TAXATION 1

CASE DIGESTS
ad majorem Dei gloriam

Commissioner vs. Algue

GRL-28890, 17 February 1988
First Division, Cruz (J); 4 concur

Facts: The Philippine Sugar Estate Development Company (PSEDC)

appointed Algue Inc. as its agent, authorizing it to sell its
land, factories, and oil manufacturing process. The Vegetable
Oil Investment Corporation (VOICP) purchased PSEDC properties.
For the sale, Algue received a commission of P125,000 and it was
from this commission that it paid Guevara, et. al. organizers of
the VOICP, P75,000 in promotional fees. In 1965, Algue received
an assessment from the Commissioner of Internal Revenue in the
amount of P83,183.85 as delinquency income tax for years 1958
amd 1959. Algue filed a protest or request for reconsideration
which was not acted upon by the Bureau of Internal Revenue
(BIR). The counsel for Algue had to accept the warrant of
distrant and levy. Algue, however, filed a petition for review
with the Coourt of Tax Appeals.

Issue: Whether the assessment was reasonable.

Held: Taxes are the lifeblood of the government and so should be

collected without unnecessary hindrance. Every person who is
able to pay must contribute his share in the running of the
government. The Government, for his part, is expected to respond
in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that is an
arbitrary method of exaction by those in the seat of power.

Tax collection, however, should be made in accordance with law

as any arbitrariness will negate the very reason for government
itself. For all the awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can demonstrate
that the law has not been observed. Herein, the claimed
deduction (pursuant to Section 30 [a] [1] of the Tax Code and
Section 70 [1] of Revenue Regulation 2: as to compensation for
personal services) had been legitimately by Algue Inc. It has
further proven that the payment of fees was reasonable and
necessary in light of the efforts exerted by the payees in
inducing investors (in VOICP) to involve themselves in an
experimental enterprise or a business requiring millions of
pesos.

The assessment was not reasonable.

Commissioner vs. Cebu Portland Cement

GR L-29059, 15 December 1987
First Division, Cruz (J): 4 concur
Facts: By virtue of a decision of the Court of Tax Appeals,
modified by the Supreme Court, the Commissioner was ordered to
refund overpayments of ad valorem taxes on cement produced and
sold by the company after October 1957. The company moved for a
writ of execution, which was opposed by the Commissioner on the
ground that the company had an outstanding sales tax liability
to which the judgment debt had already been credited. The Court
of Tax Appeals held that the alleged sales tax liability was
still being questioned and therefore cannot be set-off against
the refund.

Issue: Whether the assessment of sales tax liability may be

enforced, i.e. to set off against the refund.

Held: The argument, that the assessment cannot as yet be

enforced because it is still being contested, loss sight of the
urgency of the need to collect taxes as “the life blood of the
government.” If the payment of taxes could be postponed by
simply questioning their validity, the machinery of the state
would grind to a halt and all government functions would be
paralyzed. To require the Commissioner to actually refund to
the company the amount of the judgment debt. Which he will later
have the right to distrait for payment of its sales tax
liability, is an idle ritual.

Sison vs. Ancheta

GR L-59431, 25 July 1984
En Banc, Fernando (J): 9 concur, 2 concur in result, 1
concur in separate opinion, 1 took no part

Facts: Batas Pambansa 135 was enacted. Sison, as taxpayer,

alleged that its provision (Section 1) unduly discriminated
against him by the imposition of higher rates upon his income as
a professional, that it amounts to class legislation, and that
it transgresses against the equal protection and due process
clauses of the Constitution as well as the rule requiring
uniformity in taxation.

Issue: Whether BP 135 violates the due process and equal

protection clauses, and the rule on uniformity in taxation.

