tax week 4 digests

7/28/2019 TAX Week 4 Digests

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2. Double Taxationa. Meaning of double taxation in the strict sense/in the broad sense

b. Instances of double taxation in its broad sense

VILLANUEVA v CITY OF ILOILODecember 28, 1968

Doctrine: 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 taxesmust 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.

Nature: Appeal by the defendant City of Iloilo from the decision of the Court of FirstInstance of Iloilo declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance

Imposing Municipal License Tax On Persons Engaged In The Business Of Operating

Tenement Houses," and ordering the City to refund to the plaintiffs-appellees the sums of

collected from them under the said ordinance.

Ponente: CASTRO,J.

Facts:

- On September 30, 1946 the municipal board of Iloilo City enactedOrdinance 86, imposing license tax fees on: (1) tenement houses; (2)tenement houses, partly or wholly engaged in or dedicated to business in the

streets of J.M. Basa, Iznart and Aldeguer; (3) tenement house, partly or wholly

engaged in business in any other streets. The validity and constitutionality of

this ordinance were challenged and this Court, in City of Iloilo vs. Remedios Sian

Villanueva and Eusebio Villanueva, L-12695, March 23, 1959, declared the

ordinance ultra vires, "it not appearing that the power to tax owners of

tenement houses is one among those clearly and expressly granted to the City

of Iloilo by its Charter."

- On January 15, 1960 the municipal board of Iloilo City, believing that withthe passage of Republic Act 2264, otherwise known as the LocalAutonomy Act, it had acquired the authority or power to enact anordinance similar to that previously declared by this Court as ultra vires,enacted Ordinance 11, series of 1960.

- Appellees Eusebio Villanueva and Remedios S. Villanueva are owners of fivetenement houses, aggregately containing 43 apartments, while the other

appellees and the same Remedios S. Villanueva are owners of ten apartments.

Each of the appellees' apartments has a door leading to a street and is rented by

either a Filipino or Chinese merchant. The first floor is utilized as a store, whilethe second floor is used as a dwelling of the owner of the store.

- By virtue of the ordinance, the appellant City collected from spousesEusebio Villanueva and Remedios S. Villanueva, for the years 1960-1964,

the sum of P5,824.30, and from the other appellees, for the years 1960-

1964, the sum of P1,317.00. Eusebio Villanueva has likewise been payingreal estate taxes on his property.

- On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed acomplaint, and an amended complaint, respectively, against the City of Iloilo,

in the aforementioned court, praying that Ordinance 11, series of 1960, bedeclared "invalid for being beyond the powers of the Municipal Councilof the City of Iloilo to enact, and unconstitutional for being violative ofthe rule as to uniformity of taxation and for depriving said plaintiffs ofthe equal protection clause of the Constitution," and that the City be

ordered to refund the amounts collected from them under the saidordinance.- The lower court rendered judgment declaring 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.

Main Issues (for this section of the syllabus):- WON Ordinance 11, series of 1960, of the City of Iloilo, illegal because it

imposes double taxation?

Sub Issues :- WON the City of Iloilo is empowered by the Local Autonomy Act to impose

tenement taxes?

- WON Ordinance 11, series of 1960, oppressive and unreasonable because itcarries a penal clause?

- WON Ordinance 11, series of 1960, violate the rule of uniformity of taxation?Held:

- No. There is no double taxation.- Yes. It is empowered by the Local Autonomy Act.- No. It is not oppressive.- No. It does not violate the rule of uniformity of taxation.-

Ratio (for Double Taxation)- While it is true that the plaintiffs-appellees are taxable under the aforesaid

provisions of the National Internal Revenue Code as real estate dealers, and

still taxable under the ordinance in question, the argument against double

taxation may not be invoked. The same tax may be imposed by thenational government as well as by the local government. There isnothing inherently obnoxious in the exaction of license fees or taxeswith respect to the same occupation, calling or activity by both the Stateand a political subdivision thereof.

- Plaintiffs-appellees are NOT doubly taxed just because they are paying thereal estate taxes and the tenement tax imposed by the ordinance in question.

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 issubject to property tax. The State may collect an ad valorem tax on property


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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 butonce; both taxes must be imposed on the same property or subject-matter, for the same purpose, by the same State, Government, or taxingauthority, within the same jurisdiction or taxing district, during the sametaxing period, and they must be the same kind or character of tax." It hasbeen shown that a real estate tax and the tenement tax imposed by the

ordinance, although imposed by the sametaxing authority, are not of the samekind or character.

- At all events, there is no constitutional prohibition against double taxationin 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."

Quick Reference Ratio for sub issues (discussed already last time) :- On City of Iloilo being allowed: Theprovisions of Republic Act 2264 confer on

local governments broad taxing authority which extends to almost "everything,

excepting those which are mentioned therein," provided that the tax so levied is

"for public purposes, just and uniform," and does not transgress anyconstitutional provision or is not repugnant to a controlling statute.

-

Does the tax imposed by the ordinance in question fall within any of theexceptions provided for in section 2 of the Local Autonomy Act? Appellees

strongly maintain that it is a "property tax" or "real estate tax," and not a "tax

on persons engagedin any occupation or business or exercising privileges," or alicense tax, or a privilege tax, or an excise tax. The Courts view is that the tax in

question is not a real estate tax. The appellees confuse the tax with the real

estate tax within the meaning of the Assessment Law, which, although not

applicable to the City of Iloilo, has counterpart provisions in the Iloilo City

Charter. A real estate tax is a direct tax on the ownership of lands and buildings

or other improvements thereon, not specially exempted, and is payable

regardless of whether the property is used or not, although the value may vary

in accordance with such factor.

- It is not a tax on the land on which the tenement houses are erected, althoughboth land and tenement houses may belong to the same owner. The tax is not a

fixed proportion of the assessed value of the tenement houses, and does not

require the intervention of assessors or appraisers. It is not payable at a

designated time or date, and is not enforceable against the tenement houses

either by sale or distraint. Clearly, therefore, the tax in question is not a realestate tax.

- On oppressive: It is elementary, however, that "a tax is not a debt in the senseof an obligation incurred by contract, express or implied, and therefore is not

within the meaning of constitutional or statutory provisions abolishing or

prohibiting imprisonment for debt, and a statute or ordinance which punishes

the non-payment thereof by fine or imprisonment is not, in conflict with that

prohibition." Nor is the tax in question a poll tax, for the latter is a tax of a fixed

amount upon all persons, or upon all persons of a certain class, resident within

a specified territory, without regard to their property or the occupations in

which they may be engaged. Therefore, the tax in question is not oppressivein the manner the lower court puts it.

- On uniformity: This Court has already ruled that tenement housesconstitute a distinct class of property. It has likewise ruled that "taxes are

uniform and equal when imposed upon all property of the same class or

character within the taxing authority." The fact, therefore, that the owners of

other classes of buildings in the City of Iloilo do not pay the taxes imposed by

the ordinance in question is no argument at all against uniformity and

equality of the tax imposition. Neither is the rule of equality and uniformity

violated by the fact that tenement taxesare not imposed in other cities, for

the same rule does not require that taxes for the same purpose should be

imposed in different territorial subdivisions at the same time. So long as theburden of the tax falls equally and impartially on all owners or operators of

tenement houses similarly classified or situated, equality and uniformity of

taxation is accomplished. The plaintiffs-appellees, as owners of tenementhouses in the City of Iloilo, have not shown that the tax burden is notequally or uniformly distributed among them, to overthrow thepresumption that tax statutes are intended to operate uniformly andequally.

Disposition: ACCORDINGLY, the judgment a quo is reversed, and, the ordinance inquestion being valid, the complaint is hereby dismissed. No pronouncement as to

costs.

Vote: Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,Fernando andCapistrano, JJ., concur..

Concurring/Dissenting Opinion: None.

-JP

CIR V. SOLIDBANKG.R. No. 148191

25 November 2003

Commissioner of Internal Revenue,petitionerv.

Solidbank Corporation, respondent

PONENTE: Panganiban,J.

DOCTRINE:Double taxation means taxing the same property twice when it should betaxed only once; that is, taxing the same person twice by the same jurisdiction for the

same thing.

