Pre Tax Law Reviewer 2001

2001 PRE-WEEK REVIEW NOTES

TAXATION
By
Prof. Abelardo T. Domondon
HOW TO USE THESE NOTES:
These Notes in the form of review questions and textual materials were
specially prepared by the author for the exclusive use of Bar Candidates who
attended his lectures in Taxation. They are to be used as supplements to his Bar
Reviewer in Taxation, Vols, I and II.
The purpose of these Notes is to test the candidate’s ability to answer
hypothetical questions as well as those based on selected cases decided by the
Supreme Court during the period 1990-2000.
It is suggested that the reviewee should cover the suggested answers while
reading the questions. This should force him to recall the applicable law and
jurisprudence. If there is time, the answers should be written on a grade school
notebook using the sign pen to be used during the actual exams. Each question
should be answered within a span of nine (9) minutes only. Check your answers
referring to the SUGGESTED ANSWERS.
Do not MEMORIZE the suggested answers. They were purposely made to
be lengthy to serve as explanatory devices. This is so, because the reviewee does
not have time any more to refer back to the review materials. If the candidate still
could not understand the concepts after reading these notes, then refer to the
author’s Bar Reviewer in Taxation, Vols, I and II.
IMPORTANT: The questions asked in the Bar may not be worded in the same
manner as the questions shown in these notes, therefore the reviewee is warned
that it should be the concepts shown in the questions and suggestions that he
should master and not the questions and answers per se. Be specially careful
where the Bar questions are variations of the questions included because the
answers may be different. It is suggested that particular attention be given to
questions and areas which are marked ***
WARNING:
These materials are copyrighted and are only authorized for the use of bar
candidates who have attended the Tax Review lectures of Prof. Domondon and
others he has personally authorized. These include those who have attended the
lectures conducted by Primus Management Unlimited Services, Inc., held at the
Asian Social Institute, Inc., Lex Bar Reviews and Seminars, Inc., University of the
Philippines, University of Santo Tomas, Ateneo de Manila University, San
Sebastian College-Recolletos and Far Eastern University. Students of other

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schools and reviewees of other review centers are not authorized to use these
notes. These materials are copyrighted. UNAUTHORIZED USERS SHALL BE
SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER
PASS THE BAR.

GENERAL PRINCIPLES OF TAXATION
*** 1. When may the power to tax include the power to destroy? When is exercise
of the power to tax not destructive of taxpayer’s property?

SUGGESTED ANSWER:

The power to tax includes the power to destroy, where the tax is a valid tax. This
is so because a taxpayer could not seek the nullification of the valid tax solely upon the
premise that the tax will impoverish him.
The exercise of the power to tax is not destructive of taxpayer’s property where it
is an invalid tax, which violates the inherent or constitutional limitations. This is so
because there is a sympathetic court that shall come to the succor of the taxpayer and
declare such tax as invalid.
2. Discuss the concept of interpretation of tax laws as differentiated from the
concept of interpretation of tax exemption laws.
SUGGESTED ANSWER: A tax cannot be imposed unless it is supported by the
clear and express language of a statute. (Davao Gulf Lumber Corporation v.
Commissioner of Internal Revenue, et al., 293 SCRA 76, 88) In short, in case of doubt,
tax laws must be construed strictly against the State and liberally in favor of the taxpayer.
This is because taxes, as burdens which must be endured by the taxpayer, should not be
presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine
Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
On the other hand, when a tax is unquestionably imposed, a claim of exemption
form tax payments must be clearly shown and based on language in the law too plain to be
mistaken. (Davao Gulf Lumber Corporation, supra)
NOTES AND COMMENTS: The above concepts are also the holding in
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 107135, prom.
February 23, 1999) This is the CENVOCO case.
Furthermore, a reversal of a BIR ruling favorable to a taxpayer would not
necessarily create a perpetual exemption in his favor, for after all the government is never
estopped from collecting taxes because of mistakes or errors on the part of its agents.
(Ibid.)
*** 3. What do you understand by the inherent and constitutional limitations as
being restrictive of the otherwise unlimited and plenary power of taxation?

