent's claim for input VAT refund for the second semester
of 1991, it employed the services of Joaquin Cunanan & Co. on
account of which it (Joaquin Cunanan & Co.) executed a
certification that:
We have examined the information shown below concerning
the input tax payments made by the Makati Office of Manila
Mining Corporation for the period from July 1 to December
31, 1991. Our examination included inspection of the
pertinent suppliers' invoices and official receipts and such
other auditing procedures as we considered necessary in the
circumstances. x x x
As the certification merely stated that it used "auditing procedures
considered necessary" and not auditing procedures which are in
accordance with generally accepted auditing principles and
standards, and that the examination was made on "input tax
payments by the Manila Mining Corporation," without specifying that
the said input tax payments are attributable to the sales of gold to the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Central Bank, this Court cannot rely thereon and regard it as sufficient
proof of the respondent's input VAT payments for the second
semester.37
As for the Petition in G.R. No. 141104, involving the input VAT of petitioner
corporation on its zero-rated sales in the first quarter of 1992, this Court already
found that the petitioner corporation failed to comply with Section 106(b) of
the Tax Code of 1977, as amended, imposing the two-year prescriptive period
for the filing of the application for refund/credit thereof. This bars the grant of
the application for refund/credit, whether administratively or judicially, by
express mandate of Section 106(e) of the same Code.
Granting arguendo that the application of petitioner corporation for the
refund/credit of the input VAT on its zero-rated sales in the first quarter of 1992
was actually and timely filed, petitioner corporation still failed to present
together with its application the required supporting documents, whether
before the BIR or the CTA. As the Court of Appeals ruled –
In actions involving claims for refund of taxes assessed and collected,
the burden of proof rests on the taxpayer. As clearly discussed in the
CTA's decision, petitioner failed to substantiate its claim for tax
refunds. Thus:
"We note, however, that in the cases at bar, petitioner has
relied totally on Revenue Regulations No. 2-88 in determining
compliance with the documentary requirements for a
successful refund or issuance of tax credit. Unmentioned is the
applicable and specific amendment later introduced by
Revenue Regulations No. 3-88 dated April 7, 1988 (issued
barely after two months from the promulgation of Revenue
Regulations No. 2-88 on February 15, 1988), which amended
Section 16 of Revenue Regulations No. 5-87 on refunds or tax
credits of input tax. x x x.
xxxx
"A thorough examination of the evidence submitted by the
petitioner before this court reveals outright the failure to
Page 288

satisfy documentary requirements laid down under the
above-cited regulations. Specifically, petitioner was not able
to present the following documents, to wit:
"a) sales invoices or receipts;
"b) purchase invoices or receipts;
"c) evidence of actual receipt of goods;
"d) BOI statement showing the amount and
description of sale of goods, etc.
"e) original or attested copies of invoice or receipt on
capital equipment locally purchased; and
"f) photocopy of import entry document and
confirmation receipt on imported capital equipment.
"There is the need to examine the sales invoices or receipts in
order to ascertain the actual amount or quantity of goods
sold and their selling price. Without them, this Court cannot
verify the correctness of petitioner's claim inasmuch as the
regulations require that the input taxes being sought for
refund should be limited to the portion that is directly and
entirely attributable to the particular zero-rated transaction. In
this instance, the best evidence of such transaction are the
said sales invoices or receipts.
"Also, even if sales invoices are produced, there is the further
need to submit evidence that such goods were actually
received by the buyer, in this case, by CBP, Philp[h]os and
PASAR.
xxxx
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"Lastly, this Court cannot determine whether there were
actual local and imported purchase of capital goods as well
as domestic purchase of non-capital goods without the
required purchase invoice or receipt, as the case may
be, and confirmation receipts.
"There is, thus, the imperative need to submit before this Court
the original or attested photocopies of petitioner's invoices or
receipts, confirmation receipts and import entry documents in
order that a full ascertainment of the claimed amount may
be achieved.
"Petitioner should have taken the foresight to introduce in
evidence all of the missing documents abovementioned.
Cases filed before this Court are litigated de novo. This means
that party litigants should endeavor to prove at the first
instance every minute aspect of their cases strictly in
accordance with the Rules of Court, most especially on
documentary evidence." (pp. 37-42, Rollo)
Tax refunds are in the nature of tax exemptions. It is regarded as in
derogation of the sovereign authority, and should be construed
in strictissimi juris against the person or entity claiming the exemption.
The taxpayer who claims for exemption must justify his claim by the
clearest grant of organic or statute law and should not be permitted
to stand on vague implications (Asiatic Petroleum Co. v. Llanes, 49
Phil. 466; Northern Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31
SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias Sugar
Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light
and Power Co., Inc. v. Commissioner of Customs, 44 SCRA 122).
There is no cogent reason to fault the CTA's conclusion that the SGV's
certificate is "self-destructive", as it finds comfort in the very SGV's
stand, as follows:
"It is our understanding that the above procedure are
sufficient for the purpose of the Company. We make no
presentation regarding the sufficiency of these procedures for
Page 289

such purpose. We did not compare the total of the input tax
claimed each quarter against the pertinent VAT returns and
books of accounts. The above procedures do not constitute
an audit made in accordance with generally accepted
auditing standards. Accordingly, we do not express an
opinion on the company's claim for input VAT refund or
credit. Had we performed additional procedures, or had we
made an audit in accordance with generally accepted
auditing standards, other matters might have come to our
attention that we would have accordingly reported on."
The SGV's "disclaimer of opinion" carries much weight as it is
petitioner's independent auditor. Indeed, SGV expressed that it "did
not compare the total of the input tax claimed each quarter against
the VAT returns and books of accounts."38
Moving on to the Petition in G.R. No. 148763, concerning the input VAT of
petitioner corporation on its zero-rated sales in the second, third, and fourth
quarters of 1990, the appellate court likewise found that petitioner corporation
failed to sufficiently establish its claims. Already disregarding the declarations
made by the Court of Appeals on its erroneous application of Revenue
Regulations No. 2-88, quoted hereunder is the rest of the findings of the
appellate court after evaluating the evidence submitted in accordance with
the requirements under Revenue Regulations No. 3-88 –
The Secretary of Finance validly adopted Revenue Regulations [No.] x
x x 3-98 pursuant to Sec. 245 of the National Internal Revenue Code,
which recognized his power to "promulgate all needful rules and
regulations for the effective enforcement of the provisions of this
Code." Thus, it is incumbent upon a taxpayer intending to file a claim
for refund of input VATs or the issuance of a tax credit certificate with
the BIR x x x to prove sales to such buyers as required by Revenue
Regulations No. 3-98. Logically, the same evidence should be
presented in support of an action to recover taxes which have been
paid.
x x x Neither has [herein petitioner corporation] presented sales
invoices or receipts showing sales of gold, copper concentrates, and
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
pyrite to the CBP, [PASAR], and [PHILPHOS], respectively, and the
dates and amounts of the same, nor any evidence of actual receipt
by the said buyers of the mineral products. It merely presented
receipts of purchases from suppliers on which input VATs were
allegedly paid. Thus, the Court of Tax Appeals correctly denied the
claims for refund of input VATs or the issuance of tax credit certificates
of petitioner [corporation]. Significantly, in the resolution, dated 7
June 2000, this Court directed the parties to file memoranda
discussing, among others, the submission of proof for "its [petitioner's]
sales of gold, copper concentrates, and pyrite to buyers."
Nevertheless, the parties, including the petitioner, failed to address this
issue, thereby necessitating the affirmance of the ruling of the Court
of Tax Appeals on this point.39
This Court is, therefore, bound by the foregoing facts, as found by the
appellate court, for well-settled is the general rule that the jurisdiction of this
Court in cases brought before it from the Court of Appeals, by way of a
Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, is
limited to reviewing or revising errors of law; findings of fact of the latter are
conclusive.40 This Court is not a trier of facts. It is not its function to review,
examine and evaluate or weigh the probative value of the evidence
presented.41
The distinction between a question of law and a question of fact is clear-cut. It
has been held that "[t]here is a question of law in a given case when the
doubt or difference arises as to what the law is on a certain state of facts;
there is a question of fact when the doubt or difference arises as to the truth
or falsehood of alleged facts."42
Whether petitioner corporation actually made zero-rated sales; whether it
paid input VAT on these sales in the amount it had declared in its returns;
whether all the input VAT subject of its applications for refund/credit can be
attributed to its zero-rated sales; and whether it had not previously applied the
input VAT against its output VAT liabilities, are all questions of fact which could
only be answered after reviewing, examining, evaluating, or weighing the
probative value of the evidence it presented, and which this Court does not
have the jurisdiction to do in the present Petitions for Review
on Certiorari under Rule 45 of the revised Rules of Court.
Page 290

Granting that there are exceptions to the general rule, when this Court looked
into questions of fact under particular circumstances,43 none of these exist in
the instant cases. The Court of Appeals, in both cases, found a dearth of
evidence to support the claims for refund/credit of the input VAT of petitioner
corporation, and the records bear out this finding. Petitioner corporation itself
cannot dispute its non-compliance with the requirements set forth in Revenue
Regulations No. 3-88 and CTA Circular No. 1-95, as amended. It concentrated
its arguments on its assertion that the substantiation requirements under
Revenue Regulations No. 2-88 should not have applied to it, while being
conspicuously silent on the evidentiary requirements mandated by other
relevant regulations.
Re-opening of cases/holding of new trial before the CTA
This Court now faces the final issue of whether the prayer of petitioner
corporation for the re-opening of its cases or holding of new trial before the
CTA for the reception of additional evidence, may be granted. Petitioner
corporation prays that the Court exercise its discretion on the matter in its
favor, consistent with the policy that rules of procedure be liberally construed
in pursuance of substantive justice.
This Court, however, cannot grant the prayer of petitioner corporation.
An aggrieved party may file a motion for new trial or reconsideration of a
judgment already rendered in accordance with Section 1, Rule 37 of the
revised Rules of Court, which provides –
SECTION 1. Grounds of and period for filing motion for new trial or
reconsideration. – Within the period for taking an appeal, the
aggrieved party may move the trial court to set aside the judgment or
final order and grant a new trial for one or more of the following
causes materially affecting the substantial rights of said party:
(a) Fraud, accident, mistake or excusable negligence which ordinary
prudence could not have guarded against and by reason of which
such aggrieved party has probably been impaired in his rights; or
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(b) Newly discovered evidence, which he could not, with reasonable
diligence, have discovered and produced at the trial, and which if
presented would probably alter the result.
Within the same period, the aggrieved party may also move fore
reconsideration upon the grounds that the damages awarded are
excessive, that the evidence is insufficient to justify the decision or final
order, or that the decision or final order is contrary to law.
In G.R. No. 148763, petitioner corporation attempts to justify its motion for the
re-opening of its cases and/or holding of new trial before the CTA by
contending that the "[f]ailure of its counsel to adduce the necessary evidence
should be construed as excusable negligence or mistake which should
constitute basis for such re-opening of trial as for a new trial, as counsel was of
the belief that such evidence was rendered unnecessary by the presentation
of unrebutted evidence indicating that respondent [Commissioner] has
acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-
rated." 44 The CTA denied such motion on the ground that it was not
accompanied by an affidavit of merit as required by Section 2, Rule 37 of the
revised Rules of Court. The Court of Appeals affirmed the denial of the motion,
but apart from this technical defect, it also found that there was no
justification to grant the same.
On the matter of the denial of the motion of the petitioner corporation for the
re-opening of its cases and/or holding of new trial based on the technicality
that said motion was unaccompanied by an affidavit of merit, this Court rules
in favor of the petitioner corporation. The facts which should otherwise be set
forth in a separate affidavit of merit may, with equal effect, be alleged and
incorporated in the motion itself; and this will be deemed a substantial
compliance with the formal requirements of the law, provided, of course, that
the movant, or other individual with personal knowledge of the facts, take
oath as to the truth thereof, in effect converting the entire motion for new trial
into an affidavit.45 The motion of petitioner corporation was prepared and
verified by its counsel, and since the ground for the motion was premised on
said counsel's excusable negligence or mistake, then the obvious conclusion is
that he had personal knowledge of the facts relating to such negligence or
mistake. Hence, it can be said that the motion of petitioner corporation for
the re-opening of its cases and/or holding of new trial was in substantial
compliance with the formal requirements of the revised Rules of Court.
Page 291

Even so, this Court finds no sufficient ground for granting the motion of
petitioner corporation for the re-opening of its cases and/or holding of new
trial.
In G.R. No. 141104, petitioner corporation invokes the Resolution, 46 dated 20
July 1998, by the CTA in another case, CTA Case No. 5296, involving the claim
of petitioner corporation for refund/credit of input VAT for the third quarter of
1993. The said Resolution allowed the re-opening of CTA Case No. 5296, earlier
dismissed by the CTA, to give the petitioner corporation the opportunity to
present the missing export documents.
The rule that the grant or denial of motions for new trial rests on the discretion
of the trial court,47 may likewise be extended to the CTA. When the denial of
the motion rests upon the discretion of a lower court, this Court will not
interfere with its exercise, unless there is proof of grave abuse thereof.48
That the CTA granted the motion for re-opening of one case for the
presentation of additional evidence and, yet, deny a similar motion in another
case filed by the same party, does not necessarily demonstrate grave abuse
of discretion or arbitrariness on the part of the CTA. Although the cases involve
identical parties, the causes of action and the evidence to support the same
can very well be different. As can be gleaned from the Resolution, dated 20
July 1998, in CTA Case No. 5296, petitioner corporation was claiming
refund/credit of the input VAT on its zero-rated sales, consisting of actual
export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took
into account the presentation by petitioner corporation of inward remittances
of its export sales for the quarter involved, its Supply Contract with Mitsubishi
Metal Corporation, its 1993 Annual Report showing its sales to the said foreign
corporation, and its application for refund. In contrast, the present Petitions
involve the claims of petitioner corporation for refund/credit of the input VAT
on its purchases of capital goods and on its effectively zero-rated sales to CBP
and EPZA-registered enterprises PASAR and PHILPHOS for the second, third,
and fourth quarters of 1990 and first quarter of 1992. There being a difference
as to the bases of the claims of petitioner corporation for refund/credit of
input VAT in CTA Case No. 5926 and in the Petitions at bar, then, there are
resulting variances as to the evidence required to support them.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No.
5296, invoked by petitioner corporation, emphasizes that the decision of the
CTA to allow petitioner corporation to present evidence "is applicable pro hac
vice or in this occasion only as it is the finding of [the CTA] that petitioner
[corporation] has established a few of the aforementioned material
points regarding the possible existence of the export documents together with
the prior and succeeding returns for the quarters involved, x x x" [Emphasis
supplied.] Therefore, the CTA, in the present cases, cannot be bound by its
ruling in CTA Case No. 5296, when these cases do not involve the exact same
circumstances that compelled it to grant the motion of petitioner corporation
for re-opening of CTA Case No. 5296.
Finally, assuming for the sake of argument that the non-presentation of the
required documents was due to the fault of the counsel of petitioner
corporation, this Court finds that it does not constitute excusable negligence
or mistake which would warrant the re-opening of the cases and/or holding of
new trial.
Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must
be excusable and generally imputable to the party because if it is imputable
to the counsel, it is binding on the client. To follow a contrary rule and allow a
party to disown his counsel's conduct would render proceedings indefinite,
tentative, and subject to re-opening by the mere subterfuge of replacing the
counsel. What the aggrieved litigant should do is seek administrative sanctions
against the erring counsel and not ask for the reversal of the court's ruling.49
As elucidated by this Court in another case,50 the general rule is that the client
is bound by the action of his counsel in the conduct of his case and he
cannot therefore complain that the result of the litigation might have been
otherwise had his counsel proceeded differently. It has been held time and
again that blunders and mistakes made in the conduct of the proceedings in
the trial court as a result of the ignorance, inexperience or incompetence of
counsel do not qualify as a ground for new trial. If such were to be admitted
as valid reasons for re-opening cases, there would never be an end to
litigation so long as a new counsel could be employed to allege and show
that the prior counsel had not been sufficiently diligent, experienced or
learned.
Page 292

Moreover, negligence, to be "excusable," must be one which ordinary
diligence and prudence could not have guarded against. 51 Revenue
Regulations No. 3-88, which was issued on 15 February 1988, had been in
effect more than two years prior to the filing by petitioner corporation of its
earliest application for refund/credit of input VAT involved herein on 21 August
1990. CTA Circular No. 1-95 was issued only on 25 January 1995, after petitioner
corporation had filed its Petitions before the CTA, but still during the pendency
of the cases of petitioner corporation before the tax court. The counsel of
petitioner corporation does not allege ignorance of the foregoing
administrative regulation and tax court circular, only that he no longer
deemed it necessary to present the documents required therein because of
the presentation of alleged unrebutted evidence of the zero-rated sales of
petitioner corporation. It was a judgment call made by the counsel as to
which evidence to present in support of his client's cause, later proved to be
unwise, but not necessarily negligent.
Neither is there any merit in the contention of petitioner corporation that the
non-presentation of the required documentary evidence was due to the
excusable mistake of its counsel, a ground under Section 1, Rule 37 of the
revised Rules of Court for the grant of a new trial. "Mistake," as it is referred to in
the said rule, must be a mistake of fact, not of law, which relates to the
case.52 In the present case, the supposed mistake made by the counsel of
petitioner corporation is one of law, for it was grounded on his interpretation
and evaluation that Revenue Regulations No. 3-88 and CTA Circular No. 1-95,
as amended, did not apply to his client's cases and that there was no need to
comply with the documentary requirements set forth therein. And although
the counsel of petitioner corporation advocated an erroneous legal position,
the effects thereof, which did not amount to a deprivation of his client's right
to be heard, must bind petitioner corporation. The question is not whether
petitioner corporation succeeded in establishing its interests, but whether it
had the opportunity to present its side.53
Besides, litigation is a not a "trial and error" proceeding. A party who moves for
a new trial on the ground of mistake must show that ordinary prudence could
not have guarded against it. A new trial is not a refuge for the
obstinate.54 Ordinary prudence in these cases would have dictated the
presentation of all available evidence that would have supported the claims
for refund/credit of input VAT of petitioner corporation. Without sound legal
basis, counsel for petitioner corporation concluded that Revenue Regulations
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to its
client's claims. The obstinacy of petitioner corporation and its counsel is
demonstrated in their failure, nay, refusal, to comply with the appropriate
administrative regulations and tax court circular in pursuing the claims for
refund/credit, now subject of G.R. Nos. 141104 and 148763, even though these
were separately instituted in a span of more than two years. It is also evident in
the failure of petitioner corporation to address the issue and to present
additional evidence despite being given the opportunity to do so by the
Court of Appeals. As pointed out by the appellate court, in its Decision, dated
15 September 2000, in CA-G.R. SP No. 46718 –
x x x Significantly, in the resolution, dated 7 June 2000, this Court
directed the parties to file memoranda discussing, among others, the
submission of proof for "its [petitioner's] sales of gold, copper
concentrates, and pyrite to buyers." Nevertheless, the parties,
including the petitioner, failed to address this issue, thereby
necessitating the affirmance of the ruling of the Court of Tax Appeals
on this point.55
Summary
Hence, although this Court agreed with the petitioner corporation that the
two-year prescriptive period for the filing of claims for refund/credit of input
VAT must be counted from the date of filing of the quarterly VAT return, and
that sales to EPZA-registered enterprises operating within economic processing
zones were effectively zero-rated and were not covered by Revenue
Regulations No. 2-88, it still denies the claims of petitioner corporation for
refund of its input VAT on its purchases of capital goods and effectively zero-
rated sales during the second, third, and fourth quarters of 1990 and the first
quarter of 1992, for not being established and substantiated by appropriate
and sufficient evidence. Petitioner corporation is also not entitled to the re-
opening of its cases and/or holding of new trial since the non-presentation of
the required documentary evidence before the BIR and the CTA by its
counsel does not constitute excusable negligence or mistake as
contemplated in Section 1, Rule 37 of the revised Rules of Court.
WHEREFORE, premises considered, the instant Petitions for Review are
hereby DENIED, and the Decisions, dated 6 July 1999 and 15 September 2000,
Page 293
 DUMAUAL, JEANNE PAULINE J. 2019-2020

of the Court of Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are
hereby AFFIRMED. Costs against petitioner.

Atty. Santos, Taxation I Page 294

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-29790 February 25, 1982
AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISIONS), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
PLANA , J.:
This is a petition for review of the decision and resolution of the Court of Tax
Appeals in CTA Case No. 1636 holding the petitioner liable for the sum of
P17,123.93 as deficiency income tax for l957, plus 5% surcharge and 1%
monthly interest for late payment from December 15, 1957 until full payment is
made.
Petitioner derived profit from this sale which was entered in
the books of the Fish Nets Division as miscellaneous income to
distinguish it from its tax-exempt income.
For the year 1957, petitioner filed two separate income tax
returns — one for its Fish Nets Division and another for its
Furniture Division. After investigation of these returns, the
examiners of the Bureau of Internal Revenue found that the
Fish Nets Division deducted from its gross income for that year
the amount of P61,187.48 as additional remuneration paid to
the officers of petitioner. The examiner further found that this
amount was taken from the net profit of an isolated
transaction (sale of aforementioned land) not in the course of
or carrying on of petitioner's trade or business. (It was
reported as part of the selling expenses of the land in
Muntinglupa, Rizal, the details of said transaction being as
follows:

As summarized by the respondent Court, the facts are:

Selling P432,03
price of 1.00
... Aguinaldo Industries Corporation is a domestic corporation land
engaged in two lines of business, namely: (a) the
manufacture of fishing nets, a tax-exempt industry, and (b) DEDUCT:
the manufacture of furniture Its business of manufacturing
fishing nets is handled by its Fish Nets Division, while the Purchase P71,12
manufacture of Furniture is operated by its Furniture Division. price of 0.00
For accounting purposes, each division is provided with land
separate books of accounts as required by the Department
of Finance. Under the company's accounting method, the Registrati
net income from its Fish Nets Division, miscellaneous income on,
of the Fish Nets Division, and the income of the Furniture docume
Division are computed individually ntary
stamps
Previously, petitioner acquired a parcel of land in
Muntinglupa, Rizal, as site of the fishing net factory. This and 191.05
transaction was entered in the books of the Fish Nets Division other
of the Company. Later, when another parcel of land in expenses
Marikina Heights was found supposedly more suitable for the
needs of petitioner, it sold the Muntinglupa property,

Atty. Santos, Taxation I Page 295

 DUMAUAL, JEANNE PAULINE J. 2019-2020

of the President — 3% for the first Vice

Relocatio 450.00
President — 1 %, for the second Vice
n survey
President for the members of the Board of
Directors — 10% to he divided equally
P71,76
among themselves, for the Secretary of the
1.05
Board for the General Manager for two
ADD Assistant General Managers
SELLING
EXPENSES In this connection, petitioner explains that to arrive at the
aforesaid 20% it gets 20'7o of the profits from the furniture
Commissi 51,723 business and adds (the same) to 20 of the profit of the fish net
on .72 venture. The P61,187.48 which is the basis of the assessment of
P17,133.00 does not even represent the entire 20%, allocated
Docume 2,294. as allowance in Section 3 of its by-laws but only 20% of the
ntary 05 net profit of the non-exempt operation of the Fish Nets
stamps Division, that is, 20,%, of P305,869.89, which is the sum total of
P305,802.18 representing profit from the sale of the
Topogra 450.00 Muntinglupa land, P45.21 representing interest on savings
phic accounts, and P90.00 representing dividends from investment
survey of the Fish Nets Division. (Pages 2-5, Decision.)

Officer's 61,187 186,416 Upon the submission of the case for judgment on the basis of the pleadings
remuner .48 .30 and BIR official records, the respondent Court rendered the questioned
ation decision. Subsequently, on a motion for reconsideration filed by petitioner, the
respondent Court issued a resolution dated September 30, 1968 imposing a 5%
NET P surcharge and 1% monthly interest on the deficiency assessment.
PROFIT 244,416
.70
Dissatisfied, petitioner has come to this Court on errors assigned in its brief.

Upon recommendation of aforesaid examiner that the said
sum of P61,187.48 be disallowed as deduction from gross
income, petitioner asserted in its letter of February 19, 1958,
that said amount should be allowed as deduction because it
was paid to its officers as allowance or bonus pursuant to
Section 3 of its by-laws which provides as follows:
From the net profits of the business of the
Company shall be deducted for allowance
Petitioner argues that the profit derived from the sale of its Muntinglupa land is
not taxable for it is tax-exempt income, considering that its Fish Nets Division
enjoys tax exemption as a new and necessary industry under Republic Act
901.
It must be stressed however that at the administrative level, the petitioner
implicitly admitted that the profit it derived from the sale of its Muntinglupa
land, a capital asset, was a taxable gain — which was precisely the reason
why for tax purposes the petitioner deducted therefrom the questioned bonus

Atty. Santos, Taxation I Page 296


to its corporate officers as a supposed item of expense incurred for the sale of
the said land, apart from the P51,723.72 commission paid by the petitioner to
the real estate agent who indeed effected the sale. The BIR therefore had no
occasion to pass upon the issue.
To allow a litigant to assume a different posture when he comes before the
court and challenge the position he had accepted at the administrative level,
would be to sanction a procedure whereby the court — which is supposed
to review administrative determinations — would not review, but determine
and decide for the first time, a question not raised at the administrative forum.
This cannot be permitted, for the same reason that underlies the requirement
of prior exhaustion of administrative remedies to give administrative authorities
the prior opportunity to decide controversies within its competence, and in
much the same way that, on the judicial level, issues not raised in the lower
court cannot be raised for the first time on appeal.
In the instant case, up to the time the questioned decision of the respondent
Court was rendered, the petitioner had always implicitly admitted that the
disputed capital gain was taxable, although subject to the deduction of the
bonus paid to its corporate officers. It was only after the said decision had
been rendered and on a motion for reconsideration thereof, that the issue of
tax exemption was raised by the petitioner for the first time. It was thus not one
of the issues raised by petitioner in his petition and supporting memorandum in
the Court of Tax Appeals.
We therefore hold that petitioner's belated claim for tax exemption was
properly rejected.
The remaining issues in this appeal are: (1) whether or not the bonus given to
the officers of the petitioner upon the sale of its Muntinglupa land is an
ordinary and necessary business expense deductible for income tax purposes;
and (2) whether or not petitioner is hable for surcharge and interest for late
payment.
Anent the first question, the applicable legal provision is Sec. 30 (a) (1) of the
Tax Code which reads:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In computing net income there shall be allowed as
deductions —
(a) Expenses:
(1) In general. All the Ordinary
and necessary expenses paid or incurred
during the taxable year in carrying on any
trade or business, including a reasonable
allowance for personal services actually
rendered. ...
On the basis of the foregoing standards, the bonus given to the officers of the
petitioner as their share of the profit realized from the sale of petitioner's
Muntinglupa land cannot be deemed a deductible expense for tax purposes,
even if the aforesaid sale could be considered as a transaction for Carrying
on the trade or business of the petitioner and the grant of the bonus to the
corporate officers pursuant to petitioner's by-laws could, as an intra-corporate
matter, be sustained. The records show that the sale was effected through a
broker who was paid by petitioner a commission of P51,723.72 for his services.
On the other hand, there is absolutely no evidence of any service actually
rendered by petitioner's officers which could be the basis of a grant to them
of a bonus out of the profit derived from the sale. This being so, the payment
of a bonus to them out of the gain realized from the sale cannot be
considered as a selling expense; nor can it be deemed reasonable and
necessary so as to make it deductible for tax purposes. As stated by this Court
in Alhambra Cigar and Cigarette Manufacturing Co. vs. Collector of Internal
Revenue, G.R. No. L-12026, May 29, 1959, construing Section 30 (a) (1) of the
Tax Code:
. . . . whenever a controversy arises on the deductibility, for
purposes of income tax, of certain items for alleged
compensation of officers of the taxpayer, two (2) questions
become material, namely: (a) Have personal services been
actually rendered by said officers? (b) In the affirmative case,
what is the reasonable allowance' therefor
Then, this Court quoted with approval the appealed decision:
Page 297

