compilation for first coverage

7/25/2019 Compilation for First Coverage

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G.R. No. L-17518 October 30, 1922

FREDERICK C. FISHER,plaintif-appellant,vs.

ENCESL!O "RINID!D, Co##ector o$ I%ter% Re'e%(e,deendant-appellee.

Fisher and De Witt and Antonio M. Opisso for appellants.Acting Attorney-General Tuason for appellee.

)OHNSON, J.:

The only question presented by this appeal is: Are the "stock dividends" in the present

case "income" and taxable as such under the provisions o section ! o Act o. #$$%&hile the appellant presents other important questions, under the vie' 'hich 'e havetaken o the acts and the la' applicable to the present case, 'e deem it unnecessary todiscuss them no'.

The deendant demurred to the petition in the lo'er court. The acts are thereoreadmitted. They are simple and may be stated as ollo's:

That durin( the year )*)* the +hilippine American ru( ompany 'as a corporation dulyor(anied and existin( under the la's o the +hilippine /slands, doin( business in the ityo 0anila1 that he appellant 'as a stockholder in said corporation1 that said corporation,as result o the business or that year, declared a "stock dividend"1 that the proportionateshare o said stock divided o the appellant 'as +2,#331 that the stock dividend or thatamount 'as issued to the appellant1 that thereater, in the month o 0arch, )*3, theappellant, upon demand o the appellee, paid under protest, and voluntarily, unto the

appellee the sum o +##*.*) as income tax on said stock dividend. 4or the recovery othat sum 5+##*.*)6 the present action 'as instituted. The deendant demurred to thepetition upon the (round that it did not state acts su7cient to constitute cause o action.

The demurrer 'as sustained and the plaintif appealed.

To sustain his appeal the appellant cites and relies on some decisions o the 8upremeourt o the 9nited 8tates as 'ill as the decisions o the supreme court o some o thestates o the 9nion, in 'hich the questions beore us, based upon similar statutes, 'asdiscussed. Amon( the most important decisions may be mentioned the ollo'in(: To'nevs. isner, 2! 9.8., 2)#1 oyle vs. 0itchell ;ors. o., 2< 9.8., ).?.A., !#e(islature is an Act establishin( "an income tax." 8ect! o said Act attempts to deDne the application o the income tax. The deDnition ollo

The term "dividends" as used in this >a' shall be held to mean any distribution madeordered to be made by a corporation, . . . out o its earnin(s or proDts accrued since 0Drst, nineteen hundred and thirteen, and payable to its shareholders, 'hether in cashin stock o the corporation, . . . . 8tock dividend shall be considered income, to the amo the earnin(s or proDts distributed.

/t 'ill be noted rom a readin( o the provisions o the t'o la's above quoted that the'riter o the la' o the +hilippine /slands must have had beore him the statute o the

9nited 8tates. o important ar(ument can be based upon the sli(ht diferent in the'ordin( o the t'o sections.

/t is urther ar(ued by the appellee that there are no constitutional limitations upon thpo'er o the +hilippine >e(islature such as exist in the 9nited 8tates, and in support othat contention, he cites a number o decisions. There is no question that the +hilippin>e(islature may provide or the payment o an income tax, but it cannot, under the (uo an income tax, collect a tax on property 'hich is not an "income." The +hilippine>e(islature can not impose a tax upon "property" under a la' 'hich provides or a taxupon "income" only. The +hilippine >e(islature has no po'er to provide a tax upon"automobiles" only, and under that la' collect a tax upon acarretonor bull cart.onstitutional limitations, that is to say, a statute expressly adopted or one purposecannot, 'ithout amendment, be applied to another purpose 'hich is entirely distinct adiferent. A statute providin( or an income tax cannot be construed to cover property'hich is not, in act income. The >e(islature cannot, by a statutory declaration, chan(

the real nature o a tax 'hich it imposes. A la' 'hich imposes an important tax on riconly cannot be construed to an impose an importation tax on corn.

/t is true that the statute in question provides or an income tax and contains a urtheprovision that "stock dividends" shall be considered income and are thereore subBectincome tax provided or in said la'. / "stock dividends" are not "income" then the la'permits a tax upon somethin( not 'ithin the purpose and intent o the la'.


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/t becomes necessary in this connection to ascertain 'hat is an "income in order that 'emay be able to determine 'hether "stock dividends" are "income" in the sense that the'ord is used in the statute. +erhaps it 'ould be more lo(ical to determine Drst 'hat are"stock dividends" in order that 'e may more clearly understand their relation to "income."Eenerally speakin(, stock dividends represent undistributed increase in the capital ocorporations or Drms, Boint stock companies, etc., etc., or a particular period. They areused to sho' the increased interest or proportional shares in the capital o eachstockholder. /n other 'ords, the inventory o the property o the corporation, etc., orparticular period sho's an increase in its capital, so that the stock theretoore issued doesnot sho' the real value o the stockholderFs interest, and additional stock is issuedsho'in( the increase in the actual capital, or property, or assets o the corporation, etc.

To illustrate: A and ; orm a corporation 'ith an authoried capital o +)3,333 or thepurpose o openin( and conductin( a dru( store, 'ith assets o the value o +,333, andeach contributes +),333. Their entire assets are invested in dru(s and put upon theshelves in their place o business. They commence business 'ithout a cent in thetreasury. very dollar contributed is invested. 8hares o stock to the amount o +),333 areissued to each o the incorporators, 'hich represent the actual investment and entireassets o the corporation. ;usiness or the Drst year is (ood. 0erchandise is sold, andpurchased, to meet the demands o the (ro'in( trade. At the end o the Drst year aninventory o the assets o the corporation is made, and it is then ascertained that theassets or capital o the corporation on hand amount to +2,333, 'ith no debts, and still nota cent in the treasury. All o the receipts durin( the year have been reinvested in thebusiness. either o the stockholders have 'ithdra'n a penny rom the business durin(the year. very peso received or the sale o merchandise 'as immediately used in thepurchase o ne' stock G ne' supplies. At the close o the year there is not a centavo in

the treasury, 'ith 'hich either A or ; could buy a cup o cofee or a pair o shoes or hisamily. At the be(innin( o the year they 'ere +,333, and at the end o the year they'ere +2,333, and neither o the stockholders have received a centavo rom the businessdurin( the year. At the close o the year, 'hen it is discovered that the assets are +2,333and not +,333, instead o sellin( the extra merchandise on hand and thereby reducin(the business to its ori(inal capital, they a(ree amon( themselves to increase the capitalthey a(ree amon( themselves to increase the capital issued and or that purpose issueadditional stock in the orm o "stock dividends" or additional stock o +),333 each, 'hichrepresents the actual increase o the shares o interest in the business. At the be(innin(o the year each stockholder held one-hal interest in the capital. At the close o the year,and ater the issue o the said stock dividends, they each still have one-hal interest in thebusiness. The capital o the corporation increased durin( the year, but has either o themreceived an income% It is not denied, for the purpose of ordinary taxation, that the taxale

property of the corporation at the eginning of the year !as "#,$$$, that at the close othe year it 'as "%,$$$, and that the tax rolls should be chan(ed in accordance 'ith thechan(ed conditions in the business. /n other 'ords, the ordinary tax should be increasedby +,333.

Another illustration: and or(anied a corporation or a(ricultural purposes 'ith anauthoried capital stock o +3,333 each contributin( +!,333. &ith that capital theypurchased a arm and, 'ith it, one hundred head o cattle. very peso contributed isinvested. There is no money in the treasury. 0uch time and labor 'as expanded durin(

the year by the stockholders on the arm in the 'ay o improvements. either receivecentavo durin( the year rom the arm or the cattle. At the be(innin( o the year theassets o the corporation, includin( the arm and the cattle, 'ere +)3,333, and at theclose o the year and inventory o the property o the corporation is made and it is theound that they have the same arm 'ith its improvements and t'o hundred head ocattle by natural increase. At the end o the year it is also discovered that, by reason business chan(es, the arm and the cattle both have increased in value, and that thevalue o the corporate property is no' +3,333 instead o +)3,333 as it 'as at thebe(innin( o the year. The incorporators instead o reducin( the property to its ori(inacapital, by sellin( of a part o its, issue to themselves "stock dividends" to represent proportional value or interest o each o the stockholders in the increased capital at th

close o the year. There is still not a centavo in the treasury and neither has 'ithdra'peso rom the business durin( the year. o part o the arm or cattle has been sold annot a sin(le peso 'as received out o the rents or proDts o the capital o the corporatby the stockholders.

Another illustration: A, an individual armer, buys a arm 'ith one hundred head o caor the sum o +)3,333. At the end o the Drst year, by reason o business conditions athe increase o the value o both real estate and personal property, it is discovered ththe value o the arm and the cattle is +3,333. A, durin( the year, has received nothirom the arm or the cattle. His books at the be(innin( o the year sho' that he hadproperty o the value o +)3,333. His books at the close o the year sho' that he hasproperty o the value o +3,333. A is not a corporation. The assets o his business aresho'n thereore by certiDcates o stock. His books, ho'ever, sho' that the value o hproperty has increased durin( the year by +)3,333, under any theory o business or labe re(arded as an "income" upon 'hich the armer can be required to pay an income

/s there any diference in la' in the condition o A in this illustration and the conditionand ; in the immediately precedin( illustration% an the increase o the value o theproperty in either case be re(arded as an "income" and be subBected to the payment the income tax under the la'%

ach o the ore(oin( illustrations, it is asserted, is analo(ous to the case beore us anvie' o that act, let us ascertain ho' lexico(raphers and the courts have deDned an"income." The e' 8tandard ictionary, edition o )*)!, deDnes an income as "thea&ount of &oney comin( to a person or corporation 'ithin a speciDed time 'hether apayment or corporation 'ithin a speciDed time 'hether as payment or services, inteor proDt rom investment." &ebsterFs /nternational ictionary deDnes an income as "treceipt, salary1 especially, the annual receipts o a private person or a corporation roproperty." ;ouvier, in his la' dictionary, says that an "income" in the ederal constitutand income tax act, is used in its common or ordinary meanin( and not in its technicaeconomic sense. 5)2= orth'estern ?eporter, #)6 0r. ;lack, in his la' dictionary, say

"An income is the returnin &oney rom oneFs business, labor, or capital invested1 (ainproDt or private revenue." "An income tax is a tax on the yearly proDts arisin( romproperty , proessions, trades, and o7ces."