SUGGESTED ANSWER:

The inherent and constitutional limitations to the power of taxation are safeguards
which would prevent abuse in the exercise of this otherwise unlimited and plenary power.
*** 4. What are the inherent limitations to the power of taxation?

SUGGESTED ANSWER:

a. PUBLIC PURPOSE. The tax revenues must be utilized for the benefit of the
community in general. An alternative meaning is that tax proceeds should be utilized only
to attain the objectives of government.
b. NO IMPROPER DELEGATION OF LEGISLATIVE AUTHORITY. The
power of taxation is exercised by the legislature whose members are the mere delegates of
the people. This power could not therefore be delegated by the legislature to other
departments of government, like the executive.
c. TERRITORIALITY. The power to tax should be exercised only within the
territorial boundaries of the taxing authority.
d. GOVERNMENT EXEMPTION SHOULD BE RECOGNIZED. This is so in
order to reduce the amount of money the government is handling. There is verity in the
maxim, “For the government, exemption is the rule and taxation is the exception.”

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e. COMITY. Respect should be accorded to other sovereign nations. The power
of taxation is a high prerogative of sovereignty. The properties of other sovereign nations
within the territory of the taxing authority should not be subject to taxation as a measure
of respect to a co-equal.
*** 5. What are the constitutional limitations on the power of taxation?

SUGGESTED ANSWER:

*** GENERAL OR INDIRECT CONSTITUTIONAL LIMITATIONS:
a. Due process clause;
b. Equal protection clause;
c. Freedom of the press;
d. Religious freedom;
e. Non-impairment clause;
f. Law-making process:
1) Bill should embrace only one subject expressed in the title thereof;
2) Three (3) readings on three separate days;
3) Printed copies in final form distributed three (3) days before passage.
g. Presidential power to grant reprieves, commutations and pardons and
remittal of fines and forfeiture after conviction by final judgment.
*** SPECIFIC OR DIRECT CONSTITUTIONAL LIMITATIONS:
a. No imprisonment for non-payment of a poll tax;
b. Taxation shall be uniform and equitable;
c. Congress shall evolve a progressive system of taxation;
d. All appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives, but the Senate may propose and concur with amendments;
e. The President shall have the power to veto any particular item or items in
an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to
which he does not object;
f. Delegated power of the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues:
1) Delegation by Congress
2) Through a law
3) Subject to Congressional limits and restrictions
4) Within the framework of national development program.
g. Tax exemption of charitable institutions, churches, parsonages and
convents appurtenant thereto, mosques, and all lands, buildings and improvements
of all kinds actually, directly and exclusively used for religious, charitable or
educational purposes;
h. No tax exemption without the concurrence of majority vote of all members of
Congress;
i. No use of public money or property for religious purposes except if priest is
assigned to the armed forces, penal institutions, government orphanage or leprosarium;
j. Money collected on tax levied for a special purpose to be used only for such
purpose, balance if any, to general funds;
k. The Supreme Court's power to review judgments or orders of lower courts in
all cases involving the legality of any tax, impose, assessment or toll or the legality of any
penalty imposed in relation to the above;
l. Authority of local government units to create their own sources of revenue,
to levy taxes, fees and other charges subject to guidelines and limitations imposed by
Congress consistent with the basic policy of local autonomy;
m. Automatic release of local government's just share in national taxes;
n. Tax exemption of all revenues and assets of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational
purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative
educational institutions subject to limitations provided by law including restrictions
on dividends and provisions for reinvestment of profits;