. . . these extraordinary and unusual amounts paid by
petitioner to these directors in the guise and form of
compensation for their supposed services as such, without
any relation to the measure of their actual services, cannot
be regarded as ordinary and necessary expenses within the
meaning of the law.
This posture is in line with the doctrine in the law of taxation that the taxpayer
must show that its claimed deductions clearly come within the language of
the law since allowances, like exemptions, are matters of legislative grace.
We now come to the issue regarding the imposition of 5% surcharge and 1%
monthly interest for late payment of the deficiency tax on petitioner's income
which was earned in 1957 and assessed on May 30, 19-08.
The applicable law is Section 51 of the Tax Code which, before its
amendment by Republic Act 2343 effective June 20, 1959, reads as follows:
SEC. 51. Assessment and payment of income tax Assessment
of tax. — All assessments shall be made by the Collector of In
ternal Revenue and all persons and corporations subject to
tax shall be notified of the amount for which they are
respectively liable on or before the first day of May of each
successive year.
(b) Time of payment. — The total amount of tax imposed by
this Title shall be paid on or before the fifteenth day of May
following the close of the calendar year, by the person
subject to tax, and, in the case of a corporation, by the
president, vice- president, or other responsible officer thereof.
If the return is made on the basis of a fiscal year, the total
amount of the tax shall be paid on or before the f if teenth
day of the fifth month following the close of the fiscal year.
xxx xxx xxx
(e) Surcharge and interest in case of delinquency. — To any
sum or sums due and unpaid after the dates prescribed in
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
subsections (b), (c) and (d) for the payment of the same,
there shall be added the sum of five per centum on the
amount of tax unpaid and interest at the rate of one per
centum a month upon said tax from the time the same
became due, except from the estates of insane, deceased,
or insolvent persons.
Applying the foregoing provisions, the respondent Court said:
It should be observed that, under the old Section 51 (e), the
5% surcharge and interest on deficiency was imposed from
the time the tax became due, and said interest was
imposable in case of non-payment on time, not only on the
basic income tax, but also on the deficiency tax, since the
deficiency was part and parcel of the taxpayer's income tax
liability. It should further be observed that, although the
Commissioner (formerly Collector) of Internal Revenue, under
the old Section 51 (a) was required to assess the tax due,
based on the taxpayer's return, and notify the taxpayer of
said assessment, still, under subsection (b) of the same old
Section 51, the time prescribed for the payment of tax was
fixed, whether or not a notice of the assessment was given to
the taxpayer (See Central Azucarera Don Pedro v. Court of
Tax Appeals, et al. G.R. Nos. L-23236 & 23254, May 31, 1967).
Inasmuch as petitioner had filed its income tax return for 1957
on the fiscal year basis ending June 30, 1957, the deficiency
income tax in question should have been paid on or before
November 15, 1957-the fifteenth day of the fifth month
following the close of the fiscal year (See Sec. 51 (b), supra). It
follows that petitioner is liable to the 5% surcharge and 1%
monthly interest for late payment, not from June 30, 1958, but
from November 15, 1957. Consequently, the payment of
surcharge and interest on deficiency being statutory and
therefore mandatory, petitioner is also hable, aside from the
basic tax above mentioned, for the 5% surcharge and 1%
monthly interest for late payment of the deficiency income
tax from November 15, 1957 until paid. (CTA Resolution dated
Sept. 30, 1968.)
Page 298
 DUMAUAL, JEANNE PAULINE J. 2019-2020

The rule as to when interest and surcharges on delinquency tax payments are to be condoned for light reasons, the law imposing
become chargeable is wen settled and the respondent Court applied it penalties for delinquencies would be rendered nugatory, and
correctly. Construing the same provisions of the old Section 51 (e) and the the maintenance of the government and its multifarious
Section 51 (d) of the Tax Code, as amended by Republic Act 2343, this Court activities would be as precarious as taxpayers are wining or
held that the interest and surcharges on deficiency taxes are imposable upon unwilling to pay their obligations to the state in time.
failure of the taxpayer to pay the tax on the date fixed in the law for the Imperatives of public welfare will not approve of this result.
payment thereof, which was, under the unamended Section 51 of the Tax (Jamora vs. Meer, 74 PhiL 22.)
Code, the fifteenth day of the fifth month following the close of the fiscal year
in the case of taxpayers whose tax returns were made on the basis of fiscal WHEREFORE, the judgment under review is affirmed in toto. Costs against the
years. [Commissioner of Internal Revenue vs. Connel Bros. Co. (Phil.), 40 SCRA petitioner.
416.]
SO ORDERED.
The rule has to be so because a deficiency tax indicates non-payment of the
correct tax, and such deficiency exists not only from the assessment thereof
but from the very time the taxpayer failed to pay the correct amount of tax
when it should have been paid (Ibid.) and the imposition thereof is mandatory
even in the absence of fraud or wilful failure to pay the tax is full.

As regards interest, the reason is —

The imposition of 1% monthly is but a just compensation to the

State for the delay in paying the tax and for the concomitant
use by the taxpayer of funds that rightfully should be in the
government s hands. (U.S. vs. Goldstein, 189 F (2d) 752; Ross
vs. U.S. 148 Fed. Supp. 330; U.S. vs. Joffray 97 Fed. (2d) 488.)
The fact that the interest charged is made proportionate to
the period of delay constitutes the best evidence that such
interest is not penal but compensator (Castro vs. Collector of
Internal Revenue, G.R. L-12174, Dec. 28, 1662, Resolution on
Motion for Reconsideration.)

As regards the prescribed 5% surcharge, this Court has had occasion to cite
the reason for the strict enforcement thereof.

Strong reasons of policy support a strict observance of this

rule. Tax laws imposing penalties for deliquencies are clearly
intended to hasten tax payments or to punish evasion or
neglect of duty in respect thereof. If delays in tax payments

Atty. Santos, Taxation I Page 299


G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30,
2005 Decision1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the
February 26, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No.
5211, which cancelled and set aside the Assessment Notices for deficiency
income tax and expanded withholding tax issued by the Bureau of Internal
Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation,
received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-
86-90-000681 for deficiency expanded withholding tax in the amount of
P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for
professional and security services billed to and paid by ICC in 1986, to
wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the
year ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees]
of the law firm Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson for the years 1984 and 1985.5
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three
promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest
and surcharge) was allegedly due to the failure of ICC to withhold 1%
expanded withholding tax on its claimed P244,890.00 deduction for security
services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments.
On February 9, 1995, however, it received a final notice before seizure
demanding payment of the amounts stated in the said notices. Hence, it
brought the case to the CTA which held that the petition is premature
because the final notice of assessment cannot be considered as a final
decision appealable to the tax court. This was reversed by the Court of
Appeals holding that a demand letter of the BIR reiterating the payment of
deficiency tax, amounts to a final decision on the protested assessment and
may therefore be questioned before the CTA. This conclusion was sustained
by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded
to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting
aside the assessment notices issued against ICC. It held that the claimed
deductions for professional and security services were properly claimed by
ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services
were rendered to ICC in 1984 or 1985, it could not declare the same as
deduction for the said years as the amount thereof could not be determined
at that time.
The CTA also held that ICC did not understate its interest income on the
subject promissory notes. It found that it was the BIR which made an
overstatement of said income when it compounded the interest income
receivable by ICC from the promissory notes of Realty Investment, Inc.,
despite the absence of a stipulation in the contract providing for a
Page 300

compounded interest; nor of a circumstance, like delay in payment or breach
of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding
tax on its claimed deduction for security services as shown by the various
payment orders and confirmation receipts it presented as evidence. The
dispositive portion of the CTA’s Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-
000680 for deficiency income tax in the amount of P333,196.86, and
Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and
interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed
the CTA decision,10 holding that although the professional services (legal and
auditing services) were rendered to ICC in 1984 and 1985, the cost of the
services was not yet determinable at that time, hence, it could be considered
as deductible expenses only in 1986 when ICC received the billing statements
for said services. It further ruled that ICC did not understate its interest income
from the promissory notes of Realty Investment, Inc., and that ICC properly
withheld and remitted taxes on the payments for security services for the
taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant
petition contending that since ICC is using the accrual method of accounting,
the expenses for the professional services that accrued in 1984 and 1985,
should have been declared as deductions from income during the said years
and the failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986. As to the alleged deficiency interest
income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the
BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained
the deduction of the expenses for professional and security services from
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
ICC’s gross income; and (2) held that ICC did not understate its interest
income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security
services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are:
(a) the expense must be ordinary and necessary; (b) it must have been paid
or incurred during the taxable year; (c) it must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) it must be supported
by receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is
further qualified by Section 45 of the National Internal Revenue Code (NIRC)
which states that: "[t]he deduction provided for in this Title shall be taken for
the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent
upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining
when and how to report income and deductions.12 In the instant case, the
accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the
accrual method of accounting, expenses not being claimed as deductions
by a taxpayer in the current year when they are incurred cannot be claimed
as deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for
the current year but failed to do so cannot deduct the same for the next
year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue
where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of
payment.14
Page 301

For a taxpayer using the accrual method, the determinative question is, when
do the facts present themselves in such a manner that the taxpayer must
recognize income or expense? The accrual of income and expense is
permitted when the all-events test has been met. This test requires: (1) fixing of
a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events
test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew,
or could reasonably be expected to have known, at the closing of its books
for the taxable year.[16] Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the
taxing authority; and one who claims an exemption must be able to justify the
same by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. And
since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for
legal and auditing services. The expenses for legal services pertain to the 1984
and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of
said firm in connection with ICC’s tax problems for the year 1984. As testified
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
by the Treasurer of ICC, the firm has been its counsel since the 1960’s. 19 From
the nature of the claimed deductions and the span of time during which the
firm was retained, ICC can be expected to have reasonably known the
retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the
taxable year when they could have been claimed as deductions cannot thus
be attributed solely to the delayed billing of these liabilities by the firm. For
one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual
method of accounting. For another, it could have reasonably determined the
amount of legal and retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact
and that the taxpayer bears the burden of establishing the accrual of an
expense or income. However, ICC failed to discharge this burden. As to when
the firm’s performance of its services in connection with the 1984 tax problems
were completed, or whether ICC exercised reasonable diligence to inquire
about the amount of its liability, or whether it does or does not possess the
information necessary to compute the amount of said liability
with reasonable accuracy, are questions of fact which ICC never established.
It simply relied on the defense of delayed billing by the firm and the company,
which under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses for legal
and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense
deductions in 1986. This is so because ICC failed to present evidence showing
that even with only "reasonable accuracy," as the standard to ascertain its
liability to SGV & Co. in the year 1985, it cannot determine the professional
fees which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the
taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-
2000, they cannot be validly deducted from its gross income for the said year
and were therefore properly disallowed by the BIR.
Page 302
 DUMAUAL, JEANNE PAULINE J. 2019-2020

As to the expenses for security services, the records show that these expenses SO ORDERED.
were incurred by ICC in 198620 and could therefore be properly claimed as
deductions for the said year.

Anent the purported understatement of interest income from the promissory

notes of Realty Investment, Inc., we sustain the findings of the CTA and the
Court of Appeals that no such understatement exists and that only simple
interest computation and not a compounded one should have been applied
by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest.21 Under Article 1959 of the Civil Code,
unless there is a stipulation to the contrary, interest due should not further earn
interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly
withheld the required withholding tax from its claimed deductions for security
services and remitted the same to the BIR is supported by payment order and
confirmation receipts.22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of

P333,196.86 for deficiency income tax should be cancelled and set aside but
only insofar as the claimed deductions of ICC for security services. Said
Assessment is valid as to the BIR’s disallowance of ICC’s expenses for
professional services. The Court of Appeal’s cancellation of Assessment Notice
No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded
withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005

Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which
disallowed the expense deduction of Isabela Cultural Corporation for
professional and security services, is declared valid only insofar as the
expenses for the professional fees of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The
decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural
Corporation’s liability under Assessment Notice No. FAS-1-86-90-000680.

Atty. Santos, Taxation I Page 303


G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil
Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.
CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying
petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959
and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for
1959, as part of its ordinary and necessary business expenses, the amount it
had spent for drilling and exploration of its petroleum concessions. This claim
was disallowed by the respondent Commissioner of Internal Revenue on the
ground that the expenses should be capitalized and might be written off as a
loss only when a "dry hole" should result. ESSO then filed an amended return
where it asked for the refund of P323,279.00 by reason of its abandonment as
dry holes of several of its oil wells. Also claimed as ordinary and necessary
expenses in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit remittances to its New
York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,
disallowing the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the
year 1960, in the amount of P367,994.00, plus 18% interest thereon of
P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
P434,232.92. The deficiency arose from the disallowance of the margin fees of
Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its
New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the
tax credit of P221,033.00 representing its overpayment on its income tax for
1959 and paying under protest the additional amount of P213,201.92. On
August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the
interest on its deficiency income tax. It argued that the 18% interest should
have been imposed not on the total deficiency of P367,944.00 but only on the
amount of P146,961.00, the difference between the total deficiency and its
tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on
the entire amount of the deficiency tax. On May 4,1965, the CIR also denied
the claims of ESSO for refund of the overpayment of its 1959 and 1960 income
taxes, holding that the margin fees paid to the Central Bank could not be
considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959,
contending that the margin fees were deductible from gross income either as
a tax or as an ordinary and necessary business expense. It also claimed an
overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were
not legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959
and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess
interest. This portion of the decision was appealed by the CIR but was affirmed
by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502-
03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision
denying its claims for the refund of the margin fees P102,246.00 for 1959 and
P434,234.92 for 1960. That is the issue now before us.
II
Page 304

The first question we must settle is whether R.A. 2009, entitled An Act to
Authorize the Central Bank of the Philippines to Establish a Margin Over Banks'
Selling Rates of Foreign Exchange, is a police measure or a revenue measure.
If it is a revenue measure, the margin fees paid by the petitioner to the Central
Bank on its profit remittances to its New York head office should be deductible
from ESSO's gross income under Sec. 30(c) of the National Internal Revenue
Code. This provides that all taxes paid or accrued during or within the taxable
year and which are related to the taxpayer's trade, business or profession are
deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background
and legislative history of the Margin Fee Law showing that R.A. 2609 was
nothing less than a revival of the 17% excise tax on foreign exchange imposed
by R.A. 601. This was a revenue measure formally proposed by President
Carlos P. Garcia to Congress as part of, and in order to balance, the budget
for 1959-1960. It was enacted by Congress as such and, significantly, properly
originated in the House of Representatives. During its two and a half years of
existence, the measure was one of the major sources of revenue used to
finance the ordinary operating expenditures of the government. It was,
moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting
established principles, pointed out that —
We are not unmindful of the rule that opinions expressed in debates, actual
proceedings of the legislature, steps taken in the enactment of a law, or the
history of the passage of the law through the legislature, may be resorted to as
an aid in the interpretation of a statute which is ambiguous or of doubtful
meaning. The courts may take into consideration the facts leading up to,
coincident with, and in any way connected with, the passage of the act, in
order that they may properly interpret the legislative intent. But it is also well-
settled jurisprudence that only in extremely doubtful matters of interpretation
does the legislative history of an act of Congress become important. As a
matter of fact, there may be no resort to the legislative history of the
enactment of a statute, the language of which is plain and unambiguous,
since such legislative history may only be resorted to for the purpose of solving
doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Apart from the above consideration, there are at least two cases where we
have held that a margin fee is not a tax but an exaction designed to curb the
excessive demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated
through Justice Jose P. Bengzon:
A 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. Originally adopted to cope with balance of
payment pressures, exchange restrictions have come to serve
various purposes, such as limiting non-essential imports,
protecting domestic industry and when combined with the
use of multiple currency rates providing a source of revenue
to the government, and are in many developing countries
regarded as a more or less inevitable concomitant of their
economic development programs. The different measures of
exchange control or restriction cover different phases of
foreign exchange transactions, i.e., in quantitative restriction,
the control is on the amount of foreign exchange allowable.
In the case of the margin levy, the immediate impact is on
the rate of foreign exchange; in fact, its main function is to
control the exchange rate without changing the par value of
the peso as fixed in the Bretton Woods Agreement Act. For a
member nation is not supposed to alter its exchange rate (at
par value) to correct a merely temporary disequilibrium in its
balance of payments. By its nature, the margin levy is part of
the rate of exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign
exchange and hence should not form part of the exchange rate, suffice it to
state that We have already held the contrary for the reason that a tax is
levied to provide revenue for government operations, while the proceeds of
the margin fee are applied to strengthen our country's international reserves.
Page 305

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v.
Central Bank, 3 the same idea was expressed, though in connection with a
different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20%
retention of exporter's foreign exchange constitutes an export
tax. A tax is a levy for the purpose of providing revenue for
government operations, while the proceeds of the 20%
retention, as we have seen, are applied to strengthen the
Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the
exercise of its police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should
nevertheless be considered necessary and ordinary business expenses and
therefore still deductible from its gross income. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the
conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue
Code reading as follows:
SEC. 30. Deductions from gross income in computing net
income there shall be allowed as deductions
(a) Expenses:
(1) In general. — All the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any
trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually
rendered; traveling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments
required to be made as a condition to the continued use or
possession, for the purpose of the trade or business, of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
property to which the taxpayer has not taken or is not taking
title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and
foreign corporations. — In the case of a non-resident alien
individual or a foreign corporation, the expenses deductible
are the necessary expenses paid or incurred in carrying on
any business or trade conducted within the Philippines
exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 4 the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the
law allows. As previously adverted to, the law allowing
expenses as deduction from gross income for purposes of the
income tax is Section 30(a) (1) of the National Internal
Revenue which allows a deduction of 'all the ordinary and
necessary expenses paid or incurred during the taxable year
in carrying on any trade or business.' An item of expenditure,
in order to be deductible under this section of the statute,
must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is
axiomatic that to be deductible as a business expense, three
conditions are imposed, namely: (1) the expense must be
ordinary and necessary, (2) it must be paid or incurred within
the taxable year, and (3) it must be paid or incurred in
carrying on a trade or business. In addition, not only must the
taxpayer meet the business test, he must substantially prove
by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction.
Page 306

While it is true that there is a number of decisions in the United
States delving on the interpretation of the terms 'ordinary and
necessary' as used in the federal tax laws, no adequate or
satisfactory definition of those terms is possible. Similarly, this
Court has never attempted to define with precision the terms
'ordinary and necessary.' There are however, certain guiding
principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will
be considered 'necessary' where the expenditure is
appropriate and helpful in the development of the taxpayer's
business. It is 'ordinary' when it connotes a payment which is
normal in relation to the business of the taxpayer and the
surrounding circumstances. The term 'ordinary' does not
require that the payments be habitual or normal in the sense
that the same taxpayer will have to make them often; the
payment may be unique or non-recurring to the particular
taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a
deduction depends in each case on the particular facts and
the relation of the payment to the type of business in which
the taxpayer is engaged. The intention of the taxpayer often
may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in
the operation of the taxpayer's business, the answer to the
question as to whether the expenditure is an allowable
deduction as a business expense must be determined from
the nature of the expenditure itself, which in turn depends on
the extent and permanency of the work accomplished by
the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals
did not err when it held on this issue as follows:
Considering the foregoing test of what constitutes an ordinary
and necessary deductible expense, it may be asked: Were
the margin fees paid by petitioner on its profit remittance to
its Head Office in New York appropriate and helpful in the
taxpayer's business in the Philippines? Were the margin fees
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
incurred for purposes proper to the conduct of the affairs of
petitioner's branch in the Philippines? Or were the margin fees
incurred for the purpose of realizing a profit or of minimizing a
loss in the Philippines? Obviously not. As stated in the Lopez
case, the margin fees are not expenses in connection with
the production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the disposition of
said incomes; expenses for the remittance of funds after they
have already been earned by petitioner's branch in the
Philippines for the disposal of its Head Office in New York
which is already another distinct and separate income
taxpayer.
xxx
Since the margin fees in question were incurred for the
remittance of funds to petitioner's Head Office in New York,
which is a separate and distinct income taxpayer from the
branch in the Philippines, for its disposal abroad, it can never
be said therefore that the margin fees were appropriate and
helpful in the development of petitioner's business in the
Philippines exclusively or were incurred for purposes proper to
the conduct of the affairs of petitioner's branch in the
Philippines exclusively or for the purpose of realizing a profit or
of minimizing a loss in the Philippines exclusively. If at all, the
margin fees were incurred for purposes proper to the
conduct of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits
was made in furtherance of its own trade or business. The petitioner merely
presumed that all corporate expenses are necessary and appropriate in the
absence of a showing that they are illegal or ultra vires. This is error. The public
respondent is correct when it asserts that "the paramount rule is that claims for
deductions are a matter of legislative grace and do not turn on mere
equitable considerations ... . The taxpayer in every instance has the burden of
justifying the allowance of any deduction claimed." 5
Page 307
 DUMAUAL, JEANNE PAULINE J. 2019-2020

It is clear that ESSO, having assumed an expense properly attributable to its

head office, cannot now claim this as an ordinary and necessary expense
paid or incurred in carrying on its own trade or business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's
claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED,
with costs against the petitioner.

Atty. Santos, Taxation I Page 308

 DUMAUAL, JEANNE PAULINE J. 2019-2020

FAR EAST BANK AND TRUST GR No. 129130 DECISION

COMPANY,

Petitioner, Present: AZCUNA, J.:

DAVIDE, JR., C.J. (Chairman), This is a Petition for Review on Certiorari assailing the decision of the Court of
Appeals (CA) dated May 7, 1997 in CA-G.R. SP No. 41666.
QUISUMBING,

YNARES-SANTIAGO,
The CA affirmed in toto the decision of the Court of Tax Appeals (CTA) dated
CARPIO, and January 24, 1996 and its resolution of July 31, 1996, dismissing petitioner Far East
Bank and Trust Company's claim for refund of excess creditable withholding
taxes in the aggregate amount of Seven Hundred Fifty-Five Thousand Seven
- versus - AZCUNA, JJ.
Hundred and Fifteen Pesos (P755,715) allegedly paid and remitted to the
Bureau of Internal Revenue (BIR) sometime in 1990 and 1991.

The antecedent facts are as follows:

Promulgated:

COURT OF APPEALS, COURT OF

Petitioner is a domestic banking corporation duly organized
TAX APPEALS and COMMISSIONER ' December 9, 2005 and existing under and by virtue of Philippine laws. In the
early part of 1992, the Cavite Development Bank [CDB], also
a domestic banking corporation, was merged with Petitioner
OF INTERNAL REVENUE,
with the latter as its surviving entity [under] the merger.
Petitioner being the surviving entity[, it] acquired all [the]
Respondents. assets of CDB.

x ---------------------------------------------------------------------------------------- x

Atty. Santos, Taxation I Page 309


During the period from 1990 to 1991, CDB sold some acquired
assets in the course of which it allegedly withheld the
creditable tax from the sales proceeds which amounted
to P755,715.00.
In said years, CDB filed income tax returns which reflected
that CDB incurred negative taxable income or losses for both
years. Since there was no tax against which to credit or offset
the taxes withheld by CDB, the result was that CDB,
according to petitioner, had excess creditable withholding
tax.
Thus, petitioner, being the surviving entity of the merger, filed
this Petition for Review after its administrative claim for refund
was not acted upon. [1]
In denying petitioner's claim, the CA held that the evidence presented by
petitioner consisting of (1) confirmation receipts, payment orders, and official
receipts issued by the Central Bank and the BIR with CDB as the payor; [2] (2)
Income Tax Returns for 1990 and 1991 with attached financial statements filed
by petitioner with the BIR; [3] and, (3) a list prepared by the Accounting
Department of petitioner purportedly showing the CDB schedule of creditable
withholding tax applied for refund for 1990 and 1991, [4] all failed to clearly
establish that the taxes arising from the sale of its acquired assets sometime in
1990 and 1991 were properly withheld and remitted to the BIR. The CA likewise
ruled that it was incumbent upon petitioner to present BIR Form No. 1743.1 as
required under Revenue Regulation 6-85 to conclusively prove its right to the
refund. It held that petitioner's failure to do so was fatal to its cause.
Hence, this Petition.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Petitioner anchors its arguments on the following grounds:
1. THE DECISION OF MAY 7,1997 WHEREBY RESPONDENT CA
DISMISSED PETITIONER'S APPEAL, AND RESPONDENT
CTA'S DECISION DATED JANUARY 24, 1996 AND
RESOLUTION OF JULY 31,1996, ARE NOT BASED ON THE
FACTS AND THE LAW.
2. PETITIONER HAS ADDUCED EVIDENCE A QUO WHICH
SUFFICIENTLY AND SUBSTANTIALLY ESTABLISH[ES] THE
FACT THAT THE CREDITABLE WITHHOLDING TAX ON THE
SALE OF ACQUIRED ASSETS WAS WITHHELD AND THEN
REMITTED TO THE BUREAU OF INTERNAL REVENUE; AND,
3. THE DISMISSAL OF THE CLAIM FOR REFUND BEFORE
RESPONDENT CTA ARISES FROM AN UNDULY STRICT
APPLICATION OF THE REGULATIONS WHICH IS NOT
WARRANTED IN VIEW OF THE CLEAR PROOFS
ADDUCED BY PETITIONER WHICH ESTABLISH THE BASIS
FOR THE RELIEFS SOUGHT. [5]
Petitioner contends that the confirmation receipts presented by it constitute
'competent and irrefutable proof of the fact that taxes were withheld and
remitted to the BIR. [6] It is admitted that the taxes reflected on the
confirmation receipts as well as on the payment orders and official receipts
issued by the BIR were withheld by CDB. Petitioner maintains that these
pertained to the proceeds of the sale of its acquired assets in 1990 and 1991.
Page 310

According to petitioner, CDB took the initiative of paying the withholding tax
accruing thereon notwithstanding the fact that it was the recipient of the
income, to ensure that the correct taxes were remitted to the BIR. Petitioner
further argues that the list prepared by its Accounting Department identifying
the persons to whom the various sales were made and indicating the amount
of taxes withheld for each transaction should have been given more weight
by the court a quo as this document, when taken with the tax withholding
forms, indubitably establishes the fact of withholding and the basis for the
claims for refund. [7] Considering, therefore, that petitioner had adequately
established by other evidence the basis for the grant of the claim for tax
refund, petitioner asserts that its failure to submit BIR Form No. 1743.1 is not
fatal to its cause.
The crucial issue in this case turns on a question of fact, that is, whether
petitioner adduced sufficient evidence to prove its entitlement to a refund.
The findings of fact of the CTA, a special court exercising particular expertise
on the subject of tax, are generally regarded as final, binding and
conclusive [8] upon this Court, especially if these are substantially similar to the
findings of the CA which is normally the final arbiter of questions of fact. [9] The
findings shall not be reviewed nor disturbed on appeal [10] unless a party can
show that these are not supported by evidence, [11] or when the judgment is
premised on a misapprehension of facts, or when the lower courts failed to
notice certain relevant facts which if considered would justify a different
conclusion. [12]
Petitioner has not sufficiently presented a case for the application of an
exception from the rule.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Firstly, the CA cannot be faulted for not lending credence to petitioner's
contention that it withheld, for its own account, the creditable withholding
taxes on the sale of its acquired assets. In our withholding tax system,
possession of the amount that is used to settle the tax liability is acquired by
the payor as the withholding agent of the government. [13] For this reason,
the Tax Code imposes, among others, certain obligations upon the
withholding agent to monitor its compliance with this duty. These include the
filing of the quarterly withholding tax returns, [14] the submission to the payee,
in respect of his or its receipts during the calendar quarter or year, of a written
statement showing the income or other payments made by the withholding
agent during such quarter or year and the amount of the tax deducted and
withheld therefrom, [15] and the filing with the BIR of a reconciliation
statement of quarterly payments and a list of payees and income
payments. [16] Codal provisions on withholding tax are mandatory and must
be complied with by the withholding agent. This is significant in that a
taxpayer cannot be compelled to answer for the non-performance by the
withholding agent of its legal duty to withhold unless there is collusion or bad
faith. In addition, the former could not be deemed to have evaded the tax
had the withholding agent performed its duty. [17]
On the other hand, it is incumbent upon the payee to reflect in his or its own
return the income upon which any creditable tax is required to be withheld at
the source. Only when there is an excess of the amount of tax so withheld
over the tax due on the payee's return can a refund become possible.
A taxpayer must thus do two things to be able to successfully make a claim for
the tax refund: (a) declare the income payments it received as part of its
gross income and (b) establish the fact of withholding. [18] On this score, the
relevant revenue regulation provides as follows:
Page 311

