Anti-Graft League of the Philippines v. San Juan

FACTS: 

Marcos issued a decree establishing the Technological Colleges of Rizal. It directed the Board to provide funds for the purchase of 4 parcels of land which belonged to Ortigas &Co. For 12 yrs, the land was idle and construction did not materialize so the Board authorized the selling of the lot. This was sold to Valley View Realty. Ortigas filed for rescission of contract contending that it violated the terms of the contract by selling such lot to Valley View. The Board made a Resolution providing for the rescission of the deed of sale to Valley View.

Valley View filed a case against the Province of Rizal for specific performance but was dismissed. Thereafter, a compromise agreement was executed  between Province and Ortigas to reconvey the lots to Ortigas. The Anti-Graft League of the Philippines is a non-government organization, constituted to protect the interest of the Republic and its instrumentalities and political subdivisions against abuses its public official and employees, claims the instant petition for certiorari is a taxpayer’s suit because the Provincial Board of Rizal allegedly illegally disbursed public funds in transactions involving the land.

ISSUE: 

W/N this is a case of taxpayer’s suit.

HELD: 

To constitute a taxpayer’s suit, two requisites: (1) that public funds are disbursed by a political subdivision or instrumentality and (2) in doing so, a law is violated or some irregularity is committed, and that the petitioner is directly affected by the alleged ultra vires act.

In the case at bar, petitioner’s standing should not even be made an issue here since standing is a concept in constitutional law and here no constitutional question is actually involved. The disbursement of public funds was only made when the Province bought the lands from Ortigas. Petitioner never referred to such purchase as an illegal disbursement of public funds but focused on the alleged fraudulent reconveyance of said property to Ortigas because the price paid was lower than the prevailing market value of neighboring lots.

As a taxpayer, petitioner would somehow be adversely affected by an illegal use of public money. But when no such unlawful spending has been shown petitioner, even as a taxpayer, cannot question the transaction executed by the Province and Ortigas for the reason that it is not privy to said contract.   

BELEN C. FIGUERRES vs. COURT OF APPEALS, CITY OF ASSESSORS OF MANDALUYONG, CITY TREASURER OF MANDALUYONG, and SANGGUNIANG BAYAN OF MANDALUYONG

Doctrine:

After the proposed schedule of fair market values of the different classes of real property in a local government unit within Metro Manila, as prepared jointly by the local assessors of the district to which the city or municipality belongs, has been published or posted in accordance with §212 of R.A. No. 7160 and enacted into ordinances by the sanggunians of the municipalities and cities concerned, the ordinances containing the schedule of fair market values must themselves be published or posted in the manner provided by §188 of R.A. No. 7160

Facts: 

Belen C. Figuerres is the owner of a parcel of land located at Amarillo Street, Barangay Mauway, City of Mandaluyong.  In 1993, she received a notice of assessment from the municipal assessor of the Municipality of Mandaluyong..

The assessment was based on a number of ordinances issued by the Sangguniang Bayan of Mandaluyong. Ordinance No. 119 contains a schedule of fair market values of the different classes of real property in the municipality. Ordinance No. 125 fixes the assessment levels applicable to such classes of real property. Finally, Ordinance No. 135 amended Ordinance No. 119, by providing that only one third (1/3) of the increase in the market values applicable to residential lands pursuant to the said ordinance shall be implemented in the years 1994, 1995, and 1996.

Figuerres brought a prohibition suit in the CA against the Assessor, the Treasurer, and the Sangguniang Bayan to stop them from enforcing the ordinances in question on the ground that the ordinances were invalid for having been adopted allegedly without public hearings and prior publication or posting and without complying with the implementing rules yet to be issued by the Department of Finance.

CA dismissed the petition stating that the approval and determination by the Department of Finance is not needed under the Local Government Code of 1991, since it is now the city council of Mandaluyong that is empowered to determine and approve the aforecited ordinances.  Furthermore, the Finance Local Assessment Regulation No. 1-92  provides for the rules relative to the conduct of general revisions of real property assessments pursuant to Sections 201 and 219 of the Local Government Code of 1991.

Issue/s:.

1.Whether or not public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes

2.Whether or not there is a need for the publication of fair market values.

Held:

1.Yes.  R.A. No. 7160, §186  provides that an ordinance levying taxes, fees, or charges “shall not be enacted without any prior public hearing conducted for the purpose.”

However, it is noteworthy that apart from her bare assertions,  Figuerres has not presented any evidence to show that no public hearings were conducted prior to the enactment of the ordinances in question.  On the other hand, the Municipality of Mandaluyong claims that public hearings were indeed conducted before the subject ordinances were adopted, although it likewise failed to submit any evidence to establish this allegation. 

In accordance with the presumption of validity in favor of an ordinance, their constitutionality or legality should be upheld in the absence of  evidence showing that the procedure prescribed by law was not observed in their enactment.  

Furthermore, the lack of a public hearing is a negative allegation essential to petitioner’s cause of action in the present case.  Hence, as petitioner is the party asserting it, she has the burden of proof. Since petitioner failed to rebut the presumption of validity in favor of the subject ordinances and to discharge the burden of proving that no public hearings were conducted prior to the enactment thereof, we are constrained to uphold their constitutionality or legality.

2. Yes.   R.A. No. 7160, §212 which in part states:

. . . . The schedule of fair market values shall be published in a newspaper of general circulation in the province, city, or municipality concerned, or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in two other conspicuous public places therein.

Hence, after the proposed schedule of fair market values of the different classes of real property in a local government unit within Metro Manila, as prepared jointly by the local assessors of the district to which the city or municipality belongs, has been published or posted in accordance with §212 of R.A. No. 7160 and enacted into ordinances by the sanggunians of the municipalities and cities concerned, the ordinances containing the schedule of fair market values must themselves be published or posted in the manner provided by §188 of R.A. No. 7160.