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p. Tax exemption of grants, endowments, donations or contributions used
actually, directly and exclusively for educational purposes subject to conditions
prescribed by law.
6. Republic Act No. 7227 created the Subic Special Economic Zone (SSEZ),
and provides that the SSEZ shall be managed as a separate customs territory with
such incentives as tax and duty-free importations of raw materials, capital and
equipment. It further provides that “no taxes, local and national, shall be imposed
within the SSEZ”, but in lieu thereof, 3% of the gross income earned by businesses
therein shall be remitted to the National Government with 1% each to the local
government units affected by the declaration of the zone in proportion to their
population area and other factors. In addition, a development fund of 1% of the
gross income earned by all businesses within the SSEZ shall be utilized for the
development of municipalities outside Olongapo City and the Municipality of Subic
and other municipalities contiguous to the base areas.
On June 10, 1993, President Ramos issued Executive Order No. 97 clarifying
that tax and import duty-free importations shall apply only to raw materials, capital
goods and equipment brought in by business enterprises in the SSEZ. On June 19,
1993, President Ramos issued Executive Order No, 97-A specifying that the secured
areas that shall be completely tax and duty-free in the SSEZFPZ consists of the
“presently fenced-in former Subic Naval Base.”
Executive No. 97-A is challenged for being violative of the equal protection of
the law clause because of its bias in favor of big investors. Is there merit in the
challenge ? Explain briefly.
SUGGESTED ANSWER: No. Equal protection of the law clause is subject to
reasonable classification. If the groupings are characterized by substantial distinctions
that make real differences, one class may be treated and regulated differently from another.
The classification must also be germane to the purpose of the law and must apply to all
those belonging to the same class.
*** Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane
to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply
equally to all members of the same class.
In issuing E.O. No. 97-A delimiting incentives within the confines of the former
Subic military base, the President reasonably made a classification that is germane to the
purpose of Republic Act No. 7227.
The purpose of Republic Act No. 7227 is to
accelerate the conversion of military reservations into productive uses. It was reasonable
for the President to have delimited the application of some incentives to the confines of the
former Subic military base. The classification is therefore germane to the purposes of the
law.
There are substantial differences between big investors being enticed to the
“secured area” and the business operators outside that are in accord with the equal
protection clause that does not require territorial uniformity of laws. Of course the
outsiders, possessing the requisite investment capital can always avail of the same benefits
by channeling their resources or business operations into the fenced-off free port zone.
The classification set forth by E.O. No. 97-A does not merely apply to existing
conditions. As laid down in R.A. No. 7227, the objective is to establish a “self-sustaining,
industrial, commercial, financial and investment center” in the area. There will, therefore,
be a long-term difference between such investment center and the areas outside it.
The classification applies equally to al the resident individuals and businesses
within the ‘secured area.” The residents, being in like circumstances o contributing
directly to the achievement of the end purpose of the law, are not categorized further.
Instead, they are similarly treated, both in privileges granted and obligations required.
(Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
7. On July 1, 1993, or a month after the enactment and two days before the
effectivity of Republic Act No. 7654, the BIR issued RMC No. 37-93 which
considered Hope Luxury, Premium More and Champion cigarettes being
manufactured by Fortune Tobacco corporation as locally manufactured cigarettes
bearing a foreign brand subject to the higher 55% ad valorem tax on cigarettes.

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The following day, on July 2, 1993, at about 5:50 p.m., the BIR sent via fax a
copy of RMC No. 37-93 to Fortune Tobacco but was addressed to no one in
particular. On July 15, 1993 Fortune Tobacco received, by ordinary mail, a certified
xerox copy of RMC No. 37-93.
Fortune Tobacco now claims that its constitutional right to due process was
violated because there was no hearing before BIR issued RMC No. 37-93. Do your
agree ? Explain.

SUGGESTED ANSWER:
Yes. There was a violation of Fortune Tobacco’s right to due process.
BIR issued RMC No. 37-93 for the purpose of placing Hope Luxury, Premium
More and Champion within the scope of the amendatory law and subject them to the
increased tax rate.
In so doing, the BIR did not simply interpret the law, it issued a legislative rule
which is in the nature of subordinate legislation, designed to implement a primary
legislation by providing the details thereof. In the same way that laws must have the
benefit of public hearing, it is generally required that before a legislative rule is adopted
there must be a hearing and publication as required under the Administrative Code.
On the other hand, if what is issued is merely an interpretative rule (which is not
the rule issued in this case),no hearing or publication is required since an interpretative
rule is designed merely to provide guidelines of the law which the administrative agency is
in charge of enforcing. (Commissioner of Internal Revenue v. Court of Appeals, et al., 261
SCRA 236 )
8. It is contended that Expanded Value-Added Tax is violative of the
constitutional rule that taxes should be uniform and equitable. It is likewise
advanced that the EVAT is “oppressive, discriminatory, and unjust.” How were
these objections disposed of in the case of Tolentino v. Secretary of Finance and
companion cases, 249 SCRA 628 (1995) ?