NATURE: Petition for Review under R45

FACTS: For CY 1995, Solidbank filed its quarterly percentage tax return pertaining to 5%

Gross Receipts Tax (GRT) in the amount of P1,474,691,693.44 withcorresponding gross receipts tax payments in the sum of P73,734,584.60. This

includes the passive income already subject to 20% withholding tax (FWT)


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The Court of Tax Appeals rendered a decision in the case ofAsian Bank Corp. v. CIRwhich held that the final withholding tax of 20% should not form part of the taxable

gross receipts for the purpose of computing the 5% GRT On the basis of this decision, Solidbank applied for a refund or issuance of a tax

credit certificate representing its alleged overpayments of GRT for CY 1995 in the

amount of some 3.5M Pesos At the same time, Solidbank filed a petition for review with the CTA to toll the 2 year

prescriptive period to judicially claim the refund The CTA ordered the CIR to refund a reduced amount as overpaid GRT based on the

ruling in Asian Bank, the 20% withholding tax should not form part of the grossreceipts for computing GRT

The CIR elevated the case to the CA which held that the 20% FWT on a banksinterest income did not form part of the taxable gross receipts in computing the 5%

GRT, because the FWT was not actually received by the bank but was directlyremitted to the government

Hence this current recourse by the CIR under R45ISSUES:1. W/N the 20% final withholding tax on a banks interest income forms part of the

taxable gross receipts in computing the 5% gross receipts tax.HELD/RATIO1. YES

Petitioner claims that although the 20% FWT on Solidbanks interest income wasnot actually received by respondent because it was remitted directly to thegovernment, the fact that the amount redounded to the banks benefit makes itpart of the taxable gross receipts in computing the 5% GRT

First it must be said that the GRT and the FWT are two different taxes. The 5% GRTis provided in Sec. 119 of the NIRC:

SEC. 119. Tax on banks and non-bank financial intermediaries. There shall

be collected a tax on gross receipts derived from sources within the Philippines

by all banks and non-bank financial intermediaries in accordance with the

following schedule:

(a) On interest, commissions and discounts from lending activities as well as

income from financial leasing, on the basis of remaining maturities of

instruments from which such receipts are derived.Short-term maturity not in excess of two (2) years 5%

This 5% GRT is provided under Title V. Other Percentage Taxes and is not subject towithholding. The institutions liable therefor file a quarterly tax return

The 20% FWT, on the other hand, falls under Section 24(e)(1) ofTitle II. Tax onIncome. It is a tax on passive income, deducted and withheld at source by the

payor-corporation and/or person as withholding agent

Clearly, the FWT is income tax, while GRT is a percentage tax. A percentage tax is a national tax measured by a certain percentage of the gross

selling price or gross value in money of goods sold, bartered or imported; or of thegross receipts or earnings derived by any person engaged in the sale ofservices

An income tax, on the other hand, is a national tax imposed on the net or the grossincome realized in a taxable year

In a withholding system, as in that of income tax, the payee is the taxpayer whilethe payor is merely an agent of the government. The amount to settle the tax

liability is sourced from the proceeds constitutive of the tax base. Such proceeds

can either be constructive or actual

The amount withheld for tax purposes can be deemed constructivelyreceived by Solidbank. Thus it forms part of the gross receipts

Solidbank relies on Revenue Regulation RR 12-80 which provides that onlyincome actually received shall constitute the base for GRT

On the other hand the CIR contends that RR 17-84, which is newer, provides alsofor constructive receipt

By analogy, the Civil Code, Arts. 531 and 532, provides for actual and constructivepossession. The withholding process is one such act of constructive possession.

Possession is acquired by the payor as the withholding agent of the government,because the taxpayer ratifies the very act of possession for the government.There is thus constructive receipt

The case ofManila Jockey Club is inapplicable in this case. In that case, the fundswere earmarked for some entity other than the taxpayer. Hence the amounts

never became property of the race track. In this case, the amounts withheld

became property of the financial institution since there was constructive delivery

thereof

Further, the case of Manila Jockey provides that gross earnings shall mean theentire earnings of the taxpayer. This is the gross income before any deductions.

The 5% GRT must then be imposed on the gross amount where the 20% FWT hasnot been deducted yet

Finally it must be said that there is no DOUBLE TAXATION Double taxation means taxing the same property twice when it should be taxed

only once; that is taxing the same person twice by the same jurisdiction for the

same thing

It is obnoxious when the taxpayer is taxed twice, when it should be but once.Otherwise described as direct duplicate taxation, the two taxes must beimposed on the same subject matter, for the same purpose, by the sametaxing authority, within the same jurisdiction, during the same taxingperiod; and they must be of the same kind or character

The two taxes in this case are imposed on different subjects. A tax based onreceipts as the GRT is a tax on business. It is an excise rather than a property tax.

Its subject matter is the privilege of engaging in the business of banking On the other hand, the FWT is an income tax. Its subject matter is the passive

income generated in the form of interest on deposits and yields on deposit

substitutes

Also the taxing periods are different. The FWT is deducted and withheld assoon as the income is earned , and is paid after every calendar quarter in whichit is earned. On the other hand, the GRT is neither deducted nor withheld, butis paid only after every taxable quarter in which it is earned

And finally, again, the taxes are of a different character. One is income tax, theother is percentage (excise) tax

Thus there is clearly no double taxation Hence subjecting interest income to a 20% FWT and including it in the

computation of the 5% GRT is not double taxation


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DISPOSITION: Petition GRANTED, assailed orders of the Court of Appeals REVERSEDand SET-ASIDEVotes: Davide, Jr., C.J., Ynares-Santiago, Carpio, and Azcuna, JJ., concur

-Raffy

CIR vs. CITY TRUST INVESTMENT PHILIPPINES and ASIABANK CORPORATION1(September 27, 2006)

DOCTRINE: There can be no double taxation when the Tax Code imposes two different

kinds of taxes.

NATURE: consolidated case questioning the decision of the CIR in including the FWT aspart of the computation for GRT.

PONENTE: SANDOVAL-GUTIERREZ,J

FACTS: Under Section 27(D), formerly Section 24(e)(1) of the National Internal

Revenue Code of 1997 (Tax Code), the earnings of banks from passive income

are subject to a 20% final withholdings tax (FWT); Apart from the 20% FWT, banks are also subject to the 5% GRT on their gross

receipts, which includes their passive income. Respondents had paid the 5% GRT from 1994 to 1996, until the SC decided

uponAsian Bank Corporation v. Commissioner of Internal Revenue(ASIAN BANKcase), ruled that the basis in computing the 5% GRT is the gross receipts minus

the 20% FWT. In other words, the 20% FWT on a bank's passive income does

not form part of the taxable gross receipts.o Respondents now asked for a tax refund or credit;

The CIR, in the two separate cases of the respondents, stated that:o first, there is no law which excludes the 20% FWT from the taxable

gross receipts for the purpose of computing the 5% GRT;o second, the imposition of the 20% FWT on the bank's passive income

and the 5% GRT on its taxable gross receipts, which include the bank's

passive income, does not constitute double taxation;

o third, the ruling by this Court in Manila Jockey Club, cited in the ASIANBANKcase, is not applicable; and

ofourth, in the computation of the 5% GRT, the passive income neednot be actuallyreceived in order to form part of the taxable gross

receipts.

ISSUES:1. Does the twenty percent (20%) final withholding tax (FWT) on a bank's passiveincome form part of the taxable gross receipts for the purpose of computing the five

percent (5%) gross receipts tax (GRT)? YES.

2. Is the GRT to be imposed on the gross receipts of such financial institutions shall bebased on all items of income actually received? NO.

1 Stuff to know: FWT: Final Withholdings Tax; GRT: Gross Receipts Tax

3. [Only relevant issue, but you know how she is] Is there double taxation presentdue to the GRT being imposed on the banks passive income before the FWT is

accounted for? NO.

RATIO:

1. The Tax Code does not provide a definition of the term "gross receipts".Accordingly, the term is properly understood in its plain and ordinary meaning and

must be taken to comprise of the entire receipts without any deduction. We, thus,

made the following disquisition in Bank of Commerce The word "gross" must be used in its plain and ordinary meaning. It is

defined as "whole, entire, total, without deduction." A commondefinition is "without deduction." "Gross" is also defined as "taking inthe whole; having no deduction or abatement; whole, total as opposedto a sum consisting of separate o r specified parts."

o The issue of whether the 20% FWT on a bank's interest incomeforms part of the taxable gross receipts for the purpose of

computing the 5% GRT is no longer novel. This has been previously

resolved by this Court in a catena of cases, such as China Banking

Corporation v. Court of Appeals, Commissioner of Internal Revenue v.