Held: There is a need for proof of such persuasive character as

would lead to a conclusion that there was a violation of the due
process and equal protection clauses. Absent such showing, the
presumption of validity must prevail. 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 classifications
for purposes of taxation. Where the differentitation conforms to
the practical dictates of justice and equity, similar to the
standards of equal protection, it is not discriminatory within
the meaning of the clause and is therefore uniform. Taxpayers
may be classified into different categories, such as recipients
of compensation income as against professionals. Recipients of
compensation income are not entitled to make deductions for
income tax purposes as there is no practically no overhead
expense, while professionals and businessmen have no uniform
costs or expenses necessaryh to produce their income. There is
ample justification 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.

Lutz vs. Araneta

GR L-7859, 22 December 1955
First Division, Reyes JBL (J): 8 concur

Facts: Walter Lutz, as Judicial Administrator of the Intestate

Estate of Antonio Jayme Ledesma, sought to recover the sum of
P14,6666.40 paid by the estate as taxes from the Commissioner
under Section e of Commonwealth Act 567 (the Sugar Adjustment
Act), alleging that such tax is unconstitutional as it levied
for the aid and support of the sugar industry exclusively, which
is in his opinion not a public purpose.

Issue: Whether the tax is valid in supporting an industry.

Held: The tax is levied with a regulatory prupose, i.e. to
provide means for the rehabilitation and stabilization of the
threatened sugar industry. The act is primarily an exercise of
police power, and is not a pure exercise of taxing power. As
sugar production is one of the great industries of the
Philippines; and that its promotion, protection and advancement
redounds greatly to the general welfare, the legislature found
that the general welfare demanded that the industry should be
stabilized, and provided that the distribution of benefits
therefrom be readjusted among its component to enable it to
resist the added strain of the increase in tax that it had to
sustain. Further, it cannot be said that the devotion of tax
money to experimental stations to seek increase of efficiency in
sugar production, utilization of by-products, etc., as well as
to the improvement of living and working conditions in sugar
mills and plantations, without any part of such money being
channeled diectly to private persons, constitute expenditure of
tax money for private purposes.

The tax is valid.

Pascual vs. Secretary of Public Works and

Communications
GR L-10405, 29 December 1960
En Banc, Concepcion (J): 10 concur

Facts: RA 920 (Act appropriating funds for public works) was

enacted in 1953 containing an item (Section 1 c[a]) for the
construction, reconstruction, repair, extension and improvement
of Pasig feeder road terminals (the projected and planned
subdivision roads, which were not yet constructed, within
Antonio Subdivision owned by Senator Jose C. Zulueta). Zulueta
“donated” said parcels of land to the Government 5 months after
the enactment of RA 920, on the condition that if the Government
violates such condition the lands would revert to Zulueta. The
provincial governor of Rizal, Wenceslao Pascual, questioned the
validity of the donation and the Constitutionality of the item
in RA 920, it being not for a public purpose.

Issue: Whether the item in the appropriation is valid.

Held: The right of the legislature to appropriate funds is

correlative with its right to tax, under constitutional
provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the
devotion thereof to another purpose, no appropriation of state
funds can be made for other than a public purpose. The validity
of a statute depends upon the powers of Congress at the time of
its passage or approval, not upon events occupying, or acts
performed, subsequently thereto, unless the latter consist of an
amendment of the organic law, removing, with retrospective
operation, the constitutional limitation infringed by said
statute. Herein, inasmuch as the land on which the projected
feeder roads were to be constructed belonged to Senator Zulueta
at the time RA 920 was passed by Congress, or approved by the
President, and the disbursement of said sum became effective on
20 June 1953 pursuant to Section 13 of the Act, the result is
that the appropriating sough a private purpose and hence, null
and void.

Bagatsing vs. Ramirez

GR L-41631, 17 December 1976
En Banc, Martin (J): 7 concur, 1 concur with
qualification, 1 reserved vote

Facts: In 1974, the Municipal Board of Manila enacted Ordinance

7522, regulating the operation of public markets and prescribing
fees for the rentals of stalls and providing penalties for
violation thereof. The Federation of Manila Market Vendors Inc.
assailed the validity of the ordinance, alleging among others
the non-compliance to the publication requirement under the
Revised Charter of the City of Manila.