SUGGESTED ANSWER:
*** a. It is inherent in the power to tax that the state be free to select the subjects of
taxation and it has been repeatedly held that inequalities which result from a singling out
of one particular class for taxation, or exemption infringe no constitutional limitation.
Thus, the EVAT on certain goods and services only, but not on others, do not violate the
rule on uniformity and equitableness.
*** b. Equality and uniformity of taxation means that all taxable articles or kinds of
property of the same class be taxed at the same rate. The taxing power has the authority
to make reasonable and natural classifications for purposes of taxation. To satisfy the
requirement of uniformity and equitableness, it is enough that the statute or ordinance
applies equally to all persons, forms and organizations placed in a similar situation.
c. The EVAT is uniform because the tax is applied similarly on all goods and
services sold to the public, which is not exempt, at the constant rate of 0% or 10%.
d. The EVAT is equitable because it is imposed only on sale of goods and services
by persons engaged in business with an annual gross sales as determined by the law.
Small corner sari-sari stores are consequently exempt from its application.
Likewise exempt from the tax are sales of farm and marine products. Thus, the cost of
basic food and other necessities, spared as they are from EVAT, are expected to be
relatively lower and within the reach of the general public.
9. On August 5, 1998, BIR agents acting upon a regularly issued Mission
Order examined the books of account of various jewelers engaged in the
manufacture of jewelry and allied undertakings were examined and investigated for
excise tax purposes. Among these firms were Hans, Miladay, Mercelles, etc.
Subsequently, the jewelers and their association filed with the Regional Trial
Court a petition for declaratory relief praying that certain provisions of the NIRC
imposing 20% excise tax on jewelry, pearls and other precious stones, and provisions
of the Tariff and Customs Code imposing three to ten percent (3% to 10%) tariff
and customs duty on natural and cultured pearls and precious or semi-precious
stones, be declared unconstitutional and null and void.

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The jewelers likewise presented an exhaustive study on the tax rates on
jewelry levied by different Asian countries.
The trial court declared the questioned provisions as inoperative and without
force and effect insofar as the jewelers are concerned. The trial court made the
observation that indeed government tax policy treats jewelry as non-essential items,
and therefore, taxed heavily; that the present tariff and tax structure increase
manufacturing cost and renders the local jewelry manufacturers uncompetitive
against other countries. Was there legal basis for the trial court's declaration ?
Explain.
SUGGESTED ANSWER: No. There was no legal basis for the following reasons:
a. The trial judge encroached upon matters properly falling within the province of
legislative functions. In making the aforesaid observations, the trial judge overlooked the
fact that such matters are not for him to decide. There are reasons why jewelry, a nonessential item, is taxed as it is in this country and these reasons, deliberated upon by the
legislature are beyond the reach of judicial questioning.
b. The trial court is not the proper forum for the ventilation of the issues raised by
the jewelers. It is the legislature to which relief must be sought, because with the
legislature primarily lies the discretion to determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs (place) of taxation. The judiciary cannot freely
delve into those matters which, by constitutional fiat, rightly rest on legislative judgment.
c. The tax rates of other countries should not be used as a yardstick, in
determining what may be the proper subjects of taxation in our own country. It should be
pointed out that in imposing the aforementioned taxes and duties, the State, acting though
the legislative and executive branches, is exercising its sovereign prerogative. It is
inherent in the power to tax that the State be free to select the subjects of taxation, and it
has been repeatedly held that, "inequalities which result from a singling out of one
particular class of taxation, or exemption, infringe no constitutional limitation."
(Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)
*** 10. A fixed annual license fee on those engaged in the business of general
enterprise was also imposed on the sale of bibles by a religious sect. Is this valid ?
SUGGESTED ANSWER: No, because it violates the constitutionally guaranteed
freedom of the press, and of religion..
As a license fee is fixed in amount and unrelated to the receipts of the taxpayer,
such a license fee, when applied to a religious sect is actually imposed as a condition for
the free exercise of religion. A license fee “restrains in advance those constitutional
liberties of press and religion and inevitably tends to suppress their exercise.”
***11. The EVAT Law imposes a VAT registration fee of P1,000.00 on non-VAT
enterprises which includes among others, religious sects which sells and distributes
religious literature. Is this violative of religious freedom ?
SUGGESTED ANSWER: No. The P1,000.00 VAT registration fee, although a
fixed amount is not imposed for the exercise of a privilege but only for the purpose of
defraying part of the cost of registration.
The registration requirement is a central feature of the VAT system. It is designed
to provide a record of tax credits because any person who is subject to the payment of the
VAT pays an input tax, even as he collects an output tax on sales made or services
rendered. The registration fee is thus more of an administrative fee, one not imposed on
the exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of
Finance, et al., and companion cases, 235 SCRA 630)
*** 12. Airlines, Inc. was granted a legislative franchise to operate scheduled
flight services between Manila and Cebu and vice-versa. It was subject to a
franchise tax of 2% qualified by the “magic words,” which “shall be in lieu of all
taxes.” Subsequently, Congress enacted Republic Act No. 7716, the Expanded
Value-Added Tax (EVAT) Law which imposes a 10% VAT on all services offered by
Airlines, Inc.
Airlines, Inc. assails the validity of R.A. No. 7716 for being violative of the
non-impairment clause. It cites Commissioner of Internal Revenue v. Lingayen Gulf

