Tax Digests

A.
General Principles of Taxation
(1) Paseo Realty and Development Corporation vs. CA

GR No. 119286
October 13, 2004
Facts:
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two (2)
parcels of land at Paseo de Roxas in Makati City, filed its Income Tax Return for the calendar year 1989.
Thereafter, Paseo Realty filed with Commissioner of Internal Revenue (CIR) a claim for the refund of
excess creditable withholding and income taxes for the years 1989 and 1990. Alleging that the
prescriptive period for refunds for 1989 would soon expire and that it was necessary to interrupt the
prescriptive period, Paseo Realty filed with the Court of Tax Appeals (CTA) a petition for review praying
for the refund. The CTA ordered the refund of the alleged excess creditable withholding taxes paid. CIR
moved for reconsideration. CTA reversed and dismissed the petition for review. Paseo Realty then filed a
petition for review with the Court of Appeals. In resolving the twin issues of whether Paseo Realty is
entitled to a refund representing creditable taxes withheld in 1989 and whether Paseo Realty applied
such creditable taxes withheld to its 1990 income tax liability, the CA held that petitioner is not entitled
to a refund because it had already elected to apply the total amount which includes the refund claimed,
against its income tax liability for 1990. The CA denied Paseo Realty’s Motion for Reconsideration.
Issue:
Whether or not the alleged excess taxes paid by Paseo Realty in 1989 should be refunded or credited
against its tax liabilities for 1990.
Held:
No. The confusion as to petitioner’s entitlement to a refund could altogether have been avoided had it
presented its tax return for 1990.
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the facts stated
therein are true and correct. Without the tax return, it is error to grant a refund since it would be
virtually impossible to determine whether the proper taxes have been assessed and paid.
It is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for
tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding year. The carrying forward of
any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only.
While a taxpayer is given the choice whether to claim for refund or have its excess taxes applied as tax
credit for the succeeding taxable year, such election is not final. Prior verification and approval by the
Commissioner of Internal Revenue is required. The availment of the remedy of tax credit is not absolute
and mandatory. It does not confer an absolute right on the taxpayer to avail of the tax credit scheme if it
so chooses. Neither does it impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the taxpayer.
The amendment of Section 69 by what is now Section 76 of Republic Act No. 8424 emphasizes that it is
imperative to indicate in the tax return or the final adjustment return whether a tax credit or refund is
sought by making the taxpayer’s choice irrevocable.
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Taxation is a destructive power, which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the government. And since taxes are
what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions
from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. A claim of refund or exemption from tax
payments must be clearly shown and be based on language in the law too plain to be
mistaken. Otherwise stated, taxation is the rule, exemption therefrom is the exception.
(2) Pelizloy Realty Corporation vs. Province of Benguet

GR No. 183137
April 10, 2013
Facts:
Pelizloy owns Palm Grove Resort, which is designed for recreation and which has facilities like
swimming pools, a spa and function halls.
The Prov. Board of the Prov. of Benguet approved Prov. Tax Ordinance No. 05-107, otherwise known as
the Benguet Revenue Code of 2005 ("Tax Ordinance"). Section 59, Article X of the Tax Ordinance levied a
ten percent (10%) amusement tax on gross receipts from admissions to "resorts, swimming pools, bath
houses, hot springs and tourist spots."
It was Pelizloy's position that the Tax Ordinance's imposition of a 10% amusement tax on gross receipts
from admission fees for resorts, swimming pools, bath houses, hot springs, and tourist spots is an ultra
vires act on the part of the Province of Benguet. Thus, it filed an appeal/petition before the Secretary of
Justice on January 27, 2006.
Issue:
1. Whether or not Section 59, Article X of Provincial Tax Ordinance No. 05-107, otherwise known as
the Benguet Revenue Code of 2005, levies a percentage tax.
2. Whether or not provinces are authorized to impose amusement taxes on admission fees to resorts,
swimming pools, bath houses, hot springs, and tourist spots for being "amusement places" under the
Local Government Code.
Held:
The power to tax "is an attribute of sovereignty," and as such, inheres in the State. Such, however, is not
true for provinces, cities, municipalities and barangays as they are not the sovereign; rather, they are
mere "territorial and political subdivisions of the Republic of the Philippines”.
A municipal corporation unlike a sovereign state is clothed with no inherent power of taxation. The
charter or statute must plainly show an intent to confer that power or the municipality, cannot assume
it. And the power when granted is to be construed in strictissimi juris. Any doubt or ambiguity arising out
of the term used in granting that power must be resolved against the municipality. Inferences,
implications, deductions – all these – have no place in the interpretation of the taxing power of a
municipal corporation.
Therefore, the power of a province to tax is limited to the extent that such power is delegated to it either
by the Constitution or by statute. Section 5, Article X of the 1987 Constitution is clear on this point.
1. Percentage Tax. Supreme Court defined percentage tax as a "tax measured by a certain percentage of
the 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." Also, Republic Act No. 8424, ,
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in Section 125, Title V, lists amusement taxes as among the (other) percentage taxes which are levied
regardless of whether or not a taxpayer is already liable to pay value-added tax (VAT).
Amusement taxes are fixed at a certain percentage of the gross receipts incurred by certain specified
establishments.
However, provinces are not barred from levying amusement taxes even if amusement taxes are a form of
percentage taxes. Section 133 (i) of the LGC prohibits the levy of percentage taxes "except as otherwise
provided" by the LGC.
2. No. Section 131 (c) of the LGC already provides a clear definition of ‘amusement places’.
Indeed, theatres, cinemas, concert halls, circuses, and boxing stadia are bound by a common typifying
characteristic in that they are all venues primarily for the staging of spectacles or the holding of public
shows, exhibitions, performances, and other events meant to be viewed by an audience. Accordingly,
‘other places of amusement’ must be interpreted in light of the typifying characteristic of being venues
"where one seeks admission to entertain oneself by seeing or viewing the show or performances" or
being venues primarily used to stage spectacles or hold public shows, exhibitions, performances, and
other events meant to be viewed by an audience.
Considering these, it is clear that resorts, swimming pools, bath houses, hot springs and tourist spots
cannot be considered venues primarily "where one seeks admission to entertain oneself by seeing or
viewing the show or performances". While it is true that they may be venues where people are visually
engaged, they are not primarily venues for their proprietors or operators to actively display, stage or
present shows and/or performances.
Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not belong to the same
category or class as theaters, cinemas, concert halls, circuses, and boxing stadia. It follows that they
cannot be considered as among the ‘other places of amusement’ contemplated by Section 140 of the LGC
and which may properly be subject to amusement taxes.
The second paragraph of Section 59, Article X of the Tax Ordinance is not limited to resorts, swimming
pools, bathhouses, hot springs, and tourist spots but also covers admission fees for boxing. As Section
140 of the LGC allows for the imposition of amusement taxes on gross receipts from admission fees to
boxing stadia, Section 59, Article X of the Tax Ordinance must be sustained with respect to admission
fees from boxing stadia.
(3) Concurring and Dissenting Opinion of Justice Leonen in

Manila Memorial Park, Inc. et al vs. Secretary of DSWD and DOF
GR. No. 175356
December 03, 2013
Power to Tax
The power to tax is “a principal attribute of sovereignty.” Such inherent power of the State anchors on its
“social contract with its citizens [which] obliges it to promote public interest and common good.”
The scope of the legislative power to tax necessarily includes not only the power to determine the rate of
tax but the method of its collection as well. We have held that Congress has the power to “define what
tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what)
it shall be imposed and where it shall be imposed.” In fact, the State has the power “to make reasonable
and natural classifications for the purposes of taxation x x x [w]hether it relates to the subject of
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taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of
assessment, valuation and collection, the State’s power is entitled to presumption of validity x x x.” This
means that the power to tax also allows Congress to determine matters as whether tax rates will be
applied to gross income or net income and whether costs such as discounts may be allowed as a
deduction from gross income or a tax credit from net income after tax.
While the power to tax has been considered the strongest of all of government’s powers with taxes as the
“lifeblood of the government,” this power has its limits. In a number of cases, we have referred to our
discussion in the 1988 case of Commissioner of Internal Revenue v. Algue, as follows:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On
the other hand, such collection should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.
xxx
It is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one’s hard-earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government, for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is
not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not been observed. (Emphasis supplied)
The Constitution provides for limitations on the power of taxation. First, “[t]he rule of taxation shall be
uniform and equitable.” This requirement for uniformity and equality means that “all taxable articles or
kinds of property of the same class [shall] be taxed at the same rate.” The tax deduction scheme for the
20% discount applies equally and uniformly to all the private establishments covered by the law. Thus, it
complies with this limitation.
Second, taxes must neither be confiscatory nor arbitrary as to amount to a “[deprivation] of property
without due process of law.” In Chamber of Real Estate and Builders’ Associations, Inc. v. Executive
Secretary Romulo, petitioners questioned the constitutionality of the Minimum Corporate Income Tax
(MCIT) alleging among others that “pegging the tax base of the MCIT to a corporation’s gross income is
tantamount to a confiscation of capital because gross income, unlike net income, is not ‘realized gain.’” In
dismissing the Petition, this Court discussed the due process limitation on the power to tax:
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature
no limits, so that the principal check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat “[no] person shall be deprived of life,
liberty or property without due process of law.” In Sison, Jr. v. Ancheta, et al., we held that the due
process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it
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amounts to a confiscation of property. But in the same case, we also explained that we will not strike
down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer. There must be a factual foundation to such an
unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due process
clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for
proof of such persuasive character. (Citations omitted)
In the present case, there is no showing that the tax deduction scheme is confiscatory. The portion of the
20% discount petitioners are made to bear under the tax deduction scheme will not result in a complete
loss of business for private establishments. As illustrated earlier, these establishments are free to adjust
factors as prices and costs to recoup the 20% discount given to senior citizens. Neither is the scheme
arbitrary. Rules and Regulations have been issued by agencies as respondent Department of Finance to
serve as guidelines for the implementation of the 20% discount and its tax deduction scheme.
In fact, this Court has consistently upheld the doctrine that “taxing power may be used as an implement
of police power” in order to promote the general welfare of the people.
(4) CIR vs. Metro Star Superama Inc.

GR No. 185371
December 8, 2010
Facts:
On November 8, 2001, Revenue District Officer issued a Preliminary 15-day Letter which stated that a
post audit review was held and it was ascertained that there was deficiency value-added and
withholding taxes due from petitioner in the amount of P 292,874.16.
Petitioner received a Formal Letter of Demand dated April 3, 2002. Revenue District Office No. 67 sent a
copy of the Final Notice of Seizure.
Petitioner received from Revenue District Office No. 67 a Warrant of Distraint and/or Levy dated May
12, 2003 demanding payment of deficiency value-added tax and withholding tax payment in the amount
of P292,874,16.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded
due process, Metro Star filed a petition for review with the CTA. The CIR insisting that Metro Star
received the PAN, dated January 16, 2002, and that due process was served nonetheless because the
latter received the Final Assessment Notice (FAN).
Issue:
Whether or not Metro Star was denied due process.
Held:
Metro Star was denied due process. The Supreme Court has consistently held that while a mailed letter
is deemed received by the addressee in the course of mail, this is merely a disputable presumption
subject to controversion and a direct denial thereof shifts the burden to the party favored by the
presumption to prove that the mailed letter was indeed received by the addressee.
The facts to be proved to raise this presumption are (a) that the letter was properly addressed with
postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that the
letter was received by the addressee as soon as it could have been transmitted to him in the ordinary
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course of the mail. But if one of the said facts fails to appear, the presumption does not lie.
CIR failed to discharge its duty and present any evidence to show that Metro Star indeed received the
PAN dated January 16, 2002.
Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for
deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which
the assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is evidently violative of the
cardinal principle in administrative investigations – that taxpayers should be able to present their case
and adduce supporting evidence.
The sending of a PAN to taxpayer to inform him of the assessment made is but part of the "due process
requirement in the issuance of a deficiency tax assessment," the absence of which renders nugatory any
assessment made by the tax authorities. The use of the word "shall" in subsection 3.1.2 describes the
mandatory nature of the service of a PAN.
Thus, for its failure to send the PAN stating the facts and the law on which the assessment was made as
required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void.
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. It
is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for the lack of the motive power to activate and operate it.
It is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure.
(5) Concurring and Dissenting Opinion of Justice Leonen in

Manila Memorial Park, Inc. et al vs. Secretary of DSWD and DOF
GR. No. 175356
December 03, 2013
While the power to tax has been considered the strongest of all of government’s powers with taxes as the
“lifeblood of the government,” this power has its limits. In a number of cases, we have referred to our
discussion in the 1988 case of Commissioner of Internal Revenue v. Algue, as follows:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On
the other hand, such collection should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.
xxx
It is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one’s hard-earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government, for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.
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But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is
not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not been observed.
(6) Reyes vs. Almazor

GR No. L-49839-46
April 26, 1991
Facts:
Petitioners JBL Reyes et al. owned a parcel of land in Tondo which are leased and occupied as dwelling
units by tenants who were paying monthly rentals of not exceeding P300. Rental Freezing Law was
passed prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units
where rentals do not exceed three hundred pesos (P300.00), so that the Reyeses were precluded from
raising the rents and from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified
and reassessed the value of the subject properties based on the schedule of market values, which
entailed an increase in the corresponding tax rates prompting petitioners to file a Memorandum of
Disagreement averring that the reassessments made were "excessive, unwarranted, inequitable,
confiscatory and unconstitutional" considering that the taxes imposed upon them greatly exceeded the
annual income derived from their properties. They argued that the income approach should have been
used in determining the land values instead of the comparable sales approach which the City Assessor
adopted.
Issue:
Whether or not the approach on tax assessment used by the City Assessor is reasonable.
Held:
No. The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude the power to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights, both the due process and equal protection clauses of the
Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were
otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." The web or unreality spun from Marshall's famous dictum was brushed
away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to destroy while
this Court sits. So it is in the Philippines "
In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to
confiscation of property. That would be a clear abuse of power.
Verily, taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with the law, as any arbitrariness
will negate the very reason for government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which is
the promotion of the common good, may be achieved. Consequently, it stands to reason that petitioners
who are burdened by the government by its Rental Freezing Laws under the principle of social justice
should not now be penalized by the same government by the imposition of excessive taxes petitioners
can ill afford and eventually result in the forfeiture of their properties.
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(7) Pepsi Cola Bottling Philippines Company vs. Municipality of Tanuan
GR No. L-31156
February 27, 1976
Facts:
Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte. In September 1962, the
Municipality approved Ordinance No. 23 which levies and collects “from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked.” In
December 1962, the Municipality also approved Ordinance No. 27 which levies and collects “on soft
drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of one
centavo P0.01) on each gallon of volume capacity.” Pepsi Cola assailed the validity of the ordinances as it
alleged that they constitute double taxation in two instances: a) double taxation because Ordinance No.
27 covers the same subject matter and impose practically the same tax rate as with Ordinance No. 23, b)
double taxation because the two ordinances impose percentage or specific taxes. Pepsi Cola also
questions the constitutionality of Republic Act 2264 which allows for the delegation of taxing powers to
local government units; that allowing local governments to tax companies like Pepsi Cola is confiscatory
and oppressive.
Issue:
Whether or not there is undue delegation of taxing powers. Whether or not there is double taxation.
Held:
No. It is a power that is purely legislative and which the central legislative body cannot delegate either
to the executive or judicial department of the government without infringing upon the theory of
separation of powers. The exception, however, lies in the case of municipal corporations, to which, said
theory does not apply. Legislative powers may be delegated to local governments in respect of matters
of local concern.
Under the New Constitution, local governments are granted the autonomous authority to create their
own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit
shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may
be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from
beyond the sphere of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would
not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State
is not limited 6 the exact measure of that which is exercised by itself.
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(8) Tio vs. Videogram Regulatory Board
GR No. 75697
June 19, 1987
Facts:
The petitioner assails the validity of PD 1987 entitled an "Act creating the Videogram Regulatory Board,"
citing especially Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the
local government. Petitioner contends that aside from its being a rider and not germane to the subject
matter thereof, and such imposition was being harsh, confiscatory, oppressive and/or unlawfully
restraints trade in violation of the due process clause of the Constitution.
Issue:
Whether or not P.D. 1987 is a valid exercise of taxing power of the state.
Held:
Yes. a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters
the activities taxed. 8 The power to impose taxes is one so unlimited in force and so searching in extent,
that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as
rest in the discretion of the authority which exercises it.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an
objective of the decree to protect the movie industry, the tax remains a valid imposition.
The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose
the tax was to favor one industry over another.
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that "inequities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation". Taxation has been made the implement of the state's
police power.
(9) Planters Products Inc. vs. Fertiphil Corp.

