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FOREWORD

Where there is an income tax, the just man will pay more than the unjust on the same income. - Plato

!This is a loose compilation of several digested cases in Taxation One, most of which were assigned and reported. The purpose of this compilation is to enable the student to have a ready reference material jurisprudential pronouncements in connection with principles of taxation. It is hoped that future students would add more digested cases in this compilation for the benet of those who will study after them. Thank you.

DRCA
October 2011

CONTENTS

General Principles of Taxation CIR vs. Cebu Portland Cement!!!!!!! !Municipality of Makati vs. CA CIR vs. Algue !BPI-Family Savings Bank, Inc., vs. CA CIR vs Tokyo Shipping !CIR vs Mitsubishi Metal Corporation !Philippine Bank of Communications vs CIR !Sison vs. Ancheta Tolentino vs. Secretary of Finance !Abakada Guro vs. Purisima Procter & Gamble vs. Municipality of Jagna !CIR vs. Ateneo De Manila University Hydro Resources vs. CTA Pepsi-Cola Bottling Co vs. Municipality of Tanauan !CIR vs. S.C. Johnson and CA! !CIR vs. Estate of Toda !Republic of the Philippines vs. Sampaguita!!!!!! Domingo vs. Garlitos!!!!! The National Internal Revenue Code
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!CIR vs. Pascor Realty and Development Marcos II vs. CA!!!!!!! !Meralco Securities Corp vs. Savellano!!!!!! Republic of the Philippines vs. CTA and AGFHA CIR vs. R.O.H Auto Products !!CIR vs. Fortune Tobacco Corporation!!!!!!!! !CIR vs. Benguet Corporation!!!!! ! Income Taxation Madrigal vs Rafferty Conwi vs CTA!!!!!!! !CIR vs Javier!!!!!!! ! !Eisner vs Macomber!!!!!!! CIR vs Lednicky!!!!!!! !CIR vs. Isabela Cultural Corp.!!! ! !CIR vs Arthur Henderson!!!!! ! CIR vs CA, CTA and A. Soriano Corp!!!!! !CIR vs. Manning!!!!!!! !Sison vs. Ancheta!!!!! Pascual vs. CIR!!!!!!! ! !Obillosvs CIR and CTA!!!!!! !Philex Mining Corporation vs. CIR!!!! ! Abra Valley C. vs Hon. Juan Aquino!!!!! Royal Interocean Lines vs CIR! !

CIR vs Solidbank Corporation!!!!! ! CIR vs Tokyo Shipping Co. Ltd., and CTA!!!! Marubeni Corporation vs. CIR and CTA!!!! !CIR vs. Johnson and Son, Inc., and CA!!!! !CIR vs Procter & Gamble and CTA!!!!! !Cyanamid Philippines, Inc vs CA, CTA and CIR!!!! ! !CIR vs Young Men's Christian Association !!PLDT vs.. CIR!!!!!!! Aguinaldo Industries Co., vs. CTA!!!! !Esso Standard Eastern, Inc. vs. CIR!!!!! !FEBTC vs. CA, CTA, BIR!!!!!! PNB vs. Savellano CIR vs. Isabela Cultural Corporation!!!! ! !CIR vs. Central Luzon Drug Corporation!!! ! !Philex Mining Corporation vs. CIR!!! ! Ericsson vs. City of Pasig!!!!!! Philam Asset Management vs. CIR!!!! ! !Collector of Internal Revenue vs. Meralco!!!! !State Land Investment Corporation vs. CIR!!!! Tax One Class First Semester 2011

GENERAL PRINCIPLES

What shall I say of these save that they too stand in the sunlight, but with their backs to the sun? They see only their shadows, and their shadows are their laws. And what is the sun to them but a caster of shadows? And what is to acknowledge the laws but to stoop down and trace their shadows upon the earth? - Kahlil Gibran
The Prophet

Cebu Portland vs. CTA !The Court of Tax Appeals rendered a decision against the Commissioner of Internal Revenue to refund Cebu Portland Cement for their Overpayment of Ad Valorem Taxes on cement that the latter was producing and distributing here in the Philippines in the period after October 1957. Cebu Portland Cement receiving favorable judgment moved for a Writ of Execution against the Commissioner of Internal Revenue that said refund may be released in their favor. The Commissioner in response challenge the Writ of Execution alleging that Cebu Portland Cement had an outstanding Tax Sales Liability and he had credited the amount to be refund to the account of Cebu Portland Cement. The Court of tax appeals held that the nal sales tax liability is still undetermined thus it cannot be subject to set-off in favor of Cebu Portland Cement.

!Whether the assessment of sales tax liability may be enforced, i.e. to set off against the refund. !The High Court ruled in favor of the Commissioner of Internal Revenue. The Taxes imposed against the Cebu Portland Cement is Part of the Life Blood of the Government to effectively administer its functions, an urgency to collect taxes for undisrupted Governmental Administration. As for the present case CPCC had Php 4 million tax due after applying the Refund.

Makati vs. Court of Appeals A petition for review in relation to the Eminent Domain Powers exercised by the Municipality of Makati against Arceli P. Jo. The RTC after proper hearing of all appraisal recommendations has set the amount to be paid to the respondent in the amount of Php 5291,666.00 and ordering petitioner to pay this amount minus the advanced payment of P338,160.00 which was earlier released to private respondent. The Respondent after lling a writ of execution but later did he found out that a garnishment was served to PNB, however the sheriff was told that there was a hold code on said account. Petitioner led a motion to lift the garnishment, on the ground that the manner of payment of the expropriation amount should be done in installments which the respondent RTC judge failed to state in his decision. Private respondent led its opposition to the motion. Respondent trial judge subsequently issued an order dated September 8, 1988 which: (1) approved the compromise agreement; (2) ordered PNB Buendia Branch to immediately release to PSB the sum of P4,953,50645 which corresponds to the balance of the appraised value of the subject property under the RTC decision dated June 4, 1987, from the garnished account of petitioner; and, (3) ordered PSB and private respondent to

execute the necessary deed of conveyance over the subject property in favor of petitioner. Petitioner's motion to lift the garnishment was denied. Petitioner led a motion for reconsideration, which was duly opposed by private respondent. On the other hand, for failure of the manager of the PNB Buendia Branch to comply with the order dated September 8, 1988, private respondent led two succeeding motions to require the bank manager to show cause why he should not be held in contempt of court. During the hearings conducted for the above motions, the general manager of the PNB Buendia Branch, a Mr. Antonio Bautista, informed the court that he was still waiting for proper authorization from the PNB head ofce enabling him to make a disbursement for the amount so ordered. For its part, petitioner contended that its funds at the PNB Buendia Branch could neither be garnished nor levied upon execution, for to do so would result in the disbursement of public funds without the proper appropriation required under the law. Whether or not public funds may be compelled to be used for payment in expropriation proceedings notwithstanding a city ordinance on the contrary Nevertheless, this is not to say that private respondent and PSB are left with no legal recourse. Where a municipality fails or refuses, without justiable reason, to effect payment of a nal money judgment rendered against it, the claimant may avail of the remedy of mandamus in order to compel the enactment and approval of the necessary appropriation ordinance, and the corresponding disbursement of municipal fund. The State's power of eminent domain should be exercised within the bounds of fair play and justice. In the case at bar, considering that valuable property has been taken, the compensation to be paid xed and the municipality is in full

possession and utilizing the property for public purpose, for three (3) years, the Court nds that the municipality has had more than reasonable time to pay full compensation.

CIR vs. ALGUE The private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P 83,183.85 as delinquency income taxes for the years 1958 and 1959. The petitioner contends that the claimed deduction of P 75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The petitioner claims that these payments are ctitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction. Thereafter, Algue ied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the ofce of the petitioner. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company. For this sale, Algue received as agent a commission of P 126,000.00, and it was from this commission that the P 75,000.00 promotional fees were paid to the aforenamed individuals. The amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process.

Subsequently a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. Later on, Atty. Guevara was nally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. Sixteen days later, on April 23, 1965, Algue led a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P 75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law. The Court held that the appeal of the private respondent from the decision of the petitioner was led on time with the respondent court and it also found that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner. ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs. The petition was led seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged.It is true that as a rule the warrant of distraint and levy is "proof of the nality of the assessment and renders hopeless a request for reconsideration," being "tantamount to an outright denial thereof and makes the said request deemed rejected."

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The proven fact is that four days after the private respondent received the petitioner's notice of assessment; it led its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the ofce of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served. It thus had the effect of suspending on January 18, 1965, when it was led, the reglementary period which started on the date the assessment was received, viz., January 14, 1965 The period started running again only on April 7, 1965, when the private respondent was denitely informed of the implied rejection of the said protest and the warrant was nally served on it. Hence, when the appeal was led on April 23, 1965, only 20 days of the reglementary period had been consumed. It also agreed with the respondent court that the amount of the promotional fees was not excessive. This nding of the respondent court is in accord with the following provision of the Tax Code: SEC. 30. Deductionsfrom gross income.--ln computing net income there shall beallowed as deductions? (a) Expenses: (1) In general.--A1l the ordinary and necessaryexpenses 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 servicesactually rendered; Revenue Regulations NO.2, Section 70 (1), reading as follows: SEC. 70. Compensationfor personal services.--Among the ordinary and necessary expenses

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paidor incurred in carrying on any trade or business may be included a reasonable allowancefor salaries or other compensation for personal services actually rendered. The test ofdeductibility in the case of compensation payments is whether they are reasonable andare, in fact, payments purely for service. This test and deductibility in the case ofcompensation payments is whether they are reasonable and are, in fact, payments purelyfor service. This test and its practical application may be further stated and illustrated asfollows: Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the ofcers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. ... (Promulgated Feb. 11, 1931,30 O.G. No. 18,325.) The Court found that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testied that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P 75,000.00. 20 Admittedly, everything seemed to be informal. This

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arrangement was understandable, however, in view of the close relationship among the persons in the family corporation. It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon.'? The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved.

BPI Family Savings Bank vs. CA This case involves a claim for tax refund in the amount of P112,491.00 representing petitioner's tax withheld for the year 1989. In its Corporate Annual Income Tax Return for the year 1989, the following items are reected: Income P1,017,931,831.00; Deductions P1,026,218,791.00; Net Income (Loss) (P8,286,960.00) Taxable Income (Loss) (P8,286,960.00); Less the following amount: 1988 Tax Credit P18S,00l.00 and 1989 Tax Credit PU2.491.00, for the total amount of P297.492.00 - Refundable. It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable amount ofP297,492 inclusive of the P112.491.00 being claimed as tax refund in the present case. However, petitioner declared in the same 1989 Income Tax Return that the said total refundable amount of P297.492.00 will be applied as tax credit to the succeeding taxable year. On October u, 1990, petitioner led a written claim for refund in the amount of P112,491.00 with the respondent Commissioner of Internal Revenue alleging that it did not apply the 1989 refundable amount of P297.492.00 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the same year. petitioner led a petition for review with respondent Court of Tax Appeals, seeking the refund of the amount of P112A91.00. The respondent

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Court of Tax Appeals dismissed petitioner's petition on the ground that petitioner failed to present as evidence its corporate Annual Income Tax Return for 1990. Petitioner led a motion for reconsideration, however, the same was denied by respondent court in its Resolution dated May 6, 1994. The CA afrmed the decision of CTA by requiring petitioner to show proof that it has not credited to its 1990 Annual income Tax Return, the amount of P297.492.00 (including P112.491.00), so as to refute its previous declaration in the 1989 Income Tax Return that the said amount will be applied as a tax credit in the succeeding year of 1990. Having failed to submit such requirement, there is no basis to grant the claim for refund. Whether or not petitioner is entitled to the refund of P112,491.90, representing excess creditable withholding tax paid for the taxable year 1989. It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund amounting to Pl12,491. Pursuant to Section 69 of the 1986 Tax Code which states that a corporation entitled to a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was forthcoming, petitioner led its claim with the Court of Tax Appeals. The Bureau of Internal Revenue, failed to controvert petitioner's claim. In fact, it presented no evidence at all. Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved petitioner's claim. A copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for Reconsideration led before the CTA. A nal adjustment return shows whether a corporation

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incurred a loss or gained a prot during the taxable year. In this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit. Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that "petitioner suffered a net loss for the taxable year 1990.... " Respondent, however, urges this Court not to take judicial notice of the said case. The Court believes respondents' reasoning underscores the weakness of their case. For if they had really believed that petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail the fact appearing therein - that petitioner suffered a net loss in 1990 - in the same way that it refused to controvert the same fact established by petitioner's other documentary exhibits. Substantial justice, equity and fair play are on the side of petitioner. 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. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness. Petition was granted and the assailed decision and resolution of the Court ofAppeals was reversed and set aside. The Commissioner of Internal Revenue was ordered to refund to petitioner the amount of Php 112,491 as excess creditable taxes paid in 1989. CIR vs Tokyo Shipping Co., Ltd Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In

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December 1980, NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. 3 On December 23, 1980, Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, 4 paid the required income and common carrier's taxes in the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY FIVE CENTAVOS (PS9,S23.75) and FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.7S) based on the expected gross receipts of the vessel. 5 Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without any cargo. Due to this situation, private respondent led for refund, contending that it did not generate income from such transaction and they are entitled to such refund or tax credit. The CIR contends to the contrary and such case was elevated to the CTA.The Tax court ruled in favor of the private respondent, hence this petition for certiorari. Whether or not the private respondent is entitled to tax refund? The Supreme Court said - Yes. Private respondent is entitled to tax refund paid in advance because it is very evident that it did not gain any income from such transaction, therefore, there is no basis for tax assessment and the advance payment paid must be refunded. There is no dispute as to the applicable provision,sec.24 (b) (2) of the NIRC, Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines. Since no income was realized, there is no basis for such tax liability. The court further stressed that the power of taxation is also the power to

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destroy. It must be exercised with caution because, if not, it can cause injury to taxpayers and in turn "kill the hen that lays the golden eggs".

CIR vs Mitsubishi Metal Corporation Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. Mitsubishi thereafter applied for a loan with the ExportImport Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of 4,320,000,000.00, at about the same time as the approval of its loan for 2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30, 1981.

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Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of Pl,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. On March 5, 1976, private respondents led a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future tax liabilities.Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas. Whether or not private respondents are entitled to such tax credit? Whether or not Mitsubishi acted only as a conduit for Atlas for it to obtain a loan from Eximbank? On the rst issue, the High Court held - No. They are not entitled to the tax credit because Mitsubishi and Atlas were not one of the companies contemplated in Section 29 (b) (7) (A) which states, (A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) nancing institutions owned, controlled, or enjoying renancing from them, and (3) international or regional nancing institutions established by governments. Both Atlas and Mitsubishi were not nancing institutions nanced by a particular government,therefore, they are not entitled to tax credit from income derived from interest earned. Regarding the second issue, Mitsubishi was a mere conduit for Atlas, the latter used the former to avail the tax credit

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from such interest and then later on, such tax credit was waived and a disclaimer was led in favor Atlas. From this action, it became clear to the court that the provision of the law was used as a cloak to escape the tax imposed, therefore in order to prevent bad precedent in the future, the Court reversed the decision of the CTA. Philippine Bank of Communications vs CIR, CTA and CA Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, led its quarterly income tax returns for the rst and second quarters of 1985, reported prots, 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 ofInternal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3.401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom suffered losses so that when it led its Annual Income Tax Returns for the year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby showing no income tax liability. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50in 1985 and P234,077.69 in 1986. Petitioner, then on August 7, 1987, requested the Commissioner of Internal Revenue (CIR) for a tax credit of P5,016,954.00 representing the overpayment of taxes in the rst and second quarters of 1985. On July 25, 1988, it led a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. Pending investigation by the CIR, petitioner

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instituted a petition for review on Nov. 18, 1988 before the Court of Tax Appeals (CTA). In 1993, the CTA rendered a decision denying the request for a tax refund or credit in the amount of P5,299,749.95 on the ground that it was led beyond the twoyear reglementary period. The petitioner's claim for refund in 1986 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. These pronouncements by the CTA were afrmed in toto by the CA. Petitioner argues that its claim for refund tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 stating 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 within (ten) 10 years under Art. 1414 of the Civil Code. 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-CBNBroadcasting Corporation us.Court of Tax Appeals 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. Whether or not taxpayer, which relied in good faith on the formal assurances ofBIR in RMC No. 7-85, can be prejudiced by the subsequent BIR rejection, applied retroactively, 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). The Court ruled that 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

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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 is widely accepted that the interpretation placed upon a statute by the executive ofcers, 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. Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to nance the needs of the citizenry and to advance the common weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiey 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.

