Paul Marie Allanigue

Tax 1

A. Taxpayer’s suit

Case: 1. Anti-graft League of the Phil. V. San Juan, G.R. No. 97787 August 1, 1996

Facts:

Petitioner Anti-Graft League of the Philippines, a self-confessed "non-governmental, non-stock and non-
profit organization, which was constituted to protect the interest of the Republic and its instrumentalities
and political subdivisions and its constituents against abuses of its public officials and employees," claims
the instant petition for certiorari is a taxpayer's suit which it filed because the Provincial Board of Rizal
(the Board) allegedly illegally disbursed public funds in transactions involving four parcels of land in
Ugong Norte, Pasig. The allegation is denied by respondents who challenge the propriety of this action,
as well as the capacity of petitioner to file the same. Public respondents, officers of the Province of Rizal
(the Province), even intimate that the filing of this petition is politically-motivated.

On March 20, 1975, the President Ferdinand E. Marcos issued Presidential Decree No. 674, establishing
the Technological Colleges of Rizal. Among other things, it directed the Board to provide funds for the
purchase of a site and the construction of the necessary structures thereon. Acting upon an authority
granted by the office of the President, the Province was able to negotiate with respondent Ortigas & Co.,
Ltd. (Ortigas) for the acquisition of four parcels of land located in Ugong Norte, Pasig. Three deeds of
absolute sale were executed on April 22 and May 9, 1975, whereby Ortigas transferred its ownership over
a total of 192,177 square meters of land to the Province at P110.00 per square meter. The projected
construction, however, never materialized because of the decimation of the Province's resources brought
about by the creation of the Metro Manila Commission (MMC) in 1976.

Twelve years later, with the property lying idle and the Province needing funds to propel its 5-years
Comprehensive Development Program, the then incumbent Board passed Resolution No. 87-205 dated
October 15, 1987 authorizing the Governor to sell the same. The said property was eventually sold to
Valley View Realty Development Corporation (Valley View) for P700.00 per square meter or a total of
P134,523,900.00, of which 30 million was given as downpayment. On May 10, 1988, after learning about
the sale, Ortigas filed before Branch 151 of the Regional Trial Court of Pasig an action for recission of
contract plus damages with preliminary injunction against the Province. Docketed as Civil Case No.
55904, the complaint alleged that the Province violated one of the terms of its contracts with Ortigas by
selling the subject lots which were intended to be utilized solely as a site for the construction of the Rizal
Technological Colleges and the Rizal Provincial Hospital.

Meanwhile, the new provincial officials, including herein public respondents, assumed office. On April 21,
1988, the Board adopted Resolution No. 88-65 which provided for the rescission of the deed of sale
between the Province and Valley View on the ground that the sale price was exceedingly low and, thus,
prejudicial to the Province. Because of this, Valley View then filed a complaint docketed as a Civil Case
No. 55913 against the Province for specific performance and damages. The case was, however,
dismissed after the parties executed on August 12, 1988 a compromise agreement whereby the Province
returned the 30-million peso downpayment earlier given by Valley View.

Civil Case No. 55904 was also resolved through a compromise agreement executed by and between the
Province and Ortigas on March 20, 1989. Under the said compromise agreement, which was approved by
respondent Judge Eutropio Migriño in his decision dated March 21, 1989, the Province agreed to
reconvey the four parcels of land to Ortigas at a price of P2,250.00 per square meter, or a total of
P432,398,250.00, payable within two years at an annual interest rate of fourteen percent. This amount is
higher than the market values separately determined by respondents Asian Appraisal, Inc. and the
Provincial Appraisal Committee, which respectively pegged the price of the subject properties at
P1,800.00 and P2,200.00 per square meter. Ortigas made its final payment on March 30, 1991.

Issue: Whether or not the action is a taxpayer's suit

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Ruling:

Petitioner and respondents agree that to constitute a taxpayer's suit, two requisites must be met, namely,
that public funds are disbursed by a political subdivision or instrumentality and in doing so, a law is
violated or some irregularity is committed, and that the petitioner is directly affected by the alleged ultra
vires act.1 The same pronouncement was made in Kilosbayan, Inc. v. Guingona, Jr., where the Court
also reiterated its liberal stance in entertaining so-called taxpayer's suits, especially when important
issues are involved. A closer examination of the facts of this case would readily demonstrate that
petitioner's standing should not even be made an issue here, "since standing is a concept in constitutional
law and here no constitutional question is actually involved."

In the case at bar, disbursement of public funds was only made in 1975 when the Province bought the
lands from Ortigas at P110.00 per square meter in line with the objectives of P.D. 674. Petitioner never
referred to such purchase as an illegal disbursement of public funds but focused on the alleged fraudulent
reconveyance of said property to Ortigas because the price paid was lower than the prevailing market
value of neighboring lots. The first requirement, therefore, which would make this petition a taxpayer's suit
is absent. The only remaining justification for petitioner to be allowed to pursue this action is whether it is,
or would be, directly affected by the act complained of. As we stated in Kilosbayan, Inc. v. Morato,4

Standing is a special concern in constitutional law because in some cases suits are brought not by parties
who have been personally injured by the operation of a law or by official action taken, but by concerned
citizens, taxpayers or voters who actually sue in the public interest. Hence the question in standing is
whether such parties have "alleged such a personal stake in the outcome of the controversy as to assure
that concrete adverseness which sharpens the presentation of issues upon which the court so largely
depends for illumination of difficult constitutional questions." (Citing Baker v. Carr, 369 U.S. 186, 7 L. Ed.
2d 633 [1962])

Undeniably, as a taxpayer, petitioner would somehow be adversely affected by an illegal use of public
money. When, however, no such unlawful spending has been shown, as in the case at bar, petitioner,
even as a taxpayer, cannot question the transaction validly executed by and between the Province and
Ortigas for the simple reason that it is not privy to said contract. In other words, petitioner has absolutely
no cause of action, and consequently no locus standi, in the instant case.