The 8upreme ourt o the 9nited 8tates, in the case o Eray vs. arlin(ton 5# 9.8., =!said in speakin( o income that mere advance in value in no sense constitutes the"income" speciDed in the revenue la' as "income" o the o'ner or the year in 'hich


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sale o the property 'as made. 8uch advance constitutes and can be treated merely as anincrease o capital. 5In reErahamFs state, )*# +a., )=1 Appeal o ;raun, )3! +a., 2)2.6

0r. Custice Hu(hes, later Associate Custice o the 8upreme ourt o the 9nited 8tates andno' 8ecretary o 8tate o the 9nited 8tates, in his ar(ument beore the 8upreme ourt othe 9nited 8tates in the case o To'ne vs. isner, supra, deDned an "income" in an incometax la', unless it is other'ise speciDed, to mean cash or its equivalent. /t does not meanchoses in action or unreali'ed incre&ents in the value o the property, and cites insupport o the deDnition, the deDnition (iven by the 8upreme ourt in the case o Eray vs.arlin(ton, supra.

/n the case o To'ne vs. isner, supra, 0r. Custice Holmes, speakin( or the court, said:"ot'ithstandin( the thou(htul discussion that the case received belo', 'e cannot doubtthat the dividend 'as capital as 'ell or the purposes o the /ncome Tax >a'. . . . FA stockdividend really takes nothin( rom the property o the corporation, and adds nothin( tothe interests o the shareholders. /ts property is not diminished and their interest are notincreased. . . . The proportional interest o each shareholder remains the same. . . .F /nshort, the corporation is no poorer and the stockholder is no richer then they 'erebeore." 5Eibbons vs. 0ahon, )$= 9.8., !2*, !!*, !=31 >o(an ounty vs. 9.8., )=* 9.8.,!!, =)6.

/n the case o oyle vs. 0itchell ;ros. o. 52< 9.8., )e(islature, 'hen it provided or an "income tax," intendto tax only the "income" o corporations, Drms or individuals, as that term is (enerallyused in its common acceptation1 that is that the income means money received, comto a person or corporation or services, interest, or proDt rom investments. &e do notbelieve that the >e(islature intended that a mere increase in the value o the capital oassets o a corporation, Drm, or individual, should be taxed as "income." 8uch propertcan be reached under the ordinary rom o taxation.

0r. Custice +itney, in the case o the iner vs. 0acomber, supra, said in discussin( thediference bet'een "capital" and "income": "That the undamental relation o FcapitalFFincomeF has been much discussed by economists, the ormer bein( likened to the trethe land, the latter to the ruit or the crop1 the ormer depicted as a reservoir supplied

rom sprin(s1 the latter as the outlet stream, to be measured by its Io' durin( a periotime." /t may be ar(ued that a stockholder mi(ht sell the stock dividend 'hich he hadacquired. / he does, then he has received, in act, an income and such income, like another proDt 'hich he realies rom the business, is an income and he may be taxedthereon.

There is a clear distinction bet'een an extraordinary cash dividend, no matter 'henearned, and stock dividends declared, as in the present case. The one is a disburseme


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to the stockholder o accumulated earnin(s, and the corporation at once parts irrevocably'ith all interest thereon. The other involves no disbursement by the corporation. /t parts'ith nothin( to the stockholder. The latter receives, not an actual dividend, but certiDcateo stock 'hich simply evidences his interest in the entire capital, includin( such as byinvestment o accumulated proDts has been added to the ori(inal capital. They are notincome to him, but represent additions to the source o his income, namely, his investedcapital. 5e@oven vs. Alsop, 3!, /ll., $3*1 =$ >.?.A. !#a'. That may be admitted. He urther ar(ues that the Acton(ress 59.8. ?evenue Act o )*)#6 expressly authoried the +hilippine >e(islatures provide or an income tax. That act may also be admitted. ;ut a careul readin( o thAct 'ill sho' that, 'hile it permitted a tax upon income, the same provided that incoshall include (ains, proDts, and income derived rom salaries, 'a(es, or compensatiopersonal services, as 'ell as rom interest, rent, dividends, securities, etc. The appelleemphasies the "income rom dividends." J course, income received as dividends istaxable as an income but an income rom "dividends" is a very diferent thin( rom reo a "stock dividend." Jne is an actual receipt o proDts1 the other is a receipt o a

representation o the increased value o the assets o corporation.

/n all o the ore(oin( ar(ument 'e have not overlooked the decisions o a e' o thecourts in diferent parts o the 'orld, 'hich have reached a diferent conclusion rom one 'hich 'e have arrived at in the present case. /nasmuch, ho'ever, as appeals mataken rom this court to the 8upreme ourt o the 9nited 8tates, 'e eel bound to ollthe same doctrine announced by that court.


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Havin( reached the conclusion, supported by the (reat 'ei(ht o the authority, that "stockdividends" are not "income," the same cannot be taxes under that provision o Act o.#$$ 'hich provides or a tax upon income. 9nder the (uise o an income tax, property'hich is not an income cannot be taxed. &hen the assets o a corporation have increasedso as to Bustiy the issuance o a stock dividend, the increase o the assets should be takenaccount o the Eovernment in the ordinary tax duplicates or the purposes o assessmentand collection o an additional tax. 4or all o the ore(oin( reasons, 'e are o the opinion,and so decide, that the Bud(ment o the lo'er court should be revoked, and 'ithout anyDndin( as to costs, it is so ordered.


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G.R. No. 172231 Febr(&r* 12, 2007 +N!RES-S!N"I!GO,J.:

COISSIONER OF IN"ERN!L REENE, +etitioner, vs. IS!/EL! CL"R!LCOROR!"ION, ?espondent.

+etitioner ommissioner o /nternal ?evenue 5/?6 assails the 8eptember $3, 33!ecision)o the ourt o Appeals in A-E.?. 8+ o.


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expense must be ordinary and necessary1 5b6 it must have been paid or incurred durin(the taxable year1 5c6 it must have been paid or incurred in carryin( on the trade orbusiness o the taxpayer1 and 5d6 it must be supported by receipts, records or otherpertinent papers.))

The requisite that it must have been paid or incurred durin( the taxable year is urtherqualiDed by 8ection 2! o the ational /nternal ?evenue ode 5/?6 'hich states that:"NtOhe deduction provided or in this Title shall be taken or the taxable year in 'hich Rpaidor accruedL or Rpaid or incurredL, dependent upon the method o accountin( upon thebasis o 'hich the net income is computed x x x".

Accountin( methods or tax purposes comprise a set o rules or determinin( 'hen and

ho' to report income and deductions.)/n the instant case, the accountin( method usedby / is the accrual method.

?evenue Audit 0emorandum Jrder o. )-333, provides that under the accrual method oaccountin(, expenses not bein( claimed as deductions by a taxpayer in the current year'hen they are incurred cannot be claimed as deduction rom income or the succeedin(year. Thus, a taxpayer 'ho is authoried to deduct certain expenses and other allo'abledeductions or the current year but ailed to do so cannot deduct the same or the nextyear.)$

The accrual method relies upon the taxpayerLs ri(ht to receive amounts or its obli(ation topay them, in opposition to actual receipt or payment, 'hich characteries the cashmethod o accountin(. Amounts o income accrue 'here the ri(ht to receive thembecome Dxed, 'here there is created an enorceable liability. 8imilarly, liabilities areaccrued 'hen Dxed and determinable in amount, 'ithout re(ard to indeterminacy merely

o time o payment.)2

4or a taxpayer usin( the accrual method, the determinative question is, 'hen do the actspresent themselves in such a manner that the taxpayer must reco(nie income orexpense% The accrual o income and expense is permitted 'hen the all-events test hasbeen met. This test requires: 5)6 Dxin( o a ri(ht to income or liability to pay1 and 56 theavailability o the reasonable accurate determination o such income or liability.

The all-events test requires the ri(ht to income or liability be Dxed, and the amount osuch income or liability be determined 'ith reasonable accuracy. Ho'ever, the test doesnot demand that the amount o income or liability be kno'n absolutely, only that ataxpayer has at his disposal the inormation necessary to compute the amount 'ithreasonable accuracy. The all-events test is satisDed 'here computation remainsuncertain, i its basis is unchan(eable1 the test is satisDed 'here a computation may beunkno'n, but is not as much as unkno'able, 'ithin the taxable year. "e &4o(%t o$

#&b#t* 6oe %ot &'e to be 6eter4%e6 e&ct#* t 4(t be 6eter4%e6 :t;re&o%&b#e &cc(r&c*.; !ccor6%15?

"e =ro=ret* o$ &% &ccr( 4(t be @(6


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Anent the purported understatement o interest income rom the promissory notes o?ealty /nvestment, /nc., 'e sustain the Dndin(s o the TA and the ourt o Appeals thatno such understatement exists and that only simple interest computation and not acompounded one should have been applied by the ;/?. There is indeed no stipulationbet'een the latter and / on the application o compounded interest.)9nder Article)*!* o the ivil ode, unless there is a stipulation to the contrary, interest due shouldnot urther earn interest.

>ike'ise, the Dndin(s o the TA and the ourt o Appeals that / truly 'ithheld therequired 'ithholdin( tax rom its claimed deductions or security services and remittedthe same to the ;/? is supported by payment order and conDrmation receipts.Hence,the Assessment otice or deDciency expanded 'ithholdin( tax 'as properly cancelledand set aside.

/n sum, Assessment otice o. 4A8-)-#=-*3-333=#3 in the amount o +$$$,)*=.#= ordeDciency income tax should be cancelled and set aside but only insoar as the claimeddeductions o / or security services. 8aid Assessment is valid as to the ;/?Lsdisallo'ance o /Ls expenses or proessional services. The ourt o AppealLscancellation o Assessment otice o. 4A8-)-#=-*3-333=#) in the amount o +2,#*


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G.R. No. L-992 )&%(&r* , 1958

COLLEC"OR OF IN"ERN!L REENE,petitioner,vs.