Sison vs. Ancheta Petitioner les this suit for declaratory relief or prohibition proceeding on the validity of Section 1 of Batas Pambansa BIg. 135 depends upon a showing of its constitutional inrmity. 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 benet from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net prots of taxable partnership, (f) adjusted gross income. Petitioner, as taxpayer alleges that by virtue thereof, he would be

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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 xed income or salaried individual taxpayers. He characterizes the above section as arbitrary amounting to class legislation, oppressive and capricious in character. For petitioner, therefore, there is a transgression of both the equal protection and due process clauses of the Constitution as well as of the rule requiring uniformity in taxation. Whether or not Petitioner will be unduly discriminated against by the imposition of higher tax rates upon his income as against those which are imposed upon xed income or salaried individual taxpayers. No. The Court said that classication, if rational in character, is allowable. In a leading case, Lutz v. Araneta, 98 Phil. 143 (1955), the Court 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 subject 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. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution, the rule of taxation shall be uniform and equitable. This requirement is met according to Justice Laurel in Philippine Trust Company v: Yatco, 69 Phil. 420 (1940) that when the tax operates with the same force and effect in every place where the subject may be found. The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable. In the case of the gross income taxation, the discernible basis of classication is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and xing a set of reduced tax rates tobe 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 not entitled

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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 justication for the adoption of the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

Arturo Tolentino vs. Sec of Finance & CIR The Case is about challenging the Constitutionality of RA 7716 otherwise known as Expanded Value Added Tax (EVAT). A lot of issues were thrown like: (1) it did not originate exclusively in the House of Representatives; (2) The Growing Budget decit is not an Emergency, especially Philippines where budget decit is a chronic condition. These are motions directly led to the Supreme Court seeking reconsideration to dismiss the case. The enactment of RA 7716 otherwise known as EVAT was brought about by the enormous budget decit of the Philippines. It is an amendment which seeks to restructure the VAT by widening its tax base. Arturo Tolentino together with other petitioners like the CREBA and other Civil Society riding on the popularity of the issue on EV AT to gain political grounds, assents that EV AT violates the rules that taxes should be uniform and equitable and that Congress shall evolve a progressive system of Taxation. CREBA claims that VAT is regressive because the law imposes a

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at rate of 10% and thus places the Tax Burden on all taxpayers without regard to their ability to pay. The mandate of Congress is to evolve a progressive tax system. Whether or not EV AT violates the rule that Taxes evolve a progressive system of Taxation? Motion Denied. The Constitution does not really prohibit imposition of Indirect Taxes. It has been interpreted to mean simply that Direct Taxes are to be preferred as much as possible whereas Indirect Taxes should be minimized. Sales Taxes are the oldest form of Indirect Taxes. The issue of VAT was already provided long before RA 7716. It merely expands the base of the Tax. Resort to indirect taxes should be minimized but not avoid entirely because it is difcult, if not IMPOSSIBLE, to avoid them by imposing such taxes according to the Taxpayers ability to pay. Where VAT imposes regressive taxation, the Law on VAT minimizes the regressive effects of this imposition by providing for ZERO Rating of certain transactions like Goods in its Original State (Palay, Corn), Educational Services, Work of Art, Export sales by person not VAT registered. Transactions which involves VAT are goods and services used or availed mainly by higher income group. Real Property for Sale, Patent, copyright, lms, radio, 1V, Hotels, Restaurants, Common Carriers &Lending Investments.

Abakada Guro Partylist vs. Purisirna This petition for prohibition seeks to prevent respondents from implementing and enforcing Republic Act (RA) 9335 (Attrition Act of 2005)

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RA 9335 was enacted to optimize the revenue-generation capability and collection of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC). The law intends to encourage BIR and BOC ofcials and employees to exceed their revenue targets by providing a system of rewards and sanctions through the creation of a Reward and Incentives Fund (Fund) and a Revenue Performance Evaluation Board (Board). Petitioners, invoking their right as taxpayers they contend that, by establishing a system of rewards and incentives, the law "transform[s] the ofcials and employees of the BIR and the BOC into mercenaries and bounty hunters" as they will do their best only in consideration of such rewards. Thus, the system of rewards and incentives invites corruption and undermines the constitutionally mandated duty of these ofcials and employees to serve the people with utmost responsibility, integrity, loyalty and efciency. In their comment, respondents, through the Ofce of the Solicitor General, acknowledge that public policy requires the resolution of the constitutional issues involved in this case. They assert that the allegation that the reward system will breed mercenaries is mere speculation and does not sufce to invalidate the law. Seen in conjunction with the declared objective of RA 9335, the law validly classies the BIR and the BOC because the functions they perform are distinct from those of the other government agencies and instrumentalities. Whether or not RA 9335 is unconstitutional? SC nds that petitioners have failed to overcome the presumption of constitutionality in favor of RA 9335. Public ofcers enjoy the presumption of regularity in the performance of their duties. The presumption is disputable but proof to the contrary is required to rebut it. It cannot be overturned by mere conjecture or denied in advance (as

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petitioners would have the Court do) especially in this case where it is an underlying principle to advance a declared public policy. A law enacted by Congress enjoys the strong presumption of constitutionality. To justify its nullication, there must be a clear and unequivocal breach of the Constitution, not a doubtful and equivocal one. To invalidate RA 9335 based on petitioners' baseless supposition is an affront to the wisdom not only of the legislature that passed it but also of the executive which approved it.

Procter & Gamble vs Municipality of Jagna, Bohol A direct appeal by plaintiff company from the judgment of the Court of First Instance of Manila, Branch VI, upholding the validity of Ordinance NO.4, Series of 1957, enacted by defendant Municipality, which imposed "storage fees on all exportable copra deposited in the bodega within the jurisdiction of the Municipality of Jagna Bohol. Plaintiff-appellant is a domestic corporation with principal ofces in Manila. It is a consolidated corporation of Procter & Gamble Trading Company and Philippine Manufacturing Company, which later became Procter &Gamble Trading Company, Philippines. It is engaged in the manufacture of soap, edible oil, margarine and other similar products, and for this purpose maintains a "bodega" in defendant Municipality where it stores copra purchased in the municipality and therefrom ships the same for its manufacturing and other operations. On December 13, 1957, the Municipal Council of Jagna enacted Municipal Ordinance NO.4, Series of 1957, quoted herein below:

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AN ORDINANCE IMPOSING STORAGE FEES OF ALL EXPORTABLE COPRA DEPOSITED IN THE BODEGA WITHIN THE JURISDICTION OF THE MUNICIPALITY OF JAGNA BOHOL SECTION 1. Any person, rm or corporation having a deposit of exportable copra in the bodega, within the jurisdiction of the Municipality of Jagna Bohol, shall pay to the Municipal Treasury a storage fee of TEN (PO.10) CENTAVOS FOR EVERY HUNDRED (100) kilos; !For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under protest, storage fees in the total sum of 1142,265.13. For its part, defendant Municipality upheld its power to enact the Ordinance in question; questioned the jurisdiction of the trial Court to take cognizance of the action under section 44 (h) of the Judiciary Act in that it seeks to enjoin the enforcement of a Municipal Ordinance; and pleaded prescription and laches for plaintiffs failure to timely question the validity of the said Ordinance. After the parties had agreed to submit the case for judgment on the pleadings, the trial Court upheld its jurisdiction as well as defendant Municipality's power to enact the Ordinance in question under section 2238 of the Revised Administrative Code, otherwise known as the general welfare clause, and declared that plaintiffs right of action had prescribed under the 5-year period provided for by Article 1149 of the Civil Code. In this appeal, plaintiff interposes the following Assignments of Error:

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THE TRIAL COURT ERRED IN HOLDING THAT ORDINANCE NO.4, SERIES OF 1957, ENACTED BY THE DEFENDANT MUNICIPALITY OF JAGNA BOHOL, IS A V ALID, LEGAL AND ENFORCEABLE ORDINANCE AGAINST THE PLAINTIFF. THE TRIAL COURT ERRED IN HOLDING THAT PAYMENT OF THE TAX UNDER ORDINANCE NO.4, SERIES OF 1957 WAS NOT DONE UNDER PROTEST. THE TRIAL COURT ERRED IN HOLDING THAT THE ACTION OF THE PLAINTIFF TO ANNUL AND TO DECLARE ORDINANCE NO.4, SERIES OF 1957 OF THE DEFENDANT HAS ALREADY PRESCRIBED. AND, FINALLY, THE TRIAL COURT ERRED IN NOT HOLDING ORDINANCE NO.4. SERIES OF 1957 ULTRA-VIRES AND VOID AND IN NOT ORDERING THE REFUND OF TAXES PAID THEREUNDER. It is plaintiffs submission that the subject Ordinance is inapplicable to it as it is not engaged in the business or trade of storing copra for others for compensation or prot and that the only copra it stores is for its exclusive use in connection with its business as manufacturer of soap, edible oil, margarine and other similar products; that the levy is intended as an "export tax" as it is collected on "exportable copra' , and, therefore, beyond the power of the Municipality to enact; and that the fee of PO.10 for every 100 kilos of copra stored in the bodega is excessive, unreasonable and oppressive and is imposed more for revenue than as a regulatory fee.

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The main question to determine is whether defendant Municipality was authorized to impose and collect the storage fee provided for in the challenged Ordinance under the laws then prevailing. The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon municipalities by Commonwealth Act No. 472, approved on June 16, 1939, which was the prevailing law when the Ordinance was enacted (Procter &Gamble Trading Co. vs. Municipality of Medina, 43 SCRA 130 11972]). Section 1 thereof reads: Section 1. A municipal council or municipal district council shall have the authority to impose municipal license taxes upon persons engaged in any occupation or business, or exercising privileges in the municipality or municipal district, by requiring them to secure licenses at rates xed by the municipal council, or municipal district council, and to collect fees and charges for services rendered by the municipality or municipal district and shall otherwise have power to levy for public local purposes, and for school purposes, including teachers' salaries, just and uniform taxes other than percentage taxes and taxes on specied articles. Under the foregoing provision, a municipality is authorized to impose three kinds of licenses: (1) a license for regulation of useful occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or enterprises; and (3) license for revenue. 4 It is thus unnecessary, as plaintiff would have us do, to determine whether the subject storage fee is a tax for revenue purposes or a license fee to reimburse defendant Municipality for service of supervision because defendant Municipality is authorized not only to impose a license fee but also to tax for revenue purposes. The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on persons, rms and

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corporations, like plaintiff, exercising the privilege of storing copra in a bodega within the Municipality's territorial jurisdiction. For the term "license tax" has not acquired a xed meaning. It is often used indiscriminately to designate impositions exacted for the exercise of various privileges. In many instances, it refers to revenue-raising exactions on privileges or activities. 5 Not only is the imposition of the storage fee authorized by the general grant of authority under section 1 of CA No. 472. Neither is the storage fee in question prohibited nor beyond the power of the municipal councils and municipal district councils to impose, as listed in section 3 of said CA No. 472. 6 Moreover, the business of buying and selling and storing copra is property the subject of regulation within the police power granted to municipalities under section 2238 of the Revised Administrative Code or the "general welfare clause", which we quote hereunder: Section 2238. General power of council to enact ordinances and make regulations.- The municipal council shall enact such ordinances and make such regulations, not repugnant to law, as may be necessary to carry into effect and discharge the powers and duties conferred upon it by law and such as shall seem necessary and proper to provide for the health and safety, promote the prosperity, improve the morals, peace, good order,comfort, and convenience of the municipality and the inhabitants thereof,and for the protection of property therein. For it has been held that a warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to give rise to conagration because the oil content of the copra when ignited is difcult to put under control by water and the use of chemicals is necessary to put out the re. 7 And as the Ordinance itself states, all exportable copra deposited within the municipality is "part of the surveillance and lookout of municipal authorities. Plaintiffs argument that the imposition of PO.IO per 100 kilos of copra stored in a bodega within defendant's territory is beyond the cost of regulation and

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surveillance is not well taken. As enunciated in the case of Victorias Milling Co. vs. Municipality of Victorias, supra The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a revenue ordinance. For, 'if the charge exceeds the expense of issuance of a license and costs of regulation, it is a tax'. And if it is, and it is validly imposed, 'the rule that license fees for regulation must bear a reasonable relation to the expense of the regulation has no application. Municipal corporations are allowed wide discretion in determining the rates of imposable license fees even in cases of purely police power measures. In the absence of proof as to municipal conditions and the nature of the business being taxed as well as other factors relevant to the issue of arbitrariness or unreasonableness of the questioned rates, Courts will go slow in writing off an Ordinance. 8 In the case at bar, appellant has not sufciently shown that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive. !Plaintiffs averment that the Ordinance, even if presumed valid, is inapplicable to it because it is not engaged in the business or occupation of buying or selling of copra but is only storing copra in connection with its main business of manufacturing soap and other similar products, and that to be compelled to pay the storage fees would amount to double taxation, does not inspire assent. The question of whether appellant is engaged in that business or not is irrelevant because the storage fee, as previously mentioned, is an imposition on the privilege of storing copra in a bodega within defendant municipality by persons, rms or corporations. Section I of the Ordinance in question does not state that said persons, rms or corporations should be engaged in the business or occupation of buying or selling copra. Moreover, by plaintiffs own admission that it is a consolidated corporation with its trading company; it will be hard to segregate the copra it uses for trading from that it utilizes for manufacturing.

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Thus, it can be said that plaintiffs payment of storage fees imposed by the Ordinance in question does not amount to double taxation. For double taxation to exist,the same property must be taxed twice, when it should be taxed but once. Double taxation has also been dened as taxing the same person twice by the same jurisdiction for the same thing. 9 Surely, a tax on plaintiffs products is different from a tax on the privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality. Plaintiffs further contention that the storage fee imposed by the Ordinance is actually intended to be an export tax, which is expressly prohibited by section 2287 of the Revised Administrative Code, is without merit. Said provision reads as follows: Section 2287 ... It shall not be in the power of the municipal council to impose a tax in any form whatever upon goods and merchandise carried into the municipality, or out of the same, and any attempt to impose an import or export tax upon such goods in the guise of an unreasonable charge for wharf age use of bridges or otherwise, shall be void. We have held that only where there is a clear showing that what is being taxed is an export to any foreign country would the prohibition come into play. 10 When the Ordinance itself speaks of "exportable" copra, the meaning conveyed is not exclusively export to a foreign country but shipment out of the municipality. The storage fee impugned is not a tax on export because it is imposed not only upon copra to be exported but also upon copra sold and to be used for domestic purposes if stored in any warehouse in the Municipality and the weight thereof is 100 kilos or more. 11 Thus nding the Ordinance in question to be valid, legal and enforceable, we nd it unnecessary to discuss the ascribed error that the Court a quo erred in declaring that appellant had not paid the taxes under protest.

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However, we nd merit in plaintiffs contention that the lower Court erred in ruling that its action has prescribed under Article 1149 of the Civil Code, which provides for a period of ve years for all actions whose periods are not xed in that Code. The case of Municipality of Opon vs. Caltex Phi/" 12 is authority for the view that the period for prescription of actions to recover municipal license taxes is six years under Article 1145 (2) of the Civil Code. Thus, plaintiffs action brought within six years from the time the right of action rst accrued in 1958 has not yet prescribed.

CIR vs CA, CTA and Ateneo De Manila University Private respondent is a non-stock, non-prot educational institution with auxiliary units and branches all over the Philippines. One such auxiliary unit is theInstitute of Philippine Culture (IPC), which has no legal personality separate and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies. On July 8, 1983, private respondent received from petitioner CIR a demand letter , assessing private respondent the sum of P174,043.97 for alleged deciency contractor's tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged deciency income tax, both for the scal year ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently led with the latter a memorandum contesting the validity of the assessments. On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deciency income tax but modifying the assessment for deciency contractor's tax by

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increasing the amount due to P193,475.55. Unsatised, private respondent requested for a reconsideration or reinvestigation of the modied assessment. At the same time, it led in the respondent court a petition for review of the said letter-decision of the petitioner. While the petition was pending before the respondent court, petitioner issued a nal decision dated August 3, 1988 reducing the assessment for deciency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest. On July 12, 1993, the respondent court rendered the questioned decision which sets aside the decision of the CIR. Petitioner contends that the respondent court erred in holding that private respondent is not an "independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor", as dened by the Code, encompasses all kinds of services rendered for a fee and that the only exceptions are the following: a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of or from pioneer industry registered with the Board of Investment under R.A. No. 5186; b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax Code); and c. 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, communication and coordinating centers for their afliates, subsidiaries or branches in the Asia Pacic Region (Section 205 of the Tax Code)

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Whether or not Ateneo de Manila University, through its auxiliary unit or branch (the Institute of Philippine Culture) performing the work of an independent contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the National Internal Revenue Code? The petition is unmeritorious. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without rst applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without rst determining who are covered by the aforesaid provision. The Commissioner should have determined rst if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication." Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import."

Hydro Resources Contractors Corporation vs. CTA and the Provincial Government of Isabela Public respondent "NIA" and petitioner Hydro entered into a contract whereby the latter undertook to construct for the

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former the Magat River Multi-Purpose Project situated at Ramon, Isabela. In June 1982, the Provincial Government of Isabela, its provincial treasurer, the Municipality of Ramon, Isabela, and its assistant treasurer led a civil case against Hydro with the RTC of Echague, Isabela, for collection of taxes over certain real properties which Hydro allegedly acquired, possessed and used III connection with the construction of the said Magat River Multi-Purpose Project. After hearing, the court on 6 August 1983, issued an order nding defendant Hydro liable to pay realty taxes over the properties it had constructed in connection with Magat River Multi-Purpose Project, but that the amount thereof was to be determined infurther proceedings of the court a quo. , On 4 November 1983, now before the RTC of Santiago, Isabela, Hydro led a motion for leave to le third-party complaint, dated 21 October 1983, against NIA, attaching to the motion the proposed third-party complaint (for reimbursement from the NIA); and a motion to admit amended answer, accompanying the same with the proposed amended answer. On the same date the RTC Santiago, Isabela admitted Hydro's thirdparty complaint; however, as to its motion for leave to le amended answer, plaintiffs were given ten (10) days to le their opposition and Hydro was also given ten (10) days from receipt of such opposition to le its reply. On 12 December 1983, before the court a quo could resolve Hydro's motion for leave to le amended answer, plaintiffs led their reply to Hydro's amended answer. NIA also led its answer to Hydro's third-party complaint. In an order of 7 February 1983, the court a quo then ordered the parties to le their respective memorandum. The parties did not le their memoranda except Hydro which complied. On 20 May 1985, the court a quo ruled that the order dated 6 August 1983.