Solidbank Corporation, Commissioner of Internal Revenue v. Bank of

Commerce, and the latest,Commissioner of Internal Revenue v. Bank

of the Philippine Islands. Under Revenue Regulations No. 12-80 and No. 17-84, as well as several

numbered rulings, the BIR has consistently ruled that the term "grossreceipts" does not admit of any deduction.

2. Respondents contend that since the 20% FWT is withheld at source and is paiddirectly to the government by the entities from which the banks derived the income,

the same cannot be considered actually received, hence, must be excluded from the

taxable gross receipts. The Court does not agree. while it is true that Section 4(e) states that "the rates of taxes to be imposed

on the gross receipts of such financial institutions shall be based on all items

of income actually received," it goes on to distinguish actual receipt fromaccrual, i.e., that "mere accrual shall not be considered, but oncepayment is received in such accrual or in case of prepayment, then theamount actually received shall be included in the tax base of suchfinancial institutions."

Revenue Regulations No. 17-84 categorically states that if the recipient ofthe above-mentioned items of income are financial institutions, thesame shall be included as part of the tax base upon which the grossreceipt tax is imposed.

3. Double taxation means taxing for the same tax period the same thing or activitytwice, when it should be taxed but once, for the same purpose and with the same kind

of character of tax. This is not the situation in the case at bar. The GRT is a percentage tax under Title V of the Tax Code ([Section 121],

Other Percentage Taxes), while the FWT is an income tax under Title II of the

Code (Tax on Income). The two concepts are different from each other.


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o A percentage tax is a national tax measured by a certain percentage ofthe gross selling price or gross value in money of goods sold, bartered

or imported; or of the gross receipts or earnings derived by any

person engaged in the sale of services. It is not subject to withholding.

o An income tax, on the other hand, is a national tax imposed on the netor the gross income realized in a taxable year. It is subject to

withholding. Respondents cited the case of Manila Jockey Club, but their argument fails;

o In said case, Manila Jockey Club paid amusement tax on itscommission in the total amount of bets called wager funds from theperiod November 1946 to October 1950. But such payment did not

include the 5 % of the funds which went to the Board on Races and

to the owners of horses and jockeys. We ruled that the gross receipts

of the Manila Jockey Club should not include the 5 % because

although delivered to the Club, such money has been especially

earmarked by law or regulation for other persons.o The Manila Jockey Club does not apply to the cases at bar because

what happened there is earmarking and not withholding. Earmarking

is not the same as withholding.

DISPOSITIVE: CIR decision affirmed; FWT part of GRT computation.-Ice

c. Constitutionality of double taxation

CITY OF BAGUIO V DE LEON(Oct 31, 1968)

Doctrine: Where one tax is imposed by the national government and the other is imposed

by the city, double taxation may not be invoked. The reason is that there is

nothing inherently wrong in the requirement that license fees or taxes be

exacted from the same occupation, calling or activity by both the State and its

political subdivisions.

Facts: De Leon was held liable as a real estate dealer with a property valued within

the P10k P50k range, and therefore was obliged to pay an annual fee of P50.

De Leon assails the Ordinance as unconstitutional. TC upholds the Ordinance.

Issues: WON the City of Baguio has the power to issue the ordinance WON the exaction imposed y the Ordinance amounts to double taxation

Held: Yes No

Ratio: RA 329 amending the city charter of Baguio is the source of authority for the

ordinance. RA 239 empowers Baguio City to fix the license fee and regulatebusinesses, trades and occupations as may be established or practiced in the

city.

Justice Holmes stated that the 14th Amendment pertaining to the DueProcess clause does not forbid double taxation.

In a 1947 decision, this Court stated that if Congress has a clear expressedintention stated in the law, it must be sustained even if the same results to

double taxation. This Court likewise has previously stated that where one tax is imposed by

the national government and the other is imposed by the city, double

taxation may not be invoked. The reason is that there is nothing inherently

wrong in the requirement that license fees or taxes be exacted from the same

occupation, calling or activity by both the State and its political subdivisions.

Neither is the exaction violative of the constitutional requirement ofuniformity in taxation. As stated by Justice Laurel, a tax is considered

uniform if it operates with the same force and effect in every place where the

subject may be found.

-Ivan

Pepsi-Cola Bottling Co. of the Philippines vs City of Butuan(28 August 1968)

CONCEPT: DOUBLE TAXATION (from The Fundamentals of Taxation, de Leon)1. In its strict sense (referred to as direct duplicate taxation or direct double

taxation), double taxation means

a. Taxing twice,b. by the same taxing authority,c. within the same jurisdiction or taxing district,d. for the same purpose,e. in the same year (or taxing period),f. some of the property in the territory.

Both taxes must be imposed on the same property or subject matter. (Villanuevavs City of Iloilo, L-26521, 28 Dec 1968)

2. In its broad sense (referred to as indirect duplicate taxation or indirectdouble taxation), double taxation is taxation other than direct duplicate.

NOTE: Double taxation, while not forbidden, is something not favoured. Suchtaxation, it has been held, should, whenever possible, be avoided or prevented.

Doubts as to whether double taxation has been imposed should be resolved in

favour of the taxpayer. Obvious reason: to avoid injustice or unfairness.

Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief

under the uniformity rule or equal protection guarantee.


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Doctrine: Indeed independently of whether or not the tax in question, whenconsidered in relation to the sales tax prescribed by Acts of Congress, amounts to double

taxation, on which we need not and do not express any opinion - double taxation, ingeneral, is not forbidden by our fundamental law.

Ponente: Concepcion, C.J.

Nature: Direct Appeal from the decision of the CFI of Agusan

FACTS: Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic

corporation with offices and principal place of business in Quezon City.

The defendants are the City of Butuan, its City Mayor, the members of itsmunicipal board and its City Treasurer.

Pepsi-Cola seeks to recover the sums paid by it to Butuan, when the lattercollected such by virtue of Municipal Ordinance No. 110, as amended by

Municipal Ordinance No. 122.

Pepsi-Colas warehouse in Butuan serves as storage for its products for sale tocustomers in Butuan.

Softdrinks are bottled in Cebu, shipped to the Butuan warehouse fordistribution and sale.

16 August 1960 Ordinance Order No. 110, as amended by Ordinance No. 122on November 1960

Ordinance No. 110 states that what products are "liquors", within the purviewthereof.

Section 2 provides for the payment by "any agent and/orconsignee" of any dealer "engaged in selling liquors, imported or local, in theCity," of taxes at specified rates.

Section 3 prescribes a tax of P0.10 per case of 24 bottles of the softdrinks and carbonated beverages therein named, and "all other softdrinks or carbonated drinks."

Section 3-A, defines the meaning of the term "consignee or agent" forpurposes of the ordinance.

Section 4 provides that said taxes "shall be paid at the end of everycalendar month."

Pursuant to Section 5, the taxes "shall be based and computedfrom the cargo manifest or bill of lading or any other record showing thenumber of cases of soft drinks, liquors or all other soft drinks orcarbonated drinks received within the month."

Sections 6, 7 and 8 specify the surcharge to be added for failure topay the taxes within the period prescribed and the penalties imposable for"deliberate and willful refusal to pay the tax mentioned in Sections 2 and 3" or

for failure "to furnish the office of the City Treasurer a copy of the bill of lading

or cargo manifest or record of soft drinks, liquors or carbonated drinks for sale

in the City."Section 9 makes the ordinance applicable to soft drinks, liquors

or carbonated drinks "received outside" but "sold within" the City.Section 10 of the ordinance provides that the revenue derived

therefrom "shall be alloted as follows: 40% for Roads and Bridges Fund; 40%

for the General Fund and 20% for the School Fund."

The Ordinance imposes a tax on any person, association, etc., of 10 centavosper case of 24 bottles of Pepsi-Cola. Pepsi-Cola paid under protest.

Pepsi-Cola filed the complaint for the recovery of the total amount paidunder protest. Also alleged that the Ordinance is illegal, tax imposed is

excessive, and Ordinance is unconstitutional.