/!"!NG!S "R!NSOR"!"ION CO!N+ &%6 L!GN!-"!+!/!S /SCO!N+,respondents.

O)ce of the *olicitor General A&rosio "adilla, *olicitor +onrado T. i&caoco and oilo .ando/al for petitioner.O'aeta, ichauco and "ica'o for respondents.

ON"E!+OR, J.B

This is an appeal rom the decision o the ourt o Tax Appeals 5.T.A.6, 'hich reversed theassessment and decision o petitioner ollector o /nternal ?evenue, later reerred to asollector, assessin( and demandin( rom the respondents ;atan(as Transportationompany, later reerred to as ;atan(as Transportation, and >a(una-Tayabas ;usompany, later reerred to as >a(una ;us, the amount o +!2,)2$.!2, supposed torepresent the deDciency income tax and compromise or the years )*2= to )*2*,inclusive, 'hich amount, pendin( appeal in the .T.A., but beore the ollector Dled hisans'er in said court, 'as increased to +)2#,#*3.)2.

The ollo'in( acts are undisputed: ?espondent companies are t'o distinct and separatecorporations en(a(ed in the business o land transportation by means o motor buses,and operatin( distinct and separate lines. ;atan(as Transportation 'as or(anied in )*)#,'hile >a(una ;us 'as or(anied in )*#. ach company no' has a ully paid up capital o+l,333,333. ;eore the last 'ar, each company maintained separate head o7ces, that o

;atan(as Transportation in ;atan(as, ;atan(as, 'hile the >a(una ;us had its head o7cein 8an +ablo >a(una. ach company also kept and maintained separate books, Ieets obuses, mana(ement, personnel, maintenance and repair shops, and other acilities.

Coseph ;enedict mana(ed the ;atan(as Transportation, 'hile 0artin Jlson 'as themana(er o the >a(una ;us. To sho' the connection and close relation bet'een the t'ocompanies, it should be stated that 0ax ;louse 'as the +resident o both corporationsand o'ned about $3 per cent o the stock in each company. urin( the 'ar, the Americano7cials o these t'o corporations 'ere interned in 8anto Tomas, and said companiesceased operations. They also lost their respective properties and equipment. Ater>iberation, sometime in April, )*2!, the t'o companies 'ere able to acquire != autobuses rom the 9nited 8tates Army, and the t'o companies diveded said equipmentequally bet'een themselves,re(isterin( the same separately in their respective names. /n0arch, )*2a(una ;us, Coseph;enedict, 'ho 'as then mana(in( the ;atan(as Transportation, 'as appointed 0ana(ero both companies by their respective ;oard o irectors. The head o7ce o the >a(una

;us in 8an +ablo ity 'as made the main o7ce o both corporations. The placin( o thet'o companies under one sole man(ement 'as made by 0ax ;louse, +resident o bothcompanies, by virtue o the authority (ranted him by resolution o the ;oard o irectorso the >a(una ;us on Au(ust )3, )*2!, and ratiDed by the ;oards o the t'o companies intheir respective resolutions o Jctober

The theory o the ollector is the Coint mer(ency Jperation 'as a corporation distincrom the t'o respondent companies, as deDned in section #2 5b6, and so liable to incotax under section 2, both o the ational /nternal ?evenue ode. Ater hearin(, the ound and held, citin( authorities, that the Coint mer(ency Jperation or Bointmana(ement o the t'o companies "is not a corporation 'ithin the contemplation osection #2 5b6 o the ational /nternal ?evenue ode much less a partnership, associaor insurance company", and thereore 'as not subBect to the income tax under theprovisions o section 2 o the same ode, separately and independently o respondecompanies1 so, it reversed the decision o the ollector assessin( and demandin( romthe t'o companies the payment o the amount o +!2,)2$.!2 andor the amount o+)2#,#*3.)2. The Tax ourt did not pass upon the question o 'hether or not in theappeal taken to it by respondent companies, the ollector could chan(e his ori(inalassessment by increasin( the same rom +!2,)2$.)2 to +)2#,#*3.)2, to correct an ercommitted by him in havin( credited the Coint mer(ency Jperation, totally or )33 pe


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cent o the income taxes paid by the respondent companies or the years )*2= to )*2*,inclusive, by reason o the principle o e0uitale recoup&ent, instead o only

The t'o main and most important questions involved in the present appeal are: 5)6'hether the t'o transportation companies herein involved are liable to the payment oincome tax as a corporation on the theory that the Coint mer(ency Jperation or(aniedand operated by them is a corporation 'ithin the meanin( o 8ection #2 o the ?evised/nternal ?evenue ode, and 56 'hether the ollector o /nternal ?evenue, ater theappeal rom his decision has been perected, and ater the ourt o Tax Appeals hasacquired Burisdiction over the same, but beore said ollector has Dled his ans'er 'iththat court, may still modiy his assessment subBect o the appeal by increasin( the same,on the (round that he had committed error in (ood aith in makin( said appealedassessment.

The Drst question has already been passed upon and determined by this Tribunal in thecase o 1ufe&ia 1/angelista et al., /s. +ollector of Internal e/enueet al.,UE.?. o. >-***=, promul(ated on Jctober )!, )*!a(una ;usoperated diferent lines, sometimes in diferent provinces or territories, under diferenranchises, 'ith diferent equipment and personnel, it cannot possibly be true and corto say that the end o each year, the (ross receipts and income in the (ross expenses


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t'o companies are exactly the same or purposes o the payment o income tax. &hat'as actually done in this case 'as that, althou(h no le(al personality may have beencreated by the Coint mer(ency Jperation, nevertheless, said Coint mer(ency Jperation

Boint venture, or Boint mana(ement operated the business afairs o the t'o companies asthou(h they constituted a sin(le entity, company or partnership, thereby obtainin(substantial economy and proDts in the operation.

4or the ore(oin( reasons, and in the li(ht o our rulin( in the 1/angelista /s. +ollector ofInternal e/enuecase,supra, 'e believe and hold that the Coint mer(ency Jperation orsole mana(ement or Boint venture in this case alls under the provisions o section #2 5b6o the /nternal ?evenue ode, and consequently, it is liable to income tax provided or insection 2 o the same code.

The second important question to determine is 'hether or not the ollector o /nternal?evenue, ater appeal rom his decision to the ourt o Tax Appeals has been perected,and ater the Tax ourt Appeals has acquired Burisdiction over the appeal, but beore theollector has Dled his ans'er 'ith the court, may still modiy his assessment, subBect othe appeal, by increasin( the same. This le(al point, interestin( and vital to the interestso both the Eovernment and the taxpayer, provoked considerable discussion amon( themembers o this Tribunal, a minority o 'hich the 'riter o this opinion orms part,maintainin( that or the inormation and (uidance o the taxpayer, there should be adeDnite and Dnal assessment on 'hich he can base his decision 'hether or not to appeal1that 'hen the assessment is appealed by the taxpayer to the ourt o Tax Appeals, thecollector loses control and Burisdiction over the same, the Burisdiction bein( transerredautomatically to the Tax ourt, 'hich has exclusive appellate Burisdiction over the same1that the Burisdiction o the Tax ourt is not revisory but only appellate, and thereore, itcan act only upon the amount o assessment subBect o the appeal to determine 'hetherit is valid and correct rom the standpoint o the taxpayer-appellant1 that the Tax ourtmay only correct errors committed by the ollector a(ainst the taxpayer, but not thosecommitted in his avor, unless the Eovernment itsel is also an appellant1 and that unlessthis be the rule, the ollector o /nternal ?evenue and his a(ents may not exercise duecare, prudence and pay too much attention in makin( tax assessments, kno'in( that theycan at any time correct any error committed by them even 'hen due to ne(li(ence,carelessness or (ross mistake in the interpretation or application o the tax la', byincreasin( the assessment, naturally to the preBudice o the taxpayer 'ho 'ould not kno''hen his tax liability has been completely and deDnitely met and complied 'ith, thiskno'led(e bein( necessary or the 'ise and proper conduct and operation o hisbusiness1 and that lastly, 'hile in the 9nited 8tates o America, on appeal rom thedecision o the ommissioner o /nternal ?evenue to the ;oard or ourt o Tax Appeals,the ommissioner may still amend or modiy his assessment, even increasin( the samethe la' in that Burisdiction expressly authories the ;oard or ourt o Tax Appeals

toredeter&ineand re/isethe assessment appealed to it.

The maBority, ho'ever, holds, not 'ithout valid ar(uments and reasons, that theEovernment is not bound by the errors committed by its a(ents and tax collectors inmakin( tax assessments, specially 'hen due to a misinterpretation or application o thetax la's, more so 'hen done in (ood aith1 that the tax la's provide or a prescriptiveperiod 'ithin 'hich the tax collectors may make assessments and reassessments in orderto collect all the taxes due to the Eovernment, and that i the ollector o /nternal

?evenue is not allo'ed to amend his assessment beore the ourt o Tax Appeals, andsince he may make a subsequent reassessment to collect additional sums 'ithin thesame subBect o his ori(inal assessment, provided it is done 'ithin the prescriptive pethat 'ould lead to multiplicity o suits 'hich the la' does not encoura(e1 that since thollector o /nternal ?evenue, in modiyin( his assessment, may not only increase thesame, but may also reduce it, i he Dnds that he has committed an error a(ainst thetaxpayer, and may even make reunds o amounts erroneously and ille(ally collectedtaxpayer is not preBudiced1 that the hearin( beore the ourt o Tax Appeals partakes trial de no/oand the Tax ourt is authoried to receive evidence, summon 'itnesses,(ive both parties, the Eovernment and the taxpayer, opportunity to present and ar(utheir sides, so that the true and correct amount o the tax to be collected, may be

determined and decided, 'hether resultin( in the increase or reduction o the assessmappealed to it. The result is that the rulin( and doctrine no' bein( laid by this ourt isthat pendin( appeal beore the ourt o Tax Appeals, the ollector o /nternal ?evenuemay still amend his appealed assessment, as he has done in the present case.