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On 15 January 1986, Hydro led with the Supreme Court a Petition, which was referred by this Court (First Division) to the Court of Appeals for proper action and disposition. In a resolution dated 21 May 1986 said petition was re-docketed in the Court of Appeals. On 30 October 1987, the Court of Appeals rendered a decision denying the petition. Hence, the present petition for review. Whether or not the appellate court has acted without or in excess of its jurisdiction or with grave abuse of discretion in not nding that the order issued by the court a quo on August 6, 1983 is merely interlocutory and/or provisional in character and could not be considered as a nal determination of the merits of Civil Case No. 0093 Whether or not the appellate court has acted without or in excess of its jurisdiction or with grave abuse of discretion in not nding that the said order of August 6, 1983 was abandoned or set aside through the issuance of the order of November 4, 1983 which admitted herein petitioner's third-party complaint against respondent NIA. Whether or not the appellate court has acted without or in excess of its jurisdiction or with grave abuse of discretion in not nding that the court a quo, in issuing the order of May 20,1985 went beyond the issues presented by the parties, which act is legally impermissible, irregular and invalid. Petition was granted. Both the petitioner and the respondents agree that the main issue in the case at bar is whether or not the assailed order of the court a quo is interlocutory in nature or a nal judgment. It is to be observed that while the complaint in the case at bar is admittedly one for collection of realty taxes over certain real properties, the complaint however, does not allege the amount of taxes which the plaintiffs seek to collect from petitioner. There is thus a need

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to determine the effect of such failure of the complaint to state the aforesaid amount vis-a-visplaintiffs cause of action. Although this issue is not raised in the present petition, it is basic that the Court can review matters not assigned as an error in the appeal. Court held that the complaint at bar has failed to state the ultimate facts, which failure is violative of Section 3, Rule 17 of the Rules of Court. The amount of taxes sought to be collected is therefore determinable, yet the complaint at bar did not plead the same. In the order of the court a quo; one of the issues submitted was whether its proper for the plaintiffs to amend their complaint and plead therein the amount of tax sought to be collected. As in any case for collection of a sum of money, stating the amount of tax sought to be collected in a complaint for collection of realty taxes is part of the ultimate facts constituting the plaintiff cause of action, as provided under Section 3, Rule 6 of the Rules of Court, supra. In the instant case, there is failure to state in the complaint the ultimate facts because the amount of tax sought to be collected is not pleaded or alleged. It can be overlooked that the subject matter of the complaint led before the court a quo is the amount of the real estate taxes to be collected. Section 82 of P.D. 464 provides that the collection of delinquent real property taxes may be enforced in any court of competent jurisdiction. In the present case, as the complaint did not plead the amount of tax intended to be collected, how could the court a quo ascertain, in the rst place, in relation to the amount of the demand, whether it was the proper forum to try the case. The fact that the third party complaint led by petitioner-defendant against the National Irrigation Administration pleaded the amount P338,750.00 as reimbursable to it by the latter, is of no moment now, as the said third-party complaint was also ordered dismissed in the order of

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20 May 1985. Hence, it can be said that the complaint (in chief) was never amended. Clearly, the order of 6 August 1983 is interlocutory. We fail to see how it could or did put an end to the controversy when the court a quo still had to determine the amount of realty taxes to be collected by plaintiffs from petitioner-defendant, and to make ndings of fact on certain issues, which could still affect the very liability to pay such taxes.

Pepsi-Cola Bottling Co vs. Municipality of Tanauan This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was certied to Us by the Court of Appeals on October 6,1969, as involving only pure questions of law, challenging the power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959). On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264. otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void. On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, rst, both Ordinances Nos. 23 and 27 embrace or cover thesame subject matter and the production tax rates imposed therein are practically thesame, and second, that on January 17,1963, the acting Municipal Treasurer of Tanauan,Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in

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saidmunicipality, sought to enforce compliance by the latter of the provisions of saidOrdinance No. 27, series of 1962. Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects "from soft drinks producers and manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of computing the taxes due, the person, rm, company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the month. On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (PO.01) on each gallon (128 uid ounces, U.S.) of volume capacity." For the purpose of computing the taxes due, the person, rm, company, partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of the total number of gallons produced or manufactured during the month. On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs." !From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended. !There are three capital questions raised in this appeal:

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Is Section 2, Republic Act No. 2264 an undue delegation of power, conscatory and oppressive? Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specic taxes? Are Ordinances Nos. 23 and 27 unjust and unfair? !1. The power of taxation is an essential and inherent attribute of sovereignty, belonging\ as a matter of right to every independent government, without being expressly conferred by the people. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. 9 Under the 1973 Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local taxation. The plenary nature of the taxing power thus delegated, contrary to plaintiff appellant's pretense, would, not sufce to invalidate the said law as conscatory and oppressive. In delegating the authority, the State is not limited to the exact

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measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy theState has not deemed wise to tax for more general purposes. 10 This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power, except when the taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are provided. There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of double taxation. It must be observed that the delegating authority species the limitations and enumerates the taxes over which local taxation may not be exercised. The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union. '4 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benet of the same governmental entity '5 or by the same jurisdiction for the same purpose, ,6but not in a case where one tax is imposed by the State and the other by the city or municipality. 2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two ordinances cover the same subject matter and impose practically the same tax rate. The thesis proceeds from its assumption that both

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ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo (P0.0l) on each gallon (128 uid ounces, U.S.) of volume capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.0l) on each gallon (128 uid ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that effect. ,8 Plaintiffappellant in its brief admitted that defendants appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts conrms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought to compel compliance by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendantsappellees. That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specic tax. Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same comes within the

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ambit of the general rule, pursuant to the rules of exclucionattehusand exceptio ./innatregulum in cabisus non exceptio The tax is levied on the produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the tax. !Nor can the tax levied be treated as a specic tax. Specic taxes are those imposed on specied articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches recrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic lms, playing cards, saccharine, opium and other habit-forming drugs. Soft drink is not one of those specied. 3. The tax of one on each gallon (128 uid ounces, U.S.) of volume capacity on all soft drinks, produced or manufactured, or an equivalent of 1-1f2 centavos per case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax is oppressive, unjust and conscatory. Municipal corporations are allowed much discretion in determining the rates of imposable taxes. 25 This is in line with the constitutional policy of according the widest possible autonomy to local governments in matters of local taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973).26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be realized.

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CIR vs. S.C. JOHNSON AND SON, INC., and CA 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 CAGR SP No. 40802 afrming the decision of the Court of Tax Appeals in CTA Case No. 5136. Facts as found by the Court of Tax Appeals are not disputed, to wit: 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 nonresident 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 Certicate of Registration No. 8064. 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% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1,603443.00. On October 29, 1993, respondent led with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that,

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"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 mostfavored 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 [led with the Court of Appeals], par. 12). The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson &Son, Inc. (S.C. Johnson) then led a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993. 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 certicate in the amount of P963, 266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. The Commissioner of Internal Revenue thus led a petition for review with the Court of Appeals which rendered the decision subject of this appeal on November 7, 1996 nding no merit in the petition and afrming in toto the CTA ruling. With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a nonresident foreign corporation. Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty. For as long as the transfer of technology, under Philippine law, is subject to

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approval, the limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. 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 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. According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus: Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources within the Philippines is allowed as a credit against German income and corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West 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 from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. The clear intent of the "matching credit" is to soften the impact of double taxation by different jurisdictions.

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The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RPWest Germany Tax Treaty. Therefore, the "most favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treatys The petition is meritorious. !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 tile 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 taxation 7 as this is a matter of negotiation between the contracting parties. 8 As will be shown later, this dissimilarity is

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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 scal 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 dened 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 ow 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 reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited

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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. 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. 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 taxrelated". 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 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. 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

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States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. 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 RPUS 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 RPGermany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RPGermany 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. 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

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the tax and at the same time crediting against the domestic tax abroad a gure higher than what was collected in the Philippines. 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. 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. 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 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. rms 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.

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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.

CIR vs Estate of Benigno P. Toda, Jr. In an alleged simulated sale of a 16 storey commercial building on 2 March 1989. Cibeles insurance Corp (CIC) authorized Benigno Toda, Jr. President and owner of99.99% of its issued and outstanding capital stock, to sell the Cibeles building and the two parcels of land to Rafael A. Altonaga for P 100 million, who in turn sold the same property to Royal Match Inc, on the same day for P200 million. On the contention that it was a tax planning scheme of CIC in order to avoid payment of higher corporate income tax of 35%, the transaction was reported instead as one entitled to a capital gains tax of only 5%. On the 16th of January, 1994, Toda died and on 291h of March 1994, the BIR sent an assessment notice and demand letter to the CIC for deciency income tax for the year 1989 in the amount of P79, 099,999.22. Petitioner insisted that since the 2transactions

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actually constituted a single sale of the property by CIC to RMI, the taxable income of CIC is decient with respect to the gain on sale of real property which is commercial building. Whether or not that CIC committed tax evasion or merely a tax avoidance scheme CIC committed tax evasion. Tax avoidance and Tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at 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 of criminal liabilities. Tax evasion connotes the integration of three factors; (I) the end to be achieved, i.e, the payment of less than that known by the taxpayer to be legally due, or the non payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil" in "bad faith", "willful" or "deliberate and not accidental" and (3)a course of action or failure of action which is unlawful. All these factors are present in the instant case. The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. Tax planning is by denition, to reduce, if not eliminate altogether, a tax. Surely petitioner cannot be faulted for wanting to reduce the tax from 35% to 5%. However, the scheme resorted by CIC in making it appear that there were two sales of the subject properties cannot be considered as legitimate tax planning. Such scheme is tainted with fraud.

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Republic vs. Sampaguita In the aftermath of Pacic War, the Philippine Government issued back pay certicates in payment of salaries, wages, emoluments, per diems, not received by persons who at the outbreak of the war were employed in the classied and unclassied civil service as well as in government -owned or controlled corporations, and those who had served in the free local civil governments organized for purposes of resistance against the invaders by reason of the war. When respondent Sampaguita Pictures incurred an obligation for percentage withholding and amusement taxes in the amount of Pl0, 268.41 in favor of the Republic of the Philippines, in tendered and delivered said certicates to the ofce of Municipal Treasurer of Bocaue, Bulacan on June 9, 1961. Thirteen (13) days later, the Assistant Regional Director of the BIR advised that the acceptance of the Negotiable certicate of indebtedness in payment of amusement, percentage and withholding taxes was erroneous and that the payment was invalid, because actually said certicates were "not acceptable as payments of internal revenue taxes". The Solicitor General brought suit in behalf of the Republic of the Philippines in relation thereto while the respondent set up a counterclaim on the allegation that since the certicate have already matured, then the plaintiff is also liable to pay the amount of it to respondent. The trial judge dismissed both complaint and counterclaim. Whether or not back pay certicates are acceptable as payment for tax liabilities. The Court ruled in afrmative. The Trial Court ruled that the taxes sought to be collected by the Republic from Sampaguita were still unpaid, its tender of the certicates of indebtedness in question not constituting payment; hence, it ought properly to be sentenced to pay the taxes. It also ruled that even assuming the contrary, legal

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compensation as a mode of extinguishing an obligation to pay taxes was nonetheless unavailing against the government, conformably with de Borja v. Gella. On the other hand, according to the Trial Court, at least as of date of judgment, more than 10 years from June 18, 1958, the date when, as expressly stated in the certicates of indebtedness, the same were redeemable, the obligation thereby evidenced was unquestionably already due and payable; hence, Sampaguita was entitled to a judgment against the Republic for the payment of the face value of the certicates, the same having already been presented and surrendered within the said period of ten years (on June 9, 1961) to the Treasurer of the Philippines (thru the Municipal Treasurer of Bocaue, Bulacan ) 11 This is correct. In other words, even if as the Solicitor General points out, "there is no certainty when the certicates are actually redeemable" because the law say "that they are redeemable .. within ten years from the date of issuance" 12 there can be no question that after the lapse of ten (10) years from the declared date of redeemability, payment of the indebtedness was already exigible The Trial Court was saying in effect that while judgment should be rendered in favor of the Republic against Sampaguita for unpaid taxes in the amount of P10,268.41, judgment ought at the same time to issue for Sampaguita commanding payment to it by the Republic of the same sum, representing the face value of the certicates of indebtedness assigned to it and for recovery of which it had specically prayed in its counterclaim. What has just been said confutes the petitioner's second argument that redemption of the certicates of indebtedness was not yet demandable of it because "there is no certainty when the certicates are actually redeemable, within the meaning of the law." It is true that, as the Solicitor General contends, "the law does not say that they are redeemable from its approval on June 18, 1958 but 'within ten years from the date of issuance' of the certicates, " 13 the ineludible ineluctable fact is that more than ten (10) years have already elapsed since their issuance and

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demand for payment had been made within said 10-year period. It is useless to quibble about the precise time "within ten years" when an obligation becomes demandable, when that period of ten years has already expired. Whatever inexactitude might inhere in the phrase, "within ten years," as xing the time of exibility of the obligation in question, there can be no debate about the proposition that the obligation became due and demandable after ten years. It would be absurd and unfair to sanction the theory subsumed in the Republic's petition that its obligation was not demandable within ten years because of inexactitude yet became time-barred upon the lapse of that selfsame period.

Domingo vs. Garlitos The Supreme Court, in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso (106 Phil. 1138), declared as nal and executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties amounting to P40, 058.55, issued by the CFI Leyte in special proceedings 14 entitled "In the Matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate, the scal presented a petition dated 21 June 1961 to the CFI for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not justiable as the Government is indebted to the estate under administration in the amount of P262, 200.00. The lower court ordered on 20 August 1960 that the payment of inheritance taxes in the sum of P40, 058.55 be deducted from the amount of P262,200.00 due and payable to the estate. The lower court ordered further that the payment of the claim of the Collector of Internal Revenue be deferred until the Government shall have made the payment. The court ruled that it is only fair for the Government, as a debtor, to pay its accounts to its citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking into consideration that the amount due the

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Government draws interests while the credit due to the present estate does not accrue any interest. Melecio R. Domingo, as Commissioner of Internal Revenue, led a petition for certiorari and madamus seeking to annul the orders of the court and for an order in the Supreme Court directing the lower court to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes. Whether or not the taxes should be paid by the estate? The court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262, 200.00 has already been appropriated for the purpose by a corresponding law (RA 2700). Under the circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount. Article 1200 provides that "when all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation."

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THE NATIONAL INTERNAL REVENUE CODE

The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difculty, and we must rise with the occasion. As our case is new, so we must think anew and act anew. We must disenthrall ourselves. - Abraham Lincoln

CIR vs Pascor Realty and Development !!The Commissioner of Internal Revenue (CIR) led a criminal complaint before the Department of Justice against Pascor Realty and Development Corporation (PRDC), its President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total amount of Pl0, 513,671.00. Private respondents PRDC, et. al. led an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability. The CIR denied the urgent request for reconsideration/ reinvestigation of the private respondents on the ground that no formal assessment has as yet been issued by the Commissioner. Private respondents then led a petition for review with the Court of Tax Appeals. Subsequently, the CIR led a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject matter of the petition, as there was no formal assessment issued against the petitioners. The CTA
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denied the said motion to dismiss, citing that the criminal complaint for tax evasion is the assessment issued. At the Court of Appeals, the decision of the CTA was sustained. Whether or not the criminal complaint for tax evasion can be construed as an assessment. Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted. Not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments. To be considered an assessment, the document must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specic period. In the present case, the revenue ofcers' Afdavit merely contained a computation of respondents' tax liability. It did not state a demand or a period for payment. Moreover, the fact that the Complaint itself was specically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to le a criminal complaint for tax evasion, not to issue an assessment. Section 222 of the NIRC specically states that in cases where a false or fraudulent return is submitted or in cases of failure to le 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. The commissioner of internal revenue, therefore, has the discretion on whether to issue an assessment or to le a criminal case against the taxpayer or to do both.

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Marcos II vs CA This is a Petition for Review on Certiorari assailing the decision of the Court of Appeals (CA) dated November 29,1994 where the said court held: In view of all the foregoing, we rule that the deciency income tax assessments and estate tax assessment, are already nal and not subject to appeal. Thus, 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. Seven (7) years after the death of former President Ferdinand E. Marcos, 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. 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. Criminal charges were led 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).

