G.R. No.

L-26284 October 8, 1986 On September 29, 1962, petitioners received from respondent
Commissioner of Internal Revenue:
TOMAS CALASANZ, ET AL., petitioners,
vs. a. Demand No. 90-B-032293-57 in the amount of
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF P160.00 representing real estate dealer's fixed tax of
TAX APPEALS, respondents. P150.00 and P10.00 compromise penalty for late
payment; and
San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.
b. Assessment No. 90-5-35699 in the amount of
P3,561.24 as deficiency income tax on ordinary gain of
P3,018.00 plus interest of P 543.24.
FERNAN, J.:
On October 17, 1962, petitioners filed with the Court of Tax Appeals a
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision petition for review contesting the aforementioned assessments.
of the Court of Tax Appeals in CTA No. 1275 dated June 7, 1966, holding
them liable for the payment of P3,561.24 as deficiency income tax and On June 7, 1966, the Tax Court upheld the respondent Commissioner
interest for the calendar year 1957 and P150.00 as real estate dealer's except for that portion of the assessment regarding the compromise
fixed tax. penalty of P10.00 for the reason that in this jurisdiction, the same cannot
be collected in the absence of a valid and binding compromise
agreement.

Petitioner Ursula Calasanz inherited from her father Mariano de Torres Hence, the present appeal.
an agricultural land located in Cainta, Rizal, containing a total area of
1,678,000 square meters. In order to liquidate her inheritance, Ursula The issues for consideration are:
Calasanz had the land surveyed and subdivided into lots. Improvements,
such as good roads, concrete gutters, drainage and lighting system, a. Whether or not petitioners are real estate dealers
were introduced to make the lots saleable. Soon after, the lots were sold liable for real estate dealer's fixed tax; and
to the public at a profit.
b. Whether the gains realized from the sale of the lots
In their joint income tax return for the year 1957 filed with the Bureau of are taxable in full as ordinary income or capital gains
Internal Revenue on March 31, 1958, petitioners disclosed a profit of taxable at capital gain rates.
P31,060.06 realized from the sale of the subdivided lots, and reported
fifty per centum thereof or P15,530.03 as taxable capital gains.
The issues are closely interrelated and will be taken jointly.
Upon an audit and review of the return thus filed, the Revenue Examiner
Petitioners assail their liabilities as "real estate dealers" and seek to
adjudged petitioners engaged in business as real estate dealers, as
bring the profits from the sale of the lots under Section 34 [b] [2] 3 of the
defined in Section 194 [s] 1 of the National Internal Revenue Code, required them to pay Tax Code.
the real estate dealer's tax 2 and assessed a deficiency income tax on profits derived from the sale of
the lots based on the rates for ordinary income.
The theory advanced by the petitioners is that inherited land is a capital
asset within the meaning of Section 34[a] [1] of the Tax Code and that
an heir who liquidated his inheritance cannot be said to have engaged
in the real estate business and may not be denied the preferential tax
treatment given to gains from sale of capital assets, merely because he
disposed of it in the only possible and advantageous way.
Petitioners averred that the tract of land subject of the controversy was
sold because of their intention to effect a liquidation. They claimed that
it was parcelled out into smaller lots because its size proved difficult, if
not impossible, of disposition in one single transaction. They pointed out
that once subdivided, certainly, the lots cannot be sold in one isolated
transaction. Petitioners, however, admitted that roads and other
improvements were introduced to facilitate its sale. 4
On the other hand, respondent Commissioner maintained that the
imposition of the taxes in question is in accordance with law since
petitioners are deemed to be in the real estate business for having been
involved in a series of real estate transactions pursued for profit.
Respondent argued that property acquired by inheritance may be
converted from an investment property to a business property if, as in
the present case, it was subdivided, improved, and subsequently sold
and the number, continuity and frequency of the sales were such as to
constitute "doing business." Respondent likewise contended that
inherited property is by itself neutral and the fact that the ultimate
purpose is to liquidate is of no moment for the important inquiry is what
the taxpayer did with the property. Respondent concluded that since the
lots are ordinary assets, the profits realized therefrom are ordinary gains,
hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into
ordinary assets and capital assets. Section 34[a] [1] of the National
Internal Revenue Code broadly defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means
property held by the taxpayer [whether or not connected
with his trade or business], but does not include, stock in
trade of the taxpayer or other property of a kind which
would properly be included, in the inventory of the
taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business, or property used in the trade or business of a
character which is subject to the allowance for
depreciation provided in subsection [f] of section thirty;
or real property used in the trade or business of the
taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the asset
is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are
ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital
gain or an ordinary gain depending on the kind of asset involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be
determined with finality whether property sold by a taxpayer was held
primarily for sale to customers in the ordinary course of his trade or
business or whether it was sold as a capital asset. 6 Although several factors or
indices 7 have been recognized as helpful guides in making a determination, none of these is decisive;
neither is the presence nor the absence of these factors conclusive. Each case must in the last
analysis rest upon its own peculiar facts and circumstances. 8
Also a property initially classified as a capital asset may thereafter be
treated as an ordinary asset if a combination of the factors indubitably
tend to show that the activity was in furtherance of or in the course of the
taxpayer's trade or business. Thus, a sale of inherited real property
usually gives capital gain or loss even though the property has to be
subdivided or improved or both to make it salable. However, if the
inherited property is substantially improved or very actively sold or both
it may be treated as held primarily for sale to customers in the ordinary
course of the heir's business. 9
Upon an examination of the facts on record, We are convinced that the
activities of petitioners are indistinguishable from those invariably
employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business element
of development which is very much in evidence. Petitioners did not sell
the land in the condition in which they acquired it. While the land was
originally devoted to rice and fruit trees, 10 it was subdivided into small lots and in the
process converted into a residential subdivision and given the name Don Mariano Subdivision.
Extensive improvements like the laying out of streets, construction of concrete gutters and installation
of lighting system and drainage facilities, among others, were undertaken to enhance the value of the
lots and make them more attractive to prospective buyers. The audited financial
statements 11 submitted together with the tax return in question disclosed that a considerable amount
was expended to cover the cost of improvements. As a matter of fact, the estimated improvements lose the benefits of the capital gain provision of the
of the lots sold reached P170,028.60 whereas the cost of the land is only P 4,742.66. There is
authority that a property ceases to be a capital asset if the amount expended to improve it is double statute unless he enters the real estate business and
its original cost, for the extensive improvement indicates that the seller held the property primarily for carries on the sale in the manner in which such a
sale to customers in the ordinary course of his business. 12
business is ordinarily conducted. In that event, the
liquidation constitutes a business and a sale in the
Another distinctive feature of the real estate business discernible from ordinary course of such a business and the preferred tax
the records is the existence of contracts receivables, which stood at status is lost.
P395,693.35 as of the year ended December 31, 1957. The sizable
amount of receivables in comparison with the sales volume of
In view of the foregoing, We hold that in the course of selling the
P446,407.00 during the same period signifies that the lots were sold on subdivided lots, petitioners engaged in the real estate business and
installment basis and suggests the number, continuity and frequency of accordingly, the gains from the sale of the lots are ordinary income
the sales. Also of significance is the circumstance that the lots were
taxable in full.
advertised 13 for sale to the public and that sales and collection commissions were paid out during
the period in question.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No
Petitioners, likewise, urge that the lots were sold solely for the purpose costs.
of liquidation.
SO ORDERED.
In Ehrman vs. Commissioner,14 the American court in clear and categorical terms
rejected the liquidation test in determining whether or not a taxpayer is carrying on a trade or business
The court observed that the fact that property is sold for purposes of liquidation does not foreclose a
determination that a "trade or business" is being conducted by the seller. The court enunciated further:

We fail to see that the reasons behind a person's

entering into a business-whether it is to make money or
whether it is to liquidate-should be determinative of the
question of whether or not the gains resulting from the
sales are ordinary gains or capital gains. The sole
question is-were the taxpayers in the business of
subdividing real estate? If they were, then it seems
indisputable that the property sold falls within the
exception in the definition of capital assets . . . that is,
that it constituted 'property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade
or business.

Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the
matter in this wise:

One may, of course, liquidate a capital asset. To do so,

it is necessary to sell. The sale may be conducted in the
most advantageous manner to the seller and he will not
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the
ground that it is erroneous. We have carefully studied it and find it is not;
on the contrary, it is supported by law and doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo
with several Japanese shipbuilding companies for the construction of
twelve ocean-going vessels. 1 The purchase price was to come from the
proceeds of bonds issued by the Central Bank. 2 Initial payments were
made in cash and through irrevocable letters of credit. 3 Fourteen
promissory notes were signed for the balance by the NDC and, as
required by the shipbuilders, guaranteed by the Republic of the
Philippines. 4 Pursuant thereto, the remaining payments and the
interests thereon were remitted in due time by the NDC to Tokyo. The
vessels were eventually completed and delivered to the NDC in Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of
US$4,066,580.70 as interest on the balance of the purchase price. No
tax was withheld. The Commissioner then held the NDC liable on such
tax in the total sum of P5,115,234.74. Negotiations followed but failed.
The BIR thereupon served on the NDC a warrant of distraint and levy to
enforce collection of the claimed amount. 6 The NDC went to the Court
of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the
tax deficiency in the sum of P900.00, representing the compromise
penalty. 7 The NDC then came to this Court in a petition for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to
them under Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. — (a)
Gross income from sources within the Philippines. — The
following items of gross income shall be treated as gross income
from sources within the Philippines:
(1) Interest. — Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject
to tax under the above provision because all the related activities — the
signing of the contract, the construction of the vessels, the payment of
the stipulated price, and their delivery to the NDC — were done in
Tokyo. 8 The law, however, does not speak of activity but of "source,"
which in this case is the NDC. This is a domestic and resident
corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the
Government's right to levy and collect income tax on interest
received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition
that 'the activity or labor — and the sale from which the (interest)
income flowed had its situs' in the Philippines. The law specifies:
'Interest derived from sources within the Philippines, and interest
on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.' Nothing there speaks of the
'act or activity' of non-resident corporations in the Philippines, or
place where the contract is signed. The residence of the
obligor who pays the interest rather than the physical location of
the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income. (Mertens,
Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk
& Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate
of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4
BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the
obligor is a resident of the Philippines the interest payment paid
by him can have no other source than within the Philippines. The
interest is paid not by the bond, note or other interest-bearing
obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development
Company, a corporation duly organized and existing under the
laws of the Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa, Manila, Philippines
unconditionally promised to pay the Japanese shipbuilders, as
obligor in fourteen (14) promissory notes for each vessel, the
balance of the contract price of the twelve (12) ocean-going
vessels purchased and acquired by it from the Japanese
corporations, including the interest on the principal sum at the
rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-
13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of
Facts.) And pursuant to the terms and conditions of these
promisory notes, which are duly signed by its Vice Chairman and
General Manager, petitioner remitted to the Japanese
shipbuilders in Japan during the years 1960, 1961, and 1962 the
sum of $830,613.17, $1,654,936.52 and $1,541.031.00,
respectively, as interest on the unpaid balance of the purchase
price of the aforesaid vessels. (pars. 13, 14, & 15, Partial
Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The
residence of the obligor which paid the interest under
consideration, petitioner herein, is Calle Pureza, Sta. Mesa,
Manila, Philippines; and as a corporation duly organized and
existing under the laws of the Philippines, it is a domestic
corporation, resident of the Philippines. (Sec. 84(c), National
Internal Revenue Code.) The interest paid by petitioner, which is
admittedly a resident of the Philippines, is on the promissory
notes issued by it. Clearly, therefore, the interest remitted to the
Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the
unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the Philippines
subject to income tax under the then Section 24(b)(1) of the
National Internal Revenue Code. 9
There is no basis for saying that the interest payments were obligations
of the Republic of the Philippines and that the promissory notes of the
NDC were government securities exempt from taxation under Section
29(b)[4] of the Tax Code, reading as follows:
SEC. 29. Gross Income. — xxxx xxx xxx xxx
(b) Exclusion from gross income. — The following items shall not
be included in gross income and shall be exempt from taxation
under this Title:
xxx xxx xxx
(4) Interest on Government Securities. — Interest upon the
obligations of the Government of the Republic of the Philippines
or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent
provided in the act authorizing the issue thereof. (As amended
by Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of
securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No.
182 as amended by C.A. No. 311 does carry such authorization but, like
R.A. No. 1407, does not exempt from taxes the interests on such
securities.
It is also incorrect to suggest that the Republic of the Philippines could
not collect taxes on the interest remitted because of the undertaking
signed by the Secretary of Finance in each of the promissory notes that:
Upon authority of the President of the Republic of the
Philippines, the undersigned, for value received, hereby
absolutely and unconditionally guarantee (sic), on behalf of the
Republic of the Philippines, the due and punctual payment of
both principal and interest of the above note.10
There is nothing in the above undertaking exempting the interests from
taxes. Petitioner has not established a clear waiver therein of the right
to tax interests. Tax exemptions cannot be merely implied but must be
categorically and unmistakably expressed. 11 Any doubt concerning this
question must be resolved in favor of the taxing power. 12
Nowhere in the said undertaking do we find any inhibition against the
collection of the disputed taxes. In fact, such undertaking was made by
the government in consonance with and certainly not against the
following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. — All persons, corporations and
general co-partnership (companies colectivas), in whatever
capacity acting, including lessees or mortgagors of real or
personal capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having control,
receipt, custody; disposal or payment of interest, dividends,
rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable
annual or categorical gains, profits and income of any
nonresident alien individual, not engaged in trade or business
within the Philippines and not having any office or place of
business therein, shall (except in the cases provided for in
subsection (a) of this section) deduct and withhold from such
annual or periodical gains, profits and income a tax to twenty
(now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the
case of foreign corporations subject to taxation under this Title
not engaged in trade or business within the Philippines and not
having any office or place of business therein, there shall be
deducted and withheld at the source in the same manner and
upon the same items as is provided in section fifty-three a tax
equal to thirty (now 35%) per centum thereof, and such tax shall
be returned and paid in the same manner and subject to the
same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely
guaranteed the obligations of the NDC but without diminution of its taxing
power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the
Republic of the Philippines, the petitioner closes its eyes to the nature of
this entity as a corporation. As such, it is governed in its proprietary
activities not only by its charter but also by the Corporation Code and
other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The
tax was due on the interests earned by the Japanese shipbuilders. It was
the income of these companies and not the Republic of the Philippines
that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is
a penalty for its failure to withhold the same from the Japanese
shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code,
thus:
Section 53(c). Return and Payment. — Every person required to
deduct and withhold any tax under this section shall make return
thereof, in duplicate, on or before the fifteenth day of April of
each year, and, on or before the time fixed by law for the
payment of the tax, shall pay the amount withheld to the officer
of the Government of the Philippines authorized to receive it.
Every such person is made personally liable for such tax, and is
indemnified against the claims and demands of any person for
the amount of any payments made in accordance with the
provisions of this section. (As amended by Section 9, R.A. No.
2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue
and the Court of Tax Appeals, 13 the Court quoted with approval the
following regulation of the BIR on the responsibilities of withholding
agents:
In case of doubt, a withholding agent may always protect himself
by withholding the tax due, and promptly causing a query to be
addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is
not subject to withholding. In case the Commissioner of Internal
Revenue decides that the income paid to an individual is not
subject to withholding, the withholding agent may thereupon
 remit the amount of a tax withheld. (2nd par., Sec. 200, Income
Tax Regulations).
"Strict observance of said steps is required of a withholding agent before
he could be released from liability," so said Justice Jose P. Bengson,
who wrote the decision. "Generally, the law frowns upon exemption from
taxation; hence, an exempting provision should be construed strictissimi
juris." 14
The petitioner was remiss in the discharge of its obligation as the
withholding agent of the government an so should be held liable for its
omission.
WHEREFORE, the appealed decision is AFFIRMED, without any
pronouncement as to costs. It is so ordered.
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF
TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent
British Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on
certiorari of the joint Decision of the Court of Tax Appeals (CTA) in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside
petitioner's assessment of deficiency income taxes against respondent
British Overseas Airways Corporation (BOAC) for the fiscal years 1959
to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of
18 November, 1983 denying reconsideration.
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. 1
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 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.
Hence, this Petition for Review on certiorari of the Decision of the Tax
Court.
The Solicitor General, in representation of the CIR, has aptly defined the
issues, thus:
1. 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.
2. Whether or not during the fiscal years in question
BOAC s a resident foreign corporation doing business in
the Philippines or has an office or place of business in
the Philippines.
3. In the alternative that private respondent may not be
considered a resident foreign corporation but a non-
resident foreign corporation, then it is liable to Philippine
income tax at the rate of thirty-five per cent (35%) of its
gross income received from all sources within the
Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in
trade or business within the Philippines or having an
office or place of business therein.
(i) The term "non-resident foreign corporation" applies to
a foreign corporation not engaged in trade or business
within the Philippines and not having any office or place
of business therein
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. 3
BOAC, during the periods covered by the subject - assessments,
maintained a general sales agent in the Philippines, That general sales
agent, from 1959 to 1971, "was engaged in (1) selling and issuing
tickets; (2) breaking down the whole trip into series of trips — each trip
in the series corresponding to a different airline company; (3) receiving
the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed
by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those
activities were in exercise of the functions which are normally incident
to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no
doubt then that BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its
total net income received in the preceding taxable year from all sources
within the Philippines. 5
Sec. 24. Rates of tax on corporations. — ...
(b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation organized,
authorized, or existing under the laws of any foreign
country, except a foreign fife insurance company,
engaged in trade or business within the Philippines, shall
be taxable as provided in subsection (a) of this section
upon the total net income received in the preceding
taxable year from all sources within the
Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue
from sales of tickets by BOAC in the Philippines constitutes income from
Philippine sources and, accordingly, taxable under our income tax laws.
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
The records show that the Philippine gross income of BOAC for the fiscal
years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
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.
A transportation ticket is not a mere piece of paper. When issued by a
common carrier, it constitutes the contract between the ticket-holder and
the carrier. It gives rise to the obligation of the purchaser of the ticket to
pay the fare and the corresponding obligation of the carrier to transport
the passenger upon the terms and conditions set forth thereon. The
ordinary ticket issued to members of the traveling public in general
embraces within its terms all the elements to constitute it a valid contract,
binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross
income from sources within the Philippines, namely: (1) interest, (21)
dividends, (3) service, (4) rentals and royalties, (5) sale of real property,
and (6) sale of personal property, does not mention income from the sale
of tickets for international transportation. However, that does not render
it less an income from sources within the Philippines. Section 37, by its
language, does not intend the enumeration to be exclusive. It merely
directs that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will show
that it does not state that it is an all-inclusive enumeration, and that no
other kind of income may be so considered. " 10
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
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. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years
covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967,
1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November,
1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall
pay a tax of 2-½ per cent on their cross Philippine
billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided
a statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue
realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of
passage documents sold therein, whether for
passenger, excess baggage or mail provided the cargo
or mail originates from the Philippines. ...
The foregoing provision ensures that international airlines are taxed on
their income from Philippine sources. The 2-½ % tax on gross Philippine
billings is an income tax. If it had been intended as an excise or
percentage tax it would have been place under Title V of the Tax Code
covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for
lack of merit by this Court of the appeal in JAL vs. Commissioner of
Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case
was to the effect that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer
therein subject to the common carrier's tax. As elucidated by the Tax
Court, however, the common carrier's tax is an excise tax, being a tax
on the activity of transporting, conveying or removing passengers and
cargo from one place to another. It purports to tax the business of
transportation. 14 Being an excise tax, the same can be levied by the
State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject matter of
the case under consideration is income tax, a direct tax on the income
of persons and other entities "of whatever kind and in whatever form
derived from any source." Since the two cases treat of a different subject
matter, the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals
is hereby SET ASIDE. Private respondent, the British Overseas Airways
Corporation (BOAC), is hereby ordered to pay the amount of
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to
1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972
for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is
hereby denied. Without costs.
SO ORDERED.
G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS,
INC., Petitioner,
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE
HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner Chamber
of Real Estate and Builders’ Associations, Inc. is questioning the
constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue
(BIR) to implement said provision and those involving creditable
withholding taxes.3
Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo,
then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.
Petitioner assails the validity of the imposition of minimum corporate
income tax (MCIT) on corporations and creditable withholding tax (CWT)
on sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations
and is implemented by RR 9-98. Petitioner argues that the MCIT violates
the due process clause because it levies income tax even if there is no
realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-
2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-
2003, all of which prescribe the rules and procedures for the collection
of CWT on the sale of real properties categorized as ordinary assets.
Petitioner contends that these revenue regulations are contrary to law
for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, respondent Secretary of
Finance has no authority to collect CWT, much less, to base the CWT
on the gross selling price or fair market value of the real properties
classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject
revenue regulations violate the due process clause because, like the
MCIT, the government collects income tax even when the net income
has not yet been determined. They contravene the equal protection
clause as well because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the
present case;
(2) whether or not the imposition of the MCIT on domestic
corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales
of real properties classified as ordinary assets under RRs 2-98,
6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of
operation, is assessed an MCIT of 2% of its gross income when such
MCIT is greater than the normal corporate income tax imposed under
Section 27(A).4 If the regular income tax is higher than the MCIT, the
corporation does not pay the MCIT. Any excess of the MCIT over the
normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years. Section
27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the
year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable
year.
(2) Carry Forward of Excess Minimum Tax. – Any excess of the
[MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The
Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers losses
on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, the necessary
rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a
meritorious case.
(4) Gross Income Defined. – For purposes of applying the [MCIT]
provided under Subsection (E) hereof, the term ‘gross income’
shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall
include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include
the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold"
shall include all costs of production of finished goods, such as raw
materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income"
means gross receipts less sales returns, allowances, discounts and cost
of services. "Cost of services" shall mean all direct costs and expenses
necessarily incurred to provide the services required by the customers
and clients including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided, however, that
in the case of banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on
the recommendation of the Commissioner of Internal Revenue (CIR),
promulgated RR 9-98 implementing Section 27(E).5 The pertinent
portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year (whether calendar or fiscal year,
depending on the accounting period employed) is hereby imposed upon
any domestic corporation beginning the fourth (4th) taxable year
immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or Those which are exempt from a Exempt
whenever the amount of minimum corporate income tax is greater than withholding tax at source as
the normal income tax due from such corporation. prescribed in Sec. 2.57.5 of these
regulations.
For purposes of these Regulations, the term, "normal income tax" means
the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of With a selling price of five hundred 1.5%
the Code xxx at 32% effective January 1, 2000 and thereafter. thousand pesos (₱500,000.00) or
less.
xxx xxx xxx