There is a third question raised in the appeal beore the Tax ourt and beore this Tribnamely, the liability o the t'o respondent transportation companies or ! per centsurchar(e due to their ailure to Dle an income tax return or the Coint mer(encyJperation, 'hich 'e hold to be a corporation 'ithin the meanin( o the Tax ode. &eunderstand that said ! per cent surchar(e is included in the assessment o +)2#,#*3

The surchar(e is bein( imposed by the ollector under the provisions o 8ection


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in such a case, the imposition o penalties or ailure to Dle holdin( company surtaxreturns, and that in such a case, the imposition o penalties or ailure to Dle return is not'arranted)

/n vie' o the ore(oin(, and 'ith the reversal o the appealed decision o the ourt o TaxAppeals, Bud(ment is hereby rendered, holdin( that the Coint mer(ency Jperationinvolved in the present is a corporation 'ithin the meanin( o section #2 5b6 o the/nternal ?evenue ode, and so is liable to incom tax under section 2 o the code1 thatpendin( appeal in the ourt o Tax Appeals o an assessment made by the ollector o/nternal ?evenue, the ollector, pendin( hearin( beore said court, may amend hisappealed assessment and include the amendment in his ans'er beore the court, and thelatter may on the basis o the evidence presented beore it, redetermine the assessment1

that 'here the ailure to Dle an income tax return or and in behal o an entity 'hich islater ound to be a corporation 'ithin the meanin( o section #2 5b6 o the Tax ode 'asdue to a reasonable cause, such as an honest belie based on the advice o its attorneysand accountants, a penalty in the orm o a surchar(e should not be imposed andcollected. The respondents are thereore ordered to pay the amount o the reassessmentmade by the ollector o /nternal ?evenue beore the Tax ourt, minus the amount o !per cent surchar(e. o costs.


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G.R. No. L-1932 &* 25, 1972

LORENO ". O! &%6 HEIRS OF )LI! /!LES, %&4e#*B RODOLFO /. O!,!RI!NO /. O!, L /. O!, IRGINI! /. O! &%6 LORENO /. O!,)R., petitioners,vs.

"HE COISSIONER OF IN"ERN!L REENE, respondent.

Orlando 2elasco for petitioners.

O)ce of the *olicitor General Arturo A. Alafri', Assistant *olicitor General Felicisi&o .osete, and *pecial Attorney "uri3cacion 4reta for respondent.

/!RREDO, J.:p

+etition or revie' o the decision o the ourt o Tax Appeals in TA ase o. =)oreno T.JVa and her Dve children. /n )*2#, ivil ase o. 2!)* 'as instituted in the ourt o 4irst/nstance o 0anila or the settlement o her estate. >ater, >oreno T. JVa the survivin(spouse 'as appointed administrator o the estate o said deceased 5xhibit $, pp. $2-2),;/? rec.6. Jn April )2, )*2*, the administrator submitted the proBect o partition, 'hich'as approved by the ourt on 0ay )=, )*2* 58ee xhibit @6. ;ecause three o the heirs,namely >u, ir(inia and >oreno, Cr., all surnamed JVa, 'ere still minors 'hen the proBecto partition 'as approved, >oreno T. JVa, their ather and administrator o the estate,Dled a petition in ivil ase o. *=$< o the ourt o 4irst /nstance o 0anila orappointment as (uardian o said minors. Jn ovember )2, )*2*, the ourt appointed him(uardian o the persons and property o the aorenamed minors 58ee p. $, ;/? rec.6.

The proBect o partition 5xhibit @1 see also pp. oreno T.


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'ho, as heretoore pointed out, invested them in real properties and securities. 58eexhibit $, t.s.n., pp. !3, )3-)326.

Jn the basis o the ore(oin( acts, respondent 5ommissioner o /nternal ?evenue6decided that petitioners ormed an unre(istered partnership and thereore, subBect to thecorporate income tax, pursuant to 8ection 2, in relation to 8ection #25b6, o the Tax ode.Accordin(ly, he assessed a(ainst the petitioners the amounts o +#,3*.33 and+)$,#**.33 as corporate income taxes or )*!! and )*!=, respectively. 58ee xhibit !,amended by xhibit )


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)*!! and )*!=. &e believe this point to be important because, apparently, at the start, orin the years )*22 to )*!2, the respondent ommissioner o /nternal ?evenue did treatpetitioners as co-o'ners, not liable to corporate tax, and it 'as only rom )*!! that heconsidered them as havin( ormed an unre(istered partnership. At least, there is nothin(in the record indicatin( that an earlier assessment had already been made. 8uch bein(the case, and &e see no reason ho' it could be other'ise, it is easily understandable 'hypetitionersF position that they are co-o'ners and not unre(istered co-partners, or thepurposes o the impu(ned assessment, cannot be upheld. Truth to tell, petitioners shouldDnd comort in the act that they 'ere not similarly assessed earlier by the ;ureau o/nternal ?evenue.

The Tax ourt ound that instead o actually distributin( the estate o the deceased

amon( themselves pursuant to the proBect o partition approved in )*2*, "the propertiesremained under the mana(ement o >oreno T. JVa 'ho used said properties in businessby leasin( or sellin( them and investin( the income derived thererom and the proceedrom the sales thereo in real properties and securities," as a result o 'hich saidproperties and investments steadily increased yearly rom +#oreno T. JVaas a common und in undertakin( several transactions or in business, 'ith the intention oderivin( proDt to be shared by them proportionally, such act 'as tantamonut to actuallycontributin( such incomes to a common und and, in efect, they thereby ormed anunre(istered partnership 'ithin the purvie' o the above-mentioned provisions o the Taxode.

/t is but lo(ical that in cases o inheritance, there should be a period 'hen the heirs canbe considered as co-o'ners rather than unre(istered co-partners 'ithin the

contemplation o our corporate tax la's aorementioned. ;eore the partition anddistribution o the estate o the deceased, all the income thereo does belon( commonlyto all the heirs, obviously, 'ithout them becomin( thereby unre(istered co-partners, but itdoes not necessarily ollo' that such status as co-o'ners continues until the inheritanceis actually and physically distributed amon( the heirs, or it is easily conceivable that aterkno'in( their respective shares in the partition, they mi(ht decide to continue holdin(said shares under the common mana(ement o the administrator or executor or o anyone

chosen by them and en(a(e in business on that basis. &ithal, i this 'ere to be allo'e'ould be the easiest thin( or heirs in any inheritance to circumvent and rendermeanin(less 8ections 2 and #25b6 o the ational /nternal ?evenue ode.

/t is true that in 1/angelista /s. +ollector, )3 +hil. )23, it 'as stated, amon( the reasor holdin( the appellants therein to be unre(istered co-partners or tax purposes, thatheir common und "'as not somethin( they ound already in existence" and that "it 'not a property inherited by them pro indi/iso," but it is certainly ar etched to ar(uethererom, as petitioners are doin( here, that ergo, in all instances 'here an inheritannot actually divided, there can be no unre(istered co-partnership. As already indicateor tax purposes, the co-o'nership o inherited properties is automatically converted an unre(istered partnership the moment the said common properties andor the inco

derived thererom are used as a common und 'ith intent to produce proDts or the hin proportion to their respective shares in the inheritance as determined in a proBectpartition either duly executed in an extraBudicial settlement or approved by the court the correspondin( testate or intestate proceedin(. The reason or this is simple. 4rommoment o such partition, the heirs are entitled already to their respective deDnite sho the estate and the incomes thereo, or each o them to mana(e and dispose o asexclusively his o'n 'ithout the intervention o the other heirs, and, accordin(ly hebecomes liable individually or all taxes in connection there'ith. / ater such partitionallo's his share to be held in common 'ith his co-heirs under a sin(le mana(ement tused 'ith the intent o makin( proDt thereby in proportion to his share, there can be ndoubt that, even i no document or instrument 'ere executed or the purpose, or taxpurposes, at least, an unre(istered partnership is ormed. This is exactly 'hat happento petitioners in this case.

/n this connection, petitionersF reliance on Article )ike'ise, as deDned in se#25b6 o said ode, "the term corporation includes partnerships, no &atter ho! createorgani'ed." This qualiyin( expression clearly indicates that a Boint venture need not bundertaken in any o the standard orms, or in conDrmity 'ith the usual requirementsthe la' on partnerships, in order that one could be deemed constituted or purposes othe tax on corporation. A(ain, pursuant to said section #25b6,the term "corporation"includes, amon( others, "Boint accounts,5cuentas en participacion6" and "associations


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none o 'hich has a le(al personality o its o'n, independent o that o its members.Accordin(ly, the la'maker could not have re(arded that personality as a conditionessential to the existence o the partnerships therein reerred to. /n act, as above stated,"duly re(istered (eneral co-partnerships" G 'hich are possessed o the aorementionedpersonality G have been expressly excluded by la' 5sections 2 and #2NbO6 rom theconnotation o the term "corporation." ....

xxx xxx xxx

8imilarly, the American >a'

... provides its o!n concepto a partnership. 9nder the term "partnership" it includes not

only a partnership as kno'n in common la' but, as 'ell, a syndicate, (roup, pool,(oint/enture, or other unincorporated organi'ation !hich carries on any usiness, 3nancialoperation, or /enture, and 'hich is not, 'ithin the meanin( o the ode, a trust, estate, ora corporation. ... . 5a' o 4ederal /ncome Taxation, p. -233-), Culy *, )*=#, 2 8?A )*#, 'herein the ourt ruleda(ainst a theory o co-o'nership pursued by appellants therein.

As re(ards the second question raised by petitioners about the se(re(ation, or thepurposes o the corporate taxes in question, o their inherited properties rom thoseacquired by them subsequently, &e consider as BustiDed the ollo'in( ratiocination o the

Tax ourt in denyin( their motion or reconsideration:

/n connection 'ith the second (round, it is alle(ed that, i there 'as an unre(isteredpartnership, the holdin( should be limited to the business en(a(ed in apart rom theproperties inherited by petitioners. /n other 'ords, the taxable income o the partnershipshould be limited to the income derived rom the acquisition and sale o real propertiesand corporate securities and should not include the income derived rom the inheritedproperties. /t is admitted that the inherited properties and the income derived thererom

'ere used in the business o buyin( and sellin( other real properties and corporatesecurities. Accordin(ly, the partnership income must include not only the income derivedrom the purchase and sale o other properties but also the income o the inheritedproperties.