Accordingly, after concluding that, not only does petitioner lack the legal personality to file this so-called
taxpayer's suit, but that it filed the same beyond the reglementary period, this Court no longer finds any
reason to delve into the merits, or the lack of it, of the instant petition.

WHEREFORE, premises considered, the instant petition for certiorari is hereby DISMISSED. Cost against
petitioner.

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2. Abaya v. Ebdane, G.R. No. 167919 February 14, 2007

Facts:

The assailed resolution recommended the award to private respondent China Road & Bridge Corporation
of the contract for the implementation of civil works for Contract Package No. I (CP I), which consists of
the improvement/rehabilitation of the San Andres (Codon)-Virac-Jct. Bago-Viga road, with the length of
79.818 kilometers, in the island province of Catanduanes.

The CP I project is one of the four packages comprising the project for the improvement/rehabilitation of
the Catanduanes Circumferential Road, covering a total length of about 204.515 kilometers, which is the
main highway in Catanduanes Province. The road section (Catanduanes Circumferential Road) is part of
the Arterial Road Links Development Project (Phase IV) funded under Loan Agreement No. PH-P204
dated December 28, 1999 between the Japan Bank for International Cooperation (JBIC) and the
Government of the Republic of the Philippines.

Background

Based on the Exchange of Notes dated December 27, 1999,1 the Government of Japan and the
Government of the Philippines, through their respective representatives, namely, Mr. Yoshihisa Ara,
Ambassador Extraordinary and Plenipotentiary of Japan to the Republic of the Philippines, and then
Secretary of Foreign Affairs Domingo L. Siazon, have reached an understanding concerning Japanese
loans to be extended to the Philippines. These loans were aimed at promoting our country’s economic
stabilization and development efforts.

The Exchange of Notes consisted of two documents: (1) a Letter from the Government of Japan, signed
by Ambassador Ara, addressed to then Secretary of Foreign Affairs Siazon, confirming the understanding
reached between the two governments concerning the loans to be extended by the Government of Japan
to the Philippines; and (2) a document denominated as Records of Discussion where the salient terms of
the loans as set forth by the Government of Japan, through the Japanese delegation, were reiterated and
the said terms were accepted by the Philippine delegation. Both Ambassador Ara and then Secretary
Siazon signed the Records of Discussion as representatives of the Government of Japan and Philippine
Government, respectively.

Petitioner Plaridel M. Abaya claims that he filed the instant petition as a taxpayer, former lawmaker, and a
Filipino citizen. Petitioner Plaridel C. Garcia likewise claims that he filed the suit as a taxpayer, former
military officer, and a Filipino citizen. Petitioner PMA ’59 Foundation, Inc., on the other hand, is a non-
stock, non-profit corporation organized under the existing Philippine laws. It claims that its members are
all taxpayers and alumni of the Philippine Military Academy. It is represented by its President, Carlos L.
Agustin.

Named as public respondents are the DPWH, as the government agency tasked with the implementation
of government infrastructure projects; the Department of Budget and Management (DBM) as the
government agency that authorizes the release and disbursement of public funds for the implementation
of government infrastructure projects; and the Department of Finance (DOF) as the government agency
that acts as the custodian and manager of all financial resources of the government. Also named as
individual public respondents are Hermogenes E. Ebdane, Jr., Emilia T. Boncodin and Cesar V. Purisima
in their capacities as former Secretaries of the DPWH, DBM and DOF, respectively. On the other hand,
public respondent Norma L. Lasala was impleaded in her capacity as Treasurer of the Bureau of
Treasury.

Private respondent China Road & Bridge Corporation is a duly organized corporation engaged in the
business of construction.

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Issue:

Whether or not the action is a taxpayer's suit

Ruling:

Petitioners, as taxpayers, possess locus standi to file the present suit.

Briefly stated, locus standi is "a right of appearance in a court of justice on a given question." More
particularly, it is a party’s personal and substantial interest in a case such that he has sustained or will
sustain direct injury as a result of the governmental act being challenged. It calls for more than just a
generalized grievance. The term "interest" means a material interest, an interest in issue affected by the
decree, as distinguished from mere interest in the question involved, or a mere incidental
interest.Standing or locus standi is a peculiar concept in constitutional law40 and the rationale for
requiring a party who challenges the constitutionality of a statute to allege such a personal stake in the
outcome of the controversy is "to assure that concrete adverseness which sharpens the presentation of
issues upon which the court so largely depends for illumination of difficult constitutional questions."

Locus standi, however, is merely a matter of procedure and it has been recognized that in some cases,
suits are not brought by parties who have been personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who actually sue in the public interest.
Consequently, the Court, in a catena of cases, has invariably adopted a liberal stance on locus standi,
including those cases involving taxpayers.

The prevailing doctrine in taxpayer’s suits is to allow taxpayers to question contracts entered into by the
national government or government- owned or controlled corporations allegedly in contravention of law.A
taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public
money is being deflected to any improper purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. Significantly, a taxpayer need not be a party to the
contract to challenge its validity.

