tax digests part one

8/10/2019 tax digests part one

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TAX Week 1 Cases

1. Income v Capital: Madrigal v Rafferty (BUENAVENTURA)

DOCTRINE: Income as contrasted with capital or property is to be the test. The

essential difference between capital and income is that capital is a fund; income is

a flow. A fund of property existing at an instant of time is called capital. A flow of

services rendered by that capital by the payment of money from it or any other

benefit rendered by a fund of capital in relation to such fund through a period of

time is called an income. Capital is wealth, while income is the service of wealth.

FACTS: Vicente Madrigal and Susana Paterno were legally married prior to January

1, 1914. The marriage was contracted under the provisions of law concerning

conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente

Madrigal filed sworn declaration on the prescribed form with the Collector of

Internal Revenue, showing, as his total net income for the year 1914, the sum of

P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73

did not represent his income for the year 1914, but was in fact the income of the

conjugal partnership existing between himself and his wife Susana Paterno, and

that in computing and assessing the additional income tax provided by the Act of

Congress of October 3, 1913, the income declared by Vicente Madrigal should be

divided into two equal parts, one-half to be considered the income of Vicente

Madrigal and the other half of Susana Paterno.

After payment under protest, and after the protest of Madrigal had been decided

adversely by the Collector of Internal Revenue, action was begun by Vicente

Madrigal and his wife Susana Paterno in the Court of First Instance of the city of

Manila against Collector of Internal Revenue and the Deputy Collector of Internal

Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully

and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under

the provisions of the Act of Congress known as the Income Tax Law. The burden of

the complaint was that if the income tax for the year 1914 had been correctly and

lawfully computed there would have been due payable by each of the plaintiffs the

sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of

P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente

Madrigal, with the result that plaintiff Madrigal has paid as income tax for the year

1914, P3,786.08, in excess of the sum lawfully due and payable.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided

into 2 in computing for the additional income tax because of the conjugal

partnership.

HELD: NO. The counter contentions of appellees are that the taxes imposed by the

Income Tax Law are as the name implies taxes upon income tax and not upon

capital and property; that the fact that Madrigal was a married man, and his

marriage contracted under the provisions governing the conjugal partnership, has

no bearing on income considered as income, and that the distinction must be

drawn between the ordinary form of commercial partnership and the conjugal

partnership of spouses resulting from the relation of marriage. The Supreme Court

ruled against the Madrigals.

To recapitulate, Madrigal wants to divide into half his declared income in

computing for his tax since he is arguing that he has a conjugal partnership with his

wife. However, the court ruled that the one that should be taxed is the income

which is the flow of the capital, thus it should not be divided into 2.

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of

her husband Vicente Madrigal during the life of the conjugal partnership. She has

an interest in the ultimate property rights and in the ultimate ownership of

property acquired as income after such income has become capital. Susana

Paterno has no absolute right to one-half the income of the conjugal partnership.

Not being seized of a separate estate, Susana Paterno cannot make a separate

return in order to receive the benefit of the exemption which would arise by

reason of the additional tax. As she has no estate and income, actually and legally

vested in her and entirely distinct from her husband's property, the income cannot

properly be considered the separate income of the wife for the purposes of the

additional tax. Moreover, the Income Tax Law does not look on the spouses as

individual partners in an ordinary partnership. The husband and wife are only

entitled to the exemption of P8,000 specifically granted by the law. The higher

schedules of the additional tax directed at the incomes of the wealthy may not be

partially defeated by reliance on provisions in our Civil Code dealing with the

conjugal partnership and having no application to the Income Tax Law. The aims

and purposes of the Income Tax Law must be given effect.



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2. Income from Whatever Source: CIR v Filinvest (DORIA)

DOCTRINE:

● Gross income – all income from whatever source derived, including, but

not limited to the following items: compensation for services, including

fees, commissions, and similar items; gross income derived from

business; gains derived from dealings in property;" interest; rents;

royalties; dividends; annuities; prizes and winnings; pensions; and

partner’s distributive share of the gross income of general professional

partnership.

● CIR's powers of distribution, apportionment or allocation of gross income

and deductions under Section 43 of the 1993 NIRC does not include the

power to impute "theoretical interests".

● Requisites for the non-recognition of gain or loss under Section 34 (c) (2)

of the 1993 NIRC:

(a) the transferee is a corporation;

(b) the transferee exchanges its shares of stock for property/ies of the

transferor;

(c) the transfer is made by a person, acting alone or together with others,

not exceeding four persons; and,

(d) as a result of the exchange the transferor, alone or together with

others, not exceeding four, gains control of the transferee.

FACTS:

● A holding company is the owner of 80% of the outstanding shares of

Filinvest Alabang, Inc. (FAI) and Filinvest Development Corporation (FDC).It also owns 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI).

● 1996: FDC and FAI entered into a Deed of Exchange with FLI (important

for the 1st issue)

○ FDC & FAI transferred in favor of FLI parcels of land

○ FLI issued shares of stock to FDC & FAI in exchange for said

parcels

● As a result of the exchange, FDC and FAI collectively gained control over

FLI

● FLI requested a ruling from the BIR to the effect that no gain or loss

should be recognized in the transfer of real properties

○ BIR ruled that the exchange is among those contemplated in

Sec. 34 (c) (2) of the old NIRC

● 1996-1997: FDC extended advances in favor of its affiliates, including FAI

& FLI – evidenced by instructional letters and cash & journal vouchers

(important for the 2nd issue)

● BIR sent both FDC and FAI formal letters of demand

○ FDC: to pay deficiency income tax on the taxable gain

supposedly realized from the Deed of Exchange & interest

income tax from the advances it extended to its affiliates

○ FAI: to pay deficiency income tax on the taxable gain

supposedly realized from the Deed of Exchange

● FDC & FAI filed their requests for reconsideration/protest – ground:

assessed taxes were bereft of factual and legal basis

● CIR failed to resolve within 180 days (prescribed by Sec. 228, NIRC) – FDC

& FAI filed a petition with the CTA

○ CTA: no taxable gain should have been assessed from the Deed

of Exchange; the assessed deficiency interest income tax on the

advances made by FDC was proper

● Both FDC and CIR appealed to the CA

○ FDC’s contention: the cash advances were interest -free in the

absence of the express stipulation on interest required by Art.

1956 of the Civil Code; CIR’s authority under Sec. 43 of the NIRC

does not include the power to impute imaginary interest

○ CIR’s contention: CTA erred in cancelling the deficiency income

tax assessments

○ CA: As to FDC – granted; As to CIR - denied● CIR appealed to the SC

ISSUES:

1. WON the purported gain realized by FDC & FAI from the Deed of

Exchange can be subjected to income tax? – NO

2. WON the advances FDC granted to its affiliates can be subjected to

interest income tax? – NO



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RULING:

1. CIR's insistence on the imposition of deficiency income taxes from the Deed of

Exchange executed between FDC, FAI and FLI is without merit.

● Section 34 (c) (2) of the 1993 NIRC provides: “Sec. 34. Determination of

amount of and recognition of gain or loss. – (c) Exception – …No gain or

loss shall also be recognized if property is transferred to a corporation by

a person in exchange for shares of stock in such corporation of which as a

result of such exchange said person, alone or together with others, not

exceeding four persons, gains control of said corporation; Provided, That

stocks issued for services shall not be considered as issued in return of

property.”

As even admitted in the Stipulation of Facts submitted by the parties, the requisites

for the non-recognition of gain or loss under the foregoing provision are as follows:

(a) the transferee is a corporation; (b) the transferee exchanges its shares of stock

for property/ies of the transferor; (c) the transfer is made by a person, acting alone

or together with others, not exceeding four persons; and, (d) as a result of theexchange the transferor, alone or together with others, not exceeding four, gains

control of the transferee.

● Acting on the request filed by FLI, the BIR had, in fact, acknowledged the

concurrence of the foregoing requisites in the Deed of Exchange by

issuing its ruling.

● With the BIR's reiteration of said ruling upon the request for clarification

filed by FLI, there is also no dispute that said transferee and transferors

subsequently complied with the requirements provided for the non-

recognition of gain or loss from the exchange of property for tax, as

provided under Section 34 (c) (2) of the 1993 NIRC.

2. FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC.

● Aside from owning significant portions of the shares of stock of FLI, FAI,

DSCC and FCI, the fact that FDC extended substantial sums of money as

cash advances to its said affiliates for the purpose of providing them

financial assistance for their operational and capital expenditures

indicate that the situation sought to be addressed by the subject

provision exists.

● Section 43 of the 1993 NIRC: "(i)n any case of two or more organizations,

trades or businesses (whether or not incorporated and whether or not

organized in the Philippines) owned or controlled directly or indirectly by

the same interests, the Commissioner of Internal Revenue is authorized to

distribute, apportion or allocate gross income or deductions between or

among such organization, trade or business, if he determines that such

distribution, apportionment or allocation is necessary in order to prevent

evasion of taxes or clearly to reflect the income of any such organization,

trade or business."

However, we find that the CIR's powers of distribution, apportionment or

allocation of gross income and deductions under Section 43 of the 1993 NIRC and

Section 179 of Revenue Regulation No. 2 does not include the power to impute

"theoretical interests".

● Pursuant to Section 28 of the NIRC, the term "gross income" is

understood to mean all income from whatever source derived, including,

but not limited to the following items: compensation for services,

including fees, commissions, and similar items; gross income derived

from business; gains derived from dealings in property;" interest; rents;

royalties; dividends; annuities; prizes and winnings; pensions; and

partner’s distributive share of the gross income of general professional

partnership. While it has been held that the phrase "from whatever

source derived" indicates a legislative policy to include all income not

expressly exempted within the class of taxable income under our laws,

the term "income" has been variously interpreted to mean "cash received

or its equivalent", "the amount of money coming to a person within a

specific time" or "something distinct from principal or capital." Otherwise

stated, there must be proof of the actual or, at the very least, probable

receipt or realization by the controlled taxpayer of the item of gross

income sought to be distributed, apportioned or allocated by the CIR.