GR No. 166006
March 14, 2008
Facts:
Marcos issued Letter of Instruction (LOI) 1465, imposing a capital recovery component of Php10.00 per
bag of fertilizer. The levy was to continue until adequate capital was raised to make PPI financially
viable. Fertiphil remitted to the Fertilizer and Pesticide Authority (FPA), which was then remitted the
depository bank of PPI. Fertiphil paid P6,689,144 to FPA from 1985 to 1986.
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. Fertiphil
demanded from PPI a refund of the amount it remitted, however PPI refused. Fertiphil filed a complaint
for collection and damages, questioning the constitutionality of LOI 1465, claiming that it was unjust,
unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it
does not have a "personal and substantial interest in the case or will sustain direct injury as a result of
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its enforcement." It asserts that Fertiphil did not suffer any damage from the imposition because
"incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer
company.
Issue:
Whether or not the Letter of Instruction is constitutional.
Held:
No. The LOI is still unconstitutional even if enacted under the police power; it did not promote public
interest. Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not
for a public purpose. The levy was imposed to give undue benefit to PPI. An inherent limitation on the
power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for
purely private purposes or for the exclusive benefit of private persons. The reason for this is simple. The
power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be
used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds
generated for a private purpose. As an old United States case bluntly put it: "To lay with one hand, the
power of the government on the property of the citizen, and with the other to bestow it upon favored
individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it
is done under the forms of law and is called taxation." The term "public purpose" is not defined. It is an
elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public
purpose" should be given a broad interpretation. It does not only pertain to those purposes which are
traditionally viewed as essentially government functions, such as building roads and delivery of basic
services, but also includes those purposes designed to promote social justice. Thus, public money may
now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
Police power and the power of taxation are inherent powers of the State. These powers are distinct and
have different tests for validity. Police power is the power of the State to enact legislation that may
interfere with personal liberty or property in order to promote the general welfare, while the power of
taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is
the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects" and
"lawful means" tests are used to determine the validity of a law enacted under the police power. The
power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations. We
agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power.
While it is true that the power of taxation can be used as an implement of police power, the primary
purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a tax.
(10) CIR vs. Central Luzon Corporation

GR No. 159647
April 15, 2005
Facts:
Central Luzon Drug Corporation is a retailer of medicines and other pharmaceutical products. For the
period January 1995 to December 1995, pursuant to the mandate of Section 4(a) of Republic Act No.
7432, otherwise known as the Senior Citizens Act, it granted a twenty percent (20%) discount on the
sale of medicines to qualified senior citizens amounting to P219,778.00. It then deducted the same
amount from its gross income for the taxable year 1995, pursuant to Revenue Regulations No. 2-94
implementing the Senior Citizens Act, which states that the discount given to senior citizens shall be
deducted by the establishment from its gross sales for value-added tax and other percentage tax
purposes. For the said taxable period, Central Luzon Drug reported a net loss of P20,963.00 in its
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corporate income tax return, thus, it did not pay income tax for 1995.
Subsequently, Central Luzon Drug filed a claim for refund in the amount of P150,193.00, claiming that
according to Sec. 4(a) of the Senior Citizens Act, the amount of P219,778.00 should be applied as a tax
credit. The Commissioner of Internal Revenue (CIR) was not able to decide the claim on time, hence,
Central Luzon Drug filed a Petition for Review with the Court of Tax Appeals. The latter dismissed the
petition, declaring that even if the law treats the 20% discount granted to senior citizens as a tax credit,
the same cannot apply when there is no tax liability or the amount of the tax credit is greater than the
tax due. In the latter case, the tax credit will only be to the extent of the tax liability. Also, no refund can
be granted as no tax was erroneously, illegally and actually collected.
Furthermore, the law does not state that a refund can be claimed by the establishment concerned as an
alternative to the tax credit.
Central Luzon Drug filed a Petition for Review with the Court of Appeals. The appellate court held that
the 20% discount given to senior citizens which is treated as a tax credit is considered just
compensation and, as such, may be carried over to the next taxable period if there is no current tax
liability.
Issue:
Whether or not the 20% discount granted by Central Luzon Drug to qualified senior citizens pursuant to
Sec. 4(a) of the Senior Citizens Act may be claimed as a tax credit or as a deduction from gross sales in
accordance with Sec. 2(1) of Revenue Regulations No. 2-94.
Held:
The Petition is denied. Sec. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to
the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportations services, hotels and similar lodging establishments, restaurants and recreation centers
and purchase of medicines anywhere in the country: Provided, That private establishments may claim
the cost as tax credit.
The above provision explicitly employed the term “tax credit.” Nothing in the provision suggests for it to
mean a “deduction” from gross sales. Thus, the 20% discount required by the law to be given to senior
citizens is a tax credit, not a deduction from the gross sales of the establishment concerned. As a
corollary to this, the definition of ‘tax credit’ found in Sect. 2(1) of Revenue Regulations No. 2-94 is
erroneous as it refers to tax credit as the amount representing the 20% discount that “shall be deducted
by the said establishment from their gross sales for value added tax and other percentage tax purposes.”
When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount,
when claimed, shall be treated as a reduction from any tax liability. The law cannot be amended by a
mere regulation.
Finally, for purposes of clarity, Sec. 229 of the Tax Code does not apply to cases that fall under Sec. 4 of
the Senior Citizens Act because the former provision governs exclusively all kinds of refund or credit of
internal revenue taxes that were erroneously or illegally imposed and collected pursuant to the Tax
Code while the latter extends the tax credit benefit to the private establishments concerned even before
tax payments have been made. The tax credit that is contemplated under the Senior Citizens Act is a
form of just compensation, not a remedy for taxes that were erroneously or illegally assessed and
collected. In the same vein, prior payment of any tax liability is not a precondition before a taxable entity
can benefit from the tax credit. The credit may be availed of upon payment of the tax due, if any. Where
there is no tax liability or where a private establishment reports a net loss for the period, the tax credit
can be availed of and carried over to the next taxable year.
11
(11) Carlos Superdrug Corporation vs. DSWD
GR No. 166494
June 29, 2007
Facts:
Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.
Petitioners assail the constitutionality of Section 4(a) of RA 9257, otherwise known as the
“Expanded Senior Citizens Act of 2003.” Section 4(a) of RA 9257 grants twenty percent
(20%) discount as privileges for the Senior Citizens. Petitioner contends that said law is unconstitutional
because it constitutes deprivation of private property.
Issue:
Whether or not Republic Act 9257 is constitutional.
Held:
Yes. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object.
 Accordingly, it has been described as “the most essential, insistent and the least limitable of powers,
extending as it does to all the great public needs.” It is the power vested in the legislature by the
constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be
for the good and welfare of the commonwealth, and of the subjects of the same.”
 
For this reason, when the conditions so demand as determined by the legislature, property rights must
bow to the primacy of police power because property rights, though sheltered by due process, must
yield to general welfare.
(12) Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc vs.
Secretary of Dept. Social Welfare and Development and Dept. of Finance
GR No. 175356
December 3, 2013
Facts:
On April 23, 1992, RA 7432 was passed into law, granting senior citizens numerous privileges.
Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but are
only assailing the constitutionality of the tax deduction scheme prescribed under RA 9257 and the
implementing rules and regulations issued by the DSWD and the DOF. Petitioners posit that the tax
deduction scheme contravenes Article III, Section 9 of the Constitution, which provides that: "[p]rivate
property shall not be taken for public use without just compensation." In support of their position,
petitioners cite Central Luzon Drug Corporation, where it was ruled that the 20% discount privilege
constitutes taking of private property for public use which requires the payment of just
compensation, and Carlos Superdrug Corporation v. Department of Social Welfare and Development,
where it was acknowledged that the tax deduction scheme does not meet the definition of just
compensation. They assert that "[a]lthough both police power and the power of eminent domain have
the general welfare for their object, there are still traditional distinctions between the two" and that
"eminent domain cannot be made less supreme than police power."
Respondents, maintain that the tax deduction scheme is a legitimate exercise of the State’s police power.
12
Issue:
Whether Section 4 of RA 9257 and its Implementing Rules and Regulations, insofar as they provide that
the twenty (20%) discount to senior citizens may be claimed as a tax deduction by the private
establishments, are invalid and unconstitutional.
Held:
No. A fair reading of Carlos Superdrug Corporation would show that we categorically ruled therein that
the 20% discount is a valid exercise of police power. Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide
for a peso for peso reimbursement of the 20% discount given by private establishments, no
constitutional infirmity obtains because, being a valid exercise of police power, payment of just
compensation is not warranted. In the exercise of police power, none of the bundle of rights which
constitute ownership is appropriated for use by or for the benefit of the public.
On the other hand, in the exercise of the power of eminent domain, property interests are appropriated
and applied to some public purpose which necessitates the payment of just compensation therefor.
Normally, the title to and possession of the property are transferred to the expropriating authority.
Examples include the acquisition of lands for the construction of public highways as well as agricultural
lands acquired by the government under the agrarian reform law for redistribution to qualified farmer
beneficiaries. The 20% discount is intended to improve the welfare of senior citizens who, at their age,
are less likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need
of subsidy in purchasing basic commodities. It may not be amiss to mention also that the discount serves
to honor senior citizens who presumably spent the productive years of their lives on contributing to the
development and progress of the nation. As to its nature and effects, the 20% discount is a regulation
affecting the ability of private establishments to price their products and services relative to a special
class of individuals, senior citizens, for which the Constitution affords preferential concern. In turn, this
affects the amount of profits or income/gross sales that a private establishment can derive from senior
citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability of a
private establishment. However, it does not purport to appropriate or burden specific properties, used
in the operation or conduct of the business of private establishments, for the use or benefit of the public,
or senior citizens for that matter, but merely regulates the pricing of goods and services relative to, and
the amount of profits or income/gross sales that such private establishments may derive from, senior
citizens. The 20% discount may be properly viewed as belonging to the category of price regulatory
measures, which affect the profitability of establishments, subjected thereto. On its face, therefore, the
subject regulation is a police power measure. We find that there are at least two conceivable bases to
sustain the subject regulation’s validity absent clear and convincing proof that it is unreasonable,
oppressive or confiscatory. Congress may have legitimately concluded that business establishments
have the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount without
substantially affecting the reasonable rate of return on their investments considering (1) not all
customers of a business establishment are senior citizens and (2) the level of its profit margins on goods
and services offered to the general public. Concurrently, Congress may have, likewise, legitimately
concluded that the establishments, which will be required to extend the 20% discount, have the capacity
to revise their pricing strategy so that whatever reduction in profits or income/gross sales that they may
sustain because of sales to senior citizens, can be recouped through higher mark-ups or from other
products not subject of discounts. As a result, the discounts resulting from sales to senior citizens will
not be confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug Corporation
that the 20% senior citizen discount and tax deduction scheme are valid exercises of police power of the
State absent a clear showing that it is arbitrary, oppressive or confiscatory.
13
(13) Pascual vs. Secretary of Public Works, et. al.,
GR. No. L-10405
December 29, 1960
Facts:
RA 920 (Act appropriating funds for public works) was enacted in 1953 containing an item (Section 1
c[a]) for the construction, reconstruction, repair, extension and improvement of Pasig feeder road
terminals (the projected and planned subdivision roads, which were not yet constructed, within Antonio
Subdivision owned by Senator Jose C. Zulueta). Zulueta “donated” said parcels of land to the Government
5 months after the enactment of RA 920, on the condition that if the Government violates such condition
the lands would revert to Zulueta. The provincial governor of Rizal, Wenceslao Pascual, questioned the
validity of the donation and the Constitutionality of the item in RA 920, it being not for a public purpose.
Issue:
Whether the item in the appropriation is valid.
Held:
The right of the legislature to appropriate funds is correlative with its right to tax, under constitutional
provisions against taxation except for public purposes and prohibiting the collection of a tax for one
purpose and the devotion thereof to another purpose, no appropriation of state funds can be made for
other than a public purpose. The validity of a statute depends upon the powers of Congress at the time of
its passage or approval, not upon events occupying, or acts performed, subsequently thereto, unless the
latter consist of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Herein, inasmuch as the land on which the projected
feeder roads were to be constructed belonged to Senator Zulueta at the time RA 920 was passed by
Congress, or approved by the President, and the disbursement of said sum became effective on 20 June
1953 pursuant to Section 13 of the Act, the result is that the appropriating sough a private purpose and
hence, null and void.
(14) Lutz vs. Araneta, et. al.

GR. No. L-7859
December 22, 1955
Facts:
A Walter Lutz, as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, sought to
recover the sum of P14,6666.40 paid by the estate as taxes from the Commissioner under Section e of
Commonwealth Act 567 (the Sugar Adjustment Act), alleging that such tax is unconstitutional as it levied
for the aid and support of the sugar industry exclusively, which is in his opinion not a public purpose.
Issue:
Whether the tax is valid in supporting an industry.
Held:
The tax is levied with a regulatory purpose, i.e. to provide means for the rehabilitation and stabilization
of the threatened sugar industry. The act is primarily an exercise of police power, and is not a pure
exercise of taxing power. As sugar production is one of the great industries of the Philippines; and that
its promotion, protection and advancement redounds greatly to the general welfare, the legislature
14
found that the general welfare demanded that the industry should be stabilized, and provided that the
distribution of benefits therefrom be readjusted among its component to enable it to resist the added
strain of the increase in tax that it had to sustain. Further, it cannot be said that the devotion of tax
money to experimental stations to seek increase of efficiency in sugar production, utilization of by-
products, etc., as well as to the improvement of living and working conditions in sugar mills and
plantations, without any part of such money being channeled directly to private persons, constitute
expenditure of tax money for private purposes. Thus, the tax is valid.
(15) PAGCOR vs. BIR

GR No. 215427
December 10, 2014
Facts:
On April 17, 2006, petitioner filed a Petition for Review on Certiorari and Prohibition seeking the
declaration of nullity of Section 1 of RA 9337 insofar as it amends Section 27(c) of RA 8424, otherwise
known as the NIRC by excluding petitioner from the enumeration of government-owned or controlled
corporations (GOCCs) exempted from liability for corporate income tax.
On March 15, 2011, SC partly granted the petition insofar as it held that the BIR Revenue Regulation No.
16-2005 which subjects PAGCOR to 10% VAT is null and void for being contrary to the NIRC. It also held
that Section 1of RA 9337 is valid and constitutional.
BIR issued RMC No. 33-2013 on April 17, 2013 pursuant to the decision which clarifies the “Income Tax
and Franchise Tax Due from PAGCOR, its Contractees and Licensees.” It now subjects the income from
PAGCOR’s operations and licensing of gambling casinos, gaming clubs and other similar recreation or
amusement places, gaming pools, and other related operations, to corporate income tax under the NIRC.
PAGCOR filed a Motion for Clarification in the case entitled PAGCOR vs. the Bureau of Internal Revenue,
et al., which was promulgated on March 15, 2011 which also prays for the issuance of a TRO and/or writ
of Preliminary Injunction against BIR in the implementation of BIR Revenue Memorandum Circular No.
33-2013 dated April 17, 2013. PAGCOR alleges that said RMC is an erroneous interpretation and
application of the aforesaid decision.
Issue:
1. Whether PAGCOR’s gaming income is subject to both 5% franchise tax and income tax?
2. Whether PAGCOR’s income from operation of related services is subject to both income tax and 5%
franchise tax.
Held:
1. Gaming Income: Franchise Tax – Yes; Income Tax - No

Under PD 1869, as amended, petitioner is subject to income tax only with respect to its operations of
related services. Accordingly, the income tax exemption ordained under Section 27(c) of RA 8424 clearly
pertains only to petitioner’s income from operation of related services. Such income tax exemption could
not have been applicable to petitioner’s income from gaming operations as it is already exempt
therefrom under PD 1869.
There was no need for Congress to grant tax exemption to petitioner with respect to its income from
gaming operating as the same is already exempted from all taxes of any kind or form, income or
otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax.
The exemption attached to the income from gaming operations exists independently would be
15
downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption
was granted (then withdrawn) then when it was not granted at all in the first place.
2. Income from Operation of related services: Income tax - Yes ; Franchise tax - No
Petitioner’s Charter is not deemed repealed or amended by RA 9337. Petitioner’s income derived from
gaming operation is subject only to the five percent (5%) franchise tax, in accordance with PD 1869, as
amended. With respect to petitioner’s income from operation of other related services, the same is
subject to income tax only. The five percent (5%) franchise tax finds no application with respect to
petitioner’s income from other related services, in view of the express provision of Section 14(5) of PD
1869, as amended.
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from
other related services without basis therefor.
SC granted the petition and ordered the respondent to cease and desist the implementation of RMC No.
33-2013 insofar as it imposes corporate income tax on petitioner’s income derived from its gaming
operations; and franchise tax on petitioner’s income from other related services.
(16) Abra Valley College Inc., vs. Aquino

GR No. L-39086
June 15, 1988
Facts:
Abra Valley College rents out the ground floor of its college building to Northern Marketing Corporation
while the second floor thereof is used by the Director of the College for residential purposes. The
municipal and provincial treasurers served upon the College a “notice of seizure” and later a “notice of
sale” due to the alleged failure of the College to pay real estate taxes and penalties thereon. The school
filed suit to annul said notices, claiming that it is tax-exempt.
Issue:
Whether the College is exempt from taxes.
Held:
While the Court allows a more liberal and non-restrictive interpretation of the phrase “exclusively ised
for educational purposes,” reasonable emphasis has always been made that exemption extends to
facilities, which are incidental to and reasonably necessary for the accomplishment of the main
purposes. While the second floor’s use, as residence of the director, is incidental to education; the lease
of the first floor cannot by any stretch of imagination be considered incidental to the purposes of
education. The test of exemption from taxation is the use of the property for purposes mentioned in the
Constitution.
16
(17) American Bible Society vs. City of Manila
GR No. L-9637
April 30, 1957
Facts:
In the course of its ministry, the Philippine agency of the American Bible Society has been distributing
and selling bibles and/or gospel portions thereof throughout the Philippines and translating the same
into several Philippine dialets. The acting City Treasurer of Manila required the society to secure the
corresponding Mayor’s permit and municipal license fees, together with compromise covering the
period from the 4th quarter of 1945 to the 2nd quarter of 1953. The society paid such under protest, and
filed suit questioning the legality of the ordinances under which the fees are being collected.
Issue:
Whether the municipal ordinances violate the freedom of religious profession and worship.
Held:
A tax on the income of one who engages in religious activities is different from a tax on property used or
employed in connection with those activities. It is one thing to impose a tax on the income or property of
a preacher, and another to exact a tax for him for the privilege of delivering a sermon. The power to tax
the exercise of a privilege is the power to control or suppress its enjoyment. Even if religious groups and
the press are not altogether free from the burdens of the government, the act of distributing and selling
bibles is purely religious and does not fall under Section 27 (e) of the Tax Code (CA 466). The fact that
the price of bibles, etc. are a little higher than actual cost of the same does not necessarily mean it is
already engaged in business for profit. Ordinance 2529 and 3000 are not applicable to the Society.
(18) City Assessor of Cebu City vs. Association of Benevola de Cebu Inc.
GR No. 152904
June 8, 2007
Facts:
Respondent Association of Benevola de Cebu, Inc. is a non-stock, non-profit organization and is the
owner of Chong Hua Hospital (CHH) in Cebu City. In the late 1990’s, respondent constructed the CHH
Medical Arts Center (CHHMAC).
Petitioner City Assessor of Cebu City assessed the CHHMAC building as “commercial” at the assessment
level of 35% for commercial buildings, and not at the 10% special assessment currently imposed for
CHH and its other separate buildings—the CHH’s Dietary and Records Departments. He further
ascertained that it is not a part of the CHH building but a separate building which is actually used as
commercial clinic/room spaces for renting out to physicians and, thus, classified as “commercial.”
On the other hand, respondent contended that CHHMAC building is actually, directly, and exclusively
part of CHH and should have a special assessment level of 10% as provided under City Tax Ordinance
LXX. Respondent asserted that the CHHMAC building is similarly situated as the buildings of CHH,
housing its Dietary and Records Departments, are completely separate from the main CHH building and
are imposed the 10% special assessment level. In fine, respondent argued that the CHHMAC, though not
actually indispensable, is nonetheless incidental and reasonably necessary to CHH’s operations.
17
Issue:
Whether or not the medical arts center built by Chong Hua Hospital to house its doctors is a separate
commercial establishment or an appurtenant to the hospital.
Held:
Yes. The CHH Medical Arts Center (CHHMAC) is an integral part of CHH. It is definitely incidental to and
reasonably necessary for the operations of Chong Hua Hospital.
It is undisputed that the doctors and medical specialists holding clinics in CHHMAC are those duly
accredited by CHH, that is, they are consultants of the hospital and the ones who can treat CHH’s patients
confined in it. This fact alone takes away CHHMAC from being categorized as “commercial” since a
tertiary hospital like CHH is required by law to have a pool of physicians who comprises the required
medical departments in various medical fields.
The fact that the physicians are holding office in a separate building does not take away the essence and
nature of their services vis-à-vis the over-all operation of the hospital and the benefits to the hospital’s
patients. Their transfer to a more spacious and, perhaps, convenient place and location for the benefit of
the hospital’s patients does not remove them from being an integral part of the overall operation of the
hospital.
Respondent’s charge of rentals for the offices and clinics its accredited physicians occupy cannot be
equated to a commercial venture, which is mainly for profit.
First, CHHMAC is only for its consultants or accredited doctors and medical specialists. Second, the
charging of rentals is a practical necessity: (1) to recoup the investment cost of the building, (2) to cover
the rentals for the lot CHHMAC is built on, and (3) to maintain the CHHMAC building and its facilities.
Third, as correctly pointed out by respondent, it pays the proper taxes for its rental income. And, fourth,
if there is indeed any net income from the lease income of CHHMAC, such does not inure to any private
person or individual as it will be used for respondent’s other charitable projects.
(19) Chamber of Real Estate and Builder’s Associations’ Inc. vs.. Romulo, et. al.
GR. No. 160756
March 9, 2010
Congress has the power to condition, limit or deny deductions from gross income in order to arrive at
the net that it chooses to tax. This is because deductions are a matter of legislative grace. The assignment
of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax
rate from 32% to 2%, is not constitutionally objectionable.
Facts:
Chamber of Real Estate and Builders' Associations, Inc. (CHAMBER) is questioning the constitutionality
of Sec 27 (E) of RA 8424 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue
(BIR) to implement said provision and those involving creditable withholding taxes (CWT).
CHAMBER assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets. Chamber argues that the MCIT violates the due process clause because it levies income tax even if
there is no realized gain.
18
MCIT scheme: (Section 27 (E). [MCIT] on Domestic Corporations.) A corporation, beginning on its fourth
year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than the
normal corporate income tax imposed under Section 27(A) (Applying the 30% tax rate to net income).
If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of
the MCIT over the normal tax shall be carried forward and credited against the normal income tax for
the three immediately succeeding taxable years.
The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
The term ‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.
CHAMBER claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into account. Thus, pegging the tax
base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross
income, unlike net income, is not "realized gain."
Issue:
1. Whether or not the imposition of the MCIT on domestic corporations is unconstitutional.