In the present case, the petitioners are suing as taxpayers. They have sufficiently demonstrated that,
notwithstanding the fact that the CP I project is primarily financed from loans obtained by the government
from the JBIC, nonetheless, taxpayers’ money would be or is being spent on the project considering that
the Philippine Government is required to allocate a peso-counterpart therefor. The public respondents
themselves admit that appropriations for these foreign-assisted projects in the GAA are composed of the
loan proceeds and the peso-counterpart. The counterpart funds, the Solicitor General explains, refer to
the component of the project cost to be financed from government-appropriated funds, as part of the
government’s commitment in the implementation of the project. Hence, the petitioners correctly asserted
their standing since a part of the funds being utilized in the implementation of the CP I project partakes of
taxpayers’ money.

Further, the serious legal questions raised by the petitioners, e.g., whether RA 9184 applies to the CP I
project, in particular, and to foreign-funded government projects, in general, and the fact that public
interest is indubitably involved considering the public expenditure of millions of pesos, warrant the Court
to adopt in the present case its liberal policy on locus standi.

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B. Tax Amnesty:

Case: Republic v IAC; G.R. No. L-69344, April 26, 1991

Facts:

On April 15, 1980, the Republic of the Philippines, through the Bureau of Internal Revenue, commenced
an action in the Court of First Instance (now Regional Trial Court) of Manila, Branch XVI, to collect from
the spouses Antonio Pastor and Clara Reyes-Pastor deficiency income taxes for the years 1955 to 1959
in the amount of P17,117.08 with a 5% surcharge and 1% monthly interest, and costs.

The Pastors filed a motion to dismiss the complaint, but the motion was denied. On August 2, 1975, they
filed an answer admitting there was an assessment against them of P17,117.08 for income tax deficiency
but denying liability therefor. They contended that they had availed of the tax amnesty under P.D.'s Nos.
23, 213 and 370 and had paid the corresponding amnesty taxes amounting to P10,400 or 10% of their
reported untaxed income under P.D. 23, P2,951.20 or 20% of the reported untaxed income under P.D.
213, and a final payment on October 26, 1973 under P.D. 370 evidenced by the Government's Official
Receipt No. 1052388. Consequently, the Government is in estoppel to demand and compel further
payment of income taxes by them.

The parties agreed that there were no issues of fact to be litigated, hence, the case was submitted for
decision upon the pleadings and memoranda on the lone legal question of: whether or not the payment of
deficiency income tax under the tax amnesty, P.D. 23, and its acceptance by the Government operated to
divest the Government of the right to further recover from the taxpayer, even if there was an existing
assessment against the latter at the time he paid the amnesty tax.

It is not disputed that as a result of an investigation made by the Bureau of Internal Revenue in 1963, it
was found that the private respondents owed the Government P1,283,621.63 as income taxes for the
years 1955 to 1959, inclusive of the 50% surcharge and 1% monthly interest. The defendants protested
against the assessment. A reinvestigation was conducted resulting in the drastic reduction of the
assessment to only P17,117.08.

It appears that on April 27, 1978, the private respondents offered to pay the Bureau of Internal Revenue
the sum of P5,000 by way of compromise settlement of their income tax deficiency for the questioned
years, but Assistant Commissioner Bernardo Carpio, in a letter addressed to the Pastor spouses, rejected
the offer stating that there was no legal or factual justification for accepting it. The Government filed the
action against the spouses in 1980, ten (10) years after the assessment of the income tax deficiency was
made.

On a motion for judgment on the pleadings filed by the Government, which the spouses did not oppose,
the trial court rendered a decision on February 28, 1980, holding that the defendants spouses had settled
their income tax deficiency for the years 1955 to 1959, not under P.D. 23 or P.D. 370, but under P.D. 213,
as shown in the Amnesty Income Tax Returns' Summary Statement and the tax Payment Acceptance
Order for P2,951.20 with its corresponding official receipt, which returns also contain the very assessment
for the questioned years.

Issue: Whether or not the tax amnesty payments made by the private respondents on October 23, 1973
bar an action for recovery of deficiency income taxes under P.D.'s Nos. 23, 213 and 370.

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Ruling:

Even assuming that the deficiency tax assessment of P17,117.08 against the Pastor spouses were
correct, since the latter have already paid almost the equivalent amount to the Government by way of
amnesty taxes under P.D. No. 213, and were granted not merely an exemption, but an amnesty, for their
past tax failings, the Government is estopped from collecting the difference between the deficiency tax
assessment and the amount already paid by them as amnesty tax.

A tax amnesty, being a general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an
absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it,
and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to
reform a chance to do so and thereby become a part of the new society with a clean slate (Commission of
Internal Revenue vs. Botelho Corp. and Shipping Co., Inc., 20 SCRA 487).

The finding of the appellate court that the deficiency income taxes were paid by the Pastors, and
accepted by the Government, under P.D. 213, granting amnesty to persons who are required by law to
file income tax returns but who failed to do so, is entitled to the highest respect and may not be disturbed
except under exceptional circumstances which have already become familiar (Rule 45, Sec. 4, Rules of
Court; e.g., where: (1) the conclusion is a finding grounded entirely on speculation, surmise and
conjecture; (2) the inference made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the
judgment is based on misapprehension of facts; (5) the Court of Appeals went beyond the issues of the
case and its findings are contrary to the admissions of both the appellant and the appellee; (6) the
findings of fact of the Court of Appeals are contrary to those of the trial court; (7) said findings of fact are
conclusions without citation of specific evidence in which they are based; (8) the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not disputed by the respondents; and (9)
when the finding of fact of the Court of Appeals is premised on the absense of evidence and is
contradicted by the evidence on record (Thelma Fernan vs. CA, et al., 181 SCRA 546, citing Tolentino vs.
de Jesus, 56 SCRA 67; People vs. Traya, 147 SCRA 381), none of which is present in this case.