Issue: Whether the publication requirement was complied with.

Held: The Revised Charter of the City of Manila is a special act

since it relates only to the City of Manila, whereas the Local
Tax Code id a general law because it applies universally to all
local governments. Section 17 of the Charter speaks of
“ordinance” in general. Whereas, Section 43 of the Local Tax
Code relates to “ordinances levying or imposing taxes, fees or
other charges” in particular. While the Charter requires
publication, before the enactment of the ordinance and after
approval thereof, in two daily newspapers of the general
circulation in the city, the Local Tax Code only prescribes for
publication widely circulated within the jurisdiction of the
local government or by posting the ordinance in the local
legislative hall or premises and in two other conspicuous places
within the territorial jurisdiction of the local government.
Being a general law with a special provision applicable in the
case, the Local Tax Code prevails.
Maceda vs. Macaraig
GR 88291, 31 May 1991
En Banc, Gancayco (J): 6 concur, 2 took no part, 1
dissents
Facts: Commonwealth Act 120 created NAPOCOR as a public
corporation to undertake the development of hydraulic power and
the production of power from other sources. RA 358 (1949)
granted NAPOCOR tax and duty exemption privileges. RA 6395
(1971) revised the charter of the NAPOCOR, tasking it to carry
out the policy of the national electrification, and provided in
detail NAPOCOR’s tax exceptions. PD 380 (1974) specified that
NAPOCOR’s exemption includes all taxes, etc. imposed “directly
or indirectly.” PD 938 integrated the exemptions in favor of
GOCCs including their subsidiaries; however, empowering the
President or the Minister of Finance, upon recommendation of the
Fiscal Incentives Review Board (FIRB) to restore, partially or
completely, the exemptions withdrawn or revised. The FIRB
issued Resolution 10-85 (7 February 1985) restoring the duty and
tax exemptions privileges of NAPOCOR for period 11 June 1984- 30
June 1985. Resolution 1-86 (1January 1986) restored such
exemption indefinitely effective 1 July 1985. EO 93 (1987)
again withdrew the exemption. FIRB issued Resolution 17-87 (24
June 1987) restoring NAPOCOR’s exemption, which was approved by
the President on 5 October 1987.

Since 1976, oil firms never paid excise or specific and ad

valorem taxes for petroleum products sold and delivered to
NAPOCOR. Oil companies started to pay specific and ad valorem
taxes on their sales of oil products to NAPOCOR only in 1984.
NAPOCOR claimed for a refund (P468.58 million). Only portion
thereof, corresponding to Caltex, was approved and released by
way of a tax credit memo. The claim for refund of taxes paid by
PetroPhil, Shell and Caltex amounting to P410.58 million was
denied. NAPOCOR moved for reconsideration, starting that all
deliveries of petroleum products to NAPOCOR are tax exempt,
regardless of the period of delivery.

Issue: Whether NAPOCOR cease to enjoy exemption from indirect

tax when PD 938 stated the exemption in general terms.

Held: NAPOCOR is a non-profit public corporation created for

the general good and welfare, and wholly owned by the government
of the Republic of the Philippines. From the very beginning of
the corporation’s existence, NAPOCOR enjoyed preferential tax
treatment “to enable the corporation to pay the indebtness and
obligation” and effective implementation of the policy
enunciated in Section 1 of RA 6395. From the preamble of PD
938, it is evident that the provisions of PD 938 were not
intended to be strictly construed against NAPOCOR. On the
contrary, the law mandates that it should be interpreted
liberally so as to enhance the tax exempt status of NAPOCOR. It
is recognized principle that the rule on strict interpretation
does not apply in the case of exemptions in favor of government
political subdivision or instrumentality. In the case of
property owned by the state or a city or other public
corporations, the express exception should not be construed with
the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property
“exception is the rule and taxation the exception.”