Figuerres has not presented any evidence to show that the subject ordinances were not disseminated in accordance with these provisions of R.A. No. 7160.  On the other hand, the Municipality of Mandaluyong  presented a certificatef of  Williard S. Wong, Sanggunian Secretary of the Municipality of Mandaluyong that “Ordinance No. 125, S-1993 . . . has been posted in accordance with §59(b) of R.A. No. 7160. Thus, considering the presumption of validity in favor of the ordinances and the failure of petitioner to rebut such presumption, we are constrained to dismiss the petition in this case.

 *CA affirmed.

CIR V CA (GR 107135)

Facts:

Petitioner Central Vegetable Oil Manufacturing Co., Inc. ( CENVOCO ) is a manufacturer of edible and coconut/coprameal cake and such other coconut related oil subject to the miller's tax of 3%.  Petitioner also manufactures lard, detergent and laundry soap subject to the sales tax of 10%.

In 1986, petitioner purchased a specified number of containers and packaging materials for its edible oil from its suppliers and paid the sales tax due thereon.

After an investigation conducted by respondent's Revenue Examiner, Assessment Notice was issued against petitioner for deficiency miller's tax in the total amount of P1,575,514.70 

 CENVOCO requesting for reconsideration of the above deficiency miller's tax assessments, contending that the final provision of Section 168 of the Tax Code does not apply to sales tax paid on containers and packaging materials, hence, the amount paid therefor should have been credited against the miller's tax assessed against it - that since packaging materials are not used in the milling process then, the sales taxes paid thereon should be allowed as a credit against the miller's tax due because they do not fall within the scope of the prohibition.  

 Respondent wrote CENVOCO regarding its position stating that since the law specifically does not allow taxes paid on the raw materials or supplies used in the milling process as a credit against the miller's tax due, with more reason should the sales taxes paid on materials not used in the milling process be allowed as a credit against the miller's tax due.  There is no provision of law which allows such a credit-to-be made.

CENVOCO filed a petition for review with the Court of Tax Appeals, which came out with a decision in favor of CENVOCO. Appealed to the Court of Appeals, the said decision was affirmed.

Issue:

1. Whether or not a reversal of the ruling is violative of the rule on non-retroactivity of rulings of tax officials?

2. Whether or not the sales tax paid by CENVOCO when it purchased containers for its milled products can be credited against the deficiency miller's tax.

Held: 

1. NO. According to petitioner, to hold, as what the Court of Appeals did, that a reversal of the aforesaid ruling would be violative of the rule on non-retroactivity of rulings of tax officials when prejudicial to the taxpayer (Section 278 of the old Tax Code) would, in effect, create a perpetual exemption in favor of CENVOCO although there may be subsequent changes in circumstances warranting a reversal. 

In the case, well-entrenched principle that the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents, but this rule admits of exceptions in the interest of justice and fairplay. Moreso is there no error in allowing the sales taxes paid by CENVOCO on the containers and packages of its milled products, to be credited against the deficiency miller's tax due thereon, for a proper application of the law.

2. NO. The sales, miller's and excise taxes paid on all other materials (except on raw materials used in the milling process), such as the sales taxes paid on containers and packaging materials of the milled products under consideration, may be credited against the miller's tax due therefor. Containers and packaging materials are certainly not raw materials.  Cans and tetrapaks are not used in the manufacture of Cenvoco's finished products which are coconut, edible oil or coprameal cake.  Such finished products are packed in cans and tetrapaks.

*Decision of the CA affirmed.

Meralco Securities v Savellano

Facts:

 The late Juan G. Maniago (substituted in these proceedings by his wife and children) submitted to petitioner Commissioner of Internal Revenue confidential denunciation against the Meralco Securities Corporation for tax evasion for having paid income tax only on 25 % of the dividends it received from the Manila Electric Co, thereby allegedly shortchanging the government of income tax due from 75% of the said dividends.

 Commissioner caused the investigation of the denunciation after which he found and held that no deficiency corporate income tax was due from the Meralco Securities Corporation since under the law then prevailing (in the case of dividends received by a domestic or foreign resident corporation liable to corporate income tax only 25% shall be returnable for the purposes of the tax. The Commissioner rejected Maniago's contention that the Meralco from whom the dividends were received is not a domestic corporation liable to tax.

In a letter, the Commissioner denied Maniago's claim for informer's reward on a non-existent deficiency. This action of the Commissioner was sustained by the Secretary of Finance. Maniago filed a petition for mandamus to compel the Commissioner to impose the alleged deficiency tax assessment on the Meralco Securities Corporation and to award to him the corresponding informer's reward under the provisions of R.A. 2338.

The Commissioner filed a motion to dismiss, arguing that since in matters of issuance and non-issuance of assessments, he is clothed under the National Internal Revenue Code and existing rules and regulations with discretionary power in evaluating the facts of a case and since mandamus win not lie to compel the performance of a discretionary power, he cannot be compelled to impose the alleged tax deficiency assessment. 

On the other hand, the Meralco Securities Corporation averred that since no taxes have actually been recovered and/or collected, Maniago has no right to recover the reward prayed for

The respondent judge rendered a decision granting the writ prayed for and ordering the Commissioner to assess and collect from the Meralco Securities Corporation the sum of P51,840,612.00 as deficiency corporate income tax plus interests and surcharges due thereon and to pay 25% to Maniago as informer's reward.