The rule is that in case of doubt, tax statutes are to be construed strictly against the Government and
liberally in favor of the taxpayer, for taxes, being burdens, are not to be presumed beyond what the
applicable statute (in this case P.D. 213) expressly and clearly declares (Commission of Internal Revenue
vs. La Tondena, Inc. and CTA, 5 SCRA 665, citing Manila Railroad Company vs. Collector of Customs,
52 Phil, 950).

WHEREFORE, the petition for review is denied. No costs.

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Sources of Tax Laws

Administrative Issuances by the BIR: Legislative Rule and
Interpretative Rule

C. Cases:

CIR v. CA and Fortune, GR No. 119761, 29 August 1996

Facts:

Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of
cigarettes.

On various dates, the Philippine Patent Office issued to the corporation separate certificates of trademark
registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January 1987, of then
Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the
Presidential Commission on Good Government, "the initial position of the Commission was to classify
'Champion,' 'Hope,' and 'More' as foreign brands since they were listed in the World Tobacco Directory as
belonging to foreign companies. However, Fortune Tobacco changed the names of 'Hope' to 'Hope
Luxury' and 'More' to 'Premium More,' thereby removing the said brands from the foreign brand category.
Proof was also submitted to the Bureau (of Internal Revenue ['BIR']) that 'Champion' was an original
Fortune Tobacco Corporation register and therefore a local brand."

Under the foregoing, the test for imposition of the 55% ad valorem  tax on cigarettes is that the locally
manufactured cigarettes bear a foreign brand regardless of whether or not the right to use or title to the
foreign brand was sold or transferred by its owner to the local manufacturer. The brand must be originally
owned by a foreign manufacturer or producer. If ownership of the cigarette brand is, however, not
definitely determinable, ". . . the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern. . . ."

Issue: Is RMC 37-93 a mere interpretative ruling, therefore not requiring, for its effectivity, hearing and
filing with the UP Law Center?

Ruling:

. . . a legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation
by providing the details thereof . In the same way that laws must have the benefit of public hearing, it is
generally required that before a legislative rule is adopted there must be hearing. In this connection, the
Administrative Code of 1987 provides:

Public Participation. — If not otherwise required by law, an agency shall, as far as practicable, publish or
circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior
to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been
published in a newspaper of general circulation at least two (2) weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed.

In addition such rule must be published. On the other hand, interpretative rules are designed to provide
guidelines to the law which the administrative agency is in charge of enforcing.

It should be understandable that when an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance for it gives no real consequence more than what

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the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond
merely providing for the means that can facilitate or render least cumbersome the implementation of the
law but substantially adds to or increases the burden of those governed, it behooves the agency to accord
at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that
new issuance is given the force and effect of law.

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PBCom v. CIR, G.R. No. 112024, January 28, 1999

Facts:

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly

organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of
1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by
applying PBCom’s tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax
Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for
the year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby showing no income
tax liability. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net
loss of P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees withheld
and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax
credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their
lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a
Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA).

Issue:

Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground
of prescription, despite petitioner’s reliance on RMC No. 7-85, changing the prescriptive period of two
years to ten years?

Ruling:

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period
of two years to ten years on claims of excess quarterly income tax payments, such circular created a
clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from time to time by
the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute
by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous.
20 Thus, courts will not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and implement.

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CIR v. Michel Lhuiller GR 150947, July 25, 2003

Facts:

On 11 March 1991, CIR Jose U. Ong issued Revenue Memorandum Order (RMO) No. 15-91 imposing a
5% lending investor’s tax on pawnshops.

A restudy of P.D. [No.] 114 shows that the principal activity of pawnshops is lending money at interest and
incidentally accepting a "pawn" of personal property delivered by the pawner to the pawnee as security
for the loan.(Sec. 3, Ibid). Clearly, this makes pawnshop business akin to lending investor’s business
activity which is broad enough to encompass the business of lending money at interest by any person
whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lending investor’s
tax based on their gross income pursuant to Section 116 of the Tax Code, as amended.

Issue: Whether pawnshops are subject to the 5% lending investor’s tax. Corollary to this issue are the
following questions: (1) Are RMO No. 15-91 and RMC No. 43-91 valid? (2) Were they issued to
implement Section 116 of the NIRC of 1977, as amended?

Ruling:

While it is true that pawnshops are engaged in the business of lending money, they are not considered
"lending investors" for the purpose of imposing the 5% percentage taxes for the following reasons:

First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its
amendment by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the
NIRC of 1986, pawnshops and lending investors were subjected to different tax treatments; thus:

(3) Other Fixed Taxes. — The following fixed taxes shall be collected as follows, the amount stated being
for the whole year, when not otherwise specified:chanrob1es virtual 1aw library

x x x

(dd) Lending investors —

1. In chartered cities and first class municipalities, one thousand pesos;

2. In second and third class municipalities, five hundred pesos;

3. In fourth and fifth class municipalities and municipal districts, two hundred fifty pesos: Provided, That
lending investors who do business as such in more than one province shall pay a tax of one thousand
pesos.

x x x

(ff) Pawnshops, one thousand pesos (italics ours)

Let us first distinguish between two kinds of administrative issuances: the legislative rule and the
interpretative rule. A legislative rule is in the nature of subordinate legislation, designed to implement a
primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed
to provide guidelines to the law which the administrative agency is in charge of enforcing.