Plaintiff maintains that the disputed ordinance is null and void because: (1) itpartakes of the nature of an import tax; (2) it amounts to double taxation;(3) it is excessive, oppressive and confiscatory; (4) it is highly unjust and

discriminatory; and (5) section 2 of Republic Act No. 2264, upon the

authority of which it was enacted, is an unconstitutional delegation oflegislative powers.

ISSUES: WoN the taxation imposed by Ordinance 110, as amended, amounts todouble taxation

(Note: Other issues were already discussed in earlier classes. Review, because we all

know LaLocaKrungKrung is cray cray.)

HELD + RATIO:NO

1. Indeed independently of whether or not the tax in question, whenconsidered in relation to the sales tax prescribed by Acts of Congress,

amounts to double taxation, on which we need not and do not express anyopinion - double taxation, in general, is not forbidden by our fundamental

law.

(In short, WoN the tax in issue amounts to double taxation, DOUBLETAXATION is generally allowed by law.)

2. Why was Pepsi-Cola saying that there was double taxation under OrdinanceNo. 110?

(What follows is my own understanding of the case, please use AT YOUR

OWN RISK.)

The tax prescribed in section 3 of Ordinance No. 110, as originally approved,

was imposed upon dealers "engaged in selling" soft drinks or carbonateddrinks. It would seem that the intentwas then to levy a tax upon the sale ofsaid merchandise.

But as amended by Ordinance No. 122, the tax is, however, imposed onlyupon "any agent and/or consignee of any person, association, partnership,company or corporation engaged in selling ... soft drinks or carbonateddrinks."

What happens then is that merchants engaged in the sale of soft drink or

carbonated drinks, are not subject to the tax, unless they are agents and/or

consignees of another dealer, who, in the very nature of things, must be one

engaged in business outside the City. Besides, the tax would not be applicable

to such agent and/or consignee, if less than 1,000 cases of soft drinks areconsigned or shipped to him every month. When we consider, also, that the


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tax "shall be based and computed from the cargo manifestor bill of lading ...

showing the number of cases" not sold but "received" by the taxpayer, the

intention to limit the application of the ordinance to soft drinks and carbonated

drinks brought into the City from outside thereof becomes apparent.

So. Dealers na sila, agents pa. Two taxes to be paid.

(But remember: the Court here annulled the Ordinance because it is

discriminatory, violative of the uniformity rule. This is because only sales by

agents or consignees of outside dealers would be subject to tax while sales bylocal dealers, not acting for or on behalf of other merchants, would be exempt

from the disputed tax.)

Dispositive: WHEREFORE, the decision appealed from is hereby reversed, and anotherone shall be entered annulling Ordinance No. 110, as amended by Ordinance No.122, and sentencing the City of Butuan to refund to plaintiff herein the amountscollected from and paid under protest by the latter , with interest thereon at the legalrate from the date of the promulgation of this decision, in addition to the costs, and

defendants herein are, accordingly, restrained and prohibited permanently from

enforcing said Ordinance, as amended. It is so ordered.

Votes: Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,concur.

-Kriszanne

THE COLLECTOR (now Commissioner) OF INTERNAL REVENUE, petitioner,vs.

MANILA JOCKEY CLUB, INC., respondent.(June 30, 1960| G.R. Nos. L-13887 and L-13890 | En Banc)

DOCTRINE:

XXX

The Secretary's opinion was correct. The Government could not have meant to tax as

gross receipt of the Manila Jockey Club the 1/2 % which it directs same Club to turn over

to the Board on Races. The latter being a Government institution , there would bedouble taxation, which should be avoided unless the statute admits of no otherinterpretation. In the same manner, the Government could not have intended toconsider as gross receipt the portion of the funds which it directed the Club to give, or

knew the Club would give, to winning horses and jockeysadmittedly 5%. It is true that

the law says that out of the total wager funds 12-1/2 % shall be set aside as the

"commission" of the race track owner, but the law itself takes official notice, and actually

approves or directs payment of the portion that goes to owners of horses as prizes and

bonuses of jockeys, which portion is admittedly 5% out of that 12 1/2% commission. As

it did not at that time contemplate the application of "gross receipts" revenue principle,

the law in making distribution of the total wager funds, took no trouble of separating one

item from the other; and for convenience, grouped three items under one common

denomination.

XXX

Tax Involved: Amusement Tax

NATURE: The Commissioner (formerly Collector) of Internal Revenue has appealedfrom two decisions of the Court of Tax Appeals from two decisionsof the Court ofTax appeals disapproving his levy of amusement taxes upon the Manila Jockey Club, a

corporation duly organized and authorized to hold horse races in Manila.

PONENTE: Bengzon,J.

SHORT FACTS (Paraphrase):

First case.Manila Jockey Club, according to a special law, must earmark 5 % of

earnings from bets to the Board on Races (a government institution). The Collector of

Internal Revenue (CIR) demanded a percentage of the said 5% as amusement tax

claiming that this is part of the Clubs expenses. Secretary of Justice, as adviser of the

Government, agrees with Manila Jockey Club that since the 5% is automatically

earmarked to the Board on Races the Club never owned the said 5% and therefore

should not pay a percentage of it as amusement tax. CTA agrees with the Club. Hence,

CIR elevated the case to the SC.

Second case.The Manila Jockey Club holds once a year a so called

"special Novato race", wherein only horses which are running for the first time in an

official club race may take part. Owners of these horses must pay to the Club an

inscription fee (P1.00), and a declaration fee per horse (P1.00). In addition, each of

them must contribute to a common fund (P10.00 per horse). The Club contributes an

equal amount (P10.00 per horse) to such common fund, the total amount of which is

added to the 5% participation of horse owners already described herein-above in the

first case. (CIR) claims payment, CTA agrees with Manila Jockey Club, CIR elevated the

case to the SC.

FACTS:

First case.In (horse) races, betting is made through the sale of tickets to the public.The total amount of bets is called wager funds, which were distributed, pursuant to

Executive Order 320 and Republic Act 309, as follows:

[in regular races]

87-1/2 as dividends to holders of winning tickets;

12-1/2 as "commission" of the Manila Jockey Club, of which 1/2%

was assigned to the Board on Races and 5% was distributed

as prizes for owners of winning horses and authorized

bonuses for jockeys.

During the period November 1946 to October 1950, the Manila Jockey Club paid

amusement tax on its commission abovementioned but without including the 5 1/2%

which, as stated, went to the Board on Races and to the owners of horses and jockeys.

Under the Internal Revenue Law, sec. 260, the amusement tax was payable by the

operator on its "gross receipts." Yet the Manila Jockey Club did not consider as part ofits "gross receipts" subject to amusement tax the amounts which it had to deliver to


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the Board on Races, the horse owners and the jockeys. In this view it was fully sustained

by three opinions of the Secretary of Justice rendered on three different occasions

(Opinion No. 345, series of 1941; Opinion No. 249, series of 1952 and Opinion No. 340,

series of 1955). Said the Secretary:

There is no question that the Manila Jockey Club, Inc. owns only 7 -1/2% of the total bets

registered by the Totalizer. This portion represents its share or commission in the total

amount of money it handles and goes to the funds thereof as its own property which it

may legally disburse for its own purposes. The 5% does not belong to the club. It is

merely held in trust for distribution as prizes to the owners of winning horses. It isdestined for no other object than the payment of prizes and the club cannototherwise appropriate this portion without incurring liability to the owners ofwinning horses. It can not be considered as an item of expense because the sumused for the payment of prizes is not taken from the funds of the club but from acertain portion of the total bets especially earmarked for that purpose.

In view of all foregoing, I am of the opinion that in the submission of the returns for the

amusement taxof 10% (now it is 20%) of the "gross receipts", provided for in section

260 of the National Internal Revenue Code, the 5% of the total bets that is set aside for

prizes to owners of winning horses should not be includedby the Manila Jockey Club, Inc.

Notwithstanding the opinion of the legal adviser of the Government, in October 1955, the

Collector of Internal Revenue demanded payment of amusement taxes amounting to

P401,173.20 plus P39,810.00, for the period of November 1946 to October 1950.

After resisting the demand and making appropriate representations, the Manila Jockey

Club resorted to the Court of Tax Appeals wherein it obtained judgment unanimously

reversing the Collector's stand in the matter.