;esides, as already observed earlier, the income derived rom inherited properties may beconsidered as individual income o the respective heirs only so lon( as the inheritance or

estate is not distributed or, at least, partitioned, but the moment their respective knoshares are used as part o the common assets o the heirs to be used in makin( proDtis but proper that the income o such shares should be considered as the part o thetaxable income o an unre(istered partnership. This, &e hold, is the clear intent o thela'.

>ike'ise, the third question o petitioners appears to have been adequately resolved the Tax ourt in the aorementioned resolution denyin( petitionersF motion orreconsideration o the decision o said court. +ertinently, the court ruled this 'ise:

/n support o the third (round, counsel or petitioners alle(es:

ven i 'e 'ere to yield to the decision o this Honorable ourt that the herein petitiohave ormed an unre(istered partnership and, thereore, have to be taxed as such, itmi(ht be recalled that the petitioners in their individual income tax returns reported tshares o the proDts o the unre(istered partnership. &e think it only air and equitablthat the various amounts paid by the individual petitioners as income tax on theirrespective shares o the unre(istered partnership should be deducted rom the deDcieincome tax ound by this Honorable ourt a(ainst the unre(istered partnership. 5pa(e0emorandum or the +etitioner in 8upport o Their 0otion or ?econsideration, Jct. #)*=).6

/n other 'ords, it is the position o petitioners that the taxable income o the partnersmust be reduced by the amounts o income tax paid by each petitioner on his share opartnership proDts. This is not correct1 rather, it should be the other 'ay around. Thepartnership proDts distributable to the partners 5petitioners herein6 should be reducedthe amounts o income tax assessed a(ainst the partnership. onsequently, each o t

petitioners in his individual capacity overpaid his income tax or the years in questionthe income tax due rom the partnership has been correctly assessed. 8ince the indivincome tax liabilities o petitioners are not in issue in this proceedin(, it is not proper the ourt to pass upon the same.

+etitioners insist that it 'as error or the Tax ourt to so rule that 'hatever excess themi(ht have paid as individual income tax cannot be credited as part payment o the therein in question. /t is ar(ued that to sanction the vie' o the Tax ourt is to obli(epetitioners to pay double income tax on the same income, and, 'orse, considerin( thtime that has lapsed since they paid their individual income taxes, they may already barred by prescription rom recoverin( their overpayments in a separate action. &e da(ree. As &e see it, the case o petitioners as re(ards the point under discussion is sithat o a taxpayer 'ho has paid the 'ron( tax, assumin( that the ailure to pay thecorporate taxes in question 'as not deliberate. J course, such taxpayer has the ri(hbe reimbursed 'hat he has erroneously paid, but the la' is very clear that the claim a

action or such reimbursement are subBect to the bar o prescription. And since the peor the recovery o the excess income taxes in the case o herein petitioners has alrealapsed, it 'ould not seem ri(ht to virtually disre(ard prescription merely upon the (rothat the reason or the delay is precisely because the taxpayers ailed to make the proreturn and payment o the corporate taxes le(ally due rom them. /n principle, it is buproper not to allo' any relaxation o the tax la's in avor o persons 'ho are not exacabove suspicion in their conduct vis-a-vis their tax obli(ation to the 8tate.


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/ /& J4 A>> TH 4J?EJ/E, the Bud(ment o the ourt o Tax Appeals appealed romis a7rm 'ith costs a(ainst petitioners.


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G.R. No. L-8118 October 29, 1985 !INO, J.:

)OSE . O/ILLOS, )R., S!R!H . O/ILLOS, ROEO . O/ILLOS &%6 REEDIOS . O/ILLOS,broter &%6 ter, petitioners vs. COISSIONER OF IN"ERN!L REENE &%6 COR" OF"! !E!LS, respondents.

This case is about the income tax liability o our brothers and sisters 'ho sold t'o parcels o land'hich they had acquired rom their ather.

Jn 0arch , )*td. on t'o lots 'ith areas o),)2 and *=$ square meters located at Ereenhills, 8an Cuan, ?ial. The next day he transerred hisri(hts to his our children, the petitioners, to enable them to build their residences. The company sold

the t'o lots to petitioners or +)eon case. Thus, like the e >eon heirs, the >on(a heirs inherited the FhaciendaF inquestionpro-indi/isorom their deceased parents1 they did not contribute or invest additional F cto increase or expand the inherited properties1 they merely continued dedicatin( the property touse to 'hich it had been put by their orebears1 they individually reported in their tax returns thecorrespondin( shares in the income and expenses o the FhaciendaF, and they continued or man

years the status o co-o'nership in order, as conceded by respondent, Fto preserve its 5theFhaciendaF6 value and to continue the existin( contractual relations 'ith the entral Aucarera d;ais or millin( purposes. >on(a vs. A ranas, TA ase o. =!$, Culy $), )*=$6.

All co-o!nerships are not dee&ed unregistered pratnership.=o-J'nership 'ho o'n properties'hich produce income should not automatically be considered partners o an unre(isteredpartnership, or a corporation, 'ithin the purvie' o the income tax la'. To hold other'ise, 'ouldto subBect the income o all

co-o!nershipso inherited properties to the tax on corporations, inasmuch as i a property does produce an income at all, it is not subBect to any kind o income tax, 'hether the income tax onindividuals or the income tax on corporation. 5e >eon vs. / ?, TA ase o.


19/52

/t is like'ise diferent rom ?eyes vs. ommissioner o /nternal ?evenue, 2 8?A )*#, 'here atherand son purchased a lot and buildin(, entrusted the administration o the buildin( to an administrator

and divided equally the net income, and rom van(elista vs. ollector o /nternal ?evenue, )3 +hil.)23, 'here the three van(elista sisters bou(ht our pieces o real property 'hich they leased tovarious tenants and derived rentals thererom. learly, the petitioners in these t'o cases had ormedan unre(istered partnership.

/n the instant case, 'hat the ommissioner should have investi(ated 'as 'hether the ather donatedthe t'o lots to the petitioners and 'hether he paid the donorFs tax 58ee Art. )22#, ivil ode6. &e arenot preBud(in( this matter. /t mi(ht have already prescribed. &H?4J?, the Bud(ment o the Taxourt is reversed and set aside. The assessments are cancelled. o costs. 8J J??.


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G.R. No. 78133 October 18, 1988

!RI!NO . !SC!L &%6 REN!"O . DR!GON, petitioners,vs."HE COISSIONER OF IN"ERN!L REENE &%6 COR" OF "! !E!LS, respondents.

G!NC!+CO, J.:

The distinction bet'een co-o'nership and an unre(istered partnership or Boint venture or income taxpurposes is the issue in th is petition.

Jn Cune , )*=!, petitioners bou(ht t'o 56 parcels o land rom 8antia(o ;ernardino, et al. and on0ay #, )*==, they bou(ht another three 5$6 parcels o land rom Cuan ?oque. The Drst t'o parcels oland 'ere sold by petitioners in )*=# to0arenir evelopment orporation, 'hile the three parcels o

land 'ere sold by petitioners to rlinda ?eyes and 0aria 8amson on 0arch )*,)*


21/52

. They in/ested the sa&e, not &erely in one transaction, ut in a series of transactions . Jn 4ebruary, )*2$, they bou(ht a lot or +)33,333.33. Jn April $, )*22, they purchased ) lots or +)#,333.33.

This 'as soon ollo'ed, on April $, )*22, by the acquisition o another real estate or +)3#,#!.33.4ive 5!6 days later 5April #, )*226, they (ot a ourth lot or +$


22/52

The sharin( o returns does not in itsel establish a partnership 'hether or not the persons sharin(therein have a Boint or common ri(ht or interest in the property. There must be a clear intent to orm

a partnership, the existence o a Buridical personality diferent rom the individual partners, and thereedom o each party to transer or assi(n the 'hole property.

/n the present case, there is c lear evidence o co-o'nership bet'een the petitioners. There is noadequate basis to support the proposition that they thereby ormed an unre(istered partnership. Thet'o isolated transactions 'hereby they purchased properties and sold the same a e' yearsthereater did not thereby make them partners. They shared in the (ross proDts as co- o'ners andpaid their capital (ains taxes on their net proDts and availed o the tax amnesty thereby. 9nder thecircumstances, they cannot be considered to have ormed an unre(istered partnership 'hich is

thereby liable or corporate income tax, as the respondent commissioner proposes.

And even assumin( or the sake o ar(ument that such unre(istered partnership appears to have

been ormed, since there is no such existin( unre(istered partnership 'ith a distinct personality nor'ith assets that can be held liable or said deDciency corporate income tax, then petitioners can beheld individually liable as partners or this unpaid obli(ation o the partnership p. 7Ho'ever, aspetitioners have availed o the beneDts o tax amnesty as individual taxpayers in these transactions,they are thereby relieved o any urther tax liability arisin( thererom.

&H?4?J0, the petition is hereby E?AT and the decision o the respondent ourt o TaxAppeals o 0arch $3, )*#< is hereby ??8 and 8T A8/ and another decision is herebyrendered relievin( petitioners o the corporate income tax liability in this case, 'ithout

pronouncement as to costs. 8J J??.