When an administrative rule is merely interpretative in nature, its applicability needs nothing further than
its bare issuance, for it gives no real consequence more than what the law itself has already prescribed.
When, on the other hand, the administrative rule goes beyond merely providing for the means that can

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facilitate or render least cumbersome the implementation of the law but substantially increases the burden
of those governed, it behooves the agency to accord at least to those directly affected a chance to be
heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.
15chanrob1es virtua1 1aw 1ibrary

RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or corrective
measures revoking in the process the previous rulings of past Commissioners. Specifically, they would
have been amendatory provisions applicable to pawnshops. Without these disputed CIR issuances,
pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically
included in Section 116 of the NIRC of 1977, as amended. In so doing, the CIR did not simply interpret
the law. The due observance of the requirements of notice, hearing, and publication should not have been
ignored.

In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby declared null and void.
Consequently, Lhuillier is not liable to pay the 5% lending investor’s tax.

WHEREFORE, the petition is hereby DISMISSED for lack of merit. The decision of the Court of Appeals
of 20 November 2001 in CA-G.R. SP No. 62463 is AFFIRMED.

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Tax Ordinances

Tuzon v. CA, 212 SCRA 739

Facts:

The Sangguniang Bayan of Camalaniugan, Cagayan, unanimously adopted Resolution No. 9. To

implement the resolution, petitioner Lope C. Mapagu, then incumbent municipal treasurer, prepared the
following document for signature of all thresher/owner/operators applying for a mayor’s permit.

Soon thereafter, private respondent Saturnino T. Jurado sent his agent to the municipal treasurer’s office
to pay the license fee of P285.00 for thresher operators. Mapagu refused to accept the payment and
required him to first secure a mayor’s permit. For his part, Mayor Domingo Tuzon, the herein other
petitioner, said that Jurado should first comply with Resolution No. 9 and sign the agreement before the
permit could be issued. Jurado ignored the requirement. Instead, he sent the P285.00 license fee by
postal money order to the office of the municipal treasurer who, however, returned the said amount. The
reason given was the failure of the respondent to comply with Resolution No. 9.

On April 4, 1977, Jurado filed with the Court of First Instance of Cagayan a special civil action for
mandamus with actual and moral damages to compel the issuance of the mayor’s permit and license.

On May 31, 1977, he filed another petition with the same court this time for declaratory judgment against
the said resolution (and the implementing agreement) for being illegal either as a donation or as a tax
measure.

In a joint decision dated March 31, 1982, the trial court 1 upheld the challenged measure. However, it
dismissed the claims for damages of both parties for lack of evidence.

Jurado appealed to the Court of Appeals, which in it decision dated August 31, 1989, 2 affirmed the
validity of Resolution No. 9 and the implementing agreement. Nevertheless, it found Tuzon and Mapagu
to have acted maliciously and in bad faith when they denied Jurado’s application for the mayor’s permit
and license.

Issue: Whether or not Resolution No. 9 is valid and its implementing agreement is mandatory.

Ruling:

It was passed by the Sangguniang Bayan of Camalaniugan in the lawful exercise of its legislative powers
in pursuance to Article XI, Section 5 of the 1973 Constitution which provided that: "Each local government
unit shall have the power to create (sic) its own source of revenue and to levy taxes, subject to such
limitation as may be provided by law." And under Article 4, Section 29 of Presidential Decree No. 231
(Enacting a Local Tax Code for Provinces, Cities, Municipalities and Barrios), it is provided that:

"Section 29. Contributions. — In addition to the above specified taxing and other revenue-raising powers,
the barrio council may solicit monies, materials, and other contributions from the following
sources:chanrob1es virtual 1aw library

x           x          x

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"(c) Monies from private agencies and individuals."

That is an over simplification. The respondent court has not offered any explanation for its conclusion that
the challenged measures are valid nor does it discuss its own concept of the nature of the resolution.

While it would appear from the wording of the resolution that the municipal government merely intends to
"solicit" the 1% contribution from the threshers, the implementing agreement seems to make the donation
obligatory and a condition precedent to the issuance of the mayor’s permit. This goes against the nature
of a donation, which is an act of liberality and is never obligatory.

If, on the other hand, it is to be considered a tax ordinance, then it must be shown in view of the challenge
raised by the private respondents to have been enacted in accordance with the requirements of the Local
Tax Code. These would include the holding of a public hearing on the measure 4 and its subsequent
approval by the Secretary of Finance, 5 in addition to the usual requisites for publication of ordinances in
general. 

