G.R. No. L-15290 May 31, 1963
00, as deficiency income tax for the years 1951
MARIANO ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT
OF TAX APPEALS, respondents.
-----------------------------
G.R. No. L-15280 May 31, 1963
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
MARIANO ZAMORA, respondent.
-----------------------------
G.R. No. L-15289 May 31, 1963
ESPERANZA A. ZAMORA, as Special Administratrix
of Estate of FELICIDAD ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT
OF TAX APPEALS, respondents.
-----------------------------
G.R. No. L-15281 May 31, 1963
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
ESPERANZA A. ZAMORA, as Special Administratrix,
etc. respondent.
Office of the Solicitor General for petitioner.
Rodegelio M. Jalandoni for respondents.
PAREDES, J.:
In the above-entitled cases, a joint decision was
rendered by the lower court because they involved
practically the same issues. We do so, likewise, for the
same reason.
Cases Nos. L-15290 and L-15280
Mariano Zamora, owner of the Bay View Hotel and
Farmacia Zamora, Manila, filed his income tax returns
the years 1951 and 1952. The Collector of Internal
Revenue found that he failed to file his return of the
capital gains derived from the sale of certain real
properties and claimed deductions which were not
allowable. The collector required him to pay the sums of
P43,758.50 and P7,625.00, as deficiency income tax for
the years 1951 and 1952, respectively (C.T.A. Case No.
234, now L-15290). On appeal by Zamora, the Court of
Tax Appeals on December 29, 1958, modified the
decision appealed from and ordered him to pay the
reduced total sum of P30,258.00 (P22,980.00 and
P7,278.
and 1952, respectively), within thirty (30) days from the
date the decision becomes final, plus the corresponding
surcharges and interest in case of delinquency, pursuant
to section 51(e), Int. Revenue Code. With costs against
petitioner.
Having failed to obtain a reconsideration of the decision,
Mariano Zamora appealed (L-15290), alleging that the
Court of Tax Appeals erred —
(1) In dissallowing P10,478.50, as promotion
expenses incurred by his wife for the promotion
of the Bay View Hotel and Farmacia Zamora
(which is ½ of P20,957.00, supposed business
expenses):
(2) In disallowing 3-½% per annum as the rate of
depreciation of the Bay View Hotel Building;
(3) In disregarding the price stated in the deed of
sale, as the costs of a Manila property, for the
purpose of determining alleged capital gains;
and
(4) In applying the Ballantyne scale of values in
determining the cost of said property.
The Collector of Internal Revenue (L-15280) also
appealed, claiming that the Court of Tax Appeals erred
—
(1) In giving credence to the uncorroborated
testimony of Mariano Zamora that he bought the
said real property in question during the
Japanese occupation, partly in Philippine
currency and partly in Japanese war notes, and
(2) In not holding that Mariano Zamora is liable
for the payment of the sums of P43,758.00 and
P7,625.00 as deficiency income taxes, for the
years 1951 and 1952, plus the 5% surcharge
and 1% monthly interest, from the date said
amounts became due to the date of actual
payment.
Wherefore, the parties respectfully pray that the
foregoing stipulation of facts be admitted and
approved by this Honorable Court, without
prejudice to the parties adducing other evidence
to prove their case not covered by this
stipulation of facts. 1äwphï1.ñët
Cases Nos. L-15289 and L-15281
Mariano Zamora and his deceased sister Felicidad
Zamora, bought a piece of land located in Manila on May
16, 1944, for P132,000.00 and sold it for P75,000.00 on
March 5, 1951. They also purchased a lot located in
Quezon City for P68,959.00 on January 19, 1944, which
they sold for P94,000 on February 9, 1951. The CTA
ordered the estate of the late Felicidad Zamora
(represented by Esperanza A. Zamora, as special
administratrix of her estate), to pay the sum of P235.50,
representing alleged deficiency income tax and
surcharge due from said estate. Esperanza A. Zamora
appealed and alleged that the CTA erred: —
The Commissioner of Internal Revenue likewise
appealed from the decision, claiming that the lower court
erred: —
(1) In giving credence to the uncorroborated
testimony of Mariano Zamora that he bought the
real property involved during the Japanese
occupation, partly in genuine Philippine currency
and partly in Japanese war notes; and
(2) In not holding that Esperanza A. Zamora, as
administratrix, is liable for the payment of the
sum of P613.00 as deficiency income tax and
50% surcharge for 1951, plus 50% surcharge
and 1% monthly interest from the date said
amount became due, to the date of actual
payment.
It is alleged by Mariano Zamora that the CTA erred in
disallowing P10,478.50 as promotion expenses incurred
by his wife for the promotion of the Bay View Hotel and
Farmacia Zamora. He contends that the whole amount
of P20,957.00 as promotion expenses in his 1951
income tax returns, should be allowed and not merely
one-half of it or P10,478.50, on the ground that, while
not all the itemized expenses are supported by receipts,
the absence of some supporting receipts has been
sufficiently and satisfactorily established. For, as alleged,
the said amount of P20,957.00 was spent by Mrs.
Esperanza A. Zamora (wife of Mariano), during her
travel to Japan and the United States to purchase
machinery for a new Tiki-Tiki plant, and to observe hotel
management in modern hotels. The CTA, however,
found that for said trip Mrs. Zamora obtained only the
sum of P5,000.00 from the Central Bank and that in her
application for dollar allocation, she stated that she was
going abroad on a combined medical and business trip,
which facts were not denied by Mariano Zamora. No
evidence had been submitted as to where Mariano had
obtained the amount in excess of P5,000.00 given to his
wife which she spent abroad. No explanation had been
made either that the statement contained in Mrs.
Zamora's application for dollar allocation that she was
going abroad on a combined medical and business trip,
was not correct. The alleged expenses were not
supported by receipts. Mrs. Zamora could not even
remember how much money she had when she left
abroad in 1951, and how the alleged amount of
P20,957.00 was spent.
Section 30, of the Tax Code, provides that in computing
net income, there shall be allowed as deductions all the
ordinary and necessary expenses paid or incurred
during the taxable year, in carrying on any trade or
business (Vol. 4, Mertens, Law of Federal Income
Taxation, sec. 25.03, p. 307). Since promotion expenses
constitute one of the deductions in conducting a
business, same must testify these requirements. Claim
for the deduction of promotion expenses or
entertainment expenses must also be substantiated or
supported by record showing in detail the amount and
nature of the expenses incurred (N.H. Van Socklan, Jr.
v. Comm. of Int. Rev.; 33 BTA 544). Considering, as
heretofore stated, that the application of Mrs. Zamora for
dollar allocation shows that she went abroad on a
combined medical and business trip, not all of her
expenses came under the category of ordinary and
necessary expenses; part thereof constituted her
personal expenses. There having been no means by
which to ascertain which expense was incurred by her in
connection with the business of Mariano Zamora and
which was incurred for her personal benefit, the
Collector and the CTA in their decisions, considered
50% of the said amount of P20,957.00 as business
expenses and the other 50%, as her personal expenses.
We hold that said allocation is very fair to Mariano
Zamora, there having been no receipt whatsoever,
submitted to explain the alleged business expenses, or
proof of the connection which said expenses had to the
business or the reasonableness of the said amount of
P20,957.00. While in situations like the present, absolute
certainty is usually no possible, the CTA should make as
close an approximation as it can, bearing heavily, if it
chooses, upon the taxpayer whose inexactness is of his
own making.
In the case of Visayan Cebu Terminal Co., Inc. v.
Collector of Int. Rev., G.R. No. L-12798, May 30, 1960, it
was declared 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 Tax Code; that to be deductible, said business
expenses must be 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; that when some of the
representation expenses claimed by the taxpayer were
evidenced by vouchers or chits, but others were without
vouchers or chits, documents or supporting papers; that
there is no more than oral proof to the effect that
payments have been made for representation expenses
allegedly made by the taxpayer and about the general
nature of such alleged expenses; that accordingly, it is
not possible to determine the actual amount covered by
supporting papers and the amount without supporting
papers, the court should determine from all available
data, the amount properly deductible as representation
expenses.
In view hereof, We are of the opinion that the CTA, did
not commit error in allowing as promotion expenses of
Mrs. Zamora claimed in Mariano Zamora's 1951 income
tax returns, merely one-half or P10,478.50.
Petitioner Mariano Zamora alleges that the CTA erred in
disallowing 3-½% per annum as the rate of depreciation
of the Bay View Hotel Building but only 2-½%. In
justifying depreciation deduction of 3-½%, Mariano
Zamora contends that (1) the Ermita District, where the
Bay View Hotel is located, is now becoming a
commercial district; (2) the hotel has no room for
improvement; and (3) the changing modes in
architecture, styles of furniture and decorative designs,
"must meet the taste of a fickle public". It is a fact,
however, that the CTA, in estimating the reasonable rate
of depreciation allowance for hotels made of concrete
and steel at 2-½%, the three factors just mentioned had
been taken into account already. Said the CTA—
Normally, an average hotel building is estimated
to have a useful life of 50 years, but inasmuch
as the useful life of the building for business
purposes depends to a large extent on the
suitability of the structure to its use and location,
its architectural quality, the rate of change in
population, the shifting of land values, as well as
the extent and maintenance and rehabilitation. It
is allowed a depreciation rate of 2-½%
corresponding to a normal useful life of only 40
years (1955 PH Federal Taxes, Par 14 160-K).
Consequently, the stand of the petitioners can
not be sustained.
As the lower court based its findings on Bulletin F,
petitioner Zamora, argues that the same should have
been first proved as a law, to be subject to judicial
notice. Bulletin F, is a publication of the US Federal
Internal Revenue Service, which was made after a study
of the lives of the properties. In the words of the lower
court: "It contains the list of depreciable assets, the
estimated average useful lives thereof and the rates of
depreciation allowable for each kind of property. (See
1955 PH Federal Taxes, Par. 14, 160 to Par. 14, 163-0).
It is true that Bulletin F has no binding force, but it has a
strong persuasive effect considering that the same has
been the result of scientific studies and observation for a
long period in the United States after whose Income Tax
Law ours is patterned." Verily, courts are permitted to
look into and investigate the antecedents or the
legislative history of the statutes involved (Director of
Lands v. Abaya, et al., 63 Phil. 559). Zamora also
contends that his basis for applying the 3-½% rate is the
testimony of its witness Mariano Katipunan, who cited a
book entitled "Hotel Management — Principles and
Practice" by Lucius Boomer, President, Hotel Waldorf
Astoria Corporation. As well commented by the Solicitor
General, "while the petitioner would deny us the right to
use Bulletin F, he would insist on using as authority, a
book in Hotel management written by a man who knew
more about hotels than about taxation. All that the
witness did (Katipunan) . . . is to read excerpts from the
said book (t.s.n. pp. 99-101), which admittedly were
based on the decision of the U.S. Tax Courts, made in
1928 (t.s.n. p. 106)". In view hereof, We hold that the 2-
½% rate of depreciation of the Bay View Hotel building,
is approximately correct.
The next items in dispute are the undeclared capital
gains derived from the sales in 1951 of certain real
properties in Malate, Manila and in Quezon City,
acquired during the Japanese occupation.
The Manila property (Esperanza Zamora v. Coll. of Int.
Rev., Case No. L-15289). The CTA held in this case,
that the cost basis of property acquired in Japanese war
notes is the equivalent of the war notes in genuine
Philippine currency in accordance with the Ballantyne
Scale of values, and that the determination of the gain
derived or loss sustained in the sale of such property is
not affected by the decline at the time of sale, in the
purchasing power of the Philippine currency. It was
found by the CTA that the purchase price of
P132,000.00 was not entirely paid in Japanese War
notes but ½ thereof or P66,000.00 was in Philippine
currency, and that during certain periods of the enemy
occupation, the value of the Japanese war notes was
very much less than the value of the genuine Philippine
currency. On this point, the CTA declared —
Finally, it is alleged that the purchase price of
P132,000.00 was not entirely paid in Japanese
war notes, Mariano Zamora, co-owner of the
property in question, testified that P66,000.00
was paid in Philippine currency and the other
P66,000.00 was paid in Japanese war notes. No
evidence was presented by respondent to rebut
the testimony of Mariano Zamora; it is assailed
merely as being improbable. We have examined
this question thoroughly and we are inclined to
give credence to the allegation that a portion of
the purchase price of the property was paid in
Philippine money. In the first place, it appears
that the Zamoras owned the Farmacia Zamora
which continued to engage in business during
the war years and that a considerable portion of
its sales was paid for in genuine Philippine
currency. This circumstance enabled the
Zamoras to accumulate Philippine money which
they used in acquiring the property in question
and another property in Quezon City. In the
second place, P132,000.00 in Japanese war
notes in May, 1944 is equivalent to only
P11,000.00. The property in question had at the
time an assessed value of P27,031.00 (in
Philippine currency). Considering the well known
fact that the assessed value of real property is
very much below the fair market value, it is
incredible that said property should have been
sold by the owner thereof for less than one-half
of its assessed value. These facts have
convinced us of the veracity of the allegation
that of the purchase price of P132,000.00 the
sum of P66,000.00 was paid in Philippine
currency, so that only the sum of P66,000.00
was paid in Japanese War notes.
This being the case, the Ballantyne Scale of values,
which was the result of an impartial scientific study,
adopted and given judicial recognition, should be from is affirmed, without special pronouncement as to
applied. As the value of the Japanese war notes in May, costs.
1944 when the Manila property was bought, was 1 ½ of
the genuine Philippine Peso (Ballantyne Scale), and
since the gain derived or loss sustained in the
disposition of this property is to reckoned in terms of
Philippine Peso, the value of the Japanese war notes
used in the purchase of the property, must be reduced in
terms of the genuine Philippine Peso to determine the
cost of acquisition. It, therefore, results that since the
sum of P66,000.00 in Japanese war notes in May, 1944
is equivalent to P5,500.00 in Philippine currency
(P66,000.00 divided by 12), the acquisition cost of the
property in question is P66,000.00 plus P5,500.00 or
P71,500.00 and that as the property was sold for
P75,000.00 in 1951, the owners thereof Mariano and
Felicidad Zamora derived a capital gain of P3,500.00 or
P1,750.00 each.