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Electric Power Co., Inc., et al., 164 SCRA 27 (1988) where it was held that the
imposition of a tax on franchise holders with the “magic words” is violative of the
non-impairment clause.
The Supreme Court in the Lingayen Gulf case held that charters or special
laws granted by the legislature are in the nature of private contracts. Rule on the
contention of Airlines, Inc.
SUGGESTED ANSWER: The EVAT does not violate the non-impairment
clause. Tolentino v. Secretary of Finance and its companion cases, 235 SCRA 630, 249
SCRA.628, provides the reasons why there is no violation:
a. Article XII, Sec. 11 of the Constitution provides that the grant of a franchise
for the operation of a public utility is subject to amendment. alteration or repeal by
Congress when the common good requires;
b. Not only existing laws but also the reservation of essential attributes of
sovereignty is read into contracts as a postulate of the legal order;
c. Contracts must be understood as having been made in reference to the possible
exercise of the rightful authority of the government and no obligation of contract can
extend to defeat that authority;
d. A lawful tax on a new subject, or an increased tax on an old one, does not
interfere with a contract or impairs its obligation, within the meaning of the constitution.
Even though such taxation may affect particular contracts, as it may increase the debt of
one person and lessen the security of another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must be paid unless prohibited by the
constitution, nor can it be said that it impairs the obligations of any existing contract in its
true and legal sense.
*** 13. Meralco was granted a franchise to operate an electric light and power
service in Calamba, Laguna sometime in 1983 under P.D. No. 551. Under the
franchise Meralco pays 2% franchise tax on of its gross receipts and “any law to the
contrary notwithstanding be in lieu of all taxes and assessments of whatever nature
imposed by any national or local authority or earnings, receipts, income and
privilege of generation, distribution and sale of electric current.” Pursuant to the
Local Government Code, the province of Laguna enacted an ordinance imposing a
franchise of 50% of 1% of the gross annual receipts of business enjoying a franchise
realized during the preceding calendar year within the province including cities
located therein. Rule on the validity of the tax ordinance.
SUGGESTED ANSWER: The tax ordinance is valid. Under the now prevailing
Constitution, where there is neither a grant nor prohibition by statute, the tax power must
be deemed to exist although Congress may provide statutory limitations and guidelines.
The basic rationale for the current rule is to safeguard the viability and self-sufficiency of
local government units by directly granting them general and broad tax powers.
The Local Government Code explicitly authorizes provinces and cities,
notwithstanding “any exemption granted by any law or other special law” to impose a tax
on businesses enjoying a franchise. Indicative of the legislative intent to carry out the
constitutional mandate of vesting broad tax powers to local government units, the Local
Government Code has withdrawn tax exemptions or incentives theretofore enjoyed by
certain entities.
In addition, the Local Government Code contains a general repealing clause. The
phrase in “lieu of all taxes” has to give way to the peremptory language of the Local
Government Code which specifically provides for the withdrawal of all exemptions. The
Court has viewed its previous rulings as laying stress on the legislative intent of the
amendatory law whether the tax exemption privilege is to be withdrawn or not rather than
on whether the law can or cannot withdraw the tax exemption, without violating the
constitution. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359,
May 5, 1999)
The Local Government Code provisions on withdrawal of tax exemptions
prescribes the general rule, viz. the tax exemptions or incentives granted to or presently
enjoyed by natural or juridical persons are withdrawn with the effectivity of the Local
Government Code except with respect to those expressly enumerated. (City Government
of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