Section 10. Claims for tax credit or refund. -- Claims for tax
credit or refund of income tax deducted and withheld on
income payments shall be given due course only when it is
shown on the return that the income payment received was
declared as part of the gross income and the fact of
withholding is established by a copy of the statement duly
issued by the payor to the payee (BIR Form No. 1743.1)
showing the amount paid and the amount of tax withheld
therefrom. [19]
As mentioned, petitioner relies heavily on the confirmation receipts with the
corresponding official receipts and payment orders to support its case.
Standing alone, however, these documents only establish that CDB withheld
certain amounts in 1990 and 1991. It does not follow that the payments
reflected in the confirmation receipts relate to the creditable withholding
taxes arising from the sale of the acquired properties. The claim that CDB had
excess creditable withholding taxes can only be upheld if it were clearly and
positively shown that the amounts on the various confirmation receipts were
the amounts withheld by virtue of the sale of the acquired assets. On this
point, the CA correctly pronounced:
The confirmation receipts alone, by themselves, will not
suffice to prove that the taxes reflected in the income tax
returns are the same taxes withheld from CDB's income
payments from the sale of its acquired assets. This is because
a cursory examination of the said Confirmation Receipts,
Payment Orders and Official Receipts will show that what are
reflected therein are merely the names of the payors and the
amount of tax. The nature of the tax paid, or at the very least,
the income payments from which the taxes paid were
withheld are not reflected therein. If these are the only entries
that are found on these proferred documents, We cannot
begrudge the Respondent Court from nurturing veritable
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
doubts on the nature and identity of the taxes withheld, when
it declared, in part, in its Decision ( Annex 'A of the
Petition ) that, 'It can not well be said that the amounts paid
and remitted to the BIR were for CDB's account and not for
the other possible payees of withholding taxes which CDB
may also be liable to remit as a withholding agent x x x . [20]
Petitioner, apparently aware of the foregoing deficiency, offered into
evidence a CDB Schedule of Creditable Withholding Tax for the period 1990
to 1991 [21] prepared by petitioner's representative to show that the taxes
CDB withheld did, indeed, pertain to the taxes accruing on the sale of the
acquired assets. The CA, however, found the same to be 'self-serving and
unverifiable and therefore 'barren of evidentiary weight. [22] We accord this
finding on an issue of fact the highest respect and we will not set it aside
lightly.
It bears emphasis that questions on whether certain items of evidence should
be accorded probative value or weight, or rejected as feeble or spurious, or
whether the proofs on one side or the other are clear and convincing and
adequate to establish a proposition in issue, are without doubt questions of
fact. This is true regardless of whether the body of proofs presented by a party,
weighed and analyzed in relation to contrary evidence submitted by the
adverse party, may be said to be strong, clear and convincing. Whether
certain documents presented by one side should be accorded full faith and
credit in the face of protests as to their spurious character by the other side;
whether inconsistencies in the body of proofs of a party are of such gravity as
to justify refusing to give said proofs weightall these are issues of fact.
Questions like these are not reviewable by us. As a rule, we confine our review
of cases decided by the CA only to questions of law raised in the petition and
therein distinctly set forth. [23] We note that without the CDB Schedule, no
evidence links the Confirmation Receipts, Payment Orders and Official
Receipts to the taxes allegedly withheld by CDB on the sale of the acquired
assets.
Page 312
 DUMAUAL, JEANNE PAULINE J. 2019-2020

amount of petitioner's entitlement during the trial phase of this case is fatal to
its cause. For its negligence, petitioner 'cannot be allowed to seek refuge in a
As to the annual income tax returns for 1990 and 1991 [24] presented by liberal application of the [r]ules. [28] The liberal interpretation and
petitioner, we must stress that the mere admission into the records of these application of rules apply only in proper cases of demonstrable merit and
returns does not automatically make their contents or entries undisputed and under justifiable causes and circumstances. [29]
binding facts. Mere allegations by petitioner of the figures in its returns are not
a sufficient proof of the amount of its refund entitlement. They do not even
constitute evidence adverse to respondent, against whom these are being
presented. [25] We must emphasize that tax refunds, like tax exemptions, are construed strictly
against the taxpayer and liberally in favor of the taxing authority. [30] In the
event, petitioner has not met its burden of proof in establishing the factual
basis for its claim for refund and we find no reason to disturb the ruling of the
Furthermore, we note that in the proceedings below, respondent lower courts.
Commissioner of Internal Revenue (CIR) raised the fact that there was a
discrepancy in the excess creditable withholding tax reflected in the returns
with the amounts sought to be refunded by petitioner. Whereas the 1990 and
1991 Income Tax Returns indicated that CDB had excess creditable WHEREFORE , the petition is DENIED and the Decision of the Court of Appeals
withholding tax in the amounts of P535,310 and P357,511, respectively, the dated May 7, 1997 in CA-G.R. SP No. 41666 is AFFIRMED. No pronouncement
amounts claimed by petitioner as indicated in the CDB Schedule as to costs.
were P512,940.50 for 1990 and P242,774.50 for 1991. [26] The records are bereft
of any explanation for such discrepancy. This further undermines petitioner's
contentions, and its reliance on the CDB Schedule.

SO ORDERED .

Petitioner also asserts that the confusion or difficulty in the implementation of

Revenue Memorandum Circular 7-90 [27] was the reason why CDB took upon
itself the task of withholding the taxes arising from the sale, to ensure
accuracy. Assuming this were true, CDB should have, nevertheless,
accomplished the necessary returns to clearly identify the nature of the
payments made and file the same with the BIR. Section 2 of the circular
clearly provides that the amount of withholding tax paid by a corporation to
the BIR during the quarter on sales or exchanges of property and which are
creditable against the corporation's tax liability are evidenced by
Confirmation/Official Receipts and covered by BIR Form Nos. 1743W and
1743-B. On the other hand, Revenue Regulation 6-85 states that BIR Form No.
1743.1 establishes the fact of withholding. Since no competent evidence was
adduced by petitioner, the failure to offer these returns as evidence of the

Atty. Santos, Taxation I Page 313


[G.R. NO. 157064 : August 7, 2006]
BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities,
Inc.) Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court,
seeking to set aside the Decision of the Court of Appeals in CA-G.R. SP No.
60209 dated 11 July 2002, 1 ordering the petitioner to pay the Government the
amount of P826,698.31 as deficiency income tax for the year 1987 plus 25%
surcharge and 20% interest per annum. The Court of Appeals, in its assailed
Decision, reversed the Decision of the Court of Tax Appeals (CTA) dated 17
May 2000 2 in C.T.A. Case No. 5662.
Petitioner Barcelon, Roxas Securities Inc. (now known as UBP Securities, Inc.) is
a corporation engaged in the trading of securities. On 14 April 1988, petitioner
filed its Annual Income Tax Return for taxable year 1987. After an audit
investigation conducted by the Bureau of Internal Revenue (BIR), respondent
Commissioner of Internal Revenue (CIR) issued an assessment for deficiency
income tax in the amount of P826,698.31 arising from the disallowance of the
item on salaries, bonuses and allowances in the amount of P1,219,093,93 as
part of the deductible business expense since petitioner failed to subject the
salaries, bonuses and allowances to withholding taxes. This assessment was
covered by Formal Assessment Notice No. FAN-1-87-91-000649 dated 1
February 1991, which, respondent alleges, was sent to petitioner through
registered mail on 6 February 1991. However, petitioner denies receiving the
formal assessment notice.3
On 17 March 1992, petitioner was served with a Warrant of Distraint and/or
Levy to enforce collection of the deficiency income tax for the year 1987.
Petitioner filed a formal protest, dated 25 March 1992, against the Warrant of
Distraint and/or Levy, requesting for its cancellation. On 3 July 1998, petitioner
received a letter dated 30 April 1998 from the respondent denying the protest
with finality.4
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
On 31 July 1998, petitioner filed a Petition for Review with the CTA. After due
notice and hearing, the CTA rendered a decision in favor of petitioner on 17
May 2000. The CTA ruled on the primary issue of prescription and found it
unnecessary to decide the issues on the validity and propriety of the
assessment. It maintained that while a mailed letter is deemed received by
the addressee in the course of mail, this is merely a disputable presumption. It
reasoned that the direct denial of the petitioner shifts the burden of proof to
the respondent that the mailed letter was actually received by the petitioner.
The CTA found the BIR records submitted by the respondent immaterial, self-
serving, and therefore insufficient to prove that the assessment notice was
mailed and duly received by the petitioner.5 The dispositive portion of this
decision reads:
WHEREFORE, in view of the foregoing, the 1988 deficiency tax assessment
against petitioner is hereby CANCELLED. Respondent is hereby ORDERED TO
DESIST from collecting said deficiency tax. No pronouncement as to costs.6
On 6 June 2000, respondent moved for reconsideration of the aforesaid
decision but was denied by the CTA in a Resolution dated 25 July 2000.
Thereafter, respondent appealed to the Court of Appeals on 31 August 2001.
In reversing the CTA decision, the Court of Appeals found the evidence
presented by the respondent to be sufficient proof that the tax assessment
notice was mailed to the petitioner, therefore the legal presumption that it
was received should apply.7 Thus, the Court of Appeals ruled that:
WHEREFORE, the petition is hereby GRANTED. The decision dated May 17, 2000
as well as the Resolution dated July 25, 2000 are hereby REVERSED and SET
ASIDE, and a new on entered ordering the respondent to pay the amount
of P826,698.31 as deficiency income tax for the year 1987 plus 25% surcharge
and 20% interest per annum from February 6, 1991 until fully paid pursuant to
Sections 248 and 249 of the Tax Code.8
Petitioner moved for reconsideration of the said decision but the same was
denied by the Court of Appeals in its assailed Resolution dated 30 January
2003.9
Hence, this Petition for Review on Certiorari raising the following issues:
Page 314

I resolution of which depends on reviewing the findings of fact of the Court of
WHETHER OR NOT LEGAL BASES EXIST FOR THE COURT OF APPEALS' FINDING
THAT THE COURT OF TAX APPEALS COMMITTED "GROSS ERROR IN THE
APPRECIATION OF FACTS."
II
WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN REVERSING THE
SUBJECT DECISION OF THE COURT OF TAX APPEALS.
III
WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO ASSESS
PETITIONER FOR ALLEGED DEFICIENCY INCOME TAX FOR 1987 HAS PRESCRIBED.
IV
WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO
COLLECT THE SUBJECT ALLEGED DEFICIENCY INCOME TAX FOR 1987 HAS
PRESCRIBED.
V "The facts to be proved to raise this presumption are (a) that the letter was
WHETHER OR NOT PETITIONER IS LIABLE FOR THE ALLEGED DEFICIENCY INCOME
TAX ASSESSMENT FOR 1987.
VI
WHETHER OR NOT THE SUBJECT ASSESSMENT IS VIOLATIVE OF THE RIGHT OF
PETITIONER TO DUE PROCESS.10
This Court finds the instant Petition meritorious.
The core issue in this case is whether or not respondent's right to assess
petitioner's alleged deficiency income tax is barred by prescription, the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Appeals and the CTA.
While the general rule is that factual findings of the Court of Appeals are
binding on this Court, there are, however, recognized exceptions 11 thereto,
such as when the findings are contrary to those of the trial court or, in this
case, the CTA.12
In its Decision, the CTA resolved the issues raised by the parties thus:
Jurisprudence is replete with cases holding that if the taxpayer denies ever
having received an assessment from the BIR, it is incumbent upon the latter to
prove by competent evidence that such notice was indeed received by the
addressee. The onus probandi was shifted to respondent to prove by contrary
evidence that the Petitioner received the assessment in the due course of
mail. The Supreme Court has consistently held that while a mailed letter is
deemed received by the addressee in the course of mail, this is merely a
disputable presumption subject to controversion and a direct denial thereof
shifts the burden to the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee (Republic v. Court of
Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P.
Nava v. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:
properly addressed with postage prepaid, and (b) that it was mailed. Once
these facts are proved, the presumption is that the letter was received by the
addressee as soon as it could have been transmitted to him in the ordinary
course of the mail. But if one of the said facts fails to appear, the presumption
does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing
Enriquez v. Sunlife Assurance of Canada, 41 Phil 269)."
In the instant case, Respondent utterly failed to discharge this duty. No
substantial evidence was ever presented to prove that the assessment notice
No. FAN-1-87-91-000649 or other supposed notices subsequent thereto were in
fact issued or sent to the taxpayer. As a matter of fact, it only submitted the
BIR record book which allegedly contains the list of taxpayer's names, the
reference number, the year, the nature of tax, the city/municipality and the
amount (see Exh. 5-a for the Respondent). Purportedly, Respondent intended
Page 315

to show to this Court that all assessments made are entered into a record
book in chronological order outlining the details of the assessment and the
taxpayer liable thereon. However, as can be gleaned from the face of the
exhibit, all entries thereon appears to be immaterial and impertinent in
proving that the assessment notice was mailed and duly received by
Petitioner. Nothing indicates therein all essential facts that could sustain the
burden of proof being shifted to the Respondent. What is essential to prove
the fact of mailing is the registry receipt issued by the Bureau of Posts or the
Registry return card which would have been signed by the Petitioner or its
authorized representative. And if said documents cannot be located,
Respondent at the very least, should have submitted to the Court a
certification issued by the Bureau of Posts and any other pertinent document
which is executed with the intervention of the Bureau of Posts. This Court does
not put much credence to the self serving documentations made by the BIR
personnel especially if they are unsupported by substantial evidence
establishing the fact of mailing. Thus:
"While we have held that an assessment is made when sent within the
prescribed period, even if received by the taxpayer after its expiration (Coll. of
Int. Rev. v. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the
more imperative that the release, mailing or sending of the notice be clearly
and satisfactorily proved. Mere notations made without the taxpayer's
intervention, notice or control, without adequate supporting evidence cannot
suffice; otherwise, the taxpayer would be at the mercy of the revenue offices,
without adequate protection or defense." (Nava v. CIR, 13 SCRA 104, January
30, 1965).
xxx
The failure of the respondent to prove receipt of the assessment by the
Petitioner leads to the conclusion that no assessment was issued.
Consequently, the government's right to issue an assessment for the said
period has already prescribed. (Industrial Textile Manufacturing Co. of the
Phils., Inc. v. CIR CTA Case 4885, August 22, 1996).13
Jurisprudence has consistently shown that this Court accords the findings of
fact by the CTA with the highest respect. In Sea-Land Service Inc. v. Court of
Appeals 14 this Court recognizes that the Court of Tax Appeals, which by the
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
very nature of its function is dedicated exclusively to the consideration of tax
problems, has necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse or
improvident exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or there is a showing
of gross error or abuse on the part of the Tax Court.15 In the absence of any
clear and convincing proof to the contrary, this Court must presume that the
CTA rendered a decision which is valid in every respect.
Under Section 203 16 of the National Internal Revenue Code (NIRC),
respondent had three (3) years from the last day for the filing of the return to
send an assessment notice to petitioner. In the case of Collector of Internal
Revenue v. Bautista, 17 this Court held that an assessment is made within the
prescriptive period if notice to this effect is released, mailed or sent by the CIR
to the taxpayer within said period. Receipt thereof by the taxpayer within the
prescriptive period is not necessary. At this point, it should be clarified that the
rule does not dispense with the requirement that the taxpayer should actually
receive, even beyond the prescriptive period, the assessment notice which
was timely released, mailed and sent.
In the present case, records show that petitioner filed its Annual Income Tax
Return for taxable year 1987 on 14 April 1988.18 The last day for filing by
petitioner of its return was on 15 April 1988, 19 thus, giving respondent until 15
April 1991 within which to send an assessment notice. While respondent avers
that it sent the assessment notice dated 1 February 1991 on 6 February 1991,
within the three (3)-year period prescribed by law, petitioner denies having
received an assessment notice from respondent. Petitioner alleges that it
came to know of the deficiency tax assessment only on 17 March 1992 when
it was served with the Warrant of Distraint and Levy.20
In Protector's Services, Inc. v. Court of Appeals, 21 this Court ruled that when a
mail matter is sent by registered mail, there exists a presumption, set forth
under Section 3(v), Rule 131 of the Rules of Court, 22 that it was received in the
regular course of mail. The facts to be proved in order to raise this presumption
are: (a) that the letter was properly addressed with postage prepaid; and (b)
that it was mailed. While a mailed letter is deemed received by the addressee
in the ordinary course of mail, this is still merely a disputable presumption
subject to controversion, and a direct denial of the receipt thereof shifts the
Page 316

burden upon the party favored by the presumption to prove that the mailed
letter was indeed received by the addressee.23
In the present case, petitioner denies receiving the assessment notice, and
the respondent was unable to present substantial evidence that such notice
was, indeed, mailed or sent by the respondent before the BIR's right to assess
had prescribed and that said notice was received by the petitioner. The
respondent presented the BIR record book where the name of the taxpayer,
the kind of tax assessed, the registry receipt number and the date of mailing
were noted. The BIR records custodian, Ingrid Versola, also testified that she
made the entries therein. Respondent offered the entry in the BIR record book
and the testimony of its record custodian as entries in official records in
accordance with Section 44, Rule 130 of the Rules of Court, 24 which states
that:
Section 44. Entries in official records. - Entries in official records made in the
performance of his duty by a public officer of the Philippines, or by a person in
the performance of a duty specially enjoined by law, are prima
facie evidence of the facts therein stated.
The foregoing rule on evidence, however, must be read in accordance with
this Court's pronouncement in Africa v. Caltex (Phil.), Inc., 25 where it has been
held that an entrant must have personal knowledge of the facts stated by him
or such facts were acquired by him from reports made by persons under a
legal duty to submit the same.
There are three requisites for admissibility under the rule just mentioned: (a)
that the entry was made by a public officer, or by another person specially
enjoined by law to do so; (b) that it was made by the public officer in the
performance of his duties, or by such other person in the performance of a
duty specially enjoined by law; and (c) that the public officer or other person
had sufficient knowledge of the facts by him stated, which must have been
acquired by him personally or through official information x x x.
In this case, the entries made by Ingrid Versola were not based on her
personal knowledge as she did not attest to the fact that she personally
prepared and mailed the assessment notice. Nor was it stated in the transcript
of stenographic notes 26 how and from whom she obtained the pertinent
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
information. Moreover, she did not attest to the fact that she acquired the
reports from persons under a legal duty to submit the same. Hence, Rule 130,
Section 44 finds no application in the present case. Thus, the evidence offered
by respondent does not qualify as an exception to the rule against hearsay
evidence.
Furthermore, independent evidence, such as the registry receipt of the
assessment notice, or a certification from the Bureau of Posts, could have
easily been obtained. Yet respondent failed to present such evidence.
In the case of Nava v. Commissioner of Internal Revenue, 27 this Court stressed
on the importance of proving the release, mailing or sending of the notice.
While we have held that an assessment is made when sent within the
prescribed period, even if received by the taxpayer after its expiration (Coll. of
Int. Rev. v. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the
more imperative that the release, mailing, or sending of the notice be clearly
and satisfactorily proved. Mere notations made without the taxpayer's
intervention, notice, or control, without adequate supporting evidence,
cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue
offices, without adequate protection or defense.
In the present case, the evidence offered by the respondent fails to convince
this Court that Formal Assessment Notice No. FAN-1-87-91-000649 was
released, mailed, or sent before 15 April 1991, or before the lapse of the
period of limitation upon assessment and collection prescribed by Section 203
of the NIRC. Such evidence, therefore, is insufficient to give rise to the
presumption that the assessment notice was received in the regular course of
mail. Consequently, the right of the government to assess and collect the
alleged deficiency tax is barred by prescription.
IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. The assailed
Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11 July 2002, is
hereby REVERSED and SET ASIDE, and the Decision of the Court of Tax Appeals
in C.T.A. Case No. 5662, dated 17 May 2000, cancelling the 1988 Deficiency
Tax Assessment against Barcelon, Roxas Securitites, Inc. (now known as UPB
Securities, Inc.) for being barred by prescription, is hereby REINSTATED. No
costs.
Page 317
 DUMAUAL, JEANNE PAULINE J. 2019-2020

SO ORDERED.

Atty. Santos, Taxation I Page 318

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. 141314 November 15, 2002 The facts are brief and undisputed. On December 23, 1993, MERALCO filed
with the ERB an application for the revision of its rate schedules. The
REPUBLIC OF THE PHILIPPINES, REPRESENTED BY ENERGY REGULATORY application reflected an average increase of 21 centavos per kilowatthour
BOARD petitioner, (kwh) in its distribution charge. The application also included a prayer for
vs. provisional approval of the increase pursuant to Section 16(c) of the Public
MANILA ELECTRIC COMPANY, respondent. Service Act and Section 8 of Executive Order No. 172.

----------------------------- On January 28, 1994, the ERB issued an Order granting a provisional increase
of P0.184 per kwh, subject to the following condition.
G.R. No. 141369 November 15, 2002
"In the event, however, that the Board finds, after hearing and submission by
the Commission on Audit of an audit report on the books and records of the
LAWYERS AGAINST MONOPOLY AND POVERTY (LAMP) consisting of CEFERINO
applicant that the latter is entitled to a lesser increase in rates, all excess
PADUA, Chairman,
amounts collected from the applicant's customers as a result of this Order shall
G. FULTON ACOSTA, GALILEO BRION, ANATALIA BUENAVENTURA,
either be refunded to them or correspondingly credited in their favor for
PEDRO CASTILLO, NAPOLEON CORONADO, ROMEO ECHAUZ,
application to electric bills covering future consumptions."1
FERNANDO GAITE, ALFREDO DE GUZMAN, ROGELIO KARAGDAG, JR.,
MA. LUZ ARZAGA-MENDOZA, ANSBERTO PAREDES, AQUILINO PIMENTEL III,
MARIO REYES, EMMANUEL SANTOS, RUDEGELIO TACORDA, members, In the same Order, the ERB requested the Commission on Audit (COA) to
and ROLANDO ARZAGA, Secretary-General, conduct an "audit and examination of the books and other records of
JUSTICE ABRAHAM SARMIENTO, SENATOR AQUILINO PIMENTEL, JR. and account of the applicant for such period of time, which in no case shall be
COMMISSIONER BARTOLOME FERNANDEZ, JR., Board of Consultants, less than 12 consecutive months, as it may deem appropriate" and to submit
and Lawyer GENARO LUALHATI, petitioners, a copy thereof to the ERB immediately upon completion.2
vs.
MANILA ELECTRIC COMPANY (MERALCO), respondent. On February 11, 1997, the COA submitted its Audit Report SAO No. 95-07 (the
"COA Report") which contained, among others, the recommendation not to
DECISION include income taxes paid by MERALCO as part of its operating expenses for
purposes of rate determination and the use of the net average investment
method for the computation of the proportionate value of the properties used
PUNO, J.:
by MERALCO during the test year for the determination of the rate base.3

In third world countries like the Philippines, equal justice will have a synthetic
Subsequently, the ERB rendered its decision adopting the above
ring unless the economic rights of the people, especially the poor, are
recommendations and authorized MERALCO to implement a rate adjustment
protected with the same resoluteness as their right to liberty. The cases at bar
in the average amount of P0.017 per kwh, effective with respect to
are of utmost significance for they concern the right of our people to
MERALCO's billing cycles beginning February 1994. The ERB further ordered
electricity and to be reasonably charged for their consumption. In configuring
that "the provisional relief in the amount of P0.184 per kilowatthour granted
the contours of this economic right to a basic necessity of life, the Court shall
under the Board's Order dated January 28, 1994 is hereby superseded and
define the limits of the power of respondent MERALCO, a giant public utility
modified and the excess average amount of P0.167 per kilowatthour starting
and a monopoly, to charge our people for their electric consumption. The
with [MERALCO's] billing cycles beginning February 1994 until its billing cycles
question is: should public interest prevail over private profits?

Atty. Santos, Taxation I Page 319


beginning February 1998, be refunded to [MERALCO's] customers or
correspondingly credited in their favor for future consumption."4
The ERB held that income tax should not be treated as operating expense as
this should be "borne by the stockholders who are recipients of the income or
profits realized from the operation of their business" hence, should not be
passed on to the consumers.5 Further, in applying the net average investment
method, the ERB adopted the recommendation of COA that in computing
the rate base, only the proportionate value of the property should be
included, determined in accordance with the number of months the same
was actually used in service during the test year.6
On appeal, the Court of Appeals set aside the ERB decision insofar as it
directed the reduction of the MERALCO rates by an average of P0.167 per kwh
and the refund of such amount to MERALCO's customers beginning February
1994 and until its billing cycle beginning February 1998.7 Separate Motions for
Reconsideration filed by the petitioners were denied by the Court of Appeals.8
Petitioners are now before the Court seeking a reversal of the decision of the
Court of Appeals by arguing primarily that the Court of Appeals erred: a) in
ruling that income tax paid by MERALCO should be treated as part of its
operating expenses and thus considered in determining the amount of
increase in rates imposed by MERALCO and b) in rejecting the net average
investment method used by the COA and the ERB and instead adopted the
average investment method used by MERALCO.
We grant the petition.
The regulation of rates to be charged by public utilities is founded upon the
police powers of the State and statutes prescribing rules for the control and
regulation of public utilities are a valid exercise thereof. When private property
is used for a public purpose and is affected with public interest, it ceases to be
juris privati only and becomes subject to regulation. The regulation is to
promote the common good. Submission to regulation may be withdrawn by
the owner by discontinuing use; but as long as use of the property is
continued, the same is subject to public regulation.9
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In regulating rates charged by public utilities, the State protects the public
against arbitrary and excessive rates while maintaining the efficiency and
quality of services rendered. However, the power to regulate rates does not
give the State the right to prescribe rates which are so low as to deprive the
public utility of a reasonable return on investment. Thus, the rates prescribed
by the State must be one that yields a fair return on the public utility upon the
value of the property performing the service and one that is reasonable to the
public for the services rendered.10 The fixing of just and reasonable rates
involves a balancing of the investor and the consumer interests.11
In his famous dissenting opinion in the 1923 case of Southwestern Bell Tel. Co.
v. Public Service Commission,12 Mr. Justice Brandeis wrote:
"The thing devoted by the investor to the public use is not specific property,
tangible and intangible, but capital embarked in an enterprise. Upon the
capital so invested, the Federal Constitution guarantees to the utility the
opportunity to earn a fair return… The Constitution does not guarantee to the
utility the opportunity to earn a return on the value of all items of property
used by the utility, or of any of them.
….
The investor agrees, by embarking capital in a utility, that its charges to the
public shall be reasonable. His company is the substitute for the State in the
performance of the public service, thus becoming a public servant. The
compensation which the Constitution guarantees an opportunity to earn is the
reasonable cost of conducting the business."
While the power to fix rates is a legislative function, whether exercised by the
legislature itself or delegated through an administrative agency, a
determination of whether the rates so fixed are reasonable and just is a purely
judicial question and is subject to the review of the courts.13
The ERB was created under Executive Order No. 172 to regulate, among
others, the distribution of energy resources and to fix rates to be charged by
public utilities involved in the distribution of electricity. In the fixing of rates,
the only standard which the legislature is required to prescribe for the
guidance of the administrative authority is that the rate be reasonable and
Page 320