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G.R. No. 11275 )&%(&r* 25, 1999

!FISCO INSR!NCE COROR!"ION CCC INSR!NCE COROR!"ION CH!R"ERINSR!NCE CO., INC. CI/ELES INSR!NCE COROR!"ION COONE!L"HINSR!NCE CO!N+ CONSOLID!"ED INSR!NCE CO., INC. DEELOEN"INSR!NCE SRE"+ COROR!"ION DOES"IC INSR!NCE CO!N+ OF "HEHILIINE E!S"ERN !SSR!NCE CO!N+ SRE"+ COR EIREINSR!NCE CO!N+ EI"!/LE INSR!NCE COROR!"ION FEDER!LINSR!NCE COROR!"ION INC. FG INSR!NCE COROR!"ION FIDELI"+ SRE"+ CO!N+ OF "HE HILS., INC. FILIINO ERCH!N"S INSR!NCE CO.,INC. GOERNEN" SERICE INSR!NCE S+S"E !L!+!N INSR!NCE CO.,INC. !L!+!N RICH INSR!NCE CO. INC. ERC!N"ILE INSR!NCE CO.,

INC. E"ROOLI"!N INSR!NCE CO!N+ E"RO-"!ISHO INSR!NCECOROR!"ION NE E!L!ND INSR!NCE CO., L"D. !N-!L!+!N INSR!NCECOROR!"ION !R!ON" INSR!NCE COROR!"ION EOLES "R!NS-E!S"!SI! INSR!NCE COROR!"ION ERL! CO!NI! DE SEGROS, INC.HILIINE /RI"ISH !SSR!NCE CO., INC. HILIINE FIRS" INSR!NCE CO.,INC. IONEER INSR!NCE SRE"+ COR. IONEER IN"ERCON"INEN"!LINSR!NCE COROR!"ION ROIDEN" INSR!NCE CO!N+ OF "HEHILIINES +R!ID INSR!NCE CO., INC. RELI!NCE SRE"+ INSR!NCECO!N+ RI!L SRE"+ INSR!NCE CO!N+ S!NIRO INSR!NCECOROR!"ION SE!/O!RD-E!S"ERN INSR!NCE CO., INC. SOLID G!R!N"+,INC. SO"H SE! SRE"+ INSR!NCE CO., INC. S"!"E /ONDING INSR!NCE CO., INC. S! INSR!NCE COROR!"ION "!/!C!LER!INSR!NCE CO., INC. J # &ee6 & ;OOL OF !CHINER+INSRERS, petitioner,vs.

COR" OF !E!LS, COR" OF "! !E!LS &%6 COISSIONER OF IN"ERN!LREENE, respondent.

!NG!NI/!N, J.:

+ursuant to "reinsurance treaties," a number o local insurance Drms ormed themselvesinto a "pool" in order to acilitate the handlin( o business contracted 'ith a nonresidentorei(n insurance company. 0ay the "clearin( house" or "insurance pool" so ormed bedeemed a partnership or an association that is taxable as a corporation under theational /nternal ?evenue ode 5/?6% 8hould the poolFs remittances to the membercompanies and to the said orei(n Drm be taxable as dividends% 9nder the acts o thiscase, has the (overmentFs ri(ht to assess and collect said tax prescribed%

The +ase

These are the main questions raised in the +etition or ?evie' on +ertioraribeore us,assailin( the Jctober )), )**$ ecision1o the ourt o Appeals2in A-E? 8+ !*3,'hich dismissed petitionersF appeal o the Jctober )*, )** ecision 3o the ourt o TaxAppeals5TA6 'hich had previously sustained petitionersF liability or deDciency incometax, interest and 'ithholdin( tax. The ourt o Appeals ruled:

&H?4J?, the petition is /80/88, 'ith costs a(ainst petitioner5

The petition also challen(es the ovember )!, )**$ ourt o Appeals 5A6?esolutiondenyin( reconsideration.

The Facts

The antecedent acts,7as ound by the ourt o Appeals, are as ollo's:

The petitioners are 2) non-lie insurance corporations, or(anied and existin( under tla's o the +hilippines. 9pon issuance by them o rection, 0achinery ;reakdo'n, ;oxplosion and ontractorsF All ?isk insurance policies, the petitioners on Au(ust ), )*entered into a Yuota 8hare ?einsurance Treaty and a 8urplus ?einsurance Treaty 'ith

0unchener ?uckversicherun(s-Eesselschat 5hereater called 0unich6, a non-residentorei(n insurance corporation. The reinsurance treaties required petitioners to orm aNpOool. Accordin(ly, a pool composed o the petitioners 'as ormed on the same day.

Jn April )2, )*Jn Canuary


24/52

source due thereon +),$32,*22.3

Add: !Q surchar(e $=,$=.3!

)2Q interest rom

)!


25/52

necessarily developed an expertise on the subBect, unless there has been an abuse orimprovident exercise o its authority. 20

This ourt rules that the ourt o Appeals, in a7rmin( the TA 'hich had previouslysustained the internal revenue commissioner, committed no reversible error. 8ection 2 othe /?, as 'orded in the year endin( )*

8ec. 2. ?ate o tax on corporations. G 5a6 Tax on do&estic corporations. =A tax ishereby imposed upon the taxable net income received durin( each taxable year rom allsources by every corporation or(anied in, or existin( under the la's o the +hilippines,no matter ho' created or or(anied, but not includin( duly re(istered (eneral co-partnership 5compaVias colectivas6, (eneral proessional partnerships, private educational

institutions, and buildin( and loan associations . . . ./neludibly, the +hilippine le(islature included in the concept o corporations those entitiesthat resembled them such as unre(istered partnerships and associations. +arenthetically,the /?Fs inclusion o such entities in the tax on corporations 'as made even clearer bythe tax ?eorm Act o )**a' o 4ederal /ncome Taxation, p. ote =$6

Art. )


26/52

"ools e&ittances are Taxale

+etitioners urther contend that the remittances o the pool to the cedin( companies and0unich are not dividends subBect to tax. They insist that such remittances contravene8ections 2 5b6 5/6 and =$ o the )*

+etitioners also ar(ue that the (overnmentFs ri(ht to assess and collect the subBect tahad prescribed. They claim that the subBect inormation return 'as Dled by the pool o

April )2, )*


27/52

G.R. No. 7573 Se=te4ber 1, 1989

!R/ENI COROR!"ION $or4er#* &r(be% J I6&, Co., Lt6., petitioner,vs.

COISSIONER OF IN"ERN!L REENE !ND COR" OF "!!E!LS, respondents.

FERN!N, C.J.:

+etitioner, 0arubeni orporation, representin( itsel as a orei(n corporation dulyor(anied and existin( under the la's o Capan and duly licensed to en(a(e in businessunder +hilippine la's 'ith branch o7ce at the 2th 4loor, 40/ ;uildin(, Aduana 8treet,/ntramuros, 0anila seeks the reversal o the decision o the ourt o Tax Appeals 1dated

4ebruary ), )*#= denyin( its claim or reund or tax credit in the amount o +*,22.23representin( alle(ed overpayment o branch proDt remittance tax 'ithheld rom dividendsby Atlantic Eul and +aciDc o. o 0anila 5AEM+6.

The ollo'in( acts are undisputed: 0arubeni orporation o Capan has equity investmentsin AEM+ o 0anila. 4or the Drst quarter o )*#) endin( 0arch $), AEM+ declared and paidcash dividends to petitioner in the amount o +#2*,onsequently, in a letter dated 8eptember ), )*#) and Dled 'ith the ommissioner /nternal ?evenue on 8eptember 2, )*#), petitioner claimed or the reund or issuanca tax credit o +*,22.23 "representin( proDt tax remittance erroneously paid on thdividends remitted by Atlantic Eul and +aciDc o. o 0anila 5AEM+6 on April 3 andAu(ust 2, )*#) to ... head o7ce in Tokyo. 7

Jn Cune )2 )*# respondent ommissioner o /nternal ?evenue denied petitionerFs claim /t is the ar(ument o petitioner corporation that ollo'in( the principal a(ent relations


28/52

Jn Cune )2, )*#, respondent ommissioner o /nternal ?evenue denied petitioner s claimor reundcredit o +*,22.23 on the ollo'in( (rounds:

&hile it is true that said dividends remitted 'ere not subBect to the )!Q proDt remittancetax as the same 'ere not income earned by a +hilippine ;ranch o 0arubeni orporationo Capan1 and neither is it subBect to the )3Q intercorporate dividend tax, the recipient othe dividends, bein( a non-resident stockholder, nevertheless, said dividend income issubBect to the ! Q tax pursuant to Article )3 56 5b6 o the Tax Treaty dated 4ebruary )$,)*#3 bet'een the +hilippines and Capan.

/nasmuch as the cash dividends remitted by AEM+ to 0arubeni orporation, Capan issubBect to ! Q tax, and that the taxes 'ithheld o )3 Q as intercorporate dividend taxand )! Q as proDt remittance tax totals 5sic6 ! Q, the amount reundable ofsets theliability, hence, nothin( is let to be reunded. 8

+etitioner appealed to the ourt o Tax Appeals 'hich a7rmed the denial o the reund bythe ommissioner o /nternal ?evenue in its assailed Bud(ment o 4ebruary ), )*#=. 9

/n support o its reBection o petitionerFs claimed reund, respondent Tax ourt explained:

&hatever the dialectics employed, no amount o sophistry can i(nore the act that thedividends in question are income taxable to the 0arubeni orporation o Tokyo, Capan. Thesaid dividends 'ere distributions made by the Atlantic, Eul and +aciDc ompany o0anila to its shareholder out o its proDts on the investments o the 0arubeni orporationo Capan, a non-resident orei(n corporation. The investments in the Atlantic Eul M +aciDcompany o the 0arubeni orporation o Capan 'ere directly made by it and the dividendson the investments 'ere like'ise directly remitted to and received by the 0arubeniorporation o Capan. +etitioner 0arubeni orporation +hilippine ;ranch has no

participation or intervention, directly or indirectly, in the investments and in the receipt othe dividends. And it appears that the unds invested in the Atlantic Eul M +aciDcompany did not come out o the unds inused by the 0arubeni orporation o Capan tothe 0arubeni orporation +hilippine ;ranch. As a matter o act, the entral ;ank o the+hilippines, in authoriin( the remittance o the orei(n exchan(e equivalent o 5sic6 thedividends in question, treated the 0arubeni orporation o Capan as a non-residentstockholder o the Atlantic Eul M +aciDc ompany based on the supportin( documentssubmitted to it.

8ubBect to certain exceptions not pertinent hereto, income is taxable to the person 'hoearned it. Admittedly, the dividends under consideration 'ere earned by the 0arubeniorporation o Capan, and hence, taxable to the said corporation. &hile it is true that the0arubeni orporation +hilippine ;ranch is duly licensed to en(a(e in business under+hilippine la's, such dividends are not the income o the +hilippine ;ranch and are nottaxable to the said +hilippine branch. &e see no si(niDcance thereto in the identity

concept or principal-a(ent relationship theory o petitioner because such dividends arethe income o and taxable to the Capanese corporation in Capan and not to the +hilippinebranch. 10

Hence, the instant petition or revie'.