Our perusal of the record yielded no evidence of actual or possible showing that

the advances FDC extended to its affiliates had resulted to the interests

subsequently assessed by the CIR.

3. Police Power

3.1. LTO v Butuan (FRANCISCO)

Doctrine:



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The power to regulate the operation of tricycles and to grant franchises

for the operation thereof is still subject to guidelines prescribed by the DOTC. In

compiance therewith, the DOTC issued “Guidelines to Implement the Devolution of

LTFRBs Franchising Authority over Tricycles-For-Hire to LGU pursuant to the Local

Government Code.

LGU may adopt ordinances upon subjects covered by law or statute, suchordinances should be in accordance with and not repugnant to the.

Facts:

Antecedent Issue: W/N the power of LTO to register, tricycles in particular, as well

as to issue licenses for the driving thereof, has devolved to LGUs.

● RTC: (favored LGU - City of Butuan) that the authority to register

tricycles, franchise, the issuance of tricycle drivers' license, and the

collection of fees therefor had all been vested in the Local Government

Units. It decreed the issuance of a permanent writ of injunction against

LTO, prohibiting and enjoining LTO (a) registering tricycles and (b)

issuing licenses to drivers of tricycles.● CA: on appeal to it, sustained the trial court.

● LTO filed an instant petition for review on certiorari to annul and set

aside the decision.

○ LGU asserts that one of the salient provisions introduced by the

Local Government Code is in the area of local taxation which

allows LGUs to collect registration fees or charges along with, in

its view, the corresponding issuance of all kinds of licenses or

permits for the driving of t ricycles.

■ LGU cited Section 129 and 133 of LGC

● "SEC. 129. Power to Create Sources of Revenue. - Each

local government unit shall exercise its power tocreate its own sources of revenue and to levy taxes,

fees, and charges subject to the provisions herein,

consistent with the basic policy of local autonomy.

Such taxes, fees, and charges shall accrue exclusively

to the local government units."

● "SEC. 133. Common Limitations on the Taxing Powers

of Local Government Units. - Unless otherwise

provided herein, the exercise of the taxing powers of

provinces, cities, municipalities, and barangays shall

not extend to the levy of the following:

"(I) Taxes, fees or charges for the registration of

motor vehicles and for the issuance of all

kinds of licenses or permits for the driving

thereof, except tricycles."● Relying on Section 129 and 133 of LGC, the

Sangguniang Panglungsod ("SP") of Butuan passed

SP Ordinance No.916-92 entitled "An Ordinance

Regulating the Operation of Tricycles-for-Hire,

providing mechanism for the issuance of Franchise,

Registration and Permit, and Imposing Penalties for

Violations thereof and for other Purposes." The

ordinance provided for, among other things, the

payment of franchise fees for the grant of the

franchise of tricycles-for-hire, fees for the

registration of the vehicle, and fees for the issuance

of a permit for the driving thereof.

● LTO explains that one of the functions of the national

government that, indeed, has been transferred to

local government units is the franchising authority

over tricycles-for-hire of the LTFRB but not, it

asseverates, the authority of LTO to register all motor

vehicles and to issue to qualified persons of licenses

to drive such vehicles.

Issue:

W/N the registration of tricycles and issuance of driver’s license thereofwas given to LGU’s, hence the ordinance (SP Ordinance No.916 -92) is a valid

exercise of police power.

Held:

No.

● According to "Guidelines to Implement the Devolution of LTFRBs

Franchising Authority over Tricycles-For-Hire to Local Government units

pursuant to the Local Government Code,” it was stated that the newly

delegated powers to LGU's pertain to the franchising and regulatory



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powers exercised by the LTFRB and not to the functions of the LTO

relative to the registration of motor vehicles and issuance of licenses for

the driving thereof. Corollarily, the exercised of a police power must be

through a valid delegation. In this case the police power of registering

tricycles was not delegated to the LGU’s, but remained in the LTO.

● Clearly unaffected by the Local Government Code are the powers of LTOunder R.A. No.4136 requiring the registration of all kinds of motor

vehicles "used or operated on or upon any public highway" in the

country.

● The Commissioner of Land Transportation and his deputies are

empowered at anytime to examine and inspect such motor vehicles to

determine whether said vehicles are registered, or are unsightly, unsafe,

improperly marked or equipped, or otherwise unfit to be operated on

because of possible excessive damage to highways, bridges and other

infrastructures. The LTO is additionally charged with being the central

repository and custodian of all records of all motor vehicles.

● Adds the Court, the reliance made by respondents on the broad taxingpower of local government units, specifically under Section 133 of the

Local Government Code, is tangential.

● Police power and taxation, along with eminent domain, are inherent

powers of sovereignty which the State might share with local government

units by delegation given under a constitutional or a statutory fiat. All

these inherent powers are for a public purpose and legislative in nature

but the similarities just about end there. The basic aim of police power is

public good and welfare. Taxation, in its case, focuses on the power of

government to raise revenue in order to support its existence and carry

out its legitimate objectives. Although correlative to each other in many

respects, the grant of one does not necessarily carry with it the grant ofthe other. The two powers are, by tradition and jurisprudence, separate

and distinct powers, varying in their respective concepts, character,

scopes and limitations.

● To construe the tax provisions of Section 133 (1) of the LGC indistinctively

would result in the repeal to that extent of LTO's regulatory power which

evidently has not been intended. If it were otherwise, the law could have

just said so in Section 447 and 458 of Book III of the Local Government

Code in the same manner that the specific devolution of LTFRB's power

on franchising of tricycles has been provided. Repeal by implication is not

favored.

● The power over tricycles granted under Section 458(a)(3)(VI) of the Local

Government Code to LGUs is the power to regulate their operation and

to grant franchises for the operation thereof. The exclusionary clause

contained in the tax provisions of Section 133 (1) of the LocalGovernment Code must not be held to have had the effect of

withdrawing the express power of LTO to cause the registration of all

motor vehicles and the issuance of licenses for the driving thereof. These

functions of the LTO are essentially regulatory in nature, exercised

pursuant to the police power of the State, whose basic objectives are to

achieve road safety by insuring the road worthiness of these motor

vehicles and the competence of drivers prescribed by R. A. 4136. Not

insignificant is the rule that a statute must not be construed in isolation

but must be taken in harmony with the extant body of laws.

● LGUs indubitably now have the power to regulate the operation of

tricycles-for-hire and to grant franchises for the operation thereof, andnot to issue registration.

● Therefore, the ordinance being repugnant to a statute is void and ultra

vires.

○ SC: the assailed decision which enjoins the LTO from requiring

the due registration of tricycles and a license for the driving

thereof is REVERSED and SET ASIDE.

3.2. Fee v Tax: Chevron v BCDA (GATCHALIAN)

FACTS:

The Board of Directors of Respondent Clark Development Corporation (CDC) issuedand approved Policy Guidelines with regard to the Movement of Petroleum Fuel to

and from the Clark Special Economic Zone (CSEZ) which provided or imposed fees

and charges including Royaltee Fees. The guidelines were implemented July 27,

2002.

On October 1, 2002 CDC sent a letter to Petitioner Chevron, a locator inside CSEZ

informing the latter that a royalty fee of P0.50 per liter shall be assessed on its

deliveries to Nanox Philippines effective August 1, 2002. A Statement of Account



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was then sent to Chevron billing the royaltee fees for its fuel sales from Coastal to

Nanox Philippines from Aug 1-31 to Sept 1-31, 2002. Chevron paid under protest.

CDC again sent another letter to Chevron regarding its unsettled royalty fees

covering the period of Dec 2002 to July 2003. Chevron responded thru a letter

reiterating its continuing objection and requesting a refund of the amount itpreviously paid under protest. Chevron also asked CDC to revoke the royaltee

which the latter denied.

Petitioner elevated its protest before Respondent BCDA arguing that the royalty

fees imposed had no reasonable relation to the probable expenses of regulation

and that the imposition on a per unit measurement of fuel sales was for a revenue

generating purpose, thus, akin to a "tax". BCDA denied the protest. CA as well

dismissed the appeal of Chevron for lack of merit.

Petitioner argues now that such imposition of royalty fees for revenue generating

purposes would amount to a tax, which the respondents have no power to impose.Petitioner stresses that the royalty fee imposed by CDC is not regulatory in nature

but a revenue generating measure to i ncrease its profits and to further enhance its

exclusive right to market and distribute fuel in CSEZ.

Respondent argues that the purpose of royaltee fee is regulatory in nature ans such

being its main purpose, the revenue (if any) is just an incidental product hence,

cannot be considered as tax. Also, it is contended that the regulation is a valid

exercise of police power.

ISSUE:

1. WON the act of imposing Royaltee Fee is a valid exercise of police power?YES

2. WON the Royaltee fee is regulatory in nature? YES

HELD:

In distinguishing tax and regulation as a form of police power, the determining

factor is the purpose of the implemented measure.

● If the purpose is primarily to raise revenue >> then it will be deemed a

tax even though the measure results in some form of regulation.

● If the purpose is primarily to regulate, >> then it is deemed a regulation

and an exercise of the police power of the state , even though

incidentally, revenue is generated.