2. Whether or not RR 9-98 is a deprivation of property without due process of law because the MCIT is
being imposed and collected even when there is actually a loss, or a zero or negative taxable income.
Held:
1. No. MCIT is not violative of due process. The MCIT is not a tax on capital. The MCIT is imposed on
gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods,
i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income
tax, and only if the normal income tax is suspiciously low.
The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at
a very much reduced 2% and uses as the base the corporation’s gross income.
CHAMBER failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. It does not cite any actual, specific and concrete negative experiences of its members nor
does it present empirical data to show that the implementation of the MCIT resulted in the confiscation
of their property.
Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. The party
alleging the law’s unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.
2. No. RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or
negative taxable income, merely defines the coverage of Section 27(E).
19
This means that even if a corporation incurs a net loss in its business operations or reports zero income
after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent
with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.
(20) People vs. Cayat

GR. No. L-45987
May 5, 1939
Facts:
Cayat was a native of Baguio, Benguet, Mountain Province. He was accused for violating Act No. 1639
which declared unlawful for any native of the Philippine islands who is a member of a non-Christian
Tribe to have in his possession, drink any beer, wine or intoxicating liquors of any kind, other than the
so-called native wines and liquors which the members of the tribes have been accustomed. It was
alleged that Cayat had received, acquired and had in his possession and control, one bottle of gin which
is an intoxicating liquor other than the so-called native wines and liquors which the member of such
tribe have been accustomed to. Cayat was found guilty of such. Accused challenged the constitutionality
of the Act. One of the grounds was that the said act is discriminatory and denies the equal protection
laws.
Issue:
Whether or not the said Act is violative of the equal protection clause of the constitution.
Held:
No. As early as 1551, the Spanish Government had assumed a solicitous attitude toward these
inhabitants. It had been regarded by the Spanish Government as a sacred "duty to conscience and
humanity" to civilize these less fortunate people living "in the obscurity of ignorance" and to accord
them the "the moral and material advantages" of community life and the "protection and vigilance
afforded them by the same laws." Constant and active effort had been exercised to prevent barbarous
practices and introduce civilized customs.
Guaranty of the equal protection of the laws is not equal protection of the laws is not violated by a
legislation based on reasonable classification. And the classification, to be reasonable, (1) must rest on
substantial distinctions; (2) must be germane to the purposes of the law; (3) must not be limited to
existing conditions only; and (4) must apply equally to all members of the same class. Act No. 1639
satisfies these requirements.
The classification rests on real and substantial, not merely imaginary or whimsical, distinctions. It is
based upon the degree of civilization and culture. "The term 'non-Christian tribes' refers, not to religious
belief, but, in a way, to the geographical area, and, more directly, to natives of the Philippine Islands of a
low grade of civilization, usually living in tribal relationship apart from settled communities."
This distinction is unquestionably reasonable, for the Act was intended to meet the peculiar conditions
existing in the non-Christian tribes.
That it is germane to the purposes of law cannot be doubted. It is designed to insure peace and order
among the non-Christian tribes since past experiences show that free use of highlight intoxicating
liquors by them had resulted in lawlessness and crimes.
The law is not limited in its application to conditions existing at the time of its enactment. It is intended
to apply for all times as long as those conditions exist. Legislature understood that the civilization of a
20
people is a slow process and that hand in hand with it must go measures of protection and security.
Finally, that the Act applies equally to all members of the class.
(21) Ormoc Sugar Company vs. Conejos, et. al.

GR. No. L-23794
February 17, 1968
Facts:
In 1964, Ormoc City passed a bill which read: “There shall be paid to the City Treasurer on any and all
productions of centrifugal sugar milled at the Ormoc Sugar Company Incorporated, in Ormoc City a
municipal tax equivalent to one per centum (1%) per export sale to the United States of America and
other foreign countries.” Though referred to as a “production tax”, the imposition actually amounts to a
tax on the export of centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of sugar
alone is not taxable; the only time the tax applies is when the sugar produced is exported. Ormoc Sugar
paid the tax (P7,087.50) in protest averring that the same is violative of Sec 2287 of the Revised
Administrative Code which provides: “It shall not be in the power of the municipal council to impose a
tax in any form whatever, upon goods and merchandise carried into the municipality, or out of the same,
and any attempt to impose an import or export tax upon such goods in the guise of an unreasonable
charge for wharfage, use of bridges or otherwise, shall be void.” And that the ordinance is violative to
equal protection as it singled out Ormoc Sugar As being liable for such tax impost for no other sugar mill
is found in the city.
Issue:
Whether or not constitutional limits on the power of taxation, specifically the equal protection clause
and rule of uniformity of taxation, were infringed.
Held:
The SC held in favor of Ormoc Sugar. It ruled that the equal protection clause applies only to persons or
things identically situated and does not bar a reasonable classification of the subject of legislation, and a
classification is reasonable where (1) it is based on substantial distinctions which make real differences;
(2) these are germane to the purpose of the law; (3) the classification applies not only to present
conditions but also to future conditions which are substantially identical to those of the present; (4) the
classification applies only to those who belong to the same class.
Though Ormoc Sugar Company Inc. is the only sugar central in the city of Ormoc at the time, the
classification, to be reasonable, should be in terms applicable to future conditions as well. Said ordinance
shouldn’t be singular and exclusive as to exclude any subsequently established sugar central, of the same
class as plaintiff, for coverage of the tax.
21
(22) Tiu vs. Court of Appeals
GR. No. 127410
January 20, 1999
Facts:
Congress, with the approval of the President, passed into law RA 7227 entitled "An Act Accelerating the
Conversion of Military Reservations Into Other Productive Uses, Creating the Bases Conversion and
Development Authority for this Purpose, Providing Funds Therefor and for Other Purposes." Section 12
thereof created the Subic Special Economic Zone and granted there to special privileges. President
Ramos issued Executive Order No. 97, clarifying the application of the tax and duty incentives. The
President issued Executive Order No. 97-A, specifying the area within which the tax-and-duty-free
privilege was operative.
Petitioners challenged the constitutionality of EO 97-A for allegedly being violative of their right to equal
protection of the laws. This was due to the limitation of tax incentives to Subic and not to the entire area
of Olongapo. The case was referred to the Court of Appeals. The appellate court concluded that such
being the case, petitioners could not claim that EO 97-A is unconstitutional, while at the same time
maintaining the validity of RA 7227. Respondent Court held that "there is no substantial difference
between the provisions of EO 97-A and Section 12 of RA 7227. In both, the 'Secured Area' is precise and
well-defined as '. . . the lands occupied by the Subic Naval Base and its contiguous extensions as
embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the
United States of America, as amended . . .'"
Issue:
Whether the provisions of Executive Order No. 97-A confining the application of R.A. 7227 within the
secured area and excluding the residents of the zone outside of the secured area is discriminatory or not
owing to a violation of the equal protection clause.
Held:
No. The Court found real and substantive distinctions between the circumstances obtaining inside and
those outside the Subic Naval Base, thereby justifying a valid and reasonable classification. The
fundamental right of equal protection of the laws is not absolute, but is subject to reasonable
classification. If the groupings are characterized by substantial distinctions that make real differences,
one class may be treated and regulated differently from another. The classification must also be germane
to the purpose of the law and must apply to all those belonging to the same class. Classification, to be
valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be
limited to existing conditions only, and (4) apply equally to all members of the same class. The Supreme
Court believed it was reasonable for the President to have delimited the application of some incentives
to the confines of the former Subic military base.
RA 7227 aims primarily to accelerate the conversion of military reservations into productive uses. This
was really limited to the military bases as the law's intent provides. Moreover, the law tasked the BCDA
to specifically develop the areas the bases occupied.
Even more important, at this time the business activities outside the "secured area" are not likely to have
any impact in achieving the purpose of the law, which is to turn the former military base to productive
use for the benefit of the Philippine economy. Hence, there was no reasonable basis to extend the tax
incentives in RA 7227.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As
long as there are actual and material differences between territories, there is no violation of the
constitutional clause.
22
B. Income Taxation for Individuals
(1) Vicente Madrigal and his wife, Susana Paterno vs. James J. Rafferty
GR No. 12287 38 Phil 45
August 7, 1918
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 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 partnership. On 1915, Madrigal filed a
declaration of his net income for year 1914, the sum of P296,302.73. Vicente Madrigal was contending
that the said declared income does not represent his income for the year 1914 as it was the income of his
conjugal partnership with Paterno. He said that in computing for his additional income tax, the amount
declared should be divided by 2.
The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United States
Commissioner of Internal Revenue decided against the claim of Madrigal. Madrigal paid under protest,
and the couple decided to recover the sum of P3,786.08 alleged to have been wrongfully and illegally
assessed and collected by the CIR.
Issue:
Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the
additional income tax.
Held:
No. The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income and
not upon capital and property.
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 income. Capital is wealth, while income is the service of wealth.
As Paterno 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.
To recapitulate, Vicente wants to 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.
23
(2) Frederick C. Fisher vs. Wenceslao Trinidad
48 Phil 415
August 7, 1918
Facts:
Philippine American Drug Company was a corporation duly organized and existing under the laws of the
Philippine Islands, doing business in the City of Manila; that the appellant was a stockholder in said
corporation; that said corporation, as result of the business for that year, declared a "stock dividend";
that the proportionate share of said stock divided of the appellant was P24,800; that the stock dividend
for that amount was issued to the appellant; that thereafter, in the month of March, 1920, the appellant,
upon demand of the appellee, paid under protest, and voluntarily, unto the appellee the sum of P889.91
as income tax on said stock dividend. For the recovery of that sum (P889.91) the present action was
instituted.
Issue:
Whether or not the "stock dividends" in the present case are "income" and taxable as such under the
provisions of section 25 of Act No. 2833.
Held:
A dividend is defined as a corporate profit set aside, declared, and ordered by the directors to be paid to
the stockholders on demand or at a fixed time. Until the dividend is declared, the corporate profits
belong to the corporation and not to the stockholders, and are liable for the payment of the debts of the
corporation.
When a cash dividend is declared and paid to the stockholders, such cash dividend is declared and paid
to the stockholder, such cash becomes the absolute property of the stockholder and cannot be reached
by the creditors of the corporation in the absence of fraud. A stock dividend, however, still being the
property of the corporation, and not of the stockholder, it may be reached by an execution against the
corporation, and sold as a part of the property of the corporation. Until the dividend is declared and
paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for
corporate indebtedness. The rule is well established that cash dividends, whether large or small, are
regarded as "income" and all stock dividends, as capital or assets.
The stockholder who receives a stock dividend has received nothing but a representation of this
increased interest in the capital of the corporation. There has been no separation or segregation of his
interest. All the property or capital of the corporation still belongs to the corporation.
(3) Conwi vs. CTA

GR No. 48532, 213 SCRA 83
August 31, 1992
Facts:
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
years as payment for their services. Petitioners argue that since there were no remittances and
acceptances of their salaries and wages in US dollars into the Philippines, they are exempt from the
coverage of RMC 7-71,41-71.
24
Issue/s:
1. Whether or not the petitioners’ income earned outside the Philippines are exempt from income tax.
2. Whether or not the Sec. of Finance possess the power to promulgate the circulars in question.
Held:
Income may be defined as an amount of money coming to a person or corporation within a specified
time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it
means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor.
Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in
these cases wholly without, are subject to income tax. The fact still remains that "taxes are the lifeblood
of the government" and one of the duties of a Filipino citizen is to pay his income tax.
(4) Commission of Internal Revenue (CIR) vs. Filinvest Development Corporation (FDC)
GR. Nos. 163653 and 167689
July 19, 2011
Facts:
Respondent Filinvest Development Corporation (FDC) is a holding company which is the owner of 80% of
the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), and 67.42% of the outstanding shares
of Filinvest Land, Inc. (FLI).
On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both
transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. 463,094,301 shares of
stock of FLI were issued to FDC and FAI in exchange for said parcels which were intended to facilitate
development of medium-rise residential and commercial buildings.
FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation
(DSCC) and Filinvest Capital, Inc. (FCI). Duly evidenced by instructional letters as well as cash and
Journal vouchers, said cash advances amounted to P2,557,213,942.60 in 1996 and P3,360,889,677.48 in
1997.
Issue/s:
1. Whether the CIR’s powers include the power to impute theoretical interests on the advances FDC
extended to its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to
interest-bearing fund borrowings from commercial banks and that since considerable interest
expenses were deducted by FDC when said funds were borrowed, the CIR theorizes that interest
income should likewise be declared when the same funds were sourced for the advances FDC
extended to its affiliates.
2. Whether the exchange of shares of stock for property among FDC, FAI and FLI met all the
requirements for the non-recognition of taxable gain under Section 34(C)(2)(c) of the NIRC.  
Held:
1. No. The CIR's powers doe not include the power to impute "theoretical interests" to the controlled
taxpayer's transactions.
The term “gross income” means all income from whatever source derived. While the phrase "from
whatever source derived" There must be proof of the actual or probable receipt or realization of the item
25
of gross income sought to be distributed, apportioned or allocated by the CIR.  There was no evidence
of actual or possible realization showing that the advances FDC extended to its affiliates had resulted to
the interests subsequently assessed by the CIR.
 More so, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it
has been expressly stipulated in writing. Taxes, being burdens, are not to be presumed beyond what the
applicable statute expressly and clearly declares. Accordingly, the general rule of requiring adherence to
the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication.
2. No. Section 34 (c) (2) of the 1993 NIRC pertinently provides the exception that no gain or loss shall 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 14 February 2001 Stipulation of Facts submitted by the parties, the requisites
for the non-recognition of gain or loss 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 the exchange the transferor, alone or together with others, not exceeding four, gains
control of the transferee.
(5) Baier-Nickel vs. CIR

GR No. 156305
February 17, 2003
Facts:
This is actually a Minute Resolution dated February 17, 2003, where the SC sustained the ruling of the
Court of Appeals that Baier-Nickel is entitled to refund the sum withheld from her sales commission
income for the year 1994.
Issue:
Whether or not the sales commission is taxable in the Philippines.
Held:
The fact that recipient of commission income is President and majority stockholder of the Philippine
company does not alter the source of income. There are only two ways by which the President and other
members of the Board can be granted compensation apart from reasonable per diems: (1) when there is
a provision in the by-laws fixing their compensation; and (2) when the stockholders agree to give it to
them. If none of these conditions are present, commission income cannot be automatically attributed to
petitioner’s position in the company.
Commissions paid for marketing services rendered abroad for a Philippine company is considered
foreign-source income. The source of the income is the property, activity or service that produced the
income. Place where services are rendered determine taxation.
26
(6) CIR Vs. Baier-Nickel
GR No. 153793
August 29, 2006
Facts:
CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA.
Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation
engaged in the manufacturing, marketing and selling of embroidered textile products. Through
Jubanitex’s general manager, Marina Guzman, the company appointed respondent as commission agent
with 10% sales commission on all sales actually concluded and collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the
10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but
then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex and
that her sales commission income was compensation for services rendered in Germany not Philippines
and thus not taxable here.
She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but the
decision was reversed by CA on appeal, holding that the commission was received as sales agent not as
President and that the “source” of income arose from marketing activities in Germany.
Issue:
Whether or not the respondent is entitled to a refund.
Held:
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are
subject to the Philippine income taxation on their income received from all sources in the Philippines. In
determining the meaning of “source”, the Court resorted to origin of Act 2833 (the first Philippine
income tax law), the US Revenue Law of 1916, as amended in 1917.
US SC has said that income may be derived from three possible sources only: (1) capital and/or (2)
labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is done
should be decisive; if it is done in this country, the income should be from “sources within the United
States.” If the income is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from “sources within the United States.” If the income is
from the sale of capital assets, the place where the sale is made should be likewise decisive. “Source” is
not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is
within the United States the resulting income is taxable to nonresident aliens and foreign corporations.
The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she performed the
incoming producing service in Germany, which would have entitled her to a tax exemption for income
from sources outside the Philippines. Petition granted.
27
(7) CIR vs. Marubeni Corporation
GR No. 137377
December 18, 2001
Facts:
Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the Manila
branch’s books of accounts for fiscal year ending March 1985, and found that respondent had
undeclared income from contracts with NDC and Philphos for construction of a wharf/port complex and
ammonia storage complex respectively.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers
who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct
30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and
business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated
those who already availed amnesty under EO 41 should file an amended return to avail of the new
benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986.
Issue:
Whether Marubeni is exempted from income tax by invoking the situs of taxation rule.
Held:
Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the
Philippines because some of them were completed in Japan (and in fact subcontracted) in accordance
with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture
of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside Philippines’ taxing jurisdiction and are therefore not subject to
contractor’s tax.
(8) Tuazon vs. Lingad