XXX

Second case.The Manila Jockey Club holds once a year a so called "special Novato race",

wherein only "novato" horses, (i.e. horses which are running for the first time in an

official [of the club] race), may take part. Owners of these horses must pay to the Club an

inscription fee of P1.00 and a declaration fee of P1.00 per horse. In addition, each of themmust contribute to a common fund P10.00 per horse. The Club contributes an equal

amount (P10.00 per horse) to such common fund, the total amount of which is added tothe 5% participation of horse owners already described herein-above in the first case.

Since the institution of this yearly special novato race in 1950, the Manila Jockey Club

never paid amusement tax on the moneys thus contributed by horse owners (P10.00

each) because it entertained the belief that in accordance with the three opinions, of the

Secretary of Justice herein-above described, such contributions never formed part of its

gross receipts. On the inscription fee of the P1.00 per horse, it paid the tax. It did not on

the declaration fee of P1.00 because it was imposed by the Municipal Ordinance of

Manila and was turned over to the City officers.

The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax

on such contributed fund P10.00 per horse in a special novato race, holding they were

part of its gross receipts. The Manila Jockey Club protested and resorted to the Court of

Tax Appeals, where it obtained favorable judgment on the same grounds sustained by

said Court in connection with the 5% of the total wager funds in the herein-mentioned

first case; they were not receipts of the Club.

XXX

ISSUE: (a) Should the Manila Jockey Club pay amusement tax on the 5% mentioned?(b) Should the Manila Jockey Club pay amusement tax on the contributions in

the Novato races?

HELD: (a) NO, The Secretary's opinion was correct. The Government could not havemeant to tax as gross receipt of the Manila Jockey Club the 1/2 % which it directs

same Club to turn over to the Board on Races. The latter being a Government

institution, there would be double taxation, which should be avoided unless the

statute admits of no other interpretation.

(b) NO, The ten-peso contribution never belonged to the Club. It was held by

it as a trust fund. And then, after all, when it received the ten-peso contribution, it at

thesame time contributed ten pesos out of its own pocket, and thereafter distributed

both amounts as prizes to horse owners. It would seem unreasonable to regard the

ten-peso contribution of the horse owners as taxable receipt of the Club, since the

latter, at the same moment it receivedthe contribution necessarily lostten pesos too.

REASONING:A.

(CIR) cites two opinion of the aforesaid Department Head, particularly Opinion No.

135, series of 1950. But the Department itself in subsequent opinions, explainedthat there is no conflict between this Opinion No. 135 and the Opinion No. 345 ofOctober 1941. The former made a general statement of the rule about gross receipts(and referred to theater tickets). The latter specifically declared that the 5%reserved to horse owners and jockeys of the Manila Jockey Club should not beincluded in the computation of gross receipts for purposes of the amusementtax. Thus, for several years, the Executive Department (including previous Collectorsof Internal Revenue who at one time or another, attempted to collect on this portion of

the "commission" of the Jockey Club, but who had to desist it in view of the Secretaryof Justice's opinions), proceeded on the principle that such funds are not included as

"gross receipts" of the Jockey Club. As the courta quo holds, such interpretationdeserves great weight. More so in this case, because the Legislature has lately

amended the law making it clearer, and ordering distribution of the total wager funds.

XXX

(After) the Secretary of Justice rendered his official Opinion No. 345 (October 1945),

"the Club necessarily could not and did not deduct any amount (amusement tax) from

the prizes turned over (by it) to the owners of the winning horses. ... It is most unjust

and unfair to say the least, for the government (now) to hold the Club liable for

amusement tax on funds ... which it turned over without deductions to the parties

entitled thereto" relying upon the advice of the Goverment's legal adviser.

The Secretary's opinion was correct. The Government could not have meant totax as gross receipt of the Manila Jockey Club the 1/2 % which it directs same


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Club to turn over to the Board on Races. The latter being a Government institution,there would be double taxation, which should be avoided unless the statute admitsof no other interpretation. In the same manner, the Government could not haveintended to consider as gross receipt the portion of the funds which it directed the Club

to give, or knew the Club would give, to winning horses and jockeys admittedly 5%. It

is true that the law says that out of the total wager funds 12-1/2 % shall be set aside as

the "commission" of the race track owner, but the law itself takes official notice, and

actually approves or directs payment of the portion that goes to owners of horses as

prizes and bonuses of jockeys, which portion is admittedly 5% out of that 12 1/2%

commission. As it did not at that time contemplate the application of "gross receipts"revenue principle, the law in making distribution of the total wager funds, took no

trouble of separating one item from the other; and for convenience, grouped three items

under one common denomination.

Needless to say, gross receipts of the proprietor of the amusement place should not

include any money which although delivered to the amusement place has been especially

earmarked by law or regulation for some person other than the proprietor.

The appellants seem to labor under the impression that since the Jockey Club, at least for

some time held possession of the money represented by12-1/2 % before paying over 5%

to horse owners and jockeys and 1/2% to the Board on Races, the whole 12-1/2%should be considered its gross receipts. However, under the theory, the Club should also

pay amusement tax on the 87--1/2% paid as dividends to winning tickets. Yet no claim of

amusement tax on that portion has been laid. In fact, the appellant admits that the 87-

1/2% paid as dividends to the winning tickets is "owned" by the holders of winning

tickets. If so, there is no reason to hold that the "dividends" or prizes assigned to owners

of winning horses are not also "owned" by the latter. These form part of the gross

receiptsfrom the sale of tickets (sec. 19, Republic Act 309)not gross receipts of the

Club. They are, of course, moneys received by the racing track; but the moneysearmarked by law or regulation for horse owners and jockeys and do not for asingle minute become the property of the race track. Indeed, there were reasons forsuch earmarking. As to the 1/2% for the Board on Races, it is self-evident; to insure its

adequate functioning. As to the 5%, probably to give incentives to horse owners to

develop a better breed of horses.

B.

We think the reasons for upholding the Tax Court's decision in the first case apply to

this one. The ten-peso contribution never belonged to the Club. It was held by it as a trust

fund. And then, after all, when it received the ten-peso contribution, it at thesame time

contributed ten pesos out of its own pocket, and thereafter distributed both amounts as

prizes to horse owners. It would seem unreasonable to regard the ten-peso contribution

of the horse owners as taxable receipt of the Club, since the latter, at the same moment it

receivedthe contribution necessarily lostten pesos too.

DISPOSITIVE: Both decisions of the Court of Tax Appeals should be, and are herebyaffirmed. No costs.

VOTE: Paras, C.J., Padilla, Bautista Angelo, Concepcion, Barrera, and Gutierrez David,

JJ., concur.(No Dissents/Separate Opinions)

-Poy

3. Escape from Taxationa. Shifting of tax burden

b. Tax Evasion

Elements of tax evasion

REPUBLIC v GONZALES(April 30, 1965)

DOCTRINE: Fraud is a state of mind. It need not be proved by direct evidence but maybe inferred from the circumstances of the case. The failure of the appellant to declare

for taxation purposes his true and actual income derived from his furniture business

for 2 consecutive years is an indication of his fraudulent intent to cheat the

government of its due taxes.

NATURE: Appeal from a decision of CFI Manila

PONENTE: Regala, J.

FACTS:

Since 1946, defendant-appellant Gonzales has been a private concessionairein the US Military Base at Clark. He was engaged in the manufacture offurniture and supplied base authorities with his articles

On March 1, 1947 and 1948, he filed his income tax returns for 46 and 47 tothe municipal treasurer of Angeles

Net Income Tax Liability Sales

1946 9, 352.84 111.17 80,459.75

1947 16,829.10 1,395.95 1,707.355.57

Aggregate Sales 1,787.848.32

Upon investigation, the BIR discovered that for 1946 and 1947 Gonzales hadbeen paid P2,199,920.50 for furniture he delivered to the base authorities.Gonzales doesnt deny this since the record was furnished by the Purchasing

Officer of Clark Base on BIRs representation.

Compared against the sales figures provided by the base authorities, theamount Gonzales declared as his total sales for the 2 years was short of

P412,072.18. Thus, appellee considered the 400k as unreported item of

income of the appellant for 1946. Further investigation in the profit and loss statement disclosed local sales,

sales to persons other than the US Army, in the amount of P124,510.43. Thus,

appellee likewise considered this as unreported income for 1946. The whole

P124k was considered because Gonzales cant produce books of account

upon which any deduction could be based. Adding up these two items, appellee assessed Gonzales P340,179.84.