(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the With a selling price of more than five 3.0%
normal income tax as computed under Sec. 27(A) of the Code shall be hundred thousand pesos
carried forward on an annual basis and credited against the normal (₱500,000.00) but not more than two
income tax for the three (3) immediately succeeding taxable years. million pesos (₱2,000,000.00).

xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon
recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from
the sale, exchange or transfer of real property, other than capital assets,
by persons residing in the Philippines and habitually engaged in the real
estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed
thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent
paid to the seller/owner for the sale, exchange or transfer of. – Real
property, other than capital assets, sold by an individual, corporation,
estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the
following schedule –
With selling price of more than two 5.0%
million pesos (₱2,000,000.00)
xxx xxx xxx
Gross selling price shall mean the consideration stated in the sales
document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as
determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no
withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire
consideration shall be withheld on the last installment or installments to
be paid to the seller.
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, the tax shall be deducted and withheld by the
buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed (i) If the sale is a sale of property on the installment plan (that is,
thereon: payments in the year of sale do not exceed 25% of the selling price), the
tax shall be deducted and withheld by the buyer on every installment.
xxx xxx xxx
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-
(J) Gross selling price or total amount of consideration or its equivalent payment sale not on the installment plan" (that is, payments in the year
paid to the seller/owner for the sale, exchange or transfer of real property of sale exceed 25% of the selling price), the buyer shall withhold the tax
classified as ordinary asset. - A [CWT] based on the gross selling based on the gross selling price or fair market value of the property,
price/total amount of consideration or the fair market value determined whichever is higher, on the first installment.
in accordance with Section 6(E) of the Code, whichever is higher, paid
to the seller/owner for the sale, transfer or exchange of real property,
In any case, no Certificate Authorizing Registration (CAR) shall be
other than capital asset, shall be imposed upon the withholding issued to the buyer unless the [CWT] due on the sale, transfer or
agent,/buyer, in accordance with the following schedule: exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)
Where the seller/transferor is exempt from [CWT] in Exempt
accordance with Sec. 2.57.5 of these regulations. Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424
Upon the following values of real property, where the provides that any sale, barter or exchange subject to the CWT will not
seller/transferor is habitually engaged in the real estate be recorded by the Registry of Deeds until the CIR has certified that such
business. transfers and conveyances have been reported and the taxes thereof
With a selling price of Five Hundred Thousand Pesos 1.5% have been duly paid:
7

(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0% Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of
Pesos (₱500,000.00) but not more than Two Million Pesos conveyances of land or land and building/improvement thereon arising
(₱2,000,000.00). from sales, barters, or exchanges subject to the creditable expanded
With a selling price of more than two Million Pesos 5.0% withholding tax shall not be recorded by the Register of Deeds unless
(₱2,000,000.00). the [CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon
xxx xxx xxx have been fully paid xxxx.