The Quezon City Property (Mariano Zamora v. Coll. of

Customs, Case No. 15290). The Zamoras alleged that
the entire purchase price of P68,959.00 was paid in
Philippine currency. The collector, on the other hand,
contends that the purchase price of P68,959.00 was
paid in Japanese war notes. The CTA, however, giving
credence to Zamora's version, said —

. . . If , as contended by respondent, the

purchase price of P68,959.00 was paid in
Japanese war notes, the purchase price in
Philippine currency would be only P17,239.75
(P68,959.00 divided by 4, 34.00 in war notes
being equivalent to P1.00 in Philippine
currency). The assessed value of said property
in Philippine currency at the time of acquisition
was P46,910.00. It is quite incredible that real
property with an assessed value of P46,910.00
should have been sold by the owner thereof in
Japanese war notes with an equivalent value in
Philippine currency of only P17,239.75. We are
more inclined to believe the allegation that it was
purchased for P68,959.00 in genuine Philippine
currency. Since the property was sold for
P94,000.00 on February 9, 1951, the gain
derived from the sale is P15,361.75, after
deducting from the selling price the cost of
acquisition in the sum of P68,959.00 and the
expense of sale in the sum of P9,679.25.

The above appraisal is correct, and We have no

plausible reason to disturb the same.

Consequently, the total undeclared income of petitioners

derived from the sales of the Manila and Quezon City
properties in 1951 is P17,111.75 (P1,750.00 plus
P15,361.75), 50% of which in the sum of P8,555.88 is
taxable, the said properties being capital assets held for
more than one year.

IN VIEW HEREOF, the petition in each of the above-

entitled cases is dismissed, and the decision appealed
G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly,
Standard-Vacuum Oil Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL
REVENUE, respondent.
On appeal before us is the decision of the Court of Tax
Appeals 1 denying petitioner's claims for refund of
overpaid income taxes of P102,246.00 for 1959 and
P434,234.93 for 1960 in CTA Cases No. 1251 and 1558
respectively.
I
In CTA Case No. 1251, 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 of P323,279.00 by reason of its abandonment as
dry holes of several of its oil wells. Also claimed as
ordinary and necessary expenses in the same return
was the amount of P340,822.04, representing margin
fees it had paid to the Central Bank on its profit
remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of
P221,033.00 only, disallowing the claimed deduction for
the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a
deficiency income tax for the year 1960, in the amount of
P367,994.00, plus 18% interest thereon of P66,238.92
for the period from April 18,1961 to April 18, 1964, for a
total of P434,232.92. The deficiency arose from the
disallowance of the margin fees of Pl,226,647.72 paid by
ESSO to the Central Bank on its profit remittances to its
New York head office.
ESSO settled this deficiency assessment on August 10,
1964, by applying the tax credit of P221,033.00
representing its overpayment on its income tax for 1959
and paying under protest the additional amount of
P213,201.92. On August 13, 1964, it claimed the refund
of P39,787.94 as overpayment on the interest on its
deficiency income tax. It argued that the 18% interest
should have been imposed not on the total deficiency of
P367,944.00 but only on the amount of P146,961.00, the
difference between the total deficiency and its tax credit
of P221,033.00.
This claim was denied by the CIR, who insisted on
charging the 18% interest on the entire amount of the
deficiency tax. On May 4,1965, the 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.
ESSO appealed to the CTA and sought the refund of
P102,246.00 for 1959, contending that the margin fees
were deductible from gross income either as a tax or as
an ordinary and necessary business expense. It also
claimed an overpayment of its tax by P434,232.92 in
1960, for the same reason. Additionally, ESSO argued
that even if the amount paid as margin fees were not
legally deductible, there was still an overpayment by
P39,787.94 for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of
P102,246.00 for 1959 and P434,234.92 for 1960 but
sustained its claim for P39,787.94 as excess interest.
This portion of the decision was appealed by the CIR but
was affirmed by this Court in Commissioner of Internal
Revenue v. ESSO, G.R. No. L-28502- 03, promulgated
on April 18, 1989. ESSO for its part appealed the CTA
decision denying its claims for the refund of the margin
fees P102,246.00 for 1959 and P434,234.92 for 1960.
That is the issue now before us.
II
The first question we must settle is whether R.A. 2009,
entitled An Act to Authorize the Central Bank of the
Philippines to Establish a Margin Over Banks' Selling
Rates of Foreign Exchange, is a police measure or a
revenue measure. If it is a revenue measure, the margin
fees paid by the petitioner to the Central Bank on its
profit remittances to its New York head office should be
deductible from ESSO's gross income under Sec. 30(c)
of the National Internal Revenue Code. This provides
that all taxes paid or accrued during or within the taxable
year and which are related to the taxpayer's trade,
business or profession are deductible from gross
income.
The petitioner maintains that margin fees are taxes and
cites the background and legislative history of the Margin
Fee Law showing that R.A. 2609 was nothing less than a
revival of the 17% excise tax on foreign exchange
imposed by R.A. 601. This was a revenue measure
formally proposed by President Carlos P. Garcia to
Congress as part of, and in order to balance, the budget
for 1959-1960. It was enacted by Congress as such and,
significantly, properly originated in the House of
Representatives. During its two and a half years of
existence, the measure was one of the major sources of
revenue used to finance the ordinary operating
expenditures of the government. It was, moreover,
payable out of the General Fund.
On the claimed legislative intent, the Court of Tax
Appeals, quoting established principles, pointed out that
—
We are not unmindful of the rule that opinions expressed
in debates, actual proceedings of the legislature, steps
taken in the enactment of a law, or the history of the
passage of the law through the legislature, may be
resorted to as an aid in the interpretation of a statute
which is ambiguous or of doubtful meaning. The courts
may take into consideration the facts leading up to,
coincident with, and in any way connected with, the
passage of the act, in order that they may properly
interpret the legislative intent. But it is also well-settled
jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of
Congress become important. As a matter of fact, there
may be no resort to the legislative history of the
enactment of a statute, the language of which is plain
and unambiguous, since such legislative history may
only be resorted to for the purpose of solving doubt, not
for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least
two cases where we have held that a margin fee is not a
tax but an exaction designed to curb the excessive
demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of
Customs, 2 the Court stated through Justice Jose P.
Bengzon:
A margin levy on foreign exchange is a form of
exchange control or restriction designed to discourage
imports and encourage exports, and ultimately, 'curtail
any excessive demand upon the international reserve' in
order to stabilize the currency. Originally adopted to
cope with balance of payment pressures, exchange
restrictions have come to serve various purposes, such
as limiting non-essential imports, protecting domestic
industry and when combined with the use of multiple
currency rates providing a source of revenue to the
government, and are in many developing countries
regarded as a more or less inevitable concomitant of
their economic development programs. The different
measures of exchange control or restriction cover
different phases of foreign exchange transactions, i.e., in
quantitative restriction, the control is on the amount of
foreign exchange allowable. In the case of the margin
levy, the immediate impact is on the rate of foreign
exchange; in fact, its main function is to control the
exchange rate without changing the par value of the
peso as fixed in the Bretton Woods Agreement Act. For
a member nation is not supposed to alter its exchange
rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature,
the margin levy is part of the rate of exchange as fixed
by the government.
As to the contention that the margin levy is a tax on the
purchase of foreign exchange and hence should not
form part of the exchange rate, suffice it to state that We
have already held the contrary for the reason that a tax
is levied to provide revenue for government operations,
while the proceeds of the margin fee are applied to
strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural
Resources of the Philippines v. Central Bank, 3 the same
idea was expressed, though in connection with a
different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20%
retention of exporter's foreign exchange constitutes an
export tax. A tax is a levy for the purpose of providing
revenue for government operations, while the proceeds
of the 20% retention, as we have seen, are applied to
strengthen the Central Bank's international reserve.
We conclude then that the margin fee was imposed by
the State in the exercise of its police power and not the
power of taxation.
Alternatively, ESSO prays that if margin fees are not
taxes, they should nevertheless be considered
necessary and ordinary business expenses and
therefore still deductible from its gross income. The fees
were paid for the remittance by ESSO as part of the
profits to the head office in the Unites States. Such
remittance was an expenditure necessary and proper for
the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National
Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income in computing
net income there shall be allowed as deductions
(a) Expenses:
(1) In general. — All the ordinary and necessary
expenses paid or incurred during the taxable year in
carrying on any trade or business, including a
reasonable allowance for salaries or other compensation
for personal services actually rendered; traveling
expenses while away from home in the pursuit of a trade
or business; and rentals or other payments required to
be made as a condition to the continued use or
possession, for the purpose of the trade or business, of
property to which the taxpayer has not taken or is not
taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals
and foreign corporations. — In the case of a non-
resident alien individual or a foreign corporation, the
expenses deductible are the necessary expenses paid
or incurred in carrying on any business or trade
conducted within the Philippines exclusively.
In the case of Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal
Revenue, 4 the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims
a deduction, he must point to some specific provision of
the statute in which that deduction is authorized and
must be able to prove that he is entitled to the deduction
which the law allows. As previously adverted to, the law
allowing expenses as deduction from gross income for
purposes of the income tax is Section 30(a) (1) of the
National Internal Revenue which allows a deduction of
'all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade
or business.' An item of expenditure, in order to be
deductible under this section of the statute, must fall
squarely within its language.
We come, then, to the statutory test of deductibility
where it is axiomatic that to be deductible as a business
expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be
paid or incurred within the taxable year, and (3) it must
be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business
test, he must substantially prove by evidence or records
the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
While it is true that there is a number of decisions in the
United States delving on the interpretation of the terms
'ordinary and necessary' as used in the federal tax laws,
no adequate or satisfactory definition of those terms is
possible. Similarly, this Court has never attempted to
define with precision the terms 'ordinary and necessary.'
There are however, certain guiding principles worthy of
serious consideration in the proper adjudication of
conflicting claims. Ordinarily, an expense will be
considered 'necessary' where the expenditure is
appropriate and helpful in the development of the
taxpayer's business. It is 'ordinary' when it connotes a
payment which is normal in relation to the business of
the taxpayer and the surrounding circumstances. The
term 'ordinary' does not require that the payments be
habitual or normal in the sense that the same taxpayer
will have to make them often; the payment may be
unique or non-recurring to the particular taxpayer
affected.
There is thus no hard and fast rule on the matter. The
right to a deduction depends in each case on the
particular facts and the relation of the payment to the
type of business in which the taxpayer is engaged. The
intention of the taxpayer often may be the controlling fact
in making the determination. Assuming that the
expenditure is ordinary and necessary in the operation of
the taxpayer's business, the answer to the question as to
whether the expenditure is an allowable deduction as a
business expense must be determined from the nature
of the expenditure itself, which in turn depends on the
extent and permanency of the work accomplished by the
expenditure.
In the light of the above explanation, we hold that the
Court of Tax Appeals did not err when it held on this
issue as follows:
Considering the foregoing test of what constitutes an
ordinary and necessary deductible expense, it may be
asked: Were the margin fees paid by petitioner on its
profit remittance to its Head Office in New York
appropriate and helpful in the taxpayer's business in the
Philippines? Were the margin fees incurred for purposes
proper to the conduct of the affairs of petitioner's branch
in the Philippines? Or were the margin fees incurred for
the purpose of realizing a profit or of minimizing a loss in
the Philippines? Obviously not. As stated in the Lopez
case, the 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.
xxx
Since the margin fees in question were incurred for the
remittance of funds to petitioner's Head Office in New
York, which is a separate and distinct income taxpayer
from the branch in the Philippines, for its disposal
abroad, 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. If at all,
the margin fees were incurred for purposes proper to the
conduct of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the
Philippines. ESSO has not shown that the remittance to
the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner
merely presumed that all corporate expenses are
necessary and appropriate in the absence of a showing
that they are illegal or ultra vires. This is error. The public
respondent is correct when it asserts that "the
paramount rule is that claims for deductions are a matter
of legislative grace and do not turn on mere equitable
considerations ... . The taxpayer in every instance has
the burden of justifying the allowance of any deduction
claimed." 5
It is clear that ESSO, having assumed an expense
properly attributable to its head office, cannot now claim
this as an ordinary and necessary expense paid or
incurred in carrying on its own trade or business.
WHEREFORE, the decision of the Court of Tax Appeals
denying the petitioner's claims for refund of P102,246.00
for 1959 and P434,234.92 for 1960, is AFFIRMED, with
costs against the petitioner. SO ORDERED.
G.R. No. 143672 April 24, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue
(Commissioner) assails the resolution 1 of the Court of
Appeals reversing the decision2 of the Court of Tax
Appeals which in turn denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the
assessment made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent
corporation, which is engaged in the manufacture of
beverages such as "Tang," "Calumet" and "Kool-Aid,"
filed its income tax return for the fiscal year ending
February 28, 1985. In said tax return, respondent
corporation claimed as deduction, among other business
expenses, the amount of P9,461,246 for media
advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or
P4,730,623 of the deduction claimed by respondent
corporation. Consequently, respondent corporation was
assessed deficiency income taxes in the amount of
P2,635, 141.42. The latter filed a motion for
reconsideration but the same was denied.
On September 29, 1989, respondent corporation
appealed to the Court of Tax Appeals but the appeal
was dismissed:
With such a gargantuan expense for the advertisement
of a singular product, which even excludes "other
advertising and promotions" expenses, we are not
prepared to accept that such amount is reasonable "to
stimulate the current sale of merchandise" regardless of
Petitioner’s explanation that such expense "does not
connote unreasonableness considering the grave
economic situation taking place after the Aquino
assassination characterized by capital fight, strong
deterioration of the purchasing power of the Philippine
peso and the slacking demand for consumer products"
(Petitioner’s Memorandum, CTA Records, p. 273). We
are not convinced with such an explanation. The
staggering expense led us to believe that such
expenditure was incurred "to create or maintain some
form of good will for the taxpayer’s trade or business or
for the industry or profession of which the taxpayer is a
member." The term "good will" can hardly be said to
have any precise signification; it is generally used to
denote the benefit arising from connection and
reputation (Words and Phrases, Vol. 18, p. 556
citing Douhart vs. Loagan, 86 III. App. 294). As held in
the case of Welch vs. Helvering, efforts to establish
reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business
expenses but capital expenditures. (Atlas Mining and
Development Corp. vs. Commissioner of Internal
Revenue, supra). For sure such expenditure was meant
not only to generate present sales but more for future
and prospective benefits. Hence, "abnormally large
expenditures for advertising are usually to be spread
over the period of years during which the benefits of the
expenditures are received" (Mertens, supra, citing
Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error
in the case appealed from, we hereby RESOLVE to
DISMISS the instant petition for lack of merit and
ORDER the Petitioner to pay the respondent
Commissioner the assessed amount of P2,635,141.42
representing its deficiency income tax liability for the
fiscal year ended February 28, 1985."3
Aggrieved, respondent corporation filed a petition for
review at the Court of Appeals which rendered a
decision reversing and setting aside the decision of the
Court of Tax Appeals:
Since it has not been sufficiently established that the
item it claimed as a deduction is excessive, the same
should be allowed.
WHEREFORE, the petition of petitioner General Foods
(Philippines), Inc. is hereby GRANTED. Accordingly, the
Decision, dated 8 February 1994 of respondent Court of
Tax Appeals is REVERSED and SET ASIDE and the
letter, dated 31 May 1988 of respondent Commissioner
of Internal Revenue is CANCELLED.
SO ORDERED.4
Thus, the instant petition, wherein the Commissioner
presents for the Court’s consideration a lone issue:
whether or not the subject media advertising expense for
"Tang" incurred by respondent corporation was an
ordinary and necessary expense fully deductible under
the National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions
must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing
authority;5 and he who claims an exemption must be
able to justify his claim by the clearest grant of organic or
statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications.6
Deductions for income tax purposes partake of the
nature of tax exemptions; hence, if tax exemptions are
strictly construed, then deductions must also be strictly
construed.
We then proceed to resolve the singular issue in the
case at bar. Was the media advertising expense for
"Tang" paid or incurred by respondent corporation for
the fiscal year ending February 28, 1985 "necessary and
ordinary," hence, fully deductible under the NIRC? Or
was it a capital expenditure, paid in order to create
"goodwill and reputation" for respondent corporation
and/or its products, which should have been amortized
over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the
NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or
professional expenses.-
(a) In general.- There shall be allowed as deduction from
gross income all ordinary and necessary expenses paid
or incurred during the taxable year in carrying on, or
which are directly attributable to, the development,
management, operation and/or conduct of the trade,
business or exercise of a profession.
Simply put, 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.7
The parties are in agreement that the subject advertising
expense was paid or incurred within the corresponding
taxable year and was incurred in carrying on a trade or
business. Hence, it was necessary. However, their views
conflict as to whether or not it was ordinary. To be
deductible, an advertising expense should not only be
necessary but also ordinary. These two requirements
must be met.
The Commissioner maintains that the subject advertising
expense was not ordinary on the ground that it failed the
two conditions set by U.S. jurisprudence: first,
"reasonableness" of the amount incurred and second,
the amount incurred must not be a capital outlay to
create "goodwill" for the product and/or private
respondent’s business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a
reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising
expense. There being no hard and fast rule on the
matter, the right to a deduction depends on a number of
factors such as but not limited to: the type and size of
business in which the taxpayer is engaged; the volume
and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the
general economic conditions. It is the interplay of these,
among other factors and properly weighed, that will yield
a proper evaluation.
In the case at bar, the P9,461,246 claimed as media
advertising expense for "Tang" alone was almost one-
half of its total claim for "marketing expenses." Aside
from that, respondent-corporation also claimed
P2,678,328 as "other advertising and promotions
expense" and another P1,548,614, for consumer
promotion.
Furthermore, the subject P9,461,246 media advertising
expense for "Tang" was almost double the amount of
respondent corporation’s P4,640,636 general and
administrative expenses.
We find 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.
We agree with the Court of Tax Appeals that the subject
advertising expense was of the second kind. Not only
was the amount staggering; the respondent corporation
itself also admitted, in its letter protest8 to the
Commissioner of Internal Revenue’s assessment, that
the subject media expense was incurred in order to
protect respondent corporation’s brand franchise, a
critical point during the period under review.
The protection of brand franchise is analogous to the
maintenance of goodwill or title to one’s property. This is
a capital expenditure which should be spread out over a
reasonable period of time.9
Respondent corporation’s venture to protect its brand
franchise was tantamount to efforts to establish a
reputation. This was akin to the acquisition of capital
assets and therefore expenses related thereto were not
to be considered as business expenses but as capital
expenditures.10
True, it is the taxpayer’s prerogative to determine the
amount of advertising expenses it will incur and where to
apply them.11 Said prerogative, however, is subject to
certain considerations. The first relates to the extent to
which the expenditures are actually capital outlays; this
necessitates an inquiry into the nature or purpose of
such expenditures.12 The second, which must be applied
in harmony with the first, relates to whether the
expenditures are ordinary and necessary.
Concomitantly, for an expense to be considered
ordinary, it must be reasonable in amount. The Court of
Tax Appeals ruled that respondent corporation failed to
meet the two foregoing limitations.