Issue: 

Whether or not mandamus is proper in this case

Held:

No. It is furthermore a well-recognized rule that mandamus only lies to enforce the performance of a ministerial act or duty and not to control the performance of a discretionary power. Purely administrative and discretionary functions may not be interfered with by the courts. Discretion means the power or right conferred upon the office by law of acting officially under certain circumstances according to the dictates of his own judgment and conscience and not controlled by the judgment or conscience of others. Mandamus may not be resorted to so as to interfere with the manner in which the discretion shall be exercised or to influence or coerce a particular determination

Moreover, since the office of the Commissioner of Internal Revenue is charged with the administration of revenue laws, which is the primary responsibility of the executive branch of the government, mandamus may not be against the Commissioner to compel him to impose a tax assessment not found by him to be due or proper for that would be tantamount to a usurpation of executive functions. 

In the case, after the Commissioner who is specifically charged by law with the task of enforcing and implementing the tax laws and the collection of taxes had after a mature and thorough study rendered his decision or ruling that no tax is due or collectible, and his decision is sustained by the Secretary, such decision or ruling is a valid exercise of discretion in the performance of official duty and cannot be controlled much less reversed by mandamus.

No deficiency taxes may therefore be assessed and collected against the said corporation. Since no taxes are to be collected, no informer's reward is due to private respondents as the informer's heirs. Since no assessment, much less any collection, has been made in the instant case, respondent judge's writ for the Commissioner to pay respondents 25% informer's reward is gross error and without factual nor legal basis.

*Respondent judge has no jurisdiction to take cognizance of the case because the subject matter thereof clearly falls within the scope of cases now exclusively within the jurisdiction of the Court of Tax Appeals. 

*The determination of the correctness or incorrectness of a tax assessment to which the taxpayer is not agreeable, falls within the jurisdiction of the Court of Tax Appeals and not of the Court of First Instance.

Notes:

Informer's reward is contingent upon the payment and collection of unpaid or deficiency taxes. informer is entitled by way of reward only to a percentage of the taxes actually assessed and collected. 

Republic v Enriquez (166 SCRA 608)

FACTS:

Commissioner of the Internal Revenue served a Warrant of Distraint of Personal Property on the Maritime Company of the Philippines to satisfy various deficiency taxes of said company. The First Coast Guard District acknowledged receipt from the Commissioner of several barges , vehicles and 2 bodegas of spare parts belonging to taxpayer Maritime.

                Ramon Enriquez (Deputy Sheriff of Manila) levied on 2 barges of Maritime pursuant to a writ of execution issued in a Civil Case involving Maritime where the aforesaid company lost. Enriquez then scheduled a public auction sale including the aforementioned properties.

                The Commissioner wrote the sheriff informing him that the barges were no longer owned by Maritime as the said barges had been distrained and seized by the BIR in satisfaction of the deficiency taxes. This letter was filed on June 19, 1986 at the office of the sheriff.

                On June 23, 1986, the sheriff sold the 2 barges and issued certificates of sale to the highest bidder which was the levying creditor.

                On June 24, 1986, Commissioner filed a petition for prohibition praying that the respondent be ordered to desist and refrain from further proceedings in connection with the execution and that respondent’s notice of levy be null and void. The CA dismissed the petition holding that the sheriff did not commit grave abuse of discretion.

ISSUE:

Whether or not the BIR Warrant of Distraint prevails over the writ of execution issued by an RTC.

HELD:

BIR Warrant of Distraint prevails. It is well settled that the claim of the government prevails on a tax lien superior to the claim of a private litigant predicated on a judgment. The tax lien attached not only from the service of warrant of distraint but from the time the tax became due and payable.

In the case, the Distraint was made by the Commissioner long before the writ of execution was issued by the RTC. There is no question that at the time of the writ of execution, the 2 barges were no longer properties of Maritime. The power of the court in execution of judgments extends only to properties unquestionable belonging to the judgment debtor. Execution sale affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such right as the judgment debtor had at the time of sale.

There is no further need for petitioner to establish his rights over the 2 barges as evidence clearly proves that the barges are under distraint and in fact seized by the Commisssioner.

*Notice of Levy and Execution Sale annulled. Respondent is enjoined from further proceeding with the sale.

Oceanic Wireless Network Inc. V Commissioner of Internal Revenue (CTA CASE NO. 6111)

Facts:

                Oceanic Wireless is a corporation with principal office located in Legaspi Village, Makati. In April 1996, petitioner filed its 1995 Annual Corporate Annual Income Tax Return. In December 1996, petitioner received a letter from the Revenue District Officer authorizing Revenue Officers to examine the books of accounts and other records for the period January to December 1995.

                In 1999, petitioner executed a Waiver of Defense of Prescription of the NIRC within which respondent may assess petitioner for deficiency taxes. A preliminary report of tax assessment was issued and petitioner was requested to attend an informal conference to discuss the result of the investigation done on the books.

Again, petitioner received another pre-assessment notice this time with Details of Discrepancies. The company was advised to file a written protest or set up an office conference to discuss the assessments for deficiency income. Inasmuch as the authority of respondent to assess was about to prescribe in July 31 1999, demand letters were sent on July 30, 1999.

Petitioner now contends that the assessment notices for taxable year 1995 are void for having been issued beyond the 3-yr prescriptive period as provided under the NIRC. Since the tax return was filed in April 1995, respondent has 3 years to assess the petitioner.  But the assessment was done in 1999, hence the action has already prescribed.

Petitioner also questions the validity of the waiver on the ground that it failed to state the kind and amount of tax required under RMO 20-90.

Respondent argues that petitioner executed a waiver extending the period of the respondent pursuant to the provisions in the Tax Code.

Issue:

1.       Whether or not the BIR’s right to assess has already prescribed.

2.       Whether or not the deficiency assessments are void for failure to state the law and facts to which the assessments are made.