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The Commissioner of Internal Revenue thereby caused the preparation and ling 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) Deciency estate tax assessment against the estate of the late president Ferdinand Marcos in the amount of P23, 293,607,638.00 Pesos; (2) Deciency income tax assessments against the Spouses Ferdinand and Imelda Marcos in the amounts of PI49, 551.70 and P184,009,737.40representing deciency income tax for the years 1985 and 1986); (3) Deciency income tax assessment against petitioner Ferdinand "Bongbong" Marcos II in the amounts ofP258. 70 pesos; P9, 386-40 Pesos; P 4,388.30 Pesos; and P6, 376.60 Pesos representing his deciency income taxes for the years 1982 to 1985). Copies of the deciency estate and income tax assessments were all personally and constructively but to no avail. The deciency 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. Subsequently, a total of twenty-six notices of levy on real property against certain parcels of land owned by the Marcoses to satisfy the alleged estate tax and deciency income taxes of Spouses Marcos. Petitioner had led 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 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; annul and set aside the Notices of Sale dated May 26, 1993; and,

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enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of the real properties covered by Notices of Sale. Whether or not BIR has the authority to collect by the summary remedy of levying upon, and sale of real properties of the decedent, estate tax deciencies, without the cognition and authority of the court sitting in probate over the supposed will of the deceased? Whether or not BIR's Notices of Levy are null and void for having been issued beyond the allowed period? and Whether or not BIR's Notices of Levy are null and void for having been issued without valid service upon the petitioner? 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 the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certication by the Commissioner of Internal Revenue that the estate taxes have been paid. The omission to le 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 provision of Article 223 of the NIRC, in case of failure to le 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 nal 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

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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. Under Section 213 of the NIRC, 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. The foregoing notwithstanding, the record shows that notices of warrants of distrait and levy of sale were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his ofce at the Batasang Pambansa. We cannot therefore, countenance petitioner's insistence that he was denied due process.

Meralco Securities Corp vs. Savellano 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 (CIR) to collect from the former, the amount of P51,840,612.00, by way of alleged deciency 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 CIR condential denunciation against the Meraleo Securities Corporation for tax evasion for having paid income

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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. After conduct of investigation however, CIR found and held that no deciency corporate income tax was due from Meralco Securities Corp. on the dividends it received from the Manila Electric Co. (MERALCO) and subsequently denied Maniago's claim for informer's reward. On August 28, 1970, Maniago led a petition for mandamus, and subsequently an amended petition for mandamus, in the Court of First Instance of Manila against CIR and the Meraleo Securities to compel the former to impose tax deciency assessment on the latter and to award to him the corresponding informer's reward. 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 Meraleo Securities Corporation the sum of P51, 840,612.00 as deciency 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. Hence this petitions. Whether or not the respondent court can compel the CIR by mandamus to issue an assessment? Since the ofce 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 lie 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. A valid exercise of discretion in the performance of ofcial duty cannot be controlled much less reversed by mandamus.

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Republic of the Philippines vs CTA A shipment of bales of textile gray cloth, under Bill of Lading No. HKT - 138899,arrived at the manila International Container Port (MICP) aboard the vessel "SIS AC Daisy." The shipment Inward Foreign Manifest stated that the bales of cloth were consigned to GQ GARMENTS, Inc., of 244 EscoIta Street, Binondo, Manila. The Clean Report of Findings (CRF)issued by the Societe Generate de Surveilance (SGS), however mentioned AGFHA Incorporated, to be the consignee of the shipment. Forthwith, the shipping agent, FIL - JAPAN, requested for an amendment of the Inward Foreign Manifest so as to correct the name of the consignee from that of GQ GARMENTS, Inc., to that of AGFHA, Inc. FIL - JAPAN forwarded top AGFHA, Inc., the amended Inward Foreign Manifest which the latter, in turn, submitted to the MICP Law Division. The MICP indorsed the document to the Customs Intelligence Investigation Services (CllS). The CISS placed the subject shipment under Hold Order No. HlCII01/2293/0I ,on the ground that GQ GARMENTS, Inc., could not be located in its given address at 244 Escolta Street, Binondo, Manila, and was thus suspected to be a ctitious rm. Forfeiture proceedings under Section 2530 (f) and (I) (3-5) of the Tariff and Customs Code were initiated. AGFHA, Inc., through its president Wilson Kho, led a motion for intervention contending that AGFHA, Inc.,is the lawful owner and actual consignee of the subject shipment. The motion for intervention was granted on 2 March 1993. Following a hearing, the Collector of Customs came up with a draft decision ordering the lifting of the warrant of seizure and detention on the basis of its nding that GQ GARMENTS, Inc., was not a ctitious corporation and that there was a valid waiver of rights over the bales of cloth by GQ GARMENTS, Inc., in favor of AGFHA, Inc. The draft decision was submitted to the Deputy Commissioner for clearance and approval, who in turn,

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transmitted it for comment. The CIIS opposed the draft decision, insisting that GQ GARMENTS, Inc.,was a ctitious corporation and that even if it did exist, its president, John Barlin, had no authority to waive the right over the subject shipment in favor of AGFHA, Inc. Whether or not the forfeiture of goods is valid. The requisites for the forfeiture of goods under Section 2520 (f), in relation to (I) (3-5), of the Tariff and Customs Code are: (a) the wrongful making by the owner, importer, exporter or consignee of any declaration or afdavit or wrongful making or delivery by the same person of any invoice, letter or paper all touching on the importation or exportation of merchandise; (b) the falsity of such declaration, afdavit, invoice, letter or paper; and (c) an intention on the part of the importer I consignee to evade the payment or the duties due. Fraud must be proved to justify forfeiture. It must be actual, amounting to intentional wrong - doing with the clear purpose of avoiding the tax. Forfeiture is not favored in law. What is here involved is an honest mistake, not even directly attributable to private respondent, which will not deprive the government of its right to collect the proper tax. The conclusion of the appellate court, being consistent with the evidence on record and not contrary to law and jurisprudence, hardly can be overturned by this Court.

CIR vs CA, R.O.H Auto Products On 22 August 1986, during the period when the President of the Republic still wielding legislative power, Executive Order NO.41 was promulgated declaring a one time tax amnesty on unpaid income e taxes, later amended estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985.

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Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines, Inc., eld, 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 deciency income and business taxes for its scal years ended 30 September 1981 and 30 September 1982 in an aggregate amount of P1A10.1S7.71. The taxpayer wrote back to state that since it had been able to avail itself of the tax amnesty, the deciency 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. 4087, dated 09 February 1987, implementing Executive Order No. 41, had construed the amnesty coverage to include only assessment issued by the Bureau of Internal Revenue after the promulgation of the executive order on 22 August 1986 and not to assessments therefore made. Whether or not revenue memorandum Order No ..4-87, Promulgated to implement E.O. No. 41, is valid; Whether or not said deciency assessment in question were extinguished by reason or private respondents availment of Executive Order No. 64; Whether or not privet respondents has overcome the presumption of validity of assessments. The Supreme Court 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 of its provision. It reads

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Sec. 1.Scope of Amnesty. A one - time 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) le a sworn statement declaring his net worth as of December 31,1985; b) le a certied true copy statement declaring his net worth as of December 31, 1980 on record with the Bureau of Internal revenue, or if no such record exists, le a statement of said net worth therewith, subject to verication by the Bureau of Internal Revenue; c) le 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 PlO, 000.00 for judicial persons. Sec. 3.Computation of Net Worth. In computing the net worth referred to in Section 2 hereof, the following niles shall govern: a. Non-cash assets shall be valued at acquisition cost. b. Foreign currencies shall be valued at the rate of exchange prevailing as of the date of the net worth statement. c. Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar as the said liabilities are concerned;

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d. Those with tax cases pending investigation by the Bureau of Internal Revenue as of the affectively hereof as a result of information furnished under Section 3 16 of the National Internal Revenue Code, as amended; e. Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan; f. Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transaction) and Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as amended.

CIR vs CA, CTA and Fortune Tobacco Corporation The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1995, of respondent Court of Appeals afrming the 10th August 1994 decision and the 11th October 1994 resolution of the Court of Tax Appeals ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of Internal Revenue." Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of cigarettes. On various dates, the Philippine Patent Ofce issued to the corporation separate certicates of trademark registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January 1987, of then Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the Presidential Commission on Good Government, "the initial position of the Commission was to classify 'Champion; 'Hope; and 'More' as foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco changed the names of 'Hope' to Hope

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Luxury' and 'More' to 'Premium More; thereby removing the said brands from the foreign brand category. Proof was also submitted to the Bureau (of Internal Revenue ['BIR']) that 'Champion' was an original Fortune Tobacco Corporation register and therefore a local brand." Ad Valorem taxes were imposed on these brands. The Commissioner of BIR, however, through RMC37-93 reclassied the aforementioned brands of cigarette as locally manufactured cigarettes bearing a foreign brand subject to 55% ad valorem tax on cigarettes. Whether or not BIR erred in its RMC3793 reclassifying Fortune cigarette brands Hope, More and Champion as brands subject to 55% ad valorem tax instead of 45% or 20% tax for locally manufactured cigarettes. The Supreme Court upheld the decision of CTA and CA enjoining the Commissioner of internal Revenue from collecting deciency taxes against petitioner in its implementation ofRMC37-93. It should be understandable that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure

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(revoking in the process the previous holdings of past Commissioners) or merely as construing Section 142(C)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classication of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were not so classied as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on private respondent's products. !Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply interpreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored.

CIR vs Benguet Corporation Respondent Benguet Corporation is a domestic corporation organized and existing by virtue of Philippine laws, engaged in the exploration, development and operation of mineral resources, and the sale or marketing thereof to various entities. Respondent is a value added tax (VAT) registered enterprise.

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The transaction in question occurred during the period between 1988 and 1991. In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank. On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-88, which declared that "[t]h sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100[[10]] of the Tax Code, as amended by Executive Order No. 273." The BIR came out with at least six (6) other issuances[ll] reiterating the zero-rating of sale of gold to the Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14 February1990. 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 subject sales of gold. It then led applications for tax refunds/credits corresponding to input VAT for the amounts of P46,177,861.12, P19,218,738.44, and P84,909,247.96. Respondent's applications were either unacted upon or expressly disallowed by petitioner. In addition, petitioner issued a deciency 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. The express disallowance of respondent's application for refunds/credits and the issuance of deciency assessments against it were based on a BIR ruling-BIR VAT Ruling No. 008-92 dated 23 January 1992-that was issued subsequent to the consummation of the subject sales of gold to the Central Bank which provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92 withdrew, modied, and superseded all inconsistent BIR issuances. Whether respondent's sale of gold to the Central Bank during the period when such was classied by BIR issuances as zero-rated

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could be taxed validly at 10% rate after the consummation of the transactions involved. The Supreme Court upheld the decision of the Court of Appeals favoring respondent's position. In long line of cases the Court afrmed that the rulings, circular, 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 transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters. On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer. 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 deciency taxes with petitioner's retroactive change in the VAT categorization of respondent's transactions with the Central Bank. Tills is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids.

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INCOME TAXATION

The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difculty, and we must rise with the occasion. As our case is new, so we must think anew and act anew. We must disenthrall ourselves. - Abraham Lincoln

Madrigal vs Rafferty Vicente Madrigal and Susana Paterno, married under conjugal partnership led a sworn declaration with the Collector of Internal Revenue showing that his net income for the year being Php 296,302.73. Subsequently, Madrigal submitted a claim that the indicated income was in fact the income of the conjugal partnership existing between him and his wife. He further argued that the income should be divided into two parts; one to his wife and one on his wife, Susana. The General Questions was then submitted to the Attorney General of the Philippine Islands which decided in favor of Madrigal, in which case, the Collector of Internal Revenue forwarded the case to the United States Treasury Department where it was made to nd that; Php 362,407.67- prots made by Vicente Madrigal in his coal and shipping business; Php 4,086.50 were prots made by Susana Paterno in her embroidery business;

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Php16,687.80 were prots made Madrigal in a pawnshop business;

by

Vicente

This in sum is Php 383,181.97- representing the Gross Income of Vicente and Susana Paterno. General deductions - Php 86,879.24, resulting to an income of Php 296,30273 As a result, other specic deductions were included; (1) Php 16,687.80 the tax to be made at source and (2) Php 8,000 exemption granted to Vicente Madrigal and SusanaPaterno, husband and wife with then a remainder of Php 271,614.93.The dispute was then found to be in favor of the defendants. Whether or not the argument of the plaintiff as to whether the income tax of husband and wife should be divided into two equal parts, because of the conjugal partnership existing between them (sociedad de gananciales) thus having separate income tax returns As provided in a regulation of the US Treasury Department states that; "If a wife has a separate estate managed by herself as her own 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. In the present case, Vicente and Susana is governed by the conjugal partnership of marriage, therefore the regulation stated above is not applicable. Susana Paterno has no absolute right to one half of the income of conjugal partnership. Not being seized of a separate estate, she cannot make a separate return in order to receive benet of the exemption which would give rise to a benet of exemption. By law, husband and wives are only entitled to Php 8,000

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exemption, therefore, there can be no additional claim for Vicente Madrigal and Susana Paterno.

Conwi vs. CTA Petitioners are Filipino Citizens and employees of Procter and Gamble Philippines who were assigned for certain periods in other subsidiaries of Procter and Gamble outside the Philippines and were therefore, paid in US dollars as compensation for their services in their foreign assignments. When petitioners led their income tax returns, they computed their returns applying the dollar-to-peso conversion provided in BIR ruling no. 70-027 as follows; (1) From January 1- February 20,1970 at the conversation rate of Php 3.90 to US $ 1.00 and (2) From February 21 to December 31, 1970 at the conversation rate of Php 6.25 to US $ 1.00. However, upon the release of their returns, the Commissioner based his computation of Section 48 of RA No. 265 in relation to Section 6 of Commonwealth Act No. 699 as basis for converting their dollar income into Philippine Peso which resulted to overpayments, refunds, and/or tax credit. Arising from this, petitioners led their claims before the CTA, which denied their petitions therefore giving rise to this case. Whether or not the petitioner's dollar earnings are receipts derived from foreign exchange transactions; Whether or not the proper rate of conversion of petitioner's dollar earnings for tax purposes in the prevailing free market rate of exchange and not the par value of the peso; Whether or not the par value of the peso to convert petitioner's dollar earnings for tax purposes into Philippine Pesos is "unrealistic" and therefore, the prevailing free market rate should be the rate used.

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The Supreme Court held that CTA erred in deciding that the petitioner's dollar earnings are derived from foreign exchange transactions, being that the petitioners were "assigned" to the foreign subsidiaries of Procter and Gamble, they were earning in their assigned nation's currency and were also spending their currency, therefore, there was no conversion from one currency to another. The petitioners argued that Circular No. 289 shall be applied to them which provides for the specic instances when the par value of the peso shall not be the conversion rate used. The Supreme Court decided that the petitioners erred in such claim, being that Circular No. 289 shall only be applied to export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments, nothing by way of income tax payments. Petitioners also claimed that conversion is unrealistic and that there were no remittances and acceptances of their salaries and wages in US dollar into the Philippines, therefore they are exempted. The Supreme Court held that pursuant to RMC No. 7-71 and 41-71 providing that a uniform exchange rate for internal revenue tax purpose, is valid and therefore is applicable to them, being citizens of the Philippines, and as provided for in Sec 21 of the NIRC. Thus, the petitioner's claim are denied for lack of merit.

CIR vs Javier In 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein), received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in the US, among which is Mellon Bank, N.A. Later, Mellon Bank, N.A. led a complaint with the CFI against the petitioner (private respondent herein), his wife and other defendants,

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claiming that its remittance of US$lM was a clerical error and should have been US$1,000 only, and praying that the excess amount of US$999,000.00 be returned on the ground that the defendants are trustees of an implied trust for the benet of Mellon Bank with the clear, immediate, and continuing duty to return the said amount from the moment it was received. Later, the CFI led an information with the then Circuit Criminal Court charging the petitioner (private respondent herein) and his wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own personal use and benet the amount of US $999,000.00 which they received under an implied trust for the benet of Mellon Bank and as a result of the mistake in the remittance by the latter. In 1978, the petitioner (private respondent herein) led his Income Tax Return(ITR) for the taxable year 1977 showing a gross income of P53, 053.38 and a net income of P48, 053.88 and stating in the footnote of the return that 'Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." In 1980, the petitioner (private respondent herein) received a letter from the acting CIR, together with income assessment notices for the years 1976 and 1977,demanding that petitioner (private respondent herein) pay on or before December 15,1980 the amount of Pl,61S.96 and P9,287,297.S1 as deciency assessments for the years1976 and 1977 respectively ... The petitioner (private respondent herein) wrote the BIR that he was paying the deciency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await nal court decision on the case led against him for ling an allegedly fraudulent return.