Commissioner vs. Lingayen Gulf Electric

GR L-23771, 4 August 1988
En Banc, Sarmiento (J): 13 concur

Facts: Lingayen Gulf Electric Power operates an electric power

plant serving the municipalities of Lingayen and Binmaley,
Pangaisnan, pursuant to municipal franchise granted it by the
respective municipal councils. The franchises provided that the
grantee shall pay quarterly to the Provincial Treasury of
Pangasinan 1% of the gross earnings obtained through the
privilege for the first 20 years (from 1946), and 2% during the
remaining 15 years of the life of the franchise. In 1948, the
Philippine President approved the franchise (RA 3843). In 1955,
the BIR assessed and demanded against the company deficiency
franchise taxes and surcharges fro the years 1946 to 1954
applying the franchise tax rate of 5% on gross receipts from
1948 to 1954. The company asked for a reinvestigation, which was
denied.

Issue [1]: Whether the Court can inquire into the wisdom of the
Act.

Held [1]: The Court does not have the authority to inquire into
the wisdom of the Act. Charters or special laws granted and
enacted by the Legislatur are in the nature of private
contracts. They do not contitute a part of the machinery of the
general government. They are usually adopted after careful
consideration of the private rights in relation with the
resultant benefits of the State. In passing a special charter,
the attention of the Legislature is directed to the facts and
circumstances which the act or charter is intended to meet. The
Legislature considers and makes provision for all the
circumstance of the particular case. The Court ought not to
disturb the ruling of the Court of Tax Appeals on the
constitutionality of the law in question.

Issue [2]: Whether a rate below 5% on gross income violate the

uniformity of tax clause in the Constitution.

Held [2]: A tax is uniform when it operates with the same force
and effect in every place where the subject of it is found.
Uniformity means that all property belonging to the same class
shall be taxed alike. The legislature has the inherent power not
only to select the subjects of taxation but to grant exemptions.
Tax exemptions have never been deemed violateve of the equal
protection clause. Herein, the 5% franchise tax rate provided in
Section 259 of the Tax Code was never intended to have a
universal application. Section 259 expressly allows the payment
of taxes at rates lower than 5% when the charter granting the
franchise precludes the imposition of a higher tax. RA 3843 did
not only fix and specify a franchise tax of 2% on its gross
receipts, but made it
in lieu of any and all taxes, all laws to the contrary
notwithstanding. “

The company, hence, is not liable for deficiency taxes.

Hodges vs. Iloilo City

GR L-18129, 31 January 1963
En Banc, Bautista Angelo (J): 7 concur, 2 affirm, 1
took no part
Facts: In 1960, the Municipal Board of Iloilo enacted Ordinance
33 requiring the payment of a sales tax of 1/2 of 1% of the
selling price of any motor vehicle and prohibiting the
registration of the sale involving said vehicle in the Motors
Vehicle Office of Iloilo unless the tas has been paid. It also
expressly required that the payment of the municipal tax shall
be a requirement for registration and transfer of ownership. CN
Hodges, engaged in buying-and-selling of second hand motor
vehicles in the city, assailed the ordinance as invalid for
being passed in excessof the authority conferred by law upon the
municipal board.

Issue: Whether the City of Iloilo is empowered to impose the tax.

Held: The City of Iloilo is empowered to impose municipal
licenses, taxes or fees upon any person engaged in any
occupation or business, or exercising any privilege in the City;
to regulate and impose reasonable fees for services rendered
conducted within the city, and to levy for public purposes just
and uniform taxes, licenses, or fees. The tax in question is in
the form of percentage tax on the proceeds of the sale of a
motor vehicle. The prohibition against such tax refer only to
municipalities and municipal districts and does not comprehend
chartered cities as the City of Iloilo.