GR No. L-24248, 58 SCRA 170
July 31, 1974
Facts:
The mother of Antonio Tuason owned a 7-hectare parcel of land located in the City of Manila. She
subdivided the land into twenty-nine (29) lots. The taxpayer eventually inherited possession of the land
in 1948.
Tuazon instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of the twenty-nine parcels
were all sold. In 1953 and 1954 the Taxpayer reported his income from the sale of the small lots
(P102,050.79 and P103,468.56, respectively) as long-term capital gains. The CIR upheld Taxpayer's
treatment of this tax.
In his 1957 tax return the Taxpayer as before treated his income from the sale of the small lots
(P119,072.18) as capital gains. This treatment was initially approved by the CIR, but by 1963, the CIR
reversed itself and considered the Taxpayer's profits from the sales of the lots as ordinary gain. The CIR
assesed a deficiency of P31,095.36 from the Taxpayer.
28
Tuazon contends that he was engaged in the business of leasing the lots he inherited from his mother as
well other real properties, his subsequent sales of the mentioned lots cannot be recognized as sales of
capital assets but of “real property used in trade or business of the taxpayer.”
Issue:
Whether or not the properties in question should be regarded as capital assets.
Held:
No. It is Ordinary Income.
As thus defined by law, capital assets include all properties of a taxpayer whether or not connected with
his trade or business, except:
1. stock in trade or other property included in the taxpayer's inventory;
2. property primarily for sale to customers in the ordinary course of his trade or business;
3. property used in the trade or business of the taxpayer and subject to depreciation allowance;
4. real property used in trade or business.
If the taxpayer sells or exchanges any of the properties above, any gain or loss relative thereto is an
ordinary gain or an ordinary loss; the loss or gain from the sale or exchange of all other properties of the
taxpayer is a capital gain or a capital loss.
Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a taxpayer (other than a corporation)
from the sale or exchange of capital assets held for more than 12 months, only 50% of the net capital
gain shall be taken into account in computing the net income.
(9) Republic vs. De la Rama

GR No. L-21108, 18 SCRA 861
November 29, 1966
Facts:
Under the doctrine of constructive receipt, a taxpayer is deemed to have received income where an
amount owing to him is set off against his debt by the creditor. Such doctrine, however, is applicable
only where the set off is made against a debt acknowledged by the taxpayer or the validity of which is
not otherwise questioned. Where the validity of the debt is contested by the taxpayer, the doctrine of
constructive receipt is inapplicable.
The Commissioner sought to apply this doctrine to dividends due and payable but not actually received.
When such dividends were declared in 1950, no payment was actually made thereof to the stockholder,
Esteban de la Rama. Instead, the 1950 dividends due him were credited to or set-off against his personal
accounts with the corporation. De la Rama died without having actually collected such dividends and the
income tax returns filed in behalf of his estate for 1950 did not include them. Subsequently, a deficiency
assessment was issued against the estate, based on the undeclared dividends, which according to the
Commissioner had been constructively received in 1950 when the set-off against the personal debts of
the deceased was made by the corporation.
In behalf of the estate, however, it was contended that the doctrine of constructive receipt was
inapplicable to the situation. For the doctrine to apply, the set-off must be against valid debts of the
taxpayer. But the so-called personal accounts of the late Esteban de la Rama with the corporation were
not valid debts. At any rate, his liability for such debts was never recognized, nor properly established.
29
Issue:
Whether or not there was constructive receipt of income.
Held:
The so-called personal accounts of Esteban de la Rama were not valid debts. Of the two items, the first
was contested and proof was lacking to show its existence and validity. The second was actually the debt
of another person, Hijos de I. de la Rama, Inc. It was true that Esteban de la Rama was the principal
stockholder of said corporation, but as its personality was separate and distinct, its debts could not be
charged to the deceased in the absence of proof of a substitution of debtor. With such findings, the Court
concluded that inasmuch as the dividends in question had not been received either actually or
constructively in 1950, no tax could be due thereon for said year.
The application of the dividends to the alleged personal accounts of the deceased did not constitute such
constructive payment to the estate or the heirs that could become the basis for a tax assessment on the
said dividends because, with respect to the first debt, there was no proof adduced to show its existence
and validity; and with respect to the second debt, to which the dividends were partly applied, it was
composed of accounts due from an entity separate and distinct from the deceased and whose debts
could not be charged against the deceased even if the latter was the principal owner thereof, in the
absence of proof of substitution of debtor. There being no basis for the assessment of the income tax, the
assessment and the sending of the corresponding notices did not have any basis. The assessment and the
notices did not therefore produce any legal effect that would warrant the collection of the tax.
Income is deemed constructively received where the taxpayer has an unqualified right to receive the
same but by his own choice the income is not reduced to possession.
(10) Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation

GR. No. 188497
April 25, 2012
Facts:
Respondent is engaged in the business of processing, treating and refining petroleum for the purpose of
producing marketable products and the subsequent sale thereof. Respondent filed a formal claim for
refund or tax representing excise taxes it allegedly paid on sales and deliveries of gas and fuel oils to
various international carriers.
Issue:
Whether or not respondent as manufacturer or producer of petroleum products is exempt from the
payment of excise tax on such petroleum products it sold to international carriers.
Held:
Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally collected. An "erroneous or
illegal tax" is defined as one levied without statutory authority, or upon property not subject to taxation
or by some officer having no authority to levy the tax, or one which is some other similar respect is
illegal.
Respondent's locally manufactured petroleum products are clearly subject to excise tax under Sec. 148.
Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC allowing a refund of
erroneous or excess payment of tax. Respondent's claim is premised on what it determined as a tax
30
exemption "attaching to the goods themselves," which must be based on a statute granting tax
exemption, or "the result of legislative grace." Such a claim is to be construed strictissimi juris against the
taxpayer, meaning that the claim cannot be made to rest on vague inference. Where the rule of strict
interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, the claimant must show that he clearly falls under the exempting statute.
The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred on
international carriers who purchased the same for their use or consumption outside the Philippines. Sec.
135 (a) in relation to the other provisions on excise tax and from the nature of indirect taxation, may
only be construed as prohibiting the manufacturers-sellers of petroleum products from passing on the
tax to international carriers by incorporating previously paid excise taxes into the selling price. In other
words, respondent cannot shift the tax burden to international carriers who are allowed to purchase its
petroleum products without having to pay the added cost of the excise tax.
(11) Renato V. Diaz and Aurora MA. F. Timbol vs. the Secretary of Finance and the CIR
GR. No. 193007
July 19, 2011
Facts:
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief
assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal
Revenue (BIR) on the collections of tollway operators.
Issue:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms "franchise grantees" and "sale of services" under
Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax
on services; b) will impair the tollway operators' right to a reasonable return of investment under
their TOAs; and c) is not administratively feasible and cannot be implemented.
Held:
It is plain that the law imposes VAT on "all kinds of services" rendered in the Philippines for a fee,
including those specified in the list. The enumeration of affected services is not exclusive. By qualifying
"services" with the words "all kinds," Section 108 subjects to VAT "all kinds of services" rendered for a
fee "regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties." This means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human knowledge and
skills. And not only do tollway operators come under the broad term "all kinds of services," they also
come under the specific class described in Section 108 as "all other franchise grantees" who are subject
to VAT, "except those under Section 119 of this Code."
Fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is
imposed under the taxing power of the government principally for the purpose of raising revenues to
fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction, maintenance and operation of
the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for
the use of public facilities, therefore, they are not government exactions that can be properly treated as a
tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or entities, as an attribute of ownership.
31
(12) Philippine Amusement and Gaming Corporation (PAGCOR) vs. BIR
GR. No. 172087
March 15, 2011
Facts:
PAGCOR was created pursuant to P.D. No. 1067-A on January 1, 1977. Simultaneous to its creation, P.D.
No. 1067-B was issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of
five percent (5%) of the gross revenue. Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding
the scope of PAGCOR's exemption.
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by
Letter of Instruction No. 1430, which was issued in September 1984.
R.A. No. 8424, National Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424
provides that government-owned and controlled corporations (GOCCs) shall pay corporate income tax,
except petitioner PAGCOR, GSIS, SSS, PHIC and PCSO.
With the enactment of R.A. No. 9337 on May 24, 2005, certain sections of the National Internal Revenue
Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of R.A.
No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding
PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income tax.
Issue:
Whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A.
No. 9337.
Held:
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the
non-impairment clause of the Constitution. Petitioner’s contention lacks merit. The non-impairment
clause is limited in application to laws that derogate from prior acts or contracts by enlarging, abridging
or in any manner changing the intention of the parties.
As regards franchises, Section 11, Article XII of the Constitution 31 provides that no franchise or right
shall be granted except under the condition that it shall be subject to amendment, alteration, or repeal
by the Congress when the common good so requires. Under Section 11, Article XII of the Constitution,
PAGCOR's franchise is subject to amendment, alteration or repeal by Congress such as the amendment
under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27
(c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may
affect any benefits to PAGCOR's transactions with private parties, is not violative of the non-impairment
clause of the Constitution.
Petitioner is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869, is a special law
that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424.
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.
32
(13) United Airlines vs. Commissioner of Internal Revenue
GR. No. 178788
September 29, 2010
Facts:
International airline, petitioner United Airlines, filed a claim for income tax refund. Petitioner sought to
be refunded the erroneously collected income tax from in the amount of P5,028,813.23 on passenger
revenue from tickets sold in the Philippines, the uplifts of which did not originate in the Philippines. The
airlines ceased operation originating from the Philippines since February 21, 1998.
Court of Tax appeals ruled the petitioner is not entitled to a refund because under the NIRC, income tax
on GPB also includes gross revenue from carriage of cargoes from the Philippines. And upon assessment
by the CTA, it was found out that petitioner deducted items from its cargo revenues which should have
entitled the government to an amount of P 31.43 million, which is obviously higher than the amount the
petitioner prayed to be refunded.
Petitioner argued that the petitioner’s supposed underpayment cannot offset his claim to a refund as
established by well-settled jurisprudence.
Issue:
Whether or not petitioner is entitled to a refund.
Held:
Petitioner was correct in averring that his claim to a refund cannot be subject to offsetting or, as it
claimed the offsetting to be, a legal compensation under Sec. 28(A)(3)(a).
The Court has consistently ruled that there can be no off-setting [or compensation”] of taxes against the
claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government. (Francia vs. Intermediate
appellate court)
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and
constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself
and without unquestionable evidence, cannot be the basis for the grant of the refund. (CIR vs. CTA)
(14) Commissioner of Internal Revenue vs. Smart Communications, Inc.

GR. No. 179045-46
August 25, 2010
Facts:
Smart Communications, Inc. (Smart) entered into 3 agreements with Prism Transactive (Prism), a non-
resident Malaysian corporation, under which Prism would provide programming and consultancy
services for the installation of the Service Download Manager (SDM Agreement) and the Channel
Manager (CM Agreement), and for the installation and implementation of Smart Money and Mobile
Banking Service SIM Applications and Private Text Platform (SIM Application Agreement). Prism billed
Smart US$547,822.45. Thinking that the amount constituted royalties, Smart withheld from its payments
to Prism the amount of US$136,955.61 or P7,008,840.43, representing the 25% royalty tax under the
33
RP-Malaysia Tax Treaty.
Within the 2-year period to claim a refund, Smart filed an administrative claim with the Bureau of
Internal Revenue (BIR) for the refund of the withheld amount (P7,008,840.43). Smart averred that its
payments to Prism were not royalties but “business profits,” as defined in the RP-Malaysian Tax Treaty,
which were not taxable because Prism did not have a permanent establishment in the Philippines. The
CIR countered that Smart, as a withholding agent was not a party-in-interest to file the claim for refund,
and even if it were the proper party, there was no showing that the payments to Prism constituted
“business profits.”
Issue/s:
1. Whether or not Smart had the right to file the claim for refund;
2. Whether Smart’s payments to Prism constituted “business profits” or royalties.
Held:
1. Smart, as withholding agent, may file the claim for refund.
The person entitled to claim a tax refund is the taxpayer [Sections 204(c) and 229 of the National
Internal Revenue Code (NIRC)]. However, in case the taxpayer does not file a claim for refund, the
withholding agent may file the claim. The CIR was incorrect in saying that this ruling applies only when
the withholding agent and the taxpayer are related parties, i.e., where the withholding agent is a wholly
owned subsidiary of the taxpayer. Although such relation between the taxpayer and the withholding
agent is a factor that increases the latter’s legal interest to file a claim for refund, there is nothing in the
decision in said case to suggest that such relationship is required or that the lack of such relation
deprives the withholding agent of the right to file a claim for refund. Rather, what is clear in the decision
is that a withholding agent has a legal right to file a claim for refund for two reasons. First, he is
considered a “taxpayer” under the NIRC as he is personally liable for the withholding tax as well as for
deficiency assessments, surcharges, and penalties, should the amount of the tax withheld be finally
found to be less than the amount that should have been withheld under law. Second, as an agent of the
taxpayer, his authority to file the necessary income tax return and to remit the tax withheld to the
government impliedly includes the authority to file a claim for refund and to bring an action for recovery
of such claim.
2. The payments for the CM and SIM Application Agreements constituted “business profits” which were
not taxable under the RP-Malaysia Tax Treaty. However, the payment for the SDM Agreement
constituted taxable “royalty” under the same treaty.
Under its agreements with Smart, Prism had intellectual property right over the SDM program, but not
over the CM and SIM Application programs as the proprietary rights of these programs belonged to
Smart. Thus, out of the payments made to Prism, only the payment for the SDM program was a royalty
subject to a 25% withholding tax; the payments for the CM and SIM Application programs constituted
Prism’s non-taxable “business profits.” The BIR should, therefore, refund the erroneously withheld
royalty taxes for the payments pertaining to the CM and SIM Application Agreements. The BIR was
ordered to issue a Tax Credit Certificate to Prism in the amount of P3,989,456.43.
34
(15) Miguel J. Osorio Pension Foundation, Incorporated vs. CA and CIR
GR. No. 162175
June 28, 2010
Facts:
Petitioner, a non-stock and non-profit corporation, was organized for the purpose of holding title to and
administering the employees’ trust or retirement funds established for the benefit of the employees of
Victorias Milling Company, Inc. (VMC). Petitioner, as trustee, claims that the income earned by the
Employees’ Trust Fund is tax exempt under Section 53(b) of the National Internal Revenue Code.
Petitioner decided to invest part of the Employees’ Trust Fund to purchase a lot in the Madrigal Business
Park (MBP lot) in Alabang, Muntinlupa. Petitioner claims that since it needed funds to pay the retirement
and pension benefits of VMC employees and to reimburse advances made by VMC, petitioner’s Board of
Trustees authorized the sale of its share in the MBP lot. VMC negotiated the sale of the MBP lot with
Metropolitan Bank and Trust Company, Inc. (Metrobank). Metrobank, as withholding agent, paid the
Bureau of Internal Revenue (BIR) P6,125,625 as withholding tax on the sale of real property.
Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees’ Trust Fund, based on
the notarized Memorandum of Agreement presented before the appellate courts. Petitioner further
contends that there is no dispute that the Employees’ Trust Fund is exempt from income tax. Since
petitioner, as trustee, purchased 49.59% of the MBP lot using funds of the Employees’ Trust Fund,
petitioner asserts that the Employees’ Trust Fund's 49.59% share in the income tax paid or
P3,037,697.40 should be refunded.
Issue:
Whether or not the petitioner or the employees’ Trust Fund is exempt from tax and thus entitled to
refund.
Held:
Petitioner is a corporation that was formed to administer the Employees' Trust Fund. Petitioner invested
P5,504,748.25 of the funds of the Employees' Trust Fund to purchase the MBP lot. When the MBP lot was
sold, the gross income of the Employees’ Trust Fund from the sale of the MBP lot was P40,500,000. The
7.5% withholding tax of P3,037,500 and broker’s commission were deducted from the proceeds.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise,
taxation of those earnings would result in a diminution of accumulated income and reduce whatever the
trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of
the law. Indeed, the petitioner is correct in its adherence to the clear ruling laid by the Supreme Court
way back in 1992 in the case of Commissioner of Internal Revenue vs.. The Honorable Court of Appeals,
The Court of Tax Appeals and GCL Retirement Plan, wherein it was succinctly held:
There can be no denying either that the final withholding tax is collected from income in respect of
which employees’ trusts are declared exempt (Sec. 56(b), now 53(b), Tax Code). The application of the
withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to
maximize and expedite the collection of income taxes by requiring its payment at the source. If an
employees’ trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a
certain percentage of that income which it is not supposed to pay in the first place.
Similarly, the income of the trust funds involved herein is exempt from the payment of final withholding
taxes. Since petitioner has proven that the income from the sale of the MBP lot came from an investment
by the Employees' Trust Fund, petitioner, as trustee of the Employees’ Trust Fund, is entitled to claim
the tax refund of P3,037,500 which was erroneously paid in the sale of the MBP lot.
35
C. Income Taxation for Corporation
(1) Eufemia Evangelista et. al. vs. The Collector of Internal Revenue and the CTA
GR. No. L-9996
October 15, 1957
Facts:
The petitioners sought for the reversal of the decision of the Court of Tax Appeals which held them liable
for income tax, real estate dealer’s tax and residence tax for the real properties (parcels of land) they
bought within February 1943 to April 1994 from different persons, whose management of said
properties was charged to their brother Simeon, and which were subsequently rented out to various
tenants from the year 1945-1949. Petitioners submit that they are mere co-owners of the properties, not
co-partners because some of the characteristics of partnership are not present, therefore, no legal entity
with a personality separate from that of the members exists, and thus they are excluded from the
coverage of Section 24 of the National Internal Revenue Code of the Philippines.
Issue:
Whether or not petitioners have established a partnership and are subject to tax on corporations under
Section 24 of the NIRC.
Held:
Yes. Petitioners have agreed to contribute and did contribute money to a common fund for the purpose
of engaging in real estate transactions for monetary gain and divide the same among themselves because
of the following observations, among others: (1) Said common fund was not something they found
already in existence; (2) They invested the same, not merely in one transaction, but in a series of
transactions; (3) The aforesaid lots were not devoted to residential purposes, or to other personal uses,
of petitioners herein.
Petitioners’ argument that their being mere co-owners did not create a separate legal entity was rejected
because, according to the Court, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When the NIRC includes "partnerships" among
the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which
are not necessarily "partnerships", in the technical sense of the term. The qualifying expression found in
Section 24 and 84(b) clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could
be deemed constituted for purposes of the tax on corporations. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to.
For purposes of the tax on corporations, NIRC includes these partnerships - with the exception only of
duly registered general co partnerships - within the purview of the term "corporation." It is, therefore,
clear that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject
to the income tax for corporations.
36
(2) Obillos et. al. vs. CIR
GR. No. L-68118
October 29, 1985
Facts:
On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square meters of located
at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners,
to enable them to build their residences. The Torrens titles issued to them showed that they were co-
owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled
City Securities Corporation and Olga Cruz Canada for the total sum of P313,050. They derived from the
sale a total profit of P134, 341.88 or P33,584 for each of them. They treated the profit as a capital gain
and paid an income tax on one-half thereof or of P16,792.
In April, 1980, the Commissioner of Internal Revenue required the four petitioners to pay corporate
income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof.
The petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on
their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership
or joint venture. The petitioners contested the assessments. Two Judges of the Tax Court sustained the
same. Hence, the instant appeal.
Issue:
Whether or not the petitioners has indeed formed a partnership or joint venture making them liable for
corporate income tax.
Held:
The Supreme Court held that the petitioners should not be considered to have formed a partnership just
because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the
profit among themselves. To regard so would result in oppressive taxation and confirm the dictum that
the power to tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a partnership.
The petitioners were not engaged in any joint venture by reason of that isolated transaction.
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish
a partnership, whether or not the persons sharing them have a joint or common right or interest in
any property from which the returns are derived". There must be an unmistakable intention to form
a partnership or joint venture.
Their original purpose was to divide the lots for residential purposes. if later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. it
had to be terminated sooner or later.
They did not contribute or invest additional capital to increase or expand the properties, nor was there
an unmistakable intention to form a partnership or joint venture.
37
(3) Officemetro Philippines, Inc. vs. Commissioner of Internal Revenue
CTA Case No. 8382
June 3, 2014
Facts:
In 2006, respondent CIR ordered the examination of petitioner’s books for tax year 2005. After such
examination, it issued a deficiency assessment for expanded withholding tax (EWT), final withholding of
VAT (FWVAT), final withholding tax (FWT) and a compromise penalty.   Petitioner filed the current
petition for review to question the assessments. Respondent contends that petitioner failed to prove
with documentary evidence that the Service Agreement with Regus Centres Pty. Ltd and petitioner is for
services performed outside the Philippines.
Issue:
Whether or not petitioner is liable for the deficiency assessments and if it is, are they entirely correct.
Held:
For the EWT, the Court agrees with petitioner that condominium dues billed to the company are not
subject to EWT. The BIR has held a number of times that association/condominium dues, membership
fees, and other assessment/charges collected from its members are not included in the corporation’s
gross income as these are held in trust and used for administrative purposes for the common benefit of
the members. Thus they are not subject to income tax and withholding tax.
Petitioner failed to prove that its non-resident foreign corporation counterpart performed the services
in question. Thus, it is liable for the deficiency assessment since it failed to prove exemption from
coverage.
The CTA only partially modified the assessment of the BIR.
(4) CIR vs. Pilipinas Shell Petroleum Corporation