just. It has been held that even in the absence of an express requirement as to
reasonableness, this standard may be implied.14 What is a just and reasonable
rate is a question of fact calling for the exercise of discretion, good sense, and
a fair, enlightened and independent judgment. The requirement of
reasonableness comprehends such rates which must not be so low as to be
confiscatory, or too high as to be oppressive. In determining whether a rate is
confiscatory, it is essential also to consider the given situation, requirements
and opportunities of the utility.15
Settled jurisprudence holds that factual findings of administrative bodies on
technical matters within their area of expertise should be accorded not only
respect but even finality if they are supported by substantial evidence even if
not overwhelming or preponderant.16 In one case, 17 we cautioned that courts
should "refrain from substituting their discretion on the weight of the evidence
for the discretion of the Public Service Commission on questions of fact and
will only reverse or modify such orders of the Public Service Commission when
it really appears that the evidence is insufficient to support their conclusions." 18
In the cases at bar, findings and conclusions of the ERB on the rate that can
be charged by MERALCO to the public should be respected.19 The function of
the court, in exercising its power of judicial review, is to determine whether
under the facts and circumstances, the final order entered by the
administrative agency is unlawful or unreasonable.20 Thus, to the extent that
the administrative agency has not been arbitrary or capricious in the exercise
of its power, the time-honored principle is that courts should not interfere. The
principle of separation of powers dictates that courts should hesitate to review
the acts of administrative officers except in clear cases of grave abuse of
discretion.21
In determining the just and reasonable rates to be charged by a public utility,
three major factors are considered by the regulating agency: a) rate of return;
b) rate base and c) the return itself or the computed revenue to be earned by
the public utility based on the rate of return and rate base. 22 The rate of return
is a judgment percentage which, if multiplied with the rate base, provides a
fair return on the public utility for the use of its property for service to the
public.23 The rate of return of a public utility is not prescribed by statute but by
administrative and judicial pronouncements. This Court has consistently
adopted a 12% rate of return for public utilities.24 The rate base, on the other
hand, is an evaluation of the property devoted by the utility to the public
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
service or the value of invested capital or property which the utility is entitled
to a return.25
In the cases at bar, the resolution of the issues involved hinges on the
determination of the kind and the amount of operating expenses that should
be allowed to a public utility to generate a fair return and the proper
valuation of the rate base or the value of the property entitled to a return.
I
Income Tax as Operating Expense Cannot be Allowed For Rate-Determination
Purposes
In determining whether or not a rate yields a fair return to the utility, the
operating expenses of the utility must be considered. The return allowed to a
public utility in accordance with the prescribed rate must be sufficient to
provide for the payment of such reasonable operating expenses incurred by
the public utility in the provision of its services to the public. Thus, the public
utility is allowed a return on capital over and above operating expenses.
However, only such expenses and in such amounts as are reasonable for the
efficient operation of the utility should be allowed for determination of the
rates to be charged by a public utility.
The ERB correctly ruled that income tax should not be included in the
computation of operating expenses of a public utility. Income tax paid by a
public utility is inconsistent with the nature of operating expenses. In general,
operating expenses are those which are reasonably incurred in connection
with business operations to yield revenue or income. They are items of
expenses which contribute or are attributable to the production of income or
revenue. As correctly put by the ERB, operating expenses "should be a
requisite of or necessary in the operation of a utility, recurring, and that it
redounds to the service or benefit of customers."26
Income tax, it should be stressed, is imposed on an individual or entity as a
form of excise tax or a tax on the privilege of earning income.27 In exchange
for the protection extended by the State to the taxpayer, the government
collects taxes as a source of revenue to finance its activities. Clearly, by its
nature, income tax payments of a public utility are not expenses which
Page 321

contribute to or are incurred in connection with the production of profit of a
public utility. Income tax should be borne by the taxpayer alone as they are
payments made in exchange for benefits received by the taxpayer from the
State. No benefit is derived by the customers of a public utility for the taxes
paid by such entity and no direct contribution is made by the payment of
income tax to the operation of a public utility for purposes of generating
revenue or profit. Accordingly, the burden of paying income tax should be
Meralco's alone and should not be shifted to the consumers by including the
same in the computation of its operating expenses.
The principle behind the inclusion of operating expenses in the determination
of a just and reasonable rate is to allow the public utility to recoup the
reasonable amount of expenses it has incurred in connection with the services
it provides. It does not give the public utility the license to indiscriminately
charge any and all types of expenses incurred without regard to the nature
thereof, i.e., whether or not the expense is attributable to the production of
services by the public utility. To charge consumers for expenses incurred by a
public utility which are not related to the service or benefit derived by the
customers from the public utility is unjustified and inequitable.
While the public utility is entitled to a reasonable return on the fair value of the
property being used for the service of the public, no less than the Federal
Supreme Court of the United States emphasized: "[t]he public cannot properly
be subjected to unreasonable rates in order simply that stockholders may
earn dividends… If a corporation cannot maintain such a [facility] and earn
dividends for stockholders, it is a misfortune for it and them which the
Constitution does not require to be remedied by imposing unjust burdens on
the public."28
We are not impressed by the reliance by MERALCO on some American case
law allowing the treatment of income tax paid by a public utility as operating
expense for rate-making purposes. Suffice to state that with regard to rate-
determination, the government is not hidebound to apply any particular
method or formula.29 The question of what constitutes a reasonable return for
the public utility is necessarily determined and controlled by its peculiar
environmental milieu. Aside from the financial condition of the public utility,
there are other critical factors to consider for purposes of rate regulation.
Among others, they are: particular reasons involved for the request of the rate
increase, the quality of services rendered by the public utility, the existence of
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
competition, the element of risk or hazard involved in the investment, the
capacity of consumers, etc.30 Rate regulation is the art of reaching a result
that is good for the public utility and is best for the public.
For these reasons, the Court cannot give in to the importunings of MERALCO
that we blindly apply the rulings of American courts on the treatment of
income tax as operating expenses in rate regulation cases. An approach
allowing the indiscriminate inclusion of income tax payments as operating
expenses may create an undesirable precedent and serve as a blanket
authority for public utilities to charge their income tax payments to operating
expenses and unjustly shift the tax burden to the customer. To be sure, public
utility taxation in the United States is going through the eye of criticism. Some
commentators are of the view that by allowing the public utility to collect its
income tax payment from its customers, a form of "sales tax" is, in effect,
imposed on the public for consumption of public utility services. By charging
their income tax payments to their customers, public utilities virtually become
"tax collectors" rather than taxpayers.31 In the cases at bar, MERALCO has not
justified why its income tax should be treated as an operating expense to
enable it to derive a fair return for its services.
It is also noteworthy that under American laws, public utilities are taxed
differently from other types of corporations and thus carry a heavier tax
burden. Moreover, different types of taxes, charges, tolls or fees are assessed
on a public utility depending on the state or locality where it operates. At a
federal level, public utilities are subject to corporate income taxes and Social
Security taxes—in the same manner as other business corporations. At the
state and local levels, public utilities are subject to a wide variety of taxes, not
all of which are imposed on each state. Thus, it is not unusual to find different
taxes or combinations of taxes applicable to respective utility industries within
a particular state.32 A significant aspect of state and local taxation of public
utilities in the United States is that they have been singled out for special
taxation, i.e., they are required to pay one or more taxes that are not levied
upon other industries. In contrast, in this jurisdiction, public utilities are subject
to the same tax treatment as any other corporation and local taxes paid by it
to various local government units are substantially the same. The reason for
this is that the power to tax resides in our legislature which may prescribe the
limits of both national and local taxation, unlike in the federal system of the
United States where state legislature may prescribe taxes to be levied in their
respective jurisdictions.
Page 322

MERALCO likewise cites decisions of the ERB33 allowing the application of a tax
recovery clause for the imposition of an additional charge on consumers for
taxes paid by the public utility. A close look at these decisions will show they
are inappropos. In the said cases, the ERB approved the adoption of a
formula which will allow the public utility to recover from its customers
taxes already paid by it. However, in the cases at bar, the income tax
component added to the operating expenses of a public utility is based on
an estimate or approximate figure of income tax to be paid by the public
utility. It is this estimated amount of income tax to be paid by MERALCO which
is included in the amount of operating expenses and used as basis in
determining the reasonable rate to be charged to the customers.
Accordingly, the varying factual circumstances in the said cases prohibit a
square application of the rule under the previous ERB decisions.
II
Use of "Net Average Investment Method" is Not Unreasonable
In the determination of the rate base, property used in the operation of the
public utility must be subject to appraisal and evaluation to determine the fair
value thereof entitled to a fair return. With respect to those properties which
have not been used by the public utility for the entire duration of the test year,
i.e., the year subject to audit examination for rate-making purposes, a
valuation method must be adopted to determine the proportionate value of
the property. Petitioners maintain that the net average investment
method (also known as "actual number of months use method")
recommended by COA and adopted by the ERB should be used, while
MERALCO argues that the average investment method (also known as the
"trending method") to determine the proportionate value of properties should
be applied.
Under the "net average investment method," properties and equipment used
in the operation of a public utility are entitled to a return only on the actual
number of months they are in service during the period. 34 In contrast, the
"average investment method" computes the proportionate value of the
property by adding the value of the property at the beginning and at the end
of the test year with the resulting sum divided by two.35
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The ERB did not abuse its discretion when it applied the net average
investment method. The reasonableness of net average investment method is
borne by the records of the case. In its report, the COA explained that the
computation of the proportionate value of the property and equipment in
accordance with the actual number of months such property or equipment is
in service for purposes of determining the rate base is favored, as against the
trending method employed by MERALCO, "to reflect the real status of the
property."36 By using the net average investment method, the ERB and the
COA considered for determination of the rate base the value of properties
and equipment used by MERALCO in proportion to the period that the same
were actually used during the period in question. This treatment is consistent
with the settled rule in rate regulation that the determination of the rate base
of a public utility entitled to a return must be based on properties and
equipment actually being used or are useful to the operations of the public
utility.37
MERALCO does not seriously contest this treatment of actual usage of
property but opposes the method of computation or valuation thereof
adopted by the ERB and the COA on the ground that the net average
investment method "assumes an ideal situation where a utility, like MERALCO,
is able to record in its books within any given month the value of all the
properties actually placed in service during that month." 38 MERALCO
contends that immediate recordal in its books of the property or equipment is
not possible as MERALCO's franchise covers a wide area and that due to the
volume of properties and equipment put into service and the amount of
paper work required to be accomplished for recording in the books of the
company, "it takes three to six months (often longer) before an asset placed in
service is recorded in the books" of MERALCO.39 Hence, MERALCO adopted
the "average investment method" or the "trending method" which computes
the average value of the property at the beginning and at the end of the test
year to compensate for the irregular recording in its books.
MERALCO'S stance is belied by the COA Report which states that the
"verification of the records, as confirmed by the Management Staff, disclosed
that properties are recorded in the books as these are actually placed in
service."40 Moreover, while the case was pending trial before the ERB, the ERB
conducted an ocular inspection to examine the assets in service, records and
books of accounts of MERALCO to ascertain the physical existence,
ownership, valuation and usefulness of the assets contained in the COA
Page 323

Report.41 Thus, MERALCO's contention that the date of recordal in the books
does not reflect the date when the asset is placed in service is baseless.
Further, computing the proportionate value of assets used in service in
accordance with the actual number of months the same is used during the
test year is a more accurate method of determining the value of the
properties of a public utility entitled to a return. If, as determined by COA, the
date of recordal in the books of MERALCO reflects the actual date the
equipment or property is used in service, there is no reason for the ERB to
adopt the trending method applied by MERALCO if a more precise method is
available for determining the proportionate value of the assets placed in
service.
If we were to sustain the application of the "trending method," the public utility
may easily manipulate the valuation of its property entitled to a return (rate
base) by simply including a highly capitalized asset in the computation of the
rate base even if the same was used for a limited period of time during the
test year. With the inexactness of the trending method and the possibility that
the valuation of certain properties may be subject to the control of and abuse
by the public utility, the Court finds no reasonable basis to overturn the
recommendation of COA and the decision of the ERB.
MERALCO further insists that the Court should sustain the "trending method" in
view of previous decisions by the Public Service Commission and of this Court
which "upheld" the use of this method. By refusing to adopt the trending
method, MERALCO argues that the ERB violated the rule on stare decisis.
Again, we are not impressed. It is a settled rule that the goal of rate-making is
to arrive at a just and reasonable rate for both the public utility and the public
which avails of the former's products and services.42 However, what is a just
and reasonable rate cannot be fixed by any immutable method or formula.
Hence, it has been held that no public utility has a vested right to any
particular method of valuation.43 Accordingly, with respect to a determination
of the proper method to be used in the valuation of property and equipment
used by a public utility for rate-making purposes, the administrative agency is
not bound to apply any one particular formula or method simply because the
same method has been previously used and applied. In fact, nowhere in the
previous decisions cited by MERALCO which applied the trending method did
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
the Court rule that the same should be the only method to be applied in all
instances.
At any rate, MERALCO has not adequately shown that the rates prescribed by
the ERB are unjust or confiscatory as to deprive its stockholders a reasonable
return on investment. In the early case of Ynchausti S.S. Co. v. Public Utility
Commissioner, this Court held: "[t]here is a legal presumption that the rates
fixed by an administrative agency are reasonable, and it must be conceded
that the fixing of rates by the Government, through its authorized agents,
involves the exercise of reasonable discretion and, unless there is an abuse of
that discretion, the courts will not interfere." 44 Thus, the burden is upon the
oppositor, MERALCO, to prove that the rates fixed by the ERB are
unreasonable or otherwise confiscatory as to merit the reversal of the ERB. In
the instant cases, MERALCO was unable to discharge this burden.
WHEREFORE, in view of the foregoing, the instant petitions are GRANTED and
the decision of the Court of Appeals in C.A. G.R. SP No. 46888 is REVERSED.
Respondent MERALCO is authorized to adopt a rate adjustment in the amount
of P0.017 per kilowatthour, effective with respect to MERALCO's billing cycles
beginning February 1994. Further, in accordance with the decision of the ERB
dated February 16, 1998, the excess average amount of P0.167 per kilwatthour
starting with the applicant's billing cycles beginning February 1998 is ordered
to be refunded to MERALCO's customers or correspondingly credited in their
favor for future consumption.
SO ORDERED.
Page 324
 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. 159647 April 15, 2005 "Respondent is a domestic corporation primarily engaged in retailing of
medicines and other pharmaceutical products. In 1996, it operated six (6)
COMMISSIONER OF INTERNAL REVENUE, Petitioners, drugstores under the business name and style ‘Mercury Drug.’
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent. "From January to December 1996, respondent granted twenty (20%) percent
sales discount to qualified senior citizens on their purchases of medicines
DECISION pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and
Regulations. For the said period, the amount allegedly representing the 20%
sales discount granted by respondent to qualified senior citizens totaled
PANGANIBAN, J.:
₱904,769.00.

The 20 percent discount required by the law to be given to senior citizens is

a tax credit, not merely a tax deduction from the gross income or gross sale of
the establishment concerned. A tax credit is used by a private establishment
only after the tax has been computed; a tax deduction, before the tax is
computed. RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot amend
or revoke the law.
The Case
"On April 15, 1997, respondent filed its Annual Income Tax Return for taxable
year 1996 declaring therein that it incurred net losses from its operations.
"On January 16, 1998, respondent filed with petitioner a claim for tax
refund/credit in the amount of ₱904,769.00 allegedly arising from the 20% sales
discount granted by respondent to qualified senior citizens in compliance with
[R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent
elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a
Petition for Review.

"On February 12, 2001, the Tax Court rendered a Decision5 dismissing
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking
respondent’s Petition for lack of merit. In said decision, the [CTA] justified its
to set aside the August 29, 2002 Decision 2 and the August 11, 2003
ruling with the following ratiocination:
Resolution3 of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed
Decision reads as follows:
‘x x x, if no tax has been paid to the government, erroneously or illegally, or if
no amount is due and collectible from the taxpayer, tax refund or tax credit is
"WHEREFORE, premises considered, the Resolution appealed from
unavailing. Moreover, whether the recovery of the tax is made by means of a
is AFFIRMED in toto. No costs."4
claim for refund or tax credit, before recovery is allowed[,] it must be first
established that there was an actual collection and receipt by the
The assailed Resolution denied petitioner’s Motion for Reconsideration. government of the tax sought to be recovered. x x x.

The Facts ‘x x x x x x x x x

The CA narrated the antecedent facts as follows: ‘Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other
words, if there is no tax liability, tax credit is not available.’

Atty. Santos, Taxation I Page 325

 DUMAUAL, JEANNE PAULINE J. 2019-2020

"Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed Petitioner raises the following issues for our consideration:
resolution,6 granted respondent’s motion for reconsideration and ordered
herein petitioner to issue a Tax Credit Certificate in favor of respondent citing "Whether the Court of Appeals erred in holding that respondent may claim
the decision of the then Special Fourth Division of [the CA] in CA G.R. SP No. the 20% sales discount as a tax credit instead of as a deduction from gross
60057 entitled ‘Central [Luzon] Drug Corporation vs. Commissioner of Internal income or gross sales.
Revenue’ promulgated on May 31, 2001, to wit:
"Whether the Court of Appeals erred in holding that respondent is entitled to a
‘However, Sec. 229 clearly does not apply in the instant case because the tax refund."9
sought to be refunded or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTA’s sweeping but unfounded
These two issues may be summed up in only one: whether respondent, despite
statement that ‘both tax refund and tax credit are modes of recovering taxes
incurring a net loss, may still claim the 20 percent sales discount as a tax
which are either erroneously or illegally paid to the government.’ Tax refunds
credit.
or credits do not exclusively pertain to illegally collected or erroneously paid
taxes as they may be other circumstances where a refund is warranted. The
tax refund provided under Section 229 deals exclusively with illegally collected The Court’s Ruling
or erroneously paid taxes but there are other possible situations, such as the
refund of excess estimated corporate quarterly income tax paid, or that of The Petition is not meritorious.
excess input tax paid by a VAT-registered person, or that of excise tax paid on
goods locally produced or manufactured but actually exported. The Sole Issue:
standards and mechanics for the grant of a refund or credit under these
situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet
another instance of a tax credit and it does not in any way refer to illegally Claim of 20 Percent Sales Discount
collected or erroneously paid taxes, x x x.’"7
as Tax Credit Despite Net Loss
Ruling of the Court of Appeals
Section 4a) of RA 743210 grants to senior citizens the privilege of obtaining a 20
The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) percent discount on their purchase of medicine from any private
ordering petitioner to issue a tax credit certificate in favor of respondent in the establishment in the country.11 The latter may then claim the cost of the
reduced amount of ₱903,038.39. It reasoned that Republic Act No. (RA) 7432 discount as a tax credit.12 But can such credit be claimed, even though an
required neither a tax liability nor a payment of taxes by private establishment operates at a loss?
establishments prior to the availment of a tax credit. Moreover, such credit is
not tantamount to an unintended benefit from the law, but rather a just We answer in the affirmative.
compensation for the taking of private property for public use.
Tax Credit versus
Hence this Petition.8
Tax Deduction
The Issues

Atty. Santos, Taxation I Page 326


Although the term is not specifically defined in our Tax Code, 13 tax
credit generally refers to an amount that is "subtracted directly from one’s
total tax liability."14 It is an "allowance against the tax itself"15 or "a deduction
from what is owed"16 by a taxpayer to the government. Examples of tax
credits are withheld taxes, payments of estimated tax, and investment tax
credits.17
Tax credit should be understood in relation to other tax concepts. One of
these is tax deduction -- defined as a subtraction "from income for tax
purposes,"18 or an amount that is "allowed by law to reduce income prior to
[the] application of the tax rate to compute the amount of tax which is
due."19 An example of a tax deduction is any of the allowable deductions
enumerated in Section 3420 of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax
credit reduces the tax due, including -- whenever applicable -- the income
tax that is determined after applying the corresponding tax rates to taxable
income.21 A tax deduction, on the other, reduces the income that is subject to
tax22 in order to arrive at taxable income.23 To think of the former as the latter is
to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax
has been computed; a tax deduction, before.
Tax Liability Required
for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to
be a tax liability before the tax credit can be applied. Without that liability,
any tax credit application will be useless. There will be no reason for deducting
the latter when there is, to begin with, no existing obligation to the
government. However, as will be presented shortly, the existence of a tax
credit or its grant by law is not the same as the availment or use of such credit.
While the grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against which
any tax credit can be applied.24 For the establishment to choose the
immediate availment of a tax credit will be premature and impracticable.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing
ventures, since there is no tax liability that calls for its application. Neither can
it be reduced to nil by the quick yet callow stroke of an administrative pen,
simply because no reduction of taxes can instantly be effected. By its nature,
the tax credit may still be deducted from a future, not a present, tax liability,
without which it does not have any use. In the meantime, it need not move.
But it breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or grant solely of
such credit, neither a tax liability nor a prior tax payment is needed. The Tax
Code is in fact replete with provisions granting or allowing tax credits, even
though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax
credit -- subject to certain limitations -- for estate taxes paid to a foreign
country. Also found in Section 101(C) is a similar provision for donor’s taxes --
again when paid to a foreign country -- in computing for the donor’s tax due.
The tax credits in both instances allude to the prior payment of taxes, even if
not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in
transactions -- whether or not subject to the VAT -- is also allowed a tax
credit that includes a ratable portion of any input tax not directly attributable
to either activity. This input tax may either be the VAT on the purchase or
importation of goods or services that is merely due from -- not necessarily paid
by -- such VAT-registered person in the course of trade or business; or the
transitional input tax determined in accordance with Section 111(A). The latter
type may in fact be an amount equivalent to only eight percent of the value
of a VAT-registered person’s beginning inventory of goods, materials and
supplies, when such amount -- as computed -- is higher than the actual VAT
Page 327

paid on the said items.25 Clearly from this provision, the tax credit refers to an
input tax that is either due only or given a value by mere comparison with the
VAT actually paid -- then later prorated. No tax is actually paid prior to the
availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely
presumptive is allowed. For the purchase of primary agricultural products used
as inputs -- either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil -- and for the contract price of
public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or
effectively zero-rated may, under Section 112(A), apply for the issuance of
a tax credit certificate for the amount of creditable input taxes merely due --
again not necessarily paid to -- the government and attributable to such
sales, to the extent that the input taxes have not been applied against output
taxes.26 Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or
exempt sales, the amount of creditable input taxes due that are not directly
and entirely attributable to any one of these transactions shall be
proportionately allocated on the basis of the volume of sales. Indeed, in
availing of such tax credit for VAT purposes, this provision -- as well as the one
earlier mentioned -- shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another
illustration of a tax credit allowed, even though no prior tax payments are not
required. Specifically, in this provision, the imposition of a final withholding tax
rate on cash and/or property dividends received by a nonresident foreign
corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount
equivalent to taxes that are merely deemed paid.27 Although true, this
provision actually refers to the tax credit as a condition only for the imposition
of a lower tax rate, not as a deduction from the corresponding tax liability.
Besides, it is not our government but the domiciliary country that credits
against the income tax payable to the latter by the foreign corporation, the
tax to be foregone or spared.28
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically
allows as credits, against the income tax imposable under Title II, the amount
of income taxes merely incurred -- not necessarily paid -- by a domestic
corporation during a taxable year in any foreign country. Moreover, Section
34(C)(5) provides that for such taxes incurred but not paid, a tax credit may
be allowed, subject to the condition precedent that the taxpayer shall simply
give a bond with sureties satisfactory to and approved by petitioner, in such
sum as may be required; and further conditioned upon payment by the
taxpayer of any tax found due, upon petitioner’s redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax
treaties and special laws that grant or allow tax credits, even though no prior
tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid
double taxation, income that is taxed in the state of source is also taxable in
the state of residence, but the tax paid in the former is merely allowed as a
credit against the tax levied in the latter.29 Apparently, payment is made to
the state of source, not the state of residence. No tax, therefore, has
been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax
credit incentives. To illustrate, the incentives provided for in Article 48 of
Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP)
391, include tax credits equivalent to either five percent of the net value
earned, or five or ten percent of the net local content of exports. 30 In order to
avail of such credits under the said law and still achieve its objectives, no prior
tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not
indispensable to the availment of a tax credit. Thus, the CA correctly held that
the availment under RA 7432 did not require prior tax payments by private
establishments concerned.31 However, we do not agree with its finding32 that
the carry-over of tax credits under the said special law to succeeding taxable
periods, and even their application against internal revenue taxes, did not
necessitate the existence of a tax liability.
Page 328

The examples above show that a tax liability is certainly important in
the availment or use, not the existence or grant, of a tax credit. Regarding this
matter, a private establishment reporting a net loss in its financial statements is
no different from another that presents a net income. Both are entitled to
the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately
apply such credit, where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the
amount of discounts they grant.33 In turn, the Implementing Rules and
Regulations, issued pursuant thereto, provide the procedures for its
availment.34 To deny such credit, despite the plain mandate of the law and
the regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the
amount representing the 20 percent discount that "shall be deducted by the
said establishments from their gross income for income tax purposes and from
their gross sales for value-added tax or other percentage tax purposes."35 In
ordinary business language, the tax credit represents the amount of such
discount. However, the manner by which the discount shall be credited
against taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an "abatement or reduction made from
the gross amount or value of anything."36 To be more precise, it is in business
parlance "a deduction or lowering of an amount of money;" 37 or "a reduction
from the full amount or value of something, especially a price." 38 In business
there are many kinds of discount, the most common of which is that affecting
the income statement39 or financial report upon which the income tax is
based.
Business Discounts
Deducted from Gross Sales
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
A cash discount, for example, is one granted by business establishments
to credit customers for their prompt payment.40 It is a "reduction in price
offered to the purchaser if payment is made within a shorter period of time
than the maximum time specified."41 Also referred to as a sales discount on the
part of the seller and a purchase discount on the part of the buyer, it may be
expressed in such
terms as "5/10, n/30."42
A quantity discount, however, is a "reduction in price allowed for purchases
made in large quantities, justified by savings in packaging, shipping, and
handling."43 It is also called a volume or bulk discount.44
A "percentage reduction from the list price x x x allowed by manufacturers to
wholesalers and by wholesalers to retailers"45 is known as a trade discount. No
entry for it need be made in the manual or computerized books of accounts,
since the purchase or sale is already valued at the net price actually charged
the buyer.46 The purpose for the discount is to encourage trading or increase
sales, and the prices at which the purchased goods may be resold are also
suggested.47 Even a chain discount -- a series of discounts from one list price --
is recorded at net.48
Finally, akin to a trade discount is a functional discount. It is "a supplier’s price
discount given to a purchaser based on the [latter’s] role in the [former’s]
distribution system."49 This role usually involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales discount is peculiar.
Applying generally accepted accounting principles (GAAP) in the country,
this type of discount is reflected in the income statement50 as a line item
deducted -- along with returns, allowances, rebates and other similar
expenses -- from gross sales to arrive at net sales.51 This type of presentation is
resorted to, because the accounts receivable and sales figures that arise
from sales discounts, -- as well as from quantity, volume or bulk discounts -- are
recorded in the manual and computerized books of accounts and reflected
in the financial statements at the gross amounts of the invoices. 52 This manner
of recording credit sales -- known as the gross method -- is most widely used,
because it is simple, more convenient to apply than the net method, and
produces no material errors over time.53
Page 329