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BIR sent a letter of demand to the appellant for the above amount as deficiencyincome tax, P300 as compromise for failure to keep his journal and ledger, and

P153.75 as additional residence tax, all for 1946. On request of Gonzales, BIR reinvestigated the case but still insisted on the

original 340k assessment.

Upon review of the Conference Staff of the BIR, they recommended a reductionto P249, 289.26 as deficiency income tax, 50% surcharge for 1946 and 1%

monthly interest and penalty incident to delinquency. This was approved by

the Bureau.

They segregated the liability for the 2 years. Another demand was made onGonzales for P144,076.33 for 1946 and 1947. When appellant failed to pay, the appellee instituted the present suit. Gonzales filed MTD based on prescription and lack of jurisdiction which was

denied. Neither Gonzales nor his counsel appeared during trial, and so he was declared

in default.

Appellee presented documentary evidence, and the lower court rendered thedecision ordering Gonzales to pay deficiency income taxes, plus 50% surcharge

and 1% monthly interest on the amount.

ISSUES/HELD:

1. WON appellant is subject to Philippine tax laws? Yes.2. WON declaration of default was proper? Yes.3. WON, based on the facts, appellant is guilty of fraud? Yes.

RATIO/RULING:

1. Appellant argues that as a concessionaire in an American Air Base, he is notsubject to Philippine tax laws pursuant to the US-Philippine Military Bases

Agreement. It is agreed that US shall have right to establish on bases, free of all

license, fees, sales, excise or other taxes or imposts, Govt agencies, including

concessions xxx for the exclusive use of the US military forces and authorized

civilian personnel and their families. The merchandise shall be free or fall taxes,

duties xxx

The above provision has already been interpreted in Canlas v Republic and

Naguiat v JA Araneta. Per the latter case, The provision limits the exemption

from licenses, fees and taxes to the right to establish concessions, and theirmerchandise. The income tax, which is certainly not on the right to establish

agencies or on the merchandise or services sold or dispensed thereby, but on

the owner or operator of such agencies is logically excluded.

Appellant maintains that the rulings are inapplicable since they involved

income of public utility operators in the Air Base who were not

concessionaires like him.

This is unmeritorious. Araneta v Manila Pencil Comp ruled that operators of

freight and bus services are within the word concession in the Military Bases

agreement.

2. Orders of default lies within the discretion of courts and will not be interferedwith either by mandamus or appeal unless a showing of grave abuse can be

made against courts. Where absence of a party from trial is due to his own fault,

he should not complain that he was denied his day in court. LC did not deemvalid defendant-counsels excuse that there was a lack of transpo from his place

in Tondo as there was torrential rain, since counsel for plaintiff, a lady

attorney who lived in Sampaloc made it to court.

3. As rightly argued by the SolGen, since fraud is a state of mind, it need not beproved by direct evidence but may be inferred from the circumstances of the

case. The failure of the appellant to declare for taxation purposes his true

and actual income derived from his furniture business for 2 consecutive

years is an indication of his fraudulent intent to cheat the government of its

due taxes.

In Perez v CA, The substantial undeclaration of income in the ITRs for 4

consecutive years, coupled with his intentional overstatement of deductionsmade the imposition of the fraud penalty proper.

DISPOSITION: Judgment is affirmed

VOTE: Bengzon, Bautista, Angelo, Concepcion, Reyes JBL, Barrera, Paredes, Dizon,Makalintal, Bengzon JP and Zaldivar, concur.

-Steph

CIR v Estate of Toda, Jr.(September 14, 2004)

Doctrine: Tax avoidance is the tax saving device within the means sanctioned by law.This method should be used by the taxpayer in good faith and at arms length.

Tax evasion is a scheme used outside of those lawful means and when availed of, it

usually subjects the taxpayer to further or additional civil or criminal liabilities.

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.

A corporation has a juridical personality distinct and separate from the persons

owning or composing it. Thus, the owners or stockholders of a corporation may not

generally be made to answer for the liabilities of a corporation and vice versa. There

are, however, certain instances in which personal liability may arise. It has been heldin a number of cases that personal liability of a corporate director, trustee, or officeralong, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith orgross negligence in directing its affairs, or (c) conflict of interest, resulting in

damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledgethereof, does not forthwith file with the corporate secretary his written

objection thereto;

3. He agrees to hold himself personally and solidarily liable with thecorporation; or

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


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Nature: The petitioner seeks the reversal of the decision of the CA affirming thedecision of the CTA which held that the Estate of Toda, Jr. is not liable for the deficiency

income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for

the year 1989, and ordered the cancellation and setting aside of the assessment issued

by the CIR.

Ponente: Davide

1. Cibeles Insurance Corporation (CIC) authorized Toda, Jr., President and ownerof 99.991% of its issued and outstanding capital stock, to sell the CibelesBuilding (in Ayala Avenue, Makati) and 2 parcels of land on which the building

stands for an amount of not less than P90 million.

2. (1989) Toda purportedly sold the property for P100 million to Altonaga, who,in turn, sold the same property on the same day to Royal Match Inc. (RMI)

for P200 million. These two transactions were evidenced by Deeds of Absolute

Sale notarized on the same day by the same notary public.

3. (1990) CIC filed its corporate annual income tax return for the year 1989,declaring, among other things, its gain from the sale of real property in the

amount of P75,728.021. After crediting withholding taxes of P254,497.00, it

paid P26,341,207 for its net taxable income of P75,987,725.

4. (1990) Toda sold his entire shares of stocks in CIC to Choa for P12.5 million, asevidenced by a Deed of Sale of Shares of Stocks. Three and a half years later, or

in 1994, Toda died.

5. (1994) BIR assessed CIC for deficiency income tax for the year 1989 in theamount of P79,099,999.22.

6. New CIC (owned by Choa) asked for a reconsideration, asserting that theassessment should be directed against the old CIC (owned by Toda), and not

against the new CIC, which is owned by an entirely different set of

stockholders; moreover, Toda had undertaken to hold the buyer of his

stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-

1989.

7. (1995) CIR assessed the Estate of Toda, Jr. for deficiency income tax for theyear 1989 in the amount of P79,099,999.22. The Estate filed a letter of protest.

8. CIR dismissed the protest, stating that a fraudulent scheme was deliberatelyperpetuated by the CIC to evade the higher corporation income tax rate of 35%

9. (1996) Estate filed a petition for review with the CTA. CTA set aside CIRdecision for failure of CIR failed to prove that CIC committed fraud to deprivethe government of the taxes due it.

a. Even assuming that a pre-conceived scheme was adopted by CIC, thesame constituted mere tax avoidance, and not tax evasion.

b. There being no proof of fraudulent transaction, the applicable periodfor the BIR to assess CIC is that prescribed in Section 203 of the NIRC

of 1986, which is three years after the last day prescribed by law forthe filing of the return. Thus, the governments right to assess CIC

prescribed on 15 April 1993.

c. The mere ownership by Toda of 99.991% of the capital stock of CICwas not in itself sufficient ground for piercing the separate corporate

personality of CIC.

10. CTA denied MR.11. CA affirmed CTA -- CTA, being more advantageously situated and having the

necessary expertise in matters of taxation, is "better situated to determine the

correctness, propriety, and legality of the income tax assessments assailed by

the Toda Estate."

Petitioners arguments1. Two transactions actually constituted a single sale of the property by CIC to

RMI, and that Altonaga was neither the buyer of the property from CIC nor

the seller of the same property to RMI.

a. Sale by CIC of the Cibeles property was in connivance with itsdummy Altonaga, who was financially incapable of purchasing it.

b.

Documents themselves prove the fact of fraudi. The two sales were done simultaneously on the same dateii. Deed of Absolute Sale between Altonaga and RMI was

notarized ahead of the alleged sale between CIC and

Altonaga, both registered in the Notarial Register of

Pabelana2

iii. As early as 4 May 1989, CIC received P40 million fromRMI, and not from Altonaga. The said amount was debited

by RMI in its trial balance as of 30 June 1989 as

investment in Cibeles Building. The substantial portion

of P40 million was withdrawn by Toda through the

declaration of cash dividends to all its stockholders.2. The additional gain of P100 million (the difference between the second

simulated sale for P200 million and the first simulated sale for P100 million)

realized by CIC was taxed at the rate of only 5% purportedly as capital gains

tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC.