/t is the ar(ument o petitioner corporation that ollo'in( the principal-a(ent relationstheory, 0arubeni Capan is like'ise a resident orei(n corporation subBect only to the )3intercorporate Dnal tax on dividends received rom a domestic corporation in accorda'ith 8ection 25c6 5)6 o the Tax ode o )*


29/52

The 8olicitor Eeneral has adequately reuted petitioner s ar(uments in this 'ise:

The (eneral rule that a orei(n corporation is the same Buridical entity as its branch o7cein the +hilippines cannot apply here. This rule is based on the premise that the business othe orei(n corporation is conducted throu(h its branch o7ce, ollo'in( the principala(ent relationship theory. /t is understood that the branch becomes its a(ent here. 8o that'hen the orei(n corporation transacts business in the +hilippines independently o itsbranch, the principal-a(ent relationship is set aside. The transaction becomes one o theorei(n corporation, not o the branch. onsequently, the taxpayer is the orei(ncorporation, not the branch or the resident orei(n corporation.

orollarily, i the business transaction is conducted throu(h the branch o7ce, the latterbecomes the taxpayer, and not the orei(n corporation. 12

/n other 'ords, the alle(ed overpaid taxes 'ere incurred or the remittance o dividendincome to the head o7ce in Capan 'hich is a separate and distinct income taxpayer romthe branch in the +hilippines. There can be no other lo(ical conclusion considerin( theundisputed act that the investment 5totallin( #$.=3 shares includin( that o nominee6'as made or purposes peculiarly (ermane to the conduct o the corporate afairs o0arubeni Capan, but certainly not o the branch in the +hilippines. /t is thus clear thatpetitioner, havin( made this independent investment attributable only to the head o7ce,cannot no' claim the increments as ordinary consequences o its trade or business in the+hilippines and avail itsel o the lo'er tax rate o )3 Q.

;ut 'hile public respondents correctly concluded that the dividends in dispute 'ereneither subBect to the )! Q proDt remittance tax nor to the )3 Q intercorporate dividendtax, the recipient bein( a non-resident stockholder, they (rossly erred in holdin( that noreund 'as orthcomin( to the petitioner because the taxes thus 'ithheld totalled the !

Q rate imposed by the +hilippine-Capan Tax onvention pursuant to Article )3 56 5b6.

To simply add the t'o taxes to arrive at the ! Q tax rate is to disre(ard a basic rule intaxation that each tax has a diferent tax basis. &hile the tax on dividends is directlylevied on the dividends received, "the tax base upon 'hich the )! Q branch proDtremittance tax is imposed is the proDt actually remitted abroad." 13

+ublic respondents like'ise erred in automatically imposin( the ! Q rate under Article )356 5b6 o the Tax Treaty as i this 'ere a Iat rate. A closer look at the Treaty reveals thatthe tax rates Dxed by Article )3 are the maximum rates as reIected in the phrase "shallnot exceed." This means that any tax imposable by the contractin( state concernedshould not exceed the ! Q limitation and that said rate 'ould apply only i the taximposed by our la's exceeds the same. /n other 'ords, by reason o our bilateralne(otiations 'ith Capan, 'e have a(reed to have our ri(ht to tax limited to a certainextent to attain the (oals set orth in the Treaty.

+etitioner, bein( a non-resident orei(n corporation 'ith respect to the transaction inquestion, the applicable provision o the Tax ode is 8ection 2 5b6 5)6 5iii6 in conBunction'ith the +hilippine-Capan Treaty o )*#3. 8aid section provides:

5b6 Tax on foreign corporations.G 5)6 on-resident corporations G ... 5iii6 Jn dividendsreceived rom a domestic corporation liable to tax under this hapter, the tax shall be

)!Q o the dividends received, 'hich shall be collected and paid as provided in 8ectio5d6 o this ode, subBect to the condition that the country in 'hich the non-resident ocorporation is domiciled shall allo' a credit a(ainst the tax due rom the non-residentorei(n corporation, taxes deemed to have been paid in the +hilippines equivalent to 'hich represents the diference bet'een the re(ular tax 5$! Q6 on corporations and ttax 5)! Q6 on dividends as provided in this 8ection1 ....

+roceedin( to apply the above section to the case at bar, petitioner, bein( a non-residorei(n corporation, as a (eneral rule, is taxed $! Q o its (ross income rom all sourc'ithin the +hilippines. N8ection 2 5b6 5)6O.

Ho'ever, a discounted rate o )!Q is (iven to petitioner on dividends received rom adomestic corporation 5AEM+6 on the condition that its domicile state 5Capan6 extends avor o petitioner, a tax credit o not less than 3 Q o the dividends received. This represents the diference bet'een the re(ular tax o $! Q on non-resident orei(ncorporations 'hich petitioner 'ould have ordinarily paid, and the )! Q special rate ondividends received rom a domestic corporation.

onsequently, petitioner is entitled to a reund on the transaction in question to becomputed as ollo's:

Total cash dividend paid ................+),=**,223.33less )!Q under 8ec. 25b6 5)6 5iii 6 .........................................!2,*)=.33------------------

ash dividend net o )! Q taxdue petitioner ...............................+),222.!2.33

less net amountactually remitted .............................),$33,3


30/52

This is completely untenable. The cited ;+ ;l(. )* does not include the ourt o TaxAppeals 'hich has been created by virtue o a special la', ?epublic Act o. ))!.?espondent court is not amon( those courts speciDcally mentioned in 8ection o ;+ ;l(.)* as allin( 'ithin its scope.

Thus, under 8ection )# o ?epublic Act o. ))!, a party adversely afected by an order,rulin( or decision o the ourt o Tax Appeals is (iven thirty 5$36 days rom notice toappeal thererom. Jther'ise, said order, rulin(, or decision shall become Dnal.

?ecords sho' that petitioner received notice o the ourt o Tax AppealsFs decisiondenyin( its claim or reund on April )!, )*#=. Jn the $3th day, or on 0ay )!, )*#= 5thelast day or appeal6, petitioner Dled a motion or reconsideration 'hich respondent courtsubsequently denied on ovember )


31/52

= , , J

COISSIONER OF IN"ERN!L REENE,+T/T/J?, vs. S". LKES EDIC!LCEN"ER, INC.,?8+JT.

G.R. No. 19590

S". LKES EDIC!L CEN"ER, INC.,+T/T/J?, vs. COISSIONER OF IN"ERN!LREENE,?8+JT.

These are consolidated)petitions or revie' on certiorari under ?ule 2! o the ?ules oourt assailin( the ecision o )* ovember 3)3 o the ourt o Tax Appeals 5TA6 n;anc and its ?esolutiono ) 0arch 3)) in TA ase o. =ukeFs6 is a hospital or(anied as a non-stock and non-proDt corporation. 9nder its articles o incorporation, amon( its corporate purposes are:

5a6 To establish, equip, operate and maintain a non-stock, non-proDt hristian, benevolent,charitable and scientiDc hospital 'hich shall (ive curative, rehabilitative and spiritual careto the sick, diseased and disabled persons1 provided that purely medical and sur(icalservices shall be perormed by duly licensed physicians and sur(eons 'ho may be reelyand individually contracted by patients1

5b6 To provide a career o health science education and provide medical services to the

community throu(h or(anied clinics in such specialties as the acilities and resources othe corporation make possible1

5c6 To carry on educational activities related to the maintenance and promotion o healthas 'ell as provide acilities or scientiDc and medical researches 'hich, in the opinion othe ;oard o Trustees, may be BustiDed by the acilities, personnel, unds, or otherrequirements that are available1

5d6 To cooperate 'ith or(anied medical societies, a(encies o both (overnment andprivate sector1 establish rules and re(ulations consistent 'ith the hi(hest proessionalethics1 x x x x$

Jn )= ecember 33, the ;ureau o /nternal ?evenue 5;/?6 assessed 8t. >ukeFsdeDciency taxes amountin( to+ukeFs Dled an administrative protest 'ith the ;/? a(ainst thedeDciency tax assessments. The ;/? did not act on the protest 'ithin the )#3-day periodunder 8ection # o the /?. Thus, 8t. >ukeFs appealed to the TA.

( 5 6 , ppreerential tax rate on the income o proprietary non-proDt hospitals, should beapplicable to 8t. >ukeFs. Accordin( to the ;/?, 8ection ukeFs maintained that it is a non-stock and non-proDt institution or charitable andsocial 'elare purposes under 8ection $356 and 5E6 o the /?. /t ar(ued that the mao proDt per se does not destroy its income tax exemption.

The petition o the ;/? beore this ourt in E.?. o. )*!*3* reiterates its ar(umentsbeore the TA that 8ection ukeFs. The petition raises the sole isso 'hether the enactment o 8ection ukeFs be orde

to pay+!ukeFs in E.?. o. )*!*=3 raises actual matters on the treatment a'ithholdin( o a part o its income,*as 'ell as the payment o surchar(e and delinquinterest. There is no (round or this ourt to undertake such a actual revie'. 9nder thonstitution)3and the ?ules o ourt,))this ourtFs revie' po'er is (enerally limited"cases in 'hich only an error or question o la' is involved." )This ourt cannot deparom this limitation i a party ails to invoke a reco(nied exception.

The ?ulin( o the ourt o Tax Appeals

The TA n ;anc ecision on )* ovember 3)3 a7rmed in toto the TA 4irst ivisioecision dated $ 4ebruary 33* 'hich held:

&H?4J?, the Amended +etition or ?evie' Nby 8t. >ukeFsO is hereby +A?T/A>>K

E?AT. Accordin(ly, the )**# deDciency AT assessment issued by respondent a(petitioner in the amount o +))3,333.33 is hereby A>> and &/TH?A&.Ho'ever, petitioner is hereby J?? to +AK deDciency income tax and deDciencyexpanded 'ithholdin( tax or the taxable year )**# in the respective amountso +!,2*=,*=$.!2 and+

/n addition, petitioner is hereby J?? to +AK t'enty percent 53Q6 delinquency The ?ulin( o the ourt
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interest on the total amount o +=,

The deDciency income tax o +!,2*=,*=$.!2, ordered by the TA n ;anc to be paid, aroserom the ailure o 8t. >ukeFs to prove that part o its income in )**# 5declared as "Jther/ncome-et"6 )2came rom charitable activities. The TA cancelled the remainder othe +=$,))$,*!.ukeFs is a non-stock and non-proDt charitable institution coveredby 8ection $356 and 5E6 o the /?. This rulin( 'ould exempt all income derived by 8t.>ukeFs rom services to its patients, 'hether payin( or non-payin(. The TA reiterated its

earlier decision in 8t. >ukeFs 0edical enter, /nc. v. ommissioner o /nternal?evenue, )='hich examined the primary purposes o 8t. >ukeFs under its articles oincorporation and various documents)ukeFs as a charitable institution.