However, under the net method used in recording trade, chain or functional
discounts, only the net amounts of the invoices -- after the discounts have
been deducted -- are recorded in the books of accounts54 and reflected in
the financial statements. A separate line item cannot be shown,55 because
the transactions themselves involving both accounts
receivable and sales have already been entered into, net of the said
discounts.
The term sales discounts is not expressly defined in the Tax Code, but one
provision adverts to amounts whose sum -- along with sales
returns, allowances and cost of goods sold56 -- is deducted from gross sales to
come up with the gross income, profit or margin57 derived from business.58 In
another provision therein, sales discounts that are granted and indicated in
the invoices at the time of sale -- and that do not depend upon the
happening of any future event -- may be excluded from the gross sales within
the same quarter they were given.59 While determinative only of the VAT, the
latter provision also appears as a suitable reference point for income tax
purposes already embraced in the former. After all, these two provisions affirm
that sales discounts are amounts that are always deductible from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private
establishment’s outright deduction of the discount from the invoice price of
the medicine sold to the senior citizen.60 It is, therefore, expected that for each
retail sale made under this law, the discount period lasts no more than a day,
because such discount is given -- and the net amount thereof collected --
immediately upon perfection of the sale.61 Although prompt payment is made
for an arm’s-length transaction by the senior citizen, the real and compelling
reason for the private establishment giving the discount is that the law itself
makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales
discount or any of the above discounts in particular. Prompt payment is not
the reason for (although a necessary consequence of) such grant. To be sure,
the privilege enjoyed by the senior citizen must be equivalent to the tax
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
credit benefit enjoyed by the private establishment granting the discount. Yet,
under the revenue regulations promulgated by our tax authorities, this benefit
has been erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as
that resulting from a sales discount. However, to a private establishment, the
effect is different from a simple reduction in price that results from such
discount. In other words, the tax credit benefit is not the same as a sales
discount. To repeat from our earlier discourse, this benefit cannot and should
not be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income
tax return of an establishment covered by RA 7432 is different from that
resulting from the availment or use of its tax credit benefit. While the former is a
deduction before, the latter is a deduction after, the income tax is computed.
As mentioned earlier, a discount is not necessarily a sales discount, and a tax
credit for a simple discount privilege should not be automatically treated like
a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where
the law does not distinguish, we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as
the 20 percent discount deductible from gross income for income
tax purposes, or from gross sales for VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a sales discount. This
contrived definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross income in
the income statement and cannot be deducted again, even for purposes of
computing the income tax.
When the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount -- when claimed -- shall be treated as a
reduction from any tax liability, plain and simple. The option to avail of the tax
credit benefit depends upon the existence of a tax liability, but to limit the
benefit to a sales discount -- which is not even identical to the discount
privilege that is granted by law -- does not define it at all and serves no useful
purpose. The definition must, therefore, be stricken down.
Laws Not Amended
Page 330

by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a
regulation that "operates to create a rule out of harmony with
the statute is a mere nullity";62 it cannot prevail.
It is a cardinal rule that courts "will and should respect the contemporaneous
construction placed upon a statute by the executive officers whose duty it is
to enforce it x x x."63 In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial. 64 Our
tax authorities fill in the details that "Congress may not have the opportunity or
competence to provide."65 The regulations these authorities issue are relied
upon by taxpayers, who are certain that these will be followed by the
courts.66 Courts, however, will not uphold these authorities’ interpretations
when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term tax credit in
Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432
provides. Their interpretation has muddled up the intent of Congress in
granting a mere discount privilege, not a sales discount. The administrative
agency issuing these regulations may not enlarge, alter or restrict the
provisions of the law it administers; it cannot engraft additional requirements
not contemplated by the legislature.67
In case of conflict, the law must prevail.68 A "regulation adopted pursuant to
law is law."69 Conversely, a regulation or any portion thereof not adopted
pursuant to law is no law and has neither the force nor the effect of law.70
Availment of Tax
Credit Voluntary
Third, the word may in the text of the statute71 implies that the
availability of the tax credit benefit is neither unrestricted nor
mandatory.72 There is no absolute right conferred upon respondent, or any
similar taxpayer, to avail itself of the tax credit remedy whenever it chooses;
"neither does it impose a duty on the part of the government to sit back and
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
allow an important facet of tax collection to be at the sole control and
discretion of the taxpayer."73 For the tax authorities to compel respondent to
deduct the 20 percent discount from either its gross income or its gross
sales74 is, therefore, not only to make an imposition without basis in law, but
also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely
permissive, not imperative. Respondent is given two options -- either to claim
or not to claim the cost of the discounts as a tax credit. In fact, it may even
ignore the credit and simply consider the gesture as an act of beneficence,
an expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax
credit, then the tax credit can easily be applied. If there is none, the credit
cannot be used and will just have to be carried over and
revalidated75 accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit
can never be applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines
whether the cost of the discounts can be used as a tax credit. RA 7432 does
not give respondent the unfettered right to avail itself of the credit whenever it
pleases. Neither does it allow our tax administrators to expand or contract the
legislative mandate. "The ‘plain meaning rule’ or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation."76
Tax Credit Benefit
Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power
of eminent domain. Be it stressed that the privilege enjoyed by senior citizens
does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to
these establishments can be deemed as their just compensation for private
property taken by the State for public use.77
Page 331

The concept of public use is no longer confined to the traditional notion of use
by the public, but held synonymous with public interest, public benefit, public
welfare, and public convenience.78 The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the general public to
which these citizens belong. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments
concerned, were it not for RA 7432. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking of private property
for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent
becomes entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance -- when not done
within a reasonable time from the grant of the discounts -- cannot be
considered as just compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues while awaiting
actual receipt, through the certificate, of the equivalent amount it needs to
cope with the reduction in its revenues.79
Besides, the taxation power can also be used as an implement for the
exercise of the power of eminent domain.80 Tax measures are but "enforced
contributions exacted on pain of penal sanctions"81 and "clearly imposed for
a public purpose."82 In recent years, the power to tax has indeed become a
most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.83
While it is a declared commitment under Section 1 of RA 7432, social justice
"cannot be invoked to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a
person and give them to another who is not entitled thereto." 84 For this reason,
a just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
To put it differently, a private establishment that merely breaks even 85 --
without the discounts yet -- will surely start to incur losses because of such
discounts. The same effect is expected if its mark-up is less than 20 percent,
and if all its sales come from retail purchases by senior citizens. Aside from the
observation we have already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions from either
its gross income or its gross sales. Operating at a loss through no fault of its
own, it will realize that the tax credit limitation under RR 2-94 is inutile, if not
improper. Worse, profit-generating businesses will be put in a better position if
they avail themselves of tax credits denied those that are losing, because no
taxes are due from the latter.
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are
assisted by the community as a whole and to establish a program beneficial
to them.86 These objectives are consonant with the constitutional policy of
making "health x x x services available to all the people at affordable
cost"87 and of giving "priority for the needs of the x x x elderly."88 Sections 2.i
and 4 of RR 2-94, however, contradict these constitutional policies and
statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax
credit, not a deduction. In fact, no cash outlay is required from the
government for the availment or use of such credit. The deliberations on
February 5, 1992 of the Bicameral Conference Committee Meeting on Social
Justice, which finalized RA 7432, disclose the true intent of our legislators to
treat the sales discounts as a tax credit, rather than as a deduction from gross
income. We quote from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions
from taxable income. I think we incorporated there a provision na - on the
responsibility of the private hospitals and drugstores, hindi ba?
SEN. ANGARA. Oo.
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 DUMAUAL, JEANNE PAULINE J. 2019-2020

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here REP. AQUINO. Ano ba yung establishments na covered?
about the deductions from taxable income of that private hospitals, di ba
ganon 'yan? SEN. ANGARA. Restaurant lodging houses, recreation centers.

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting REP. AQUINO. All establishments covered siguro?
government and public institutions, so, puwede na po nating hindi isama yung
mga less deductions ng taxable income.
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung
ganon. Can we go back to Section 4 ha?
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals.
Yung isiningit natin?
REP. AQUINO. Oho.

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20%
microphone).
discount from all establishments et cetera, et cetera, provided that said
establishments - provided that private establishments may claim the cost as a
SEN. ANGARA. Hindi pa, hindi pa. tax credit. Ganon ba 'yon?

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin? REP. AQUINO. Yah.

SEN. ANGARA. Oo. You want to insert that? SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e. THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
discount, provided that, the private hospitals can claim the expense as a tax
credit.
REP. AQUINO Okay.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".89
(inaudible) income.

Special Law
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

Over General Law

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng
establishments na covered.
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code --
a general law. "x x x [T]he rule is that on a specific matter the special law shall
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
prevail over the general law, which shall
be resorted to only to supply deficiencies in the former." 90 In addition, "[w]here

Atty. Santos, Taxation I Page 333

 DUMAUAL, JEANNE PAULINE J. 2019-2020

there are two statutes, the earlier special and the later general -- the terms of
the general broad enough to include the matter provided for in the special --
the fact that one is special and the other is general creates a presumption
that the special is to be considered as remaining an exception to the
general,91 one as a general law of the land, the other as the law of a
particular case."92 "It is a canon of statutory construction that a
later statute, general in its terms and not expressly repealing a prior
special statute, will ordinarily not affect the special provisions of such earlier
statute."93

RA 7432 is an earlier law not expressly repealed by, and therefore remains an
exception to, the Tax Code -- a later law. When the former states that a tax
credit may be claimed, then the requirement of prior tax payments under
certain provisions of the latter, as discussed above, cannot be made to apply.
Neither can the instances of or references to a tax deduction under the Tax
Code94 be made to restrict RA 7432. No provision of any revenue regulation
can supplant or modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and

Resolution of the Court of Appeals AFFIRMED. No pronouncement as to costs.

Atty. Santos, Taxation I Page 334

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. 118794 May 8, 1996
PHILIPPINE REFINING COMPANY (now known as "UNILEVER PHILIPPINES [PRC],
INC."), petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
REGALADO, J.:p
This is an appeal by certiorari from the decision of respondent Court of
Appeals1 affirming the decision of the Court of Tax Appeals which disallowed
petitioner's claim for deduction as bad debts of several accounts in the total
sum of P395,324.27, and imposing a 25% surcharge and 20% annual
delinquency interest on the alleged deficiency income tax liability of
petitioner.
Petitioner Philippine Refining Company (PRC) was assessed by respondent
Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for
the year 1985 in the amount of P1,892,584.00, computed as follows:
Add: 20% Interest (60% max.) 709,719.00
——————
Total Amount Due and Collectible P1,892,584.002
The assessment was timely protested by petitioner on April 26, 1989, on the
ground that it was based on the erroneous disallowances of "bad debts" and
"interest expense" although the same are both allowable and legal
deductions. Respondent Commissioner, however, issued a warrant of
garnishment against the deposits of petitioner at a branch of City Trust Bank, in
Makati, Metro Manila, which action the latter considered as a denial of its
protest.
Petitioner accordingly filed a petition for review with the Court of Tax Appeals
(CTA) on the same assignment of error, that is, that the "bad debts" and
"interest expense" are legal and allowable deductions. In its decision3 of
February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the findings of the
Commissioner by reducing the deficiency income tax assessment to
P237,381.26, with surcharge and interest incident to delinquency. In said
decision, the Tax Court reversed and set aside the Commissioner's
disallowance of the interest expense of P2,666,545.19 but maintained the
disallowance of the supposed bad debts of thirteen (13) debtors in the total
sum of P395,324.27.

Deficiency Income Tax

Petitioner then elevated the case to respondent Court of Appeals which, as
earlier stated, denied due course to the petition for review and dismissed the
Net Income per investigation P197,502,568.00 same on August 24, 1994 in CA-G.R. SP No. 31190,4 on the following
Add: Disallowances ratiocination:
Bad Debts P 713,070.93
Interest Expense P 2,666,545.49
We agree with respondent Court of Tax Appeals:
—————— ——————
P3,379,616.00
Out of the sixteen (16) accounts alleged as
bad debts, We find that only three (3)
Net Taxable Income 200,882,184.00
accounts have met the requirements of the
worthlessness of the accounts, hence were
Tax Due Thereon 70,298,764.00 properly written off as: bad debts, namely:
Less: Tax Paid 69,115,899.00
Deficiency Income Tax 1,182,865.00

Atty. Santos, Taxation I Page 335

 DUMAUAL, JEANNE PAULINE J. 2019-2020

1. Petronila Catap P We find that said accounts have not satisfied the
29,098.30 requirements of the "worthlessness of a debt". Mere testimony
(Pet Mini Grocery) of the Financial Accountant of the Petitioner explaining the
worthlessness of said debts is seen by this Court as nothing
2. Esther Guinto 254,375.54 more than a self-serving exercise which lacks probative value.
(Esther Sari-sari Store) There was no iota of documentary evidence (e.g., collection
letters sent, report from investigating fieldmen, letter of referral
to their legal department, police report/affidavit that the
3. Manuel Orea 34,272.82
owners were bankrupt due to fire that engulfed their stores or
(Elman Gen. Mdsg.)
that the owner has been murdered. etc.), to give support to
the testimony of an employee of the Petitioner. Mere
————— allegations cannot prove the worthlessness of such debts in
1985. Hence, the claim for deduction of these thirteen (13)
TOTAL P 317,746.66 debts should be rejected.5

xxx xxx xxx 1. This pronouncement of respondent Court of Appeals relied on the ruling of
this Court in Collector vs. Goodrich International Rubber Co.,6 which
With regard to the other accounts, namely: established the rule in determining the "worthlessness of a debt." In said case,
we held that for debts to be considered as "worthless," and thereby qualify as
"bad debts" making them deductible, the taxpayer should show that (1) there
1. Remoblas Store P 11,961.00 is a valid and subsisting debt. (2) the debt must be actually ascertained to be
worthless and uncollectible during the taxable year; (3) the debt must be
2. Tomas Store 16,842.79 charged off during the taxable year; and (4) the debt must arise from the
3. AFPCES 13,833.62 business or trade of the taxpayer. Additionally, before a debt can be
4. CM Variety Store 10,895.82 considered worthless, the taxpayer must also show that it is indeed
5. U' Ren Mart Enterprise 10,487.08 uncollectible even in the future.
6. Aboitiz Shipping Corp. 89,483.40
7. J. Ruiz Trucking 69,640.34 Furthermore, there are steps outlined to be undertaken by the taxpayer to
8. Renato Alejandro 13,550.00 prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of
9. Craig, Mostyn Pty. Ltd. 23,738.00 statement of accounts; (2) sending of collection letters; (3) giving the account
10. C. Itoh 19,272.22 to a lawyer for collection; and (4) filing a collection case in court.
11. Crocklaan B.V. 77,690.00
12. Enriched Food Corp. 24,158.00
13. Lucito Sta. Maria 13,772.00 On the foregoing considerations, respondent Court of Appeals held that
petitioner did not satisfy the requirements of "worthlessness of a debt" as to the
thirteen (13) accounts disallowed as deductions.
—————

It appears that the only evidentiary support given by PRC for its aforesaid
TOTAL P 395,324.27 claimed deductions was the explanation or justification posited by its financial

Atty. Santos, Taxation I Page 336


adviser or accountant, Guia D. Masagana. Her allegations were not
supported by any documentary evidence, hence both the Court of Appeals
and the CTA ruled that said contentions per se cannot prove that the debts
were indeed uncollectible and can be considered as bad debts as to make
them deductible. That both lower courts are correct is shown by petitioner's
own submission and the discussion thereof which we have taken time and
patience to cull from the antecedent proceedings in this case, albeit
bordering on factual settings.
The accounts of Remoblas Store in the amount of P11,961.00 and CM Variety
Store in the amount of P10,895.82 are uncollectible, according to petitioner,
since the stores were burned in November, 1984 and in early 1985,
respectively, and there are no assets belonging to the debtors that can be
garnished by PRC.7 However, PRC failed to show any documentary evidence
for said allegations. Not a single document was offered to show that the stores
were burned, even just a police report or an affidavit attesting to such loss by
fire. In fact, petitioner did not send even a single demand letter to the owners
of said stores.
The account of Tomas Store in the amount of P16,842.79 is uncollectible,
claims petitioner PRC, since the owner thereof was murdered and left no
visible assets which could satisfy the debt. Withal, just like the accounts of the
two other stores just mentioned, petitioner again failed to present proof of the
efforts exerted to collect the debt, other than the aforestated asseverations of
its financial adviser.
The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking in the
amounts of P89,483.40 and P69,640.34, respectively, both of which allegedly
arose from the hijacking of their cargo and for which they were given 30%
rebates by PRC, are claimed to be uncollectible. Again, petitioner failed to
present an iota of proof, not even a copy of the supposed policy regulation of
PRC that it gives rebates to clients in case of loss arising from fortuitous events
or force majeure, which rebates it now passes off as uncollectible debts.
As to the account of P13,550.00 representing the balance collectible from
Renato Alejandro, a former employee who failed to pay the judgment against
him, it is petitioner's theory that the same can no longer be collected since his
whereabouts are unknown and he has no known property which can be
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
garnished or levied upon. Once again, petitioner failed to prove the existence
of the said case against that debtor or to submit any documentation to show
that Alejandro was indeed bound to pay any judgment obligation.
The amount of P13,772.00 corresponding to the debt of Lucito Sta. Maria is
allegedly due to the loss of his stocks through robbery and the account is
uncollectible due to his insolvency. Petitioner likewise failed to submit
documentary evidence, not even the written reports of the alleged
investigation conducted by its agents as testified to by its aforenamed
financial adviser.
Regarding the accounts of C. Itoh in the amount of P19,272.22, Crocklaan B.V.
in the sum of P77,690.00, and Craig, Mostyn Pty. Ltd. with a balance of
P23,738.00, petitioner contends that these debtors being foreign corporations,
it can sue them only in their country of incorporation; and since this will entail
expenses more than the amounts of the debts to be collected, petitioner did
not file any collection suit but opted to write them off as bad debts. Petitioner
was unable to show proof of its efforts to collect the debts, even by a single
demand letter therefor. While it is not required to file suit, it is at least expected
by the law to produce reasonable proof that the debts are uncollectible
although diligent efforts were exerted to collect the same.
The account of Enriched Food Corporation in the amount of P24,158.00
remains unpaid, although petitioner claims that it sent several letters. This is not
sufficient to sustain its position. even if true, but even smacks of insouciance on
its part. On top of that, it was unable to show a single copy of the alleged
demand letters sent to the said corporation or any of its corporate officers.
With regard to the account of AFPCES for unpaid supplies in the amount of
P13,833.62, petitioner asserts that since the debtor is an agency of the
government, PRC did not file a collection suit therefor. Yet, the mere fact that
AFPCES is a government agency does not preclude PRC from filing suit since
said agency, while discharging proprietary functions, does not enjoy immunity
from suit. Such pretension of petitioner cannot pass judicial muster.
No explanation is offered by petitioner as to why the unpaid account of U'
Ren Mart Enterprise in the amount of P10,487.08 was written off as a bad debt.
However, the decision of the CTA includes this debtor in its findings on the lack
Page 337

of documentary evidence to justify the deductions claimed, since the
worthlessness of the debts involved are sought to be established by the mere
self-serving testimony of its financial consultant.
The contentions of PRC that nobody is in a better position to determine when
an obligation becomes a bad debt than the creditor itself, and that its
judgment should not be substituted by that of respondent court as it is PRC
which has the facilities in ascertaining the collectibility or uncollectibility of
these debts, are presumptuous and uncalled for. The Court of Tax Appeals is a
highly specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine the
issue of whether or not the debt is deductible through the evidence presented
before it.8
Because of this recognized expertise, the findings of the CTA will not ordinarily
be reviewed absent a showing of gross error or abuse on its part.9 The findings
of fact of the CTA are binding on this Court and in the absence of strong
reasons for this Court to delve into facts, only questions of law are open for
determination. 10 Were it not, therefore, due to the desire of this Court to satisfy
petitioner's calls for clarification and to use this case as a vehicle for
exemplification, this appeal could very well have been summarily dismissed.
The Court vehemently rejects the absurd thesis of petitioner that despite the
supervening delay in the tax payment, nothing is lost on the part of the
Government because in the event that these debts are collected, the same
will be returned as taxes to it in the year of the recovery. This is an irresponsible
statement which deliberately ignores the fact that while the Government may
eventually recover revenues under that hypothesis, the delay caused by the
non-payment of taxes under such a contingency will obviously have a
disastrous effect on the revenue collections necessary for governmental
operations during the period concerned.
2. We need not tarry at length on the second issue raised by petitioner. It
argues that the imposition of the 25% surcharge and the 20% delinquency
interest due to delay in its payment of the tax assessed is improper and
unwarranted, considering that the assessment of the Commissioner was
modified by the CTA and the decision of said court has not yet become final
and executory.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Regarding the 25% surcharge penalty, Section 248 of the Tax Code provides:
Sec. 248. Civil Penalties. — (a) There shall be imposed, in
addition to the tax required to be paid, a penalty equivalent
to twenty-five percent (25%) of the amount due, in the
following cases:
xxx xxx xxx
(3) Failure to pay the tax within the time prescribed for its
payment.
With respect to the penalty of 20% interest, the relevant provision is found in
Section 249 of the same Code, as follows:
Sec. 249. Interest. — (a) In general. — There shall be assessed
and collected on any unpaid amount of tax, interest at the
rate of twenty percent (20%) per annum, or such higher rate
as may be prescribed by regulations, from the date
prescribed for payment until the amount is fully paid.
xxx xxx xxx
(c) Delinquency interest. — In case of failure pay:
(1) The amount of the tax due on any return required to be
filed, or
(2) The amount of the tax due for which no return is required,
or
(3) A deficiency tax, or any surcharge or interest thereon, on
the due date appearing in the notice and demand of the
Commissioner,
Page 338
 DUMAUAL, JEANNE PAULINE J. 2019-2020

there shall be assessed and collected, on the unpaid

amount, interest at the rate prescribed in paragraph (a)
hereof until the amount is fully paid, which interest shall form
part of the tax. (emphasis supplied)

xxx xxx xxx

As correctly pointed out by the Solicitor General, the deficiency tax

assessment in this case, which was the subject of the demand letter of
respondent Commissioner dated April 11,1989, should have been paid within
thirty (30) days from receipt thereof. By reason of petitioner's default thereon,
the delinquency penalties of 25% surcharge and interest of 20% accrued from
April 11, 1989. The fact that petitioner appealed the assessment to the CTA
and that the same was modified does not relieve petitioner of the penalties
incident to delinquency. The reduced amount of P237,381.25 is but a part of
the original assessment of P1,892,584.00.

Our attention has also been called to two of our previous rulings and these we
set out here for the benefit of petitioner and whosoever may be minded to
take the same stance it has adopted in this case. Tax laws imposing penalties
for delinquencies, so we have long held, are intended to hasten tax payments
by punishing evasions or neglect of duty in respect thereof. If penalties could
be condoned for flimsy reasons, the law imposing penalties for delinquencies
would be rendered nugatory, and the maintenance of the Government and
its multifarious activities will be adversely affected. 11

We have likewise explained that it is mandatory to collect penalty and interest

at the stated rate in case of delinquency. The intention of the law is to
discourage delay in the payment of taxes due the Government and, in this
sense, the penalty and interest are not penal but compensatory for the
concomitant use of the funds by the taxpayer beyond the date when he is
supposed to have paid them to the Government. 12 Unquestionably, petitioner
chose to turn a deaf ear to these injunctions.

ACCORDINGLY, the petition at bar is DENIED and the judgment of respondent

Court of Appeals is hereby AFFIRMED, with treble costs against petitioner.

Atty. Santos, Taxation I Page 339


G.R. No. 174689 October 22, 2007
ROMMEL JACINTO DANTES SILVERIO, petitioner,
vs.
REPUBLIC OF THE PHILIPPINES, respondent.
DECISION
CORONA, J.:
When God created man, He made him in the likeness of God; He
created them male and female. (Genesis 5:1-2)
Amihan gazed upon the bamboo reed planted by Bathala and she
heard voices coming from inside the bamboo. "Oh North Wind! North
Wind! Please let us out!," the voices said. She pecked the reed once,
then twice. All of a sudden, the bamboo cracked and slit open. Out
came two human beings; one was a male and the other was a
female. Amihan named the man "Malakas" (Strong) and the woman
"Maganda" (Beautiful). (The Legend of Malakas and Maganda)
When is a man a man and when is a woman a woman? In particular, does
the law recognize the changes made by a physician using scalpel, drugs and
counseling with regard to a person’s sex? May a person successfully petition
for a change of name and sex appearing in the birth certificate to reflect the
result of a sex reassignment surgery?
On November 26, 2002, petitioner Rommel Jacinto Dantes Silverio filed a
petition for the change of his first name and sex in his birth certificate in the
Regional Trial Court of Manila, Branch 8. The petition, docketed as SP Case
No. 02-105207, impleaded the civil registrar of Manila as respondent.
Petitioner alleged in his petition that he was born in the City of Manila to the
spouses Melecio Petines Silverio and Anita Aquino Dantes on April 4, 1962. His
name was registered as "Rommel Jacinto Dantes Silverio" in his certificate of
live birth (birth certificate). His sex was registered as "male."
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
He further alleged that he is a male transsexual, that is, "anatomically male but
feels, thinks and acts as a female" and that he had always identified himself
with girls since childhood.1 Feeling trapped in a man’s body, he consulted
several doctors in the United States. He underwent psychological
examination, hormone treatment and breast augmentation. His attempts to
transform himself to a "woman" culminated on January 27, 2001 when he
underwent sex reassignment surgery2 in Bangkok, Thailand. He was thereafter
examined by Dr. Marcelino Reysio-Cruz, Jr., a plastic and reconstruction
surgeon in the Philippines, who issued a medical certificate attesting that he
(petitioner) had in fact undergone the procedure.
From then on, petitioner lived as a female and was in fact engaged to be
married. He then sought to have his name in his birth certificate changed from
"Rommel Jacinto" to "Mely," and his sex from "male" to "female."
An order setting the case for initial hearing was published in the People’s
Journal Tonight, a newspaper of general circulation in Metro Manila, for three
consecutive weeks.3 Copies of the order were sent to the Office of the
Solicitor General (OSG) and the civil registrar of Manila.
On the scheduled initial hearing, jurisdictional requirements were established.
No opposition to the petition was made.
During trial, petitioner testified for himself. He also presented Dr. Reysio-Cruz, Jr.
and his American fiancé, Richard P. Edel, as witnesses.
On June 4, 2003, the trial court rendered a decision 4 in favor of petitioner. Its
relevant portions read:
Petitioner filed the present petition not to evade any law or judgment
or any infraction thereof or for any unlawful motive but solely for the
purpose of making his birth records compatible with his present sex.
The sole issue here is whether or not petitioner is entitled to the relief
asked for.
The [c]ourt rules in the affirmative.
Page 340

Firstly, the [c]ourt is of the opinion that granting the petition would be
more in consonance with the principles of justice and equity. With his
sexual [re-assignment], petitioner, who has always felt, thought and
acted like a woman, now possesses the physique of a female.
Petitioner’s misfortune to be trapped in a man’s body is not his own
doing and should not be in any way taken against him.
Likewise, the [c]ourt believes that no harm, injury [or] prejudice will be
caused to anybody or the community in granting the petition. On the
contrary, granting the petition would bring the much-awaited
happiness on the part of the petitioner and her [fiancé] and the
realization of their dreams.
Finally, no evidence was presented to show any cause or ground to
deny the present petition despite due notice and publication thereof.
Even the State, through the [OSG] has not seen fit to interpose any
[o]pposition.
WHEREFORE, judgment is hereby rendered GRANTING the petition
and ordering the Civil Registrar of Manila to change the entries
appearing in the Certificate of Birth of [p]etitioner, specifically for
petitioner’s first name from "Rommel Jacinto" to MELY and petitioner’s
gender from "Male" to FEMALE. 5
On August 18, 2003, the Republic of the Philippines (Republic), thru the OSG,
filed a petition for certiorari in the Court of Appeals.6 It alleged that there is no
law allowing the change of entries in the birth certificate by reason of sex
alteration.
On February 23, 2006, the Court of Appeals7 rendered a decision8 in favor of
the Republic. It ruled that the trial court’s decision lacked legal basis. There is
no law allowing the change of either name or sex in the certificate of birth on
the ground of sex reassignment through surgery. Thus, the Court of Appeals
granted the Republic’s petition, set aside the decision of the trial court and
ordered the dismissal of SP Case No. 02-105207. Petitioner moved for
reconsideration but it was denied.9 Hence, this petition.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Petitioner essentially claims that the change of his name and sex in his birth
certificate is allowed under Articles 407 to 413 of the Civil Code, Rules 103 and
108 of the Rules of Court and RA 9048.10
The petition lacks merit.
A Person’s First Name Cannot Be Changed On the Ground of Sex
Reassignment
Petitioner invoked his sex reassignment as the ground for his petition for
change of name and sex. As found by the trial court:
Petitioner filed the present petition not to evade any law or judgment
or any infraction thereof or for any unlawful motive but solely for the
purpose of making his birth records compatible with his present sex.
(emphasis supplied)
Petitioner believes that after having acquired the physical features of a
female, he became entitled to the civil registry changes sought. We disagree.
The State has an interest in the names borne by individuals and entities for
purposes of identification.11 A change of name is a privilege, not a
right.12 Petitions for change of name are controlled by statutes.13 In this
connection, Article 376 of the Civil Code provides:
ART. 376. No person can change his name or surname without judicial
authority.
This Civil Code provision was amended by RA 9048 (Clerical Error Law). In
particular, Section 1 of RA 9048 provides:
SECTION 1. Authority to Correct Clerical or Typographical Error and
Change of First Name or Nickname. – No entry in a civil register shall
be changed or corrected without a judicial order, except for clerical
or typographical errors and change of first name or nickname which
can be corrected or changed by the concerned city or municipal
Page 341

civil registrar or consul general in accordance with the provisions of
this Act and its implementing rules and regulations.
RA 9048 now governs the change of first name.14 It vests the power and
authority to entertain petitions for change of first name to the city or municipal
civil registrar or consul general concerned. Under the law, therefore,
jurisdiction over applications for change of first name is now primarily lodged
with the aforementioned administrative officers. The intent and effect of the
law is to exclude the change of first name from the coverage of Rules 103
(Change of Name) and 108 (Cancellation or Correction of Entries in the Civil
Registry) of the Rules of Court, until and unless an administrative petition for
change of name is first filed and subsequently denied.15 It likewise lays down
the corresponding venue,16 form17 and procedure. In sum, the remedy and
the proceedings regulating change of first name are primarily administrative in
nature, not judicial.
RA 9048 likewise provides the grounds for which change of first name may be
allowed:
SECTION 4. Grounds for Change of First Name or Nickname. – The
petition for change of first name or nickname may be allowed in any
of the following cases:
(1) The petitioner finds the first name or nickname to be ridiculous,
tainted with dishonor or extremely difficult to write or pronounce;
(2) The new first name or nickname has been habitually and
continuously used by the petitioner and he has been publicly known
by that first name or nickname in the community; or
(3) The change will avoid confusion.
Petitioner’s basis in praying for the change of his first name was his sex
reassignment. He intended to make his first name compatible with the sex he
thought he transformed himself into through surgery. However, a change of
name does not alter one’s legal capacity or civil status.18 RA 9048 does not
sanction a change of first name on the ground of sex reassignment. Rather
than avoiding confusion, changing petitioner’s first name for his declared
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
purpose may only create grave complications in the civil registry and the
public interest.
Before a person can legally change his given name, he must present proper
or reasonable cause or any compelling reason justifying such change. 19 In
addition, he must show that he will be prejudiced by the use of his true and
official name.20 In this case, he failed to show, or even allege, any prejudice
that he might suffer as a result of using his true and official name.
In sum, the petition in the trial court in so far as it prayed for the change of
petitioner’s first name was not within that court’s primary jurisdiction as the
petition should have been filed with the local civil registrar concerned,
assuming it could be legally done. It was an improper remedy because the
proper remedy was administrative, that is, that provided under RA 9048. It was
also filed in the wrong venue as the proper venue was in the Office of the Civil
Registrar of Manila where his birth certificate is kept. More importantly, it had
no merit since the use of his true and official name does not prejudice him at
all. For all these reasons, the Court of Appeals correctly dismissed petitioner’s
petition in so far as the change of his first name was concerned.
No Law Allows The Change of Entry In The Birth Certificate As To Sex On the
Ground of Sex Reassignment
The determination of a person’s sex appearing in his birth certificate is a legal
issue and the court must look to the statutes.21 In this connection, Article 412 of
the Civil Code provides:
ART. 412. No entry in the civil register shall be changed or corrected
without a judicial order.
Together with Article 376 of the Civil Code, this provision was amended by RA
9048 in so far as clerical or typographical errors are involved. The correction or
change of such matters can now be made through administrative
proceedings and without the need for a judicial order. In effect, RA 9048
removed from the ambit of Rule 108 of the Rules of Court the correction of
such errors.22 Rule 108 now applies only to substantial changes and corrections
in entries in the civil register.23
Page 342