We find said ruling to be well founded. Respondent

corporation incurred the subject advertising expense in
order to protect its brand franchise. We consider this as
a capital outlay since it created goodwill for its business
and/or product. The P9,461,246 media advertising
expense for the promotion of a single product, almost
one-half of petitioner corporation’s entire claim for
marketing expenses for that year under review, inclusive
of other advertising and promotion expenses of
P2,678,328 and P1,548,614 for consumer promotion, is
doubtlessly unreasonable.

It has been a long standing policy and practice of the

Court to respect the conclusions of quasi-judicial
agencies such as the Court of Tax Appeals, a highly
specialized body specifically created for the purpose of
reviewing tax cases. The CTA, by the nature of its
functions, is dedicated exclusively to the study and
consideration of tax problems. It has necessarily
developed an expertise on the subject. We extend due
consideration to its opinion unless there is an abuse or
improvident exercise of authority.13 Since there is none
in the case at bar, the Court adheres to the findings of
the CTA.

Accordingly, we find that the Court of Appeals committed

reversible error when it declared the subject media
advertising expense to be deductible as an ordinary and
necessary expense on the ground that "it has not been
established that the item being claimed as deduction is
excessive." It is not incumbent upon the taxing authority
to prove that the amount of items being claimed is
unreasonable. The burden of proof to establish the
validity of claimed deductions is on the taxpayer. 14 In the
present case, that burden was not discharged
satisfactorily.