GR. No. 188497
February 19, 2014
Facts:
Shell sold petroleum products to international carriers who are excise tax exempt. On such sale, the
taxing authority imposed excise taxes.
Issue:
Whether a manufacturer or producer of petroleum products is exempt for payment of excise tax on such
products if sold to international carriers.
Held:
No. Erroneous or illegal taxes are those levied without statutory authority or upon property not subject
to tax.
Shell's locally manufactured petroleum products are subject to excise tax in Sec. 148 NIRC. Thus, there is
no tax refund to speak of because there is no erroneous or excess payment.
38
Excise tax attaches to petroleum products sold to international carriers. Thus, the excise tax imposed on
manufacturers cannot invoke excise tax exemption granted to its buyers who are international carriers.
International air carriers are tax-exempt as provided in the Chicago Convention. This exemption allows
international carriers to purchase petroleum products without excise tax as component of price fixed by
the seller.
(5) Deutsche Bank-AG Manila Branch vs. CIR

GR. No. 188550
August 19, 2013
Facts:
In accordance with Section 28 (A) (5) of the National Internal Revenue Code (NIRC) of 1997, petitioner
withheld and remitted to respondent on 21 October 2003 the amount of PHP67,688,553.51,
representing fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking unit
(RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years.
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or issuance
of its tax credit certificate in the total amount of PHP22,562,851.17. On the same date, petitioner
requested from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the
preferential tax rate of 10% under the RP-Germany Tax Treaty. Alleging the inaction of the BIR on its
administrative claim, petitioner filed a Petition for Review with the CTA on 18 October 2005. Petitioner
reiterated its claim for the refund or issuance of its tax credit certificate for the amount of
PHP22,562,851.17 representing the alleged excess BPRT paid on branch profits remittance to DB
Germany.
Issue:
Whether or not the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations
of the benefit of a tax treaty.
Held:
No. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed
period under the administrative issuance would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief. "A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken." Thus, laws and issuances must ensure that the reliefs granted under tax treaties are
accorded to the parties entitled thereto.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. It
is significant to emphasize that petitioner applied though belatedly for a tax treaty relief, in substantial
compliance with RMO No. 1-2000. Clearly, there is no reason to deprive petitioner of the benefit of a
preferential tax rate of 10% BPRT in accordance with the RP-Germany Tax Treaty.
39
(6) CIR vs. General Foods (Phils.), Inc.
GR. No. 143672
April 24, 2003
Facts:
General Foods (Phils), which is engaged in the manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its
income tax return for the fiscal year ending February 1985 and claimed as deduction, among other
business expenses, P9,461,246 for media advertising for “Tang”.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision
by CTA dismissing the company’s appeal.
Issue:
Whether or not the subject media advertising expense for “Tang” was ordinary and necessary expense
fully deductible under the NIRC.
Held:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of
the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest
grant of organic or statute law.
To be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
The Court finds the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use
of services and (2) advertising designed to stimulate the future sale of merchandise or use of services.
The second type involves expenditures incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a
member. If the expenditures are for the advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second kind, then normally they should be spread
out over a reasonable period of time.
The company’s media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the company’s entire claim for marketing
expenses for that year under review. Petition granted, judgment reversed and set aside.
40
(7) The Late Lino Gutierrez by Andrea C. vda. De Gutierrez et. al. vs. Collector of Internal Revenue
GR. No. I-19537
May 20, 1965
Facts:
The late Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid
real estate broker's privilege tax. Subsequently, the Commissioner of Internal Revenue assessed
Gutierrez a deficiency income tax amounting to P11,841.00 which was caused by the disallowance of the
deductions from gross income representing depreciation expenses allegedly incurred by Gutierrez in
carrying on his business and the addition to gross income of receipts which he did not report in his
income tax returns. In sum, the disallowed business expenses consisted of:
1. Transportation expenses incurred to attend the funeral of his friends

2. Procurement and installation of an iron door
3. Cost of furniture given by the taxpayer in furtherance of a business transaction
4. Membership fees in organizations established by those engaged in the real estate trade
5. Car expenses, salary of his driver and car depreciation
6. Repairing taxpayer’s rental apartments
7. Litigation expenses
8. Depreciation of Gutierrez’ residence
9. Fines and penalties for late payment of taxes
10. Alms given to in indigent family and a donation consisting of officer’s jewels and aprons to Biak-na-
Bato Lodge No. 7
Issue/s:
1. Whether or not he taxpayer's aforementioned claims for deduction are proper and allowable.
2. Whether or not real properties used in the trade or business of the taxpayer are considered as
ordinary assets.
Held:
1. Yes, provided such expenses meet the requirements. The said claims for deduction are proper and
allowable if such expenses are: a) ordinary and necessary, b) paid or incurred within the taxable year
and c) paid or incurred in carrying on a trade or business.
Of those enumerated, what were considered as deductible are the following:
a) The cost of furniture given by the taxpayer as commission in furtherance of a business transaction
and the expenses incurred in attending the National Convention of Filipino Businessmen, luncheon
meeting and cruise to Corregidor of the Homeowners' Association. According to the Supreme Court,
commissions given in consideration for bringing about a profitable transaction are part of the cost of the
business transaction and are deductible.
b) Membership and activities in connection with the real estate trade were solely to enhance his
business. Hence, the expenses incurred thereunder are deductible as ordinary and necessary business
expenses.
c) Only ½ of the car expenses, salary of his driver and car depreciation are allowed as deduction since
according to the evidence, the taxpayer's car was utilized both for personal and business needs.
d) The expenses used to repair the taxpayer's rental apartments are deductible as necessary
expenditures for the maintenance of the taxpayer's business as they did not increase the value of such
apartments or prolong their life. They merely kept the apartments in an ordinary operating condition.
41
e). Litigation expenses which were defrayed by Gutierrez to collect apartment rentals and to eject
delinquent tenants are considered as ordinary and necessary expenses in pursuing his business. It is
routinary and necessary for one in the leasing business to collect rentals and to eject tenants who refuse
to pay their accounts.  Hence, Lino Gutierriez and/or his heirs are ordered to pay the total sum of
P11,929.00 as deficiency income tax for years 1951-1954 plus the statutory penalties in case of
delinquency.
2. Yes. Before Section 34 was amended by RA 82 in 1947, it considered the real property used in the
trade or business of taxpayer as capital asset. However, with the passage of RA 82, Congress classified
such real properties as ordinary assets. This has the effect of withdrawing the gain or loss from the sale
or exchange of real property used in the trade or business of the taxpayer from the operation of the
capital gains and losses provisions. As such, it is logical that the gain or loss from the sale or exchange of
such real properties be treated as ordinary income or loss.
(8) Commissioner of Internal Revenue vs. Isabela Cultural Corporation

GR. No. 172231
February 12, 2007
Facts:
Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for deficiency
income tax and expanded withholding tax from BIR. It arose from the disallowance of ICC’s claimed
expense for professional and security services paid by ICC; as well as the alleged understatement of
interest income on the three promissory notes due from Realty Investment Inc. The deficiency
expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding tax on its
claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought
the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTA’s ruling
was reversed by CA, and then sustained by SC, and case was remanded to CTA. CTA rendered a decision
in favor of ICC. It ruled that the deductions for professional and security services were properly claimed,
it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at that
time. Hence it is a proper deduction in 1986.
Issue:
Whether or not the expenses for professional and security services are deductible.
Held:
No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have
been paid or incurred during the taxable year. This requisite is dependent on the method of accounting
of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this
method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the
method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed in the succeeding year.
Accrual of income and expense is permitted when the all-events test has been met. This test requires:
1) fixing of a right to income or liability to pay; and
2) the availability of the reasonable accurate determination of such income or liability.
42
The test does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an
excuse the delayed billing, since it could have inquired into the amount of their obligation and
reasonably determine the amount.
(9) H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue

GR. No. 173373
July 29, 2013
Facts:
This case stemmed from a pre-assessment issued by CIR against Tambunting for among others, a
deficiency documentary stamp tax of P 50, 910.Thereafter, the CIR issued an assessment notice with the
corresponding demand letters for the payment of the DST and the corresponding compromise penalty
for taxable year 1997.
Tambunting filed its written protest to the assessment notice alleging that it was not subject to
documentary stamp tax under Section 195 of the National Internal Revenue Code (NIRC) because
documentary stamp taxes were applicable only to pledge contracts, and the pawnshop business did not
involve contracts of pledge. Tambunting filed a petition for review when the protest it filed with the CIR
was not acted upon. The court rendered a decision stating that petitioner is not subject to DST.
Issue:
Whether or not Tambunting Pawnshop is subject to Documentary Stamp Tax based on its pawn tickets.
Held:
Petitioner contends that it is the document evidencing a pledge of personal property which is subject to
the DST. Petitioner further contends that the DST is imposed on the documents issued, not the
“transactions so had or accomplished.” Petitioner also insists that the document to be taxed under the
transaction contemplated should be the pledge agreement, if any is issued, not the pawn ticket.
On the other hand, commissioner contented that a documentary stamp tax shall be collected on every
pledge of personal property as a security for the fulfillment of the contract of loan. Since the transactions
in a pawnshop business partake of the nature of pledge transactions, then pawn transactions evidenced
by pawn tickets, are subject to documentary stamp taxes.
Petitioner’s contention is devoid of merit.
True, the pawn ticket is neither a security nor a printed evidence of indebtedness. However,
precisely being a receipt for a pawn, it documents the pledge. A pledge is a real contract, hence, it is
necessary in order to constitute the contract of pledge, that the thing pledged be placed in the possession
of the creditor, or of a third person by common agreement.
Consequently, the issuance of the pawn ticket by the pawnshop means that the thing pledged has
already been placed in its possession and that the pledge has been constituted. Section 195 of the
National Internal Revenue Code (NIRC) imposes a DST.
One very mortgage or pledge of lands, estate, or property, real or personal, heritable or movable,
whatsoever, where the same shall be made as a security for the payment of any definite and certain sum
43
of money lent. All pledges are subject to DST, unless there is a law exempting them in clear and
categorical language.
The law imposes DST on documents issued in respect of the specified transactions, such as pledge, and
not only on papers evidencing indebtedness. Therefore, a pawn ticket, being issued in respect of a pledge
transaction, is subject to documentary stamp tax.
(10) Plaridel Surety and Insurance Company vs. Commissioner of Internal Revenue
GR. No. L-21520
December 11, 1967
Facts:
Petitioner Plaridel Surety is a domestic corporation engaged in the bonding business.
Petitioner surety and Constancio San Jose (principal), solidarily executed a performance bond in favor of
the PL Galang Machinery to secure the performance of San Jose contractual obligation to produce and
supply logs. To afford itself adequate protection against loss or damages on the performance, petitioner
required San Jose and Ramon Cuervo to execute an indemnity agreement obligating themselves,
solidarity to indemnify petitioner for whatever liability it may incur by reason of said performance
bond. San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners
favor while Ramon Cuervo executed a real estate mortgage.
San Jose failed to deliver the logs to Galang Machinery and sued on the performance bond. The lower
court directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang
Machinery.
Petitioner in his income tax claimed that the amount P44,490 as deductible loss from its gross income.
CIR disallowed the claimed deductions and assessed against petitioner the sum P8,898, plus interest, as
deficiency income tax for the year 1957.
Issue:
Whether or not petitioner can claim P44,490 as a deductible loss from its gross income.
Held:
No. Petitioner was duly compensated for otherwise than by insurance- thru the mortgage in its favor
executed by San Jose and Cuervo and it had not yet exhausted all its available remedies, especially as
against Cuervo to minimize its loss.
Loss is deductible only in the taxable year it actually happens or is sustained. However, if it is
compensable by insurance or otherwise deductions for the loss suffered is postponed to a subsequent
year, with, to be precise, is that year in which it appears that no compensation at all can be had, on that
there is a remaining or net loss.
44
(11) Philippine Refining Company vs. CA, CTA, and CIR
GR. No. 118794
May 8, 1996
Facts:
Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue to
pay a deficiency tax for the year 1985. The assessment was timely protested by PRC, on the ground that
it was based on the erroneous disallowances of "bad debts" on several accounts although the same are
both allowable and legal deductions.
Issue:
Whether or not the CA was correct in affirming the CTA decision in disallowing PRC’s claim of deduction
as bad debts of several accounts
Held:
Yes. In determining the "worthlessness of a debt" and thereby qualify as "bad debts" making them
deductible, the taxpayer should show that:
(1) there is a valid and subsisting debt;

(2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and
(4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed
uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent
efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection letters; (3)
giving the account to a lawyer for collection; and (4) filing a collection case in court.
In this case, the only evidentiary support given by PRC for its aforesaid claimed deductions was the
explanation or justification posited by its financial adviser or accountant. Her allegations were not
supported by any documentary evidence, hence, both the Court of Appeals and the CTA ruled that said
contentions per se cannot prove that the debts were indeed uncollectible and can be considered as bad
debts as to make them deductible.
(12) China Banking Corporation vs. CA, CIR and CTA

GR. No. 125508
July 19, 2000
Facts:
China Banking Corporation (CBC) made an equity investment in First CBC Capital (Asia) Ltd., a
Hongkong subsidiary engaged in financing and investment with “deposit-taking” function. In the course
of the regular examination of the financial books and investment portfolios of CBC by Bangko Sentral, it
was shown that First CBC Capital (Asia), Ltd., has become insolvent.
With the approval of Bangko Sentral, CBC write-off as being worthless its investment in First CBC Capital
(Asia), Ltd. and treated it as a bad debt or as an ordinary loss deductible from its gross income. However,
the Commissioner of Internal Revenue (CIR) disallowed the deduction and assessed petitioner for
45
income tax deficiency. In assuming that the securities had indeed become worthless, CIR held the view
that they should then be classified as "capital loss," and not as a bad debt expense there being no
indebtedness to speak of between petitioner and its subsidiary.
Issue:
Whether or not the equity investment made in First CBC Capital, after becoming worthless, be deducted
from gross income.
Held:
No. An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which
results in either a capital gain or a capital loss.
A capital gain or a capital loss normally requires the concurrence of two conditions for it to result:
(1) There is a sale or exchange; and