Gross selling price shall remain the consideration stated in the sales
document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in
exchange shall be considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:
On February 11, 2003, RR No. 7-20038 was promulgated, providing for
the guidelines in determining whether a particular real property is a
capital or an ordinary asset for purposes of imposing the MCIT, among
others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall, unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident
aliens, and non-resident aliens engaged in trade or business in the
Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E)
of the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as
the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations. –
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and other
real property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the Code, whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless
the following requisites are satisfied: (1) there must be an actual case
calling for the exercise of judicial review; (2) the question before the court
must be ripe for adjudication; (3) the person challenging the validity of
the act must have standing to do so; (4) the question of constitutionality
must have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case.
According to them, there is no actual case calling for the exercise of
judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its
members, has been assessed by the BIR for the payment of [MCIT] or
[CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment of
the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances
cited that the assailed law and revenue regulations have actually and
adversely affected it. Lacking empirical data on which to base any
conclusion, any discussion on the constitutionality of the MCIT or CWT
on sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does not
really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an
assertion of opposite legal claims which is susceptible of judicial
resolution as distinguished from a hypothetical or abstract difference or
dispute.11 On the other hand, a question is considered ripe for
adjudication when the act being challenged has a direct adverse effect
on the individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until
petitioner’s members have shut down their operations as a result of the
MCIT or CWT. The assailed provisions are already being implemented.
As we stated in Didipio Earth-Savers’ Multi-Purpose Association,
Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the
challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial
duty.14
If the assailed provisions are indeed unconstitutional, there is no better
time than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and
builders in the Philippines. Petitioners did not allege that [it] itself is in
the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed
provisions].15
Legal standing or locus standi is a party’s personal and substantial
interest in a case such that it has sustained or will sustain direct injury
as a result of the governmental act being challenged.16 In Holy Spirit
Homeowners Association, Inc. v. Defensor,17 we held that the
association had legal standing because its members stood to be injured
by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant
petition xxx. There is no dispute that the individual members of petitioner
association are residents of the NGC. As such they are covered and
stand to be either benefited or injured by the enforcement of the IRR,
particularly as regards the selection process of beneficiaries and lot
allocation to qualified beneficiaries. Thus, petitioner association may
assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have
sustained direct injury arising from the enforcement of the IRR in that
they have been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit
which does not satisfy the requirements of an actual case, ripeness or
legal standing when paramount public interest is involved.19 The
questioned MCIT and CWT affect not only petitioners but practically all
domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to
society make it proper for us to take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA
8424 to the Philippine taxation system. It came about as a result of the
perceived inadequacy of the self-assessment system in capturing the
true income of corporations.21 It was devised as a relatively simple and
effective revenue-raising instrument compared to the normal income tax
which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the
public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of
certain corporations of reporting constantly a loss in their operations to
avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first
time a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative
convenience. … This will go a long way in ensuring that corporations will
pay their just share in supporting our public life and our economic
advancement.22
Domestic corporations owe their corporate existence and their privilege
to do business to the government. They also benefit from the efforts of
the government to improve the financial market and to ensure a
favorable business climate. It is therefore fair for the government to
require them to make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which,
while having large turn-overs, report minimal or negative net income
resulting in minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses otherwise
called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy,
that is why they have proposed the [MCIT]. Because from experience
too, you have corporations which have been losing year in and year out
and paid no tax. So, if the corporation has been losing for the past five
years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year out?
So, we have this provision to avoid this type of tax shelters, Your
Honor.24
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes
resorted to by corporations are allowed in our jurisdiction. The MCIT
serves to put a cap on such tax shelters. As a tax on gross income, it
prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following
safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the
need to recoup initial major capital expenditures, the imposition of the
MCIT commences only on the fourth taxable year immediately following
the year in which the corporation commenced its operations.25 This
grace period allows a new business to stabilize first and make its
ventures viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT
paid over the normal income tax which shall be credited against the
normal income tax for the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated
losses, the law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to prolonged labor
dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine
taxation system, several other countries already had their own system
of minimum corporate income taxation. Our lawmakers noted that most
developing countries, particularly Latin American and Asian countries,
have the same form of safeguards as we do. As pointed out during the
committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of
course quite a bit of room for underdeclaration of gross receipts have
this same form of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of
income tax of half a percent (0.5%) of gross assessable income. In
Korea a 25% of taxable income before deductions and exemptions. Of
course the different countries have different basis for that minimum
income tax.
The other thing you’ll notice is the preponderance of Latin American
countries that employed this method. Okay, those are additional Latin
American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia,
Panama and Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and interest
expenses which are equally necessary to produce gross income, were
not taken into account.31 Thus, pegging the tax base of the MCIT to a
corporation’s gross income is tantamount to a confiscation of capital
because gross income, unlike net income, is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the
government can neither exist nor endure. The exercise of taxing power
derives its source from the very existence of the State whose social
contract with its citizens obliges it to promote public interest and the
common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is
purely legislative.35 Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.36 It has the authority to prescribe a certain tax at a specific rate
for a particular public purpose on persons or things within its jurisdiction.
In other words, the legislature wields the power to define what tax shall
be imposed, why it should be imposed, how much tax shall be imposed,
against whom (or what) it shall be imposed and where it shall be
imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check
against its abuse is to be found only in the responsibility of the legislature
(which imposes the tax) to its constituency who are to pay
it.37 Nevertheless, it is circumscribed by constitutional limitations. At the
same time, like any other statute, tax legislation carries a presumption
of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no]
person shall be deprived of life, liberty or property without due process
of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process
clause may properly be invoked to invalidate, in appropriate cases, a
revenue measure39 when it amounts to a confiscation of property.40 But
in the same case, we also explained that we will not strike down a
revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the
taxpayer.41 There must be a factual foundation to such an
unconstitutional taint.42 This merely adheres to the authoritative doctrine
that, where the due process clause is invoked, considering that it is not
a fixed rule but rather a broad standard, there is a need for proof of such
persuasive character.43
Petitioner is correct in saying that income is distinct from
capital.44 Income means all the wealth which flows into the taxpayer
other than a mere return on capital. Capital is a fund or property existing
at one distinct point in time while income denotes a flow of wealth during
a definite period of time.45 Income is gain derived and severed from
capital.46 For income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital
because capital is not income. In other words, it is income, not capital,
which is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting
the capital spent by a corporation in the sale of its goods, i.e., the cost
of goods48 and other direct expenses from gross sales. Clearly, the
capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the normal
income tax is suspiciously low. The MCIT merely approximates the
amount of net income tax due from a corporation, pegging the rate at a
very much reduced 2% and uses as the base the corporation’s gross
income.
Besides, there is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time reducing
the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of
particular corporations are found in many jurisdictions. Tax thereon is
generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates
the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system
which is generally characterized by a lower tax rate but a broader tax
base.51 Since our income tax laws are of American origin, interpretations
by American courts of our parallel tax laws have persuasive effect on the
interpretation of these laws.52 Although our MCIT is not exactly the same
as the AMT, the policy behind them and the procedure of their
implementation are comparable. On the question of the AMT’s
constitutionality, the United States Court of Appeals for the Ninth Circuit
stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general
taxpayer distrust of the system growing from large numbers of taxpayers
with large incomes who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality
of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax,
and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes was a
legitimate governmental end to which the AMT bore a reasonable
relation.55
American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive
at the net that it chooses to tax.56 This is because deductions are a
matter of legislative grace.57
Absent any other valid objection, the assignment of gross income,
instead of net income, as the tax base of the MCIT, taken with the
reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.
Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical data
to show that the implementation of the MCIT resulted in the confiscation
of their property.
In sum, petitioner failed to support, by any factual or legal basis, its
allegation that the MCIT is arbitrary and confiscatory. The Court cannot
strike down a law as unconstitutional simply because of its
yokes.58 Taxation is necessarily burdensome because, by its nature, it
adversely affects property rights.59 The party alleging the law’s
unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due
process of law because the MCIT is being imposed and collected even
when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever
the amount of [MCIT] is greater than the normal income tax due from
such corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines the
coverage of Section 27(E). This means that even if a corporation incurs
a net loss in its business operations or reports zero income after
deducting its expenses, it is still subject to an MCIT of 2% of its gross
income. This is consistent with the law which imposes the MCIT on gross
income notwithstanding the amount of the net income. But the law also
states that the MCIT is to be paid only if it is greater than the normal net
income. Obviously, it may well be the case that the MCIT would be less
than the net income of the corporation which posts a zero or negative
taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes
(including income taxes) are collected.61 Under Section 57 of RA 8424,
the types of income subject to withholding tax are divided into three
categories: (a) withholding of final tax on certain incomes; (b) withholding
of creditable tax at source and (c) tax-free covenant bonds. Petitioner is
concerned with the second category (CWT) and maintains that the
revenue regulations on the collection of CWT on sale of real estate
categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and
ordinary assets under RA 8424, contends that Sections 2.57.2(J) and
2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated "with grave abuse of discretion amounting to lack of
jurisdiction" and "patently in contravention of law"62 because they ignore
such distinctions. Petitioner’s conclusion is based on the following
premises: (a) the revenue regulations use gross selling price (GSP) or
fair market value (FMV) of the real estate as basis for determining the
income tax for the sale of real estate classified as ordinary assets and
(b) they mandate the collection of income tax on a per transaction
basis, i.e., upon consummation of the sale via the CWT, contrary to RA
8424 which calls for the payment of the net income at the end of the
taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary
assets differently, respondents cannot disregard the distinctions set by
the legislators as regards the tax base, modes of collection and payment
of taxes on income from the sale of capital and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of
CWT on Sales of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the
authority to promulgate the necessary rules and regulations for the
effective enforcement of the provisions of the law. Such authority is
subject to the limitation that the rules and regulations must not override,
but must remain consistent and in harmony with, the law they seek to
apply and implement.64 It is well-settled that an administrative agency
cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source is
a procedure of collecting income tax which is sanctioned by our tax
laws.66 The withholding tax system was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet his
probable income tax liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially reduced through failure
to file the corresponding returns and third, to improve the government’s
cash flow.67 This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means
and remedies.68
Respondent Secretary has the authority to require the withholding of a
tax on items of income payable to any person, national or juridical,
residing in the Philippines. Such authority is derived from Section 57(B)
of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source. –
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon
the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax
liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the
authority given by Section 57(B) to the Secretary, i.e., the graduated rate
of 1.5%-5% is between the 1%-32% range; the withholding tax is
imposed on the income payable and the tax is creditable against the
income tax liability of the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or
Corporations Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax
base of a real estate business’ income tax from net income to GSP or
FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to extinguish its possible tax obligation. 69 They are
installments on the annual tax which may be due at the end of the
taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entity’s net
income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross
income less allowable deductions. The CWT is to be deducted from the
net income tax payable by the taxpayer at the end of the taxable
year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that
the tax base for the sale of real property classified as ordinary assets
remains to be the net taxable income:
Section 4. – Applicable taxes on sale, exchange or other disposition of
real property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or business in
the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV]
as determined in accordance with Section 6(E) of the Code, whichever
is higher, and consequently, to the ordinary income tax imposed
under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be,
based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other
real property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis
supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its
income tax return and credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other hand,
the tax due is less than the tax withheld, the taxpayer will be entitled to
a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net
income.
The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to withhold the tax does not
know, nor is he privy to, how much the taxpayer/seller will have as its
net income at the end of the taxable year. Instead, said withholding
agent’s knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his basis can only be
the GSP or FMV as these are the only factors reasonably known or
knowable by him in connection with the performance of his duties as a
withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital
Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or
FMV of the real property categorized as ordinary assets. On the other
hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of
6% on the gain presumed to be realized from the sale of a capital asset
based on its GSP or FMV. This final tax is also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable
and final, show that ordinary assets are not treated in the same manner
as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:
FWT CWT
a) The amount of income tax a) Taxes withheld on certain
withheld by the withholding income payments are intended
agent is constituted as a full and to equal or at least approximate
final payment of the income tax the tax due of the payee on said
due from the payee on the said income.
income.
 b)The liability for payment of the b) Payee of income is required income. The enumeration in Section 57(A) refers to passive income
tax rests primarily on the payor to report the income and/or pay being subjected to FWT. It follows that Section 57(B) on CWT should
as a withholding agent. the difference between the tax also be limited to passive income:
withheld and the tax due on the
income. The payee also has the SEC. 57. Withholding of Tax at Source. —
right to ask for a refund if the tax
withheld is more than the tax (A) Withholding of Final Tax on Certain Incomes. — Subject to
due. rules and regulations, the [Secretary] may promulgate, upon the
c) The payee is not required to c) The income recipient is still recommendation of the [CIR], requiring the filing of income tax
file an income tax return for the required to file an income tax return by certain income payees, the tax imposed or
particular income.73 return, as prescribed in Sec. 51 prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
and Sec. 52 of the NIRC, as 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
amended.74 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
As previously stated, FWT is imposed on the sale of capital assets. On 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code
the other hand, CWT is imposed on the sale of ordinary assets. The on specified items of income shall be withheld by payor-
inherent and substantial differences between FWT and CWT disprove corporation and/or person and paid in the same manner and
petitioner’s contention that ordinary assets are being lumped together subject to the same conditions as provided in Section 58 of this
with, and treated similarly as, capital assets in contravention of the Code.
pertinent provisions of RA 8424.
(B) Withholding of Creditable Tax at Source. — The [Secretary]
Petitioner insists that the levy, collection and payment of CWT at the may, upon the recommendation of the [CIR], require the
time of transaction are contrary to the provisions of RA 8424 on the withholding of a tax on the items of income payable to natural
manner and time of filing of the return, payment and assessment of or juridical persons, residing in the Philippines, by payor-
income tax involving ordinary assets.75 corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent
The fact that the tax is withheld at source does not automatically mean (32%) thereof, which shall be credited against the income tax
that it is treated exactly the same way as capital gains. As liability of the taxpayer for the taxable year. (Emphasis supplied)
aforementioned, the mechanics of the FWT are distinct from those of the
CWT. The withholding agent/buyer’s act of collecting the tax at the time This line of reasoning is non sequitur.
of the transaction by withholding the tax due from the income payable is
the essence of the withholding tax method of tax collection. Section 57(A) expressly states that final tax can be imposed on certain
kinds of income and enumerates these as passive income. The BIR
No Rule that Only Passive defines passive income by stating what it is not:

Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to
withholding tax, whether final or creditable. According to petitioner, the
whole of Section 57 governs the withholding of income tax on passive
…if the income is generated in the active pursuit and performance of the
corporation’s primary purposes, the same is not passive income…76
It is income generated by the taxpayer’s assets. These assets can be in
the form of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from
savings.
On the other hand, Section 57(B) provides that the Secretary can require
a CWT on "income payable to natural or juridical persons, residing in the
Philippines." There is no requirement that this income be passive
income. If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT
while Section 57(B) pertains to CWT. The former covers the kinds of
passive income enumerated therein and the latter encompasses any
income other than those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not
modify or deviate from the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular procedure
to be followed by an administrative agency, the agency may adopt any
reasonable method to carry out its functions.77 Similarly, considering that
the law uses the general term "income," the Secretary and CIR may
specify the kinds of income the rules will apply to based on what is
feasible. In addition, administrative rules and regulations ordinarily
deserve to be given weight and respect by the courts78 in view of the
rule-making authority given to those who formulate them and their
specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate
classified as ordinary assets deprives its members of their property
without due process of law because, in their line of business, gain is
never assured by mere receipt of the selling price. As a result, the
government is collecting tax from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from
the seller of the property at the end of the taxable year. The seller will be
able to claim a tax refund if its net income is less than the taxes withheld.
Nothing is taken that is not due so there is no confiscation of property
repugnant to the constitutional guarantee of due process. More
importantly, the due process requirement applies to the power to
tax.79 The CWT does not impose new taxes nor does it increase
taxes.80 It relates entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort
to litigation before they are granted a refund.81 This argument is
misleading. The practical problems encountered in claiming a tax refund
do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.
1avvphi1
Petitioner complains that the amount withheld would have otherwise
been used by the enterprise to pay labor wages, materials, cost of
money and other expenses which can then save the entity from having
to obtain loans entailing considerable interest expense. Petitioner also
lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period;
sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front"
regulatory fees from at least 20 government agencies.82
Petitioner’s lamentations will not support its attack on the
constitutionality of the CWT. Petitioner’s complaints are essentially
matters of policy best addressed to the executive and legislative
branches of the government. Besides, the CWT is applied only on the
amounts actually received or receivable by the real estate entity. Sales
on installment are taxed on a per-installment basis.83 Petitioner’s desire
to utilize for its operational and capital expenses money earmarked for
the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the
government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their
manner of doing business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate business is
involved in a continuous process of production and it incurs costs and
expenditures on a regular basis. The only difference is that "goods"
produced by the real estate business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no
person or class of persons shall be deprived of the same protection of
laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."85 Stated differently, all persons
belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by legislation
based on a reasonable classification. Classification, to be valid, must (1)
rest on substantial distinctions; (2) be germane to the purpose of the law;
(3) not be limited to existing conditions only and (4) apply equally to all
members of the same class.86
The taxing power has the authority to make reasonable classifications
for purposes of taxation.87 Inequalities which result from a singling out of
one particular class for taxation, or exemption, infringe no constitutional
limitation.88 The real estate industry is, by itself, a class and can be
validly treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes the
real estate business from other manufacturing enterprises, for purposes
of the imposition of the CWT, is not their production processes but the
prices of their goods sold and the number of transactions involved. The
income from the sale of a real property is bigger and its frequency of
transaction limited, making it less cumbersome for the parties to comply
with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every month
involving both minimal and substantial amounts. To require the
customers of manufacturing enterprises, at present, to withhold the
taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive
items are also sold infrequently, e.g. heavy equipment, jewelry,
furniture, appliance and other capital goods yet these are not similarly
subjected to the CWT.89 As already discussed, the Secretary may adopt
any reasonable method to carry out its functions.90 Under Section 57(B),
it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s
argument is not accurate. The sales of manufacturers who have clients
within the top 5,000 corporations, as specified by the BIR, are also
subject to CWT for their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA
8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that
the Registry of Deeds should not effect the regisration of any document
transferring real property unless a certification is issued by the CIR that
the withholding tax has been paid. Petitioner proffers hardly any reason
to strike down this rule except to rely on its contention that the CWT is
unconstitutional. We have ruled that it is not. Furthermore, this provision
uses almost exactly the same wording as Section 58(E) of RA 8424 and
is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any
document transferring real property shall be effected by the
Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported,
and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject to the
penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the]
hardest thing in the world to understand is the income tax."92 When a
party questions the constitutionality of an income tax measure, it has to
contend not only with Einstein’s observation but also with the vast and
well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge
its burden of convincing the Court that the imposition of MCIT and CWT
is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
G.R. No. 125508 July 19, 2000
CHINA BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE
and COURT OF TAX APPEALS, respondents.
DECISION
VITUG, J.:
The Commissioner of Internal Revenue denied the deduction from gross
income of "securities becoming worthless" claimed by China Banking
Corporation ("CBC"). The Commissioner’s disallowance was sustained
by the Court of Tax Appeals ("CTA"). When the ruling was appealed to
the Court of Appeals ("CA"), the appellate court upheld the CTA. The
case is now before us on a Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a 53%
equity investment in the First CBC Capital (Asia) Ltd., a Hongkong
subsidiary engaged in financing and investment with "deposit-taking"
function. The investment amounted to P16,227,851.80, consisting of
106,000 shares with a par Value of P100 per share.
In the course of the regular examination of the financial books and
investment portfolios of petitioner conducted by Bangko Sentral in 1986,
it was shown that First CBC Capital (Asia), Ltd., has become insolvent.
With the approval of Bangko Sentral, petitioner wrote-off as being
worthless its investment in First CBC Capital (Asia), Ltd., in its 1987
Income Tax Return and treated it as a bad debt or as an ordinary loss
deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the
deduction and assessed petitioner for income tax deficiency in the
amount of P8,533,328.04, inclusive of surcharge, interest and
compromise penalty. The disallowance of the deduction was made on
the ground that the investment should not be classified as being
"worthless" and that, although the Hongkong Banking Commissioner
had revoked the license of First CBC Capital as a "deposit-taping"
company, the latter could still exercise, however, its financing and
investment activities. Assuming that the securities had indeed become
worthless, respondent Commissioner of Internal Revenue held the view
that they should then be classified as "capital loss," and not as a bad
debt expense there being no indebtedness to speak of between
petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the
CTA. The tax court sustained the Commissioner, holding that the
securities had not indeed become worthless and ordered petitioner to
pay its deficiency income tax for 1987 of P8,533,328.04 plus 20%
interest per annum until fully paid. When the decision was appealed to
the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become
worthless is based on a Profit and Loss Account for the Year-End 31
December 1987, and the recommendation of Bangko Sentral that the
equity investment be written-off due to the insolvency of the subsidiary.
While the matter may not be indubitable (considering that certain classes
of intangibles, like franchises and goodwill, are not always given
corresponding values in financial statements1 , there may really be no
need, however, to go of length into this issue since, even to assume the
worthlessness of the shares, the deductibility thereof would still be nil in
this particular case. At all events, the Court is not prepared to hold that
both the tax court and the appellate court are utterly devoid of substantial
basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of
individuals and passive income subject to final tax, as well as income of
non-resident aliens and foreign corporations not engaged in trade or
business in the Philippines, the tax on income is imposed on the net
income allowing certain specified deductions from gross income to be
claimed by the taxpayer. Among the deductible items allowed by the
National Internal Revenue Code ("NIRC") are bad debts and losses.2
An equity investment is a capital, not ordinary, asset of the investor the
sale or exchange of which results in either a capital gain or a capital loss.
The gain or the loss is ordinary when the property sold or exchanged
is not a capital asset.3 A capital asset is defined negatively in Section
33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the
taxpayer (whether or not connected with his trade or business), but does
not include stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year, or property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade or business, or
property used in the trade or business, of a character which is subject to
the allowance for depreciation provided in subsection (f) of section
twenty-nine; or real property used in the trade or business of the
taxpayer."
Thus, shares of stock; like the other securities defined in Section 20(t)4 of
the NIRC, would be ordinary assets only to a dealer in securities or a
person engaged in the purchase and sale of, or an active trader (for
his own account) in, securities. Section 20(u) of the NIRC defines a
dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or
securities, whether an individual, partnership or corporation, with an
established place of business, regularly engaged in the purchase of
securities and their resale to customers; that is, one who as a merchant
buys securities and sells them to customers with a view to the gains and
profits that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way
of an investment, the shares to him would be capital assets. When
the shares held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital assets.
Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section
20 become worthless during the tax" year and are capital assets, the
loss resulting therefrom shall, for the purposes of his Title, be considered
as a loss from the sale or exchange, on the last day of such taxable year,
of capital assets."
The above provision conveys that the loss sustained by the holder of the
securities, which are capital assets (to him), is to be treated as a capital
loss as if incurred from a sale or exchange transaction. A capital
gain or a capital loss normally requires the concurrence of two conditions
for it to result: (1) There is a sale or exchange; and (2) the thing sold or
exchanged is a capital asset. When securities become worthless, there
is strictly no sale or exchange but the law deems the loss anyway to be
"a loss from the sale or exchange of capital assets."5 A similar kind of
treatment is given, by the NIRC on the retirement of certificates of
indebtedness with interest coupons or in registered form, short sales and
options to buy or sell property where no sale or exchange strictly
exists.6 In these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the capital gain
and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent of
capital gains, i.e., gains derived from the sale or exchange of
capital assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee
corporation, is a subsidiary corporation of petitioner bank whose shares
in said investee corporation are not intended for purchase or sale but as
an investment. Unquestionably then, any loss therefrom would be a
capital loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall
be allowed only to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the
aforesaid Section 29(d)(4)(A), read:
"Section 33. Capital gains and losses. -
"x x x xxx xxx
"(c) Limitation on capital losses. - Losses from sales or exchange of
capital assets shall be allowed only to the extent of the gains from
such sales or exchanges. If a bank or trust company incorporated
under the laws of the Philippines, a substantial part of whose business
is the receipt of deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political
subdivision thereof), with interest coupons or in registered form, any
loss resulting from such sale shall not be subject to the foregoing
limitation an shall not be included in determining the applicability of such
limitation to other losses."
The exclusionary clause found in the foregoing text of the law does not
include all forms of securities but specifically covers only bonds,
debentures, notes, certificates or other evidence of indebtedness,
with interest coupons or in registered form, which are the
instruments of credit normally dealt with in the usual lending operations
of a financial institution. Equity holdings cannot come close to being,
within the purview of "evidence of indebtedness" under the second
sentence of the aforequoted paragraph. Verily, it is for a like thesis that
the loss of petitioner bank in its equity in vestment in the Hongkong
subsidiary cannot also be deductible as a bad debt. The shares of stock
in question do not constitute a loan extended by it to its subsidiary (First
CBC Capital) or a debt subject to obligatory repayment by the latter,
essential elements to constitute a bad debt, but a long term investment
made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire
amount of the gain or loss upon the sale or exchange of property, as the
case may be, shall be recognized. The complete text reads:
"SECTION 34. Determination of amount of and recognition of gain or
loss.-
"(a) Computation of gain or loss. - The gain from the sale or other
disposition of property shall be the excess of the amount realized
therefrom over the basis or adjusted basis for determining gain
and the loss shall be the excess of the basis or adjusted basis
for determining loss over the amount realized. The amount
realized from the sale or other disposition of property shall be to
sum of money received plus the fair market value of the property
(other than money) received. (As amended by E.O. No. 37)
"(b) Basis for determining gain or loss from sale or disposition of
property. - The basis of property shall be - (1) The cost thereof
in cases of property acquired on or before March 1, 1913, if such
property was acquired by purchase; or
"(2) The fair market price or value as of the date of
acquisition if the same was acquired by inheritance; or
"(3) If the property was acquired by gift the basis shall be
the same as if it would be in the hands of the donor or
the last preceding owner by whom it was not acquired by
gift, except that if such basis is greater than the fair
market value of the property at the time of the gift, then
for the purpose of determining loss the basis shall be
such fair market value; or
"(4) If the property, other than capital asset referred to in
Section 21 (e), was acquired for less than an adequate
consideration in money or moneys worth, the basis of
such property is (i) the amount paid by the transferee for
the property or (ii) the transferor's adjusted basis at the
time of the transfer whichever is greater.
 "(5) The basis as defined in paragraph (c) (5) of this
section if the property was acquired in a transaction
where gain or loss is not recognized under paragraph (c)
(2) of this section. (As amended by E.O. No. 37)
"(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the
sale or exchange of property, the entire amount of the
gain or loss, as the case may be, shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in
too, how the resulting gain might be taxed, or whether or not the loss
would be deductible and how, are matters properly dealt with elsewhere
in various other sections of the NIRC.8 At all events, it may not be amiss
to once again stress that the basic rule is still that any capital loss can
be deducted only from capital gains under Section 33(c) of the NIRC.
In sum -
(a) The equity investment in shares of stock held by CBC of
approximately 53% in its Hongkong subsidiary, the First CBC
Capital (Asia), Ltd., is not an indebtedness, and it is a capital,
not an ordinary, asset.91âwphi1