WHEREFORE, premises considered, the instant petition

is GRANTED. The assailed decision of the Court of
Appeals is hereby REVERSED and SET ASIDE.
Pursuant to Sections 248 and 249 of the Tax Code,
respondent General Foods (Phils.), Inc. is hereby
ordered to pay its deficiency income tax in the amount of
P2,635,141.42, plus 25% surcharge for late payment
and 20% annual interest computed from August 25,
1989, the date of the denial of its protest, until the same
is fully paid. SO ORDERED.
G.R. No. L-13325 April 20, 1961
SANTIAGO GANCAYCO, petitioner,
vs.
THE COLLECTOR OF INTERNAL
REVENUE, respondent.
Benjamin J. Molina for petitioner.
Office of the Solicitor General and Special Attorney
Antonio A. Garces for respondent.
CONCEPCION, J.:
Petitioner Santiago Gancayco seeks the review of a
decision of the Court of Tax Appeals, requiring him to
pay P16,860.31, plus surcharge and interest, by way of
deficiency income tax for the year 1949.
On May 10, 1950, Gancayco filed his income tax return
for the year 1949. Two (2) days later, respondent
Collector of Internal Revenue issued the corresponding
notice advising him that his income tax liability for that
year amounted P9,793.62, which he paid on May 15,
1950. A year later, on May 14, 1951, respondent wrote
the communication Exhibit C, notifying Gancayco, inter
alia, that, upon investigation, there was still due from
him, a efficiency income tax for the year 1949, the sum
of P29,554.05. Gancayco sought a reconsideration,
which was part granted by respondent, who in a letter
dated April 8, 1953 (Exhibit D), informed petitioner that
his income tax defendant efficiency for 1949 amounted
to P16,860.31. Gancayco urged another reconsideration
(Exhibit O), but no action taken on this request, although
he had sent several communications calling
respondent's attention thereto.
On April 15, 1956, respondent issued a warrant of
distraint and levy against the properties of Gancayco for
the satisfaction of his deficiency income tax liability, and
accordingly, the municipal treasurer of Catanauan,
Quezon issued on May 29, 1956, a notice of sale of said
property at public auction on June 19, 1956. Upon
petition of Gancayco filed on June 16, 1956, the Court of
Tax Appeal issued a resolution ordering the cancellation
of the sale and directing that the same be readvertised
at a future date, in accordance with the procedure
established by the National Internal Revenue Code.
Subsequently, or on June 22, 1956, Gancayco filed an
amended petition praying that said Court:
(a) Issue a writ of preliminary injunction, enjoining the
respondents from enforcing the collection of the alleged
tax liability due from the petitioner through summary
proceeding pending determination of the present case;
(b) After a review of the present case adjudge that the
right of the government to enforce collection of any
liability due on this account had already prescribed;
(c) That even assuming that prescription had not set in
the objections of petitioner to the disallowance of the
entertainment, representation and farming expenses be
allowed;
xxx xxx xxx
In his answer respondent admitted some allegations the
amended petition, denied other allegations thereof an
set up some special defenses. Thereafter Gancayco
received from the municipal treasurer of Catanauan,
Quezon, another notice of auction sale of his properties,
to take place on August 29, 1956. On motion of
Gancayco, the Court of Tax Appeals, by resolution dated
August 27, 1956, "cancelled" the aforementioned sale
and enjoined respondent and the municipal treasurer of
Catanauan, Quezon, from proceeding with the same.
After appropriate proceedings, the Court of Tax Appeals
rendered, on November 14, 1957, the decision adverted
to above.
Gancayco maintains that the right to collect the
deficiency income tax in question is barred by the statute
of limitations. In this connection, it should be noted,
however, that there are two (2) civil remedies for the
collection of internal revenue taxes, namely: (a) by
distraint of personal property and levy upon real
property; and (b) by "judicial action" (Commonwealth Act
456, section 316). The first may not be availed of except
within three (3) years after the "return is due or has been
made ..." (Tax Code, section 51 [d] ). After the expiration
of said Period, income taxes may not be legally and
validly collected by distraint and/or levy (Collector of
Internal Revenue v. Avelino, L-9202, November 19,
1956; Collector of Internal Revenue v. Reyes, L-8685,
January 31, 1957; Collector of Internal Revenue v.
Zulueta, L-8840, February 8, 1957; Sambrano v. Court
of Tax Appeals, L-8652, March 30, 1957). Gancayco's
income tax return for 1949 was filed on May 10, 1950; so
that the warrant of distraint and levy issued on May 15,
1956, long after the expiration of said three-year period,
was illegal and void, and so was the attempt to sell his
properties in pursuance of said warrant.
The "judicial action" mentioned in the Tax Code may be
resorted to within five (5) years from the date the return
has been filed, if there has been no assessment, or
within five (5) years from the date of the assessment
made within the statutory period, or within the period
agreed upon, in writing, by the Collector of Internal
Revenue and the taxpayer. before the expiration of said
five-year period, or within such extension of said
stipulated period as may have been agreed upon, in
writing, made before the expiration of the period
previously situated, except that in the case of a false or
fraudulent return with intent to evade tax or of a failure to
file a return, the judicial action may be begun at any time
within ten (10) years after the discovery of the falsity,
fraud or omission (Sections 331 and 332 of the Tax
Code). In the case at bar, respondent made three (3)
assessments: (a) the original assessment of P9,793.62,
made on May 12, 1950; (b) the first deficiency income
tax assessment of May 14, 1951, for P29,554.05; and (c)
the amended deficiency income tax assessment of April
8, 1953, for P16,860.31.
Gancayco argues that the five-year period for the judicial
action should be counted from May 12, 1950, the date of
the original assessment, because the income tax for
1949, he says, could have been collected from him since
then. Said assessment was, however, not for the
deficiency income tax involved in this proceedings, but
for P9,793.62, which he paid forthwith. Hence, there
never had been any cause for a judicial action against
him, and, per force, no statute of limitations to speak of,
in connection with said sum of P9,793.62.
Neither could said statute have begun to run from May
14, 1951, the date of the first deficiency income tax
assessment or P29,554.05, because the same was,
upon Gancayco's request, reconsidered or modified by
the assessment made on April 8, 1953, for P16,860.31.
Indeed, this last assessment is what Gancayco
contested in the amended petition filed by him with the
Court of Tax Appeals. The amount involved in such
assessment which Gancayco refused to pay and
respondent tried to collect by warrant of distraint and/or
levy, is the one in issue between the parties. Hence, the
five-year period aforementioned should be counted from
April 8, 1953, so that the statute of limitations does not
bar the present proceedings, instituted on April 12, 1956,
if the same is a judicial action, as contemplated in
section 316 of the Tax Code, which petitioner denies,
upon the ground that
a. "The Court of Tax Appeals does not have original
jurisdiction to entertain an action for the collection of the
tax due;
b. "The proper party to commence the judicial action to
collect the tax due is the government, and
c. "The remedies provided by law for the collection of the
tax are exclusive."
Said Section 316 provides:
The civil remedies for the collection of internal revenue
taxes, fees, or charges, and any increment thereto
resulting from delinquency shall be (a) by distraint of
goods, chattels, or effects, and other personal property
of whatever character, including stocks and other
securities, debts, credits, bank accounts, and interest in
and rights to personal property, and by levy upon real
property; and (b) by judicial action. Either of these
remedies or both simultaneously may be pursued in the
discretion of the authorities charged with the collection of
such taxes.
No exemption shall be allowed against the internal
revenue taxes in any case.
Petitioner contends that the judicial action referred to in
this provision is commenced by filing, with a court of first
instance, of a complaint for the collection of taxes. This
was true at the time of the approval of Commonwealth
Act No. 456, on June 15, 1939. However, Republic Act
No. 1125 has vested the Court of Tax Appeals, not only
with exclusive appellate jurisdiction to review decisions
of the Collector (now Commissioner) of Internal Revenue
in cases involving disputed assessments, like the one at
bar, but, also, with authority to decide "all cases
involving disputed assessments of Internal Revenue
taxes or customs duties pending determination before
the court of first instance" at the time of the approval of
said Act, on June 16, 1954 (Section 22, Republic Act No.
1125). Moreover, this jurisdiction to decide all cases
involving disputed assessments of internal revenue
taxes and customs duties necessarily implies the power
to authorize and sanction the collection of the taxes and
duties involved in such assessments as may be upheld
by the Court of Tax Appeals. At any rate, the same now
has the authority formerly vested in courts of first
instance to hear and decide cases involving disputed
assessments of internal revenue taxes and customs
duties. Inasmuch as those cases filed with courts of first
instance constituted judicial actions, such is, likewise,
the nature of the proceedings before the Court of Tax
Appeals, insofar as sections 316 and 332 of the Tax
Code are concerned.
The question whether the sum of P16,860.31 is due from
Gancayco as deficiency income tax for 1949 hinges on
the validity of his claim for deduction of two (2) items,
namely: (a) for farming expenses, P27,459.00; and (b)
for representation expenses, P8,933.45.
Section 30 of the Tax Code partly reads:
(a) Expenses:
(1) In General — All
the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries
or other compensation for personal services actually
rendered; traveling expenses while away from home in
the pursuit of a trade or business; and rentals or other
payments required to be made as a condition to the
continued use or possession, for the purposes of the
trade or business, of property to which the taxpayer has
not taken or is not taking title or in which he has no
equity. (Emphasis supplied.)
Referring to the item of P27,459, for farming expenses
allegedly incurred by Gancayco, the decision appealed
from has the following to say:
No evidence has been presented as to the nature of the
said "farming expenses" other than the bare
statement of petitioner that they were spent for the
"development and cultivation of (his) property". No
specification has been made as to the actual amount
spent for purchase of tools, equipment or materials, or
the amount spent for improvement. Respondent claims
that the entire amount was spent exclusively for clearing
and developing the farm which were necessary to place
it in a productive state. It is not, therefore, an ordinary
expense but a capitol expenditure. Accordingly, it is not
deductible but it may be amortized, in accordance with
section 75 of Revenue Regulations No. 2, cited above.
See also, section 31 of the Revenue Code which
provides that in computing net income, no deduction
shall in any case be allowed in respect of any amount
paid out for new buildings or for permanent
improvements, or betterments made to increase the
value of any property or estate. (Emphasis supplied.)
We concur in this view, which is a necessary
consequence of section 31 of the Tax Code, pursuant to
which:
(a) General Rule — In computing net income no
deduction shall in any case be allowed in respect of —
(1) Personal, living, or family expenses;
(2) Any amount paid out for new buildings or
for permanent improvements, or betterments made
to increase the value of any property or estate;
(3) Any amount expended in restoring property or
in making good the exhaustion thereof for which an
allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering
the life of any officer or employee, or any person
financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such
policy. (Emphasis supplied.)
Said view is, likewise, in accord with the consensus of
the authorities on the subject.
Expenses incident to the acquisition of property follow
the same rule as applied to payments made as direct
consideration for the property. For example, commission
paid in acquiring property are considered as
representing part of the cost of the property acquired.
The same treatment is to be accorded to amounts
expended for maps, abstracts, legal opinions on titles,
recording fees and surveys. Other non-deductible
expenses include amounts paid in connection with
geological explorations, development and subdividing of
real estate; clearing and grading; restoration of soil,
drilling wells, architects's fees and similar types of
expenditures. (4 Merten's Law of Federal Income
Taxation, Sec. 25.20, pp. 348-349; see also sec. 75 of
the income Regulation of the B.I.R.; Emphasis supplied.)
The cost of farm machinery, equipment and farm
building represents a capital investment and is not an
allowable deduction as an item of expense. Amounts
expended in the development of farms, orchards, and
ranches prior to the time when the productive state is
reached may be regarded as investments of capital.
(Merten's Law of Federal Income Taxation, supra, sec.
25.108, p. 525.)
Expenses for clearing off and grading lots acquired is
a capital expenditure, representing part of the cost of the
land and was not deductible as an expense. (Liberty
Banking Co. v. Heiner 37 F [2d] 703 [8AFTR 100111]
[CCA 3rd]; The B.L. Marble Chair Company v. U.S., 15
AFTR 746).
An item of expenditure, in order to be deductible under
this section of the statute providing for the deduction
of ordinary and necessary business expenses, must
fall squarely within the language of the statutory
provision. This section is intended primarily, although not
always necessarily, to cover expenditures of
a recurring nature where the benefit derived from the
payment is realized and exhausted within the taxable
year. Accordingly, if the result of the expenditure is
the acquisition of an asset which has an economically
useful life beyond the taxable year, no deduction of such
payment may be obtained under the provisions of the
statute. In such cases, to the extent that a deduction is
allowable, it must be obtained under the provisions of
the statute which permit deductions for amortization,
depreciation, depletion or loss. (W.B. Harbeson Co. 24
BTA, 542; Clark Thread Co., 28 BTA 1128 aff'd 100 F
[2d] 257 [CCA 3rd, 1938]; 4 Merten's Law of Federal
Income Taxation, Sec. 25.17, pp. 337-338.)
Gancayco's claim for representation expenses
aggregated P31,753.97, of which P22,820.52 was
allowed, and P8,933.45 disallowed. Such disallowance
is justified by the record, for, apart from the absence of
receipts, invoices or vouchers of the expenditures in
question, petitioner could not specify the items
constituting the same, or when or on whom or on what
they were incurred. The case of Cohan v.
Commissioner, 39 F (2d) 540, cited by petitioner is not in
point, because in that case there was evidence on the