(2) The thing sold or exchanged is a capital asset.
When securities become worthless, there is strictly no sale or exchange but the law deems the loss
anyway to be "a loss from the sale or exchange of capital assets.” In these cases, the NIRC dispenses, in
effect, with the standard requirement of a sale or exchange for the application of the capital gain and loss
provisions of the code.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the
sale or exchange of capital assets, and not from any other income of the taxpayer.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only to the extent
provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section 29(d)(4)(A), read:
"Section 33. Capital gains and losses. –
“x x x (c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed
only to the extent of the gains from such sales or exchanges.
In sum -
(a) The equity investment in shares of stock held by CBC in its Hongkong subsidiary, the First CBC
Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset.
(b) Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a
capital, not an ordinary, loss.
(c) The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during
the same taxable year that the securities have become "worthless."
46
(13) Commissioner of Internal Revenue vs. Bicolandia Drug Corporation
GR. No. 148083
July 21, 2006
Facts:
RA No. 7432, otherwise known as “An Act to Maximize the Contribution of Senior Citizens to Nation
Building, Grant Benefits and Special Privileges and For Other Purposes,” granted senior citizens the
privilege of obtaining a 20% discount from all establishments relative to the use of transportation
services, hotels and similar lodging establishments, restaurants, recreation centers and purchase of
medicines anywhere in the country. The law provided that private establishments giving discount to
senior citizens may claim the cost as tax credit. In compliance with the law, BIR issued Revenue
Regulations No. 2-94 defining tax credit as the amount representing the 20% discount…which discount
shall be deducted by said establishments from their gross income for tax purposes and from their gross
sales for VAT or other percentage tax purposes.
Respondent, a corporation engaged in the business of retailing pharmaceutical products under the
business style of “Mercury Drug,” granted the 20% sales discount to qualified senior citizens purchasing
their medicines, treating this discount as deduction from its gross income. Respondent filed its 1995
Corporate Annual Income Tax Return declaring a net loss position with nil income tax liability.
Respondent filed a claim for tax refund or credit with BIR because its net losses for the year 1995
prevented it from benefitting from the treatment of sales discount as a deduction from gross sales
during the taxable year. It alleged that petitioner erred in treating the 20% sales discount given to senior
citizens as deductions from gross income for tax purposes rather than as a tax credit. Petitioner argues
that the tax credit is in the nature of a tax refund and should be treated as a return for tax payments
erroneously or excessively assessed against a taxpayer, in line with Sec. 204 (c) of NIRC. Petitioner
claims that there should first be payment of the tax before tax credit can be claimed. To do otherwise
would result in RA No. 7432 impliedly repealing Sec. 204 (c) of NIRC.
Issue:
Whether or not the 20% sales discount may be claimed as a tax credit, instead of a deduction from gross
income or gross sales.
Held:
Yes. Revenue Regulations No. 2-94 is null and void for failing to conform to the law it sought to
implement. Revenue Regulations No. 2-94 is still subordinate to RA No. 7432, and in cases of conflict, the
implementing rule will not prevail over the law it seeks to implement.
But even as this particular case is decided in this manner, it must be noted that the concerns of
petitioner have been addressed. RA No. 7432 has been amended by RA No. 9257, the “Expanded Senior
Citizens Act of 2003.” In this, the term tax credit is no longer used. Under its IRR, Revenue Regulations
No. 4-2006, “only the actual amount of the discount granted not exceeding 20% of the gross selling price
can be deducted from the gross income, net of VAT, if applicable, for income tax purposes, and from
gross sales or receipts for VAT or other percentage taxes.” Under the new law, there is no tax credit to
speak of, only deductions.
As it was RA No. 7432 in force at the time this case arose, this law controls the result in this particular
case, for which reason respondent is entitled to its claim of tax credit.
47
(14) Kuenzle & Streiff, Inc. vs. The Collector of Internal Revenue
GR. Nos. L-12010 and L-12113
October 20, 1959
Facts:
Petitioner filed its income tax return for the years 1950, 1951 and 1952 and petitioner deducted from
its gross income certain items representing salaries, directors' fees and bonuses of its non-resident
president and vice-president; bonuses of its resident officers and employees; and interests on earned
but unpaid salaries and bonuses of its officers and employees. Petitioner duly paid the income tax
computed in accordance with these returns.
The CIR, after disallowing the deductions of the items representing director's fees, salaries and bonuses
of petitioner's non-resident president and vice-president; the bonus participation of certain resident
officers and employees; and the interests on earned but unpaid salaries and bonuses, respondent
assessed and demanded from petitioner the payment of deficiency income taxes in the sums of
P26,370.00, P53,865.00 and P44,112.00 for the years 1950, 1951 and 1952, respectively. However the
respondent modified the same by allowing as deductible all items comprising directors' fees and salaries
of the non-resident president and vice-president, but disallowing the bonuses insofar as they exceed the
salaries of the recipients, as well as the interests on earned but unpaid salaries and bonuses.
Issue/s:
1. Whether or not bonuses are deductible.

2. Whether or not interests are deductible.
Held:
1. It would appear that all ordinary and necessary expenses paid or incurred in carrying on a trade or
business, including a reasonable allowance for salaries or other compensation for personal services
actually rendered, may be allowed as deductions in computing the taxable income during the year. It
likewise appears that the amount of interests paid within the taxable year on any indebtedness may also
be deducted from the gross income.
Here it is admitted that the bonuses paid to the officers and employees of petitioner, whether resident or
non-resident, were paid to them as additional compensation for personal services actually rendered and
as such can be considered as ordinary and necessary expenses incurred in the business within the
meaning of the law, the only question in dispute being how much of said bonuses may be considered
reasonable in order that it may be allowed as deduction.
It is a general rule that "Bonuses to employees made in good faith and as additional compensation for
the services actually rendered by the employees are deductible, provided such payments, when added to
the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The
condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in
fact compensation; (2) it must be for personal services actually rendered; and (3) the bonuses, when
added to the salaries, are reasonable when measured by the amount and quality of the services
performed with relation to the business of the particular taxpayer."
2. There is no dispute that these items accrued on unclaimed salaries and bonus participation of
shareholders and employees. Under the law, in order that interest may be deductible, it must be paid "on
indebtedness" (Section 30, (b)(1) of the National Internal Revenue Code). It is therefore imperative to
show that there is an existing indebtedness which may be subjected to the payment of interest. Here the
items involved are unclaimed salaries and bonus participation which in our opinion cannot constitute
indebtedness within the meaning of the law.
48
(15) Paper Industries Corporation of the Philippines (PICOP) vs. CA, CIR, and CTA
GR. Nos. 106949-50
December 1, 1995
Facts:
In 1969, 1972 and 1977, PICOP obtained loans from foreign creditors in order to finance the purchase of
machinery and equipment needed for its operations. In its 1977 Income Tax Return, PICOP claimed
interest payments made in 1977, amounting to P42,840,131.00, on these loans as a deduction from its
1977 gross income. The CIR disallowed this deduction upon the ground that, because the loans had been
incurred for the purchase of machinery and equipment, the interest payments on those loans should
have been capitalized instead and claimed as a depreciation deduction taking into account the adjusted
basis of the machinery and equipment (original acquisition cost plus interest charges) over the useful
life of such assets. Both the CTA and the Court of Appeals sustained the position of PICOP and held that
the interest deduction claimed by PICOP was proper and allowable. In the instant Petition, the CIR
insists on its original position.
On the other hand, on 18 January 1977, PICOP entered into a merger agreement with the Rustan Pulp
and Paper Mills, Inc. ("RPPM") and Rustan Manufacturing Corporation ("RMC"). Under this agreement,
the rights, properties, privileges, powers and franchises of RPPM and RMC were to be transferred,
assigned and conveyed to PICOP as the surviving corporation. Immediately before merger effective date,
RPPM had over preceding years accumulated losses in the total amount of P81,159,904.00. In its 1977
Income Tax Return, PICOP claimed P44,196,106.00 of RPPM's accumulated losses as a deduction against
PICOP's 1977 gross income. The CIR disallowed all the deductions claimed on the basis that RPPM's
losses were incurred by "another taxpayer," RPPM, and not by PICOP in connection with PICOP's own
registered operations. The CIR took the view that PICOP, RPPM and RMC were merged into one (1)
corporate personality only on 12 January 1978, upon approval of the merger agreement by the BOI.
Issue/s:
1. Whether or not PICOP is entitled to deductions against income interest payments on loans for the
purchase of machinery and equipment.
2. Whether or not PICOP may claim RPPM’s net operating loss as a deduction against its 1977 gross
income.
Held:
1. SC started by noting that interest payments on loans incurred by a taxpayer (whether BOI-registered
or not) are allowed by the NIRC as deductions against the taxpayer's gross income. In the instant case,
the CIR does not dispute that the interest payments were made by PICOP on loans incurred in
connection with the carrying on of the registered operations of PICOP neither does the CIR deny that
such interest payments were legally due and demandable under the terms of such loans, and in fact paid
by PICOP during the tax year 1977.
The CIR has been unable to point to any provision of the 1977 Tax Code or any other statute that
requires the disallowance of the interest payments made by PICOP . The CIR invokes Section 79 of
Revenue Regulations No. 2 but the SC ruled that said provision is to be construed as referring to the so
called "theoretical interest," that is to say, interest "calculated" or computed (and not incurred or paid)
for the purpose of determining the "opportunity cost" of investing funds in a given business. We have
already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for
acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest
payments on such a loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the
other tax treatment of such interest payments. Accordingly, the general rule that interest payments on a
legally demandable loan are deductible from gross income must be applied.
49
The CIR argues finally that to allow PICOP to deduct its interest payments against its gross income would
be to encourage fraudulent claims to double deductions from gross income. The Court is not persuaded.
So far as the records of the instant cases show, PICOP has not claimed to be entitled to double deduction
of its 1977 interest payments. The CIR has neither alleged nor proved that PICOP had previously
adjusted its cost basis for the machinery and equipment purchased with the loan proceeds by
capitalizing the interest payments here involved. The Court will not assume that the CIR would be
unable or unwilling to disallow "a double deduction" should PICOP, having deducted its interest cost
from its gross income, also attempt subsequently to adjust upward the cost basis of the machinery and
equipment purchased and claim, e.g., increased deductions for depreciation.
2. The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated operating losses
against PICOP's 1977 gross income, basically because towards the end of the taxable year 1977, upon
the arrival of the effective date of merger, only one (1) corporation, PICOP, remained. The losses suffered
by RPPM's registered operations and the gross income generated by PICOP's own registered operations
now came under one and the same corporate roof. We consider that this circumstance relates much
more to form than to substance. We do not believe that that single purely technical factor is enough to
authorize and justify the deduction claimed by PICOP. PICOP's claim for deduction is not only bereft of
statutory basis; it does violence to the legislative intent which animates the tax incentive granted by
Section 7 (c) of R.A. No. 5186. In granting the extraordinary privilege and incentive of a net operating
loss carry-over to BOI-registered pioneer enterprises, the legislature could not have intended to require
the Republic to forego tax revenues in order to benefit a corporation which had run no risks and
suffered no losses, but had merely purchased another's losses. We conclude that the deduction claimed
by PICOP in the amount of P44,196,106.00 in its 1977 Income Tax Return must be disallowed.
(16) Hospital de San Juan de Dios, Inc. vs. Commissioner of Internal Revenue
GR. No. L-31305
May 10, 1990
Facts:
In a letter dated January 15, 1959, the Commissioner of Internal Revenue assessed and demanded from
the petitioner, Hospital De San Juan De Dios, Inc., payment of P51,462 as deficiency income taxes for
1952 to 1955. The petitioner protested against the assessment and requested the Commissioner to
cancel and withdraw it. After reviewing, Commissioner advised petitioner that the deficiency income tax
assessment against it was reduced to only P16,852.41 but the petitioner thru its auditors insisted to
have the revised assessment cancelled but the same was denied.
Petitioner sought a review of the assessment by the Court of Tax Appeals. The CTA found out that
petitioner failed to establish by competent proof that its receipt of interests and dividends constituted
the carrying on of a "trade or business" so as to warrant the deductibility of the expenses incurred in
their realization. No evidence whatsoever was presented by petitioner to show how it handled its
investment, the manner it bought, sold and reinvested its securities, how it made decisions, and whether
it consulted brokers, investment or statistical services. Neither is there any showing of the extent of its
activities in stocks or bonds, and participation, if any, direct or indirect, in the management of the
corporations where it made investments. In effect, there is total absence of any indication of a business-
like management or operation of its interests and dividends.
Issue:
Whether or not the expenses incurred by the petitioner for handling its funds or income consisting
solely of dividends and interests, were not expenses incurred in "carrying on any trade or business,"
hence, not deductible as business or administrative expenses.
50
Held:
The Court of Tax Appeals found that the interests and dividends received by the petitioner "were merely
incidental income to petitioner's main activity, which is the operation of its hospital and nursing schools
the conclusion is inevitable that petitioner's activities never went beyond that of a passive investor,
which under existing jurisprudence do not come within the purview of carrying on any 'trade or
business'. The fact that petitioner was assessed a real estate dealer's fixed tax of P640 on its rental
income does not alter its status as a charitable, non-stock, non-profit corporation. Finding no reversible
error in the decision of the CTA, the same is affirmed in toto.
(17) Commissioner of Internal Revenue vs. Central Luzon Drug Corporation

GR. No. 159610
June 12, 2008
Facts:
The case involves Mercury Drugs’ (Central Luzon Drug Corporation) claim for tax refund arising from an
alleged erroneous interpretation of the Senior Citizens Act. While complying with RR 2-94 in computing
its income tax liability for taxable year 1997, respondent filed such return under protest because of its
allegation that RR 2-94, which provides that the sales discount should be treated as a deduction from the
gross income or sales, is without force and effect for being inconsistent with RA 7432 which provides for
a tax credit treatment for the senior citizens discount.
Issue:
Whether or not the 20% senior citizen’s sales discount should be treated as a tax credit to be deducted
from the income tax due or as a mere deduction from gross income or gross sales.
Held:
The discount is treated as a tax credit thus entitling Central Luzon to the tax refund. This case covers the
taxable year 1997 and is governed by the old law, RA 7432 which expressly allowed private
establishment to claim the amount of discounts they grant to senior citizens as tax credit and not merely
as a reduction to the gross income or gross sales. In this case taxation was considered to be an
implement for the exercise of the power of imminent domain wherein the tax credit is deemed to be the
just compensation for private property taken by the State for public purpose (the reduction of income
due to the grant of the senior citizen discount). However, with the effectivity of RA 9257 on 21 March
2004, there is now a new tax treatment for senior citizens’ discount granted by all covered
establishments. This discount should be considered as a deductible expense from gross income and no
longer as tax credit.
51
(18) Commissioner of Internal Revenue vs. Philippine Airlines (PAL)
GR. 179259
September 25, 2013
Facts:
Philippine Airlines Inc. had zero taxable income for 2000 but would have been liable for Minimum
Corporate Income Tax based on its gross income. However, Philippine Airlines Inc. did not pay the
Minimum Corporate Income Tax using as basis its franchise which exempts it from “all other taxes” upon
payment of whichever is lower of either (a) the basic corporate income tax based on the net taxable
income or (b) a franchise tax of 2%.
Issue:
Whether or not PAL is liable for Minimum Corporate Income Tax.
Held:
No. Philippine Airlines Inc.’s franchise clearly refers to "basic corporate income tax" which refers to the
general rate of 35% (now 30%). In addition, there is an apparent distinction under the Tax Code
between taxable income, which is the basis for basic corporate income tax under Sec. 27 (A) and gross
income, which is the basis for the Minimum Corporate Income Tax under Section 27 (E). The two terms
have their respective technical meanings and cannot be used interchangeably. Not being covered by the
Charter which makes PAL liable only for basic corporate income tax, then Minimum Corporate Income
Tax is included in "all other taxes" from which PHILIPPINE AIRLINES, INC. is exempted.
The CIR also cannot point to the “Substitution Theory” which states that Respondent may not invoke the
“in lieu of all other taxes” provision if it did not pay anything at all as basic corporate income tax or
franchise tax. The Court ruled that it is not the fact tax payment that exempts Respondent but the
exercise of its option. The Court even pointed out the fallacy of the argument in that a measly sum of one
peso would suffice to exempt PAL from other taxes while a zero liability would not and said that there is
really no substantial distinction between a zero tax and a one-peso tax liability. Lastly, the Revenue
Memorandum Circular stating the applicability of the MCIT to PAL does more than just clarify a previous
regulation and goes beyond mere internal administration and thus cannot be given effect without
previous notice or publication to those who will be affected thereby.
As a general rule, a domestic corporation must pay whichever is higher of (1) the income tax under
Section 27(A) of the National Internal Revenue Code (NIRC), computed by applying the tax rate to the
taxable income of the corporation, or (2) the minimum corporate income tax under Section 27(E) of the
NIRC equivalent to 2% of the gross income of the corporation.
Under Philippine Air Lines, Inc.’s (PAL) charter, Presidential Decree No. 1590, however, PAL cannot be
subjected to MCIT as finally settled and categorically enunciated in Commissioner of Internal Revenue v.
Philippine Airlines, Inc. PAL’s charter further provides that the basic corporate income tax of PAL shall
be based on its annual net taxable income.
52
D. Accounting Period, Methods of Accounting, Tax Returns and Payment of Tax
(1) Maria Carla Pirovano vs. Commissioner of Internal Revenue

GR. No. L-19865
July 31, 1965
Facts:
The heirs of Pirovano received a donation from De La Rama Steamship Co., of which Pirovano was the
former president whose life the company had insured. The heirs contended that since the SC in a related
case had declared the donation a remuneratory donation and not a simple donation, it was not subject to
donee’s tax.
Issue:
Whether or not the heirs are liable for donee’s tax despite an SC decision that the donation was
remuneratory.
Held:
Yes. NCC Art. 726. When a person gives to another a thing ... on account of the latter's merits or of the
services rendered by him to the donor, provided they do not constitute a demandable debt, there is also a
donation. ...
(2) Carmelino F. Pansacola vs. Commissioner of Internal Revenue