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Conwi v. CTA, 213 SCRA 83

Facts:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing
Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is a
subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years
1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter & Gamble,
outside of the Philippines, during which petitioners were paid U.S. dollars as compensation for services in
their foreign assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs.
D, D-1 to D-19). When petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year
1970, they computed the tax due by applying the dollar-to-peso conversion on the basis of the floating
rate ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:

From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S. $1.00

Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in converting their dollar
income for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973, petitioners in
said cases filed with the office of the respondent Commissioner, amended income tax returns for the
above-mentioned years, this time using the par value of the peso as prescribed in Section 48 of Republic
Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in relation to Section 6 of
Commonwealth Act No. 699 as the basis for converting their respective dollar income into Philippine
pesos for purposes of computing and paying the corresponding income tax due from them. The aforesaid
computation as shown in the amended income tax returns resulted in the alleged overpayments, refund
and/or tax credit. Accordingly, claims for refund of said over-payments were filed with respondent
Commissioner. Without awaiting the resolution of the Commissioner of the Internal Revenue on their
claims, petitioners filed their petitioner for review in the above-mentioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No. 2511 on
July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve common question of law and
facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision dated September 26,
1977, the respondent Court of Tax Appeals held that the proper conversion rate for the purpose of
reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates
prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. Accordingly, the claim for refund
and/or tax credit of petitioners in the above-entitled cases was denied and the petitions for review
dismissed, with costs against petitioners. Hence, this petition for review on certiorari.

Issue: Whether or not dollar earnings are receipts and subject to income tax

Ruling:

This basically an income tax case. For the proper resolution of these cases income may be defined as an
amount of money coming to a person or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent.
Income can also be though of as flow of the fruits of one's labor.

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Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that — a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another." When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO
spending in said currency. There was no conversion, therefore, from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell
under Section 2(f)(g) and (m) of C.B. Circular No. 42.

The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign
earnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall
within the classification of foreign exchange transactions, there occurred no actual inward remittances,
and, therefore, they are not included in the coverage of Central Bank Circular No. 289 which provides for
the specific instances when the par value of the peso shall not be the conversion rate used. They
conclude that their earnings should be converted for income tax purposes using the par value of the
Philippine peso.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
yeas as payment for their services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:

Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every individual, whether a citizen of the Philippines
residing therein or abroad or an alien residing in the Philippines, determined in accordance with the
following schedule:

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338
thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions.

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX
PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of
the authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue
Code. And these are presumed to be a valid interpretation of said code until revoked by the Secretary of
Finance himself.

Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US
dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that
they are citizens of the Philippines, and their income, within or without, and in these cases wholly without,
are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent
Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long
standing and not contrary to law, are valid.

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Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax.

CIR v. BOAC, 149 SCRA 395

Facts:

British Overseas Airways Corporation (BOAC) is a 100% British Government-owned corporation

organized and existing under the laws of the United Kingdom It is engaged in the international airline
business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates
air transportation service and sells transportation tickets over the routes of the other airline members.
During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights
for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month
period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the
period covered by the assessments, it maintained a general sales agent in the Philippines — Wamer
Barnes and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC tickets
covering passengers and cargoes.

G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This
was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new
assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount
paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a
letter, dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First
Case but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for
the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code.
BOAC's request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to
file the Second Case before the Tax Court praying that it be absolved of liability for deficiency income tax
for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and
Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC
income from Philippine sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that the place where services are
rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered

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petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

Issue: Whether or not the revenue derived by private respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly, taxable.
Ruling:

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to
what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light
of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some
of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary character.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property, whether real or personal, growing out of the
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profile, or gains, profits, and income derived from any
source whatever (Sec. 29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport documents. "The
words 'income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific time ...; it means something
distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax
law, "income" refers to the flow of wealth. 6

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the income. 8 For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of supporting
the government.

BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.

The absence of flight operations to and from the Philippines is not determinative of the source of income
or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent
to this case. The test of taxability is the "source"; and the source of an income is that activity ... which
produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the

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Philippines and the revenue therefrom was derived from a activity regularly pursued within the
Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and
cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of tickets was
derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin
of the income herein is the Philippines.

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Madrigal v. Rafferty, 38 Phil. 414

Facts

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was
contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales). On
February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the Collector of
Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73.
Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the
year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife
Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of
Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal
parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno.
The general question had in the meantime been submitted to the Attorney-General of the Philippine
Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue officers
being still unsatisfied, the correspondence together with this opinion was forwarded to Washington for a
decision by the United States Treasury Department. The United States Commissioner of Internal
Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal.

After payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the
Court of First Instance of the city of Manila against Collector of Internal Revenue and the Deputy Collector
of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and
illegally collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of
Congress known as the Income Tax Law. The burden of the complaint was that if the income tax for the
year 1914 had been correctly and lawfully computed there would have been due payable by each of the
plaintiffs the sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of
P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that
plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due
and payable.

The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the
stipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente Madrigal
and his wife Susana Paterno of the year 1914 was made up of three items: (1) P362,407.67, the profits
made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the profits made by Susana
Paterno in her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop
company. The sum of these three items is P383,181.97, the gross income of Vicente Madrigal and
Susana Paterno for the year 1914. General deductions were claimed and allowed in the sum of
P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the normal tax of
one per cent on the net income there were allowed as specific deductions the following: (1) P16,687.80,
the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente
Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon which
the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.

Issue:

Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the
additional income tax.

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Ruling:

Income as contrasted with capital or property is to be the test. The essential difference between capital
and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is
called capital. A flow of services rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a period of time is called an income.
Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.")
The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is
that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the
fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property.
"Income," as here used, can be defined as "profits or gains."

With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn
for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently
in two elaborate decisions in which a long line of Spanish authorities were cited, this court in speaking of
the conjugal partnership, decided that "prior to the liquidation the interest of the wife and in case of her
death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an
equitable estate, and does not ripen into title until there appears that there are assets in the community as
a result of the liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel
and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente
Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and
in the ultimate ownership of property acquired as income after such income has become capital. Susana
Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a
separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As she has no estate and income, actually
and legally vested in her and entirely distinct from her husband's property, the income cannot properly be
considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income
Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and
wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of
the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on
provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income
Tax Law. The aims and purposes of the Income Tax Law must be given effect.