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In 1981, the petitioner (private respondent herein) received from Acting CIR a letter stating in reply to his letterprotest that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is denitely taxable." ... The CIR also imposed a 50% fraud penalty against Javier. Disagreeing, Javier led an appeal before the respondent CTA. The respondent CTA, after the proper proceedings, rendered the challenged decision, that ... since petitioner (private respondent) led his income tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by respondent (petitioner) because he considered the return led false or fraudulent. This additional requirement, is much less called for because petitioner (private respondent), reected in his 1977 return as footnote that ''Taxpayer was recipient of some money received from abroad which he presumed to be gift but turned out to be an error and is now subject of litigation." Section 29 is not too plain and simple to understand. Since the question involved in this case is of rst impression in this jurisdiction, under the circumstances, the 50% surcharge imposed in the deciency assessment should be deleted. The CIR, not satised with the respondent CTA's ruling, elevated the matter to the SC, by the present petition. Whether or not income received by mistake is income Whether or not a taxpayer who merely states as a footnote in his income tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation and there did not declare it as income is liable to pay the 50% penalty for ling a fraudulent return First, the Honorable Court took judicial notice of the fact that so-called "million dollar case" was given very, very wide

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publicity by media; and only one who is not in his right mind would have entertained the idea that the BIR would not make an assessment if the amount in question was indeed subject to the income tax. Second, as the respondent Court ruled, "the question involved in this case is of rst impression in this jurisdiction". Even in the United States, the authorities are not unanimous in holding that similar receipts are subject to the income tax. It should be noted that the decision in the Rutkin case is a ve-tofour decision; and in the very case before this Honorable Court, one out of three Judges of the respondent Court was of the opinion that the amount in question is not taxable. Thus, even without the footnote, the failure to declare the "mistaken remittance" is not fraudulent. Third, when the private respondent led his income tax return on March 15, 1978 he was being sued by the Mellon Bank for the return of the money, and was being prosecuted by the Government for estafa committed allegedly by his failure to return the money and by converting it to his personal benet. The basic tax amounted to P4, 899,377.00 and could not have been paid without using part of the mistaken remittance. Thus, it was not unreasonable for the private respondent to simply state in his income tax return that the amount received was still under litigation. If he had paid the tax, would that not constitute estafa for using the funds for his own personal benet? And would the Government refund it to him if the courts ordered him to refund the money to the Mellon Bank? Fraud is never imputed and the courts never sustain ndings of fraud upon circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be. In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the BIR, headed by the herein

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petitioner. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything.

Eisner vs Macomber Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend and she received 1,100 additional shares, of which about $20,000 in par value represented earnings accumulated by the company -recapitalized rather than distributed -- since the effective date of the original tax law. The current statute expressly included stock dividends in income, and the government contended that those certicates should be taxed as income to Mrs. Macomber as though the corporation had distributed money to her. Mrs. Macomber sued Mr. Mark Eisner, the Collector of Internal Revenue, for a refund. Whether or not a stock dividend is taxable In the majority opinion, Justice Mahlon Pitney ruled that this stock dividend was not a realization of income by the taxpayer-shareholder for purposes of the Sixteenth Amendment: 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 prots evidenced thereby, while indicating that the shareholder is richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction. The Court noted that in Towne v. Eisner, it had clearly stated that stock dividends were not income, as nothing of value

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was received by Towne - the company was not worth any less than it was when the dividend was declared, and the total value of Towne's stock had not changed. Although the Eisner v. Macomber Court acknowledged the power of the Federal Government to tax income under the Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax - as income - anything other than income, i.e., that Congress did not have the power to re-dene the term income as it appeared in the Constitution: 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 certicates which, so far as they have any effect, deny him [or "her" - in this case, Mrs. Macomber present participation in such earnings. It [the government] contends that the tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none; that the prots are "distributed by means of a stock dividend," although a stock dividend distributes no prots; 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 prots are segregated from his[her] former capital, and [s]he has a separate certicate representing his [her] invested prots or gains," whereas there has been no segregation of prots, nor has [s]he any separate certicate representing a personal gain, since the certicates, new and old, are alike in what they represent-a capital interest in the entire concerns of the corporation. The Court ordered that Macomber be refunded the tax she overpaid.

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CIR vs Lednicky Spouses Lednicky are American citizens residing in the Philippines whose income are derived from Philippine sources. They were paying taxes to both the Philippine and American governments and subsequently amended their income tax returns by claiming deductions. Petitioner CIR admits in its brief that the purpose of the law is to prevent taxpayer from claiming twice the benets of his payment of foreign taxes, by deduction from gross income and by tax credits. The danger of double credit cannot exist if taxpayer cannot claim benet under either of these headings at his option, so that he must be entitled to a tax credit [RESPONDENT TAXPAYERS LEDNICKY SPOUSES ARE NOT SO ENTITLED BECAUSE ALL THEIR INCOMES IS DERIVED FROM PHIL.] or the option to deduct from gross income disappears altogether. The Supreme Court reversed the decisions of the Court of Tax Appeals, thus granting the petition of the CIR: What respondents fail to observe is that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benet of the SAME GOVERNMENTAL ENTTIY. To allow an ALIEN RESIDENT (LEDNICKY) 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 Phil. Govt. simply by increasing the tax rates on the alien resident. Every time the rate of taxation imposed upon an alien resident is increased by his own govt., his deduction from Phil. Taxes would correspondingly increase, and the proceeds for the Philippines diminished, thereby subordinating our own taxes to those levied by a foreign govt.

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Such a result is incompatible with the status of the Philippines as an independent and sovereign state.

CIR vs. Isabela Cultural Corp. On Feb.23,1990, ICC, domestic Corp. received from the BIR Assessment notice for deciency income tax in the amount of P333,196.86 and deciency Expanded W/tax in the amount ofP4,897.79 inclusive of surcharges and interest for the taxable year 1986.The deciency income tax arose from claimed deductions for auditing services for 1985,legal services for 1984 and 1985, security services for April and May 1986. The deciency expanded w/tax of P4,897.79 was allegedly due to the failure of ICC to withhold 1%w /tax for security services. On Feb. 9, 1995, ICC received a nal notice before seizure demanding payment of the amounts stated in the said notices. CTA held that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only on said year as the amount thereof could not be determined at that time. ICC in fact withheld that the claimed deductions for security services. Petitioner led a petition for review with the CA, which afrms CTA decision which holds that although the professional services were rendered to ICC in 1984 and 1985 the cost of the services was not yet determinable at that time, hence it could only be considered as deductions in 1986. Hence, the petitioner, through the ofce of Solicitor General, led the instant petition contending that since ICC is using the accrual method of accounting, the said expenses should have been declared as deductions from income during the said year and failure of ICC to do so bars it form claiming said expenses as deduction for the taxable year 1986. Whether or not the professional and security services are deductible expenses for the taxable year 1986.

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The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and security services are (a) the expenses must be ordinary and necessary, (b) it must have been paid and incurred during the taxable year, (c) it must have been paid or incurred in the carrying on the trade or business of the taxpayer, Cd) it must be supported by a receipts, records, or other pertinent papers. Sec 45 (NIRC) states that "the deduction provided for in this TITLE shall be taken for the taxable year in which paid or incurred , dependent upon the method of accounting upon the basis of which the net income is computed." 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 of the next year. In the instant case, the expenses for legal services pertain to the 1984&1985. The failure to determine the exact amount of the expenses for during the taxable year cannot thus be attributed solely to the delayed billing of these liabilities by the rm. The professional fee for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to discharge the burden of proving that the expenses were allowable deduction for the taxable year. As to the security services, the records show that these expenses were incurred by ICC in 1986 and could there be validly claimed for the said year.

CIR vs Arthur Henderson Arthur Henderson is the President of the American International Underwriters for the Philippines, a domestic corporation engaged in insurance business; he receives a basic annual salary of P30,000 and allowance for house rentals and utilities. They lived in a large apartment provided for by his employer, they had to live in apartments of the size beyond their personal needs because as president of the corporation, he and

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his wife had to entertain and put up house guests for the company. The BIR now assessed the taxable income of the respondent and include as part of it, their allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to the country club paid by his employer for his account; and traveling allowance of his wife.The respondent taxpayer asked for reconsideration of the assessed deciency taxed, but was denied by the BIR. Whether or not 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? No. The exigencies of Henderson's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Because they had to entertain and put up house guests, the employer had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those 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 apartment chosen by the employer is of no moment, for no part of the allowance redounded to the benet of the Hendersons. Neither was there an amount retained by them. Their bills for rental and utilities were paid directly by the employer to the creditor. Likewise, the ndings 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

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plans and specications of a proposed building, is also supported by the evidence.

CIR vs CA, CTA and A. Soriano Corp Private respondent A. Soriano Corporation's (ANSCOR) on various dates (1949-1963) declared stock dividends. Thereafter, Don Andres, who is holding signicant amount of shareholdings, died. 50,495 shares of which are original issues and the balance of 134,659 shares as stock dividend declarations. Half of this shares are transferred to his wife. Immediately after death of Don Andres, ANSCOR had signicantly increased its capital stock. These increases were received by the Don Andres estate. Subsequently, Don Andres' wife reclassifying a certain number of the common shares as preferred shares. ANSCOR redeemed these common shares from the Don Andres' estate. EIR examiner, after review, assessed that ANSCOR is liable for deciency withholding tax-at-source. ANSCOR's subsequent protest on the assessments was denied by petitioner. ANSCOR led a petition for review with the CTA. In its decision, the Tax Court reversed petitioner's ruling, after nding sufcient evidence to overcome the prima facie correctness of the questioned assessments. Hence, this appeal. Whether or not ANSCOR's redemption of stocks from its stockholder can be considered as "essentially equivalent to the distribution of taxable dividend," making the proceeds thereof taxable under the provisions of the above-quoted law? Whether or not exchange of common with preferred shares can be considered as a taxable transaction? Yes. Generally, a stock dividend representing the transfer of surplus to capital account shall not be subject to tax. Its mere issuance are nothing but an "enrichment through increase in value of capital investment. In a loose sense, stock dividends

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issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or prots accumulated. This process of issuance-redemption amounts to a distribution of taxable cash dividends which was just delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of taxation. Although redemption and cancellation are generally considered capital transactions, as such, they are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such transactions. Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder. No. There was no change in their proportional interest after the exchange. There was no cash ow. Both stocks had the same par value. Under the facts herein, any difference in their market value would be immaterial at the time of exchange because no income is yet realized - it was a mere corporate paper transaction. It would have been different, if the exchange transaction resulted into a ow of wealth, in which case income tax may be imposed. Reclassication of shares does not always bring any substantial alteration in the subscriber's proportional interest. Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary investors who

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take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the prots and losses of the enterprise. In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modication of the subscriber's rights and privileges which is not a ow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest.

CIR vs. Manning In 1952, MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of which were owned by Reese, and the rest were owned by the respondents with 100 shares each. On Feb. 29, 1952, Reese executed a trust agreement with the law rm of Ross, Selph, Carrascoso and Janda as trustees. The agreement provides that during the life of the owner, the shares shall remain in the name of and shall be voted upon by the owner; that upon the death of the owner, the shares shall be transferred to the company, and the company shall transfer such shares into the trustees, who shall hold the same until the company pays in full; that the trustees shall vote, subject to the provisions of the agreement; that the estate and heirs of the owner shall receive the fair value of the shares at the date of the owner's death. On October 19, 1954, Reese died. On February 2, 1955, after making partial payment, the certicate was cancelled and a new one issued in the name of MANTRAS CO. On December 22,1958, a resolution was passed reverting the 24,700 shares in the treasury to capital and declaring the same as stock dividend. Full payment of Reese's interest was made in 1963. On September 14, 1962, BIR examined the books of MANTRASCO, and found out that 24,700 shares were declared as dividends, with a book value of P, 7,973,660, and such were not included by respondents in their gross income. On April 14, 1965, the Commissioner issued

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notices of assessment for deciency income taxes to respondent. CTA absolved the respondents on the ground that the respondents' respective 1/3 interest in the corporation remained the same; hence, CIR appealed. Both parties agree that distribution of assets of a corporation is taxable, but stock dividend is not. However, they differ on the nature of the questioned shares. Respondents maintain that their interest remained the same, while petitioner argues that their respective interest increased from 0-4% to 331/3% after the declaration. Whether or not the shares declared as dividend are treasury shares, such that those were properly reverted to capital and distributed as stock dividend which is not subject to tax The said shares were not, on December 22, 1958 or at any time before or after that date, treasury shares. Treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid-for interest in the property of the corporation. The foregoing essential features of a treasury stock are lacking in the questioned shares. The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700 shares of Reese as absolutely outstanding shares of Reese's estate until they were fully paid. Such being the true nature of the

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24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings.

Sison vs. Ancheta This is a petition for declaratory relief or prohibition, assailing the constitutionality of Section 1 of B.P. 135, amending Section 21 of the National Internal Revenue Code of 1977. The assailed provision provides for rates of tax on citizens and residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes and other winnings, Cd) interest from bank deposits and yield or any other monetary benet from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net prots of taxable partnership, and (f) adjusted gross income. Petitioner alleges that by virtue thereof, he would be unduly discriminated against by the imposition of higher tax rates on his income arising from the exercise of his profession vis-a-vis those which are imposed upon xed income of salaried individual taxpayers. For petitioner, there is transgression of the due process and equal protection clauses, as well as that of the rule on uniformity in taxation. Whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally inrm Where the due process and equal protection clauses are invoked, considering that they are not xed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. The due process clause may be invoked where a taxing statute is so

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arbitrary that it nds no support in the Constitution. 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. For equal protection, it sufces 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. The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the same. Classication if rational in character is allowable. Equality and uniformity in taxation means that all 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 natural classications for purposes of taxation. 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." 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, rms and corporations placed in similar situation. 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 classied into different categories. To repeat, it is enough that the classication must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa BIg. 135, the discernible basis of classication is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and xing 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 not entitled to make deductions for income tax purposes because they are in the same situation more or less.

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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 justication 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.

Pascual vs. CIR Petitioners bought 2 parcels of land in 1965, and another 3 parcels in 1966. The rst 2 parcels were sold in 1968, and the remaining 3 were sold in 1970. Petitioners realized net prot from sale of PI65, 224.70 in 1968, and P60, 000 in 1970. Capital gains taxes were paid in 1973 and 1974 by availing tax amnesty. In 1979, the acting BIR Commissioner assessed the petitioners and required them to pay deciency income taxes of P107, 101.70. Petitioners protested the assessment, asserting that they have availed of tax amnesty. In reply, the Commissioner informed the petitioners that as co-owners, they formed an unregistered partnership or joint venture taxable as a corporation, and that the tax amnesty only relieved them from liability with respect to their individual share in the prots but did not relieve them from the tax liability of the unregistered partnership. On review, the Court of Tax Appeals sustained the assessment. Hence, petitioners led a petition before the Supreme Court. Whether or not by performing the aforementioned transactions, the petitioners have formed an unregistered partnership taxable as a corporation

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The essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide theprots among the contracting parties. There is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the prots among themselves. Respondent commissioner and/or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross prots as co-owners and paid their capital gains taxes on their net prots and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

Obillos vs. CIR and CTA On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas&Co., Ltd. on two lots with areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. Presumably, the Torrens

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titles issued to them would show that they were co-owners of the two lots. In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P 313,OSO. They derived from the sale a total prot of P 134,341.88 or P 33,S84 for each of them. They treated the prot as a capital gain and paid an income tax on one-half thereof or of P16,792. In April, 1980, or one day before the expiration of the veyear prescriptive period, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total prot of P 134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P 18,S09 as so% fraud surcharge and P 15,S47.S6 as 42% accumulated interest, or a total of P71,o74S6. Not only that. He considered the share of the prots of each petitioner in the sum of P33,S84 as taxable in full (not a mere capital gain of which 1f2 is taxable) and required them to pay deciency income taxes aggregating PS6,707.20 including the fraud surcharge and the accumulated interest. Thus, the petitioners are being held liable for deciency income taxes and penalties totalling P127,781.76 on their prot of P134,336, in addition to the tax on capital gains already paid by them. The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code. The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal.

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Whether or not the petitioners formed a taxable partnership that should be subjected tocorporate income tax on the total prot of P 134,336, in addition to individual income tax on their shares thereof. The Supreme Court held that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they allegedly contributed P 178,708.12 to buy the two lots, resold the same and divided the prot among themselves. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and conrm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated. As testied by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a coownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the prot was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture. All co-ownerships are not deemed unregistered partnership.-CoOwnership who own properties which produce income should not automatically be considered partners of an unregistered

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partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. In the instant case, what the Commissioner, should have investigated was whether the father donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.