3. Since such falsity or fraud was discovered by the BIR only on 8 March 1991,the assessment issued on 9 January 1995 was well within the prescriptive

period prescribed by Section 223 (a) of the NIRC of 19863, which provides

that.

4. With the sale being tainted with fraud, the separate corporate personality ofCIC should be disregarded. Toda, being the registered owner of the 99.991%

shares of stock of CIC and the beneficial owner of the remaining 0.009%

shares registered in the name of the individual directors of CIC, should be

held liable for the deficiency income tax, especially because the gains

realized from the sale were withdrawn by him as cash advances or paid tohim as cash dividends. Since he is already dead, his estate shall answer for

his liability.

Respondents arguments:

1. CIR failed to present the income tax return of Altonaga to prove that thelatter is financially incapable of purchasing the Cibeles property.

2. CIR erred in holding the Estate liable for income tax deficiency3. Inference of fraud of the sale of the properties is unreasonable and

unsupported

4. Right of the CIR to assess CIC had already prescribed.ISSUES

2

Altonaga and RMI: Doc. 91, Page 20, Book I, Series of 1989; CIC and Altonaga: Doc. No. 92, Page 20, Book I, Seriesof 1989, of the same Notary Public3 Tax may be assessed within ten y ears from the discovery of the falsity or fraud


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3. When the late Toda sold his shares of stock to Choa, he knowingly andvoluntarily held himself personally liable for all the tax liabilities of CIC and the

buyer for the years 1987, 1988, and 1989.

4. When the late Toda undertook and agreed "to hold the BUYER and Cibeles freefrom any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and

1989," he thereby voluntarily held himself personally liable therefor.

Respondent estate cannot, therefore, deny liability for CICs deficiency income

tax for the year 1989 by invoking the separate corporate personality of CIC,since its obligation arose from Todas contractual undertaking, as contained in

the Deed of Sale of Shares of Stock.

DISPOSITIVE: Petition is hereby GRANTED. CA decision reversed and set aside.

-Zoilo

c. Tax avoidance

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,vs.

INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC.,respondents.

(January 26, 1988)

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which

sustained the private respondent's contention that the deed of exchange whereby Delfin

Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in

exchange for 2,500 shares of stock was actually a deed of sale which violated a right of

first refusal under a lease contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 sq.m.

of real estate in Valenzuela

April 3, 1974: co-owners leased to Construction Components International Inc. the

property and providing that during the existence or after the term of this lease the lessor

should he decide to sell the property leased shall first offer it to Construction

Components International Inc. and be preferred.

lessee Construction Components International, Inc. assigned its rights and obligations

under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed

conformity and consent of the Pachecos

The contract of lease, as well as the assignment of lease were annotated at the back of the

title

January 3, 1976, a deed of exchange was executed between lessors Pacheco and

defendant Delpher Trades Corporation whereby the Pachecos conveyed to Delpher

the leased property together with another parcel of land also located in Valenzuela for

2,500 shares of stock of defendant corporation with a total value of P1,500,000.00

On the ground that it was not given the first option to buy the leased property

pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines,

Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under

conditions similar to those whereby Delpher Trades Corporation acquired the

property from Pelagia Pacheco and Delphin Pacheco.

CFI: Hydro Pipes has the preferential right to acquire the property (right of first

refusal)

IAC affirmed CFI

ISSUE:

W/N the "Deed of Exchange" of the properties executed by the Pachecos on the one

hand and the Delpher Trades Corporation on the other was meant to be a contract of

sale which, in effect, prejudiced the private respondent's right of first refusal over the

leased property included in the "deed of exchange."

NO

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco

testified that Delpher Trades Corporation is a family corporation; that the corporation

was organized by the children of the two spouses (spouses Pelagia Pacheco and

Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in

common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate

their control over the property through the corporation and to avoid taxes; that in

order to accomplish this end, two pieces of real estate, including Lot No. 1095 which

had been leased to Hydro Pipes Philippines, were transferred to the corporation; that

the leased property was transferred to the corporation by virtue of a deed of exchange

of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500

unissued no par value shares of stock which are equivalent to a 55% majority in thecorporation because the other owners only owned 2,000 shares; and that at the time

of incorporation, he knew all about the contract of lease of Lot. No. 1095 to HydroPipes Philippines. In the petitioners' motion for reconsideration, they refer to this

scheme as "estate planning."

Under this factual backdrop, the petitioners contend that there was actually no

transfer of ownership of the subject parcel of land since the Pachecos remained in

control of the property. Thus, the petitioners allege: "Considering that the beneficial

ownership and control of petitioner corporation remained in the hands of the original

co-owners, there was no transfer of actual ownership interests over the land when the

same was transferred to petitioner corporation in exchange for the latter's shares of

stock. The transfer of ownership, if anything, was merely in form but not in substance.

In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-

owners; hence the corporation and the co-owners should be deemed to be the same,

there being in substance and in effect an Identity of interest."


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After incorporation, one becomes a stockholder of a corporation by subscription or by

purchasing stock directly from the corporation or from individual owners thereof. In the

case at bar, in exchange for their properties, the Pachecos acquired 2,500 original

unissued no par value shares of stocks6 of the Delpher Trades Corporation.

Consequently, the Pachecos became stockholders of the corporation by subscription

"The essence of the stock subscription is an agreement to take and pay for original

unissued shares of a corporation, formed or to be formed." It is significant that the

Pachecos took no par value shares in exchange for their properties.

The Deed of Exchange of property between the Pachecos and Delpher TradesCorporation cannot be considered a contract of sale. There was no transfer of actual

ownership interests by the Pachecos to a third party. The Pacheco family merely changed

their ownership from one form to another. The ownership remained in the same hands.

Hence, the private respondent has no basis for its claim of a light of first refusal under

the lease contract.

Petition granted, CFI and IAC reversed

-Justin

YUTIVO SONS HARDWARE CO. v CTA

(GR No. G.R. No. L-13203 | Jan 28, 1961)

DOCTRINE:

NATURE: Petition for review on certiorari

PONENTE: Gutierrez David, J.

FACTS:

Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation,

organized under the laws of the Philippines, with principal office at 404 Dasmarias St.,

Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the

importation and sale of hardware supplies and equipment. After the liberation, it

resumed its business and until June of 1946 bought a number of cars and trucks from

General Motors Overseas Corporation (hereafter referred to as GM for short), an

American corporation licensed to do business in the Philippines. As importer, GM paid

sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its

selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no

further sales tax on its sales to the public.

6A no-par value share does not purport to represent any stated proportionate interest in the capital stock

measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. Theholder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the

corporation. But this character of proportionate interest is not hidden beneath a false appearance of a given sum

in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares isnot set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares,

such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the

corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the parvalue of shares, the attention of persons interested in the financial condition of a corporation is focused upon the

value of assets and the amount of its debts.

After the incorporation of SM and until the withdrawal of GM from the Philippines in

the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by

Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.

When GM left they appointed Yutivo as importer for the Visayas and Mindanao, and

Yutivo continued its previous arrangement of selling exclusively to SM. In the same

way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as

importer, paid sales tax prescribed on the basis of its selling price to SM, and since

such sales tax, as already stated, is collected only once on original sales, SM paid no

sales tax on its sales to the public.

On November 7, 1950, after several months of investigation by revenue officers

started in July, 1948, the Collector of Internal Revenue made an assessment upon

Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus

surcharge. CIR claimed that the taxable sales were the retail sales by SM to thepublic and not the sales at wholesale made by, Yutivo to the latter inasmuch asSM and Yutivo were one and the same corporation, the former being thesubsidiary of the latter.

(The contention in simpler words: Before GM imported cars sold it to Yutivo who then

sold it to SM to be sold for retail. GM paid the sales tax as the importer, Yutivo and SMdidnt pay as sales tax is only paid once. GM then stopped operations in the Phil and

assigned Yutivo as importer. Yutivo was paying sales tax as importer, selling

wholesale exclusively to SM. CIR comes in and says that they should be paying sales

tax on the Retail price, as Yutivo and SM are one entity.)

ISSUES:

WON SM/Yutivo committed tax evasion through fraud? No

WON SM and Yutivo had separate juridical personalities? Yes

HELD:

RATIO/RULING: It should be stated that the intention to minimize taxes, when usedin the context of fraud, must be proved to exist by clear and convincing evidence

amounting to more than mere preponderance, and cannot be justified by a mere

speculation. This is because fraud is never lightly to be presumed.