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Limpan v. CIR 17 SCRA 703

Facts:

Limpan Investment Corporation a domestic corporation duly registered since June 21, 1955, is engaged
in the business of leasing real properties. It commenced actual business operations on July 1, 1955. Its
principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and
control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is
the same Isabelo P. Lim.

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of
which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of
P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of
P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation
of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and
ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during
these taxable years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and
P16,336.00 covering the same period.

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above
assessment but the latter denied said request and reiterated its original assessment and demand, plus
5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the
corporation filed its petition for review before the Tax Appeals court, questioning the correctness and
validity of the above assessment of respondent Commissioner of Internal Revenue. It disclaimed having
received or collected the amount of P20,199.00, as unreported rental income for 1956, or any part
thereof, reasoning out that 'the previous owners of the leased building has (have) to collect part of the
total rentals in 1956 to apply to their payment of rental in the land in the amount of P21,630.00" (par. 11,
petition). It also denied having received or collected the amount of P81,690.00, as unreported rental
income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00 was not
declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and
received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year
but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to
P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant paid
P4,200.00 which ought not be declared as rental income.

Issue: Whether or not the BIR was correct in assessing deficiency taxes against Limpan Corp. for
undeclared rental income

Ruling:

Yes, Petitioner having admitted, through its own witness (Vicente G. Solis), that it had undeclared more
than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the BIR examiners as
unreported rental income for the year 1956 and more than one-third (1/3) of the amount (P29,350.00 out
of P81,690.00) ascertained by the same examiners as unreported rental income for the year 1957,
contrary to its original claim to the revenue authorities, it was incumbent upon it to establish the remainder
of its pretensions by clear and convincing evidence, that in the case is lacking.

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With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the
excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and only
later transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation,
so as to justify the alleged verbal agreement whereby they would turn over to petitioner corporation six
percent (6%) of the value of its properties to be applied to the rentals of the land and in exchange for
whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of
the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document or
unbiased evidence. Hence, the first assigned error is without merit.

As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining
unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P.
Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax
return submitted in court to establish that the rental income which he allegedly collected and received in
1957 were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient
justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the
refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed
to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have
been reported as rental income in said year, since it is income just the same regardless of its source.

On the third assigned error, suffice it to state that this Court has already held that "depreciation is a
question of fact and is not measured by theoretical yardstick, but should be determined by a consideration
of actual facts", and the findings of the Tax Court in this respect should not be disturbed when not shown
to be arbitrary or in abuse of discretion (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al.,
L-18282, May 29, 1964), and petitioner has not shown any arbitrariness or abuse of discretion in the part
of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. It appearing that
the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal
Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for
having been the result of scientific studies and observation for a long period in the United States, after
whose Income Tax Law ours is patterned (M. Zamora vs. Collector of internal Revenue & Collector of
Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of Internal Revenue and Collector of Internal
Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963), the foregoing
error is devoid of merit.

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Republic v. dela Rama, 18 SCRA 861

Facts:

The estate of the late Esteban de la Rama was the subject of Special Proceedings No. 401 of the Court of
First Instance of Iloilo. The executor-administrator, Eliseo Hervas, filed on March 12, 1951, income tax
returns of the estate corresponding to the taxable year 1950, declaring a net income of P22,796.59, on
the basis of which the amount of P3,919.00 was assessed and was paid by the estate as income tax. The
Bureau of Internal Revenue later claimed that it had found out that there had been received by the estate
in 1950 from the De la Rama Steamship Company, Inc. cash dividends amounting to P86,800.00, which
amount was not declared in the income tax return of the estate for the year 1950. The Bureau of Internal
Revenue then, on March 7, 1956, made an assessment as deficiency income tax against the estate in the
sum of P56,032.50 of which amount P37,355.00 was the deficiency and P18,677.50 was the 50%
surcharge.

The Collector of Internal Revenue wrote a letter, dated February 29, 1956, to Mrs. Lourdes de la Rama-
Osmeña informing her of the deficiency income tax and asking payment thereof. On March 13, 1956 the
latter's counsel wrote to the Collector acknowledging receipt of the assessment but contended that
Lourdes de la Rama-Osmeña had no authority to represent the estate, and that the assessment should
be sent to Leonor de la Rama who was pointed to by said counsel as the administratrix of the estate of
her late father. On the basis of this information the Deputy Collector of Internal Revenue, on November
22, 1956, sent a letter to Leonor de la Rama as administratrix of the estate, asking payment. The tax, as
assessed, not having been paid, the Deputy Commissioner of Internal Revenue, on September 7, 1959,
wrote another letter to Mrs. Lourdes de la Rama-Osmeña demanding, through her, upon the heirs, the
payment of the deficiency income tax within the period of thirty days from receipt thereof. The counsel of
Lourdes de la Rama-Osmeña, in a letter dated September 25, 1959, insisted that the letter should be sent
to Leonor de la Rama. The Deputy Commissioner of Internal Revenue wrote to Leonor de la Rama
another letter, dated February 11, 1960, demanding, through her as administratrix, upon the heirs of
Esteban de la Rama, the payment of the sum of P56,032.50, as deficiency income tax including the 50%
surcharge, to the City Treasurer of Pasay City within thirty days from receipt thereof.