3.       Whether or not petitioner is liable for deficiency income tax.

Held:

1.       No. BIR’s right has not yet prescribed and the assessment notices are valid. At the time of the execution of the waiver, there was no preliminary assessment issued yet against petitioner where the kind and amount of tax could be referred to. Such details cannot be specified in the waiver since it was still unascertainable at the time.

Following the rule that the period of respondent to assess was extended up to July 31, 1999 in view of the waiver, the deficiency assessments issued against petitioner on July 30, 1999 are within the period allowed by law.

2.       No.  The purpose of Section 228 of the National Internal Revenue Code of 1997in requiring that "(t)he taxpayer be informed of the law and facts on which assessment is made" is to give the taxpayer the opportunity to refute the findings of the examiner and give a more accurate and detailed explanation regarding the proposed assessment.

In the case, there was substantial compliance with Sec. 228 of the NIRC because petitioner was able to protest the assessments intelligently, thereby implying that it had actual knowledge of the factual and legal bases of the assessments. The fact that petitioner was furnished the computation and brief explanation of how the assessment for deficiency quarterly income tax was arrived at, the requirement under Section 228 of the 1997 Tax Code is deemed complied with. And even if petitioner was not furnished of the detailed computation of the deficiency quarterly income tax, the same was discussed with petitioner during the informal conference.  

3.       Yes. Petitioner having failed to comply with the requirement of the law in disputing an assessment, the same became final, executory and demandable.  Sec. 228 states that:

x x x If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) daysfrom submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. Undoubtedly, a taxpayer has sixty (60) days from the filing of the protest to submit the relevant documents to support its protest, otherwise, the assessment becomes final. Within one hundred eighty(180) days from the submission of the relevant documents, the respondent should act on the protest. If the respondent rendered his decision within the period or failed to act on it, the remedy of the taxpayer is to file within thirty (30) days from the receipt of the decision or from the lapse of one hundred eighty(180) days, an appeal to this court, otherwise, the assessment will become final, executory and demandable. x x x

In the case, petitioner failed to submit supporting documents contrary to what was jointly stipulated by the parties. Hence, the reckoning of the 180-day period would be the day the protest was filed (August 16, 1999). However, respondent failed to render his decision within 180 days or until February 12, 2000. The remedy of petitioner was to file within 30 days there from an appeal with this court which would be until March 14, 2000. But since the Petition for Review was filed only on May 12, 2000, the same was definitely filed beyond the date prescribed by law.

*Case dismissed for being filed out of time. 

Good Day Trading Corporation v Board of Tax Appeals

Facts:

Good Day Trading Corporation imported 238 cases of  Chesterfield cigarettes. Surety bond was filed to secure the payment of P52,360 – the amount of specific taxes due on cigarette importation. The shipment was stored in a bonded warehouse.

While the cigarettes were stored, Good Day sold them to Buenaventura Isleta for P32,000, EXCLUSIVE of specific taxes, on the condition that the buyer shall pay all specific taxes or file a surety bond with the BIR to guarantee its payment within 15 days from the sale agreement. A few days later, Isleta informed Good Day that he bought the cigarettes not for himself but in behalf of his companions who intended to pay the specific taxes with certificates of indebtedness.

Good day then wrote a letter to the CIR advising him of the sale. Despite several extensions, Isleta and his companions failed to show evidence that they paid the taxes or filed the surety. To avoid deterioration of the cigars, Good Day decided to rescind the sale, pay an initial tax of P8,800, and attempted to withdraw the 40 cases of cigars covered by the initial payment. Warehouseman refused, claiming that Isleta owns the shipment because they have already submitted to the BIR the certificates of indebtedness which the BIR approved. The BIR also authorized the Bureau of Customs to release to buyers the whole shipment.

Good Day asks for the refund of P8,800. CIR granted the refund. Secretary of Finance approved and no appeal was taken. But because the amount was more than P5,000, the case was brought before the Board of Tax Appeals. The Board reversed the decision of the CIR, rejected the payment through certificates of indebtedness, and ordered Good Day to pay the whole tax.

Good Day asked for reconsideration claiming that the payment of P8,800 amounted to a double payment because it was paid later through the certificates of indebtedness.  MR was denied.

Issue:

Whether or not Good Day should pay the specific taxes since it is an importer of the shipment of cigarettes.

Held:

No.Under Sec. 125 of the NIRC,

Payment of specific tax on imported articles. — Specific taxes on imported articles shall be paid by the owner or importer to the customs officers, conformably with regulations of the Department of Finance and before the release of such articles from the customhouse.

either the owner of importer shall pay the specific taxes on imported articles. If the sale of the cigarettes was valid, then purchasers (Isleta and company) become the owners of shipment and could pay specific taxes.

*BTA erred in holding Good Day to pay the specific taxes.

Notes:

Importer – primary consignee to whom the goods are sent and who himself presents the invoices, makes the entry, receives the bill of lading and gets the goods.

When importation by sea begins and ends: Importation is not completed until the duties due upon the merchandise have been paid and legal permit for withdrawal and actual withdrawing the goods becomes the importer.

*Whether one is an importer or not is NOT an issue in paying specific taxes.

BIR Ruling 145-98

Facts:

A lot was registered in the name of the Posadas spouses (jointly titled in their names). Juan Posadas (husband) died in an aircraft accident and an agreement was executed by Maria Elena Posadas (wife) that the designated lots shall be exclusively registered in the name of one party only in exchange for the exclusive co-ownership of other lots by the other co-owner. Maria Elena, who was assigned the property, sold the lot to Noel Espina where title to the property should be transferred in his name upon payment of the appropriate taxes.

Issue:

Whether the transaction of Elena and Noel is exempt from capital gains tax.