SM was organized and it operated, under circumstance that belied any intention to

evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses

and forbidden devices to lessen or defeat taxes. The transactions between Yutivo and

SM, however, have always been in the open, embodied in private and public

documents, constantly subject to inspection by the tax authorities. As a matter of fact,after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it

merely continued the method of distribution that it had initiated long before GM

withdrew from the Philippines.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall

be collected "once only on every original sale, barter, exchange . . , to be paid by the

manufacturer, producer or importer." The use of the word "original" and the express

provision that the tax was collectible "once only" evidently has made the provisions

susceptible of different interpretations. In this connection, it should be stated that a


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taxpayer has the legal right to decrease the amount of what otherwise would be his taxes

or altogether avoid them by means which the law permits.

The amount involved, moreover, is extremely small inducement for Yutivo to go thru all

the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charges

in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is

uncharacteristic of fraud.

However, the Court agreed that SM was actually owned and controlled by petitioner as tomake it a mere subsidiary or branch of the latter created for the purpose of selling the

vehicles at retail and maintaining stores for spare parts as well as service repair shops.1) The founders of the corporation are closely related to each other either by

blood or affinity, and most of its stockholders are members of the Yu (Yutivo or

Young) family.

2) It is, likewise, admitted that SM was organized by the leading stockholders ofYutivo headed by Yu Khe Thai.

3) Subscription of shares were credited from Yutivo, and no money actuallypassed hands.

4) The shareholders in SM are mere nominal stockholders holding the shares forand in behalf of Yutivo, so even conceding that the original subscribers were

stockholders

5) bona fide Yutivo was at all times in control of the majority of the stock of SMand that the latter was a mere subsidiary of the former.

6) The cash assets of SM was actually handled by Yutivo.SM being merely an instrumentality of Yutivo, the sales tax should be paid on the Retail

sale to the public.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in

the imposition of the 5% fraud surcharge. As already shown in the early part of this

decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge

should be added to the deficiency sales tax "in case a false or fraudulent return is

willfully made." Although the sales made by SM are in substance by Yutivo this does not

necessarily establish fraud nor the willful filing of a false or fraudulent return.

Yutivo and SM was a single entity but their payment of Sales tax was not seen to be

fraudulent.

DISPOSITION: IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appealsunder review is hereby modified in that petitioner shall be ordered to pay to respondent

the sum of P820,549.91, plus 25% surcharge thereon for late payment.

So ordered without costs.

VOTE: EN BANC. Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ.,concur.

Padilla, J., took no part.

-Miggy

COMMISSIONER OF INTERNAL REVENUE v LINCOLN PHILIPPINE LIFE INSURANCECOMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.) and THE

COURT OF APPEALS(19 March 2002)

Doctrine:Finally, it should be emphasized that while tax avoidance schemes andarrangements are not prohibited, tax laws cannot be circumvented in order toevade the payment of just taxes. In the case at bar, to claim that the increase in the

amount insured (by virtue of the automatic increase clause incorporated into thepolicy at the time of issuance) should not be included in the computation of the

documentary stamp taxes due on the policy would be a clear evasion of the law

requiring that the tax be computed on the basis of the amount insured by the policy.

Nature: Petition for review on certiorari of a decision of the CA.Ponente: Kapunan, J.

Facts:1. Private respondent Lincoln Philippine Life Insurance Co., Inc. is a domestic

corporation registered with the Securities and Exchange Commission and

engaged in life insurance business. In the years prior to 1984, privaterespondent issued a special kind of life insurance policy known as the "Junior

Estate Builder Policy," the distinguishing feature of which is a clause

providing for an automatic increase in the amount of life insurance coverage

upon attainment of a certain age by the insured without the need of issuing a

new policy. The clause was to take effect in the year 1984. Documentary

stamp taxes due on the policy were paid by petitioner only on the initialsum assured.

2. In 1984, private respondent also issued 50,000 shares of stock dividendswith a par value of P100.00 per share or a total par value of P5,000,000.00.

The actual value of said shares, represented by its book value, was

P19,307,500.00. Documentary stamp taxes were paid based only on the parvalue of P5,000,000.00 and not on the book value.

3. Subsequently, petitioner issued deficiency documentary stamps taxassessment for the year 1984 in the amounts of (a) P464,898.75,corresponding to the amount of automatic increase of the sum assured on

the policy issued by respondent, and (b) P78,991.25 corresponding to thebook value in excess of the par value of the stock dividends.

4. Private respondent questioned the deficiency assessments and sought theircancellation in a petition filed in the Court of Tax Appeals, which ruled for

the respondents and cancelled both assessments. Petitioner appealed to the

CA which affirmed the CTAs ruling on the insurance policy part but reversed

on the stock dividends part. The CTA ruled that the correct basis of thedocumentary stamp tax due on the stock dividends is the actual value or

book value represented by the shares. Both parties appealed. CIR filed thepresent petition questioning the CAs decision on the insurance policy part.

Issue:1. WON the insurance policy is validly assessed as being more than one policy

and hence subject to deficiency tax assessment.


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Held & Ratio:1. Yes. Petitioner claims that the "automatic increase clause" in the subject

insurance policy is separate and distinct from the main agreement and involves

another transaction; and that, while no new policy was issued, the original

policy was essentially re-issued when the additional obligation was assumed

upon the effectivity of this "automatic increase clause" in 1984; hence, a

deficiency assessment based on the additional insurance not covered in the

main policy is in order. Section 49, Title VI of the Insurance Code defines an

insurance policy as the written instrument in which a contract of insurance is

set forth.5 Section 50 of the same Code provides that the policy, which is

required to be in printed form, may contain any word, phrase, clause, mark,

sign, symbol, signature, number, or word necessary to complete the contract of

insurance.6 It is thus clear that any rider, clause, warranty or endorsement

pasted or attached to the policy is considered part of such policy or contract of

insurance.

Although the clause was to take effect only in 1984, it was written into the

policy at the time of its issuance. The distinctive feature of the "junior estate

builder policy" called the "automatic increase clause" already formed part and

parcel of the insurance contract, hence, there was no need for an execution of a

separate agreement for the increase in the coverage that took effect in 1984when the assured reached a certain age.

It is clear from Section 1737 that the payment of documentary stamp taxes is

done at the time the act is done or transaction had and the tax base for the

computation of documentary stamp taxes on life insurance policies under

Section 1838 is the amount fixed in policy, unless the interest of a person

insured is susceptible of exact pecuniary measurement.7 What then is the

amount fixed in the policy? Logically, we believe that the amount fixed in the

policy is the figure written on its face and whatever increases will take effect in

the future by reason of the "automatic increase clause" embodied in the policy

without the need of another contract.

Logically, we believe that the amount fixed in the policy is the figure written on

its face and whatever increases will take effect in the future by reason of the"automatic increase clause" embodied in the policy without the need of another

contract.

7 Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan

agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right orproperty incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so h ad or

accomplished, the corresponding documentary stamp taxes prescribed in the foll owing section of this Title, by the

person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed,issued, accepted, or transferred when the obligation or right arises from Philip pine sources or the property is

situated in the Philippines, and at the same time such act is done or transaction had: Provided, That wheneverone party to the taxable document enjoys exemption fro m the tax herein imposed, the other party thereto who is

not exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the value of

documentary stamp taxes to be paid on the insurance policy is Section 18 3 of the National Internal Revenue Codewhich states in part:8 Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever

name the same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shallbe collected a documentary stamp tax of thirty (now 50c) centavos on each Two hundred pesos per f ractional part

thereof, of the amount insured by any such policy.

Thus, the amount insured by the policy at the time of its issuance necessarily

included the additional sum covered by the automatic increase clause

because it was already determinable at the time the transaction was entered

into and formed part of the policy.

(ITO LANG ANG RELEVANT SA TOPIC)Finally, it should be emphasized that while tax avoidance schemes andarrangements are not prohibited, tax laws cannot be circumvented inorder to evade the payment of just taxes. In the case at bar, to claim thatthe increase in the amount insured (by virtue of the automatic increase

clause incorporated into the policy at the time of issuance) should not be

included in the computation of the documentary stamp taxes due on the

policy would be a clear evasion of the law requiring that the tax be computed

on the basis of the amount insured by the policy.

Dispositive:The petition is hereby given DUE COURSE. The decision of the Court of Appeals is S