pursuance of a plan of merger or consolidation (a) a

corporation which is a party to a merger or consolidation
exchanges property solely for stock in a corporation
which is, a party to the merger or consolidation, (b) a
shareholder exchanges stock in a corporation which is a
party to the merger or consolidation solely for the stock
in another corporation also a party to the merger or
consolidation, or (c) a security holder of a corporation
which is a party to the merger or consolidation
exchanges his securities in such corporation solely for
stock or securities in another corporation, a party to the
merger or consolidation.
(b) Assuming that the equity investment of CBC has indeed
become "worthless," the loss sustained is a capital, not an
ordinary, loss.10
(c) The capital loss sustained by CBC can only be deducted from
capital gains if any derived by it during the same taxable year
that the securities have become "worthless."11
WHEREFORE, the Petition is DENIED. The decision of the Court of
Appeals disallowing the claimed deduction of P16,227,851.80 is
AFFIRMED.

"No gain or loss shall also be recognized if property is transferred to a SO ORDERED.

corporation by a person in exchange for stock in such corporation of
which as a result of such exchange said person, alone or together with
others, not exceeding four persons, gains control of said corporation:
Provided, That stocks issued for services shall not be considered as
issued in return of property."

The above law should be taken within context on the general subject of
the determination, and recognition of gain or loss; it is not preclusive of,
let alone renders completely inconsequential, the more specific
provisions of the code. Thus, pursuant, to the same section of the law,
no such recognition shall be made if the sale or exchange is made in
pursuance of a plan of corporate merger or consolidation or, if as a result
of an exchange of property for stocks, the exchanger, alone or together
with others not exceeding four, gains control of the corporation.7 Then,
G.R. No. L-19342 May 25, 1972 estate, filed a petition in Civil Case No. 9637 of the Court
of First Instance of Manila for appointment as guardian
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: of said minors. On November 14, 1949, the Court
RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. appointed him guardian of the persons and property of
OÑA and LORENZO B. OÑA, JR., petitioners, the aforenamed minors (See p. 3, BIR rec.).
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent. The project of partition (Exhibit K; see also pp. 77-70,
BIR rec.) shows that the heirs have undivided one-half
Orlando Velasco for petitioners. (1/2) interest in ten parcels of land with a total assessed
value of P87,860.00, six houses with a total assessed
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor value of P17,590.00 and an undetermined amount to be
General Felicisimo R. Rosete, and Special Attorney Purificacion Ureta collected from the War Damage Commission. Later, they
for respondent. received from said Commission the amount of
P50,000.00, more or less. This amount was not divided
among them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p. 46). Of
the ten parcels of land aforementioned, two were
BARREDO, J.:p acquired after the death of the decedent with money
borrowed from the Philippine Trust Company in the
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34
as above, holding that petitioners have constituted an unregistered partnership and are, therefore,
subject to the payment of the deficiency corporate income taxes assessed against them by BIR rec.).
respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of
P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the
provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic The project of partition also shows that the estate shares
Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' equally with Lorenzo T. Oña, the administrator thereof,
motion for reconsideration of said decision.
in the obligation of P94,973.00, consisting of loans
contracted by the latter with the approval of the Court
The facts are stated in the decision of the Tax Court as follows: (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

Julia Buñales died on March 23, 1944, leaving as heirs
her surviving spouse, Lorenzo T. Oña and her five
children. In 1948, Civil Case No. 4519 was instituted in
the Court of First Instance of Manila for the settlement of
her estate. Later, Lorenzo T. Oña the surviving spouse
was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14,
1949, the administrator submitted the project of partition,
which was approved by the Court on May 16, 1949 (See
Exhibit K). Because three of the heirs, namely Luz,
Virginia and Lorenzo, Jr., all surnamed Oña, were still
minors when the project of partition was approved,
Lorenzo T. Oña, their father and administrator of the
Although the project of partition was approved by the
Court on May 16, 1949, no attempt was made to divide
the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oña who
used said properties in business by leasing or selling
them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties
and securities. As a result, petitioners' properties and
investments gradually increased from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the
following year-end balances:
 Investment
Y
e
Land Building On the basis of the foregoing facts, respondent
a (Commissioner of Internal Revenue) decided that
r
petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, pursuant
to Section 24, in relation to Section 84(b), of the Tax
Account Account Account Code. Accordingly, he assessed against the petitioners
1949 — P87,860.00 P17,590.00 the amounts of P8,092.00 and P13,899.00 as corporate
income taxes for 1955 and 1956, respectively. (See
1950 P24,657.65 128,566.72 96,076.26 Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR
rec.). Petitioners protested against the assessment and
1951 51,301.31 120,349.28 110,605.11
asked for reconsideration of the ruling of respondent that
1952 67,927.52 87,065.28 152,674.39 they have formed an unregistered partnership. Finding
no merit in petitioners' request, respondent denied it
1953 61,258.27 84,925.68 161,463.83 (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52 The original assessment was as follows:

1956 175,028.68 135,714.68 169,262.52
1955

Net income as per investigation ................ P40,209.89

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-
104)
From said investments and properties petitioners
derived such incomes as profits from installment sales of
subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR
rec.; t.s.n., pp. 37-38). The said incomes are recorded in
the books of account kept by Lorenzo T. Oña where the
corresponding shares of the petitioners in the net income
for the year are also known. Every year, petitioners
returned for income tax purposes their shares in the net
income derived from said properties and securities
and/or from transactions involving them (Exhibit
3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n.,
pp. 25-26, 40, 98, 100). The income was always left in
the hands of Lorenzo T. Oña who, as heretofore pointed
out, invested them in real properties and securities. (See
Exhibit 3, t.s.n., pp. 50, 102-104).
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ...............................................................
P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ...............................................................
P17,361.25
(See Exhibit 13, page 50, BIR records)
 Upon further consideration of the case, the 25%
surcharge was eliminated in line with the ruling of the
Supreme Court in Collector v. Batangas Transportation
Co., G.R. No. L-9692, Jan. 6, 1958, so that the
questioned assessment refers solely to the income tax
proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item obviously
referring to the compromise in lieu of the criminal liability
for failure of petitioners to file the corporate income tax
returns for said years. (See Exh. 17, page 86, BIR
records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax
Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING
THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE CO-
OWNERS OF THE PROPERTIES INHERITED AND
(THE) PROFITS DERIVED FROM TRANSACTIONS
THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING
THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956
AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS
CONSTITUTED AN UNREGISTERED PARTNERSHIP,
THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT
ONLY THAT THEY INVESTED THE PROFITS FROM
THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN
UNREGISTERED PARTNERSHIP, THE COURT OF
TAX APPEALS ERRED IN NOT DEDUCTING THE
VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING FROM THE
PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following
questions: (1) Under the facts found by the Court of Tax Appeals, should
petitioners be considered as co-owners of the properties inherited by
them from the deceased Julia Buñales and the profits derived from
transactions involving the same, or, must they be deemed to have
formed an unregistered partnership subject to tax under Sections 24 and
84(b) of the National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in the sense
that they invested as a common fund the profits earned by the properties
owned by them in common and the loans granted to them upon the
security of the said properties, with the result that as far as their
respective shares in the inheritance are concerned, the total income
thereof should be considered as that of co-owners and not of the
unregistered partnership? And (3) assuming again that they are taxable
as an unregistered partnership, should not the various amounts already
paid by them for the same years 1955 and 1956 as individual income
taxes on their respective shares of the profits accruing from the
properties they owned in common be deducted from the deficiency
corporate taxes, herein involved, assessed against such unregistered
partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is
that whereas petitioners' predecessor in interest died way back on
March 23, 1944 and the project of partition of her estate was judicially
approved as early as May 16, 1949, and presumably petitioners have
been holding their respective shares in their inheritance since those
dates admittedly under the administration or management of the head
of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point
to be important because, apparently, at the start, or in the years 1944 to
1954, the respondent Commissioner of Internal Revenue did treat
petitioners as co-owners, not liable to corporate tax, and it was only from
1955 that he considered them as having formed an unregistered
partnership. At least, there is nothing in the record indicating that an
earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable
why petitioners' position that they are co-owners and not unregistered
co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they
were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition
approved in 1949, "the properties remained under the management of
Lorenzo T. Oña who used said properties in business by leasing or
selling them and investing the income derived therefrom and the
proceed from the sales thereof in real properties and securities," as a
result of which said properties and investments steadily increased yearly
from P87,860.00 in "land account" and P17,590.00 in "building account"
in 1949 to P175,028.68 in "investment account," P135.714.68 in "land
account" and P169,262.52 in "building account" in 1956. And all these
became possible because, admittedly, petitioners never actually
received any share of the income or profits from Lorenzo T. Oña and
instead, they allowed him to continue using said shares as part of the
common fund for their ventures, even as they paid the corresponding
income taxes on the basis of their respective shares of the profits of their
common business as reported by the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limit themselves to holding the properties inherited by
them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit,
and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the
purchase and sale of corporate securities. It is likewise admitted that all
the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the
inheritance. In these circumstances, it is Our considered view that from
the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oña as a common fund in
undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common fund and,
in effect, they thereby formed an unregistered partnership within the
purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period
when the heirs can be considered as co-owners rather than unregistered
co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs,
obviously, without them becoming thereby unregistered co-partners, but
it does not necessarily follow that such status as co-owners continues
until the inheritance is actually and physically distributed among the
heirs, for it is easily conceivable that after knowing their respective
shares in the partition, they might decide to continue holding said shares
under the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis. Withal, if
this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b)
of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated,
among the reasons for holding the appellants therein to be unregistered
co-partners for tax purposes, that their common fund "was not
something they found already in existence" and that "it was not a
property inherited by them pro indiviso," but it is certainly far fetched to
argue therefrom, as petitioners are doing here, that ergo, in all instances
where an inheritance is not actually divided, there can be no
unregistered co-partnership. As already indicated, for tax purposes, the
co-ownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with
intent to produce profits for the heirs in proportion to their respective partnerships, no matter how created or organized." This
shares in the inheritance as determined in a project partition either duly qualifying expression clearly indicates that a joint
executed in an extrajudicial settlement or approved by the court in the venture need not be undertaken in any of the standard
corresponding testate or intestate proceeding. The reason for this is forms, or in confirmity with the usual requirements of the
simple. From the moment of such partition, the heirs are entitled already law on partnerships, in order that one could be deemed
to their respective definite shares of the estate and the incomes thereof, constituted for purposes of the tax on corporation. Again,
for each of them to manage and dispose of as exclusively his own pursuant to said section 84(b),the term "corporation"
without the intervention of the other heirs, and, accordingly he becomes includes, among others, "joint accounts,(cuentas en
liable individually for all taxes in connection therewith. If after such participacion)" and "associations", none of which has a
partition, he allows his share to be held in common with his co-heirs legal personality of its own, independent of that of its
under a single management to be used with the intent of making profit members. Accordingly, the lawmaker could not have
thereby in proportion to his share, there can be no doubt that, even if no regarded that personality as a condition essential to the
document or instrument were executed for the purpose, for tax existence of the partnerships therein referred to. In fact,
purposes, at least, an unregistered partnership is formed. This is exactly as above stated, "duly registered general co-
what happened to petitioners in this case. partnerships" — which are possessed of the
aforementioned personality — have been expressly
In this connection, petitioners' reliance on Article 1769, paragraph (3), of excluded by law (sections 24 and 84[b]) from the
the Civil Code, providing that: "The sharing of gross returns does not of connotation of the term "corporation." ....
itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from which the xxx xxx xxx
returns are derived," and, for that matter, on any other provision of said
code on partnerships is unavailing. In Evangelista, supra, this Court Similarly, the American Law
clearly differentiated the concept of partnerships under the Civil Code
from that of unregistered partnerships which are considered as ... provides its own concept of a
"corporations" under Sections 24 and 84(b) of the National Internal partnership. Under the term
Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, "partnership" it includes not only a
elucidated on this point thus: partnership as known in common law
but, as well, a syndicate, group,
To begin with, the tax in question is one imposed upon pool, joint venture, or other
"corporations", which, strictly speaking, are distinct and unincorporated organization which
different from "partnerships". When our Internal carries on any business, financial
Revenue Code includes "partnerships" among the operation, or venture, and which is not,
entities subject to the tax on "corporations", said Code within the meaning of the Code, a trust,
must allude, therefore, to organizations which are not estate, or a corporation. ... . (7A Merten's
necessarily "partnerships", in the technical sense of the Law of Federal Income Taxation, p. 789;
term. Thus, for instance, section 24 of said emphasis ours.)
Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute The term "partnership" includes a
precisely one of the most typical forms of partnerships in syndicate, group, pool, joint venture or
this jurisdiction. Likewise, as defined in section 84(b) of other unincorporated organization,
said Code, "the term corporation includes through or by means of which any
 business, financial operation, or venture
is carried on. ... . (8 Merten's Law of
Federal Income Taxation, p. 562 Note
63; emphasis ours.)
For purposes of the tax on corporations, our National
Internal Revenue Code includes these partnerships —
with the exception only of duly registered general
copartnerships — within the purview of the term
"corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as
said Code is concerned, and are subject to the income
tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.
Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29,
1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.
As regards the second question raised by petitioners about the
segregation, for the purposes of the corporate taxes in question, of their
inherited properties from those acquired by them subsequently, We
consider as justified the following ratiocination of the Tax Court in
denying their motion for reconsideration:
In connection with the second ground, it is alleged that,
if there was an unregistered partnership, the holding
should be limited to the business engaged in apart from
the properties inherited by petitioners. In other words,
the taxable income of the partnership should be limited
to the income derived from the acquisition and sale of
real properties and corporate securities and should not
include the income derived from the inherited properties.
It is admitted that the inherited properties and the income
derived therefrom were used in the business of buying
and selling other real properties and corporate
securities. Accordingly, the partnership income must
include not only the income derived from the purchase
and sale of other properties but also the income of the
inherited properties.
Besides, as already observed earlier, the income derived from inherited
properties may be considered as individual income of the respective
heirs only so long as the inheritance or estate is not distributed or, at
least, partitioned, but the moment their respective known shares are
used as part of the common assets of the heirs to be used in making
profits, it is but proper that the income of such shares should be
considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been
adequately resolved by the Tax Court in the aforementioned resolution
denying petitioners' motion for reconsideration of the decision of said
court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners
alleges:
Even if we were to yield to the decision
of this Honorable Court that the herein
petitioners have formed an unregistered
partnership and, therefore, have to be
taxed as such, it might be recalled that
the petitioners in their individual income
tax returns reported their shares of the
profits of the unregistered partnership.
We think it only fair and equitable that the
various amounts paid by the individual
petitioners as income tax on their
respective shares of the unregistered
partnership should be deducted from the
deficiency income tax found by this
Honorable Court against the
unregistered partnership. (page 7,
Memorandum for the Petitioner in
Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the
taxable income of the partnership must be reduced by
the amounts of income tax paid by each petitioner on his
share of partnership profits. This is not correct; rather, it
 should be the other way around. The partnership profits
distributable to the partners (petitioners herein) should
be reduced by the amounts of income tax assessed
against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from
the partnership has been correctly assessed. Since the
individual income tax liabilities of petitioners are not in
issue in this proceeding, it is not proper for the Court to
pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that
whatever excess they might have paid as individual income tax cannot
be credited as part payment of the taxes herein in question. It is argued
that to sanction the view of the Tax Court is to oblige petitioners to pay
double income tax on the same income, and, worse, considering the
time that has lapsed since they paid their individual income taxes, they
may already be barred by prescription from recovering their
overpayments in a separate action. We do not agree. As We see it, the
case of petitioners as regards the point under discussion is simply that
of a taxpayer who has paid the wrong tax, assuming that the failure to
pay the corporate taxes in question was not deliberate. Of course, such
taxpayer has the right to be reimbursed what he has erroneously paid,
but the law is very clear that the claim and action for such reimbursement
are subject to the bar of prescription. And since the period for the
recovery of the excess income taxes in the case of herein petitioners
has already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is
precisely because the taxpayers failed to make the proper return and
payment of the corporate taxes legally due from them. In principle, it is
but proper not to allow any relaxation of the tax laws in favor of persons
who are not exactly above suspicion in their conduct vis-a-vis their tax
obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax

Appeals appealed from is affirm with costs against petitioners.