amounts spent and the persons entertained and the
necessity of entertaining them, although there were no
receipts an vouchers of the expenditures involved
therein. Such is not the case of petitioner herein.
Being in accordance with the facts and law, the decision
of the Court of Tax Appeals is hereby affirmed therefore,
with costs against petitioner Santiago Cancayco. It is so
ordered.
G.R. No. L-61632 August 16, 1983
WESTERN MINOLCO CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS, respondents.
GUTIERREZ JR., J.:
This is a petition for review on certiorari of a Court of Tax
Appeal's decision denying the petitioner's claim for the
refund of P1,317,801.03, representing Money market
transaction taxes which the petitioner paid from June 3,
1977 to August 5, 1977, and the resolution denying its
motion for reconsideration.
Petitioner is a domestic corporation engaged in mining,
particularly copper concentrates for export mined from
mineral lands in Atok and Kibungan, Benguet.
In October 1972, upon application for tax exemption filed
with the Bureau of Mines, the petitioner was granted
Certificate of Qualification for Tax Exemption No. 34.
On December 24, 1976, the petitioner was also granted
by the Securities and Exchange Commission, under
Certificate of Renewal No. R-1056, authority to borrow
money and issue commercial papers. Pursuant to this
authority, the petitioner borrowed funds from several
financial institutions from June, 1977 to October 1977
and paid the corresponding 35% transaction tax due
thereon in the amount of P1,317,801.03, The tax was
paid pursuant to Section 210 (b) of the National Internal
Revenue Code of 1977.
On February 16, 1978, the petitioner applied for the
refund of the P1,317,801.03 alleging that it was not liable
to pay the 35% transaction tax under its Certificate of
Qualification for Tax Exemption No. 34 issued by the
Secretary of Agriculture and Natural Resources, and
pursuant to Section 79-A of Commonwealth Act No. 137,
otherwise known as The Mining Act and Presidential
Decree No. 463, the Mineral Resources Development
Decree of 1974, as implemented by Consolidated Mines
Administrative Order of the Secretary of Natural
Resources dated May 17, 1974.
On February 19, 1979, the respondent Commissioner of
internal Revenue denied the petitioner's claim for refund.
On May 29, 1979, the petitioner filed a petition for review
with the respondent Court of Tax Appeals. On August
28, 1979, the Commissioner of Internal Revenue filed his
answer alleging inter alia that:
xxx xxx xxx
(a) The 35% transaction tax is actually a tax on the
interest earnings of the lender who is actually the
taxpayer on whose income, the tax is imposed;
(b) Petitioner did not pay the 35", transaction tax in its
own behalf, as this liability has been fully shifted to and
paid for the account of the lender:
(c) Petitioner merely acted as withholding agent in
paying
(d) the 35% transaction tax based on the gross interest
income of the
(e) lender;
(d) Petitioner's exemption from taxes granted under
Sections 52 and 53 of Presidential Decree No. 463
relates to importations of machineries, tools and
equipment to be used in the mining operations and taxes
on mining claims, improvement thereon and mineral
products, whereas the 35% transaction tax is levied on
transactions pertaining to commercial papers issued in
the primary money market as principal instruments; in
other words, Sections 52 and 53 of P.D. 463 do not
apply to this case of petitioner.
After due hearing but before the respondent court could
render its decision, the petitioner filed a pleading entitled
"Request for Judicial Notice and Request for Admission"
alleging that the subject tax was paid in the nature of a
business tax, that petitioner's claim for refund is based
on its exemption from business taxes, and that its
exemption is protected by existing tax exemptions
granted it under the mining law.
On January 29, 1982, the respondent court denied the
petitioner's "Request for Judicial Notice and Request for
Admission. "
On May 21, 1982, the respondent court rendered its
decision dismissing the petition for review for lack of
merit.
The petitioner raised the following assignments of errors:
Assignment of error No. 1
THAT THE TAX COURT ERRONEOUSLY
CONCLUDED BY SUPPORTING RESPONDENT
COMMISSIONER'S CONTENTION THAT THE 35%
TRANSACTION TAX ON COMMERCIAL PAPER
(INVOLVED IN THIS CASE) IS AN INCOME TAX
IMPOSED UPON THE INTEREST EARNINGS OF THE
MONEY LENDER WHO (ACCORDING TO THE TAX
COURT) IS ACTUALLY THE TAX PAYER ON WHOSE
INCOME THE 35r7(, TAX IS IMPOSED.
Assignment of Error No. 2
THAT THE TAX COURT ERRED IN THAT ITS
CONCLUSIONS CONTRAVENE THE MANDATES IN
SAID P.D. No. 1154 (particularly SEC. 2 OF WHICH)
AMENDING SECTION 291b) OF THE 1977 REVENUE
CODE BY EXCLUDING FROM GROSS INCOME' THE
'INTEREST EARNED ON COMMERCIAL PAPER
ISSUED IN THE PRIMARY MARKET (WHICH) SHALL
NOT BE INCLUDED IN THE DETERMINATION OF
GROSS INCOME OF THE LENDER FOR PURPOSES
OF INCOME TAXATION
Assignment of Error No. 3
THAT THE TAX COURT ERRED IN CONFUSING TWO
DISTINCT AND SEPARATE ASPECTS OF THE
TAXATION AND THE PERSONS OF THE TAX PAYER
AS IF THEY ARE ONE AND THE SAME PERSON,
WHEN THE LAW TREATS THEM AS TOTALLY
DISTINCT AND SEPARATE PERSONS AND ASPECTS
THEREOF.-NAMELY: (A) THE INCIDENCE OF THE
TAX AND THE PERSON LEGALLY LIABLE FOR THE
TAX; AND THE (B) 'ACTUAL PAYOR' OR 'RESULTING
PAYOR' OF THE 35, of TRANSACTION TAX.
Assignment of Error No. 4
THAT THE TAX COURT ERRED IN RULING THAT
THE 35% TRANSACTION TAX IS AN INCOME TAX
FROM WHICH MINOLCO IS NOT EXEMPT AND NOT
A BUSINESS TAX.
Assignment of Error No. 5
THAT THE TAX COURT ERRED IN CONFUSING THE
'INCIDENT OF THE TAX AND THE ACTUAL PAYOR'
OR 'RESULTING PAYOR' OF THE 35%
TRANSACTION TAX; THAT CONFUSION OF THE
TWO SEPARATE PERSONS HAS RESULTED INTO
THE ERRONEOUS CONCLUSION THAT THE 35%
TRANSACTION TAX IS AN INCOME TAX IMPOSED
UPON THE INTEREST EARNED BY THE MONEY
LENDER INVOLVED IN THE ISSUANCE OF THE
COMMERCIAL PAPER UPON WHICH INTEREST
INCOME IS PAID OR COLLECTED: THAT THIS
ERROR HAS RESULTED IN RESPONDENT
COMMISSIONER'S AND SHE TAX COURT'S) VIEW
THAT PETITIONER MINOLCO IS A WITHHOLDING
AGENT IN RESPECT OF THE INCOME TAX DUE TO
BE WITHHELD ON INTEREST INCOME OF MONEY
LENDER.
Assignment of Error No.6
THAT THE TAX COURT ERRED IN FAILING TO
RECOGNIZE THAT PETITIONER MINOLCO IS A
QUALIFIED MINING LESSEE AND DEVELOPER
UNDER THE MINING LAW (C.A. No. t37, As Amended),
AND UNDER THE MINERAL RESOURCES
DEVELOPMENT DECREE OF 1974 (P.D. No. 463, As
Amended); THAT AS SUCH PETITIONER IS
EXEMPTED FROM ALL TAXES (EXEMPT INCOME
TAX) PURSUANT TO THE LAW AND THE
IMPLEMENTING REGULATIONS THEREOF
(CONSOLIDATED MINES ADMINISTRATIVE ORDER,
DATED AND EFFECTIVE MAY 17,1975); FURTHER,
THAT THE TAX COURT HAS ERRONEOUSLY RULED
TO IMPOSE THE INCOME TAX UPON MINOLCO
WHICH IS BASED ON SECTION 24 OF THE
REVENUE CODE AND MAY NOT BE THE SUBJECT
OF THE LITIGATION AS PART OF PETITIONER'S
APPEAL BEFORE THE TAX COURT.
Assignment of Error No. 7
THAT RESPONDENT I HAVE FAILED TO CONSIDER
THE 'WHEREAS CLAUSES OF THE ENABLING ACT
IMPOSING THE 35% TRANSACTION TAX LAW (P.D.
No. 1154) IN THE APPLICATION OF THE LAW,
TOGETHER WITH THE IMPLEMENTING
REGULATIONS THEREOF AS WELL AS THE
'WHEREAS CLAUSES OF THE REPEALING LAW (P.D.
No. 1739) WHICH RECOGNIZES PETITIONER'S
RIGHT OF RELIEF AGAINST THE TRANSACTION TAX
(SEE PEOPLE VS. PURISIMA, I,-42050-66; NOV.
20,1978; 86 SCRA 542).
The errors raised by the petitioner are grounded on one
main issue, whether or not the petitioner is exempt from
the 35% transaction tax.
We find the alleged errors without merit.
The petitioner claims exemption from the 35%
transaction tax on the basis of the following statutory
provisions:
(1) Sec. 1 of Republic Act No. 3823, amending
Commonwealth Act No. 137, otherwise known as the
Mining Act" which reads:
Sec. 1. There is hereby inserted after Section seventy-
nine, Chapter VI of the Mining Act, a new section which
shall read as follows:
Sec. 79-A. However, new mines, and old mines which
resume operation, when certified to as such by the
Secretary of Agriculture and Natural Resources upon the
recommendation of the Director of Mines, shall be
granted five years complete tax exemptions, except
income tax, from the time of its actual bona fide orders
for equipment for commercial production.
If any of the tax-exempt articles acquired under this
provision are sold, transferred or otherwise disposed of
within a period of five years from such tax-exempt
acquisition, all taxes and duties which would have been
due at the time of such acquisition shall become due and
payable, together with all interests and surcharges, and
which amount shall constitute a lien on these properties.
(2) Sec. I of Presidential Decree No. 237, amending the
Tax Code, which reads:
Section 1. The last paragraph of Section One hundred
ninety of Commonwealth Act Numbered Four hundred
sixty-six, otherwise known as the 'National Internal
Revenue Code' is further amended to read as follows:
Sec. 190. Compensating Tax.
xxx xxx xxx
The provisions of existing laws to the contrary
notwithstanding exemption from this tax shall be limited
to the following:
xxx xxx xxx
4. Machineries, equipment, tools for production, plants to
convert mineral ores into saleable form, spare parts,
supplies, materials, accessories, explosives, chemicals,
and transportation and communication facilities imported
by and for the use of new mines and old mines which
resume operations, when certified, to as such by the
Secretary of Agriculture and Natural Resources upon the
recommendation of the Director of Mines, for a period
ending five (5) years frorn the first date of actual
commercial production of saleable mineral
products: Provided That such articles are not locally
available in reasonable quantity quality and price and
are necessary or incidental in the proper operation of the
mine:
xxx xxx xxx
(3) Sec. 1 of P. D. No. 238, further amending the Tax
Code, which reads:
Section 1. Section One hundred five of Republic Act
Numbered Nineteen hundred and thirty-seven, otherwise
known as the 'Tariff and Customs Code of the
Philippines,' is further amended by inserting two new
paragraphs '(u) and '(v)' therein after paragraph '(t)'
thereof which shall read as follows:
Sec. 105. Conditionally-Free Importations
xxx xxx xxx
... Machineries, equipment, tools for production, plants to
convert mineral ores into saleable form, spare parts,
supplies, materials, accessories, explosives, chemicals,
and transportation and communication facilities imported
by and for the use of new mines and old mines which
resume operations, when certified to as such by the
Secretary of Agriculture and Natural Resources upon the
recommendation of the Director of Mines, for a period
ending five (5) years from the first date of actual
commercial production of saleable mineral
product; Provided That such articles are not locally
available in reasonable quantity, quality and price and
are necessary or incidental in the proper operation of the
mine.
(4) Secs. 52 and 53 of Presidential Decree No. 463,
amending Section 79-A, Commonwealth Act No. 137,
which read:
Sec. 52. Power to Levy Taxes on Mines. Mining
Operations and Mineral Products. — Any law to the
contrary notwithstanding, no province, city, municipality,
barrio or municipal district shall levy and collect taxes,
fees, rentals, royalties or charges of any kind
whatsoever on mines, mining claims, mineral products,
or on any operation, process or activity connected
therewith.
Sec. 53. Tax Exemptions. — Machineries equipment,
tools for production, plants to convert mineral ores into
saleable form, spare parts, supplies, materials,
accessories, explosives, chemicals and transportation
and communication facilities imported by and for the use
of new mines and old mines which resume operation,
when certified as such by the Secretary upon
recommendation of the Director, are exempt from the
payment of customs duties and all taxes except income
tax for a period starting from exploration and ending five
(5) years from the first date of actual commercial
.production of saleable mineral products: Provided, That
such articles are not locally available in reasonable
quantity, quality and price and are necessary or
incidental in the proper operation of the mine.
xxx xxx xxx
All mining claims, improvements thereon and mineral
products derived therefrom shall likewise be exempt
from the payment of all taxes, except income tax, for the
same period provided for in the first paragraph of this
section.
xxx xxx xxx
The statutory provisions on tax exemptions clearly
exclude the 35% transaction tax.
Section 1 of Presidential Decree No. 237 on
Compensating Tax, Section I of P.D. No. 238 on
Conditionally Free Importations, and Section 53 of P.D.
No. 463 all refer to tax exemptions for importations of
machineries, tools for production, plants to convert
mineral ores into saleable form, spare parts, supplies,
materials, accessories, explosives, chemicals and
transportation and communication facilities, to be used in
mining operations. Section 53 of P.D. No. 463 likewise
refers to tax exemptions for mining claims and
improvements thereon, and mineral products, except
income tax. The petitioner's Certificate of Qualification
for Tax Exemption No. 34 exempts "... from payment of
all taxes except income tax, payable by him in the
conduct of his business and in the importation of
machineries, spare parts and or equipment listed in the
stamped "Annex I " which are considered to be
indispensable in the operation and will be used by said
operator lessee exclusively in the mineral land
mentioned above.
Clearly, the transaction tax of P1,317,801.03 paid by the
petitioner was not actually imposed upon it in the
conduct of its mining business or in the importation of
machinery, spare parts and or equipment listed in the
stamped "ANNEX I" of its certificate of qualification for
tax exemption and which are indespensable in the
operation and used exclusively on petitioner's mineral
land.
Petitioner submits that inasmuch as taxes in general
constitute allowable deductions from gross income in the
determination of taxable net income, the 35%
transaction tax is a business tax and not an income tax
because the Revenue Code itself classifies it as
"Business Tax" under Title V, and that P. D. No. 1154
expressly states that the transaction tax shall be allowed
as a deductible item for purposes of determining the
borrower's taxable income.
The petitioner's contentions deserve scant
consideration, The 35%, transaction tax is imposed on
interest income from commercial papers issued in the
primary money market. Being a tax on interest, it is a tax
on income.
As correctly ruled by the respondent Court of Tax
Appeals:
Accordingly, we need not and do not think it necessary
to discuss further the nature of the transaction tax more
than to say that the incipient scheme in the issuance of
Letter of Instructions No. 340 on November 24, 1975
(O.G. Dec. 15, 1975), i.e., to achieve operational
simplicity and effective administration in capturing the
interest-income 'windfall' from money market operations
as a new source of revenue has lost none of its
animating principle in parturition of amendatory
Presidential decree No. 1154, now Section 210(b) of the
Tax Code. The tax thus imposed is actually a tax on
interest earrings of the lenders or placers who are
actually the taxpayer,, in whose income is imposed.
Thus, "the borrower withholds the tax of 35% from the
interest he would have to pay the lender so that he
(borrower) can pay the 35% of the interest to the
Government." (President Marcos, Times Journal, June