In the case at bar, we hold that the subject royalty fee was imposed primarily for

regulatory purposes, and not for the generation of income or profits as petitionerclaims. The Policy Guidelines was issued, first and foremost, to ensure the safety,

security, and good condition of the petroleum fuel industry within the CSEZ. The

questioned royalty fees form part of the regulatory framework to ensure "free flow

or movement" of petroleum fuel to and from the CSEZ

In relation to the regulatory purpose of the imposed fees, this Court in Progressive

Development Corporation v. Quezon City, stated that "x x x the imposition

questioned must relate to an occupation or activity that so engages the public

interest in health, morals, safety and development as to require regulation for the

protection and promotion of such public interest ; the imposition must also bear a

reasonable relation to the probable expenses of regulation, taking into account not

only the costs of direct regulation but also its incidental consequences as well ."

In the case at bar, there can be no doubt that the oil industry is greatly imbued

with public interest as it vitally affects the general welfare. In addition, fuel is a

highly combustible product which, if left unchecked, poses a serious threat to life

and property. Also, the reasonable relation between the royalty fees imposed on a

"per liter" basis and the regulation sought to be attained is that the higher the

volume of fuel entering CSEZ, the greater the extent and frequency of supervision

and inspection required to ensure safety, security, and order within the Zone.

Respondents submit that increased administrative costs were triggered by security

risks that have recently emerged, such as terrorist strikes in airlines andmilitary/government facilities (in light of the 9/11 tragedy).

4. Purpose of Taxation

4.1. Revenue Raising: Citibank v CA (HAUTEA)

CITIBANK is a foreign corporation doing business in the Philippines. In 1979 and

1980, its tenants withheld and paid to the Bureau of Internal Revenue the following

taxes on a quarterly basis on rents due to Citibank... For 1979 = P270, 160.56 & For

1980 = P298,829.29.



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On April 15, 1980, Citibank filed its corporate income tax returns for the year ended

December 31, 1979, showing a net loss of P74,854,916.00 and its tax credits

totalled P6,257,780.00, even without including the amounts withheld on rental

income under the Expanded Withholding Tax System, the same not having been

utilized or applied for the reason that the year’s operation resulted in a loss. Thetaxes thus withheld by the tenants from rentals paid to Citibank in 1979 were not

included as tax credits although a rental income amounting to P7,796,811.00 was

included in its income declared for the year ended December 31, 1979.

For the year ended December 31, 1980, Citibank’s corporate income tax returns

filed on April 15, 1981, showed a net loss of P77,071,790.00 for income tax

purposes. Its available tax credit (refundable) at the end of 1980 amounting to

P11,532,855.00 was not utilized or applied. The said available tax credits did not

include the amounts withheld by Citibank’s tenants from rental payments in 1980

but the rental payments for that year were declared as part of its gross income

included in its annual income tax returns

Citibank submitted its claim for refund of the aforesaid amounts of P270,160.56

and P298,829, respectively, or a total of P568,989.85

Court of Tax Appeals adjudged Citibank’s entitlement to the tax refund sought for,

representing the 5% tax withheld and paid on Citibank’s rental income for 1979 and

1980

Not satisfied, the Commissioner appealed to the Court of Appeals. In due course,

Respondent Court issued the assailed Decision and Resolution, ruling that the five

percent tax withheld by tenants from the rental income of Citibank for the years1979 and 1980 was in accordance with Section 1(c) of the Expanded Withholding

Tax Regulations (BIR Revenue Regulation No. 13-78, as amended) and did not

involve illegally or erroneously collected taxes.

Issues & Held:

1. For creditable withholding tax to be refundable, when should the illegality or

error in its assessment or collection be reckoned: at the time of withholding or at

the end of the taxable year?

END OF TAXABLE YEAR. Taxes remitted partially on a periodic or quarterly basis

should be credited or refunded to the taxpayer on the basis of the ta xpayer’s final

adjusted returns, not on such periodic or quarterly basis. Like the corporate

quarterly income tax, creditable withholding taxes are subject to adjustment upon

determination of the correct income tax liability after the filing of the corporate

income tax return, as at the end of the taxable yearpayments of quarterly income taxes (per Section 68, NIRC) should be considered

mere installments on the annual tax due.

Consequently, the taxes withheld during the course of the taxable year, while

collected legally under the aforesaid revenue regulation, became untenable and

took on the nature of erroneously collected taxes at the end of the taxable year.

Under the present tax code, the types of income subject to withholding tax in

Section 53, now Section 50, is simplified into three categories: (a) withholding of

final tax on certain incomes; (b) withholding of creditable tax at source; and (c) tax

free covenant bonds.

Accordingly, the withheld amounts equivalent to five percent of the gross rental

are remitted to the BIR and are considered creditable withholding taxes under

Section 53-f, i.e., creditable against income tax liability for that year

ike the corporate quarterly income tax, creditable withholding taxes are subject to

adjustment upon determination of the correct income tax liability after the filing of

the corporate income tax return, as at the end of the taxable year.

Note: Regarding Revenue Raising

The withholding tax system was devised for two main reasons: first , to provide thetaxpayer a convenient manner to meet his probable income tax liability; and

second , to ensure the collection of the income tax which could otherwise be lost or

substantially reduced through failure to file the corresponding returns. To these, a

third reason may be added: to improve the government’s cash flow.

Under Section 53 a-f of the tax code which was in effect at the time this case

ripened, withholding of tax at source was mandated in cases of: (a) tax free

covenant bonds, (b) payments of interest, dividends, rents, royalties, salaries,

wages, premiums, annuities, compensations, remunerations, emoluments, or other



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fixed or determinable annual, periodical, or casual gains, profits and income, and

capital gains of non-resident aliens and foreign corporations; (c) dividends from a

domestic corporation and royalties received by resident individuals and

corporation; (d) certain dividends; (e) interest on bank deposit; and (f) other items

of income payable to resident individuals or corporations. Section 53-f was

amended by Presidential Decree No. 1351, delegating to the Secretary of Financethe power to require the withholding of a tax

2. Who has the burden of proving whether he is entitled to a refund?

THE CLAIMANT. Tax refunds, like tax exemptions, are construed strictly against the

taxpayer. A refund claimant is required to prove the inclusion of the income

payments which were the basis of the withholding taxes and the fact of

withholding. However, detailed proof of the truthfulness of each and every item in

the income tax return is not required. That function is lodged in the commissioner

of internal revenue by the NIRC which requires the commissioner to assess internal

revenue taxes within three years after the last day prescribed by law for the filingof the return.

WHEREFORE, the assailed Decision is hereby REVERSED and the decision of the

Court of Tax Appeals is REINSTATED (Citibank’s entitlement to the tax refund

sought for, representing the 5% tax withheld and paid on Citibank’s rental inco me

for 1979 and 1980)

Non revenue/ special or regulatory: Angeles University v City of Angeles (LESAVA)

4.2.

Doctrine:

Non-stock, non-profit education foundations under RA No. 6055 are not exempted

from building permit fees.

In order to be entitled to the exemption from real estate tax, the petitioner is

burdened to prove, by clear and unequivocal proof, that (a) it is a charitable

institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY

used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to

the exclusion of others; debarred from participation or enjoyment; and

"exclusively" is defined, "in a manner to exclude; as enjoying a privilege

exclusively." If real property is used for one or more commercial purposes, it is not

exclusively used for the exempted purposes but is subject to taxation. The words

"dominant use" or "principal use" cannot be substituted for the words "used

exclusively" without doing violence to the Constitutions and the law. Solely is

synonymous with exclusively.

Petitioner: AUF (Angeles University Foundation) - educational institution which

converted into a non-stock, non-profit education foundation under RA No. 6055

Respondent: City Building Officials

Facts:

● AUF filed with the Office of the City Building Official an application for a

building permit for the construction of an 11-storey building of the AUF

Medical Center in its main campus.

● Office of the City Building Official (CBO), issued a building permit feeassessment and an order of payment was also issued by the City Planning and

Development Office, Zoning Administration unit requiring AUF to pay

locational clearance fee.

● AUF is claiming it is exempted from payment of building permit and locational

clearance fees citing legal opinions rendered by the DOJ. It also reminded

respondents that they previously issued building permits acknowledging such

exemption.

● Respondents still refused to issue the building permits for the construction of

the AUF Medical Center.

● AUF paid in protest and respondents released the corresponding permits

(Building permit, wiring permit, electrical permit, and sanitary building permit)● AUF formally requested for refund of the fees

● City treasurer denied claim for refund.

● AUF filed complaint.

● Respondents asserted that petitioner cannot claim exemption because its

structures are not those mentioned in Sec. 209 of the National Building Code

as exempted from the building permit fee. They also argue that RA No. 6055

should be deemed repealed on the basis of Sec. 2104 of the National Building

Code.



9

● Petitioner counters that the building permit is being collected under Art. 244 o

the Implementing Rules and Regulations of the Local Government Code.

TC: rendered judgment in favor of petitioner

CA: reversed TC’s decision. It held that although petitioner is a tax-free entity, it is

not exempted from paying regulatory fees.● building permit cannot be considered as the other “charges” mentioned

in RA No. 6055 which refers to impositions in the nature of tax, import

duties, assessments, and other collection for revenue purposes, following

the ejusdem generic rule.

Issue: WON petitioner should be exempted for payment of building permit fees

and other fees as well as payment for real property tax.

Held: NO on both accounts.

A. On the Fees:

Sec. 8 of RA No. 6055 exempts a foundation from the payment of all taxes, import

duties, assessments, and other charges imposed by the Government on all income

derived from or property, real or personal, used exclusively for the educational

activities of the Foundation.

the "other charges" mentioned in Sec. 8 of R.A. N o. 6055 is qualified by the words

"imposed by the Government on all x x x property used exclusively for the

educational activities of the foundation." Building permit fees are not impositions

on property but on the activity subject of government regulation.