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NOTES AND COMMENTS: It is possible that the Bar question might come from
one of the following areas:
*** Power of local governments to tax. Local governments do not have the inherent
power to tax except to the extent that such power might be delegated to them either by
the basic law or statute. Presently, under Article X of the 1987 Constitution a general
delegation of that power has been given in favor of local government units.
Nevertheless, the fundamental law did not intend the delegation to be absolute and
unconditional, the constitutional objective obviously is to ensure that, while local
government units are being strengthened and made more autonomous, the legislature must
still see to it that:
a. the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions;
b. each local government unit will have its fair share of available resources;
c. the resources of the national government will be unduly disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric Company v.
Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
The Manila Electric Company case doctrine reversed the holding in City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25,
1999 that municipal corporations are vested by the Constitution with the power to tax. It
may be exercised by local legislative bodies, no longer by virtue of a valid delegation as
before, but pursuant to direct authority conferred by the Constitution.
The non-impairment clause. Questionable ruling. The non-impairment clause
cannot be invoked by franchises, as franchises are always subject to police power, as well
as the power to tax (?), which like police power cannot be contracted away (?). (City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25,
1999) The author considers this ruling to be questionable because the taxing power is
inferior to the nonimpairment clause.
While the Court has, not too infrequently, referred to tax exemptions contained in
special franchises as being in the nature of contracts and a part of the inducement for
carrying out the franchise, these exemptions, nevertheless far from being strictly
contractual in nature.
*** Constitutional tax exemptions, in the real sense of the term and where the nonimpairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the government, acting in its
private capacity sheds its cloak of authority and waives its government immunity.
Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts. A franchise partakes of the nature of a grant which is not beyond
the purview of the non-impairment clause. Indeed the 1987 Constitution like its
precursors the 1935 and the 1973 Constitutions is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and when the common
good so requires. (Manila Electric Company v. Province of Laguna, et al., G.R. No.
131359, May 5, 1999)
The reader should take note of the conflicting doctrines espoused by the Manila
Electric case and the City Government of San Pablo, Laguna case. It may interest the
reader also to know that the ponente in the Manila Electric case is Justice Jose Vitug,
while the ponente in the City Government of San Pablo, Laguna is Justice Minerva
Gonzaga-Reyes.
*** 14. What is the concept of double taxation ?
a. MEANING. In its generic sense, this means taxing the same subject or object
twice during the same taxable period. In its particular sense, it may mean direct duplicate
taxation, which is prohibited under the constitution because it violates the concept of
equal protection, uniformity and equitableness of taxation. Indirect duplicate taxation is
not anathemized by the above constitutional limitations.
b. ELEMENTS OF DIRECT DUPLICATE TAXATION:
1) Same
a) Subject or object is taxed twice