Section 2(c) of RA 9048 defines what a "clerical or typographical error" is:
SECTION 2. Definition of Terms. – As used in this Act, the following terms
shall mean:
xxx xxx xxx
(3) "Clerical or typographical error" refers to a mistake
committed in the performance of clerical work in writing,
copying, transcribing or typing an entry in the civil register
that is harmless and innocuous, such as misspelled name or
misspelled place of birth or the like, which is visible to the eyes
or obvious to the understanding, and can be corrected or
changed only by reference to other existing record or
records: Provided, however, That no correction must involve
the change of nationality, age, status or sex of the petitioner.
(emphasis supplied)
Under RA 9048, a correction in the civil registry involving the change of sex is
not a mere clerical or typographical error. It is a substantial change for which
the applicable procedure is Rule 108 of the Rules of Court.
The entries envisaged in Article 412 of the Civil Code and correctable under
Rule 108 of the Rules of Court are those provided in Articles 407 and 408 of the
Civil Code:24
ART. 407. Acts, events and judicial decrees concerning the civil status
of persons shall be recorded in the civil register.
ART. 408. The following shall be entered in the civil register:
(1) Births; (2) marriages; (3) deaths; (4) legal separations; (5)
annulments of marriage; (6) judgments declaring marriages void from
the beginning; (7) legitimations; (8) adoptions; (9) acknowledgments
of natural children; (10) naturalization; (11) loss, or (12) recovery of
citizenship; (13) civil interdiction; (14) judicial determination of filiation;
(15) voluntary emancipation of a minor; and (16) changes of name.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The acts, events or factual errors contemplated under Article 407 of the Civil
Code include even those that occur after birth.25 However, no reasonable
interpretation of the provision can justify the conclusion that it covers the
correction on the ground of sex reassignment.
To correct simply means "to make or set aright; to remove the faults or error
from" while to change means "to replace something with something else of
the same kind or with something that serves as a substitute." 26 The birth
certificate of petitioner contained no error. All entries therein, including those
corresponding to his first name and sex, were all correct. No correction is
necessary.
Article 407 of the Civil Code authorizes the entry in the civil registry of
certain acts (such as legitimations, acknowledgments of illegitimate children
and naturalization), events (such as births, marriages, naturalization and
deaths) and judicial decrees (such as legal separations, annulments of
marriage, declarations of nullity of marriages, adoptions, naturalization, loss or
recovery of citizenship, civil interdiction, judicial determination of filiation and
changes of name). These acts, events and judicial decrees produce legal
consequences that touch upon the legal capacity, status and nationality of a
person. Their effects are expressly sanctioned by the laws. In contrast, sex
reassignment is not among those acts or events mentioned in Article 407.
Neither is it recognized nor even mentioned by any law, expressly or impliedly.
"Status" refers to the circumstances affecting the legal situation (that is, the
sum total of capacities and incapacities) of a person in view of his age,
nationality and his family membership.27
The status of a person in law includes all his personal qualities and
relations, more or less permanent in nature, not ordinarily terminable
at his own will, such as his being legitimate or illegitimate, or his being
married or not. The comprehensive term status… include such matters
as the beginning and end of legal personality, capacity to have rights
in general, family relations, and its various aspects, such as birth,
legitimation, adoption, emancipation, marriage, divorce, and
sometimes even succession.28 (emphasis supplied)
Page 343

A person’s sex is an essential factor in marriage and family relations. It is a part
of a person’s legal capacity and civil status. In this connection, Article 413 of
the Civil Code provides:
ART. 413. All other matters pertaining to the registration of civil status
shall be governed by special laws.
But there is no such special law in the Philippines governing sex reassignment
and its effects. This is fatal to petitioner’s cause.
Moreover, Section 5 of Act 3753 (the Civil Register Law) provides:
SEC. 5. Registration and certification of births. – The declaration of the
physician or midwife in attendance at the birth or, in default thereof,
the declaration of either parent of the newborn child, shall be
sufficient for the registration of a birth in the civil register. Such
declaration shall be exempt from documentary stamp tax and shall
be sent to the local civil registrar not later than thirty days after the
birth, by the physician or midwife in attendance at the birth or by
either parent of the newborn child.
In such declaration, the person above mentioned shall certify to the
following facts: (a) date and hour of birth; (b) sex and nationality of
infant; (c) names, citizenship and religion of parents or, in case the
father is not known, of the mother alone; (d) civil status of parents; (e)
place where the infant was born; and (f) such other data as may be
required in the regulations to be issued.
xxx xxx xxx (emphasis supplied)
Under the Civil Register Law, a birth certificate is a historical record of the facts
as they existed at the time of birth.29 Thus, the sex of a person is determined at
birth, visually done by the birth attendant (the physician or midwife) by
examining the genitals of the infant. Considering that there is no law legally
recognizing sex reassignment, the determination of a person’s sex made at
the time of his or her birth, if not attended by error,30 is immutable.31
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
When words are not defined in a statute they are to be given their common
and ordinary meaning in the absence of a contrary legislative intent. The
words "sex," "male" and "female" as used in the Civil Register Law and laws
concerning the civil registry (and even all other laws) should therefore be
understood in their common and ordinary usage, there being no legislative
intent to the contrary. In this connection, sex is defined as "the sum of
peculiarities of structure and function that distinguish a male from a
female"32 or "the distinction between male and female."33 Female is "the sex
that produces ova or bears young"34 and male is "the sex that has organs to
produce spermatozoa for fertilizing ova."35 Thus, the words "male" and "female"
in everyday understanding do not include persons who have undergone sex
reassignment. Furthermore, "words that are employed in a statute which had
at the time a well-known meaning are presumed to have been used in that
sense unless the context compels to the contrary."36 Since the statutory
language of the Civil Register Law was enacted in the early 1900s and remains
unchanged, it cannot be argued that the term "sex" as used then is something
alterable through surgery or something that allows a post-operative male-to-
female transsexual to be included in the category "female."
For these reasons, while petitioner may have succeeded in altering his body
and appearance through the intervention of modern surgery, no law
authorizes the change of entry as to sex in the civil registry for that reason.
Thus, there is no legal basis for his petition for the correction or change of the
entries in his birth certificate.
Neither May Entries in the Birth Certificate As to First Name or Sex Be Changed
on the Ground of Equity
The trial court opined that its grant of the petition was in consonance with the
principles of justice and equity. It believed that allowing the petition would
cause no harm, injury or prejudice to anyone. This is wrong.
The changes sought by petitioner will have serious and wide-ranging legal
and public policy consequences. First, even the trial court itself found that the
petition was but petitioner’s first step towards his eventual marriage to his male
fiancé. However, marriage, one of the most sacred social institutions, is a
special contract of permanent union between a man and a woman.37 One of
its essential requisites is the legal capacity of the contracting parties who must
Page 344
 DUMAUAL, JEANNE PAULINE J. 2019-2020

be a male and a female.38 To grant the changes sought by petitioner will about that. The Court recognizes that there are people whose preferences
substantially reconfigure and greatly alter the laws on marriage and family and orientation do not fit neatly into the commonly recognized parameters of
relations. It will allow the union of a man with another man who has social convention and that, at least for them, life is indeed an ordeal.
undergone sex reassignment (a male-to-female post-operative transsexual). However, the remedies petitioner seeks involve questions of public policy to
Second, there are various laws which apply particularly to women such as the be addressed solely by the legislature, not by the courts.
provisions of the Labor Code on employment of women,39 certain felonies
under the Revised Penal Code40 and the presumption of survivorship in case of
calamities under Rule 131 of the Rules of Court,41 among others. These laws
underscore the public policy in relation to women which could be
substantially affected if petitioner’s petition were to be granted.

It is true that Article 9 of the Civil Code mandates that "[n]o judge or court
shall decline to render judgment by reason of the silence, obscurity or
insufficiency of the law." However, it is not a license for courts to engage in
judicial legislation. The duty of the courts is to apply or interpret the law, not to
make or amend it.

In our system of government, it is for the legislature, should it choose to do so,

to determine what guidelines should govern the recognition of the effects of
sex reassignment. The need for legislative guidelines becomes particularly
important in this case where the claims asserted are statute-based.

To reiterate, the statutes define who may file petitions for change of first name
and for correction or change of entries in the civil registry, where they may be
filed, what grounds may be invoked, what proof must be presented and what
procedures shall be observed. If the legislature intends to confer on a person
who has undergone sex reassignment the privilege to change his name and
sex to conform with his reassigned sex, it has to enact legislation laying down
the guidelines in turn governing the conferment of that privilege.

It might be theoretically possible for this Court to write a protocol on when a

person may be recognized as having successfully changed his sex. However,
this Court has no authority to fashion a law on that matter, or on anything else.
The Court cannot enact a law where no law exists. It can only apply or
interpret the written word of its co-equal branch of government, Congress.

Petitioner pleads that "[t]he unfortunates are also entitled to a life of

happiness, contentment and [the] realization of their dreams." No argument

Atty. Santos, Taxation I Page 345


G.R. No. 159991 November 16, 2006
CARMELINO F. PANSACOLA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision1 dated June 5, 2003 of the Court of
Appeals in CA-G.R. S.P. No. 60475. The appellate court denied petitioner’s
availment of the increased amounts of personal and additional exemptions
under Republic Act No. 8424, the National Internal Revenue Code of
19972 (NIRC), which took effect on January 1, 1998. Also assailed is the
appellate court’s Resolution3 dated September 11, 2003, denying the motion
for reconsideration.
The facts are undisputed.
On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return
for the taxable year 1997 that reflected an overpayment of ₱5,950. In it he
claimed the increased amounts of personal and additional exemptions under
Section 354 of the NIRC, although his certificate of income tax withheld on
compensation indicated the lesser allowed amounts 5 on these exemptions.
He claimed a refund of ₱5,950 with the Bureau of Internal Revenue, which was
denied. Later, the Court of Tax Appeals also denied his claim because
according to the tax court, "it would be absurd for the law to allow the
deduction from a taxpayer’s gross income earned on a certain year of
exemptions availing on a different taxable year…"6 Petitioner sought
reconsideration, but the same was denied.7
On appeal, the Court of Appeals denied his petition for lack of merit. The
appellate court ruled that Umali v. Estanislao,8 relied upon by petitioner, was
inapplicable to his case. It further ruled that the NIRC took effect on January 1,
1998, thus the increased exemptions were effective only to cover taxable year
1998 and cannot be applied retroactively.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Petitioner, before us, raises a single issue:
…[W]hether or not the increased personal and additional exemptions under
[the NIRC] can be availed of by the [p]etitioner for purposes of computing his
income tax liability for the taxable year 1997 and thus be entitled to the
refund.9
Simply stated, the issue is: Could the exemptions under Section 35 of the NIRC,
which took effect on January 1, 1998, be availed of for the taxable year 1997?
Petitioner argues that the personal and additional exemptions are of a fixed
character based on Section 35 (A) and (B) of the NIRC 10 and as ruled by this
Court in Umali, these personal and additional exemptions are fixed amounts
to which an individual taxpayer is entitled. He contends that unlike other
allowable deductions, the availability of these exemptions does not depend
on the taxpayer’s profession, trade or business for a particular taxable period.
Relying again in Umali, petitioner alleges that the Court of Appeals erred in
ruling that the increased exemptions were meant to be applied beginning
taxable year 1998 and were to be reflected in the taxpayers’ returns to be
filed on or before April 15, 1999. Petitioner reasons that such ruling would
postpone the availability of the increased exemptions and literally defer the
effectivity of the NIRC to January 1, 1999. Petitioner insists that the increased
exemptions were already available on April 15, 1998, the deadline for filing
income tax returns for taxable year 1997, because the NIRC was already
effective.
Respondent, through the Office of the Solicitor General, counters that the
increased exemptions were not yet available for taxable year 1997 because
all provisions of the NIRC took effect on January 1, 1998 only; that the fixed
character of personal and additional exemptions does not necessarily mean
that these were not time bound; and petitioner’s proposition was contrary to
Section 35 (C)11 of the NIRC. It further stated that petitioner’s exemptions were
determined as of December 31, 1997 and the effectivity of the NIRC during
the period of January 1 to April 15, 1998 did not affect his tax liabilities within
the taxable year 1997; and the inclusive period from January 1 to April 15,
1998, the filing dates and deadline for administrative purposes, was outside of
the taxable year 1997. Respondent also maintains that Umali is not applicable
to this case.
Page 346

Prefatorily, personal and additional exemptions under Section 35 of the NIRC
are fixed amounts to which certain individual taxpayers (citizens, resident
aliens)12 are entitled. Personal exemptions are the theoretical personal, living
and family expenses of an individual allowed to be deducted from the gross
or net income of an individual taxpayer. These are arbitrary amounts which
have been calculated by our lawmakers to be roughly equivalent to the
minimum of subsistence,13 taking into account the personal status and
additional qualified dependents of the taxpayer. They are fixed amounts in
the sense that the amounts have been predetermined by our lawmakers as
provided under Section 35 (A) and (B). Unless and until our lawmakers make
new adjustments on these personal exemptions, the amounts allowed to be
deducted by a taxpayer are fixed as predetermined by Congress.
A careful scrutiny of the provisions14 of the NIRC specifically shows that Section
79 (D)15 provides that the personal and additional exemptions shall be
determined in accordance with the main provisions in Title II of the NIRC. Its
main provisions pertain to Section 35 (A) and (B) which state,
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General.-For purposes of determining the tax provided in Section 24(A)
of this Title,16 there shall be allowed a basic personal exemption as follows:
xxxx
For each married individual – ₱32,000
xxxx
(B) Additional Exemption for Dependents.–There shall be allowed an
additional exemption of Eight thousand pesos (₱8,000) for each dependent
not exceeding four (4). (Emphasis ours.)
Section 35 (A) and (B) allow the basic personal and additional exemptions as
deductions from gross or net income, as the case maybe, to arrive at the
correct taxable income of certain individual taxpayers. Section 24 (A) (1) (a)
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
imposed income tax on a resident citizen’s taxable income derived for each
taxable year. It provides as follows:
SEC. 24. Income Tax Rates. –
(A) Rates of Income Tax on Individual Citizen …
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than
income subject to tax under Subsections (B),17 (C),18 and (D)19 of this Section,
derived for each taxable year from all sources within and without the
Philippines by every individual citizen of the Philippines residing therein;
(Emphasis ours.)
Section 31 defines "taxable income" as the pertinent items of gross income
specified in the NIRC, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by the NIRC or other
special laws. As defined in Section 22 (P),20 "taxable year" means the calendar
year, upon the basis of which the net income is computed under Title II of the
NIRC. Section 4321 also supports the rule that the taxable income of an
individual shall be computed on the basis of the calendar year. In addition,
Section 4522 provides that the deductions provided for under Title II of the NIRC
shall be taken for the taxable year in which they are "paid or accrued" or
"paid or incurred."
Moreover, Section 79 (H)23 requires the employer to determine, on or before
the end of the calendar year but prior to the payment of the compensation
for the last payroll period, the tax due from each employee’s taxable
compensation income for the entire taxable year in accordance with Section
24 (A). This is for the purpose of either withholding from the employee’s
December salary, or refunding to him not later than January 25 of the
succeeding year, the difference between the tax due and the tax withheld.
Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22
(P) and Sections 43, 45 and 79 (H) of the NIRC, the income subject to income
tax is the taxpayer’s income as derived and computed during the calendar
year, his taxable year.
Page 347

Clearly from the abovequoted provisions, what the law should consider for the
purpose of determining the tax due from an individual taxpayer is his status
and qualified dependents at the close of the taxable year and not at the time
the return is filed and the tax due thereon is paid. Now comes Section 35 (C)
of the NIRC which provides,
Sec. 35. Allowance of Personal Exemption for Individual Taxpayer. –
xxxx
(C) Change of Status. – If the taxpayer marries or should have additional
dependent(s) as defined above during the taxable year, the taxpayer may
claim the corresponding additional exemption, as the case may be, in full for
such year.
If the taxpayer dies during the taxable year, his estate may still claim the
personal and additional exemptions for himself and his dependent(s) as if he
died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents
marries, becomes twenty-one (21) years old or becomes gainfully employed
during the taxable year, the taxpayer may still claim the same exemptions as if
the spouse or any of the dependents died, or as if such dependents married,
became twenty-one (21) years old or became gainfully employed at the
close of such year.
Emphasis must be made that Section 35 (C) of the NIRC allows a taxpayer to
still claim the corresponding full amount of exemption for a taxable
year, e.g. if he marries; have additional dependents; he, his spouse, or any of
his dependents die; and if any of his dependents marry, turn 21 years old; or
become gainfully employed. It is as if the changes in his or his dependents’
status took place at the close of the taxable year.
Consequently, his correct taxable income and his corresponding allowable
deductions e.g. personal and additional deductions, if any, had already been
determined as of the end of the calendar year.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In the case of petitioner, the availability of the aforementioned deductions if
he is thus entitled, would be reflected on his tax return filed on or before the
15th day of April 1999 as mandated by Section 51 (C) (1).24 Since the NIRC
took effect on January 1, 1998, the increased amounts of personal and
additional exemptions under Section 35, can only be allowed as deductions
from the individual taxpayer’s gross or net income, as the case maybe, for the
taxable year 1998 to be filed in 1999. The NIRC made no reference that the
personal and additional exemptions shall apply on income earned before
January 1, 1998.
Thus, petitioner’s reliance in Umali is misplaced.
In Umali, we noted that despite being given authority by Section 29 (1) (4) 25 of
the National Internal Revenue Code of 1977 to adjust these exemptions, no
adjustments were made to cover 1989. Note that Rep. Act No. 7167 is entitled
"An Act Adjusting the Basic Personal and Additional Exemptions Allowable to
Individuals for Income Tax Purposes to the Poverty Threshold Level, Amending
for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of the National
Internal Revenue Code, As Amended, and For Other Purposes." Thus, we said
in Umali, that the adjustment provided by Rep. Act No. 7167 effective 1992,
should consider the poverty threshold level in 1991, the time it was enacted.
And we observed therein that since the exemptions would especially benefit
lower and middle-income taxpayers, the exemption should be made to cover
the past year 1991. To such an extent, Rep. Act No. 7167 was a social
legislation intended to remedy the non-adjustment in 1989. And as cited
in Umali, this legislative intent is also clear in the records of the House of
Representatives’ Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any
such intent. The policy declarations in its enactment do not indicate it was a
social legislation that adjusted personal and additional exemptions according
to the poverty threshold level nor is there any indication that its application
should retroact. At the time petitioner filed his 1997 return and paid the tax
due thereon in April 1998, the increased amounts of personal and additional
exemptions in Section 35 were not yet available. It has not yet accrued as of
December 31, 1997, the last day of his taxable year. Petitioner’s taxable
income covers his income for the calendar year 1997. The law cannot be
given retroactive effect. It is established that tax laws are prospective in
application, unless it is expressly provided to apply retroactively.26 In the NIRC,
Page 348
 DUMAUAL, JEANNE PAULINE J. 2019-2020

we note, there is no specific mention that the increased amounts of personal

and additional exemptions under Section 35 shall be given retroactive effect.
Conformably too, personal and additional exemptions are considered as
deductions from gross income. Deductions for income tax purposes partake of
the nature of tax exemptions, hence strictly construed 27 against the
taxpayer28 and cannot be allowed unless granted in the most explicit and
categorical language29 too plain to be mistaken.30 They cannot be extended
by mere implication or inference.31 And, where a provision of law speaks
categorically, the need for interpretation is obviated, no plausible pretense
being entertained to justify non-compliance. All that has to be done is to
apply it in every case that falls within its terms.32

Accordingly, the Court of Appeals and the Court of Tax Appeals were correct
in denying petitioner’s claim for refund.1âwphi1

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated June 5,
2003 and the Resolution dated September 11, 2003 of the Court of Appeals in
CA-G.R. S.P. No. 60475 are hereby AFFIRMED.

Atty. Santos, Taxation I Page 349


G.R. Nos. L-33665-68 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO and ELVIRA
B. RUFINO, RAFAEL R. RUFINO and JULIETA A. RUFINO, MANUEL S. GALVEZ and
ESTER R. GALVEZ, and COURT OF TAX APPEALS, respondents.
Leonardo Abola for respondents.
CRUZ, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals
absolving the private respondents from liability for capital gains tax on the
stocks received by them from the Eastern Theatrical Inc. These were originally
four cages involving appeals from the decision of the Commissioner of Internal
Revenue dated July 11, 1966, holding the said respondents, Vicente A. Rufino
and Remedies S. Rufino, Ernesto D. Rufino and Elvira B. Rufino, Rafael R. Rufino
and Julieta A. Rufino, and Manuel S. Galvez and Ester R. Galvez, liable for
deficiency income tax, surcharge and interest in the sums of P44,294.88,
P27,229.44, P58,082.60 and P58,074.24, respectively, for the year 1959.
The facts, as narrated by the Court of Tax Appeals, are as follows:
The private respondents were the majority stockholders of the defunct Eastern
Theatrical Co., Inc., a corporation organized in 1934, for a period of twenty-
five years terminating on January 25, 1959. It had an original capital stock of
P500,000.00, which was increased in 1949 to P2,000,000.00, divided into
200,000 shares at P10.00 per share, and was organized to engage in the
business of operating theaters, opera houses, places of amusement and other
related business enterprises, more particularly the Lyric and Capitol Theaters in
Manila. The President of this corporation (hereinafter referred to as the Old
Corporation) during the year in question was Ernesto D. Rufino.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
The private respondents are also the majority and controlling stockholders of
another corporation, the Eastern Theatrical Co Inc., which was organized on
December 8, 1958, for a term of 50 years, with an authorized capital stock of
P200,000.00, each share having a par value of P10.00. This corporation is
engaged in the same kind of business as the Old Corporation. The General-
Manager of this corporation (hereinafter referred to as the New Corporation)
at the time was Vicente A. Rufino.
In a special meeting of stockholders of the Old Corporation on December 17,
1958, to provide for the continuation of its business after the end of its
corporate life, and upon the recommendation of its board of directors, a
resolution was passed authorizing the Old Corporation to merge with the New
Corporation by transferring its business, assets, goodwill, and liabilities to the
latter, which in exchange would issue and distribute to the shareholders of the
Old Corporation one share for each share held by them in the said
Corporation.
It was expressly declared that the merger of the Old Corporation with the New
Corporation was necessary to continue the exhibition of moving pictures at
the Lyric and Capitol Theaters even after the expiration of the corporate
existence of the former, in view of its pending booking contracts, not to
mention its collective bargaining agreements with its employees.
Pursuant to the said resolution, the Old Corporation, represented by Ernesto D.
Rufino as President, and the New Corporation, represented by Vicente A.
Rufino as General Manager, signed on January 9, 1959, a Deed of Assignment
providing for the conveyance and transfer of all the business, property, assets
and goodwill of the Old Corporation to the New Corporation in exchange for
the latter's shares of stock to be distributed among the shareholders on the
basis of one stock for each stock held in the Old Corporation except that no
new and unissued shares would be issued to the shareholders of the Old
Corporation; the delivery by the New Corporation to the Old Corporation of
125,005-3/4 shares to be distributed to the shareholders of the Old Corporation
as their corresponding shares of stock in the New Corporation; the assumption
by the New Corporation of all obligations and liabilities of the Old Corporation
under its bargaining agreement with the Cinema Stage & Radio
Entertainment Free Workers (FFW) which included the retention of all
personnel in the latter's employ; and the increase of the capitalization of the
Page 350