Held:

The agreement executed by Elena and the administratrix of Juan Posadas in effect partitioned the properties transferring the co-ownership by designating the said properties to each of the said owners. Also, the transfer of title from the co-owners is not a barter, exchange or disposition of realty that would warrant the imposition of capital gains tax.

The dissolution of the co-ownership is not subject to capital gains tax however, that portion of the properties belonging to the deceased owner (in this case Juan) shall be subject to estate tax.

Dison v Posadas

Facts:

Don Felix Dison, before his death, made a gift inter vivos in favor of plaintiff Luis Dison. Luis was the legitimate and only child of Felix. The Collector of Internal Revenue, Juan Posadas Jr. taxed him. Luis filed for the recovery of an inheritance tax in the sum of P2,808.73 paid under protest. He alleged in his complaint that the tax is illegal because he received the property from his father before his death by a deed of gift inter vivos which was duly accepted and registered before the death of his father. He contends that he received and held the property by a consummated gift and that Act No. 2601 being the inheritance tax statute, does not tax gifts.

Issue:

Whether or not Dison should pay inheritance tax.

Held:

Yes. Dison should pay tax. Section 1540 of the Administrative Code is applicable. It states that:

‘Addition of Gifts and Advances- After the aforementioned deductions have been made, there shall be added to the resulting amount the value of all gifts/advances made by the predecessor to any of those, who, after his death, shall prove to be his heirs, devisees, legatees or donees mortis causa.’

That Dison occupies the status of heir to his deceased father cannot be questioned. The conveyance is deemed to be an advancement upon the inheritance which the donee, as the sole and forced heir of the donor, would be entitled to receive upon the death of the donor. The tax has been properly assessed by the CIR.

As regards Act 2601, it is not applicable since the Act does not make any reference to a tax on gifts.

C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue

Facts:

Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents and administrators, filed its income tax return (ITR) showing a net income of P92,540.25 and a tax liability of P18,508 which it paid.

CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an item which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and set aside the disallowance of the other 3 items.

Issue:

Whether or not the disallowance of the 4 items were proper.

Held:

NOT deductible.  It did not pass the test of reasonableness which is:

General rule, bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered.

The conditions precedent to the deduction of bonuses to employees are:

·         Payment of bonuses is in fact compensation

·         Must be for personal services actually rendered

·         Bonuses when added to salaries are reasonable when measured by the amount and quality of services performed with relation to the business of the particular taxpayer.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by the company was inordinately large and could not be treated as an ordinary and necessary expenses allowed for deduction.

China Banking Corporation v CA

Facts:

China Banking Corporation made a 53% equity investment (P16,227,851.80) in the First CBC Capital – a Hongkong subsidiary engaged in financing and investment with “deposit-taking” function.

It was shown that CBC has become insolvent so China Banking wrote-off its investment as worthless and treated it as a bad debt or as an ordinary loss deductible from its gross income.

CIR disallowed the deduction on the ground that the investment should not be classified as being worthless. It also held that assuming that the securities were worthless, then they should be classified as a capital loss and not as a bad debt since there was no indebtedness between China Banking and CBC.

Issue:

Whether or not the investment should be classified as a capital loss.

Held:

Yes.  Section 29.d.4.B of the NIRC contains provisions on securities becoming worthless. It conveys that capital loss normally requires the concurrence of 2 conditions:

a.       there is a sale or exchange

b.      the thing sold or exchanges is a capital asset.

When securities become worthless, there is strictly no sale or exchange but the law deems it to be a loss. These are allowed to be deducted only to the extent of capital gains and not from any other income of the taxpayer. 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. In these cases, The NIRC dispenses with the standard requirements.

There is ordinary loss when the property sold is not a capital asset.

In the case, CBC as an investee corporation, is a subsidiary corporation of China Banking whose shares in CBC are not intended for purchase or sale but as an investment. An equity investment is a capital asset of the investor. Unquestionably, any loss is a capital loss to the investor.

--

Additional notes:

*The loss cannot be deductible as bad debt since the shares of stock do not constitute a loan extended by it to its subsidiary or a debt subject to obligatory repayment by the latter.

CIR v Solidbank Corporation (G.R. No. 148191)

Facts:

Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receipts from passive income which was already subjected to 20%final withholding tax (FWT).

The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not form part of its taxable gross receipts for purposes of computing the tax.

Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax credit. It also filed a petition for review with the CTA where the it ordered the refund.

The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because the FWT was not actually received by the bank but was directly remitted to the government.

The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the amount redounded to the bank’s benefit makes it part of the taxable gross receipts in computing the Gross Receipts Tax. Solidbank says the CA ruling is correct.

Issue:

Whether or not the FWT forms part of the gross receipts tax.

Held:

Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds constitutive of the tax base.

These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer, the rule on constructive receipt can be rationalized.

The Court  applied provisions of the Civil Code on actual and constructive possession. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established.  The withholding process is one such act.  There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power shall be considered as acquired when ratified by the person in whose name the act of possession is executed.

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

The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits that its income is subjected to a tax burden immediately upon “receipt”, although it claims that it derives no pecuniary benefit or advantage through the withholding process.

There being constructive receipt, part of which is withheld, that income is included as part of the tax base on which the gross receipts tax is imposed.

Gutierrez v Collector of Internal Revenue (14 SCRA 33)

Facts:

Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid real estate broker’s privilege tax. The Collector assessed against Gutierrez deficiency income tax amounting to P11,841.