The TA adopted the test in Hospital de 8an Cuan de ios, /nc. v. +asay ity, )#'hichstates that "a charitable institution does not lose its charitable character and itsconsequent exemption rom taxation merely because recipients o its beneDts 'ho areable to pay are required to do so, 'here unds derived in this manner are devoted to thecharitable purposes o the institution x x x." )*The (eneration o income rom payin(patients does not per se destroy the charitable nature o 8t. >ukeFs.

Hospital de 8an Cuan cited Cesus 8acred Heart olle(e v. ollector o /nternal?evenue, 3'hich ruled that the old /? 5ommon'ealth Act o. 2==, asamended6 )"positively exempts rom taxation those corporations or associations 'hich,other'ise, 'ould be subBect thereto, because o the existence o x x x net income." The

/? o )**< substantially reproduces the provision on charitable institutions o the old/?. Thus, in reBectin( the ar(ument that tax exemption is lost 'henever there is netincome, the ourt in Cesus 8acred Heart olle(e declared: "NOvery responsibleor(aniation must be run to at least insure its existence, by operatin( 'ithin the limits oits o'n resources, especially its re(ular income. /n other 'ords, it should al'ays strive,'henever possible, to have a surplus."$

The TA held that 8ection ukeFs. 2TheTA explained that to apply the )3Q preerential rate, 8ection ukeFs is liable or deDciency income tax in )**# under8ection


33/52

maintained and administered by private individuals or (roups 'ith an issued permit tooperate rom the epartment o ducation, ulture and 8ports 586, or the ommissionon Hi(her ducation 5H6, or the Technical ducation and 8kills evelopment Authority5T8A6, as the case may be, in accordance 'ith existin( la's and re(ulations. 5mphasissupplied6

8t. >ukeFs claims tax exemption under 8ection $356 and 5E6 o the /?. /t contends thatit is a charitable institution and an or(aniation promotin( social 'elare. The ar(umentso 8t. >ukeFs ocus on the 'ordin( o 8ection $356 exemptin( rom income tax non-stock,non-proDt charitable institutions. $28t. >ukeFs asserts that the le(islative intent ointroducin( 8ection un( enter o the +hilippines v. Yueon ity 23as "a (ibe applied consistently 'ith existin( la's, or the beneDt o an indeDnite number opersons, either by brin(in( their minds and hearts under the inIuence o education oreli(ion, by assistin( them to establish themselves in lie or NbyO other'ise lessenin( t

burden o (overnment."

2)

A non-proDt club or the beneDt o its members ails this teAn or(aniation may be considered as non-proDt i it does not distribute any part o itincome to stockholders or members. Ho'ever, despite its bein( a tax exempt institutany income such institution earns rom activities conducted or proDt is taxable, asexpressly provided in the last para(raph o 8ection $3.

To be a charitable institution, ho'ever, an or(aniation must meet the substantive tescharity in >un( enter. The issue in >un( enter concerns exemption rom real propertax and not income tax. Ho'ever, it provides or the test o charity in our Burisdiction.harity is essentially a (it to an indeDnite number o persons 'hich lessens the burde(overnment. /n other 'ords, charitable institutions provide or ree (oods and servicethe public 'hich 'ould other'ise all on the shoulders o (overnment. Thus, as a mato e7ciency, the (overnment or(oes taxes 'hich should have been spent to addresspublic needs, because certain private entities already assume a part o the burden. Tthe rationale or the tax exemption o charitable institutions. The loss o taxes by the

(overnment is compensated by its relie rom doin( public 'orks 'hich 'ould have bunded by appropriations rom the Treasury.2

haritable institutions, ho'ever, are not ipso acto entitled to a tax exemption. Therequirements or a tax exemption are speciDed by the la' (rantin( it. The po'er oon(ress to tax implies the po'er to exempt rom tax. on(ress can create taxexemptions, subBect to the constitutional provision that "NnOo la' (rantin( any taxexemption shall be passed 'ithout the concurrence o a maBority o all the 0embers oon(ress." 2$The requirements or a tax exemption are strictly construed a(ainst thetaxpayer 22because an exemption restricts the collection o taxes necessary or theexistence o the (overnment.

The ourt in >un( enter declared that the >un( enter o the +hilippines is a charitainstitution or the purpose o exemption rom real property taxes. This rulin( uses thesame premise as Hospital de 8an Cuan2!and Cesus 8acred Heart olle(e 2='hich says receivin( income rom payin( patients does not destroy the charitable nature o ahospital.

As a (eneral principle, a charitable institution does not lose its character as such and exemption rom taxes simply because it derives income rom payin( patients, 'hetheout-patient, or conDned in the hospital, or receives subsidies rom the (overnment, solon( as the money received is devoted or used alto(ether to the charitable obBect 'hi

is intended to achieve1 and no money inures to the private beneDt o the personsi ti th i tit ti 2ukeFs is or(anied as a non-stock and non-proDt charitabinstitution. Ho'ever, this does not automatically exempt 8t. >ukeFs rom payin( taxes

This only reers to the or(aniation o 8t. >ukeFs. ven i 8t. >ukeFs meets the test ocharity, a charitable institution is not ipso acto tax exempt. To be exempt rom realproperty taxes, 8ection #5$6, Article / o the onstitution requires that a charitableinstitution use the property "actually, directly and exclusively" or charitable purposesbe exempt rom income taxes, 8ection $356 o the /? requires that a charitableinstitution must be "or(anied and operated exclusively" or charitable purposes.>ike'ise, to be exempt rom income taxes, 8ection $35E6 o the /? requires that theinstitution be "operated exclusively" or social 'elare.

Ho'ever, the last para(raph o 8ection $3 o the /? qualiDes the 'ords "or(anied operated exclusively" by providin( that:

ot'ithstandin( the provisions in the precedin( para(raphs, the income o 'hatever and character o the ore(oin( or(aniations rom any o their properties, real or persoor rom any o their activities conducted or proDt re(ardless o the disposition made osuch income, shall be subBect to tax imposed under this ode. 5mphasis supplied6

/n short, the last para(raph o 8ection $3 provides that i a tax exempt charitableinstitution conducts "any" activity or proDt, such activity is not tax exempt even as itnot-or-proDt activities remain tax exempt. This para(raph qualiDes the requirements 8ection $356 that the "NnOon-stock corporation or association Nmust beO or(anied andoperated exclusively or x x x charitable x x x purposes x x x." /t like'ise qualiDes therequirement in 8ection $35E6 that the civic or(aniation must be "operated exclusivel

or the promotion o social 'elare.

Thus, even i the charitable institution must be "or(anied and operated exclusively" charitable purposes, it is nevertheless allo'ed to en(a(e in "activities conducted orproDt" 'ithout losin( its tax exempt status or its not-or-proDt activities. The onlyconsequence is that the "income o 'hatever kind and character" o a charitableinstitution "rom any o its activities conducted or proDt, re(ardless o the dispositionmade o such income, shall be subBect to tax." +rior to the introduction o 8ection ukeFs had total revenues o +),


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S O S C S O S , $3,$= ,*=! 33

OER!"ING EENSES

+roessional care o patients +),3)=,=3#,$*2.33

Administrative #ukeFs is a corporation that is not "operated exclusively" orcharitable or social 'elare purposes insoar as its revenues rom payin( patients areconcerned. This rulin( is based not only on a strict interpretation o a provision (rantitax exemption, but also on the clear and plain text o 8ection $356 and 5E6. 8ection $and 5E6 o the /? requires that an institution be "operated exclusively" or charitabl

social 'elare purposes to be completely exempt rom income tax. An institution under8ection $356 or 5E6 does not lose its tax exemption i it earns income rom its or proDt
http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt54http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt54http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt55http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt55http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt56http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt56http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt57http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt58http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt58http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt54http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt55http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt56http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt57http://www.lawphil.net/judjuris/juri2012/sep2012/gr_195909_2012.html#fnt58


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8ection $356 or 5E6 does not lose its tax exemption i it earns income rom its or-proDtactivities. 8uch income rom or-proDt activities, under the last para(raph o 8ection $3, ismerely subBect to income tax, previously at the ordinary corporate rate but no' at thepreerential )3Q rate pursuant to 8ection ukeFs is thereore liable or deDciency income tax in )**# under 8ection ukeFs is "a corporation or purely charitable and social 'elarepurposes"!* and thus exempt rom income tax.=3/n 0ichael C. >huillier, /nc. v.ommissioner o /nternal ?evenue, =)the ourt said that "(ood aith and honest beliethat one is not subBect to tax on the basis o previous interpretation o (overnmenta(encies tasked to implement the tax la', are su7cient BustiDcation to delete theimposition o surchar(es and interest." =

&H?4J?, the petition o the ommissioner o /nternal ?evenue in E.?. o. )*!*3* is+A?T>K E?AT. The ecision o the ourt o Tax Appeals n ;anc dated )* ovember3)3 and its ?esolution dated ) 0arch 3)) in TA ase o. =ukeFs 0edical enter, /nc. is J?? TJ +AK the deDciency income tax in )**# basedon the )3Q preerential income tax rate under 8ection


37/52

J00/88/J? J4 /T?A> ?9, petitioner, vs. ;?/T/8H J?8A8 A/?&AK8J?+J?AT/J and J9?T J4 TAW A++A>8, respondents.

+etitioner ommissioner o /nternal ?evenue 5/?6 seeks a revie' on certiorari o the Bointecision o the ourt o Tax Appeals 5TA6 in TA ases os. $td., and later Yantas Air'ays G'hich 'as responsible or sellin( ;JA tickets coverin( passen(ers and car(oes. )

G.. :o. 87


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(o the unctions 'hich are normally incident to, and are in pro(ressive pursuit o, the purposeand obBect o its or(aniation as a

compilation for first coverage

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