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b) Taxing authority
c) Taxing purpose
d) Taxing period
2) Taxing all of the subjects or objects for the first time without taxing all
of them for the second time.
If any of the elements are absent then there is indirect duplicate taxation
which is not prohibited by the constitution.
NOTES AND COMMENTS: There may be a problem on double taxation,
including compensation and set-off.
*** 15. Define international juridical double taxation.
SUGGESTED ANSWER: The imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical
grounds.
Double taxation usually takes place when a person is a resident of a contracting
state and derives income from or owns capital in, the other contracting state and both
states impose tax on that income or capital. (Commissioner of Internal Revenue v. S.C.
Johnson and Son, Inc., et al., G.R. No. 127105, prom. June 25, 1999
*** 16. What are the methods for avoidance of double taxation ? Explain each
briefly but comprehensively.
SUGGESTED ANSWER: The following are the methods of avoiding double
taxation:
a. Tax treaties which exempts foreign nationals from local taxation and local
nationals from foreign taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local taxes that
are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.
NOTES AND COMMENTS:
a. Purpose of tax treaties. To reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted with a view towards
the elimination of international juridical double taxation.
b. Rationale for avoiding double taxation. To encourage the free flow of goods
and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments
will only thrive in a fairly predictable and reasonable international investment climate and
the protection against double taxation is crucial in creating such a climate.
*** c. Methods resorted to by a tax treaty in order to eliminate double taxation:
First Method: It sets out the respective rights to tax of the state of source or situs
and of the state of residence with regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of the contracting states; however, for
other items of income or capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is limited.
Second Method: The state of source is given a full or limited right to tax together
with the state of residence. In this case, the treaties make it incumbent upon the state of
residence to allow relief in order to avoid double taxation. Two methods of relief are
used:
1) The exemption method – the income or capital which is taxable in the
state of source or situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate of tax applicable to
the taxpayer’s remaining income or capital.
2) The credit method – although the income or capital which is taxed in
the state of source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. (Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, prom. June 25,
1999)
Difference between the exemption method and the credit method. The exemption
method focuses on income or capital itself while the credit method focuses upon the tax. .

10

(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No.
127105, prom. June 25, 1999)
*** 17. The RP-West Germany Tax Treaty provides a 10% tax on royalties. but
expressly allows against German income and corporate tax of 20% of the gross
royalties paid under the law of the Philippines. On the other hand the RP-US Tax
Treaty does not provide for a similar tax crediting. Thus, the tax on royalties earned
by U.S. firms in the Philippines may either be of three rates:
25 percent of the
gross amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; or the lowest rate of Philippine tax that may be imposed
on royalties of the same kind paid under similar circumstances to a resident of a
third state.
May U.S. Corporations claim entitlement to the “most favored nation” tax
rate of 10% on royalties as provided in the RP-US Tax Treaty in relation to the RPWest Germany Tax Treaty ? Explain with reasons.
SUGGESTED ANSWER: No. The entitlement of the 10% rate by U.S. firms
despite the absence of a matching credit (20% for royalties) would derogate from the
design behind the most favored nation clause to grant equality of international treatment
since the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of the most favored nation treatment precisely to underscore the need for
equality of treatment. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.,
et al., G.R. No. 127105, prom. June 25, 1999)
NOTES AND COMMENTS:
a. Intention behind adoption of provision on “relief from double taxation.”
The intention should be considered in the light of the purpose behind the most favored
nation (MFN) clause which is to grant to the contracting party treatment not less favorable
than which has been or may be granted to the “most favored” among other countries.
The MFN is intended to establish the principle of equality of international
treatment by providing that the citizens or subjects of the contracting nations may enjoy
privileges accorded by either party to those of the most favored nation. The essence of the
principle is to allow the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such taxpayer is also a party
provided that the subject matter of taxation is the same as that in the tax treaty under
which the taxpayer is liable. (Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc., et al., G.R. No. 127105, prom. June 25, 1999)
18. The Expanded Value-Added Tax Law is an indirect tax which may be
considered as regressive in character. It is a fixed tax therefore the lower is the
income the taxes that are paid are proportionately higher. Is this violative of the
constitution which mandates that Congress shall evolve a progressive system of
taxation ? Explain.
SUGGESTED ANSWER: There is no violation of the constitutional mandate
for the following reasons:
a. The mandate to Congress is not to prescribe but to evolve a progressive system
of taxation. Otherwise, sales taxes which perhaps are the oldest form of indirect taxes,
would have been prohibited with the proclamation of the constitutional provision. Sales
taxes are also regressive.
b. The Constitution does not really prohibit the imposition of indirect taxes which,
like the VAT, are regressive. The constitutional provision means simply that indirect taxes
should be minimized.
c. Resort to indirect taxes should be minimized but not avoided entirely because it
is difficult, if not impossible, to avoid imposing such taxes according to the taxpayer’s
ability to pay.
In the case of VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions while granting exemptions to other
transactions. The transactions which are subject to VAT are those which involve goods