GR. 159991
November 16, 2006
Facts:
On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return for the taxable year
1997 that reflected an overpayment of P5,950. In it he claimed the increased amounts of personal and
additional exemptions under Section 35 of the NIRC, although his certificate of income tax withheld on
compensation indicated the lesser allowed amounts on these exemptions.
Issue:
Whether or not the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, can
be availed of for the taxable year 1997.
Held:
No. NIRC provides that the income subject to income tax is the taxpayer’s income as derived and
computed during the calendar year, his taxable year. What the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents at the close of
the taxable year and not at the time the return is filed and the tax due thereon is paid.
At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased
amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet
accrued as of December 31, 1997, the last day of his taxable year. Petitioner’s taxable income covers his
income for the calendar year 1997. The law cannot be given retroactive effect. It is established that tax
laws are prospective in application, unless it is expressly provided to apply retroactively. Conformably
53
too, personal and additional exemptions are considered as deductions from gross income. Deductions
for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the
taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to
be mistaken.
(3) C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue
GR. L-24059
November 28, 1969
Facts:
Petitioner-appellant, a domestic corporation engaged in the development and management of

subdivisions, sale of subdivision lots and collection of installments due for a fee which the real estate
owners pay as compensation for each of the services rendered, failed to pay the real estate broker's tax
on its income derived from the supervision and collection fees. Consequently, the Commissioner of
Internal Revenue demanded the payment of the percentage tax plus surcharge, contending that said
income is subject to the real estate broker's percentage tax. On the other hand, petitioner-appellant
claimed that the supervision and collection fees do not form part of its taxable gross compensation.
Issue:
Whether or not the supervision and collection fees received by a real estate broker are deductible from
its gross compensation.
Held:
No. With respect to the collection fees, the services rendered by Hoskins in collecting the amounts due
on the sales of lots on the installment plan are incidental to its brokerage service in selling the lots. If the
broker's commissions on the cash sales of lots are subject to the brokerage percentage tax, its
commissions on installment sales should likewise be taxable. As to the supervision fees for the
development and management of the subdivisions, which fees were paid out of the proceeds of the sales
of the subdivision lots, they, too, are subject to the real estate broker's percentage tax.
The development, management and supervision services were necessary to bring about the sales of the
lots and were inseparably linked thereto. Hence, there is basis for holding that the operation of
subdivisions is really incidental to the main business of the broker, which is the sale of the lots on
commission.
(4) Jose Ledesma vs. The Collector of Internal Revenue and the
Provincial Treasurer of Occidental Negros
GR. No. L-15014
October 2, 1920
Facts:
For the year 1916, Jose Ledesma (plaintiff) made his declaration for the purpose of paying his income
tax. In the said declaration, he claimed several exceptions and one of which is the amount of P135,229.10
which he claims should be deducted from his income for the reason that it had been paid to his
employees as compensation for their services. The said exemption was not allowed by the Provincial
Treasurer and Collector of Internal Revenue (defendants). Hence, the plaintiff paid under protest the
income tax upon the full amount of his income without the deductions claimed.
54
He then filed a complaint alleging that the persons to whom he had paid the said sum are his employees
in his business and as such receive a certain percentage of his annual gain; and that percentage is fixed
and determined; and is based upon the extent of the powers and responsibilities of each of them in the
management and administration of his business. In the answer to the complaint, the Attorney-General,
on behalf of the defendants, alleged that the sums paid to said employees were in the nature of bonuses
or distribution of profit, and were not expenses of the business.
The Court of First Instance rendered a decision directing and ordering to pay to the plaintiff the amount
that latter paid in excess. The said court is of the opinion that such percentage does not constitute bonus
but fixed and agreed permanent compensation in addition to the stipulated salaries and is reasonable,
taking into consideration the services rendered by said employees and the importance of the business in
which such services were and are being rendered. The defendants, through the Attorney-General,
contends that the lower court erred in holding that said sum paid by plaintiff to his employees, together
with their fixed salaries, constituted reasonable compensation for their services. Hence, this petition.
Issue:
Whether or not the said sum, together with their fixed salaries, constituted reasonable compensation for
their services.
Held:
Plaintiff did not contended that said sum was “gifts or bonuses” but were fixed compensations agreed
upon, depending upon the value of the services of said employees and the importance of the business in
which they were engaged. A corporation or person engaged in a commercial enterprise has a right to fix
the compensation of his employees, and said compensation shall be considered as part of the expenses
in the conduct and management of the business. Such expenses should be taken into consideration in
ascertaining the amount to be paid as income tax. By computing such expenses, the net income may be
correctly ascertained. In the present case, there is not a word of proof in the record which disproves the
declaration of the plaintiff that the said sum was paid to the persons mentioned in the complaint as
compensation for their services. Said sum, according to proof, did not constitute “gifts or bonuses”.
Hence, the lower court was fully justified in allowing the deduction of the said sum from the gross
income of the plaintiff. However, plaintiff cannot claim interest upon the sum to be returned by the
defendants as Section 1579 of Act No. 2711 expressly provides that actions like the present “interest”
shall not be collected. The courts are, therefore, without authority to allow interest upon the sum
recovered in actions like the present.
(5) Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue

GR. Nos. L-28508-9
July 7, 1989
Facts:
Petitioner Esso deducted from its gross income for 1959, as part of its ordinary and necessary business
expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim
was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses
should be capitalized and might be written off as a loss only when a "dry hole" should result. Esso then
filed an amended return where it asked for the refund by reason of its abandonment as dry holes of
several of its oil wells. Also it claimed as ordinary and necessary expenses in the same return the amount
representing margin fees it had paid to the Central Bank on its profit remittances to its New York head
office.
55
CIR assessed Esso a deficiency income tax for the year 1960. The deficiency arose from the disallowance
of the margin fees paid by Esso to the Central Bank on its profit remittances to its New York head office.
CIR also denied the claims of Esso for refund of the overpayment of its 1959 and 1960 income taxes,
holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses.
Issue:
Whether or not the margin fees paid by petitioner on its profit remittance to its Head Office in New York
are deductible.
Held:
No. Margin fees are not expenses in connection with the production or earning of petitioner's incomes in
the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the
remittance of funds after they have already been earned by petitioner's branch in the Philippines for the
disposal of its Head Office in New York, which is already another distinct and separate income
taxpayer. It can never be said therefore that the margin fees were appropriate and helpful in the
development of petitioner's business in the Philippines exclusively or were incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the Philippines exclusively.
The margin fees were incurred for purposes proper to the conduct of the corporate affairs of Esso in
New York, but certainly not in the Philippines.
(6) Visayan Cebu Terminal Co., Inc. vs. Collector of Internal Revenue
GR. L-12798
May 30, 1960
"To be deductible, (said) business expenses must "ordinary and necessary expenses paid or incurred in
carrying on any trade or business"; that (those) expenses “must also, meet the further test of
reasonableness in amount."
Facts:
Visayan Terminal Co. Inc., is a corporation organized for the purpose of handling arrastre operations in
the port of Cebu. Visayan filed its income tax return for 1951reporting a gross income of P420, 633.40
and claimed deductions amounting to P379, 036.95, leaving a net income of P41,596.45 on which it paid
income tax in the sum of P8,319.20. The sum of P379, 036.95 claimed as deductions consisted of various
items, among which were the following:
1. Salaries
(a) Salary and bonus of Juan Eugenio Lo P1,875.00, (b) Salary of Felix Go Chan P250.00, (c) Salary of
Teomino Tiu Tiam P2,375.00
2. Representation expenses 75,855.88
3. Miscellaneous expenses
(a) Christmas bonus given to various persons P1,500.00, (b) Tips to ships' officers 4,800.00 6,300.00
Total of P84,530.88
The claimed deductions were disallowed by the CIR thus giving rise to a deficiency assessment of
P18,991.00.
56
Upon reconsideration, the CIR allowed P 1875.00 as deduction for salaries and P532.00 for
miscellaneous expenses but maintained the disallowance of P75 855.90 as representation expenses.
On appeal to the CTA, the Tax Court allowed a deduction of P10 000.00 as reasonable representation
expenses based on a comparison of the gross income and the representation expenses for the years
1950 to 1952 and disallowed the rest of the amount.
Issue:
Whether or not Visayan can claim deductions for representation expenses in the amount of P75 855.90.
Held:
No. The Tax Court based its allowance of ONLY P10 000.00 on a comparison of the gross income of
Visayan versus its claimed representation expenses. The gross income for 1950 was greater than in
1951 and 1952 and yet the expenses for that year was only a little over P10 000. Hence, this figure is a
reasonable amount considering that vouchers or chits had evidenced some of the representation
expenses claimed, but others were reimbursed "without presentation of supporting papers.”
The aforementioned vouchers or chits were allegedly "destroyed when the house of Buenaventura M.
Veloso, treasurer of appellant, where the records were kept was burned"; Accordingly, "it is not possible
to determine the actual amount covered by supporting papers and the amount without supporting
papers." Thus, the Court is left with no choice but to deduce a reasonable amount of representation
expenses based on the available data.
The Court explained that "representation expenses fall under the category of business expenses which"
are allowable deductions from gross income if they meet the conditions prescribed by law", particularly
Section 30(a) (1) of the National Internal Revenue Code.
To be deductible, said business expenses must "ordinary and necessary expenses paid or incurred in
carrying on any trade or business"
Further, those expenses "must also, meet the test of reasonableness in amount", this test being "inherent
in the phase `ordinary and necessary'." The evidence bears out the fact that the expenses were not
liquidated. The receipts or vouchers were allegedly lost and no proof other than oral testimony served to
substantiate the claims or deductions. Thus, the CTA was fully justified in extrapolating the allowable
deductions from the data available to it. Further, the amount of P10 000.00 appears reasonable in light
of the expenses and gross income for the other years.
(7) Commissioner of Internal Revenue vs. Carlos Palanca, Jr.

GR. No. L-16626
October 29, 1966
Facts:
Sometime in July 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, Carlos Palanca, Sr.,
shares of stock in La Tondeña, Inc. amounting to 12,500 shares. For failure to file a return on the
donation within the statutory period, Carlos Palanca, Jr was assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest, respectively, or a total of
P170,002.74, which he paid on June 22, 1955. The year after, Palanca filed with the Bureau of Internal
Revenue his income tax return for the calendar year 1955, claiming, among others, a deduction for
interest amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of this
return, he was assessed the sum of P21,052.91. Subsequently, Palanca Jr. filed an amended return for the
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calendar year 1955, claiming therein an additional deduction in the amount of P47,868.70 representing
interest paid on the donee's gift tax, thereby reporting a taxable net income of P18,113.42 and a tax due
thereon in the sum of P3,167.00. The claim for deduction was based on the provisions of Section
30(b)(1) of the Tax Code, which authorizes the deduction from gross income of interest paid within the
taxable year on indebtedness. BIR denied the claim for refund. Morever, BIR considered the transfer of
shares of stocks to be a transfer in contemplation of death, so Palanca Jr was assessed a sum of
P191,591.62 as estate and inheritance taxes. On August 12, 1958, Palanca, Jr. once more filed an
amended income tax return for the calendar year 1955, claiming, in addition to the interest deduction of
P9,076.45 appearing in his original return, a deduction in the amount of P60,581.80, representing
interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby reporting a net
taxable income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of
P428.00. Attached to this amended return was a letter of the petitioner, dated August 11, 1958, wherein
he requested the refund of P20,624.01 which is the difference between the amounts of P21,052.01 he
paid as income tax under his original return and of P428.00. CIR denies his claim for refund. On appeal,
the Court of Tax Appeals, finding that the amount paid by Palanca for interest on his delinquent estate
and inheritance tax is deductible from the gross income for that year under section 30(b)(1) of the
Revenue Code, ordered the CIR to refund to the Palanca, Jr. the amount of P20,624.01 representing
alleged overpayment of income taxes for the calendar year 1955.
Hence, the CIR appeals. The CIR argues that a tax is not an indebtedness. He adopts the view that debts
are due to the government in its corporate capacity, while taxes are due to the government in its
sovereign capacity.
Issue:
Whether or not deductibility of "interest on indebtedness" from a person's income tax under section
30(b)(1) extends to "interest on taxes.”
Held:
Yes. In a more recent case, Commissioner of Internal Revenue vs.. Prieto, we explicitly announced that
while the distinction between "taxes" and "debts" was recognized in this jurisdiction, the variance in
their legal conception does not extend to the interests paid on them, at least insofar as Section 30(b) (1)
of the National Internal Revenue Code is concerned. Under the law, for interest to be deductible, it must
be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed
as an interest deduction should have been paid or accrued within the year. It is here conceded that the
interest paid by respondent was in consequence of the late payment of his estate and inheritance, and
the same was paid within the year it is sought to be deducted. The only question to be determined, as
stated by the parties, is whether or not such interest was paid upon an indebtedness within the
contemplation of Section (30) (b) (1) of the Tax Code, the pertinent part of which reads:
Sec. 30. Deductions from gross income. — In computing net income there shall be allowed as deductions
—
xxx xxx xxx
'Interest:
'(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt
from taxation as income under this Title.
The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in
the above-quoted section has been defined as the unconditional and legally enforceable obligation for
the payment of money. Within the meaning of that definition it is apparent that a tax may be considered
an indebtedness. It follows that the interest paid by herein respondent for the late payment of his estate
and inheritance tax is deductible from his gross income under Section 30(b) of the Tax Code.
58
(8) Philex Mining Corporation vs. Commissioner of Internal Revenue
GR. No. 148187
April 16, 2008
Facts:
Philex Mining entered into an agreement with Baguio Gold for the former to manage and operate the
latter’s mining claim known as Sto. Nino mine. Philex Mining made advancements; however, the mine
still suffered losses which led to Philex Mining’s withdrawal as manager of the mine. The parties entered
into a compromise with dation in payment where the assets of Baguio Gold were to be transferred to
Philex Mining.
In its annual income tax return, Philex Mining deducted from its gross income the amount representing a
loss on settlement of receivables from Baguio Gold.
BIR disallowed the deduction as bad debt and assessed Philex Mining a deficiency income tax.
Issue:
Whether or not there is a bad debt for Philex Mining to treat it as a deduction.
Held:
No. There is no bad debt in this case. What the parties actually entered into was a partnership wherein
each of them was bound to contribute. It is unlikely for a corporation to lend millions of pesos to another
corporation without any collateral or security; there was no stipulation for Baguio Gold to actually repay
Philex Mining.
The inevitable conclusion is that the advances were not loans but capital contributions to a partnership.
They can also be called investments.
In sum, Philex Mining cannot claim the advances as bad debt deduction. Philex Mining failed to
substantiate its assertion that the advances were subsisting debts that could be deducted from its gross
income.
(9) Fernandez Hermanos, Inc. vs. CIR and CTA

GR. No. L-21551
September 30, 1969
That the circumstances are such that the method does not reflect the taxpayer ’ s income with
reasonable accuracy and certainty and proper and just additions of personal expenses and other non-
deductible expenditures were made and correct , fair and equitable credit adjustments were given by
way of eliminating non- taxable items.
Facts:
Four cases involve two decisions of the Court of Tax Appeal s determining the taxpayer’s income tax
liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of
Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax
Court's decisions, insofar as their respective contentions on particular tax items were therein resolved
against them. Since the issues raised are inter related, the Court resolves the four appeals in this joint
decision.
59
The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose
of engaging in business as an "investment company" with main office at Manila. Upon verification of the
taxpayer's income tax returns for the period in question, the Commissioner of Internal Revenue assessed
against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as
alleged deficiency income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively. Said
assessments were the result of alleged discrepancies found upon the examination and verification of the
taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10,
1963 in CTA Case No. 787, as follows:
Issue:
The correctness of the Tax Court's rulings with respect to the disputed items of disallowances
enumerated in the Tax Court's summary reproduced.
Held:
That the circumstances are such that the method does not reflect the taxpayer’s income with reasonable
accuracy and certainty and proper and just additions of personal expenses and other non-deductible
expenditures were made and correct, fair and equitable credit adjustments were given by way of
eliminating non-taxable items.
Proper adjustments to conform to the income tax laws. Proper adjustments for non-deductible items
must be made. The following non-deductibles, as the case may be, must be added to the increase of
decrease in the net worth:
1. Personal living or family expenses

2. Premiums paid on any life insurance policy
3. Losses from sales or exchanges of property between members of the family
4. Income taxes paid
5. Other non-deductible taxes
6. Election expenses and other expense against public policy
7. Non-deductible contributions
8. Gifts to others
9. Estate inheritance and gift taxes
10. Net Capital Loss
On the other hand, non- taxable items should be deducted therefrom. These items are necessary
adjustments to avoid the inclusion of what otherwise are non-taxable receipts. They are:
1. Inheritance gifts and bequests received