That a building permit fee is a regulatory imposition is highlighted by the fact that

in processing an application for a building permit, the Building Official shall see to it

that the applicant satisfies and conforms with approved standard requirements on

zoning and land use, lines and grades, structural design, sanitary and sewerage,

environmental health, electrical and mechanical safety as well as with other rules

and regulations implementing the National Building Code.24 Thus, ancillary permits

such as electrical permit, sanitary permit and zoning clearance must also be

secured and the corresponding fees paid before a building permit may be issued.

And as can be gleaned from the implementing rules and regulations of the National

Building Code, clearances from various government authorities exercising and

enforcing regulatory functions affecting buildings/structures, like local government

units, may be further required before a building permit may be issued.

Since building permit fees are not charges on property, they are not impositions

from which petitioner is exempt.

Note: charges are different from fees.

Charges- refer to pecuniary liability, as rents, and fees against persons or property;

broadly defined as the "price of, or rate for, something

Fees- A fee is generally imposed to cover the cost of regulation as activity or

privilege and is essentially derived from the exercise of police power; on the other

hand, impositions for services rendered by the local government units or for

conveniences furnished, are referred to as "service charges".; pertains to a "charge

fixed by law for services of public officers or for use of a privilege under control of

government."

Furthermore, Petitioner’s reliance on Sec. 193 of the Local Government Code of

1991 is misplaced.

SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or presently

enjoyed by all persons, whether natural or juridical, including government-owned

or controlled corporations, except local water districts, cooperatives duly

registered under R.A. No. 6938, non-stock and non-profit hospitals and educational

institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis

supplied.)

Considering that exemption from payment of regulatory fees was not among those

"incentives" granted to petitioner under R.A. No. 6055, there is no such incentive

that is retained under the Local Government Code of 1991.

B. On the Real Estate Tax: Petitioner failed to discharge its burden to prove that its

real property is actually, directly and exclusively used for educational purposes.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be

entitled to the exemption, the petitioner is burdened to prove, by clear and

unequivocal proof, that (a) it is a charitable institution; and (b) its real properties



10

are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.

"Exclusive" is defined as possessed and enjoyed to the exclusion of others;

debarred from participation or enjoyment; and "exclusively" is defined, "in a

manner to exclude; as enjoying a privilege exclusively." If real property is used for

one or more commercial purposes, it is not exclusively used for the exempted

purposes but is subject to taxation. The words "dominant use" or "principal use"cannot be substituted for the words "used exclusively" without doing violence to

the Constitutions and the law. Solely is synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for charitable

purposes: direct and immediate and actual application of the property itself to the

purposes for which the charitable institution is organized.

4.3. Principles of Sound Tax System: BAT v Camacho (LIM)

BRITISH AMERICAN TOBACCO, v. JOSE ISIDRO N. CAMACHO (Motion for

Reconsideration of the 2008 case)

FACTS:

To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue

Regulations No. 1-97, 2 which classified the existing brands of cigarettes as those

duly registered or active brands prior to January 1, 1997. New brands, or those

registered after January 1, 1997 shall be initially assessed at their suggested retail

price until such time that the appropriate survey to determine their current net

retail price is conducted.

In June 2001 British American Tobacco introduced into the market Lucky Strike

Filter, Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a

suggested retail price of P9.90 per pack. 3 Pursuant to Sec. 145 (c) quoted above,the Lucky Strike brands were initially assessed the excise tax at P8.96 per pack.

On February 17, 2003, Revenue Regulations No. 9-2003, amended Revenue

Regulations No. 1-97 by providing, among others, a periodic review every two years

or earlier of the current net retail price of new brands and variants thereof for the

purpose of establishing and updating their tax classification.

Pursuant thereto, Revenue Memorandum Order No. 6-2003 5 was issued on March

11, 2003, prescribing the guidelines and procedures in establishing current net

retail prices of new brands of cigarettes and alcohol products. Subsequently,

Revenue Regulations No. 22-2003 6 was issued on August 8, 2003 to implement the

revised tax classification of certain new brands introduced in the market after

January 1, 1997, based on the survey of their current net retail price.

The survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky StrikeMenthol Lights, are sold at the current net retail price of P22.54, P22.61 and

P21.23, per pack, respectively. Respondent Commissioner of the Bureau of Internal

Revenue thus recommended the applicable tax rate of P13.44 per pack inasmuch

as Lucky Strike's average net retail price is above P10.00 per pack.

Thus filed before the Regional Trial Court (RTC) of Makati, Branch 61, a petition for

injunction with prayer for the issuance of a temporary restraining order (TRO)

and/or writ of preliminary injunction, docketed as Civil Case No. 03-1032. Said

petition sought to enjoin the implementation of Section 145 of the NIRC, Revenue

Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-

2003 on the ground that they discriminate against new brands of cigarettes, inviolation of the equal protection and uniformity provisions of the Constitution. The

trial court rendered a decision upholding the constitutionality of Section 145 of the

NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum

Order No. 6-2003

ISSUE: W/N the classification freeze provision violates the equal protection and

uniformity of taxation clauses of the Constitution.

HELD:

No. In the instant case, there is no question that the classification freeze provision

meets the geographical uniformity requirement because the assailed law applies toall cigarette brands in the Philippines. And, for reasons already adverted to in our

August 20, 2008 Decision, the four-fold test has been met in the present case.

As held in the assailed Decision, the instant case neither involves a suspect

classification nor impinges on a fundamental right. Consequently, the rational basis

test was properly applied to gauge the constitutionality of the assailed law in the

face of an equal protection challenge.



11

It has been held that "in the areas of social and economic policy, a statutory

classification that neither proceeds along suspect lines nor infringes constitutional

rights must be upheld against equal protection challenge if there is any reasonably

conceivable state of facts that could provide a rational basis for the classification."

Under the rational basis test, it is sufficient that the legislative classification is

rationally related to achieving some legitimate State interest.

Petitioner's reliance on Ormoc Sugar Co. is misplaced. In said case, the

controverted municipal ordinance specifically named and taxed only the Ormoc

Sugar Company, and excluded any subsequently established sugar central from its

coverage. Thus, the ordinance was found unconstitutional on equal protection

grounds because its terms do not apply to future conditions as well.

This is not the case here. The classification freeze provision uniformly applies to all

cigarette brands whether existing or to be introduced in the market at some future

time. It does not purport to exempt any brand from its operation nor single out a

brand for the purpose of imposition of excise taxes.

5. Lifeblood Theory: NPC v City of Cabanatuan (MORA)

Taxes are the lifeblood of the government, for without taxes, the government can

neither exists nor endure. A principal attribute of sovereignty, the exercise of taxing

power derives its source from the very existence of the state whose social contract

with its citizens obliges it to promote public interest and common good. The theory

behind the exercise of the power to tax emanates from necessity; without taxes,

government cannot fulfill its mandate of promoting the general welfare and well-

being of the people.

FACTS:

National Power Corporation (NAPOCOR) is a government owned and controlled

corporation created under Commonwealth Act No. 120, as amended. Petitioner

sells electric power to the residents of the City of Cabanatuan. Said City assessed

the petitioner a franchise tax that petitioner refused to pay.

Petitioner argues that respondent has no authority to impose tax on government

entities. It further contends that as a non-profit organization, it is exempted from

the payment of all forms of taxes, charges, duties or fees.

Thus, respondent filed a collection suit in the RTC of Cabanatuan City, demanding

the petitioner to pay the assessed tax due plus surcharge and monthly interest. The

respondent alleged that petitioner’s exemption from local taxes has been repealed

by Sec. 193 of the Local Government Code (RA 7160)

RTC - dismissed the case. It rules that tax exemption privileges granted to

petitioner subsists despite passage of RA 7160, a general law. RA 6395 which grants

the privilege is a special law. A general law cannot repeal a special law.

CA - reversed RTC ruling. the appellate court ruled as such, on the ground that SEc

193 in relation to Sec 137 of the LGC expressly repealed the exemptions granted to

the petitioner.

In the SC, the petitioner submits that the charter of NaPoCor, being a valid exercise

of police power, should prevail over the LGC. It alleges that the power of the local

government to impose franchise tax is subordinate to petitioner’s exemption fromtaxation; police power being the most pervasive, least limitable and most

demanding of all powers, including the power of taxation.

ISSUE:

Whether NaPoCor is liable to pay annual f ranchise tax to the City of Cabanatuan?---

YES

RULING:

Taxes are the lifeblood of the government, for without taxes, the government can

neither exists nor endure. A principal attribute of sovereignty, the exercise of

taxing power derives its source from the very existence of the state whose socialcontract with its citizens obliges it to promote public interest and common good.

The theory behind the exercise of the power to tax emanates from necessity;

without taxes, government cannot fulfill its mandate of promoting the general

welfare and well-being of the people.

In recent years, the increasing social challenges of the times expanded the scope

of state activity, and taxation has become a tool to realize social justice and the

equitable distribution of wealth, economic progress and the protection of local

industries as well as public welfare and similar objectives. Taxation assumes even



12

greater significance with the ratification of the 1987 Constitution. Thenceforth, the

power to tax is no longer vested exclusively on Congress; local legislative bodies

are now given direct authority to levy taxes, fees and other charges pursuant to

Article X, section 5 of the 1987 Constitution, viz:

“Section 5.- Each Local Government unit shall have the power to create its ownsources of revenue, to levy taxes, fees and charges subject to such guidelines and

limitations as the Congress may provide, consistent with the basic policy of local

autonomy. Such taxes, fees and charges shall accrue exclusively to the Local

Governments.”