Philex Mining Corporation vs. CIR On April 16, 1971, petitioner Philex Mining Corporation (Phil ex Mining), entered into an agreement with Bagnio Gold Mining Company ("Bagnio Gold") for the former to manage and operate the latter's mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet Province. In the course of managing and operating the project, Philex Mining made advances of cash and property in accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years which resulted to petitioner's withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine operations on February 20, 1982. Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in Payment" wherein Baguio Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in three segments by rst assigning Baguio Gold's tangible assets to petitioner, transferring to the latter Baguio Gold's equitable title in its

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Philodrill assets and nally settling the remaining liability through properties that Baguio Gold may acquire in the future. On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in Payment" where the parties determined that Baguio Gold's indebtedness to petitioner actually amounted to P 259,137,245.00, which sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to US$l1, 000, 000. 00 contracted by Baguio Gold from the Bank of America NT &SA and Citibank N.A. Baguio Gold undertook to pay petitioner in two segments by rst assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P 114,996,768.00. Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by charging P 112,136,000.00 to allowances and reserves that were set up in 1981 and P 2,860,768.00 to the 1982 operations. In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112, 136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and allowances." However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deciency income tax of P 62,811,16139 Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were satised, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it was charged off within the taxable year when it was determined to be worthless. On October 28, 1994, the BIR denied petitioner's protest for lack of legal and factual basis. It held that the alleged debt was not ascertained to be worthless since

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Baguio Gold remained existing and had not led a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the management contract, petitioner was to be paid fty percent (50%) of the project's net prot. Petitioner appealed before the Court of Tax Appeals (CTA) which rendered that the instant Petition for Review is hereby DENIED for lack of merit. The assessment for deciency income tax in the amount of P 62,811,161.39 was afrmed. The Court of Appeals afrmed the decision of the CTA. Whether the Philex Mining Corporation and Baguio Gold Mining Company ("Baguio Gold") has a creditor-debtor or a partnership joint venture relationship between them. The petition lacks merit. The lower courts correctly held that the "Power of Attorney" is the instrument that is material in determining the true nature of the business relationship between petitioner and Baguio Gold. Before resort may be had to the two compromise agreements, the parties' contractual intent must rst be discovered from the expressed language of the primary contract under which the parties' business relations were founded. It should be noted that the compromise agreements were mere collateral documents executed by the parties pursuant to the termination of their business relationship created under the "Power of Attorney". On the other hand, it is the latter which established the juridical relation of the parties and dened the parameters of their dealings with one another. The compromise agreements were executed eleven years after the "Power of Attorney" and merely laid out a plan or procedure by which petitioner could recover the advances and payments it made under the "Power of Attorney". An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed intended by the parties. Under a contract of partnership, two or more persons bind

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themselves to contribute money, property, or industry to a common fund, with the intention of dividing the prots among themselves. While a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership. Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the prots of the business as shown by a 50-50 sharing in the income of the mine. Under the "Power of Attorney", petitioner and Bagnio Gold undertook to contribute money, property and industry to the common fund known as the Sto. Nino mine. In this regard, we note that there is a substantive equivalence in the respective contributions of the parties to the development and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture assets under their respective accounts. Baguio Gold would contribute P11M under its owner's account plus any of its income that is left in the project, in addition to its actual mining claim. Meanwhile, petitioner's contribution would consist of its expertise in the management and operation of mines, as well as the manager's account which is comprised of P11M in funds and property and petitioner's "compensation" as manager that cannot be paid in cash. There is no merit to petitioner's claim that the prohibition in paragraph 5 (c) against withdrawal of advances should not be taken as an indication that it had entered into a partnership with Baguio Gold; that the stipulation only showed that what the parties entered into was actually a contract of agency coupled with an interest which is not revocable at will and not a partnership.

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In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it, or the mutual interest of both principal and agent. In this case, the nonrevocation or non-withdrawal under paragraph 5 applies to the advances made by petitioner who is supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that the parties' relation under the agreement is one of agency coupled with an interest and not a partnership. Although paragraph 16 of the agreement states that "this Agency shall be irrevocable while any obligation of the PRINCIPAL in favour of the MANAGERS is outstanding, inclusive of the MANAGERS' account," it does not necessarily follow that the parties entered into an agency contract coupled with an interest that cannot be withdrawn by Baguio Gold. It should be stressed that the main object of the "Power of Attorney" was not to confer a power in favour of petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner and Baguio Gold, in which the former was to manage and operate the latter's mine through the parties' mutual contribution of material resources and industry. The essence of an agency, even one that is coupled with interest, is the agent's ability to represent his principal and bring about business relations between the latter and third persons. Where representation for and in behalf of the principal is merely incidental or necessary for the proper discharge of one's paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but some other agreement depending on the ultimate undertaking of the parties. In this case, the totality of the circumstances and the stipulations in the parties' agreement indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio Gold. Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. Nino mine upon termination, a provision that is more consistent

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with a partnership than a creditor-debtor relationship. It should be pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing acquires ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality. In this case, however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had advanced, but only the return of an amount pegged at a ratio which the manager's account had to the owner's account. The "Power of Attorney" clearly provides that petitioner would only be entitled to the return of a proportionate share of the mine assets to be computed at a ratio that the manager's account had to the owner's account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements, for any amount over and above the proportion agreed upon in the "Power of Attorney". The tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions of pesos to another corporation with neither security, nor collateral, nor a specic deed evidencing the terms and conditions of such loans. The parties also did not provide a specic maturity date for the advances to become due and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the advances were not loans but capital contributions to a partnership. The strongest indication that petitioner was a partner in the 8to. Nino mine is the fact that it would receive 50% of the net prots as "compensation" under paragraph 12 of the agreement. The entirety of the parties' contractual stipulations simply leads to no other conclusion than that petitioner's "compensation" is actually its share in the income of the joint venture. Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the prots of a business is

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prima facie evidence that he is a partner in the business." Petitioner asserts, however, that no such inference can be drawn against it since its share in the prots of the 8to .Nino project was in the nature of compensation or "wages of an employee", under the exception provided in Article 1769 (4) (b). On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid "wages" pursuant to an employeremployee relationship. The petitioner was the manager of the project and had put substantial sums into the venture in order to ensure its viability and protability. By pegging its compensation to prots, petitioner also stood not to be remunerated in case the mine had no income. The Court found that petitioner's "compensation" under paragraph 12 of the agreement actually constitutes its share in the net prots of the partnership. Indeed, petitioner would not be entitled to an equal share in the income of the mine if it were just an employee of Baguio Gold. The "compensation" agreed upon only serves to reinforce the notion that the parties' relations were indeed of partners and not employer-employee. The lower courts did not err in treating petitioner's advances as investments in a partnership known as the 8to. Nino mine.The advances were not "debts" of Baguio Gold to petitioner inasmuch as the latter was under no unconditional obligation to return the same to the former under the "Power of Attorney". As for the amounts that petitioner paid as guarantor to Baguio Gold's creditors, we nd no reason to depart from the tax court's factual nding that Baguio Gold's debts were not yet due and demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold's outstanding loans to its bank creditors and this conclusion is supported by the evidence on record. In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing

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evidence that he is entitled to the deduction claimed. In this case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction. The petition was denied. The decision of the Court of Appeals which afrmed the decision of the Court of Tax Appeals was afrmed. Philex Mining Corporation was ordered to pay the deciency tax on its 1982 income in the amount of P 62,811,161.31, with 20% delinquency interest computed from February 10, 1995, which is the due date is given for the payment of the deciency income tax, up to the actual date of payment.

Abra Valley vs. Hon. Juan Aquino Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission in 1948, led a complaint on July 10,1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P 5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original Certicate of Title No. Q-83 duly registered in the name of petitioner, plaintiff on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer, defendants, was issued for the satisfaction of the said taxes thereon. The ''Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of said college lot and building, which sale was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted. The certicate of sale was correspondingly issued to him.

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On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered the respondents provincial and municipal treasurers to deliver\ to the Clerk of Court the proceeds of the auction sale. Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of P 6,000.00 evidenced by PNB Check No. 904369. On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned decision. The trial court among others, found the following: Ca) that the school is recognized by the government and is offering Primary, High School and College Courses, and has a school population of more than one thousand students all in all; (b) that it is located right in the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the Court of First Instance building; Cc) that the elementary pupils are housed in a two-storey building across the street; Cd) that the high school and college students are housed in the main building; Ce) that the Director with his family is in the second oor of the main building; and Cf) that the annual gross income of the school reaches more than one hundred thousand pesos. Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void. On the other hand, private respondents maintain that the college lot and building in question which were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the

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educational purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial purposes because the ground oor of the college building is being used and rented by a commercial establishment, theNorthern Marketing Corporation Whether or not the lot and building In question are used exclusively for educational purposes. Due to its time frame, the constitutional provision which nds application in the case at bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes ... Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409, otherwise known as the Assessment Law, provides: The following are exempted from real property tax under the Assessment Law: xxxxxxxxx (c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, scientic or educational purposes. In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof.

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As early as 1916 in YMCA of Manila vs. Collector of Internal Revenue, the Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still these do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from taxation. In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, the Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was claried that the term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favour of the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place also qualies for exemption because this constitutes incidental use in religious functions. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence.Thus, while the use of the second oor of the main building in the case at bar for residential purposes of the Director and his family, may nd justication under the concept of incidental use, which is complimentary to the main or primary purpose educational,the lease of the rst oor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education.

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It will be noted however that the aforementioned lease appears to have been raised for the rst time. That the matter was not taken up in the court is really apparent in the decision of respondent Judge. No mention thereof was made in the stipulation of facts, not even in the description of the school building by the trial judge, both embodied in the decision nor as one of the issues to resolve in order to determine whether or not said properly may be exempted from payment of real estate taxes. On the other hand, it is noteworthy that such fact was not disputed even after it was raised in the Supreme Court. Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the rst time on appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not squarely raised below, still in the interest of substantial justice, this Court is not prevented from considering a pivotal factual matter. 'The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it nds that their consideration is necessary in arriving at a just decision." Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot where it is built, should be taxed, not because the second oor of the same is being used by the Director and his family for residential purposes, but because the rst oor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved. The decision of the Court of First Instance of Abra, Branch I, is hereby afrmed subject to the modication that half of the assessed tax be returned to the petitioner.

Royal Interocean Lines vs. CIR

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From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964, MY "Amstelkroon, " both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on Philippine ports to load cargoes for foreign destination. The freight fees for these transactions were paid abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on the freight receipts.Respondent Commissioner of Internal Revenue, through his examiners, led the corresponding income tax returns for and in behalf of the former under Section 15 of the National Internal Revenue Code. On June 30, 1967, respondent Commissioner assessed said petitioner in the amounts of PI93,973.20 and P262,904.94 as deciency income tax for 1963 and 1964, respectively, as "a nonresident foreign corporation not engaged in trade or business in the Philippines under Section 24 (b) (1) of the Tax Codeugust 28, 1967, petitioner Royal Interocean Lines led an income tax return of the aforementioned vessels computed at the exchange rate of P2.00 to USSl.00 1 and paid the tax thereon in the amount of Pl,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue Regulations NO.2. Royal Interocean Lines as the husbanding agent of petitioner N.V. Reederij "AMSTERDAM" led a written protest against the abovementioned assessment .the respondent Court of Tax Appeals praying for the cancellation of the subject assessment. After due hearing, the respondent court, on December 1, 1976, rendered a decision modifying said assessments by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioners led a motion for reconsideration of said decision but this was denied by the respondent court. Whether N.V. Reederij "Amsterdam" not having any ofce or place of business in the philippines, whose vessels called on the

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philippine ports for the purpose of loading cargoes only twice-one in 1963 and another in 1964 - should be taxed as a foreign corporation not engaged in trade or business in the Philippines under section 24(b) (1) of the tax code or should be taxed as a foreign corporation engaged in trade or business in the philippines under section 24(b) (2) in relation to section 37 (e) of the same code; and Whether the foreign exchange receipts of n.v. reederij "amsterdam" should be converted into Philipine pesos at the ofcial rate of p2.00 to us $1.00, or at P3.90 to us $1.00. The petition is devoid of merit. Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do business in the Philippines. It does not have a branch ofce in the Philippines and it made only two calls in Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation, as in the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes.Foreign corporation doing business in the Philippines is taxable on income solely from sources within the Philippines, it is permitted to deductions from gross income but only to the extent connected with income earned in the Philippines. (Sees. 24(b) (2) and 37, Tax Code.) On the other hand, foreign corporations not doing business in the Philippines are taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations, emoluments, or other xed or determinable annual or periodical or casual gains, prots and income and capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.) As stated above Amsterdam is therefore taxable.

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!The conversion rate of P2.00 to US $1.00 which petitioners claim should be applicable to the income of petitioners for income tax purposes instead of P3.90 toSl.00 is likewise untenable. The transactions involved in this case are for the taxable years 1963 and 1964. Under Rep. Act No. 2609, the monetary board was authorized to x the legal conversion rate for foreign exchange. The free market conversion rate during those years was P3.90 to US $1.00.

CIR vs. Solidbank Corporation Under the Tax Code, the earnings of banks from "passive" income are subject to a twenty percent nal withholding tax (20% FWT). This tax is withheld at source and is thus not actually and physically received by the banks, because it is paid directly to the government by the entities from which the banks derived the income. Apart from the 20% FWT, banks are also subject to a ve percent gross receipts tax (5% GRT) which is imposed by the Tax Code on their gross receipts, including the "passive" income. Since the 20% FWT is constructively received by the banks and forms part of their gross receipts or earnings, it follows that it is subject to the 5% GRT. Before us is a Petition for Review[l] under Rule 45 of the Rules of Court, seeking to annul the July 18, 2000 Decision [2] and the May 8, 2001 Resolution[3] of the Court of Appeals[4] (CA) in CA-GR SP No. 54599. For the calendar year 1995, [respondent] seasonably led its Quarterly Percentage Tax Returns reecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total amount of Fl,474,691,693.44 with corresponding gross receipts tax payments in the sum of F73,734,584.60,Respondent] alleges that the total gross receipts in the amount of Fl,474,691,693.44 included the sum of F350,807,875.15 representing gross receipts

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from passive income which was already subjected to 20% nal withholding tax. June 19, 1997, on the strength of the aforementioned decision, [respondent] led with the Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance of [a] tax credit certicate in the aggregate amount of F3,508,078.75, representing allegedly overpaid gross receipts tax for the year 1995Asian BankCorporation vs. Commissioner of Internal Revenue x xx, wherein it was held that the 20% [nal withholding tax] on [a] bank's interest income should not form part of its taxable gross receipts for purposes of computing the [gross receipts tax]The CA held that the 20% FWT on a bank's interest income did not form part of the taxable gross receipts in computing the 5% GRT, because the FWT was not actually received by the bank but was directly remitted to the government. The appellate court curtly said that while the Tax Code "does not specically state any exemption, x xx the statute must receive a sensible construction such as will give effect to the legislative intention, and so as to avoid an unjust or absurd conclusion." Hence, this appeal Whether or not the 20% nal withholding tax on bank's interest income forms part of the taxable gross receipts in computing the 5% gross receipts tax. The Petition is meritorious. Petitioner claims that although the 20% FWT on respondent's interest income was not actually received by respondent because it was remitted directly to the government, the fact that the amount redounded to the bank's benet makes it part of the taxable gross receipts in computing the 5% GRT. Respondent, on the other hand, maintains that the CA correctly ruled otherwise. We agree with petitioner. In fact, the same issue has been raised recently in China Banking Corporation v. CA, where this Court held that the amount of interest income withheld in

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payment of the 20% FWT forms part of gross receipts in computing for the GRT on banks. The 5% GRT is included under "Title v. Other Percentage Taxes" of the Tax Code and is not subject to withholding. The banks and non-bank nancial intermediaries liable therefor shall, under Section 125(a)(1),le quarterly returns on the amount of gross receipts and pay the taxes due thereon within twenty (20) days after the end of each taxable quarter. The 20% FWT,on the other hand, falls under Section 24(e) (1)of "Title II. Tax onIncome."It is a tax on passive income, deducted and withheld at source by the pay or corporation and/ or person as withholding agent pursuant to Section 50, and paid in the same manner and subject to the same conditions as provided for in Section 51. Double taxation means taxing the same property twice when it should be taxed only once; that is, "x xx taxing the same person twice by the same jurisdiction for the same thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character.

CIR vs. Tokyo Shipping and CTA Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. On December 23, 1980, Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, paid the required income and common

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carrier's taxes in the total amount of P107,142.75 based on the expected gross receipts of the vessel. Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without any cargo. Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the charter agreement, private respondent instituted a claim for tax credit or refund before petitioner Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private respondent led a petition for review before public respondent Court of Tax Appeals. Petitioner contested the petition and contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to prove that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when it did not present its charter agreement. After trial, respondent tax court decided in favor of the private respondent. It also denied petitioner's motion for reconsideration. Hence, this petition for review on certiorari. Whether or not the private respondent was able to prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it prepaid to the government. Pursuant to Section 24 (b)(2) of the National Internal Revenue Code, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines.

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A claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. There can be no disagreement with petitioner's stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund. The Supreme Court held that respondent court was correct when it held that sufcient evidence has been adduced by the private respondent proving that it derived no receipt from its charter agreement with NASUTRA. Exhibits "E", "F," and "G" positively showed that the tramper vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of lloilo while Exhibit "F" is the Certication by the Ofcer-inCharge, Export Division of the Bureau of Customs lloilo. The correctness of the contents of these documents regularly issued by ofcials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the petitioner. With respect to petitioner's contention that private respondent suppressed evidence when it did not present its charter agreement with NASUTRA, the Court held that since the said charter agreement was not presented to bolster its position, the petitioner cannot take to task the private respondent for not presenting what it mistakenly calls "suppressed evidence." The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and condence in the Government this

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power must be used justly and not treacherously. The assailed decision of respondent Court of Tax Appeals was afrmed.