2. Non- taxable gains
3. Compensation for injuries or sickness
4. Proceeds of life insurance policies
5. Sweepstakes
6. Winnings
7. Interest on government securities and increase in net worth are not taxable if they are
shown not to be the result of unreported income but to be the result of the correction of
errors in the taxpayer’s entries in the books relating to indebtedness.
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(10) Consolidated Mines, Inc. vs. CTA and CIR 
GR. Nos. L-18843 and L-18844
August 29, 1974
Facts:
The BIR and Consolidated Mines got into a long and complicated court case over how to properly
compute the company’s net income.
The Consolidated Mines, Inc. (aka. Company), a domestic corporation engaged in mining, filed its income
tax returns for 1951, 1952, 1953 and 1956. In 1957, BIR investigated the income tax returns filed by the
Company because it claimed the refund of the sum of P107,472.00 representing alleged overpayments of
income taxes for the year 1951.
BIR found that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share
in the company profits of Benguet Consolidated Mines as operator of the Company's mines, although for
income tax purposes the Company had reported income and expenses on the accrual basis; (2) depletion
and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and
miscellaneous expenses for 1953 and 1954 had not been properly substantiated; and that (B) for the
year 1956 (1) the Company had overstated its claim for depletion; and (2) certain claims for
miscellaneous expenses were not duly supported by evidence.
Tax Court rendered judgment ordering the Company to pay the amounts of P107,846.56, P134,033.01
and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively and nullified
the assessments for 1951 and 1952 because of prescription.
Upon motion, Tax Court further reduced the deficiency income tax liabilities of the Company to
P79,812.93, P51,528.24 and P71,382.82 for the years 1953, 1954 and 1956, respectively.
Both the Company and CIR appealed questioning the method of computing the income.
The Company used the accrual method of accounting in computing its income. One of its expenses is the
amount paid to Benguet as mine operator, which amount is computed as 50% of "net income." The
Company deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the
end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the
"accounts receivable." However, it deducts Benguet's 50% if and when the "accounts receivable" are
actually paid. It would seem, therefore, that the Company has been deducting a portion of this expense
(Benguet's share as mine operator) on the "cash & carry" basis.
Issue/s:
1. Whether or not the company was using a “hybrid method” of accounting rather than accrual.
2. Whether or not the proper amount of mine depletion expense was calculated.
3. Whether or not the disallowance of the depreciation expense of the tax court was correct.
4. Whether or not the disallowance of payments made as expenses was correct.
Held:
1. No. The company was consistent in using accrual method. The issue was a misunderstanding by the
BIR of the terminology used by the company.
Here we distinguish between (1) the method of accounting used by the Company in determining its net
income for tax purposes; and (2) the method of computation agreed upon between the Company and
Benguet in determining the amount of compensation that was to be paid by the former to the latter. The
parties, being free to do so, had contracted that in the method of computing compensation the basis
were "cash receipts" and "cash payments." Once determined in accordance with the stipulated bases and
61
procedure, then the amount due Benguet for each month accrued at the end of that month, whether the
Company had made payment or not (see par. XIV of the agreement). To make the Company deduct as an
expense one-half of the "Accounts Receivable" would, in effect, be equivalent to giving Benguet a right
which it did not have under the contract, and to substitute for the parties' choice a mode of computation
of compensation not contemplated by them. Since Benguet had no right to one-half of the "Accounts
Receivable," the Company was correct in not accruing said one-half as a deduction. The Company was
not using a hybrid method of accounting, but was consistent in its use of the accrual method of
accounting.
2. The company failed to properly substantiate its mine development costs, so very little depletion
expense was allowed and that the rate of depletion per ton of the ore deposit mined and sold by the
Company is P0.6196 per ton not P0.59189 as contended by the Commissioner nor P1.0197 as claimed by
the Company.
3. You cannot ascribe depreciation from “incomplete constructions”, because being incomplete; they
haven’t even begun to be used yet. The disallowance by the Tax Court of the depreciation charges
claimed by the Company is correct in view of the latter's failure to itemize and/or substantiate with
definite proof that the Commissioner's own method of determining depreciation is unreasonable or
inaccurate;
4. Payments with receipts from the payees, internal company vouchers and testimony only prove that
such expenses were incurred, not that they are legally deductible. The lack of supporting evidence to
show that the Company's claimed expenses were legally deductible items, the Tax Court's disallowance
of the same is affirmed.
(11) Antonio Roxas, Eduardo Roxas, and Roxas Y CIA., in their own respective behalf and as
judicial co-guardians of Jose Roxas vs. CTA and CIR
GR. NO. L-25043
April 26, 1968
Facts:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and
Jose Roxas, formed a partnership called Roxas y Compania.
1. Agricultural Land
In consonance with the constitutional mandate to acquire big landed estates and apportion them among
landless tenants-farmers, the government persuaded the Roxas brothers to part with their landholdings.
It turned out however that the Government did not have funds to cover the purchase price, and so a
special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. The
amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the
farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price
but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the
proceeds of the yearly amortizations paid by the farmers.
62
In 1953 and 1955, Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of
capital asset held for more than one year pursuant to Section 34 of the Tax Code.
2. Residential House
During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila,
which they inherited from their grandparents. After Antonio and Eduardo got married, they resided
somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia.
rentals for the house in the sum of P8,000.00 a year.
3. Assessments
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of
real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late
payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for late
payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received
house rentals from Jose Roxas in the amount of P8,000.00.
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities
against Roxas y Cia. on the fact that said partnership made profits from the purchase and sale of
securities.
In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers
for the years 1953 and 1955.
The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50%
of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and
the disallowance of deductions from gross income of various business expenses and contributions
claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu
farm lands and sold them to the farmers on installment, the Commissioner considered the partnership
as engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed.
Issue/s:
1. Whether or not the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence
100% taxable.
2. Whether for not the deductions for business expenses and contributions are deductible.
3. Whether or not Roxas y Cia. is liable for the payment of the fixed tax on real estate dealers.
Held:
1. No. Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to
Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the
sale thereof is capital gain, taxable only to the extent of 50%.
It should be borne in mind that the sale of the Nasugbu farmlands to the very farmers who tilled them
for generations was not only in consonance with, but more in obedience to the request and pursuant to
the policy of our Government to allocate lands to the landless. It was the bounden duty of the
Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and
to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the
Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to the farmers in the same way and
under the same terms as would have been the case had the Government done it itself.
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2. a) Tickets to a banquet in honor of Sergio Osmena and San Miguel Beer given to various persons are
not deductible.
Representation expenses are deductible from gross income as expenditures incurred in carrying on a
trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are
reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case
at bar, the evidence does not show such link between the expenses and the business of Roxas y Cia.
b) The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City
Police are not deductible for the reason that the Christmas funds were not spent for public purposes but
as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a
government entity is deductible when used exclusively for public purposes.
c) The contribution to the Manila Police trust fund are deductible.
It is an allowable deduction for said trust fund belongs to the Manila Police, a government entity,
intended to be used exclusively for its public functions.
d) The contributions to the Philippines Herald's fund for Manila's neediest families are deductible.
It should be noted however that the contributions were not made to the Philippines Herald but to a
group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There
is no question that the members of this group of citizens do not receive profits, for all the funds they
raised were for Manila's neediest families. Such a group of citizens may be classified as an association
organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.
e) The contribution to Our Lady of Fatima chapel at the Far Eastern University are not deductible since
the said university gives dividends to its stockholders.
3. Yes. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving
rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the
rentals. The law, which states:
"Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing
or renting property on his own account as principal and holding himself out as a full or part-time dealer
in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate
amount of three thousand pesos or more a year.
The findings of the Court of Tax Appeals or, this point are sustained.
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(12) Eufemia Evangelista et. al. vs. The Collector of Internal Revenue and the CTA
GR. No. L-9996
October 15, 1957
Facts:
The petitioners sought for the reversal of the decision of the Court of Tax Appeals which held them liable
for income tax, real estate dealer’s tax and residence tax for the real properties (parcels of land) they
bought within February 1943 to April 1994 from different persons, whose management of said
properties was charged to their brother Simeon, and which were subsequently rented out to various
tenants from the year 1945-1949. Petitioners submit that they are mere co-owners of the properties, not
co-partners because some of the characteristics of partnership are not present, therefore, no legal entity
with a personality separate from that of the members exists, and thus they are excluded from the
coverage of Section 24 of the National Internal Revenue Code of the Philippines.
Issue:
Whether or not petitioners have established a partnership and are subject to tax on corporations under
Section 24 of the NIRC.
Held:
Yes. Petitioners have agreed to contribute and did contribute money to a common fund for the purpose
of engaging in real estate transactions for monetary gain and divide the same among themselves because
of the following observations, among others: (1) Said common fund was not something they found
already in existence; (2) They invested the same, not merely in one transaction, but in a series of
transactions; (3) The aforesaid lots were not devoted to residential purposes, or to other personal uses,
of petitioners herein.
Petitioners’ argument that their being mere co-owners did not create a separate legal entity was rejected
because, according to the Court, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When the NIRC includes "partnerships" among
the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which
are not necessarily "partnerships", in the technical sense of the term. The qualifying expression found in
Section 24 and 84(b) clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could
be deemed constituted for purposes of the tax on corporations. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to.
For purposes of the tax on corporations, NIRC includes these partnerships - with the exception only of
duly registered general co partnerships - within the purview of the term "corporation." It is, therefore,
clear that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject
to the income tax for corporations.
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(13) Alexander Howden and Co., Ltd., H.G. Chester and Others, et. al. vs.
Commissioner of Internal Revenue
GR. L-19392
April 14, 1965
Facts:
The Commonwealth Insurance Co., a domestic corporation, entered into reinsurance contracts with 32
British insurance companies not engaged in trade or business in the Philippines, whereby the former
agreed to cede to them a portion of the premiums on insurances on fire, marine and other risks it has
underwritten in the Philippines. Alexander Howden & Co., Ltd., also a British corporation not engaged in
business in this country, represented the aforesaid British insurance companies. The reinsurance
contracts were prepared and signed by the foreign reinsurers in England and sent to Manila where
Commonwealth Insurance Co. signed them.
Pursuant to the aforesaid contracts, Commonwealth Insurance Co., in 1951, remitted P798,297.47 to
Alexander Howden & Co., Ltd., as reinsurance premiums. In behalf of Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed in April 1952 an income tax return declaring the sum of P798,297.47,
with accrued interest thereon in the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross
income for calendar year 1951. It also paid the Bureau of Internal Revenue P66,112.00 income tax
thereon.
On May 12, 1954, within the two-year period provided for by law, Alexander Howden & Co., Ltd. filed
with the Bureau of Internal Revenue a claim for refund of the P66,112.00, later reduced to P65,115.00,
because Alexander Howden & Co., Ltd. agreed to the payment of P977.00 as income tax on the P4,985.77
accrued interest. But the said claim was denied.
Issue/s:
1. Whether or not the portions of premiums earned from insurances locally underwritten by a
domestic corporation, ceded to and received by non-resident foreign reinsurance companies, thru a
non-resident foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers
abroad but signed by the domestic corporation in the Philippines, subject to income tax or not.
2. If subject thereto, whether or not they are subject to withholding tax under Section 54 in relation to
Section 53 of the Tax Code.
Held:
1. Yes. Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign
corporation's income from sources within the Philippines.
The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and the same took place in the
Philippines. In the first place, the reinsured, the liabilities insured and the risks originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. Secondly, contrary to appellants' view, the reinsurance contracts
were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila. And,
thirdly, the parties to the reinsurance contracts in question evidently intended Philippine law to govern.
2. Yes. Section 53 subjects to withholding tax various specified income, among them, "premiums", the
generic connotation of each and every word or phrase composing the enumeration in Subsection (b)
thereof is income. Perforce, the word "premiums", which is neither qualified nor defined by the law
itself, should mean income and should include all premiums constituting income, whether they be
insurance or reinsurance premiums.
66
Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still they may
be classified as determinable and periodical income under the same provision of law. Reinsurance
premiums, therefore, are determinable and periodical income: determinable, because they can be
calculated accurately on the basis of the reinsurance contracts; periodical, inasmuch as they were earned
and remitted from time to time.
(14) Marubeni Corporation vs. CIR and CTA

GR. No. 76573
September 14, 1989
Facts:
The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income
arising from the business activity in which Marubeni Corporation (head office) is engaged. Accordingly,
said dividends if remitted abroad are not considered branch profits subject to Branch Profit Remittance
Tax.
Take Note: In this case, Marubeni Japan (head office) was the investor of AG and P Co. Manila, not the
branch office of Marubeni in Manila.
Marubeni Corporation is a Japanese corporation licensed to engage in business in the Philippines. When
the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co. of Manila were declared, a 10%
final dividend tax was withheld from it, and another 15% profit remittance tax based on the remittable
amount after the final 10% withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp.
now claims for a refund or tax credit for the amount which it has allegedly overpaid the BIR.
Issue/s:
1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific Co. are
effectively connected with its conduct or business in the Philippines as to be considered branch
profits subject to 15% profit remittance tax imposed under Section 24(b)(2) of the National Internal
Revenue Code.
2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.
Held:
1. No. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted abroad by a
branch office to its head office which are effectively connected with its trade or business in the
Philippines are subject to the 15% profit remittance tax. The dividends received by Marubeni
Corporation from Atlantic Gulf and Pacific Co. are not income arising from the business activity in which
Marubeni Corporation is engaged. Accordingly, said dividends if remitted abroad are not considered
branch profits for purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of the Tax
Code, as amended.
2. Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction. Marubeni
Corporation’s head office in Japan is a separate and distinct income taxpayer from the branch in the
Philippines. The investment on Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane
to the conduct of the corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch
in the Philippines.
67
(15) Chamber of Real Estate and Builders’ Associations, Inc. vs.
The Hon. Executive Secretary Alberto Romulo, the Hon. Acting Secretary of Finance Juanita D.
Amatong, and the Hon. CIR Guillermo Parayno, Jr.
GR. No. 160756
March 9, 2010
Facts:
Chamber of Real Estate and Builders’ Associations, Inc. is questioning the constitutionality of Section 27
(E) of Republic Act (RA) 8424 and the revenue regulations (RRs) issued by the Bureau of Internal
Revenue (BIR) to implement said provision and those involving creditable withholding taxes.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the
collection of creditable withholding tax (CWT) on the sale of real properties categorized as ordinary
assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first, they
ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling
price or fair market value of the real properties classified as ordinary assets.
Issue:
Whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
Held:
No. Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary
assets remains to be the entity’s net income imposed under Section 24 (resident individuals) or Section
27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable
deductions. The CWT is to be deducted from the net income tax payable by the taxpayer at the end of
the taxable year. Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale
of real property classified as ordinary assets remains to be the net taxable income.
Final withholding Tax (FWT) is imposed on the sale of capital assets. On the other hand, CWT is imposed
on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove
petitioner’s contention that ordinary assets are being lumped together with, and treated similarly as,
capital assets in contravention of the pertinent provisions of RA 8424.
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same
way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT.
The withholding agent/buyer’s act of collecting the tax at the time of the transaction by withholding the
tax due from the income payable is the essence of the withholding tax method of tax collection.
68
(16) Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the CTA
GR. No. L-68375
April 15, 1988
Facts:
On two occasions, Wander filed its withholding tax return and remitted to its parent company (Glaro
S.A. Ltd, a Swiss Corporation not engaged in trade or business in the Philippines) dividends on which
35% withholding tax was withheld and paid to the BIR. Later, Wander filed a claim for refund and/or tax
credit contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of
the Tax Code as amended by PD 369 and 778.
Issue:
Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends declared
and remitted to its parent corporation, Glaro.
Held:
Yes. Section 24 (b) (1) of the Tax Code as amended provides that the dividends received from a domestic
corporation liable to tax shall be 15% of the dividends received, subject to the condition that the country
in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from
the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to
20% which represents the difference between the regular tax (35%) in corporations and the tax (15%)
dividends.
In this case, Switzerland did not impose any tax on the dividends received by Glaro from the Philippines.
It follows then that the condition imposed under the above-mentioned section is satisfied. Hence,
Wander is entitled to 15% withholding tax rate and the BIR should make a refund and/or tax credit.
(17) Cyanamid Philippines, Inc. vs. CA, CTA, and CIR

GR. No. 108067
January 20, 2000
In order to determine whether profits are accumulated for the reasonable needs of the business to avoid
the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is
manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts.
Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985 the
CIR assessed on petitioner a deficiency income tax of P119,817 for the year 1981. Cyanamid protested
the assessments particularly the 25% surtax for undue accumulation of earnings.
It claimed that said profits were retained to increase petitioner’s working capital and it would be used
for reasonable business needs of the company. The CIR refused to allow the cancellation of the
assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the assessment
because (1) it accumulated its earnings and profits for reasonable business requirements to meet
working capital needs and retirement of indebtedness (2) it is a wholly owned subsidiary of American
Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY Stock Exchange.
69
The CTA denied the petition stating that the law permits corporations to set aside a portion of its
retained earnings for specified purposes under Sec. 43 of the Corporation Code but that petitioner’s
purpose did not fall within such purposes. It found that there was no need to set aside such retained
earnings as working capital as it had considerable liquid funds. Those corporations exempted from the
accumulated earnings tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those
exempted. The CA affirmed the CTA’s decision.
Issue:
Whether or not the accumulation of income was justified.
Held:
In order to determine whether profits are accumulated for the reasonable needs of the business to avoid
the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is
manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts.
The accumulated profits must be used within reasonable time after the close of the taxable year. In the
instant case, petitioner did not establish by clear and convincing evidence that such accumulated was for
the immediate needs of the business.
To determine the reasonable needs of the business, the United States Courts have invented the
“Immediacy Test” which construed the words “reasonable needs of the business” to mean the immediate
needs of the business, and it is held that if the corporation did not prove an immediate need for the
accumulation of earnings and profits such was not for reasonable needs of the business and the penalty
tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business
depend on the nature of the business, its credit policies, the amount of inventories, the rate of turnover,
the amount of accounts receivable, the collection rate, the availability of credit and other similar factors.
The Tax Court opted to determine the working capital sufficiency by using the ration between the
current assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct.
With the petitioner’s failure to prove the CIR incorrect, clearly and conclusively, the Tax Court’s ruling is
upheld.
70

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A.

General Principles of Taxation

(1) Paseo Realty and Development Corporation vs. CA

(2) Pelizloy Realty Corporation vs. Province of Benguet

(3) Concurring and Dissenting Opinion of Justice Leonen in

(4) CIR vs. Metro Star Superama Inc.

Whether or not Metro Star was denied due process.

(5) Concurring and Dissenting Opinion of Justice Leonen in

(6) Reyes vs. Almazor

(9) Planters Products Inc. vs. Fertiphil Corp.

Whether or not the Letter of Instruction is constitutional.

(10) CIR vs. Central Luzon Corporation

Whether or not Republic Act 9257 is constitutional.

Whether the item in the appropriation is valid.

(14) Lutz vs. Araneta, et. al.

Whether the tax is valid in supporting an industry.

(15) PAGCOR vs. BIR

1. Gaming Income: Franchise Tax – Yes; Income Tax - No

(16) Abra Valley College Inc., vs. Aquino

Whether the College is exempt from taxes.

1. Whether or not the imposition of the MCIT on domestic corporations is unconstitutional.

(20) People vs. Cayat

(21) Ormoc Sugar Company vs. Conejos, et. al.

(3) Conwi vs. CTA

(a) the transferee is a corporation;

(5) Baier-Nickel vs. CIR

Whether or not the sales commission is taxable in the Philippines.

Whether or not the respondent is entitled to a refund.

(8) Tuazon vs. Lingad

Whether or not the properties in question should be regarded as capital assets.

No. It is Ordinary Income.

(9) Republic vs. De la Rama

Whether or not there was constructive receipt of income.

(10) Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation

Whether or not petitioner is entitled to a refund.

(14) Commissioner of Internal Revenue vs. Smart Communications, Inc.

1. Smart, as withholding agent, may file the claim for refund.

The CTA only partially modified the assessment of the BIR.

(4) CIR vs. Pilipinas Shell Petroleum Corporation

(5) Deutsche Bank-AG Manila Branch vs. CIR

1. Transportation expenses incurred to attend the funeral of his friends

Of those enumerated, what were considered as deductible are the following:

(8) Commissioner of Internal Revenue vs. Isabela Cultural Corporation

(9) H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue

Petitioner Plaridel Surety is a domestic corporation engaged in the bonding business.

(1) there is a valid and subsisting debt;

(12) China Banking Corporation vs. CA, CIR and CTA

(1) There is a sale or exchange; and

Section 29(d)(4)(A), of the NIRC expresses:

"Section 33. Capital gains and losses. –

1. Whether or not bonuses are deductible.

(17) Commissioner of Internal Revenue vs. Central Luzon Drug Corporation

Whether or not PAL is liable for Minimum Corporate Income Tax.

(1) Maria Carla Pirovano vs. Commissioner of Internal Revenue

(2) Carmelino F. Pansacola vs. Commissioner of Internal Revenue

Petitioner-appellant, a domestic corporation engaged in the development and management of

(5) Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue

(7) Commissioner of Internal Revenue vs. Carlos Palanca, Jr.