This paradigm shift results from the realization that genuine development can be

achieved only by strengthening local autonomy and promoting decentralization

of governance. For a long time, the country’s highly centralized government

structure has bred a culture of dependence among local government leaders upon

the national leadership. It has also “dampened the spirit of initiati ve, innovation

and imaginative resilience in matters of local development on the part of localgovernment leaders.” The only way to shatter this culture of dependence is to

give the LGUs a wider role in the delivery of basic services, and confer them

sufficient powers to generate their own sources for the purpose. To achieve this

goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a

local government code that will, consistent with the basic policy of local

autonomy, set the guidelines and limitations to this grant of taxing powers, viz:

“Section 3. The Congress shall enact a local government code which shall provide

for a more responsive and accountable local government structure instituted

through a system of decentralization with effective mechanisms of recall, initiative,

and referendum, allocate among the different local government units their powers,responsibilities, and resources, and provide for the qualifications, election,

appointment and removal, term, salaries, powers and functions and duties of local

officials, and all other matters relating to the organization and operation of the

local units.”

To recall, prior to the enactment of the Rep. Act No. 7160, also known as the

Local Government Code of 1991 (LGC), various measures have been enacted to

promote local autonomy. These include the Barrio Charter of 1959, the Local

Autonomy Act of 1959,the Decentralization Act of 1967 and the Local Government

Code of 1983. Despite these initiatives, however, the shackles of dependence on

the national government remained. Local government units were faced with the

same problems that hamper their capabilities to participate effectively in the

national development efforts, among which are: (a) inadequate tax base, (b) lack

of fiscal control over external sources of income, (c) limited authority to prioritize

and approve development projects, (d) heavy dependence on external sources ofincome, and (e) limited supervisory control over personnel of national line

agencies. Considered as the most revolutionary piece of legislation on local

autonomy, the LGC effectively deals with the fiscal constraints faced by LGUs. It

widens the tax base of LGUs to include taxes which were prohibited by previous

laws such as the imposition of taxes on forest products, forest concessionaires,

mineral products, mining operations, and the like. The LGC likewise provides

enough flexibility to impose tax rates in accordance with their needs and

capabilities. It does not prescribe graduated fixed rates but merely specifies the

minimum and maximum tax rates and leaves the determination of the actual

rates to the respective sanggunian.

One of the most significant provisions of the LGC is the removal of the blanket

exclusion of instrumentalities and agencies of the national government from the

coverage of local taxation. Although as a general rule, LGUs cannot impose taxes,

fees or charges of any kind on the National Government, its agencies and

instrumentalities, this rule now admits an exception, i.e., when specific

provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the

aforementioned entities, viz:

“Section 133. Common Limitations on the Taxing Powers of the Local Government

Units.- Unless otherwise provided herein, the exercise of the taxing powers of

provinces, cities, municipalities, and barangays shall not extend to the levy of thefollowing:

xxx

(o) Taxes, fees, or charges of any kind on the National Government, its agencies

and instrumentalities, and local government units.” (emphasis supplied)

In view of the afore-quoted provision of the LGC, the doctrine in Basco vs.

Philippine Amusement and Gaming Corporation relied upon by the petitioner to

support its claim no longer applies. To emphasize, the Basco case was decided prior

to the effectivity of the LGC, when no law empowering the local government units



13

to tax instrumentalities of the National Government was in effect. However, as this

Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs.

Marcos, nothing prevents Congress from decreeing that even instrumentalities or

agencies of the government performing governmental functions may be subject to

tax. In enacting the LGC, Congress exercised its prerogative to tax instrumentalities

and agencies of government as it sees fit.

In the case at bar, section 151 in relation to section 137 of the LGC clearly

authorizes the respondent city government to impose on the petitioner the

franchise tax in question.

In its general signification, a franchise is a privilege conferred by government

authority, which does not belong to citizens of the country generally as a matter of

common right. In its specific sense, a franchise may refer to a general or primary

franchise, or to a special or secondary franchise. The former relates to the right to

exist as a corporation, by virtue of duly approved articles of incorporation, or a

charter pursuant to a special law creating the corporation. The right under aprimary or general franchise is vested in the individuals who compose the

corporation and not in the corporation itself. On the other hand, the latter refers to

the right or privileges conferred upon an existing corporation such as the right to

use the streets of a municipality to lay pipes of tracks, erect poles or string wires.

The rights under a secondary or special franchise are vested in the corporation and

may ordinarily be conveyed or mortgaged under a general power granted to a

corporation to dispose of its property, except such special or secondary franchises

as are charged with a public use.

In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the

sense of a secondary or special franchise. This is to avoid any confusion when theword franchise is used in the context of taxation. As commonly used, a franchise

tax is “a tax on the privilege of transacting bus iness in the state and exercising

corporate franchises granted by the state.” It is not levied on the corporation

simply for existing as a corporation, upon its property or its income, but on its

exercise of the rights or privileges granted to it by the government. Hence, a

corporation need not pay franchise tax from the time it ceased to do business and

exercise its franchise. It is within this context that the phrase “tax on businesses

enjoying a franchise” in section 137 of the LGC should be interpreted and

understood. Verily, to determine whether the petitioner is covered by the franchise

tax in question, the following requisites should concur: (1) that petitioner has a

“franchise” in the sense of a secondary or special franchise; and (2) that it is

exercising its rights or privileges under this franchise within the territory of the

respondent city government.

Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended byRep. Act No. 7395, constitutes petitioner’s primary and secondary franchises. It

serves as the petitioner’s charter, defining its composition, capitalization, the

appointment and the specific duties of its corporate officers, and its corporate life

span. Petitioner also fulfills the second requisite. It is operating within the

respondent city government’s territorial jurisdiction pursuant to the powers

granted to it by Commonwealth Act No. 120, as amended. From its operations in

the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in

1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the

franchise tax in question.

To stress, a franchise tax is imposed based not on the ownership but on theexercise by the corporation of a privilege to do business. The taxable entity is the

corporation which exercises the franchise, and not the individual stockholders. By

virtue of its charter, petitioner was created as a separate and distinct entity from

the National Government. It can sue and be sued under its own name, and can

exercise all the powers of a corporation under the Corporation Code

We also do not find merit in the petitioner’s contention that its tax exemptions

under its charter subsist despite the passage of the LGC.

As a rule, tax exemptions are construed strongly against the claimant. Exemptions

must be shown to exist clearly and categorically, and supported by clear legalprovisions. In the case at bar, the petitioner’s sole refuge is section 13 of Rep. Act

No. 6395 exempting from, among others, “all income taxes, franchise taxes and

realty taxes to be paid to the National Government, its provinces, cities,

municipalities and other government agencies and instrumentalities.” However,

section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax

privileges previously enjoyed by private and public corporations. Contrary to the

contention of petitioner, section 193 of the LGC is an express, albeit general, repeal

of all statutes granting tax exemptions from local taxes. It reads:



14

“Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all

persons, whether natural or juridical, including government-owned or controlled

corporations, except local water districts, cooperatives duly registered under R.A.

No. 6938, non-stock and non-profit hospitals and educational institutions, are

hereby withdrawn upon the effectivity of this Code.” (emphases supplied )

It is a basic precept of statutory construction that the express mention of one

person, thing, act, or consequence excludes all others as expressed in the familiar

maxim expressio unius est exclusio alterius. Not being a local water district, a

cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital

or educational institution, petitioner clearly does not belong to the exception. It is

therefore incumbent upon the petitioner to point to some provisions of the LGC

that expressly grant it exemption from local taxes.

But this would be an exercise in futility. Section 137 of the LGC clearly states that

the LGUs can impose franchise tax “notwithstanding any exemption granted by anylaw or other special law.” This particular provision of the LGC does not admit any

exception. In City Government of San Pablo, Laguna v. Reyes, MERALCO’s

exemption from the payment of franchise taxes was brought as an issue before this

Court.

It is worth mentioning that section 192 of the LGC empowers the LGUs, through

ordinances duly approved, to grant tax exemptions, initiatives or reliefs. But in

enacting section 37 of Ordinance No. 165-92 which imposes an annual franchise

tax “notwithstanding any exemption granted by law or other special law,” the

respondent city government clearly did not intend to exempt the petitioner from

the coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise needed

revenues to finance and support myriad activities of the local government units

for the delivery of basic services essential to the promotion of the general

welfare and the enhancement of peace, progress, and prosperity of the people.

As this Court observed in the Mactan case, “the original reasons for the

withdrawal of tax exemption privileges granted to government-owned or

controlled corporations and all other units of government were that such

privilege resulted in serious tax base erosion and distortions in the tax treatment

of similarly situated enterprises.” With the added burden of devolution, it is even

more imperative for government entities to share in the requirements of

development, fiscal or otherwise, by paying taxes or other charges due from

them.

CA decision affirmed.

6. Jurisdiction over subject

6.1. Prospectivity of Tax Laws: CIR v Filipinas (SUPAPO)

DOCTRINE:

TAX LAWS; REAL ESTATE DEALER’S TAX; IMPOSITION OF HIGHER RATE OF TAXES

AFTER THE TAXPAYER HAS PAID THE TAX UNDER THE OLD RATE. — On January 4,

1956, respondent, in accordance with the single rate then prescribed under Section

182 of the National Internal Revenue Code, paid its real estate dealer’s fixed annual

tax for the year 1956. Subsequently, said Section 182 of the Code was amended by

Republic Act No. 1612 which imposes new and higher rates of real estate dealer’stax. section 21 thereof provides that the Act "shall take effect upon its approval" on

August 24, 1956. Held: Since the respondent has paid the annual tax then

prescribed for the year 1956, to require it to pay the additional tax provided in

Republic Act 1612 would result in the imposition upon respondent of a tax burden

to which it was not liable before the enactment of said amendatory act, thus

rendering its operation retroactive rather than prospective, which cannot be done,

as it would contravene Section 21 of said Act as well as the established rule

regarding the prospectivity of operation of statutes.