New Corporation in compliance with their agreement. This agreement was
made retroactive to January 1, 1959.
The aforesaid transfer was eventually made by the Old Corporation to the
New Corporation, which continued the operation of the Lyric and Capitol
Theaters and assumed all the obligations and liabilities of the Old Corporation
beginning January 1, 1959.
The resolution of the Old Corporation of December 17, 1958, and the Deed of
Assignment of January 9, 1959, were approved in a resolution by the
stockholders of the New Corporation in their special meeting on January 12,
1959. In the same meeting, the increased capitalization of the New
Corporation to P2,000,000.00 was also divided into 200,000 shares at P10.00
par value each share, and the said increase was registered on March 5, 1959,
with the Securities and Exchange Commission, which approved the same on
August 20,1959.
As agreed, and in exchange for the properties, and other assets of the Old
Corporation, the New Corporation issued to the stockholders of the former
stocks in the New Corporation equal to the stocks each one held in the Old
Corporation, as follows:
Mr. & Mrs. Vicente A. Rufino............... 17,083 shares
Mr. & Mrs. Rafael R. Rufino ................. 16,881 shares
Mr. & Mrs. Ernesto D. Rufino .............. 18,347 shares
Mr. & Mrs. Manuel S. Galvez ............... 16,882 shares
It was this above-narrated series of transactions that the Bureau of Internal
Revenue examined later, resulting in the petitioner declaring that the merger
of the aforesaid corporations was not undertaken for a bona fide business
purpose but merely to avoid liability for the capital gains tax on the exchange
of the old for the new shares of stock. Accordingly, he imposed the deficiency
assessments against the private respondents for the amounts already
mentioned. The private respondents' request for reconsideration having been
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
denied, they elevated the matter to the Court of Tax Appeals, which reversed
the petitioner.
We have given due course to the instant petition questioning the decision of
the said court holding that there was a valid merger between the Old
Corporation and the New Corporation and declaring that:
It is well established that where stocks for stocks were
exchanged, and distributed to the stockholders of the
corporations, parties to the merger or consolidation, pursuant
to a plan of reorganization, such exchange is exempt from
capital gains tax . . .
In view of the foregoing, we are of the opinion and so hold
that no taxable gain was derived by petitioners from the
exchange of their old stocks solely for stocks of the New
Corporation pursuant to Section 35(c) (2), in relation to (c) (5),
of the National Internal Revenue Code, as amended by
Republic Act 1921. 1
The above-cited Section 35 of the Tax Code, on the proper interpretation and
application of which the resolution of this case depends, provides in material
part as follows:
Sec. 35. Determination of gain or loss from the sale or other
disposition of property. — The gain derived or loss sustained
from the sale or other disposition of property, real, personal or
mixed, shall be determined in accordance with the following
schedule:
xxx xxx xxx
(c) Exchange of property-
(1) General Rule. — Except as herein
provided upon the sale or exchange of
property, the entire amount of the gain or
Page 351

loss, as the case may be, shall be
recognized.
(2) Exceptions. — No gain or loss shall be
recognized if in pursuance of a plan of
merger or consolidation (a) a corporation
which is a party to a merger or consolidation,
exchanges property solely for stock in a
corporation which is a party to the merger or
consolidation, (b) a shareholder exchanges
stock in a corporation which is a party to the
merger or consolidation solely for the stock of
another corporation, also a party to the
merger or consolidation, or (c) a security
holder of a corporation which is a party to
the merger or consolidation exchanges his
securities in such corporation solely for stock
or securities in another corporation, a party
to the merger or consolidation.
xxx xxx xxx
(5) Definitions.-(a) x x x (b) The term "merger"
or "consolidation," when used in this section,
shall be understood to mean: (1) The
ordinary merger or consolidation, or (2) the
acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock; Provided, That
for a transaction to be regarded as a merger
or consolidation within the purview of this
section, it must be undertaken for a bona
fide business purpose and not solely for the
purpose of escaping the burden of taxation;
Provided further, That in determining whether
a bona fide business purpose exists, each
and every step of the transaction shall be
considered and the whole transaction or
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
series of transactions shall be treated as a
single unit: ...
In support of its position that the Deed of Assignment was concluded by the
private respondents merely to evade the burden of taxation, the petitioner
points to the fact that the New Corporation did not actually issue stocks in
exchange for the properties of the Old Corporation at the time of the
supposed merger on January 9, 1959. The exchange, he says, was only on
paper. The increase in capitalization of the New Corporation was registered
with the Securities and Exchange Commission only on March 5, 1959, or 37
days after the Old Corporation expired on January 25, 1959. Prior to such
registration, it was not possible for the New Corporation to effect the
exchange provided for in the said agreement because it was capitalized only
at P200,000.00 as against the capitalization of the Old Corporation at
P2,000,000.00. Consequently, as there was no merger, the automatic
dissolution of the Old Corporation on its expiry date resulted in its liquidation,
for which the respondents are now liable in taxes on their capital gains.
For their part, the private respondents insist that there was a genuine merger
between the Old Corporation and the New Corporation pursuant to a plan
aimed at enabling the latter to continue the business of the former in the
operation of places of amusement, specifically the Capitol and Lyric Theaters.
The plan was evolved through the series of transactions above narrated, all of
which could be treated as a single unit in accordance with the requirements
of Section 35. Obviously, all these steps did not have to be completed at the
time of the merger, as there were some of them, such as the increase and
distribution of the stock of the New Corporation, which necessarily had to
come afterwards. Moreover, the Old Corporation was dissolved on January 1,
1959, pursuant to the Deed of Assignment, and not on January 25, 1959, its
original expiry date. As the properties of the Old Corporation were transferred
to the New Corporation before that expiry date, there could not have been
any distribution of liquidating dividends by the Old Corporation for which the
private respondents should be held liable in taxes.
We sustain the Court of Tax Appeals. We hold that it did not err in finding that
no taxable gain was derived by the private respondents from the questioned
transaction.
Page 352

Contrary to the claim of the petitioner, there was a valid merger although the
actual transfer of the properties subject of the Deed of Assignment was not
made on the date of the merger. In the nature of things, this was not possible.
Obviously, it was necessary for the Old Corporation to surrender its net assets
first to the New Corporation before the latter could issue its own stock to the
shareholders of the Old Corporation because the New Corporation had to
increase its capitalization for this purpose. This required the adoption of the
resolution to this effect at the special stockholders meeting of the New
Corporation on January 12, 1959, the registration of such issuance with the
SEC on March 5, 1959, and its approval by that body on August 20, 1959. All
these took place after the date of the merger but they were deemed part
and parcel of, and indispensable to the validity and enforceability of, the
Deed of Assignment.
The Court finds no impediment to the exchange of property for stock between
the two corporations being considered to have been effected on the date of
the merger. That, in fact, was the intention, and the reason why the Deed of
Assignment was made retroactive to January 1, 1959. Such retroaction
provided in effect that all transactions set forth in the merger agreement shall
be deemed to be taking place simultaneously on January 1, 1959, when the
Deed of Assignment became operative.
The certificates of stock subsequently delivered by the New Corporation to
the private respondents were only evidence of the ownership of such stocks.
Although these certificates could be issued to them only after the approval by
the SEC of the increase in capitalization of the New Corporation, the title
thereto, legally speaking, was transferred to them on the date the merger
took effect, in accordance with the Deed of Assignment.
The basic consideration, of course, is the purpose of the merger, as this would
determine whether the exchange of properties involved therein shall be
subject or not to the capital gains tax. The criterion laid down by the law is
that the merger" must be undertaken for a bona fide business purpose and
not solely for the purpose of escaping the burden of taxation." We must
therefore seek and ascertain the intention of the parties in the light of their
conduct contemporaneously with, and especially after, the questioned
merger pursuant to the Deed of Assignment of January 9, 1959.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
It has been suggested that one certain indication of a scheme to evade the
capital gains tax is the subsequent dissolution of the new corporation after the
transfer to it of the properties of the old corporation and the liquidation of the
former soon thereafter. This highly suspect development is likely to be a mere
subterfuge aimed at circumventing the requirements of Section 35 of the Tax
Code while seeming to be a valid corporate combination. Speaking of such a
device, Justice Sutherland declared for the United States Supreme Court in
Helvering v. Gregory:
When subdivision (b) speaks of a transfer of assets by one
corporation to another, it means a transfer made 'in
pursuance of a plan of reorganization' (Section 112[g]) of
corporate business; and not a transfer of assets by one
corporation to another in pursuance of a plan having no
relation to the business of either, as plainly is the case here.
Putting aside, then, the question of motive in respect of
taxation altogether, and fixing the character of proceeding
by what actually occurred, what do we find? Simply an
operation having no business or corporate purpose — a mere
devise which put on the form of a corporate reorganization
as a disguise for concealing its real character, and the sole
object and accomplishment of which was the consummation
of a preconceived plan, not to reorganize a business or any
part of a business, but to transfer a parcel of corporate shares
to the petitioner. No doubt, a new and valid corporation was
created. But that corporation was nothing more than a
contrivance to the end last described. It was brought into
existence for no other purpose; it performed, as it was
intended from the beginning it should perform, no other
function. When that limited function had been exercised, it
immediately was put to death.
In these circumstances, the facts speak for themselves and
are susceptible of but one interpretation. The whole
undertaking, though conducted according to the terms of
subdivision (b), was in fact an elaborate and devious form of
conveyance masquerading as a corporate reorganization
and nothing else. The rule which excludes from consideration
the motive of tax avoidance is not pertinent to the situation,
Page 353

because the transaction upon its face lies outside the plain
intent of the statute. To hold otherwise would be to exalt
artifice above reality and to deprive the statutory provision in
question of all serious purpose. 2
We see no such furtive intention in the instant case. It is clear, in fact, that the
purpose of the merger was to continue the business of the Old Corporation,
whose corporate life was about to expire, through the New Corporation to
which all the assets and obligations of the former had been transferred. What
argues strongly, indeed, for the New Corporation is that it was not dissolved
after the merger agreement in 1959. On the contrary, it continued to operate
the places of amusement originally owned by the Old Corporation and
transfered to the New Corporation, particularly the Capitol and Lyric Theaters,
in accordance with the Deed of Assignment. The New Corporation, in fact,
continues to do so today after taking over the business of the Old Corporation
twenty-seven years ago.
It may be recalled at this point that under the original provisions of the old
Corporation Law, which was in effect when the merger agreement was
concluded in 1959, it was not possible for a corporation, by mere amendment
of its charter, to extend its life beyond the time fixed in the original articles; in
fact, this was specifically prohibited by Section 18, which provided that "any
corporation may amend its articles of incorporation by a majority vote of its
board of directors or trustees and the vote or written assent of two-thirds of its
members, if it be a non-stock corporation, or if it be a stock corporation, by
the vote or written assent of the stockholders representing at least two-thirds of
the subscribed capital stock of the corporation ... : Provided, however, That
the life of said corporation shall not be extended by said amendment beyond
the fixed in the original articles ... "
This prohibition, which incidentally has since been deleted, made it necessary
for the Old and New Corporations to enter into the questioned merger, to
enable the former to continue its unfinished business through the latter.
The procedure for such merger was prescribed in Section 28 1/2 of the old
Corporation Law which, although not expressly authorizing a merger by name
(as the new Corporation Code now does in its Section 77), provided that "a
corporation may, by action taken at any meeting of its board of directors, sell,
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
lease, exchange, or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for
such considerations, which may be money, stocks, bond, or other instruments
for the payment of money or other property or other considerations, as its
board of directors deem expedient." The transaction contemplated in the old
law covered the second type of merger defined by Section 35 of the Tax
Code as "the acquisition by one corporation of all or substantially all of the
properties of another corporation solely for stock," which is precisely what
happened in the present case.
What is also worth noting is that, as in the case of the Old Corporation when it
was dissolved on December 31, 1958, there has been no distribution of the
assets of the New Corporation since then and up to now, as far as the record
discloses. To date, the private respondents have not derived any benefit from
the merger of the Old Corporation and the New Corporation almost three
decades earlier that will make them subject to the capital gains tax under
Section 35. They are no more liable now than they were when the merger
took effect in 1959, as the merger, being genuine, exempted them under the
law from such tax.
By this decision, the government is, of course, not left entirely without recourse,
at least in the future. The fact is that the merger had merely deferred the
claim for taxes, which may be asserted by the government later, when gains
are realized and benefits are distributed among the stockholders as a result of
the merger. In other words, the corresponding taxes are not forever foreclosed
or forfeited but may at the proper time and without prejudice to the
government still be imposed upon the private respondents, in accordance
with Section 35(c) (4) of the Tax Code. Then, in assessing the tax, "the basis of
the property transferred in the hands of the transferee shall be the same as it
would be in the hands of the transferor, increased by the amount of gain
recognized to the transferor on the transfer." The only inhibition now is that
time has not yet come.
The reason for this conclusion is traceable to the purpose of the legislature in
adopting the provision of law in question. The basic Idea was to correct the
Tax Code which, by imposing taxes on corporate combinations and
expansions, discouraged the same to the detriment of economic progress,
particularly the promotion of local industry. Speaking of this problem, HB No.
Page 354
 DUMAUAL, JEANNE PAULINE J. 2019-2020

7233, which was subsequently enacted into R.A. No. 1921 embodying Section
35 as now worded, declared in the Explanatory Note:

The exemption from the tax of the gain derived from

exchanges of stock solely for stock of another corporation
resulting from corporate mergers or consolidations under the
above provisions, as amended, was intended to encourage
corporations in pooling, combining or expanding their
resources conducive to the economic development of the
country. 3

Our ruling then is that the merger in question involved a pooling of resources
aimed at the continuation and expansion of business and so came under the
letter and intendment of the National Internal Revenue Code, as amended
by the abovecited law, exempting from the capital gains tax exchanges of
property effected under lawful corporate combinations.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed in full, without
any pronouncement as to costs.

Atty. Santos, Taxation I Page 355

 DUMAUAL, JEANNE PAULINE J. 2019-2020

G.R. No. L-69259 January 26, 1988 the signed conformity and consent of lessors Delfin Pacheco
and Pelagia Pacheco (Exhs. B to B-6 inclusive)
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs. The contract of lease, as well as the assignment of lease were
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, annotated at he back of the title, as per stipulation of the
INC., respondents. parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed

between lessors Delfin and Pelagia Pacheco and defendant
GUTIERREZ, JR., J.: Delpher Trades Corporation whereby the former conveyed to
the latter the leased property (TCT No.T-4240) together with
another parcel of land also located in Malinta Estate,
The petitioners question the decision of the Intermediate Appellate Court
Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of
which sustained the private respondent's contention that the deed of
stock of defendant corporation with a total value of
exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
of land to Delpher Trades Corporation in exchange for 2,500 shares of stock
was actually a deed of sale which violated a right of first refusal under a lease
contract. On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes
Philippines, Inc., filed an amended complaint for reconveyance of Lot. No.
Briefly, the facts of the case are summarized as follows:
1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were Pacheco.
the owners of 27,169 square meters of real estate Identified as
Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff.
Valenzuela), Province of Bulacan (now Metro Manila) which is
The dispositive portion of the decision reads:
covered by Transfer Certificate of Title No. T-4240 of the
Bulacan land registry.
ACCORDINGLY, the judgment is hereby rendered declaring
the valid existence of the plaintiffs preferential right to acquire
On April 3, 1974, the said co-owners leased to Construction
the subject property (right of first refusal) and ordering the
Components International Inc. the same property and
defendants and all persons deriving rights therefrom to
providing that during the existence or after the term of this
convey the said property to plaintiff who may offer to acquire
lease the lessor should he decide to sell the property leased
the same at the rate of P14.00 per square meter, more or less,
shall first offer the same to the lessee and the letter has the
for Lot 1095 whose area is 27,169 square meters only. Without
priority to buy under similar conditions (Exhibits A to A-5)
pronouncement as to attorney's fees and costs. (Appendix I;
Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
On August 3, 1974, lessee Construction Components
International, Inc. assigned its rights and obligations under the
The lower court's decision was affirmed on appeal by the Intermediate
contract of lease in favor of Hydro Pipes Philippines, Inc. with
Appellate Court.

Atty. Santos, Taxation I Page 356


The defendants-appellants, now the petitioners, filed a petition for certiorari to
review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set
aside the resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the
petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private
respondent") will acquire from petitioners a parcel
of industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit of
the toll expressway) for only P14/sq. meter, or a total
of P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first
refusal even if there is no "sale" or transfer of actual ownership
interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of
actual ownership interests, private respondent will acquire the
land not under "similar conditions" by which it was transferred
to petitioner Delpher Trades Corporation, as provided in the
same contractual provision invoked by private respondent.
(pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of
the properties executed by the Pachecos on the one hand and the Delpher
Trades Corporation on the other was meant to be a contract of sale which, in
effect, prejudiced the private respondent's right of first refusal over the leased
property included in the "deed of exchange."
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Eduardo Neria, a certified public accountant and son-in-law of the late
Pelagia Pacheco testified that Delpher Trades Corporation is a family
corporation; that the corporation was organized by the children of the two
spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land
leased to Hydro Pipes Philippines in order to perpetuate their control over the
property through the corporation and to avoid taxes; that in order to
accomplish this end, two pieces of real estate, including Lot No. 1095 which
had been leased to Hydro Pipes Philippines, were transferred to the
corporation; that the leased property was transferred to the corporation by
virtue of a deed of exchange of property; that in exchange for these
properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of
stock which are equivalent to a 55% majority in the corporation because the
other owners only owned 2,000 shares; and that at the time of incorporation,
he knew all about the contract of lease of Lot. No. 1095 to Hydro Pipes
Philippines. In the petitioners' motion for reconsideration, they refer to this
scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually
no transfer of ownership of the subject parcel of land since the Pachecos
remained in control of the property. Thus, the petitioners allege: "Considering
that the beneficial ownership and control of petitioner corporation remained
in the hands of the original co-owners, there was no transfer of actual
ownership interests over the land when the same was transferred to petitioner
corporation in exchange for the latter's shares of stock. The transfer of
ownership, if anything, was merely in form but not in substance. In reality,
petitioner corporation is a mere alter ego or conduit of the Pacheco co-
owners; hence the corporation and the co-owners should be deemed to be
the same, there being in substance and in effect an Identity of interest." (p.
254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They
argue that there was no sale and that they exchanged the land for shares of
stocks in their own corporation. "Hence, such transfer is not within the letter, or
even spirit of the contract. There is a sale when ownership is transferred for a
price certain in money or its equivalent (Art. 1468, Civil Code) while there is a
barter or exchange when one thing is given in consideration of another thing
(Art. 1638, Civil Code)." (pp. 254-255, Rollo)
Page 357

On the other hand, the private respondent argues that Delpher Trades
Corporation is a corporate entity separate and distinct from the Pachecos.
Thus, it contends that it cannot be said that Delpher Trades Corporation is the
Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having
treated Delpher Trades Corporation as such a separate and distinct corporate
entity, is not a party who may allege that this separate corporate existence
should be disregarded. It maintains that there was actual transfer of ownership
interests over the leased property when the same was transferred to Delpher
Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or from
individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing
Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their
properties, the Pachecos acquired 2,500 original unissued no par value shares
of stocks of the Delpher Trades Corporation. Consequently, the Pachecos
became stockholders of the corporation by subscription "The essence of the
stock subscription is an agreement to take and pay for original unissued shares
of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines,
Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value
shares in exchange for their properties.
A no-par value share does not purport to represent any
stated proportionate interest in the capital stock measured
by value, but only an aliquot part of the whole number of
such shares of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is only an
aliquot sharer in the assets of the corporation. But this
character of proportionate interest is not hidden beneath a
false appearance of a given sum in money, as in the case of
par value shares. The capital stock of a corporation issuing
only no-par value shares is not set forth by a stated amount of
money, but instead is expressed to be divided into a stated
number of shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
have, to the extent of 100/1,000 or 1/10. Thus, by removing
the par value of shares, the attention of persons interested in
the financial condition of a corporation is focused upon the
value of assets and the amount of its debts. (Agbayani,
Commentaries and Jurisprudence on the Commercial Laws
of the Philippines, Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of
the real estate. Land valued at P300.00 a square meter was turned over to the
family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock,
the Pachecos have control of the corporation. Their equity capital is 55% as
against 45% of the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business conduit of the
Pachecos. What they really did was to invest their properties and change the
nature of their ownership from unincorporated to incorporated form by
organizing Delpher Trades Corporation to take control of their properties and
at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of
taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with
their execution of a deed of exchange on
the properties for no par value shares of the
defendant corporation?
A Yes, sir.
Page 358
 DUMAUAL, JEANNE PAULINE J. 2019-2020
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and
corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?)
What are these benefits to the spouses of this
deed of exchange?
A Continuous control of the property, tax
exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said
spouses from the point of view of taxation in
entering in the deed of exchange?
A Having fulfilled the conditions in the
income tax law, providing for tax free
exchange of property, they were able to
execute the deed of exchange free from
income tax and acquire a corporation.
Q What provision in the income tax law are
you referring to?
A I refer to Section 35 of the National Internal
Revenue Code under par. C-sub-par. (2)
Exceptions regarding the provision which I
quote: "No gain or loss shall also be
recognized if a person exchanges his
property for stock in a corporation of which
Atty. Santos, Taxation I
as a result of such exchange said person
alone or together with others not exceeding
four persons gains control of said
corporation."
Q Did you explain to the spouses this benefit
at the time you executed the deed of
exchange?
A Yes, sir
Q You also, testified during the last hearing
that the decision to have no par value share
in the defendant corporation was for the
purpose of flexibility. Can you explain
flexibility in connection with the ownership of
the property in question?
A There is flexibility in using no par value
shares as the value is determined by the
board of directors in increasing
capitalization. The board can fix the value of
the shares equivalent to the capital
requirements of the corporation.
Q Now also from the point of taxation, is
there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it
can continue to hold on to the property
indefinitely for a period of at least 50 years.
On the other hand, if the property is held by
the spouse the property will be tied up in
succession proceedings and the
consequential payments of estate and
inheritance taxes when an owner dies.
Page 359
 DUMAUAL, JEANNE PAULINE J. 2019-2020

Q Now what advantage is this continuity in

relation to ownership by a particular person
of certain properties in respect to taxation?

A The property is not subjected to taxes on

succession as the corporation does not die.

Q So the benefit you are talking about are

inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this

"estate planning" scheme resorted to by the Pachecos. "The legal right of a
taxpayer to decrease the amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits, cannot be doubted."
(Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing
Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher

Trades Corporation cannot be considered a contract of sale. There was no
transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another.
The ownership remained in the same hands. Hence, the private respondent
has no basis for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision

and resolution of the then Intermediate Appellate Court are REVERSED and
SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then
Court of First Instance of Bulacan is DISMISSED. No costs.

Atty. Santos, Taxation I Page 360


[G.R. NO. 176667 : November 22, 2007]
ERICSSON TELECOMMUNICATIONS, INC., Petitioner, v. CITY OF PASIG,
represented by its City Mayor, Hon. Vicente P. Eusebio, et al.*, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Ericsson Telecommunications, Inc. (petitioner), a corporation with principal
office in Pasig City, is engaged in the design, engineering, and marketing of
telecommunication facilities/system. In an Assessment Notice dated October
25, 2000 issued by the City Treasurer of Pasig City, petitioner was assessed a
business tax deficiency for the years 1998 and 1999 amounting
to P9,466,885.00 and P4,993,682.00, respectively, based on its gross revenues
as reported in its audited financial statements for the years 1997 and 1998.
Petitioner filed a Protest dated December 21, 2000, claiming that the
computation of the local business tax should be based on gross receipts and
not on gross revenue.
The City of Pasig (respondent) issued another Notice of Assessment to
petitioner on November 19, 2001, this time based on business tax deficiencies
for the years 2000 and 2001, amounting to P4,665,775.51 and P4,710,242.93,
respectively, based on its gross revenues for the years 1999 and 2000. Again,
petitioner filed a Protest on January 21, 2002, reiterating its position that the
local business tax should be based on gross receipts and not gross revenue.
Respondent denied petitioner's protest and gave the latter 30 days within
which to appeal the denial. This prompted petitioner to file a Petition for
Review 1 with the Regional Trial Court (RTC) of Pasig, Branch 168, praying for
the annulment and cancellation of petitioner's deficiency local business taxes
totaling P17,262,205.66.
Respondent and its City Treasurer filed a motion to dismiss on the grounds that
the court had no jurisdiction over the subject matter and that petitioner had
no legal capacity to sue. The RTC denied the motion in an Order dated
December 3, 2002 due to respondents' failure to include a notice of hearing.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Thereafter, the RTC declared respondents in default and allowed petitioner to
present evidence ex - parte.
In a Decision2 dated March 8, 2004, the RTC canceled and set aside the
assessments made by respondent and its City Treasurer. The dispositive portion
of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and ordering defendants to CANCEL and SET ASIDE Assessment Notice
dated October 25, 2000 and Notice of Assessment dated November 19, 2001.
SO ORDERED.3
On appeal, the Court of Appeals (CA) rendered its Decision 4 dated
November 20, 2006, the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby ordered SET ASIDE and a
new one entered DISMISSING the plaintiff/appellee's complaint WITHOUT
PREJUDICE.
SO ORDERED.5
The CA sustained respondent's claim that the petition filed with the RTC should
have been dismissed due to petitioner's failure to show that Atty. Maria
Theresa B. Ramos (Atty. Ramos), petitioner's Manager for Tax and Legal Affairs
and the person who signed the Verification and Certification of Non-Forum
Shopping, was duly authorized by the Board of Directors.
Its motion for reconsideration having been denied in a Resolution6 dated
February 9, 2007, petitioner now comes before the Court via a Petition for
Review on Certiorari under Rule 45 of the Rules of Court, on the following
grounds:
(1) THE COURT OF APPEALS ERRED IN DISMISSING THE CASE FOR LACK OF
SHOWING THAT THE SIGNATORY OF THE VERIFICATION/ CERTIFICATION IS NOT
SPECIFICALLY AUTHORIZED FOR AND IN BEHALF OF PETITIONER.
Page 361

(2) THE COURT OF APPEALS ERRED IN GIVING DUE COURSE TO RESPONDENT'S
APPEAL, CONSIDERING THAT IT HAS NO JURISDICTION OVER THE SAME, THE
MATTERS TO BE RESOLVED BEING PURE QUESTIONS OF LAW, JURISDICTION OVER
WHICH IS VESTED ONLY WITH THIS HONORABLE COURT.
(3) ASSUMING THE COURT OF APPEALS HAS JURISDICTION OVER RESPONDENT'S
APPEAL, SAID COURT ERRED IN NOT DECIDING ON THE MERITS OF THE CASE
FOR THE SPEEDY DISPOSITION THEREOF, CONSIDERING THAT THE DEFICIENCY
LOCAL BUSINESS TAX ASSESSMENTS ISSUED BY RESPONDENT ARE CLEARLY
INVALID AND CONTRARY TO THE PROVISIONS OF THE PASIG REVENUE CODE
AND THE LOCAL GOVERNMENT CODE.7
After receipt by the Court of respondent's complaint and petitioner's reply, the
petition is given due course and considered ready for decision without the
need of memoranda from the parties.
The Court grants the petition.
First, the complaint filed by petitioner with the RTC was erroneously dismissed
by the CA for failure of petitioner to show that its Manager for Tax and Legal
Affairs, Atty. Ramos, was authorized by the Board of Directors to sign the
Verification and Certification of Non-Forum Shopping in behalf of the
petitioner corporation.
Time and again, the Court, under special circumstances and for compelling
reasons, sanctioned substantial compliance with the rule on the submission of
verification and certification against non-forum shopping.8
In General Milling Corporation v. National Labor Relations Commission,9 the
Court deemed as substantial compliance the belated attempt of the
petitioner to attach to the motion for reconsideration the board
resolution/secretary's certificate, stating that there was no attempt on the part
of the petitioner to ignore the prescribed procedural requirements.
In Shipside Incorporated v. Court of Appeals,10 the authority of the petitioner's
resident manager to sign the certification against forum shopping was
submitted to the CA only after the latter dismissed the petition. The Court
considered the merits of the case and the fact that the petitioner
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
subsequently submitted a secretary's certificate, as special circumstances or
compelling reasons that justify tempering the requirements in regard to the
certificate of non-forum shopping.11
There were also cases where there was complete non-compliance with the
rule on certification against forum shopping and yet the Court proceeded to
decide the case on the merits in order to serve the ends of substantial
justice.12
In the present case, petitioner submitted a Secretary's Certificate signed on
May 6, 2002, whereby Atty. Ramos was authorized to file a protest at the local
government level and to "sign, execute and deliver any and all papers,
documents and pleadings relative to the said protest and to do and perform
all such acts and things as may be necessary to effect the foregoing."13
Applying the foregoing jurisprudence, the subsequent submission of the
Secretary's Certificate and the substantial merits of the petition, which will be
shown forthwith, justify a relaxation of the rule.
Second, the CA should have dismissed the appeal of respondent as it has no
jurisdiction over the case since the appeal involves a pure question of law. The
CA seriously erred in ruling that the appeal involves a mixed question of law
and fact necessitating an examination and evaluation of the audited
financial statements and other documents in order to determine petitioner's
tax base.
There is a question of law when the doubt or difference is on what the law is
on a certain state of facts. On the other hand, there is a question of fact when
the doubt or difference is on the truth or falsity of the facts alleged. 14 For a
question to be one of law, the same must not involve an examination of the
probative value of the evidence presented by the litigants or any of them. The
resolution of the issue must rest solely on what the law provides on the given
set of circumstances. Once it is clear that the issue invites a review of the
evidence presented, the question posed is one of fact. Thus, the test of
whether a question is one of law or of fact is not the appellation given to such
question by the party raising the same; rather, it is whether the appellate court
can determine the issue raised without reviewing or evaluating the evidence,
in which case, it is a question of law; otherwise it is a question of fact.15
Page 362
 DUMAUAL, JEANNE PAULINE J. 2019-2020