17, 1977 cited in Respondent's Memorandum p. 6) ...
Suffice it to state that the broad concensus of fiscal and
monetary authorities is that "even if nominally, the
borrower is made to pay the tax, actually the tax is on
the interest earning of the immediate and an prior
lenders/placers of the money ... (Rollo, pp. 36-37)
The 35% transaction tax is an income tax on interest
earnings to the lenders or placers The latter are actually
the taxpayers. Therefore, the tax cannot be a tax
imposed upon petitioner. In other words, the petitioner
who borrowed funds from several financial institutions by
issuing commercial papers merely withheld the 35%
transaction tax before paying to the financial institutions
the interests earned by them and later remitted the same
to the respondent Commissioner of Internal Revenue.
The tax could have been collected by a different
procedure but the statute chose this method. Whatever
collecting procedure is adopted does not change the
nature of the tax.
Furthermore, whether or not certain taxes are on income
is not necessarily determined by their deductibility or
non-deductibility from gross income. As correctly
observed by the Solicitor General, income in the form of
dividends, capital gains on real property pursuant to
Batas Pambansa Blg, 37, shares of stock pursuant to
Presidential Decree 1739, and interests on savings in
bank accounts, for instance, are incomes, yet they are
not includible in the gross income when income taxes
are paid because these are subject to final withholding
taxes.
The petitioner also submits that the 35% transaction tax
is a business tax because it is imposed under Title V,
entitled -,Taxes on Business" and classified specially
under Chapter II, entitled "Tax on Business."
The location of the 35%, tax in the Tax Code does not
necessarily determine its nature, Again, we agree with
the Solicitor General that the legislative body must have
realized later that. the subject tax was inappropriately
included among the taxes on business because Section
210 of the Tax Code has been repealed by Presidential
Decree No. 1739, which now imposes a tax of 20% on
interests from deposits and yields from deposit
substitutes such as commercial papers issued in the
primary market as principal instrument and provides for
them in Section 24(cc) under Chapter III, Tax on
Corporations, Title II-Income. Tax.
Petitioner Western Minolco Corporation has failed to
justify its claimed exemption from the 35,7c, transaction
tax. The decision of the Commissioner of Internal
Revenue denying the petitioner's claim for refund is
affirmed. It bears repeating that the law looks with
disfavor on tax exemptions and he who would seek to be
thus privileged must justify it by words too plain to be
mistaken and too categorical to be misinterpreted.
(Commissioner of Internal Revenue U. P. J Kiener
Company Ltd, International Construction Corporation et
al., L,-24754, July 18, 1975, 65 SCRA 142).
WHEREFORE, the instant petition is DENIED for lack of
merit. The decision of the respondent Court of Tax
Appeals is AFFIRMED: In toto.
SO ORDERED.
G.R. No. L-13203 January 28, 1961
YUTIVO SONS HARDWARE COMPANY, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF
INTERNAL REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of
Tax Appeals ordering petitioner to pay to respondent
Collector of Internal Revenue the sum of P1,266,176.73
as sales tax deficiency for the third quarter of 1947 to the
fourth quarter of 1950; inclusive, plus 75% surcharge
thereon, equivalent to P349,632.54, or a sum total of
P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence adduced
by both parties, it appears that petitioner Yutivo Sons
Hardware Co. (hereafter referred to as Yutivo) is a
domestic corporation, organized under the laws of the
Philippines, with principal office at 404 Dasmariñas St.,
Manila. Incorporated in 1916, it was engaged, prior to
the last world war, in the importation and sale of
hardware supplies and equipment. After the liberation, it
resumed its business and until June of 1946 bought a
number of cars and trucks from General Motors
Overseas Corporation (hereafter referred to as GM for
short), an American corporation licensed to do business
in the Philippines. As importer, GM paid sales tax
prescribed by sections 184, 185 and 186 of the Tax
Code on the basis of its selling price to Yutivo. Said tax
being collected only once on original sales, Yutivo paid
no further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter
referred to as SM) was organized to engage in the
business of selling cars, trucks and spare parts. Its
original authorized capital stock was P1,000,000 divided
into 10,000 shares with a par value of P100 each.
At the time of its incorporation 2,500 shares worth
P250,000 appear to have been subscribed into equal
proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin,
Yu Eng Poh, and Washington Sycip. The first three
named subscribers are brothers, being sons of Yu Tiong
Yee, one of Yutivo's founders. The latter two are
respectively sons of Yu Tiong Sin and Albino Sycip, who
are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of
GM from the Philippines in the middle of 1947, the cars
and tracks purchased by Yutivo from GM were sold by
Yutivo to SM which, in turn, sold them to the public in the
Visayas and Mindanao.
When GM decided to withdraw from the Philippines in
the middle of 1947, the U.S. manufacturer of GM cars
and trucks appointed Yutivo as importer for the Visayas
and Mindanao, and Yutivo continued its previous
arrangement of selling exclusively to SM. In the same
way that GM used to pay sales taxes based on its sales
to Yutivo, the latter, as importer, paid sales tax
prescribed on the basis of its selling price to SM, and
since such sales tax, as already stated, is collected only
once on original sales, SM paid no sales tax on its sales
to the public.
On November 7, 1950, after several months of
investigation by revenue officers started in July, 1948,
the Collector of Internal Revenue made an assessment
upon Yutivo and demanded from the latter
P1,804,769.85 as deficiency sales tax plus surcharge
covering the period from the third quarter of 1947 to the
fourth quarter of 1949; or from July 1, 1947 to December
31, 1949, claiming that the taxable sales were the retail
sales by SM to the public and not the sales at wholesale
made by, Yutivo to the latter inasmuch as SM and Yutivo
were one and the same corporation, the former being
the subsidiary of the latter.
The assessment was disputed by the petitioner, and a
reinvestigation of the case having been made by the
agents of the Bureau of Internal Revenue, the
respondent Collector in his letter dated November 15,
1952 countermanded his demand for sales tax
deficiency on the ground that "after several
investigations conducted into the matter no sufficient
evidence could be gathered to sustain the assessment
of this Office based on the theory that Southern Motors
is a mere instrumentality or subsidiary of Yutivo." The
withdrawal was subject, however, to the general power
of review by the now defunct Board of Tax Appeals. The
Secretary of Finance to whom the papers relative to the
case were endorsed, apparently not agreeing with the
withdrawal of the assessment, returned them to the
respondent Collector for reinvestigation.
After another investigation, the respondent Collector, in
a letter to petitioner dated December 16, 1954,
redetermined that the aforementioned tax assessment
was lawfully due the government and in addition
assessed deficiency sales tax due from petitioner for the
four quarters of 1950; the respondents' last demand was
in the total sum of P2,215,809.27 detailed as follows:
Deficiency 75% Total Amount
Sales Tax Surcharge Due
Assessment
(First) of
November 7,
1950 for
deficiency
sales Tax for
the period
from 3rd Qrtr
1947 to 4th P1,031,296.60 P773,473.45 P1,804,769.05
 Qrtr 1949
inclusive
Additional
Assessment
for period
from 1st to
4th Qrtr
1950,
inclusive 234,880.13 176,160.09 411,040.22 Government of its lawful revenues. In the first place, this
Total amount
demanded
per letter of
December
16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27Yutivo, which, in turn resold them to SM. During that
This second assessment was contested by the petitioner
Yutivo before the Court of Tax Appeals, alleging that
there is no valid ground to disregard the corporate
personality of SM and to hold that it is an adjunct of
petitioner Yutivo; (2) that assuming the separate
personality of SM may be disregarded, the sales tax
already paid by Yutivo should first be deducted from the
selling price of SM in computing the sales tax due on
each vehicle; and (3) that the surcharge has been
erroneously imposed by respondent. Finding against
Yutivo and sustaining the respondent Collector's theory
that there was no legitimate or bona fide purpose in the
organization of SM — the apparent objective of its
organization being to evade the payment of taxes — and
that it was owned (or the majority of the stocks thereof
are owned) and controlled by Yutivo and is a mere
subsidiary, branch, adjunct, conduit, instrumentality or
alter ego of the latter, the Court of Tax Appeals — with
Judge Roman Umali not taking part — disregarded its
separate corporate existence and on April 27, 1957,
rendered the decision now complained of. Of the two
Judges who signed the decision, one voted for the
modification of the computation of the sales tax as
determined by the respondent Collector in his decision
so as to give allowance for the reduction of the tax
already paid (resulting in the reduction of the
assessment to P820,509.91 exclusive of surcharges),
while the other voted for affirmance. The dispositive part
of the decision, however, affirmed the assessment made
by the Collector. Reconsideration of this decision having
been denied, Yutivo brought the case to this Court thru
the present petition for review.
It is an elementary and fundamental principle of
corporation law that a corporation is an entity separate
and distinct from its stockholders and from other
corporation petitions to which it may be connected.
However, "when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud,
or defend crime," the law will regard the corporation as
an association of persons, or in the case of two
corporations merge them into one. (Koppel [Phil.], Inc.
vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of
Corporation, Perm Ed., pp. 135 136; United States vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255
per Sanborn, J.) Another rule is that, when the
corporation is the "mere alter ego or business conduit of
a person, it may be disregarded." (Koppel [Phil.], Inc. vs.
Yatco, supra.)
After going over the voluminous record of the present
case, we are inclined to rule that the Court of Tax
Appeals was not justified in finding that SM was
organized for no other purpose than to defraud the
corporation was organized in June, 1946 when it could
not have caused Yutivo any tax savings. From that date
up to June 30, 1947, or a period of more than one year,
GM was the importer of the cars and trucks sold to
period, it is not disputed that GM as importer, was the
one solely liable for sales taxes. Neither Yutivo or SM
was subject to the sales taxes on their sales of cars and
trucks. The sales tax liability of Yutivo did not arise until
July 1, 1947 when it became the importer and simply
continued its practice of selling to SM. The decision,
therefore, of the Tax Court that SM was organized
purposely as a tax evasion device runs counter to the
fact that there was no tax to evade.
Making the observation from a newspaper clipping (Exh.
"T") that "as early as 1945 it was known that GM was
preparing to leave the Philippines and terminate its
business of importing vehicles," the court below
speculated that Yutivo anticipated the withdrawal of GM
from business in the Philippines in June, 1947. This
observation, which was made only in the resolution on
the motion for reconsideration, however, finds no basis
in the record. On the other hand, GM had been an
importer of cars in the Philippines even before the war
and had but recently resumed its operation in the
Philippines in 1946 under an ambitious plan to expand
its operation by establishing an assembly plant here, so
that it could not have been expected to make so drastic
a turnabout of not merely abandoning the assembly
plant project but also totally ceasing to do business as
an importer. Moreover, the newspaper clipping, Exh. "T",
was published on March 24, 1947, and clipping, merely
reported a rumored plan that GM would abandon the
assembly plant project in the Philippines. There was no
mention of the cessation of business by GM which must
not be confused with the abandonment of the assembly
plant project. Even as respect the assembly plant, the
newspaper clipping was quite explicit in saying that the
Acting Manager refused to confirm that rumor as late as
March 24, 1947, almost a year after SM was organized.
At this juncture, it should be stated that the intention to
minimize taxes, when used in the context of fraud, must
be proved to exist by clear and convincing evidence
amounting to more than mere preponderance, and
cannot be justified by a mere speculation. This is
because fraud is never lightly to be presumed. (Vitelli &
Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d)
786; Budd vs. Commr., 43 F (2d) 509; Maryland
Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374;
Schoonfield Bros., Inc. vs. Commr., 38 BTA 943;
Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs.
Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d)
548; Moore vs. Commr., 37 BTA 378; National City Bank
of New York vs. Commr., 98 (2d) 93; Richard vs.
Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA
518). (See also Balter, Fraud Under Federal Law, pp.
301-302, citing numerous authorities: Arroyo vs.
Granada, et al., 18 Phil. 484.) Fraud is never imputed
and the courts never sustain findings of fraud upon
circumstances which, at the most, create only suspicion.
(Haygood Lumber & Mining Co. vs. Commr., 178 F (2d)
769; Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated,
under circumstance that belied any intention to evade
sales taxes. "Tax evasion" is a term that connotes fraud
thru the use of pretenses and forbidden devices to
lessen or defeat taxes. The transactions between Yutivo
and SM, however, have always been in the open,
embodied in private and public documents, constantly
subject to inspection by the tax authorities. As a matter
of fact, after Yutivo became the importer of GM cars and
trucks for Visayas and Mindanao, it merely continued the
method of distribution that it had initiated long before GM
withdrew from the Philippines.
On the other hand, if tax saving was the only justification
for the organization of SM, such justification certainly
ceased with the passage of Republic Act No. 594 on
February 16, 1951, governing payment of advance sales
tax by the importer based on the landed cost of the
imported article, increased by mark-ups of 25%, 50%,
and 100%, depending on whether the imported article is
taxed under sections 186, 185 and 184, respectively, of
the Tax Code. Under Republic Act No. 594, the amount
at which the article is sold is immaterial to the amount of
the sales tax. And yet after the passage of that Act, SM
continued to exist up to the present and operates as it
did many years past in the promotion and pursuit of the
business purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code
provides that the sales tax shall be collected "once only
on every original sale, barter, exchange . . , to be paid by