FACTS:

1. In this case, Filipinas Compania de Seguros, an insurance and real estatedealer, made an early payment (January 4) for its real estate dealer’s fixed

annual tax for the year 1956 worth P150.00 (old rate).

2. In the same year, a tax law (RA1612 amending Sections 172 and 182 NIRC) was

passed which changes the real estate dealer’s tax rate from uniform fixed

annual rate to a graduated rate thereby increasing the tax imposed.

3. Accordingly, said Act "shall take effect upon its approval" on August 24, 1956.

4. Based on the assessment of the BIR using the graduated rate, the tax payable

of Filipinas for the year should have been P 500.00.



15

5. As such, the CIR demanded from Filipinas an additional P350.00 for the latter’s

real estate dealer’s tax for the year 1956.

6. Filipinas contended that it already paid its due prior to the effectivity of

RA1612; and that it should not have a retroactive effect as RA1856 (which was

subsequently passed by congress) amended the effectivity date of RA1612 to

January 1, 1597.

CA: Ordered CIR to desist from collecting the additional assessment.

ISSUE: Whether the new tax law should be applied prospectively.

(In other words, in computing for the real estate dealer’s tax for the year 1956,

what rate should be applied: old rate or new rate? -- Old rate!)

HELD: It should be applied PROSPECTIVELY.

A statute should be considered as prospective in its operation whether it enacts,

amends or repeals a tax, unless the language of the statute clearly demands orexpresses that it shall have a retroactive effect. The rule applies with greater force

to the case at bar, considering that Republic Act No. 1612, which imposes the new

and higher rates of real estate dealer’s annual fixed tax, expressly provides in

Section 21 thereof that said Act "shall take effect upon its approval" on August 24,

1956.

The instant case involves the fixed annual real estate dealer’s tax for 1956. There is

no dispute that before the enactment of Republic Act No. 1612 on August 24, 1956,

the uniform fixed annual real estate dealer’s tax was P150.00 for all owners of

rental properties receiving an aggregate amount of P3,000.00 or more a year in the

form of rentals 2 and that "the yearly fixed taxes are due on the first of January ofeach year" unless tendered in semi-annual or quarterly installments. 3 Since the

petitioner indisputably paid in full on January 4, 1956, the total annual tax then

prescribed for the year 1956, to require it to pay an additional sum of P350.00 to

complete the P500.00 provided in Republic Act No. 1612 which became effective

by its very terms only on August 24, 1956, would, in the language of the Court of

Tax Appeals, result in the imposition upon respondent of a tax burden to which it

was not liable before the enactment of said amendatory act, thus rendering its

operation retroactive rather than prospective, which cannot be done, as it would

contravene the aforecited Section 21 of Republic Act No. 1612 as well as the

established rule regarding the prospectivity of operation of statutes.

The view that Congress did intend to impose said increased rates of real estate

dealer’s annual tax prospectively and not retroactively, finds some affirmation in

Republic Act No. 1856, approved on June 22, 1957, which fixed the effective dateof said new rates under Republic Act No. 1612 by inserting the following proviso in

Section 182 of the National Internal Revenue Code: "Provided, further, That any

amount collected in excess of the rates in effect prior to January one, nineteen

hundred and fifty- seven, shall be refunded or credited to the taxpayer concerned

subject to the provisions of section three hundred and nine of this Code."e

6.2. Imprescriptibility: Lim v CA (BUENAVENTURA)

(Guys, sorry ang haba. Material din kasi yung dates)

FACTS: Petitioner spouses Emilio E. Lim, Sr. and Antonia Sun Lim were engaged in

the dealership of various household appliances They filed income tax returns for

the years 1958 and 1959.

On October 5, 1959, a raid was conducted at their business address by the National

Bureau of Investigation. Another rraid was made on petitioners' premises at 111

12th Street, Quezon City. Seized from the Lim couple were business and accounting

records which served as bases for an investigation undertaken by the Bureau of

Internal Revenue (BIR).

On September 30, 1964 Senior Revenue Examiner Raphael S. Daet submitted amemorandum with the findings that the income tax returns filed by petitioners for

the years 1958 and 1959 were false or fraudulent. Daet recommended that an

assessment of P835,127.00 be made against the petitioners.

Accordingly, on April 7, 1965, then Acting Commissioner of the BIR, Benjamin M.

Tabios informed petitioners that there was due from them the amount of

P922,913.04 as deficiency income taxes for 1958 and 1959, giving them until May

7, 1965 to pay the amount.



16

On April 10, 1965, petitioner Emilio E. Lim, Sr., requested for a reinvestigation. The

BIR expressed willingness to grant such request but on condition that within ten

days from notice, Lim would accomplish a waiver of defense of prescription under

the Statute of Limitations and that one half of the deficiency income tax would be

deposited with the BIR and the other half secured by a surety bond. If within the

ten-day period the BIR did not hear from petitioners, then it would be presumedthat the request for reinvestigation had been abandoned.

Petitioner Emilio E. Lim, Sr. refused to comply with the above conditions and

reiterated his request for another investigation.

On January 31, 1967, the BIR Commissioner informed petitioners that their

deficiency income tax liabilities for 1958 and 1959 had been assessed at

P934,000.54 including interest and compromise penalty for late payment.

Petitioners were given until March 7, 1967 to submit their objections with the

admonition that if they failed to do so, it would be assumed that they were

agreeable to the assessment and a formal demand would issue.

On March 15, 1967, petitioners wrote the BIR to protest the latest assessment and

repeated their request for a reinvestigation.

On October 10, 1967, the BIR rendered a final decision holding that there was no

cause for reversal of the assessment against the Lim couple. Petitioners were

required to pay deficiency income taxes for 1958 and 1959 amounting to

P1,237,190.55 inclusive of interest, surcharges and compromise penalty for late

payment. The final notice and demand for payment was served on petitioners

through their daughter-in-law on July 3, 1968.

Still, no payment was forthcoming from the delinquent taxpayers. Accordingly on

September 1, 1969, the matter was referred by the BIR to the Manila Fiscal's Office

for investigation and prosecution. On June 23, 1970, four (4) separate criminal

informations were filed against petitioners for violation of Sections 45 and 51 in

relation to Section 73 of the National Internal Revenue Code. TC found the spouses

guilty as charged.

ISSUE:

A. WON the prescriptive period in Criminal Cases Nos. 1788 and 1789

commenced to run only from July 3, 1968, the date of the final assessment;

B. WON the offenses charged in Criminal Case Nos. 1790 and 1791 prescribed in

ten (10) years, instead of five (5) years;

HELD:

Indubitably, petitioners had filed false and fraudulent income tax returns for the

years 1958 and 1959 by nondisclosure of sales in the aggregate amount of

P2,197,742.92, thereby depriving the Government in the amount of P1,237,190.55,

representing deficiency income taxes inclusive of interest, surcharges and

compromise penalty for late payment. Considering that this occurred in the late

1950's, the defraudation was on a massive scale.

ON ISSUE A: YES. Relative to Criminal Cases Nos. 1788 and 1789 which involved

petitioners' refusal to pay the deficiency income taxes due, again both parties are

in accord that by their nature, the violations as charged could only be committedafter service of notice and demand for payment of the deficiency taxes upon the

taxpayers. Petitioners maintain that the five-year period of limitation under Section

354 should be reckoned from April 7, 1965, the date of the original assessment

while the Government insists that it should be counted from July 3, 1968 when

the final notice and demand was served on petitioners' daughter-in-law. SC rules

for the GOVERNMENT.

Section 51 (b) of the Tax Code provides:

(b) Assessment and payment of deficiency tax. — After the return is filed,

the Commissioner of internal Revenue shall examine it and assess the correctamount of the tax. The tax or deficiency in tax so discovered shall be paid upon

notice and demand from the Commissioner of Internal Revenue.

Inasmuch as the final notice and demand for payment of the deficiency taxes was

served on petitioners on July 3, 1968, it was only then that the cause of action on

the part of the BIR accrued. This is so because prior to the receipt of the letter-

assessment, no violation has yet been committed by the taxpayers. The offense

was committed only after receipt was coupled with the wilful refusal to pay the

taxes due within the alloted period. The two criminal informations, having been



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filed on June 23, 1970, are well-within the five-year prescriptive period and are

not time-barred.

ON ISSUE B: FIVE YEARS. With regard to Criminal Cases Nos. 1790 and 1791 which

dealt with petitioners' filing of fraudulent consolidated income tax returns with

intent to evade the assessment decreed by law, petitioners contend that the saidcrimes have likewise prescribed. They advance the view that the five-year period

should be counted from the date of discovery of the alleged fraud which, at the

latest, should have been October 15, 1964, the date stated by the Appellate Court

in its resolution of April 4, 1978 as the date the fraudulent nature of the returns

was unearthed.

On behalf of the Government, the Solicitor General counters that the crime of filing

false returns can be considered "discovered" only after the manner of commission,

and the nature and extent of the fraud have been definitely ascertained. It was

only on October 10, 1967 when the BIR rendered its final decision holding that

there was no ground for the reversal of the assessment and therefore required thepetitioners to pay P1,237,190.55 in deficiency taxes that the tax infractions were

discovered.

Not only that. The Solicitor General stresses that Section 354 speaks not only of

discovery of the fraud but also institution of judicial proceedings. Note the

conjunctive word "and" between the phrases "the discovery thereof" and "the

institution of judicial proceedings for its investigation and proceedings." In other

words, in addition to the fact of discovery, there must be a judicial proceeding for

the investigation and punishment of the tax offense before the five-year limiting

period begins to run. It was on September 1, 1969 that the offenses subject of

Criminal Cases Nos. 1790 and 1791 were indorsed to the Fiscal's Office forpreliminary investigation. Inasmuch as a preliminary investigation is a proceeding

for investigation and punishment of a crime, it was only on September 1, 1969

that the prescriptive period commenced.