Marubeni Corporation vs CIR and CTA Petitioner Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the rst and third quarter of 1981, Atlantic Gulf & Pacic (AG&P) declared and paid cash dividends to petitioner in the amount of P849,720 each quarter and withheld the corresponding 10% nal dividend tax thereon. AG&P directly remitted the cash dividends to petitioner's head ofce in Tokyo, Japan, net not only of the 10% nal dividend tax but also of the withheld 15% prot remittance tax based on the remittable amount after deducting the nal withholding tax of 10%. A ruling was then sought by the petitioner, through the accounting rm Sycip, Gorres, Velayo and Company, from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch prots subject to the 15% prot remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773. The then Acting Commissioner Ruben Ancheta ruled that the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged and that accordingly, said dividends if remitted abroad are not considered branch prots for purposes of the 15% prot remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended ... Consequently, a letter-claim for refund was led with the Commissioner of Internal Revenue on September 24, 1981. However, on June 14, 1982 respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of P229,424-40 on the ground that while said dividends remitted

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were not subject to 15% prot remittance tax nor the 10% inter corporate tax, the recipient of the dividends, being a nonresident stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan. On appeal, the Court of Tax Appeals afrmed the denial of the refund. Hence, the instant petition for review. It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10 % inter corporate nal tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977 Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign corporation and not engaged in trade or business in the Philippines, is subject to tax on income earned from Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code but expressly made subject to the special rate of 25% under Article 10 (2) (b) of the Tax Treaty of 1980 concluded between the Philippines and Japan. Whether or not Marubeni is a resident or a non-resident foreign corporation under Philippine laws. As held, the Solicitor General has adequately refuted petitioner's arguments that the same is a resident foreign corporation. The general rule that a foreign corporation is the same juridical entity as its branch ofce in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch ofce, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is

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set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. The alleged overpaid taxes were incurred for the remittance of dividend income to the head ofce in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. Petitioner cannot claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %. While public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % prot remittance tax nor to the 10 % inter corporate dividend tax, the recipient being a non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). It is a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch prot remittance tax is imposed is the prot actually remitted abroad." Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said section provides: (b) Tax on foreign corporations. - (1) Non-resident corporations - ... (iii) On dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, 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 nonresident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have

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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; .... Proceeding to apply the above section to the case at bar, petitioner, being a nonresident foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)]. However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation. Consequently, petitioner is entitled to a refund on the transaction in question. The questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which afrmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund was REVERSED. The Commissioner of Internal Revenue was ordered to refund or grant as tax credit in favor of petitioner the amount of P144.452-40 representing overpayment of taxes on dividends received.

CIR vs. Johnson and Son and CA 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.

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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. 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% 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. On October 29, 1993, [respondent] led 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 [led with the Court of Appeals], par. 12). [Respondent's] claim for there fund of P963,266.00. The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson &Son, Inc. (S.C. Johnson) then led a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.

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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 certicate in the amount ofP963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. The Court of Appeals erred in ruling that SC Johnson and Son and Son, USA is entitled to the "Most Favored Nation" tax rate on royalties as provided in the RPUS tax treaty in relation to the RPWEST Germany tax treaty. The main point of contention in this appeal is the interpretation of Article 13 (2)(b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by thePhilippines upon royalties received by a non-resident foreign corporation. The provision states insofar as pertinent that1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2) However, the tax imposed by that Contracting State shall not exceed. a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties; (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and

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(iii) thelowest 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. xxxxxxxxx (emphasis supplied) The court 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. 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. 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 taxrelated". 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 RPUS Tax Treaty and in the RP-Germany Tax Treaty are paid under

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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 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 RPGermany 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. The court 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.

CIR vs Procter & Gamble and CTA Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as PMCPhiL), a corporation duly organized and existing under and by virtue of the Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. herein referred to as PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. As such PMC-U.s.A. is the sole shareholder or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive

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income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-Phil has a legal personality separate and distinct from PMC-U.S.A. After taxation it declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code which reads in full: SECTION 1. The rst paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue Code, as amended, is hereby further amended to read as follows: (b) Tax on foreign corporations. - 41) Non-resident corporation. A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other xed or determinable, annual, periodical or casual gains, prots, and income, and capital gains: Provided, however, That premiums shall not include re-insurance premium Provided, further, That cinematograpy lm owners, lessors, or distributors, shall pay a tax of 15% on their gross income from sources within the Philippines: Provided, still further That on dividends received from a domestic corporation subject to tax under this Chapter, the tax shall be 15% of the dividends received, 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 nonresident 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

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20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this section: Provided, nally That regional or area headquarters established in the Philippines by multinational corporations and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their afliates, subsidiaries or branches in theAsia-Pacic Region shaJl not be subject to tax. For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%- 35% or P2,952,159.00, thereafter leaving a net prot of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00. In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section24(b) as afore quoted, as the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMC-U.S.A., led a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged "overpaid withholding tax at source or overpaid withholding tax in the amount of P 4,832,989.00. There being no immediate action by the BIR on PMCPhilippines' letter-claim the latter sought the intervention of the CfA. On January 31,1974 the Court of Tax Appeals in its decision ruled in favor of thePMC. The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax rate on dividends declared and remitted to its parent corporation.

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The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code,as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporations, which to the extent applicable reads: SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGNCORPORATION. (a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this subject, adomestic 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(1) to the extent such dividends are paid by such foreign corporation out of accumulated prots [as dened in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation, be deemed to have paid the same proportion of any income, war prots, or excess prots 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 prots, which the amount of such dividends (determined without regard to Section 78) bears to the amount of such accumulated prots in excess of such income, war prots, and excess prots taxes (other than those deemed paid); and (2) to the extent such dividends are paid by such foreign corporation out of accumulated prots [as dened 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 prots, or

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excess prots 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 prots, which the amount of such dividends bears to the amount of such accumulated prots. ! xxxxxxxxx (c) Applicable Rules (1) Accumulated prots dened - For purpose of this section, the term 'accumulated prots' means with respect to any foreign corporation. (A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, prots, or income computed without reduction by the amount of the income, war prots, and excess prots taxes imposed on or with respect to such prots or income by any foreign country .... ; and (B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, prots, or income in excess of the income, was prots, and excess prots taxes imposed on or with respect to such prots or income. The Secretary or his delegate shall have full power to determine from the accumulated prots of what year or years such dividends were paid, treating dividends paid in the rst 20 days of any year as having been paid from the accumulated prots of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, prots, or earnings ...

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To Our mind there is nothing in the afore cited provision that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

Cyanamid vs. CA, CTA and CIR The Commissioner of Internal Revenue (CIR) sent an assessment letter to petitioner Cyanamid Philippines, Inc. and demanded the payment of deciency income tax of PU9,817.00 for taxable year 1981. A 25% Surtax of P3,774,867.50 was also assessed on its accumulated earnings for the same taxable year. Petitioner protested the assessments and claimed that the CIR's assessment representing the 25% surtax on its accumulated earnings for the year 1981 had no legal basis. The accumulation of its earnings and prots was for reasonable business requirements to meet working capital needs and retirement of indebtedness. Whether or not petitioner is liable for the accumulated earnings tax for the year 1981. BardahlFonnula - Petitioner claims that increase of working capital by a corporation justies accumulating income. Petitioner

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relies on the so-called "Bardahl formula, which allowed retention, as working capital reserve, sufcient amounts of liquid assets to carry the company through one operating cycle. The "Bardahl" formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufcient liquid assets to pay all of its current liabilities and an extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. 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 decit of P7,986,633.00. 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. However, the companies where the "Bardahl" formula was applied had operating cycles much shorter than that of petitioner. In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year, reecting that petitioner will need sufcient liquid funds, of at least three quarters of the year, to cover the operating costs of the business. There are vanabons 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. 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. The ratio of current assets to current liabilities is used to determine the sufciency of working capital. Ideally, the

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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. 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 decit" which could have necessitated an increase in working capital, as rationalized by petitioner. Immediacy Test - In order to determine whether prots are accumulated for the reasonable needs to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore, the accumulated prots 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 prot was for the immediate needs of the business.

CIR vs. Young Men's Christian Association Private Respondent Young Men's Christian Association of the Philippines, Inc. (YMCA) is a non-stock, non-prot institution, which conducts various programs and activities that are benecial to the public, especially the young people, pursuant to its religious, educational and charitable objectives.

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In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees collected from non-members. The Commissioner of Internal Revenue (CIR) issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge and interest, for deciency income tax, deciency expanded withholding taxes on rentals and professional fees and deciency withholding tax on wages. Private respondent formally protested the assessment. The CIR, however, denied the claims of YMCA. Contesting the denial of its protest, the YMCA led a petition for review at the Court of Tax Appeals (CTA). The CTA issued a ruling in favor of the YMCA and held that the income earned from leasing out its premises and from parking fees are not subject to tax. The leasing of private respondent's facilities to small shop owners, to restaurant and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of its objectives. Dissatised with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). The CA initially decided in favor of the CIR but it reversed itself upon nding merit on private respondent's motion for reconsideration Whether or not the income derived from rentals of real property owned by the Young Men's Christian Association of the Philippines, Inc. (YMCA) - established as "a welfare, educational and charitable non-prot corporation" - subject to income tax under the National Internal Revenue Code (NIRC) and the Constitution. !National Internal Revenue Code - In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of Section 30 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of their properties,real or personal, be

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subject to the tax imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property, the Court is dutybound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction. Hence, Respondent Court of Appeals committed reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on the solitary but unconvincing ground that the said income is not collected for prot but is merely incidental to its operation. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we. !Constitutional Provisions on Taxation - Invoking not only the NIRC but also the fundamental law, private respondentsubmits that Article VI, Section 28 of par. 3 of the 1987 Constitution, exempts "charitable institutions" from the payment not only of property taxes but also of income tax from any source. Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner,stressed during the Concom debates that " ... what is exempted is not the institution itself ... ; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes." Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of the Concom, adhered to the same view that the exemption created by said provision pertained only to property taxes. In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption covers property taxes only." Indeed, the income tax exemption claimed by private respondent nds no basis in Article VI, Section 26, par. 3 of the Constitution.

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Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution,claiming that the YMCA "is a non-stock, non-prot educational institution whose revenues and assets are used actually, directly and exclusively for educational purposes so it is exempt from taxes on its properties and income." For the YMCA to be granted the exemption it claims under the afore cited provision, it must prove with substantial evidence that (1) it falls under the classication non-stock, non-prot educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites.

PLDT vs. CIR Petitioner, the Philippine Long Distance Telephone Company (PLDT), claiming that it terminated in 1995 the employment of several rank-and-le, supervisory, and executive employees due to redundancy; that in compliance with labor law requirements, it paid those separated employees separation pay and other benets; 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), led 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 Code which excluded from gross income: "any amount received by an ofcial or employee or by his heirs from the employer as a consequence of separation of such ofcial 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 ofcial or employee."

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As the BIR took no action on its claim, PLDT led a claim for judicial refund before the Court of Tax Appeals. In its Answer, 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. PLOT 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 le their respective claims for refund of taxes erroneously withheld from their separation pay. By Decision of July 25, 2000, the CTA denied PLDTs claim on the ground that it "failed to sufciently prove that the terminated employees received separation pay and that taxes were withheld therefrom and remitted to the BIR." PLDT led a Motion for New TrialReconsideration, praying for an opportunity to present the receipts and quitclaims executed by the employees and prove that they received their separation pay. The CTA denied PLDTs motion. PLDT thus led a Petition for Review before the Court of Appeals which, by Decision of February 11, 2002, dismissed the same. PLDTs Motion for Reconsideration having been denied, it led the present Petition for Review on Certiorari, faulting the appellate court to have committed grave abuse of discretion. PLDT argues that it is not essential to prove that the separation pay benets 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.

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Whether or not the court committed grave abuse of discretion in afrming the denial ofPLDT's motion for a judicial tax refund? 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. 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 xx reect 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. It must be stressed that newly discovered evidence as a basis of a motion for new trial should be supported by afdavits 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. 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. PLDT has not shown any such abuse, however. Finally, on PLDT's plea for a liberal application of the rules of procedure, Commissioner of Internal Revenue v. A. Soriano Corporation37 furnishes a caveat on the matter:

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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, "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 rst 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. At all events, the alleged "newly discovered evidence" that PLDT seeks to offer does not sufce 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

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whose behalf it led 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."

Aguinaldo Industries vs. CTA This is a petition for review of the decision and resolution of the Court of TaxAppeals holding the petitioner liable for the sum of P17,123.93 as deciency income tax for 1957, plus 5% surcharge and 1% monthly interest for late payment from December 15, 1957 until full payment is made. Aguinaldo Industries Corporation is a domestic corporation engaged in the manufacture of shing nets, a taxexempt industry, and the manufacture of furniture. For accounting purposes, each division is provided with separate books of accounts as required by the Department of Finance and each division's income is computed individually, as per its accounting methods. Previously, petitioner acquired a parcel of land in Muntinglupa, Rizal, and this transaction was entered in the books of the Fish Nets Division of the Company. Later, the petitioner sold the property and the prot from this sale 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 led two separate income tax returns. 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 ofcers of petitioner. It was further found that the amount was taken from the net prot of an isolated transaction (sale of aforementioned

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land) not in the course of or carrying on of petitioner's trade or business. It was recommended that the said sum of P61,187.48 be disallowed as deduction from gross income. Petitioner, however, asserted in its letter of February 19, 1958, that said amount should be allowed as deduction because it was paid to its ofcers as allowance or bonus pursuant to Section 3 of its bylaws. Upon the submission of the case for judgment on the basis of the pleadings and BIR ofcial records, the respondent Court rendered the questioned decision. Subsequently, on a motion for reconsideration led by petitioner, the respondent Court issued a resolution imposing a 5% surcharge and 1% monthly interest on the deciency assessment. Dissatised, petitioner has come to this Court on errors assigned in its brief. Petitioner argues that the prot derived from the sale of its Muntinglupa land is not taxable for it is taxexempt income, considering that its Fish Nets Division enjoys tax exemption as a new and necessary industry under Republic Act 901. Whether or not herein petitioner for the sum of PI7,123.93 as deciency income tax for 1957, plus 5% surcharge and 1% monthly interest for late payment from December15,1957 until full payment is made? The court held that petitioner's belated claim for tax exemption was properly rejected. !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

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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 ofcers of the petitioner as their share of the prot 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 ofcers pursuant to petitioner's bylaws 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 ofcers which could be the basis of a grant to them of a bonus out of the prot 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 ofcers of the taxpayer, two (2) questions become material, namely: (a) Have personal services been actually rendered by said ofcers? (b) In the afrmative case, what is the reasonable allowance' therefor? This posture is in line with the doctrine in the law of taxation that the taxpayer must show that its claimed deductions

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clearly come within the language of the law since allowances, like exemptions, are matters of legislative grace. Now to resolve the issue regarding the imposition of 5% surcharge and 1% monthly interest for late payment of the deciency tax on petitioner's income. The provision of Section 51 of the Tax Code shall be applied. It should be observed that the 5% surcharge and interest on deciency 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 deciency tax, since the deciency was part and parcel of the taxpayer's income tax liability. Inasmuch as petitioner had led its income tax return for 1957 on the scal year basis ending June 30, 1957, the deciency income tax in question should have been paid on or before November 15, 1957-the fteenth day of the fth month following the close of the scal year. This Court held that the interest and surcharges on deciency taxes are imposable upon failure of the taxpayer to pay the tax on the date xed in the law for the payment thereof. The rule has to be so because a deciency tax indicates non-payment of the correct tax, and such deciency 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 and the imposition thereof is mandatory even in the absence of fraud or willful failure to pay the tax is full. 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. 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. As

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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 delinquencies are clearly intended to hasten tax payments or to punish evasion or neglect of duty in respect thereof. If delays in tax payments are to be condoned for light reasons, the law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the government and its multifarious activities would be as precarious as taxpayers are wining or unwilling to pay their obligations to the state in time. Imperatives of public welfare will not approve of this result.

Esso Standard Eastern, Inc. vs. CIR This is an appeal in the decision of the CTA 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. 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 led an amended return where it asked for the refund of P323,279.00by 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 prot remittances to its New York head ofce.

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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 deciency 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 P434,232.92. The deciency arose from the disallowance of the margin fees of PI, 226,647.72 paid by ESSO to the Central Bank on its prot remittances to its New York head ofce. ESSO settled this deciency 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 P213,20l.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its deciency income tax. It argued that the 18% interest should have been imposed not on the total deciency of P367,944.00 but only on the amount of P146,961.00, the difference between the total deciency 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 deciency 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.

Whether or not margin fee is a tax? Whether or not the margin fees be considered ordinary and necessary expenses when paid? Margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve.

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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 xed 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 xed 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, sufce 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. We nd 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

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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 prots to the head ofce in the Unites States. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. 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. 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

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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. Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Ofce 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 prot 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 ofce of part of its prots 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 It is clear that ESSO, having assumed an expense properly attributable to its head ofce, cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or business.

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FEBTC vs. CA This is a Petition for Review on Certiorari assailing the decision of the Court of Appeals. Petitioner is a domestic banking corporation duly organized 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 with the latter as its surviving entity [under] the merger. Petitioner being the surviving entity[, it] acquired all [the] assets of CDB. 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 led income tax returns which reected 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, led this Petition for Review after its administrative claim for refund was not acted upon. Whether or not petitioner adduced sufcient evidence to prove its entitlement to a refund. Petitioner has not sufciently presented a case for the application of an exception from the rule.

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The ndings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as nal, binding and conclusive upon this Court, especially if these are substantially similar to the ndings of the CA which is normally the nal arbiter of questions of fact.-The ndings shall not be reviewed nor disturbed on appeal unless a party can show that these are not supported by evidence, 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. 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. We must emphasize that tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in favor of the taxing authority. In the event, petitioner has not met its burden of proof in establishing the factual basis for its claim for refund and we nd no reason to disturb the ruling of the lower courts.