the manufacturer, producer or importer." The use of the
word "original" and the express provision that the tax
was collectible "once only" evidently has made the
provisions susceptible of different interpretations. In this
connection, it should be stated that a taxpayer has the
legal right to decrease the amount of what otherwise
would be his taxes or altogether avoid them by means
which the law permits. (U.S. vs. Isham 17 Wall. 496,
506; Gregory vs. Helvering 293 U.S. 465, 469; Commr.
vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d)
380). Any legal means by the taxpayer to reduce taxes
are all right Benry vs. Commr. 25 T. Cl. 78). A man may,
therefore, perform an act that he honestly believes to be
sufficient to exempt him from taxes. He does not incur
fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case of Court Holding Co. vs.
Commr. 2 T. Cl. 531, it was held that though an incorrect
position in law had been taken by the corporation there
was no suppression of the facts, and a fraud penalty was
not justified.
The evidence for the Collector, in our opinion, falls short
of the standard of clear and convincing proof of fraud. As
a matter of fact, the respondent Collector himself
showed a great deal of doubt or hesitancy as to the
existence of fraud. He even doubted the validity of his
first assessment dated November 7, 1959. It must be
remembered that the fraud which respondent Collector
imputed to Yutivo must be related to its filing of sales tax
returns of less taxes than were legally due. The
allegation of fraud, however, cannot be sustained
without the showing that Yutivo, in filing said returns, did
so fully knowing that the taxes called for therein called
for therein were less than what were legally due.
Considering that respondent Collector himself with the
aid of his legal staff, and after some two years of
investigation and duty of investigation and study
concluded in 1952 that Yutivo's sales tax returns were
correct — only to reverse himself after another two years
— it would seem harsh and unfair for him to say in 1954
that Yutivo fully knew in October 1947 that its sales tax
returns were inaccurate.
On this point, one other consideration would show that
the intent to save taxes could not have existed in the
minds of the organizers of SM. The sales tax imposed, in
theory and in practice, is passed on to the vendee, and
is usually billed separately as such in the sales invoice.
As pointed out by petitioner Yutivo, had not SM handled
the retail, the additional tax that would have been
payable by it, could have been easily passed off to the
consumer, especially since the period covered by the
assessment was a "seller's market" due to the post-war
scarcity up to late 1948, and the imposition of controls in
the late 1949.
It is true that the arrastre charges constitute expenses of
Yutivo and its non-inclusion in the selling price by Yutivo
cost the Government P4.00 per vehicle, but said non-
inclusion was explained to have been due to an
inadvertent accounting omission, and could hardly be
considered as proof of willful channelling and fraudulent
evasion of sales tax. Mere understatement of tax in itself
does not prove fraud. (James Nicholson, 32 BTA 377,
affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p.
21) The amount involved, moreover, is extremely small
inducement for Yutivo to go thru all the trouble of
organizing SM. Besides, the non-inclusion of these small
arrastre charges in the sales tax returns of Yutivo is
clearly shown in the records of Yutivo, which is
uncharacteristic of fraud (See Insular Lumber Co. vs.
Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below
that SM was actually owned and controlled by petitioner
as to make it a mere subsidiary or branch of the latter
created for the purpose of selling the vehicles at retail
and maintaining stores for spare parts as well as service
repair shops. It is not disputed that the petitioner, which
is engaged principally in hardware supplies and
equipment, is completely controlled by the Yutivo, Young
or Yu family. The founders of the corporation are closely
related to each other either by blood or affinity, and most
of its stockholders are members of the Yu (Yutivo or
Young) family. It is, likewise, admitted that SM was
organized by the leading stockholders of Yutivo headed
by Yu Khe Thai. At the time of its incorporation 2,500
shares worth P250,000.00 appear to have been
subscribed in five equal proportions by Yu Khe Thai, Yu
Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington
Sycip. The first three named subscribers are brothers,
being the sons of Yu Tien Yee, one of Yutivo's founders.
Yu Eng Poh and Washington Sycip are respectively
sons of Yu Tiong Sing and Alberto Sycip who are co-
founders of Yutivo. According to the Articles of
Incorporation of the said subscriptions, the amount of
P62,500 was paid by the aforenamed subscribers, but
actually the said sum was advanced by Yutivo. The
additional subscriptions to the capital stock of SM and
subsequent transfers thereof were paid by Yutivo itself.
The payments were made, however, without any transfer
of funds from Yutivo to SM. Yutivo simply charged the
accounts of the subscribers for the amount allegedly
advanced by Yutivo in payment of the shares. Whether a
charge was to be made against the accounts of the
subscribers or said subscribers were to subscribe shares
appears to constitute a unilateral act on the part of
Yutivo, there being no showing that the former initiated
the subscription.
The transactions were made solely by and between SM
and Yutivo. In effect, it was Yutivo who undertook the
subscription of shares, employing the persons named or
"charged" with corresponding account as nominal
stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu
Khe Siong and Yu Eng Poh were manifestly aware of
these subscriptions, but considering that they were the
principal officers and constituted the majority of the
Board of Directors of both Yutivo and SM, their
subscriptions could readily or easily be that of Yutivo's
Moreover, these persons were related to death other as
brothers or first cousins. There was every reason for
them to agree in order to protect their common interest
in Yutivo and SM.
The issued capital stock of SM was increased by
additional subscriptions made by various person's but
except Ng Sam Bak and David Sycip, "payments"
thereof were effected by merely debiting 'or charging the
accounts of said stockholders and crediting the
corresponding amounts in favor of SM, without actually
transferring cash from Yutivo. Again, in this instance, the
"payments" were Yutivo, by effected by the mere
unilateral act of Yutivo a accounts of the virtue of its
control over the individual persons charged, would
necessarily exercise preferential rights and control
directly or indirectly, over the shares, it being the party
which really undertook to pay or underwrite payment
thereof.
The shareholders in SM are mere nominal stockholders
holding the shares for and in behalf of Yutivo, so even
conceding that the original subscribers were
stockholders bona fide Yutivo was at all times in control
of the majority of the stock of SM and that the latter was
a mere subsidiary of the former.
True, petitioner and other recorded stockholders
transferred their shareholdings, but the transfers were
made to their immediate relatives, either to their
respective spouses and children or sometimes brothers
or sisters. Yutivo's shares in SM were transferred to
immediate relatives of persons who constituted its
controlling stockholders, directors and officers. Despite
these purported changes in stock ownership in both
corporations, the Board of Directors and officers of both
corporations remained unchanged and Messrs. Yu Khe
Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of
the Yu or Young family) continued to constitute the
majority in both boards. All these, as observed by the
Court of Tax Appeals, merely serve to corroborate the
fact that there was a common ownership and interest in
the two corporations.
SM is under the management and control of Yutivo by
virtue of a management contract entered into between
the two parties. In fact, the controlling majority of the
Board of Directors of Yutivo is also the controlling
majority of the Board of Directors of SM. At the same
time the principal officers of both corporations are
identical. In addition both corporations have a common
comptroller in the person of Simeon Sy, who is a
brother-in-law of Yutivo's president, Yu Khe Thai. There
is therefore no doubt that by virtue of such control, the
business, financial and management policies of both
corporations could be directed towards common ends.
Another aspect relative to Yutivo's control over SM
operations relates to its cash transactions. All cash
assets of SM were handled by Yutivo and all cash
transactions of SM were actually maintained thru Yutivo.
Any and all receipts of cash by SM including its
branches were transmitted or transferred immediately
and directly to Yutivo in Manila upon receipt thereof.
Likewise, all expenses, purchases or other obligations
incurred by SM are referred to Yutivo which in turn
prepares the corresponding disbursement vouchers and
payments in relation there, the payment being made out
of the cash deposits of SM with Yutivo, if any, or in the
absence thereof which occurs generally, a
corresponding charge is made against the account of
SM in Yutivo's books. The payments for and charges
against SM are made by Yutivo as a matter of course
and without need of any further request, the latter would
advance all such cash requirements for the benefit of
SM. Any and all payments and cash vouchers are made
on Yutivo stationery and made under authority of
Yutivo's corporate officers, without any copy thereof
being furnished to SM. All detailed records such as cash
disbursements, such as expenses, purchases, etc. for
the account of SM, are kept by Yutivo and SM merely
keeps a summary record thereof on the basis of
information received from Yutivo.
All the above plainly show that cash or funds of SM,
including those of its branches which are directly
remitted to Yutivo, are placed in the custody and control
of Yutivo, resources and subject to withdrawal only by
Yutivo. SM's being under Yutivo's control, the former's
operations and existence became dependent upon the
latter.
Consideration of various other circumstances, especially
when taken together, indicates that Yutivo treated SM
merely as its department or adjunct. For one thing, the
accounting system maintained by Yutivo shows that it
maintained a high degree of control over SM accounts.
All transactions between Yutivo and SM are recorded
and effected by mere debit or credit entries against the
reciprocal account maintained in their respective books
of accounts and indicate the dependency of SM as
branch upon Yutivo.
Apart from the accounting system, other facts
corroborate or independently show that SM is a branch
or department of Yutivo. Even the branches of SM in
Bacolod, Iloilo, Cebu, and Davao treat Yutivo — Manila
as their "Head Office" or "Home Office" as shown by
their letters of remittances or other correspondences.
These correspondences were actually received by
Yutivo and the reference to Yutivo as the head or home
office is obvious from the fact that all cash collections of
the SM's branches are remitted directly to Yutivo. Added
to this fact, is that SM may freely use forms or stationery
of Yutivo
The fact that SM is a mere department or adjunct of
Yutivo is made more patent by the fact that arrastre
conveying, and charges paid for the "operation of
receiving, loading or unloading" of imported cars and
trucks on piers and wharves, were charged against SM.
Overtime charges for the unloading of cars and trucks as
requested by Yutivo and incurred as part of its
acquisition cost thereof, were likewise charged against
and treated as expenses of SM. If Yutivo were the
importer, these arrastre and overtime charges were
Yutivo's expenses in importing goods and not SM's. But
since those charges were made against SM, it plainly
appears that Yutivo had sole authority to allocate its
expenses even as against SM in the sense that the latter
is a mere adjunct, branch or department of the former.
Proceeding to another aspect of the relation of the
parties, the management fees due from SM to Yutivo
were taken up as expenses of SM and credited to the
account of Yutivo. If it were to be assumed that the two
organizations are separate juridical entities, the
corresponding receipts or receivables should have been
treated as income on the part of Yutivo. But such
management fees were recorded as "Reserve for
Bonus" and were therefore a liability reserve and not an
income account. This reserve for bonus were
subsequently distributed directly to and credited in favor
of the employees and directors of Yutivo, thereby clearly
showing that the management fees were paid directly to
Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly,
the business of SM and actually extended all the credit
to the latter not only in the form of starting capital but
also in the form of credits extended for the cars and
vehicles allegedly sold by Yutivo to SM as well as
advances or loans for the expenses of the latter when
the capital had been exhausted. Thus, the increases in
the capital stock were made in advances or "Guarantee"
payments by Yutivo and credited in favor of SM. The
funds of SM were all merged in the cash fund of Yutivo.
At all times Yutivo thru officers and directors common to
it and SM, exercised full control over the cash funds,
policies, expenditures and obligations of the latter.
Southern Motors being but a mere instrumentality, or
adjunct of Yutivo, the Court of Tax Appeals correctly
disregarded the technical defense of separate corporate
entity in order to arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had
lost his right or authority to issue the disputed
assessment by reason of prescription. The contention, in
our opinion, cannot be sustained. It will be noted that the
first assessment was made on November 7, 1950 for
deficiency sales tax from 1947 to 1949. The
corresponding returns filed by petitioner covering the
said period was made at the earliest on October 1, as
regards the third quarter of 1947, so that it cannot be
claimed that the assessment was not made within the
five-year period prescribed in section 331 of the Tax
Code invoked by petitioner. The assessment, it is
admitted, was withdrawn by the Collector on
insufficiency of evidence, but November 15, 1952 due to
insufficiency of evidence, but the withdrawal was made
subject to the approval of the Secretary of Finance and
the Board of Tax Appeals, pursuant to the provisions of
section 9 of Executive Order No. 401-A, series of 1951.
The decision of the previous assessment of November
7, Collector countermanding the as 1950 was forwarded
to the Board of Tax Appeals through the Secretary of
Finance but that official, apparently disagreeing with the
decision, sent it back for re-investigation. Consequently,
the assessment of November 7, 1950 cannot be
considered to have been finally withdrawn. That the
assessment was subsequently reiterated in the decision
of respondent Collector on December 16, 1954 did not
alter the fact that it was made seasonably. In this
connection, it would appear that a warrant of distraint
and levy had been issued on March 28, 1951 in relation
with this case and by virtue thereof the properties of
Yutivo were placed under constructive distraint. Said