IN SUM:

Criminal Cases Nos. 1788-1789 and 1790-1791, having been instituted by the

Government on June 23, 1970, are not time-barred pursuant to Section 354 of the

National Internal Revenue Code.

6.3. Double Tax

6.3.1. Constitutionality of Double Taxation: Villanueva v

City of Iloilo (DORIA)

DOCTRINE:

● There is no constitutional prohibition against double taxation in the

Philippines. It is something not favored, but is permissible, provided some

other constitutional requirement is not violated, such as the requirement

that taxes must be uniform.

● A license tax may be levied upon a business or occupation although the

land or property used in connection therewith is subject to property tax.

FACTS:

● September 30, 1946: municipal board of Iloilo City enacted Ordinance 86,

imposing license tax fees on tenement houses (casa de vecindad).

○ The SC declared the ordinance ultra vires, "it not appearing that

the power to tax owners of tenement houses is one amongthose clearly and expressly granted to the City of Iloilo by its

Charter."

● On January 15, 1960, the City enacted Ordinance 11, series of 1960, An

Ordinance Imposing Municipal License Tax on Persons Engaged in the

Business of Operating Tenement Houses.

○ The municipal board believed that with the passage of R.A.

2264 (Local Autonomy Act), it had acquired the authority or

power to enact an ordinance similar to that previously declared

as ultra vires.

● By virtue of Ordinance 11, the City collected taxes from spouses Eusebio

Villanueva and Remedios Villanueva and the other owners of tenementhouses in Iloilo City.

○ Note: Eusebio Villanueva has been paying real estate taxes on

his property.

● The Villanuevas and the other appellees filed with the CFI a complaint

against the City of Iloilo, praying that Ordinance 11 be declared invalid for

being beyond the powers of the Municipal Council of the City of Iloilo to

enact, and unconstitutional for being violative of the rule as to uniformity

of taxation.



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● The CFI declared the ordinance illegal on the grounds that (a) "Republic

Act 2264 does not empower cities to impose apartment taxes," (b) the

same is "oppressive and unreasonable," for the reason that it penalizes

owners of tenement houses who fail to pay the tax, (c) it constitutes not

only double taxation, but treble at that and (d) it violates the rule of

uniformity of taxation.○ Reason for the ruling on double taxation: "buildings pay real

estate taxes and also income taxes as provided for in Sec. 182

(A) (3) (s) of the NIRC, besides the tenement tax under the said

ordinance."

ISSUE: WON Ordinance 11 imposes double taxation? – NO

RATIO:

● What the TC referred to as "income taxes" are the fixed taxes on business

and occupation provided for in Sec. 182, Title V, of the NIRC, by virtue of

which persons engaged in "leasing or renting property, whether on their

account as principals or as owners of rental property or properties," are

considered "real estate dealers" and are taxed according to the amount

of their annual income.

● While it is true that the appellees are taxable under the aforesaid

provisions of the NIRC as real estate dealers, and still taxable under the

ordinance, the argument against double taxation may not be invoked.

○ The same tax may be imposed by the national government as

well as by the local government.

○ There is nothing i nherently obnoxious in the exaction of license

fees or taxes with respect to the same occupation, calling or

activity by both the State and a political subdivision thereof.

● It is a well-settled rule that a license tax may be levied upon a business or

occupation although the land or property used in connection therewith is

subject to property tax.

○ The State may collect an ad valorem tax on property used in a

calling, and at the same time impose a license tax on that

calling, the imposition of the latter kind of tax being in no sense

a double tax.

● In order to constitute double taxation in the objectionable or prohibited

sense the same property must be taxed twice when it should be taxed

but once; both taxes must be imposed on the same property or subject-

matter, for the same purpose, by the same State, Government, or taxing

authority, within the same jurisdiction or taxing district, during the same

taxing period, and they must be the same kind or character of tax."○ It has been shown that a real estate tax and the tenement tax

imposed by the ordinance, although imposed by the same

taxing authority, are not of the same kind or character.

● At all events, there is no constitutional prohibition against double

taxation in the Philippines. It is something not favored, but is permissible,

provided some other constitutional requirement is not thereby violated,

such as the requirement that taxes must be uniform.

6.3.2. Modes of eliminating double taxation: CIR v SC

Johnson (FRANCISCO)Doctrine:

Double Taxation - is the imposition of comparable taxes in two or more states on

the same taxpayer in respect of the same subject matter and for i dentical period.

The purpose of doing away with double taxation: To encourage the free flow of

goods and services and the movement of capital technology and persons between

countries, conditions deemed vital in creating robust and dynamic economies.

Modes of eliminating double taxation:

1. First, it sets out the respective rights to tax of the state of source or situs and

of the state of residence with regard to certain classes of income or capital.2. Second, for the elimination of double taxation applies whenever the state of

source is given a full or limited right to tax together with the state of

residence.

Facts:

● S.C. Johnson and Son, PH (respondent), is a domestic corporation organized

and operating under the Philippine Laws, entered into a licensed agreement

with the SC Johnson and Son, USA, a non-resident foreign corporation based

in the USA pursuant to which the respondent was granted the right to use



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● At the same time, the intention behind the adoption of the provision on

relief from double taxation in the two tax treaties in question should be

considered in light of the purpose behind the most favored nation clause.

The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the

taxes paid to the Philippines on royalties as allowed under the RP-West GermanyTax Treaty, respondent cannot be deemed entitled to the 10 percent rate granted

under the latter treaty for the reason that there is no payment of taxes on

royalties under similar circumstances.

Private respondent is claiming for a refund of the alleged overpayment of tax on

royalties; however, there is nothing on record to support a claim that the tax on

royalties under the RP-US Tax Treaty is paid under similar circumstances as the

tax on royalties under the RP-West Germany Tax Treaty.

SC: Instant petition is GRANTED. The decision of the CTA and CS are hereby SET

ASIDE.

Modes of eliminating double taxation:

1. First, it sets out the respective rights to tax of the state of source or situs and

of the state of residence with regard to certain classes of income or capital.

In some cases, an exclusive right to tax is conferred on one of the contracting

states; however, for other items of income or capital, both states are given

the right to tax, although the amount of tax that may be imposed by the

state of source is limited.

2. The second method for the elimination of double taxation applies whenever

the state of source is given a full or limited right to tax together with the

state of residence. In this case, the treaties make it incumbent upon the stateof residence to allow relief in order to avoid double taxation. In this case, the

treaties make it incumbent upon the state of residence to allow relief in

order to avoid double taxation.

a. Methods of relief under the second mode of eliminating double

taxation

i. Exemption method, the income or capital which is taxable in the

state of source or situs is exempted in the state of residence,

although in some instances it may be taken into account in

determining the rate of tax applicable to the taxpayer’s

remaining income or capital.

ii. Credit method, although the income or capital which is taxed in

the state of source is still taxable in the state of residence, the

tax paid in the former is credited against the tax levied in the

latter.The basic difference between the two methods is that in

the exemption method, the focus is on the income or

capital itself, whereas the credit method focuses upon

the tax.

6.4. Escape from taxation

6.4.1. Shifting of tax burden: Silkair v CIR (GATCHALIAN)

PARTIES:

● Petitioner Silkair is an online international carrier organized under the laws of

Singapore and also the buyer of aviation jet fuel● Respondent CIR – is impleaded in the case as the head of BIR

● BIR - duly authorized to decide, approve, and grant refunds and/or tax credits

of erroneously paid or illegally collected internal revenue taxes

● Petron Corporation – seller of aviation jet fuel

FACTS:

● Petitioner filed with the BIR an administrative claim for the refund of excise

taxes which it erronerously paid on its purchase of aviation jet fuel from

Petron.

○ The claim was based on a BIR Ruling stating that the petroleum

products Silkair purchased should not be subject of exise taxes underSec 135 of NIRC

● BIR took no action. Silkair filed petition for review with CTA.

○ Invoked its exemption to pay excise taxes in accordance with Section

135 (b) of NIRC

○ Sec 135(b) of NIRC exempts from excise taxes the entities covered by

tax treaties, conventions and other international agreements;

provided that the country of said carrier or exempt entity likewise

exempts from similar taxes the petroleum products sold to Philippine

carriers or entities.



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○ Silkair presented Art 4(2) of Air Transport Agreement between Phil

and Singapore as a support to Sec 135(b)

● Although CTA found that Silkair was qualified for tax exemption under Sec

135(b), it ruled that it was NOT entitled to excise tax exemption for failure to

present proof tgat it was authorized to operate in the Phil during the period

material.● Elevated the case to CTA En Banc. It affirmed that decision of the CTA and

stated that SIlakair is not found to be the proper party to file the instant claim

for refund.

ISSUES:

1. WON Petron may shift the tax burden to Silkair? YES

2. WON Silkair is the proper party to claim for the refund/tax credit of

excise taxes? NO. Petron is the proper party, being that it is the statutory

taxpayer

3. WON excise tax is considered as an indirect tax? YES

HELD:

It is important to note that on two separate occasions, this Court has already put to

rest the issue of whether or not petitioner is the proper party to claim for the

refund or tax credit of excise taxes it allegedly paid on its aviation fuel purchases.

First Case: In Silkair (Singapore) Pte, Ltd. v. CIR involving the same parties and the

same cause of action but pertaining to different periods of taxation, we have

categorically held that Petron, not petitioner, is the proper party to question, or

seek a refund of, an indirect tax.

● The proper party to question, or seek a refund of, an indirect tax is the

statutory taxpayer, the person on whom the tax is imposed by law andwho paid the same even if he shifts the burden thereof to another.

Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise

specifically allowed, the return shall be filed and the excise tax paid by

the manufacturer or producer before removal of domestic products from

place of production." Thus, Petron Corporation, NOT Silkair, is the

statutory taxpayer which is entitled to claim a refund based on Section

135 of the NIRC and Article 4(2) of the Air Transport Agreement between

RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the

additional amount billed to Silkair for jet fuel is NOT a tax but part of the price

which Silkair had to pay as a purchaser.

Second Case: The Court explained that an EXCISE TAX IS AN INDIRECT TAX where

the burden can be shifted or passed on to the consumer but the tax liabilityremains with the manufacturer or seller. Thus, the manufacturer or seller has the

option of shifting or passing on the burden of the tax to the buyer. However,

where the burden of the tax is shifted, the amount passed on to the buyer is no

longer a tax but a part of the purchase price of the goods sold. Petron, as

manufacturer or producer, is the person liable for the payment of the excise tax as

shown in the Excise Tax Returns filed with the BIR. Stated otherwise, Petron is the

taxpayer that is primarily, directly and legally liable for the payment of the excise

taxes. However, since an excise tax is an indirect tax, Petron can transfer to its

customers the amount of the excise tax paid by t reating it as part of the cost of the

goods and tacking it on the selling price.

Difference between DIRECT and INDIRECT taxes

1. Direct - taxes that are those exacted from the very person who, it is intended

or desired, should pay them; they are impositions for which a taxpayer is

directly liable on the transaction or business he is engaged in.

2. Indirect - taxes wherein the liability for the payment of the tax falls on one

person but the burden thereof can be shifted or passed on to another person,

such as when the tax is imposed upon goods before reaching the consumer

who ultimately pays for it. When the seller passes on the tax to his buyer, he,

in effect, shifts the tax burden, not the liability to pay it, to the purchaser as

part of the purchase price of goods sold or services rendered.

6.4.2. Tax avoidance: CIR v Estate of Toda (HAUTEA)

FACTS:

Cebiles Insurance Corporation authorized Benigno P. Toda, Jr., President and owner

of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building

and the two parcels of land on which the building stands for an amount of not less

than P90 million.



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Toda purportedly sold the property for P100 million to Rafael A. Altonaga.

However, Altonaga in turn, sold the same property on the same day to Royal Match

Inc. for P200 million. These two transactions were evidenced by Deeds of Absolute

Sale notarized on the same day by the same notary public.

For the sale of the property to Royal Dutch, Altonaga paid capital gains tax [6%] inthe amount of P10 million.

ISSUE:

Is this a case of tax evasion or tax avoidance? Tax Evasion

HELD:

Tax avoidance and tax evasion are the two most common ways used by taxpayers

in escaping from taxation. Tax avoidance is the tax saving device within the means

sanctioned by law. This method should be used by the taxpayer in good f aith and at

arms length. Tax evasion, on the other hand, is a scheme used outside of those

lawful means and when availed of, it usually subjects the taxpayer to further oradditional civil or criminal liabilities.

Tax evasion connotes the integration of three factors: (1) the end to be achieved,

i.e., the payment of less than that known by the taxpayer to be legally due, or the

non-payment of tax when it is shown that a tax is due; (2) an accompanying state

of mind which is described as being “evil,” in “bad faith,” “willfull,”or “deliberate

and not accidental”; and (3) a course of action or failure of action which is unlawful.

All these factors are present in the instant case. It is significant to note that as

early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to

Altonaga, CIC received P40 million from RMI, and not from Altonaga. That P40million was debited by RMI and reflected in its trial balance as “other inv. – Cibeles

Bldg.” Also, another P40 million was debited and reflected in RMI’s trial balance as

“other inv. – Cibeles Bldg.” This would show that the real buyer of the properties

was RMI, and not the intermediary Altonaga.

The investigation conducted by the BIR disclosed that Altonaga was a close

business associate and one of the many trusted corporate executives of Toda. This

information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an

old timer in the company. But Mr. Prieto did not testify on this matter, hence, that

information remains to be hearsay and is thus inadmissible in evidence. It was not

verified either, since the letter-request for investigation of Altonaga was unserved,

Altonaga having left for the United States of America in January 1990.

Nevertheless, that Altonaga was a mere conduit finds support in the admission of

respondent Estate that the sale to him was part of the tax planning scheme of CIC.

That admission is borne by the records.

The scheme resorted to by CIC in making it appear that there were two sales of the

subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI

cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, “is deemed to comprise anything calculated to deceive,

including all acts, omissions, and concealment involving a breach of legal or

equitable duty, trust or confidence justly reposed, resulting in the damage to

another, or by which an undue and unconscionable advantage is taken of another.”

It is obvious that the objective of the sale to Altonaga was to reduce the amount oftax to be paid especially that the transfer from him to RMI would then subject the

income to only 5% individual capital gains tax, and not the 35% corporate income

tax. Altonaga’s sole purpose of acquiring and transferring title of the subject

properties on the same day was to create a tax shelter. Altonaga never controlled

the property and did not enjoy the normal benefits and burdens of ownership. The

sale to him was merely a tax ploy, a sham, and without business purpose and

economic substance. Doubtless, the execution of the two sales was calculated to

mislead the BIR with the end in view of reducing the consequent income tax

liability.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which wasprompted more on the mitigation of tax liabilities than for legitimate business

purposes constitutes one of tax evasion.

Generally, a sale or exchange of assets will have an income tax incidence only when

it is consummated. The incidence of taxation depends upon the substance of a

transaction. The tax consequences arising from gains from a sale of property are

not finally to be determined solely by the means employed to transfer legal title.

Rather, the transaction must be viewed as a whole, and each step from the

commencement of negotiations to the consummation of the sale is relevant. A sale



23

by one person cannot be transformed for tax purposes into a sale by another by

using the latter as a conduit through which to pass title. To permit the true nature

of the transaction to be disguised by mere formalisms, which exist solely to alter

tax liabilities, would seriously impair the effective administration of the tax policies

of Congress.

To allow a taxpayer to deny tax liability on the ground that the sale was made

through another and distinct entity when it is proved that the latter was merely a

conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga

should be disregarded for income tax purposes. The two sale transactions should

be treated as a single direct sale by CIC to RMI.

6.4.3. Tax evasion: CIR v Javier (VILLAFUERTE)

DOCTRINE:

● Fraud is never imputed and the courts never sustain findings of fraud

upon circumstances which, at most, create only suspicion and the mereunderstatement of a tax is not itself proof of fraud for the purpose of tax

evasion.

● A "fraudulent return" is always an attempt to evade a tax, but a merely

"false return" may not be.

FACTS: In 1977, Victoria Javier received a $1 Million remittance in her bank account

from her sister abroad, Dolores Ventosa. Melchor Javier, Jr., the husband of

Victoria immediately withdrew the said amount and then appropriated it for

himself.

Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against theJaviers for estafa. Apparently, Ventosa only sent $1,000.00 to her sister Victoria but

due to a clerical error in Mellon Bank, what was sent was the $1 Million.

Meanwhile, Javier filed his income tax return. In his return, he place a footnote

which states: “Taxpayer was recipient of some money received from abroad which

he presumed to be a gift but turned out to be an error and is now subject of

litigation.”

The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability

amounting to P4.8 Million. The CIR also imposed a 50% penalty against Javier as the

CIR deemed Javier’s return as a fraudulent return.

ISSUE: WON a taxpayer (Javier) who merely states as a footnote in his income tax

return that a sum of money that he erroneously received and already spent is thesubject of a pending litigation and there did not declare it as income is liable to pay

the 50% penalty for filing a fraudulent return.

HELD: No.

Supreme Court held that there is no fraud in the filing of the return. The notation,

"Taxpayer was the recipient of some money from abroad which he presumed to be

a gift but turned out to be an error and is now subject of litigation” was an "error

or mistake of fact or law" not constituting fraud, that such notation was practically

an invitation for investigation and that Javier had literally "laid his cards on the

table."

The fraud contemplated by law is actual and not constructive. It must be

intentional fraud, consisting of deception willfully and deliberately done or

resorted to in order to induce another to give up some legal right. Negligence,

whether slight or gross, is not equivalent to the fraud with intent to evade the tax

contemplated by law. It must amount to intentional wrong-doing with the sole

object of avoiding the tax. It necessarily follows that a mere mistake cannot be

considered as fraudulent intent, and if both petitioner and respondent

Commissioner of Internal Revenue committed mistakes in making entries in the

returns and in the assessment, respectively, under the inventory method of

determining tax liability, it would be unfair to treat the mistakes of the petitioner

as tainted with fraud and those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraud upon

circumstances which, at most, create only suspicion and the mere understatement

of a tax is not itself proof of fraud for the purpose of tax evasion.

A "fraudulent return" is always an attempt to evade a tax, but a merely "false

return" may not be.



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In the case at bar, there was no actual and intentional fraud through willful and

deliberate misleading of the government agency concerned, the Bureau of Internal

Revenue, headed by the herein petitioner. The government was not induced to

give up some legal right and place itself at a disadvantage so as to prevent its lawful

agents from proper assessment of tax liabilities because Javier did not conceal

anything. Error or mistake of law is not fraud. The petitioner's zealousness tocollect taxes from the unearned windfall to Javier is highly commendable.

Unfortunately, the imposition of the fraud penalty in this case is not justified by the

extant facts. Javier may be guilty of swindling charges, perhaps even for greed by

spending most of the money he received, but the records lack a clear showing of

fraud committed because he did not conceal the fact that he had received an

amount of money although it was a "subject of litigation." As ruled by respondent

Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner

against the private respondent in the deficiency assessment should be deleted.

tax digests part one

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