The deficiency income tax not having been paid, the Republic of the Philippines filed on March 6, 1961
with the Court of First Instance of Manila a complaint against the heirs of Esteban de la Rama, seeking to
collect from each heir his/her proportionate share in the income tax liability of the estate. An amended
complaint dated August 31, 1961, was admitted by the court.

The defendants-appellees, Lourdes de la Rama-Osmeña, Leonor de la Rama, Estefania de la Rama-

Pirovano, Dolores de la Rama-Lopez, Charles Miller, and Aniceta de la Rama-Sian, thru counsel, filed
their respective answers, the gist of their allegations and/or defenses being (1) that no cash dividends of
P86,800.00 had been paid to the estate; (2) that the administration of the estate had been extended by
the probate court precisely for the purpose of collecting said dividends; (3) that Leonor dela Rama had
never been administratrix of the estate; (4) that the executor of the estate, Eliseo Hervas, had never been
given notice of the assessment, and consequently the assessment had never become final; and (5) that
the collection of the alleged deficiency income tax had prescribed. Fausto F. Gonzales, Jr., one of the
defendants, not having filed an answer, was declared in default.

From the evidence introduced at the trial, both oral and documentary, the lower court found that the
dividends of P86,800.00 declared by the De la Rama Steamship Co. in favor of the late Esteban de la
Rama were applied to the obligation of the estate to the company declaring the dividends; that Leonor de
la Rama was not the administratrix of the estate, but it was the late Eliseo Hervas who was the executor-
administrator; that the administration of the estate was extended for the purpose of recovering for the
estate said dividends from the De la Rama Steamship Co., Inc.; and that the question of whether the
deceased Esteban de la Rama was a debtor to the entity known as the Hijos de I. de la Rama, which was
also indebted to the De la Rama Steamship Co., Inc., was not a settled one.

Issue: Whether or not income from the dividends were wrongly assessed as part of the estate

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Ruling:

It is not disputed that the dividends in question were not actually paid either to the estate, or to the heirs,
of the late Esteban de la Rama. The question to be resolved is whether or not the said application of the
dividends to the personal accounts of the deceased Esteban de la Rama constituted constructive
payment to, and hence, constructively received by, the estate or the heirs. If the debts to which the
dividends were applied really existed, and were legally demandable and chargeable against the
deceased, there was constructive receipt of the dividends; if there were no such debts, then there was no
constructive receipt.

Under the National Internal Revenue Code, income tax is assessed on income that has been received.
Thus, Section 21 of the Code requires that the income must be received by an individual before a tax can
be levied thereon.

Sec. 21. Rates of tax on citizens or residents.—There shall be levied, collected, and paid annually upon
the entire net income received in the preceding taxable year from all sources by every individual, a citizen
or resident of the Philippines, Section 56 also requires receipt of income by an estate before an income
tax can be assessed thereon. It provides:

Sec. 56. Imposition of tax.—(a) Application of tax.—The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust, including —
(3) Income received by estates of deceased persons during the period of administration or settlement of
the estate; . . .
Hence, if income has not been received, no income tax can be assessed thereon. Inasmuch as, the
income was not received either by the estate, or by the heirs, neither the estate nor the heir can be liable
for the payment of income tax therefor.

After a study of the proofs, the Court is constrained to sustain the position of the defendants on the
fundamental issue that there could have been no correct and real basis for the assessment or that there
is no proof that the income in question had been received; it was not actually delivered unto the Estate
since it was retained by the De la Rama Steamship Co., Inc.; which applied said dividends to certain
accounts receivable due from the deceased allegedly, Exh. A-1; now if truly there had been such
indebtedness owing from the deceased unto said De la Rama Steamship Co., Inc., the Court will agree
with plaintiff that the offsetting of the dividends against such indebtedness amounted to constructive
delivery; but here has not been presented any proof to that effect, i.e., that there was such an
indebtedness due from deceased; on the contrary what the evidence shows is that the former
administrator of the Estate had challenged the validity of said indebtedness, Exh. D, motion of 4 June,
1951; that being the case, there is no clear showing that income in the form of said dividends had really
been received, which is the verb used in Section 21 of the Internal Revenue Code, by the Estate whether
actually or constructively; and the income tax being collected by the Government on income received, the
Government's position is here without a clear basis; the position becomes worse when it be considered
that it is not even the Estate that is being sued but the heirs themselves, who admittedly had not received
any of said dividends themselves; the fiction of transfer of ownership by succession from the death of the
decedent will have to give way to actual fact that the dividends have not been adjudicated at all to the
heirs up to now at least so far as the evidence shows. This being the conclusion of the Court, there will be
no need to discuss the question of whether the action has or has not prescribed.

The estate was still under the administration of Eliseo Hervas as regards the collection of said dividends.
The administrator was the representative of the estate, whose duty it was to pay and discharge all debts
and charges on the estate and to perform all orders of the court by him to be performed (Rule 71, Section
1), and to pay the taxes and assessments due to the Government or any branch or subdivision thereof
(Section 7, Rule 89, Old Rules of Court). The tax must be collected from the estate of the deceased, and
it is the administrator who is under obligation to pay such claim (Estate of Claude E. Haygood.) (Collector
of Internal Revenue v. Haygood, 65 Phil. 520). The notice of assessment, therefore, should have been
sent to the administrator. In this case, notice was first sent to Lourdes de la Rama-Osmeña on February

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29, 1956, and later to Leonor de la Rama on November 27, 1956, neither of whom had authority to
represent the estate.

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