warrant and constructive distraint have not been lifted up
to the present, which shows that the assessment of
November 7, 1950 has always been valid and
subsisting.
Anent the deficiency sale tax for 1950, considering that
the assessment thereof was made on December 16,
1954, the same was assessed well within the prescribed
five-year period.
Petitioner argues that the original assessment of
November 7, 1950 did not extend the prescriptive period
on assessment. The argument is untenable, for, as
already seen, the assessment was never finally
withdrawn, since it was not approved by the Secretary of
Finance or of the Board of Tax Appeals. The authority of
the Secretary to act upon the assessment cannot be
questioned, for he is expressly granted such authority
under section 9 of Executive Order No. 401-And under
section 79 (c) of the Revised Administrative Code, he
has "direct control, direction and supervision over all
bureaus and offices under his jurisdiction and may, any
provision of existing law to the contrary not withstanding,
repeal or modify the decision of the chief of said Bureaus
or offices when advisable in public interest."
It should here also be stated that the assessment in
question was consistently protested by petitioner,
making several requests for reinvestigation thereof.
Under the circumstances, petitioner may be considered
to have waived the defense of prescription.
"Estoppel has been employed to prevent the application
of the statute of limitations against the government in
certain instances in which the taxpayer has taken some
affirmative action to prevent the collection of the tax
within the statutory period. It is generally held that a
taxpayer is estopped to repudiate waivers of the statute
of limitations upon which the government relied. The
cases frequently involve dissolved corporations. If no
waiver has been given, the cases usually show come
conduct directed to a postponement of collection, such,
for example, as some variety of request to apply an
overassessment. The taxpayer has 'benefited' and 'is not
in a position to contest' his tax liability. A definite
representation of implied authority may be involved, and
in many cases the taxpayer has received the 'benefit' of
being saved from the inconvenience, if not hardship of
immediate collection. "
Conceivably even in these cases a fully informed
Commissioner may err to the sorrow of the revenues,
but generally speaking, the cases present a strong
combination of equities against the taxpayer, and few
will seriously quarrel with their application of the doctrine
of estoppel." (Mertens Law of Federal Income Taxation,
Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No.
401-A, series of 1951 — es involving an original
assessment of more than P5,000 — refers only to
compromises and refunds of taxes, but not to total
withdrawal of the assessment. The contention is without
merit. A careful examination of the provisions of both
sections 8 and 9 of Executive Order No. 401-A, series of
1951, reveals the procedure prescribed therein is
intended as a check or control upon the powers of the
Collector of Internal Revenue in respect to assessment
and refunds of taxes. If it be conceded that a decision of
the Collector of Internal Revenue on partial remission of
taxes is subject to review by the Secretary of Finance
and the Board of Tax Appeals, then with more reason
should the power of the Collector to withdraw totally an
assessment be subject to such review.
We find merit, however, in petitioner's contention that the
Court of Tax Appeals erred in the imposition of the 5%
fraud surcharge. As already shown in the early part of
this decision, no element of fraud is present.
Pursuant to Section 183 of the National Internal
Revenue Code the 50% surcharge should be added to
the deficiency sales tax "in case a false or fraudulent
return is willfully made." Although the sales made by SM
are in substance by Yutivo this does not necessarily
establish fraud nor the willful filing of a false or fraudulent
return.
The case of Court Holding Co. v. Commissioner of
Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is
in point. The petitioner Court Holding Co. was a
corporation consisting of only two stockholders, to wit:
Minnie Miller and her husband Louis Miller. The only
assets of third husband and wife corporation consisted
of an apartment building which had been acquired for a
very low price at a judicial sale. Louis Miller, the
husband, who directed the company's business, verbally
agreed to sell this property to Abe C. Fine and Margaret
Fine, husband and wife, for the sum of $54,000.00,
payable in various installments. He received $1,000.00
as down payment. The sale of this property for the price
mentioned would have netted the corporation a
handsome profit on which a large corporate income tax
would have to be paid. On the afternoon of February 23,
1940, when the Millers and the Fines got together for the
execution of the document of sale, the Millers
announced that their attorney had called their attention
to the large corporate tax which would have to be paid if
the sale was made by the corporation itself. So instead
of proceeding with the sale as planned, the Millers
approved a resolution to declare a dividend to
themselves "payable in the assets of the corporation, in
complete liquidation and surrender of all the outstanding
corporate stock." The building, which as above stated
was the only property of the corporation, was then
transferred to Mr. and Mrs. Miller who in turn sold it to
Mr. and Mrs. Fine for exactly the same price and under
the same terms as had been previously agreed upon
between the corporation and the Fines.
The return filed by the Court Holding Co. with the
respondent Commissioner of Internal Revenue reported
no taxable gain as having been received from the sale of
its assets. The Millers, of course, reported a long term
capital gain on the exchange of their corporate stock
with the corporate property. The Commissioner of
Internal Revenue contended that the liquidating dividend
to stockholders had no purpose other than that of tax
avoidance and that, therefore, the sale by the Millers to
the Fines of the corporation's property was in substance
a sale by the corporation itself, for which the corporation
is subject to the taxable profit thereon. In requiring the
corporation to pay the taxable profit on account of the
sale, the Commissioner of Internal Revenue, imposed a
surcharge of 25% for delinquency, plus an additional
surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the
Millers was for no other purpose than to avoid the tax
and was, in substance, a sale by the Court Holding Co.,
and that, therefore, the said corporation should be liable
for the assessed taxable profit thereon. The Court of Tax
Appeals also sustained the Commissioner of Internal
Revenue on the delinquency penalty of 25%. However,
the Court of Tax Appeals disapproved the fraud
penalties, holding that an attempt to avoid a tax does not
necessarily establish fraud; that it is a settled principle
that a taxpayer may diminish his tax liability by means
which the law permits; that if the petitioner, the Court
Holding Co., was of the opinion that the method by
which it attempted to effect the sale in question was
legally sufficient to avoid the imposition of a tax upon it,
its adoption of that methods not subject to censure; and
that in taking a position with respect to a question of law,
the substance of which was disclosed by the statement
indorsed on it return, it may not be said that that position
was taken fraudulently. We quote in full the pertinent
portion of the decision of the Court of Tax Appeals: .
". . . The respondent's answer alleges that the
petitioner's failure to report as income the taxable profit
on the real estate sale was fraudulent and with intent to
evade the tax. The petitioner filed a reply denying fraud
and averring that the loss reported on its return was
correct to the best of its knowledge and belief. We think
the respondent has not sustained the burden of proving
a fraudulent intent. We have concluded that the sale of
the petitioner's property was in substance a sale by the
petitioner, and that the liquidating dividend to
stockholders had no purpose other than that of tax
avoidance. But the attempt to avoid tax does not
necessarily establish fraud. It is a settled principle that a
taxpayer may diminish his liability by any means which
the law permits. United States v. Isham, 17 Wall.
496; Gregory v. Helvering, supra; Chrisholm v.
Commissioner, 79 Fed. (2d) 14. If the petitioner here
was of the opinion that the method by which it attempted
to effect the sale in question was legally sufficient to
avoid the imposition of tax upon it, its adoption of that
method is not subject to censure. Petitioner took a
position with respect to a question of law, the substance
of which was disclosed by the statement endorsed on its
return. We can not say, under the record before us, that
that position was taken fraudulently. The determination
of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler,
of the cars and trucks, the sales tax was paid only once
and on the original sales by the former and neither the
latter nor SM paid taxes on their subsequent sales.
Yutivo might have, therefore, honestly believed that the
payment by it, as importer, of the sales tax was enough
as in the case of GM Consequently, in filing its return on
the basis of its sales to SM and not on those by the latter
to the public, it cannot be said that Yutivo deliberately
made a false return for the purpose of defrauding the
government of its revenues which will justify the
imposition of the surcharge penalty.
We likewise find meritorious the contention that the Tax
Court erred in computing the alleged deficiency sales tax
on the selling price of SM without previously deducting
therefrom the sales tax due thereon. The sales tax
provisions (sees. 184.186, Tax Code) impose a tax on
original sales measured by "gross selling price" or "gross
value in money". These terms, as interpreted by the
respondent Collector, do not include the amount of the
sales tax, if invoiced separately. Thus, General Circular
No. 431 of the Bureau of Internal Revenue dated July
29, 1939, which implements sections 184.186 of the Tax
Code provides: "
. . .'Gross selling price' or gross value in money' of the
articles sold, bartered, exchanged, transferred as the
term is used in the aforecited sections (sections 184,
185 and 186) of the National Internal Revenue Code, is
the total amount of money or its equivalent which the
purchaser pays to the vendor to receive or get the
goods. However, if a manufacturer, producer, or
importer, in fixing the gross selling price of an article sold
by him has included an amount intended to cover the
sales tax in the gross selling price of the articles, the
sales tax shall be based on the gross selling price less
the amount intended to cover the tax, if the same is
billed to the purchaser as a separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a
separate em so as not to pay a tax on the tax. — On
sales made after he third quarter of 1939, the amount
intended to cover the sales tax must be billed to the
purchaser as separate items in the, invoices in order that
the reduction thereof from the gross ailing price may be
allowed in the computation of the merchants' percentage
tax on the sales. Unless billed to the purchaser as a
separate item in the invoice, the amounts intended to
cover the sales tax shall be considered as part of the
gross selling price of the articles sold, and deductions
thereof will not be allowed, (Cited in Dalupan, Nat. Int.
Rev. Code, Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to
SM, and as separately billed, the sales taxes did not
form part of the "gross selling price" as the measure of
the tax. Since Yutivo had previously billed the sales tax
separately in its sales invoices to SM General Circulars
Nos. 431 and 440 should be deemed to have been
complied. Respondent Collector's method of
computation, as opined by Judge Nable in the decision and the concurrence of two judges shall be necessary to
complained of — promulgate decision thereof. . . . " It is on record that the
present case was heard by two judges of the lower
. . . is unfair, because . . .(it is) practically imposing tax court. And while Judge Nable expressed his opinion on
on a tax already paid. Besides, the adoption of the the issue of whether or not the amount of the sales tax
procedure would in certain cases elevate the bracket should be excluded from the gross selling price in
under which the tax is based. The late payment is computing the deficiency sales tax due from the
already penalized, thru the imposition of surcharges, by petitioner, the opinion, apparently, is merely an
adopting the theory of the Collector, we will be creating expression of his general or "private sentiment" on the
an additional penalty not contemplated by law." particular issue, for he concurred the dispositive part of
the decision. At any rate, assuming that there is no valid
decision for lack of concurrence of two judges, the case
If the taxes based on the sales of SM are computed in
was submitted for decision of the court below on March
accordance with Gen. Circulars Nos. 431 and 440 the
total deficiency sales taxes, exclusive of the 25% and 28, 1957 and under section 13 of Republic Act 1125,
50% surcharges for late payment and for fraud, would cases brought before said court hall be decided within
30 days after submission thereof. "If no decision is
amount only to P820,549.91 as shown in the following
rendered by the Court within thirty days from the date a
computation:
case is submitted for decision, the party adversely
affected by said ruling, order or decision, may file with
Sales Taxes said Court a notice of his intention to appeal to the
Rates Gross Sales Due and Total Gross Supreme Court, and if no decision has as yet been
of of VehiclesComputed Selling Price rendered by the Court, the aggrieved party may file
Sales Exclusive of under Gen. Charged to directly with the Supreme Court an appeal from said
Tax Sales Tax Cir Nos. 431 the Public ruling, order or decision, notwithstanding the foregoing
& 400 provisions of this section." The case having been
P11,912,219. P595,610.9 P12,507,830 brought before us on appeal, the question raised by
5% 57 8 55 petitioner as become purely academic.
7% 909,559.50 63,669.16 973,228.66
10% 2,618,695.28 261,869.53 2,880,564.81 IN VIEW OF THE FOREGOING, the decision of the
Court of Tax Appeals under review is hereby modified in
15% 3,602,397.65 540,359.65 4,142,757.30 that petitioner shall be ordered to pay to respondent the
20% 267,150.50 53,430.10 320,580.60 sum of P820,549.91, plus 25% surcharge thereon for
30% 837,146.97 251,114.09 1,088,291.06 late payment.
50% 74,244.30 37,122.16 111,366.46
So ordered without costs.
75% 8,000.00 6,000.00 14,000.00
TOTA P20,220,413. P1,809,205. P22,038,619.
L 77 67 44

Less Taxes
Paid by
Yutivo 988,655.76
Deficiency
Tax still due P820,549.91

This is the exact amount which, according to Presiding

Judge Nable of the Court of Tax Appeals, Yutivo would
pay, exclusive of the surcharges.

Petitioner finally contends that the Court of Tax Appeals

erred or acted in excess of its jurisdiction in promulgating
judgment for the affirmance of the decision of
respondent Collector by less than the statutory
requirement of at least two votes of its judges. Anent this
contention, section 2 of Republic Act No. 1125, creating
the Court of Tax Appeals, provides that "Any two judges
of the Court of Tax Appeals shall constitute a quorum,