Herrera vs. Quezon City Board of Assessment Appeals

GR L-15270, 30 September 1961
First Division, Concepcion (J): 6 concur
Facts: In 1952, the Director of the Bureau of Hospitals
authorized Jose V. Herrera and Ester Ochangco Herrera to
establish and operate the St. Catherine’s Hospital. In 1953, the
Herreras sent a letter to the Quezon City Assessor requesting
exemption from payment of real estate tax on the hospital,
stating that the same was established for charitable and
humanitarian purposes and not for commercial gain. The exemption
was granted effective years 1953 to 1955. In 1955, however, the
Assessor reclassified the properties from “exempt” to “taxable”
effective 1956, as it was ascertained that out 32 beds in the
hospital, 12 of which are for pay-patients. A school of
midwifery is also operated within the premises of the hospital.

Issue: Whether St. Catherine’s Hospital is exempt from reallty

tax.

Held: The admission of pay-patients does not detract from the

charitable character of a hospital, if all its funds are devoted
exclusively to the maintenance of the institution as a public
charity. The exemption in favor of property used exclusively
for charitable or educational purpose is not limited to property
actually indispensable therefore, but extends to facilities
which are incidental to and reasonably necessary for the
accomplishment of said purpose, such as in the case of hospitals
— a school for training nurses; a nurses’ home; property used to
provide housing facilities for interns, resident doctors,
superintendents and other members of the hospital staff; and
recreational facilities for student nurses, interns and
residents. Within the purview of the Constitution, St.
Catherine’s Hospital is a charitable institution exempt from
taxation.
Ormoc Sugar vs. Treasurer of Ormoc City
GR L-23794, 17 February 1968
En Banc, Bangzon JP (J): 9 concur
Facts: In 1964, the Municipal Board of Ormoc City passed
Ordinance 4, imposing on any and all productions of centrifuga
sugar milled at the Ormoc Sugar Co. Inc. in Ormoc City a
municpal tax equivalent to 1% per export sale to the United
States and other foreign countries. The company paid the said
tax under protest. It subsequently filed a case seeking to
invalidate the ordinance for being unconstitutional.

Issue: Whether the ordinance violates the equal protection

clause.

Held: The Ordinance taxes only centrifugal sugar produced and

exported by the Ormoc Sugar Co. Inc. and none other. At the time
of the taxing ordinance’s enacted, the company was the only
sugar central in Ormoc City. The classification, to be
reasonable, should be in terms applicable to future conditions
as well. The taxing ordinance should not be singular and
exclusive as to exclude any subsequently established sugar
central, of the same class as the present company, from the
coverage of the tax. As it is now, even if later a similar
company is set up, it cannot be subject to the tax because the
ordinance expressly points only to the company as the entity to
be levied upon.

Villanueva vs. Iloilo City

GR L-26521, 28 December 1968
En Banc, Castro (J): 8 concur

Facts: On 30 September 1946, the Municipal Board of Iloilo City

enacted Ordinance 86 imposing license tax fees upon tenement
house (P25); tenemen house partly engaged or wholly engaged in
and dedicated to business in Baza, Iznart, and Aldeguer Streets
(P24 per apartment); and tenement house, padtly or wholly
engaged in business in other streets (P12 per apartment). The
validity of such ordinance was challenged by Eusebio and
Remedios Villanueva, owners of four tenement houses containing
34 apartments. The Supreme Court held the ordinance to be ultra
vires. On 15 January 1960, however, the municipal board,
believing that it acquired authority to enact an ordinance of
the same nature pursuant to the Local Autonomy Act, enacted
Ordinance 11 (series of 1960), Eusebio and Remedios Villaniueva
assailed the ordinance anew.

Issue: Whether Ordinance 11 violate the rule of uniformity of

taxation.

Held: The Court has ruled that tenement houses constitute a

distinct class of property; and that taxes are uniform and equal
when imposed upon all property of the same class or character
within the taxing authority. The fact that the owners of the
other classes of buildings in Iloilo are not imposed upon by the
ordinance, or that tenement taxes are imposed in other cities do
not violate the rule of equality and uniformity. The rule does
not require that taxes for the same purpose should be imposed in
different territorial subdivisions at the same time. So long as
the burden of tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated,
equality and uniformity is accomplished. The presumption that
tax statutes are intended to operate uniformly and equally was
not overthrown herein.