The deficiency tax came about by the disallowance of deductions from gross income representing depreciation expenses Gutierrez allegedly incurred in carrying on his business. The expenses consisted of:

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

2.       Procurement and installation of an iron door,

3.       Cost of furniture given by the taxpayer in furtherance of a business transaction,

4.       Membership fees in organizations established by those engaged in the real estate trade,

5.       Car expenses, salary of his driver and car depreciation,

6.       Repairing taxpayer’s rental apartments,

7.       Litigation expenses,

8.       Depreciation of Gutierrez’ residence,

9.       Fines and penalties for late payment of taxes,

10.   Alms given to in indigent family and a donation consisting of officer’s jewels and aprons to Biak-na-Bato Lodge No. 7.

Issue:

Whether or not claims for deduction are proper and allowable.

Held:

To be deductible, an expense must be:

·         Ordinary and necessary

·         Paid or incurred within the taxable year

·         Paid or incurred in carrying on a trade or business.

1. Transportation expenses which petitioner incurred to attend the funeral of his friends and the cost of admission tickets to operas - expenses relative to his personal and social activities rather than to his business of leasing real estate.

2. Procurement and installation of an iron door to - purely a personal expense. Personal, living, or family expenses are not deductible.

3. Cost of furniture given by the taxpayer as commission in furtherance of a business transaction - the expenses incurred in attending the National Convention of Filipino Businessmen, luncheon meeting and cruise to Corregidor of the Homeowners' Association were shown to have been made in the pursuit of his business. Commissions given in consideration for bringing about a profitable transaction are part of the cost of the business transaction and are deductible.

4. Membership and activities in connection therewith were solely to enhance his business -Gutierrez was an officer of the Junior Chamber of Commerce which sponsored the National Convention of Filipino Businessmen. He was also the president of the Homeowners' Association, an organization established by those engaged in the real estate trade. Having proved that his, the expenses incurred are deductible as ordinary and necessary business expenses.

5. Car expenses, salary of his driver and car depreciation – 1/3 of the same was disallowed by the Commissioner on the ground that the taxpayer used his car and driver both for personal and business purposes. There is no clear showing, however, that the car was devoted more for the taxpayer's business than for his personal and business needs. According to the evidence, the taxpayer's car was utilized both for personal and business needs. It is reasonable to allow as deduction 1/2 of the driver's salary, car expenses and depreciation.

6. Those used to repair the taxpayer's rental apartments - did not increase the value of such apartments, or prolong their life. They merely kept the apartments in an ordinary operating condition. Hence, the expenses incurred are deductible as necessary expenditures for the maintenance of the taxpayer's business.

7. Litigation expenses - defrayed by Gutierrez to collect apartment rentals and to eject delinquent tenants are ordinary and necessary expenses in pursuing his business. It is routinary and necessary for one in the leasing business to collect rentals and to eject tenants who refuse to pay their accounts.

8. Depreciation of Gutierrez' residence - not deductible. A taxpayer may deduct from gross income a reasonable allowance for deterioration of property arising out of its use or employment in business or trade. Gutierrez' residence was not used in his trade or business.

9. Deduction the fines and penalties which he paid for late payment of taxes - while Section 30 allows taxes to be deducted from gross income, it does not specifically allow fines and penalties to be so deducted.

Deductions from gross income are matters of legislative grace; what is not expressly granted by Congress is withheld. Moreover, when acts are condemned, by law and their commission is made punishable by fines or forfeitures, to allow them to be deducted from the wrongdoer's gross income, reduces, and so in part defeats, the prescribed punishment.

10. Alms to an indigent family and various individuals, contributions to Lydia Yamson and G. Trinidad and a donation consisting of officers' jewels and aprons to Biak-na-Bato Lodge No. 7 - not deductible from gross income inasmuch as their recipients have not been shown to be among those specified by law. Contributions are deductible when given to the Government of the Philippines, or any of its political subdivisions for exclusively public purposes, to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual.

Collector v Goodrich International Rubber Co. (G.R. No. L-22265)

Facts:

Goodrich claimed for deductions based upon receipts issued, not by entities in which the alleged expenses had been incurred, but by the officers of Goodrich who allegedly paid for them.

The Commissioner disallowed deductions in the amount of P50,455.41 (for the year 1951) for bad debts and P30,188.88 (for year 1952) for representation expenses.

Goodrich appealed from the said assessment to the Court of Tax Appeals (CTA) which allowed the deduction for bad debts but disallowing the alleged representation expenses. CTA amended its decision allowing the deduction of representation expenses.

 The Government appealed to the SC. The alleged bad debts are the following:

1. Portillo's Auto Seat Cover                                        630.31

2. Visayan Rapid Transit                                                 17,810.26

3. Bataan Auto Seat Cover                                           373.13

4. Tres Amigos Auto Supply                                         1,370.31

5. P. C. Teodorolawphil                                                  650.00

6. Ordnance Service, P.A.                                             386.42

7. Ordnance Service, P.C.                                             796.26

8. National land Settlement Administration          3,020.76

9. National Coconut Corporation                               644.74

10. Interior Caltex Service Station                             1,505.87

11. San Juan Auto Supply                                              4,530.64

12. P A C S A                                                                       45.36

13. Philippine Naval Patrol                                            14.18

14. Surplus Property Commission                             277.68

15. Alverez Auto Supply                                                                285.62

16. Lion Shoe Store                                                         1,686.93

17. Ruiz Highway Transit                                                2,350.00

18. Esquire Auto Seat Cover                                        3,536.94

T O T A L                                                                               P50,455.41*

Issue:

Whether or not these bad debts are properly deducted.

Held:

The claim for deduction for debt numbers 1-10 is REJECTED. Goodrich has not established either that the debts are actually worthless or that it had reasonable grounds to believe them to be so.

NIRC permits the deduction of debts “actually ascertained to be worthless within the taxable year” obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.