There is no dispute as to the veracity of the facts involved in the present case. However, the higher interest of substantial justice dictates that this Court
While there is an issue as to the correct amount of local business tax to be should resolve the same, to evade further repetition of erroneous
paid by petitioner, its determination will not involve a look into petitioner's interpretation of the law,16 for the guidance of the bench and bar.
audited financial statements or documents, as these are not disputed; rather,
petitioner's correct tax liability will be ascertained through an interpretation of As earlier stated, the substantive issue in this case is whether the local business
the pertinent tax laws, i.e., whether the local business tax, as imposed by the tax on contractors should be based on gross receipts or gross revenue.
Pasig City Revenue Code (Ordinance No. 25-92) and the Local Government
Code of 1991, should be based on gross receipts, and not on gross revenue
Respondent assessed deficiency local business taxes on petitioner based on
which respondent relied on in computing petitioner's local business tax
the latter's gross revenue as reported in its financial statements, arguing
deficiency. This, clearly, is a question of law, and beyond the jurisdiction of the
that gross receipts is synonymous with gross earnings/revenue, which, in turn,
CA.
includes uncollected earnings. Petitioner, however, contends that only the
portion of the revenues which were actually and constructively received
Section 2(c), Rule 41 of the Rules of Court provides that in all cases where should be considered in determining its tax base.
questions of law are raised or involved, the appeal shall be to this Court by
Petition for Review on Certiorari under Rule 45.
Respondent is authorized to levy business taxes under Section 143 in relation to
Section 151 of the Local Government Code.
Thus, as correctly pointed out by petitioner, the appeal before the CA should
have been dismissed, pursuant to Section 5(f), Rule 56 of the Rules of Court,
Insofar as petitioner is concerned, the applicable provision is subsection (e),
which provides:
Section 143 of the same Code covering contractors and other independent
contractors, to wit:
Sec. 5. Grounds for dismissal of appeal. - The appeal may be dismissed motu
proprio or on motion of the respondent on the following grounds:
SEC. 143. Tax on Business. - The municipality may impose taxes on the following
businesses:
xxx
xxx
(f) Error in the choice or mode of appeal.
(e) On contractors and other independent contractors, in accordance with
xxx the following schedule:

Third, the dismissal of the appeal, in effect, would have sustained the RTC With gross receipts for the preceding Amount of Tax Per
Decision ordering respondent to cancel the Assessment Notices issued by calendar year in the amount of: Annum
respondent, and therefore, would have rendered moot and academic the
issue of whether the local business tax on contractors should be based
on gross receipts or gross revenues. xxx

(Emphasis supplied)

Atty. Santos, Taxation I Page 363


The above provision specifically refers to gross receipts which is defined under
Section 131 of the Local Government Code, as follows:
xxx
(n) "Gross Sales or Receipts" include the total amount of money or its
equivalent representing the contract price, compensation or service fee,
including the amount charged or materials supplied with the services and the
deposits or advance payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another
person excluding discounts if determinable at the time of sales, sales return,
excise tax, and value-added tax (VAT);
xxx
The law is clear. Gross receipts include money or its equivalent actually or
constructively received in consideration of services rendered or articles sold,
exchanged or leased, whether actual or constructive.
In Commissioner of Internal Revenue v. Bank of Commerce,17 the Court
interpreted gross receipts as including those which were actually or
constructively received, viz.:
Actual receipt of interest income is not limited to physical receipt. Actual
receipt may either be physical receipt or constructive receipt. When the
depository bank withholds the final tax to pay the tax liability of the lending
bank, there is prior to the withholding a constructive receipt by the lending
bank of the amount withheld. From the amount constructively received by the
lending bank, the depository bank deducts the final withholding tax and
remits it to the government for the account of the lending bank. Thus, the
interest income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies
that the amount of the tax withheld comes from the income earned by the
taxpayer. Since the amount of the tax withheld constitutes income earned by
the taxpayer, then that amount manifestly forms part of the taxpayer's gross
receipts. Because the amount withheld belongs to the taxpayer, he can
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
transfer its ownership to the government in payment of his tax liability. The
amount withheld indubitably comes from income of the taxpayer, and thus
forms part of his gross receipts. (Emphasis supplied)cralawlibrary
Further elaboration was made by the Court in Commissioner of Internal
Revenue v. Bank of the Philippine Islands,18 in this wise:
Receipt of income may be actual or constructive. We have held that the
withholding process results in the taxpayer's constructive receipt of the income
withheld, to wit:
By analogy, we apply to the receipt of income the rules
on actual and constructive possession provided in Articles 531 and 532 of our
Civil Code.
Under Article 531:
"Possession is acquired by the material occupation of a thing or the exercise of
a right, or by the fact that it is subject to the action of our will, or by the proper
acts and legal formalities established for acquiring such right."
Article 532 states:
"Possession may be acquired by the same person who is to enjoy it, by his
legal representative, by his agent, or by any person without any power
whatever; but in the last case, the possession shall not be considered as
acquired until the person in whose name the act of possession was executed
has ratified the same, without prejudice to the juridical consequences
of negotiorum gestio in a proper case."
The last means of acquiring possession under Article 531 refers to juridical
acts'the acquisition of possession by sufficient title to which the law gives the
force of acts of possession. Respondent argues that only items of
income actually received should be included in its gross receipts. It claims that
since the amount had already been withheld at source, it did not have actual
receipt thereof.
Page 364

We clarify. Article 531 of the Civil Code clearly provides that the acquisition of
the right of possession is through the proper acts and legal formalities
established therefor. The withholding process is one such act. There may not
be actual receipt of the income withheld; however, as provided for in Article
532, possession by any person without any power whatsoever shall be
considered as acquired when ratified by the person in whose name the act of
possession is executed.
In our withholding tax system, possession is acquired by the payor as the
withholding agent of the government, because the taxpayer ratifies the very
act of possession for the government. There is thus constructive receipt. The
processes of bookkeeping and accounting for interest on deposits and yield
on deposit substitutes that are subjected to FWT are indeed for legal
purposes'tantamount to delivery, receipt or remittance.19
Revenue Regulations No. 16-2005 dated September 1, 200520 defined and
gave examples of "constructive receipt", to wit:
SEC. 4. 108-4. Definition of Gross Receipts. - - x x x
"Constructive receipt" occurs when the money consideration or its equivalent
is placed at the control of the person who rendered the service without
restrictions by the payor. The following are examples of constructive receipts:
(1) deposit in banks which are made available to the seller of services without
restrictions;
(2) issuance by the debtor of a notice to offset any debt or obligation and
acceptance thereof by the seller as payment for services rendered;
andcralawlibrary
(3) transfer of the amounts retained by the payor to the account of the
contractor.
There is, therefore, constructive receipt, when the consideration for the articles
sold, exchanged or leased, or the services rendered has already been placed
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
under the control of the person who sold the goods or rendered the services
without any restriction by the payor.
In contrast, gross revenue covers money or its equivalent actually or
constructively received, including the value of services rendered or articles
sold, exchanged or leased, the payment of which is yet to be received. This is
in consonance with the International Financial Reporting Standards, 21 which
defines revenue as the gross inflow of economic benefits (cash, receivables,
and other assets) arising from the ordinary operating activities of an enterprise
(such as sales of goods, sales of services, interest, royalties, and
dividends),22 which is measured at the fair value of the consideration received
or receivable.23
As aptly stated by the RTC:
"[R]evenue from services rendered is recognized when services have been
performed and are billable." It is "recorded at the amount received
or expected to be received." (Section E [17] of the Statements of Financial
Accounting Standards No. 1).24
In petitioner's case, its audited financial statements reflect income or revenue
which accrued to it during the taxable period although not yet actually or
constructively received or paid. This is because petitioner uses the accrual
method of accounting, where income is reportable when all the events have
occurred that fix the taxpayer's right to receive the income, and the amount
can be determined with reasonable accuracy; the right to receive income,
and not the actual receipt, determines when to include the amount in gross
income.25
The imposition of local business tax based on petitioner's gross revenue will
inevitably result in the constitutionally proscribed double taxation - taxing of
the same person twice by the same jurisdiction for the same thing 26 -
inasmuch as petitioner's revenue or income for a taxable year will definitely
include its gross receipts already reported during the previous year and for
which local business tax has already been paid.
Thus, respondent committed a palpable error when it assessed petitioner's
local business tax based on its gross revenue as reported in its audited
Page 365
 DUMAUAL, JEANNE PAULINE J. 2019-2020

financial statements, as Section 143 of the Local Government Code and

Section 22(e) of the Pasig Revenue Code clearly provide that the tax should
be computed based on gross receipts.

WHEREFORE, the petition is GRANTED. The Decision dated November 20, 2006
and Resolution dated February 9, 2007 issued by the Court of Appeals are SET
ASIDE, and the Decision dated March 8, 2004 rendered by the Regional Trial
Court of Pasig, Branch 168 is REINSTATED.

Atty. Santos, Taxation I Page 366


[G.R. NOS. 156637/162004 December 14, 2005]
PHILAM ASSET MANAGEMENT, INC., Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
DECISION
PANGANIBAN, J.:
Under Section 76 of the National Internal Revenue Code, a taxable
corporation with excess quarterly income tax payments may apply for either a
tax refund or a tax credit, but not both. The choice of one precludes the
other. Failure to indicate a choice, however, will not bar a valid request for a
refund, should this option be chosen by the taxpayer later on.
The Case
Before us are two consolidated Petitions for Review1 under Rule 45 of the Rules
of Court, seeking to review and reverse the December 19, 2002 Decision 2 of
the Court of Appeals (CA) in CA-GR SP No. 69197 and its January 30, 2004
Decision3 in CA-GR SP No. 70882.
The dispositive portion of the assailed December 19, 2002 Decision, on the one
hand, reads as follows:
"WHEREFORE, the petition is hereby DENIED. The assailed decision and
resolution of the Court of Tax Appeals are AFFIRMED."4
That of the assailed January 30, 2004 Decision, on the other hand, was similarly
worded, except that it referred to the May 2, 2002 Decision of the Court of Tax
Appeals (CTA).5
The Facts
In GR No. 156637, the CA adopted the CTA's narration of the facts as follows:
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
"Petitioner, formerly Philam Fund Management, Inc., is a domestic corporation
duly organized and existing under the laws of the Republic of the Philippines. It
acts as the investment manager of both Philippine Fund, Inc. (PFI) and Philam
Bond Fund, Inc. (PBFI), which are open-end investment companies[,] in the
sale of their shares of stocks and in the investment of the proceeds of these
sales into a diversified portfolio of debt and equity securities. Being an
investment manager, [p]etitioner provides management and technical
services to PFI and PBFI. Petitioner is, likewise, PFI's and PBFI's principal
distributor which takes charge of the sales of said companies' shares to
prospective investors. Pursuant to the separate [m]anagement and
[d]istribution agreements between the [p]etitioner and PFI and PBFI, both PFI
and PBFI [agree] to pay the [p]etitioner, by way of compensation for the
latter's services and facilities, a monthly management fee from which PFI and
PBFI withhold the amount equivalent to [a] five percent (5%) creditable tax[,]
pursuant to the Expanded Withholding Tax Regulations.
"On April 3, 1998, [p]etitioner filed its [a]nnual [c]orporate [i]ncome [t]ax
[r]eturn for the taxable year 1997 representing a net loss of P2,689,242.00.
Consequently, it failed to utilize the creditable tax withheld in the amount of
Five Hundred Twenty-Two Thousand Ninety-Two Pesos (P522,092.00)
representing [the] tax withheld by [p]etitioner's withholding agents, PFI and
PBFI[,] on professional fees.
"The creditable tax withheld by PFI and PBFI in the amount of P522,092.00 is
broken down as follows:
PFI P496,702.05
PBFI 25,389.66_
Total P522,091.71
"On September 11, 1998, [p]etitioner filed an administrative claim for refund
with the [Bureau of Internal Revenue (BIR)] - - Appellate Division in the amount
of P522,092.00 representing unutilized excess tax credits for calendar year
1997. Thereafter, on July 28, 1999, a written request was filed with the same
division for the early resolution of [p]etitioner's claim for refund.
Page 367

"Respondent did not act on [p]etitioner's claim for refund[;] hence, a Petition
for Review was filed with this Court6 on November 29, 1999 to toll the running
of the two-year prescriptive period."7
On October 9, 2001, the CTA rendered a Decision denying petitioner's Petition
for Review. Its Motion for Reconsideration was likewise denied in a Resolution
dated January 29, 2002.
In GR No. 162004, the antecedents are narrated by the CA in this wise:
"On April 13, 1999, [petitioner] filed its Annual Income Tax Return with the [BIR]
for the taxable year 1998 declaring a net loss of P1,504,951.00. Thus, there was
no tax due against [petitioner] for the taxable year 1998. Likewise, [petitioner]
had an unapplied creditable withholding tax in the amount of P459,756.07,
which amount had been previously withheld in that year by petitioner's
withholding agents[,] namely x x x [PFI], x x x [PBFI], and Philam Strategic
Growth Fund, Inc. (PSGFI).
"In the next succeeding year, [petitioner] had a tax due in the amount
of P80,042.00, and a creditable withholding tax in the amount of P915,995.00.
[Petitioner] likewise declared in its 1999 tax return the amount of P459,756.07,
which represents its prior excess credit for taxable year 1998.
"Thereafter, on November 14, 2000, [petitioner] filed with the Revenue District
Office No. 50, Revenue Region No. 8, a written administrative claim for refund
with respect to the unapplied creditable withholding tax of P459,756.07.
According to [petitioner,] the amount of P80,042.00, representing the tax due
for the taxable year 1999 has been credited from its P915,995.00 creditable
withholding tax for taxable year 1999, thus leaving its 1998 creditable
withholding tax in the amount of P459,756.07 still unapplied.
"The claim for refund yielded no action on the part of the BIR. [Petitioner] then
filed a Petition for Review before the CTA on December 26, 2000, asserting
that it is entitled [to] the refund [of P459,756.07,] since said amount has not
been applied against its tax liabilities in the taxable year 1998.
"On May 2, 2002, the CTA rendered [a] x x x decision denying [petitioner's]
Petition for Review. x x x."8
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Ruling of the Court of Appeals
The CA denied the claim of petitioner for a refund of the latter's excess
creditable taxes withheld for the years 1997 and 1998, despite compliance
with the basic requirements of Revenue Regulations (RR) No. 12-94. The
appellate court pointed out that, in the respective Income Tax Returns (ITRs)
for both years, petitioner did not indicate its option to have the amounts either
refunded or carried over and applied to the succeeding year. It was held that
to request for either a refund or a credit of income tax paid, a corporation
must signify its intention by marking the corresponding option box on its annual
corporate adjustment return.
The CA further held in GR No. 156637 that the failure to present the 1998 ITR
was fatal to the claim for a refund, because there was no way to verify if the
tax credit for 1997 could not have been applied against the 1998 tax liabilities
of petitioner.
In GR No. 162004, however, the subsequent acts of petitioner demonstrated its
option to carry over its tax credit for 1998, even if it again failed to tick the
appropriate box for that option in its 1998 ITR. Under RR 12-94, its failure to
indicate that option resulted in the automatic carry-over of any excess tax
credit for the prior year. The appellate court said that the government would
not be unjustly enriched by denying a refund, because there would be no
forfeiture of the amount in its favor. The amount claimed as a refund would
remain in the account of the taxpayer until utilized in succeeding taxable
years.
Hence, these Petitions.9
The Issues
Petitioner raises two issues in GR No. 156637 for the Court's consideration:
"A.
Page 368

"Whether or not the failure of the [p]etitioner to indicate in its [a]nnual
[i]ncome [t]ax [r]eturn the option to refund its creditable withholding tax is
fatal to its claim for refund.
"B.
"Whether or not the presentation in evidence of the [p]etitioner's [a]nnual
[i]ncome [t]ax [r]eturn for the succeeding calendar year is a legal requisite in
a claim for refund of unapplied creditable withholding tax."10
In GR No. 162004, petitioner raises one question only:
"Whether or not the petitioner is entitled to the refund of its unutilized
creditable withholding tax in the taxable year 1998 in the amount
of P459,756.07."11
In both cases, a simple issue needs to be resolved: whether petitioner is
entitled to a refund of its creditable taxes withheld for taxable years 1997 and
1998.
The Court's Ruling
The Petition in GR No. 156637 is meritorious, but that in GR No. 162004 is not.
Main Issue:
Entitlement to Refund
The provision on the final adjustment return (FAR) was originally found in
Section 69 of Presidential Decree (PD) No. 1158, otherwise known as the
"National Internal Revenue Code of 1977."12 On August 1, 1980, this provision
was restated as Section 8613 in PD 1705.14
On November 5, 1985, all prior amendments and those introduced by PD
199415 were codified16 into the National Internal Revenue Code (NIRC) of
1985, as a result of which Section 86 was renumbered17 as Section 79.18
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all "net
income" phrases appearing in Title II of the NIRC of 1977 to "taxable income."
Section 79 of the NIRC of 1985,19 however, was not amended.
On July 25, 1987, EO 27320 renumbered21 Section 86 of the NIRC22 as Section
76,23 which was also rearranged24 to fall under Chapter 10 of Title II of the
NIRC. Section 79, which had earlier been renumbered by PD 1994, remained
unchanged.
Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD
1705; later, as Section 79 under PD 1994;25 then, as Section 76 under EO
273.26 Finally, after being renumbered and reduced to the chaff of a grain,
Section 69 was repealed by EO 37.
Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as
Section 76, which reads:
"Section 76. Final Adjustment Return. - - Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net
income27 for the preceding calendar or fiscal year. If the sum of the quarterly
tax payments made during the said taxable year is not equal to the total tax
due on the entire taxable net income 28 of that year the corporation shall
either:
"(a) Pay the excess tax still due; or
"(b) Be refunded the excess amount paid, as the case may be.
"In case the corporation is entitled to a refund of the excess estimated
quarterly income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable year."
GR No. 156637
This section applies to the first case before the Court. Differently numbered in
1977 but similarly worded 20 years later (1997), Section 76 offers two options to
Page 369

a taxable corporation whose total quarterly income tax payments in a given
taxable year exceeds its
total income tax due. These options are (1) filing for a tax refund or (2) availing
of a tax credit.
The first option is relatively simple. Any tax on income that is paid in excess of
the amount due the government may be refunded, provided that a taxpayer
properly applies for the refund.
The second option works by applying the refundable amount, as shown on
the FAR of a given taxable year, against the estimated quarterly income tax
liabilities of the succeeding taxable year.
These two options under Section 76 are alternative in nature. 29 The choice of
one precludes the other. Indeed, in Philippine Bank of Communications v.
Commissioner of Internal Revenue,30 the Court ruled that a corporation must
signify its intention - - whether to request a tax refund or claim a tax credit - -
by marking the corresponding option box provided in the FAR.31 While a
taxpayer is required to mark its choice in the form provided by the BIR, this
requirement is only for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same
excess income taxes paid. Failure to signify one's intention in the FAR does not
mean outright barring of a valid request for a refund, should one still choose
this option later on. A tax credit should be construed merely as an alternative
remedy to a tax refund under Section 76, subject to prior verification and
approval by respondent.32
The reason for requiring that a choice be made in the FAR upon its filing is to
ease tax administration,33 particularly the self-assessment and collection
aspects. A taxpayer that makes a choice expresses certainty or preference
and thus demonstrates clear diligence. Conversely, a taxpayer that makes no
choice expresses uncertainty or lack of preference and hence shows simple
negligence or plain oversight.
In the present case, respondent denied the claim of petitioner for a refund of
excess taxes withheld in 1997, because the latter
(1) had not indicated in its ITR for that year whether it was opting for a credit
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
or a refund; and (2) had not submitted as evidence its 1998 ITR, which could
have been the basis for determining whether its claimed 1997 tax credit had
not been applied against its 1998 tax liabilities.
Requiring that the ITR or the FAR of the succeeding year be presented to the
BIR in requesting a tax refund has no basis in law and jurisprudence.
First, Section 76 of the Tax Code does not mandate it. The law merely requires
the filing of the FAR for the preceding - - not the succeeding - - taxable year.
Indeed, any refundable amount indicated in the FAR of the preceding
taxable year may be credited against the estimated income tax liabilities for
the taxable quarters of the succeeding taxable year. However, nowhere is
there even a tinge of a hint in any of the provisions of the Tax Code that the
FAR of the taxable year following the period to which the tax credits are
originally being applied should also be presented to the BIR.
Second, Section 534 of RR 12-94, amending Section 10(a) of RR 6-85, merely
provides that claims for the refund of income taxes deducted and withheld
from income payments shall be given due course only (1) when it is shown on
the ITR that the income payment received is being declared part of the
taxpayer's gross income; and (2) when the fact of withholding is established
by a copy of the withholding tax statement, duly issued by the payor to the
payee, showing the amount paid and the income tax withheld from that
amount.35
Undisputedly, the records do not show that the income payments received by
petitioner have not been declared as part of its gross income, or that the fact
of withholding has not been established. According to the CTA, "[p]etitioner
substantially complied with the x x x requirements" of RR 12-94 "[t]hat the fact
of withholding is established by a copy of a statement duly issued by the
payor (withholding agent) to the payee, showing the amount paid and the
amount of tax withheld therefrom; and x x x [t]hat the income upon which the
taxes were withheld were included in the return of the recipient."36
The established procedure is that a taxpayer that wants a cash refund shall
make a written request for it, and the ITR showing the excess expanded
withholding tax credits shall then be examined by the BIR. For the grant of
refund, RRs 12-94 and 6-85 state that all
Page 370

pertinent accounting records should be submitted by the taxpayer. These
records, however, actually refer only to (1) the withholding tax statements; (2)
the ITR of the present quarter to which the excess withholding tax credits are
being applied; and (3) the ITR of the quarter for the previous taxable year in
which the excess credits arose.37 To stress, these regulations implementing the
law do not require the proffer of the FAR for the taxable year following the
period to which the tax credits are being applied.
Third, there is no automatic grant of a tax refund. As a matter of procedure,
the BIR should be given the opportunity "to investigate and confirm the
veracity"38 of a taxpayer's claim, before it grants the refund. Exercising the
option for a tax refund or a tax credit does not ipso facto confer upon a
taxpayer the right to an immediate availment of the choice made. Neither
does it impose a duty on the government to allow tax collection to be at the
sole control of a taxpayer.39
Fourth, the BIR ought to have on file its own copies of petitioner's FAR for the
succeeding year, on the basis of which it could rebut the assertion that there
was a subsequent credit of the excess income tax payments for the previous
year. Its failure to present this vital document to support its contention against
the grant of a tax refund to petitioner is certainly fatal.
Fifth, the CTA should have taken judicial notice40 of the fact of filing and the
pendency of petitioner's subsequent claim for a refund of excess creditable
taxes withheld for 1998. The existence of the claim ought to be known by
reason of its judicial functions. Furthermore, it is decisive to and will easily
resolve the material issue in this case. If only judicial notice were taken earlier,
the fact that there was no carry-over of the excess creditable taxes withheld
for 1997 would have already been crystal clear.
Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in
writing within two years after payment of the taxes erroneously received by
the BIR.41 Despite the failure of petitioner
to make the appropriate marking in the BIR form, the filing of its written claim
effectively serves as an expression of its choice to request a tax refund,
instead of a tax credit. To assert that any future claim for a tax refund will be
instantly hindered by a failure to signify one's intention in the FAR is to render
nugatory the clear provision that allows for a two-year prescriptive period.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
In fact, in BPI-Family Savings Bank v. CA,42 this Court even ordered the refund
of a taxpayer's excess creditable taxes, despite the express declaration in the
FAR to apply the excess to the succeeding year.43 When circumstances show
that a choice of tax credit has been made, it should be respected. But when
indubitable circumstances clearly show that another choice - - a tax refund - -
is in order, it should be granted. "Technicalities and legalisms, however
exalted, should not be misused by the government to keep money not
belonging to it and thereby enrich itself at the expense of its law-abiding
citizens."44
In the present case, although petitioner did not mark the refund box in its 1997
FAR, neither did it perform any act indicating that it chose a tax credit. On the
contrary, it filed on September 11, 1998, an administrative claim for the refund
of its excess taxes withheld in 1997. In none of its quarterly returns for 1998 did it
apply the excess creditable taxes. Under these circumstances, petitioner is
entitled to a tax refund of its 1997 excess tax credits in the amount of P522,092.
GR No. 162004
As to the second case, Section 76 also applies. Amended by Republic Act
(RA) No. 8424, otherwise known as the "Tax Reform Act of 1997," it now states:
"SEC. 76. Final Adjustment Return. - - Every corporation liable to tax under
Section 27 shall file a final adjustment return covering the total taxable income
for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due
on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may
be.
"In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its final
Page 371

adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding
taxable years. Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor."
The carry-over option under Section 76 is permissive. A corporation that is
entitled to a tax refund or a tax credit for excess payment of quarterly income
taxes may carry over and credit the excess income taxes paid in a given
taxable year against the estimated income tax liabilities of the succeeding
quarters. Once chosen, the carry-over option shall be considered
irrevocable45 for that taxable period, and no application for a tax refund or
issuance of a tax credit certificate shall then be allowed.
According to petitioner, it neither chose nor marked the carry-over option box
in its 1998 FAR.46 As this option was not chosen, it seems that there is nothing
that can be considered irrevocable. In other words, petitioner argues that it is
still entitled to a refund of its 1998 excess income tax payments.
This argument does not hold water. The subsequent acts of petitioner reveal
that it has effectively chosen the carry-over option.
First, the fact that it filled out the portion "Prior Year's Excess Credits" in its 1999
FAR means that it categorically availed itself of the carry-over option. In fact,
the line that precedes that phrase in the BIR form clearly states "Less: Tax
Credits/Payments." The contention that it merely filled out that portion
because it was a requirement - - and that to have done otherwise would
have been tantamount to falsifying the FAR - - is a long shot.
The FAR is the most reliable firsthand evidence of corporate acts pertaining to
income taxes. In it are found the itemization and summary of additions to and
deductions from income taxes due. These entries are not without rhyme or
reason. They are required, because they facilitate the tax administration
process.
Atty. Santos, Taxation I
DUMAUAL, JEANNE PAULINE J. 2019-2020
Failure to indicate the amount of "prior year's excess credits" does not mean
falsification by a taxpayer of its current year's FAR. On the contrary, if an
application for a tax refund has been - - or will be - - filed, then that portion of
the BIR form should necessarily be blank, even if the FAR of the previous
taxable year already shows an overpayment in taxes.
Second, the resulting redundancy in the claim of petitioner for a refund of its
1998 excess tax credits on November 14, 200047 cannot be countenanced. It
cannot be allowed to avail itself of a tax refund and a tax credit at the same
time for the same excess income taxes paid. Besides, disallowing it from
getting a tax refund of those excess tax credits will not enervate the two-year
prescriptive period under the Tax Code. That period will apply if the carry-over
option has not been chosen.
Besides, "tax refunds x x x are construed strictly against the
taxpayer."48 Petitioner has failed to meet the burden of proof required in order
to establish the factual basis of its claim for a tax refund.
Third, the "first-in first-out" (FIFO) principle enunciated by the CTA49 does not
apply.50 Money is fungible property.51 The amount to be applied against
the P80,042 income tax due in the 1998 FAR 52 of petitioner may be taken from
its excess credits in 1997 or from those withheld in 1998 or from both.
Whichever of these the amount will be taken from will not make a difference.
Even if the FIFO principle were to be applied, the tax credits would have to be
in consonance with the usual and normal course of events. In fact, the FAR is
cumulative in nature.53 Following a natural sequence, the prior year's excess
tax credits will have to be reduced first to answer for any current tax liabilities
before the current year's withheld amounts can be applied. Otherwise, there
will be no sense in requiring a taxpayer to fill out the line items in the FAR to
segregate its sources of tax credits.
Whether the FIFO principle is applied or not, Section 76 remains clear and
unequivocal. Once the carry-over option is taken, actually or constructively, it
becomes irrevocable. Petitioner has chosen that option for its 1998 creditable
withholding taxes. Thus, it is no longer entitled to a tax refund of P459,756.07,
which corresponds to its 1998 excess tax credit. Nonetheless, the amount will
Page 372
 DUMAUAL, JEANNE PAULINE J. 2019-2020

not be forfeited in the government's favor, because it may be claimed by

petitioner as tax credits in the succeeding taxable years.

WHEREFORE, the Petition in GR No. 156637 is GRANTED and the assailed

December 19, 2002 Decision REVERSED and SET ASIDE. No pronouncement as
to costs.

The Petition in GR No. 162004 is, however, DENIED and the assailed January 30,
2004 Decision AFFIRMED. Costs against petitioner.

Atty. Santos, Taxation I Page 373