PNB vs. Savellano The Petitions before this Court originated from a sworn statement submitted by private respondent Tirso B. Savellano (Savellano) to the Bureau of Internal Revenue (BIR) on 24 June 1986. Through his sworn statement, private respondent Savellano informed the BIR that PNB had failed to withhold the 15% nal tax on interest earnings and/ or yields from the money placements of PNOC with the said bank, in violation of Presidential Decree (P.O.) No. 1931. P.O. No. 1931, which took effect on 11 June 1984, withdrew all tax exemptions of government-owned and controlled corporations.

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In a letter, dated 08 August 1986, the BIR requested PNOC to settle its liability for taxes on the interests earned by its money placements with PNB and which PNB did not withhold. PNOC wrote the BIR on 25 September 1986, and made an offer to compromise its tax liability, which it estimated to be in the sum of P304, 419,396.83, excluding interest and surcharges, as of 31 July 1986. PNOC proposed to set-off its tax liability against a claim for tax refund/credit of the National Power Corporation (NAPOCOR),then pending with the BIR, in the amount of 11335, 259.450.21. The amount of the claim for tax refund/credit was supposedly a receivable account of PNOC from NAPOCOR. On 08 October 1986, the BIR sent a demand letter to PNB, as withholding agent, for the payment of the nal tax on the interest earnings and/or yields from PNOC's money placements with the bank, from 15 October 1984 to 15 October 1986, in the total amount of P376, 301,133.33. On the same date, the BIR also mailed a letter to PNOC informing it of the demand letter sent to PNB. PNOC, in another letter, dated 14 October 1986, reiterated its proposal to settle its tax liability through the set-off of the said tax liability against NAPOCOR'S pending claim for tax refund/ credit. The BIR replied on 11 November 1986 that the proposal for set-off was premature since NAPOCOR's claim was still under process. Once more, BIR requested PNOC to settle its tax liability in the total amount of P385, 961,580.82, consisting of P303,343,765.32 nal tax, plus P82,617,815.50 interest computed until 15 November 1986. On 09 June 1987, PNOC made another offer to the BIR to settle its tax liability. This time, however, PNOC proposed a compromise by paying 1191,003,129.89,representing 30% of the P303,343,766.29 basic tax, in accordance with the provisions ofExecutive Order (E.O.) No. 44.

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PNOC and PNB led separate Motions to Dismiss, both arguing that the CTA lacked jurisdiction to decide the case. In its Resolution, dated 28 November 1988, the CTA denied the Motions to Dismiss since the question of lack of jurisdiction and/or cause of action do not appear to be indubitable. After their Motions to Dismiss were denied by the CTA, PNOC and PNB led their respective Answers to the amended Petition. PNOC averred, among other things,that (1) it had no privity with private respondent Savellano; (2) the BIR Commissioner's discretionary act in entering into the compromise agreement had legal basis under E.O.No. 44 and RMO No. 39-86 and RMO No. 4-87; and (3) the CTA had no jurisdiction to resolve the case against it. On the other hand, PNB asserted that (1) the CCA lacked jurisdiction over the case; and (2) the BIR Commissioner's decision to accept the compromise was discretionary on his part and, therefore, cannot be reviewed or interfered with by the courts. PNOC and PNB later led their amended Answer invoking an opinion of the Commission on Audit (COA) disallowing the payment by the BIR of informer's reward to private respondent Savellano. The compromise agreement between PNOC and the BIR, dated 22 June 1987, is declared void for being contrary to law and public policy, and is without force and effect; Paragraph 2 of RMO No. 39-86 remains a valid provision of the regulation; The withholding tax assessment against PNB, dated 08 October 1986, had become nal and unappealable. The BIR Commissioner is ordered to enforce the said assessment and collect the amount of 1'294,958.450.73, the balance of tax assessed after crediting the previous payment made by PNOC pursuant to the compromise agreement, dated 22 June 1987; and Private respondent Savellano shall be paid the remainder of his informer's reward, equivalent to 15% of the deciency withholding tax ordered collected herein, or P 44,243,767.61

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CIR vs. Isabela Cultural Corporation On February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deciency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deciency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986. The deciency income tax ofP333,196.86, 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 rm for the years 1984 and 1985.5 (c) Expense for security services of EI 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 deciency 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 nal notice before seizure demanding payment of the amounts

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stated in the said notices. Hence, it brought the case to the CTA which held that the petition is premature because the nal notice of assessment cannot be considered as a nal 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 deciency tax amounts to a nal 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. Was the cost of the services such as advertising expenses be considered as deductible expenses? 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 compounded interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the application of compounded interest.

ClR vs. Central Luzon Drug Corporation Central Luzon Drug Corporation is a retailer of medicines and other pharmaceutical products. For the period January 1995

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to December 1995, pursuant to the mandate of Sec. 4(a) of Republic Act No. 7432, otherwise known as the Senior Citizens Act, it granted a 20% discount on the sale of medicines to qualied senior citizens amounting to P219,778.00. lt then deducted the same amount from its gross income for the taxable year 1995, pursuant to Revenue Regulations No. 2-94 implementing the Senior Citizens Act, which states that the discount given to the senior citizens shall be deducted by the establishment from its gross sales for value-added tax and other percentage tax purposes. For the said taxable period, Central Luzon Drug reported a net loss of P20,963.00in its corporate income tax returns, thus it did not pay income tax for 1995. Subsequently, Central Luzon Drug led a claim for refund in the amount ofPI50,193.00, claiming that according to Sec. 4(a) of the Senior Citizens Act, the amount of P219,778.00 should be applied as tax credit. The Commissioner of Internal Revenue (CIR) was not able to decide the claim on time,hence, Central Luzon Drug led a Petition for Review with the Court of TaxAppeals. The latter dismissed the petition, declaring that even if the law treats the 20% discount granted to senior citizens as a tax credit, the same cannot apply when there is no tax liability or the amount of the tax credit is greater than the tax due. In the latter case, the tax credit will only be to the extent of the tax liability. Furthermore, the law does not sate that a refund can be claimed by the establishment concerned as an alternative to tax credit. Central Luzon Drug led a Petition for Review with the Court of Appeals. The appellate court held that the 20% discount given to senior citizens which is treated as a tax credit is considered just compensation and, as such, may be carried over to the next taxable period if there is no current tax liability. Whether or not the 20% discount granted by the Central Luzon Drug to qualied senior citizens pursuant to Section 4(a) of the Senior Citizens Act may be claimed as a tax credit or as a deduction from

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gross sales in accordance with Section 2(1) of Revenue Regulations No. 2-94. !The Petition is denied. !Section 4(a) of the Senior Citizen Acts provides: "Section 4.Privileges for the Senior Citizens.- The senior citizens shall be entitled to the following: (a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportations services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit. " The above provision explicitly employed the term ''tax credit." Nothing in this provision suggests for it to mean a "deduction" from gross sales. Thus, the 20% discount required by the law to be given to senior citizens is tax credit, not a deduction from the gross sales of the establishment concerned. As a corollary to this, the denition of ''tax credit" found in Sec. 2 (1) of Revenue Regulations No. 2-94 is erroneous as it refers to tax credit as the amount representing the 20% discount that "shall be deducted by the said establishment from their gross sales for value added tax and other percentage tax purposes." 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. The law cannot be amended by a mere regulation. Finally, for purposes of clarity, Section 229 of the Tax Code does not apply to cases that fall under Sec. 4 of the Senior Citizens Act because the former provision governs exclusively all kinds of refund or credit internal revenue taxes that were

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erroneously or illegally imposed an collected pursuant to the Tax Code while the latter extends the tax credit benet to the private establishments concerned even before tax payments have been made. The tax credit that is contemplated under the Senior Citizens Act is a form of just compensation, not a remedy for taxes that were erroneously or illegally assessed and collected. In the same vein, proper payment of any tax liability is not a precondition before taxable entity can benet from the tax credit. The credit may be availed of upon payment of the tax due, if any. Where there is no tax liability or where a private establishment reports a net loss for the period, the tax credit can be availed of and carried over the next taxable year.

Philex Mining Corporation vs. CIR On August 5, 1992, BIR send a letter to Philex asking it to settle its tax liabilities for the 2nd, 3cd and 4th quarter of 1991 as well as the 1" and 2nd quarter of 1992 in the total amount of P123,821,982.52. Philex protested stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of PU9,977,037.02 plus interest. Therefore, these claims for tax credit/refund should be applied against the tax liabilities citing eIR vs. Itogon-Suyoc Mines, Inc. BIR, founding no merit in Phil ex's position stating that these claims have not yet been established or determined with certainty, hence no legal compensation can take place. Philex appealed to the CTA. CTA ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract". Phil ex led a motion for reconsideration but it was denied. However, a few days after the denial of the Motion for Reconsideration, Philex was able to obtain is VAT input credit/ refund and Philex contends that it should off-set its excise tax liabilities since both had already become "due and demandable", as well as fully liquidated.

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Whether or not the grant of V AT input credit/refund can be applied against the tax liabilities. Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity. The court cited Francia us. Intermediate Appellate Court where it was held that taxes cannot be subject to set-off or compensation. The court cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it led against the government.

Ericsson vs. City of Pasig In an Assessment Notice, petitioner was assessed a business tax deciency for the years1998 and 1999 amounting to P9,466,885.00 and P4,993,682.00, respectively, based on its gross revenues as reported in its audited nancial statements for the years 1997 and 1998. Petitioner led a Protest claiming that the computation of the local business tax should be based on gross receipts and not on gross revenue. The City of Pasig

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(respondent) issued another Notice of Assessment to petitioner on November 19, 2001, this time based on business tax deciencies for the years 2000 and 2001, amounting to P4,665,775.51 and P4,71O,242.93, respectively, based on its gross revenues for the years 1999 and 2000. Again, petitioner led 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 the protest. The RTC, however, canceled and set aside the assessments made by respondent and its City Treasurer. The CA reversed and set aside the complaint for lack of authority to sign the CNFS. Issue: WON the case should be dismissed based on procedural grounds Held: No Ratio: First, the complaint led by petitioner with theRTC 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 Verication and Certication 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 verication and certication against non-forum shopping. In the present case, petitioner submitted a Secretary's Certicate signed on May 6, 2002, whereby Atty. Ramos was authorized to le 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." Applying the foregoing jurisprudence, the subsequent submission of the Secretary's Certicate and the substantial merits of the petition, which will be shown forthwith, justify a relaxation of the rule. Whether or not the local business tax on contractors should be based on gross receipts or gross revenue. Insofar as petitioner is concerned, the applicable provision is subsection (e), Section 143of the same Code covering contractors and other independent contractors. The provision

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specically refers to gross receipts which is dened under Section 131 of the Local GovernmentCode, as follows:"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). 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, the Court interpreted gross receipts as including those which were actually or constructively received: "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 nal 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 nal 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 nal tax." There is constructive receipt, when the consideration for the articles sold, exchanged or leased, or the services rendered has already been placed 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,

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the payment of which is yet to be received. This is in consonance with the International Financial Reporting Standards, which denes revenue as the gross inow of economic benets (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),which is measured at the fair value of the consideration received or receivable. 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 - inasmuch as petitioner's revenue or income for a taxable year will denitely 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 nancial statements, as Section 143 of the LocalGovernment Code and Section 22(e) of the Pasig Revenue Code clearly provide that the tax should be computed based on gross receipts.

Philam Asset Management vs. CIR The Petioner, formerly known as Philam Fund Management, Inc., is a domestic corporation duly organized and existing under the laws of the Philippines, with its main purpose as an Investment Manager. 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 diversied portfolio of debt and equity securities. The case involves two cases under Philam. On April 3, 1998, petitioner led its annual corporate income tax return 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-

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Two Thousand Ninety-Two Pesos (P522,092.00) representing the tax withheld by petitioner's withholding agents, PFI and PBFI, on professional fees. On September 11, 1998, petitioner led an administrative claim for refund with theBureau of Internal Revenue Appellate Division in the amount of P522,092.00representing unutilized excess tax credits for calendar year 1997. Thereafter, on July 28, 1999, a written request was led with the same division for the early resolution of petitioner's claim for refund. Upon appeal to the Court of Tax Appeals, the court denied Philam's claim. In another case, on April 13, 1999, Philam led its Annual Income Tax Return with the Bureau of Internal Revenue for the taxable year 1998 declaring a net loss of P1,504,951.00. Thus, there was no tax due against Philam for the taxable year 1998. Likewise, Phil am 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 PFI, PBFI, and Phil am Strategic Growth Fund, Inc. (PSGFI). In the next succeeding year, Philam had a tax due in the amount of of P80,042.00, and a creditable withholding tax in the amount of P915,995.00. Philam likewise declared in its 1999 tax return the amount of P459,756.07, which represents its prior excess credit for taxable year 1998. That is why on November 14, 2000, Philam led and Administrative claim for refund with the Revenue District Ofce with respect to the unapplied creditable withholding tax of P459,756.07. According to Philam, the amount of P80,042.00, representing the tax due for the taxable year 1999 has been credited from itsP915,995.00 creditable withholding tax for taxable year 1999, thus leaving its 1998 creditable withholding tax in the amount of P459,756.07 still unapplied. The BIR denied Philam's claim and was also denied upon petition to the Court of Tax Appeals. Whether or not Philam is entitled to refund of its creditable taxes withheld for the taxable years 1997 and 1998.

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The court favored Philam on the rst case but did not on the second case. Section76 of the National Internal Revenue Code states that: "Section 76.Final Adjustment Return. -- Every corporation liable to tax under Section 24 shall le a nal adjustment return covering the total net income for the preceding calendar or scal 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 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 maybe. "In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its nal adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year." The Court said that the options under Section 76 are alternative in nature. The choice of one precludes the other. In Philippine Bank of Communications v. Commissioner of Internal Revenue, 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, 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 verication and approval by the BIR. In the present case, although petitioner did not mark the refund box in

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its 1997 FAR, neither did it perform any act indicating that it chose a tax credit. On the contrary, it led 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 FS22,092.

Collector of Internal Revenue vs. Meralco Juan Maniego substituted by his wife and children submitted before theCommissioner of Internal Revenue a condential denunciation against Manila Electric Corporation for having paid only 25% of the dividends from 1962 up to 1966. Hence, the said company is alleged to have committed tax evasion for short changing the government. The Commissioner of Internal Revenue held that no deciency was committed by Meralco in accordance with the provision of Sec 24 (a) of the National Internal Revenue Code. The judge of the court of First Instance of the city of Manila on the other hand, ruled that a mandamus be issued against the Commissioner compelling him to issue an assessment to Meralco for the collection of the alleged deciency and ordered as well that the informant Maniego be rewarded. The Commissioner of Internal Revenue contended that mandamus will not lie since he is exercising discretionary powers. Meralco argued further more that there is no cause of action and the action is premature and that mandamus will not lie. Also, that the court of rst Instance has no jurisdiction to reside over the said subject matter. Whether or not the Court of First Instance has jurisdiction to hear and decide casesinvolving disputed assessments, refunds of internal revenue taxes, and other matters arising from the Internal Revenue Code.

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The Supreme Court ruled that in accordance to the provisions of RA 1125, Sec. 7,and the power to hear and decide cases relating to taxation are vested upon the Court ofTax Appeals. The disputed assessment claims against Meralco is within the jurisdiction of the Court of Tax Appeals. The most that Maniego would have done is to le a complaint before the Court of Tax Appeals. Furthermore, the mandamus issued cannotlie as such would be tantamount to usurpation of executive functions. Hence, no assessment may be issued against Meralco, and in thus, the Maniego's heirs cannot claim the reward.

Stateland Investment vs. CIR Stateland Investment Corporation opted to apply the excess tax credits amounting to Php 13,929,793.51 for the succeeding year 1998. That year the declared minimum corporate income tax of Stateland amounted to Php4, 187, 523. Hence, a balance of Php 9, 742,270.51 was left unutilized. In 1999, the said company led its motion for refund of the said unutilized excess tax payment. The Court of Tax Appeals denied the said motion due to the fact that the "x" mark on the company's income tax return which means that the company intended the said amount to be carried over the next year. Stateland contended however that it intended to carry over for the year 1999 only what it has earned during the taxable year 1998 as it the company was aware that it could no longer avail the excess tax credit for the year 1997. The Court of Tax Appeals nd no merits on this argument presented by Stateland. Whether or not the petitioner, Stateland Corporation, isentitled to the Php9,742,270.51 representing the excess credit tax for the year 1997.

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The petitioner alleged that the "x" mark indicated in the income tax return was not appreciated by the Court of Tax Appeals. They furthermore argued that the said excess amount cannot be used in the year 1999 because they have incurred loss during that year. Hence, they do not have any tax liability in which the excess amount can be utilized. The Supreme Court ruled in accordance to the provision of Sec 69 of the InternalRevenue Code ruled in favor of Stateland Corporation. It has been well dened in the said provision that if the total tax due is less than the quarterly tax payments made during the year, a taxpayer is entitled to a refund or credit for the excess amount paid. Also, excess tax payments that cannot be applied to tax due the following year may be refunded the next year. This is exactly what the petitioner has done which the Court of Tax Appeals failed to appreciate. The Court held that justice and fair play are on the side of the petitioner. The principle of solutio indebiti could also be applied in this case. The BIR received something that is due it; hence it has the obligation to return the same. Wherefore, the petition of Stateland Corporation ordering the Bureau of Internal Revenue to refund the excess tax payment.

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TAX ONE CLASS


First Semester 2011

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