The requirement of ascertainment of worthlessness require proof of 2 facts:

• 1.       That the taxpayer did in fact ascertain the debt to be worthless
• 2.       That he did so, in good faith.

Good faith on the part of the taxpayer is not enough. He must also how that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information obtained by him. In the case, Goodrich has not adequately made such showing.

The payments made, after being characterized as bad debts, merely stresses the undue haste with which the same had been written off. Goodrich has not proven that said debts were worthless. There was no evidence that the debtors can not pay them.

SC held that the claim for bad debts are allowed but only up to P22,627.35. (those from Debts 11-18)

Anderson v Posadas (G.R. No. 44100)

Good will is the reputation of good name of an establishment. If the good will, that is, the good reputation of the business is acquired in the course of its management and operation, it does form part of the capital with which it was established. It is an intangible moral profit which is subject to income tax.
FACTS:

William Anderson purchased the business of Erlanger & Galinger. He incorporated the partnership with an authorized capital of P600,000 (all of which were subscribed by Anderson). Anderson paid P70,000 and the amount left (totaling P530,000) was entered in an underwriting account.

A good will account was opened by Anderson. In 1918, he sold to Simon Feldstein 500 of his shares which amounted to P150,000 but in the course of their transactions incurred losses. In view of the said losses, Anderson deducted P125,000 from his taxable income which was approved by the BIR.

Juan Posadas, Commissioner of Internal Revenue attempted to collect a tax (P300,000) at which Anderson was assessed the goodwill of the business. Anderson agreed to eliminate the goodwill by debiting the sum in his capital account and crediting it to the good will account .

It appears, that with the P100,000 paid by Feldstein on account of his purchasing 500 shares, the loss (P125,000) has been recovered and it is but just that the P125,000 be restored as taxable income.

CFI Manila decided and held that P155,000 (which represents proceeds of the sale of the Goodwill Account) and that P125,000 (representing the recovered loss) is not subject to income tax.

ISSUES:
1. Whether or not goodwill account is subject to income tax

2. Whether or not the amount of P125,000 subject to income tax.

HELD:
1. YES. Good will is the reputation of good name of an establishment. If the good will, that is, the good reputation of the business is acquired in the course of its management and operation, it does form part of the capital with which it was established. It is an intangible moral profit, susceptible of valuation in money, acquired by the business by reason of the confidence reposed in it by the public, due to the efficiency and honesty shown by the manager and personnel thereof in conducting the same on account of the courtesy accorded its customers, which moral profit, once it is valuated and used, becomes a part of the assets.

In the case, the good will of P155,000 created by Anderson has been beneficial not only to him but also to Feldstein. Aside from the benefit, he also realized a gain of P70,838 from the sale of the 500 shares to Feldstein. When you add these two amounts, it totals to P161,250 which is more than what the CIR is trying to collect from Anderson.

2. YES. It is subject to income tax.* (no legal explanation given by the Court)

In the case, the loss of P125,000 suffered by Anderson (by reason of the sale of said 500 shares) has been recovered, and it is but just that the sum of P125,000, deducted from the profits by reason of losses suffered temporarily on the capital, be restored.

CIR v Castaneda (G.R. No. 96016)

FACTS:

Efren Castaneda retired from gov’t service as Revenue Attache in the Philippine Embassy, London, England. Upon retirement, he received benefits such as the terminal leave pay. The Commissioner of Internal Revenue withheld P12,557 allegedly representing that it was tax income.

Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt from income tax.

The Solicitor General contends that the terminal leave is based from an employer-employee relationship and that as part of the services rendered by the employee, the terminal leave pay is part of the gross income of the recipient.

CTA -> ruled in favor of Castaneda and ordered the refund.
CA -> affirmed decision of CTA. Hence, this petition for review on certiorari.

ISSUE:
Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to income tax.

HELD:

NO. As explained in Borromeo v CSC, the rationale of the court in holding that terminal leave pays are subject to income tax is that:


. . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits.
A terminal leave pay is a retirement benefit which is NOT subject to income tax.

*Petition denied.

Raytheon Productions v CIR (144 F2d 110)

Facts:

Raytheon Prod.  Came into existence as a result of a tax free reorganization. The original Raytheon was a manufacturer of tubes which made possible the operation of radio receiving set. Another company (R.C.A) developed a competitive tube which produced the same type of rectification as those of the Raytheon tube.

R.C.A  began to license the manufacturers of radio sets and incorporated a clause which provided that the licensee was required to buy tubes from R.C.A. As a consequence of this restriction, Raytheon found it impossible to market its tubes so Raytheon also obtained a license from R.C.A. to manufacture tubes on a royalty basis.

The license agreement between R.C.A and Raytheon contained a release of all claims of Raytheon against R.C.A. BUT such claims can be asserted if R.C.A paid similar claims to others. Raytheon was informed that R.C.A violated the agreement so a suit was filed to enforce Raytheon’s claims.

R.C.A also filed a suit against Raytheon for non-payment of royalties. There was a settlement agreement of the anti-trust action where R.C.A agreed to pay($410, 000). The officers of Raytheon testified that they returned to R.C.A $60,000 as income from patent licenses and treated the remaining $350,000 as a realization from a chose in action and not taxable income.

The Commissioner however, determined this $350,000 as income tax.

Issue:

Whether an amount received by a taxpayer in compromise settlement of as suit for damages is a non-taxable return of capital or income.

Held:

Amount is a TAXABLE INCOME. Damages recovered in an anti-trust action are not necessarily nontaxable. According to US jurisprudence, recoveries which represent a reimbursement for lost profits are income.

Accdg. to Commercial Electrical Supply v Commissioner, damages for violation of the anti-trust acts are treated as ordinary income where they represent compensation for lost profits.

The test is not whether the action was one in tort or contract but rather “In lieu of what were the damages awarded?” Where the suit is not to recover lost profits but is for injury to good will, the recovery represents a return of capital and is not taxable.

In the case, the Court held that there was nothing to indicate that the suit was for lost profits. It was not a kind of antitrust suit where the plaintiff’s business still exists and where the injury was merely for loss of profits.  

Since the suit was to recover damages to the destruction of the business and good will, the recovery represents a return of capital. Nor does the fact that the suit ended in a compromise agreement change the nature of the recovery, “ the determining factor is the nature of the basic claim from which the compromise amount was realized”.

--

*Realization Test (accdg. to the case)

Although the injured party may not be deriving a profit as a result of the damage suit itself, the conversion thereby of his property into cash is a realization of any gain made over the cost or other basis of the good will prior to the illegal interference.

ILLUSTRATIVE EXAMPLE:  A buys Blackacre for $5,000. It appreciates in value to $50,000. B tortiously destroys it by fire. A sues and recovers $50,000 tort damages from B. Although no gain was derived by A from the suit, his prior gain due to the appreciation in value of Blackacre is realized when it is turned into cash by the money damages.

CIR v Wander Philippines Inc.

Facts:

Wander is a domestic corporation which is a wholly-owned subsidiary of Glaro S.A. Ltd.,a Swiss corporation not engaged in trade/business in the Philippines. In two instances, Wander filed its withholding tax return and remitted to Glaro (the parent company) dividends (P222,000 in the first instance and P355,200 in the second), on which 35% tax was withheld and paid to the BIR.

Wander now files a claim for refund of the withheld tax contending that it is liable only to 15% withholding tax pursuant to Section 24. B.1 of the Tax Code. The BIR did not act upon the claim filed by Wander so the corporation filed a petition to the Court of Tax Appeals (CTA). The CTA held that the corporation is entitled to 15% withholding tax rate on dividends remitted to Glaro, a non-resident foreign corporation.

Issue:

Whether or not Wander is entitled to the 15% withholding tax rate.

Held:

Yes. According to Sec. 24.B.1 of the Tax Code, the dividends received from a domestic corporation is liable to a 15% withholding tax, provided that the country in which the foreign corporation is domiciled shall allow a tax credit (equivalent to 20% which is the difference between the 35% tax due on regular corporations and the 15% tax due on dividends) against the taxes due to have been paid in the Philippines.

In the case, Switzerland did not impose any tax on the dividends received by Glaro thus it should be considered as a full satisfaction of the given condition. To deny respondent  the privilege to withhold 15% would run counter to the spirit and intent of the law and will adversely affect the foreign corporations’ interest and discourage them from investing capital in our country.

*Petition dismissed for lack of merit.

Tan v Del Rosario, Jr.

Facts:

This is a consolidated case involving the constitutionality of RA 7496 or the Simplified Net Income Taxation (SNIT) scheme.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the SNIT. In the 1^st case, they contend that the House Bill which eventually became RA 7496 is a misnomer or deficient because it was named as “Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession” while the actual title contains the said words with the additional phrase, “…Amending Section 21 and 29 of the National Internal Revenue Code”.

In the 2^nd case, they argue that respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships by issuing Revenue Regulation 2-93 to carry out the RA.

Issue:

Whether or not general professional partnerships may be taxed under SNIT

Held:

No. A general professional partnership is not itself an income taxpayer. Income tax is imposed not on the partnership (which is tax exempt), but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. There is no distinction in income tax liability between a person who practices his profession alone and one who does it through partnership with others in the exercise of a common profession.

In the case, SNIT is not envisioned by the Congress to cover corporations or partnerships which are independently subject to the payment of income tax.

***

Notes:

*2 KINDS OF PARTNERSHIPS UNDER TAX CODE

1. Taxable Partnerships – no matter how it was created or organized, they are subject to income tax by law.

2. Exempt Partnerships – the partners, not the partnership (although obligated to file an income tax return for administration and data) are liable for income tax in their individual capacity.

Wonder Mechanical Engineering Corp. v CTA

Facts:

Wonder Corp. was engaged in the business of manufacturing auto spare parts, lamp shades, rice threshers and other articles. It was also engaged in the business of electroplating and repair of machines. However, it did not pay sales tax on the sale of articles and the percentage tax on its electroplating and repair business.

Commissioner of Internal Revenue caused the investigation of Wonder Corp. for the purpose of ascertaining its tax liability. Revenue Examiner Pedro Cabigao reported that Corp. manufactured and sold other articles subject to 7% sales tax but not covered by the Corp’s tax exemption privilege. The Corp. was assessed with a deficiency percentage tax of P25, 080. and a 25% surcharge.

Wonder Corp. contends that it was a given a Certificate of Tax  Exemption with respect to the manufacture of machines for making cigarette paper, pails, lead washer, nails… (those which are determined as new and necessary by RA 901).

Issue:

Whether or not the manufacture and sale of steel chairs, jeep parts… which are not machines for making other products are tax exempt under RA 901.

Held:

No. Wonder Corp. was granted the tax exemption in the manufacture and sale of machines but not manufacture and sale of the articles produced by the machines. Such was the intention of the State for new and necessary industries as an incentive to greater and adequate production of products made scarce by World War II. Tax exemptions are highly disfavored in law and those who claim them must be able to justify his claim and must be clearly expressed in the law. Tax exemptions cannot be established by implication.

In the case, Wonder Corp. was granted tax exemption in the manufacture of cigarette paper, pails, lead washers, nails…  as explicitly stated in the Certificate of Tax Exemption. The manufacture of steel chairs, jeep parts and other articles not constituting machines for making certain products does not fall under RA 901.