11

and services which are used or availed of mainly by higher income groups. (Tolentino v.
Secretary of Finance and companion cases, 249 SCRA 628)
***19. The Constitution requires that all revenue bills shall originate exclusively
from the House of Representatives. Was this violated when the EVAT bill that
originated from the House did not become the EVAT law ? Explain.
a. The Constitution simply means that the initiative for filing revenue, tariff or tax
bills must come from the House of Representatives on the theory that, elected as they are
from the districts, the Members of the House can be expected to be more sensitive to the
local needs and problems.
b. It is not the law - but the revenue bill - which is required by the Constitution to
“originate exclusively” in the House of Representatives because a bill originating in the
House may undergo such extensive changes in the Senate that the result may be a
rewriting of the whole, and a distinct bill may be produced.
c. To insist that a revenue statute - not only the bill which initiated the legislative
process culminating in the enactment of the law - must substantially be the same as the
House bill would be to deny the Senate’s power not only to “concur with amendments”
but also to “propose amendment.” It would be to violate the coequality of legislative
power of the two houses of Congress and in fact make the House superior to the Senate.
Given the power of the Senate to propose amendments, it can propose its own
version even with respect to bills which are required by the Constitution to originate in the
House.
d. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in
anticipation of its receipt of the bill from the House, so long as action by the Senate as a
body is withheld pending receipt of the House bill. (Tolentino v. Secretary of Finance and
companion cases, 235 SCRA 630)
20. A petition for certiorari and/or prohibition challenging the validity of
Republic Act No. 8240, amending certain provisions of the NIRC by imposing socalled "sin taxes" (actually specific taxes) on the manufacture of beer and
cigarettes.
Rep. Arroyo charges that (1) in violation of Rule VIII, Sec. 35 and Rule XVII,
Sec. 103 of the rules of the House of Representatives, the Chair, in submitting the
conference committee report to the House, did not call for the yeas and nays, but
simply asked for its approval by motion in order to prevent Rep. Arroyo from
questioning the presence of a quorum; (2) in violation of Rule XIX, Sec. 112, the
Chair deliberately ignored Rep. Arroyo's question, "What is that ... Mr. Speaker ?"
and did not repeal Rep. Albano's motion to approve or ratify; (3) in violation of
Rule XX, Secs. 121-122, Rule XXI, Sec. 123, and Rule XVIII, Sec. 109, the Chair
suspended the session without first ruling on Rep. Arroyo's question which, it is
alleged, is a point of order or a privileged motion. It is argued that Rep. Arroyo's
query should have been resolved upon the resumption of the session on November
28, 1996, because the parliamentary situation at the time of the adjournment
remained upon the resumption of the session.
On the same day, November 21, 1996, the bill was signed by the Speaker of
the House of Representatives and the President of the Senate and certified by the
respective secretaries of both Houses of Congress as having been formally passed by
the House of Representatives and he Senate on November 21, 1996. The enrolled bill
was signed into law by President Ramos on November 22, 1996.
It is now charged that the session was hastily adjourned at 3:40 p.m. on
November 21, 1996 and the bill certified by Speaker de Venecia to prevent Rep.
Arroyo from formally challenging the existence of a quorum and asking for a
reconsideration. Rule on the controversy.
SUGGESTED ANSWER: There is no basis for the procedure being bruited as
having been violated.
Under the enrolled bill doctrine, the signing of the bill by the Speaker and the
Senate President and the certification by the Secretaries of both Houses are conclusive of
its due enactment. (Arroyo, et al., v. de Venecia, et al., 277 SCRA 268)

12

21. Manila Golf & Country Club, Inc. is a non-stock corporation. It
maintains a golf course and operates a clubhouse with a lounge, bar and dining
room, but these facilities are for the exclusive use of its members and accompanied
guests, and it charges on cost-plus-expense basis.
The club now claims that Section 42 inserting a new Section 191-A in the
National Internal Revenue Code was vetoed by the President. On the other hand,
the BIR maintains that Section 42 was not entirely vetoed but merely the words
“hotels, motels, resthouses” on the ground that it might restrain the development of
hotels which is essential to the tourism industry.
Rule on the conflicting contentions.
SUGGESTED ANSWER: The BIR is correct. The inclusion of hotels, motels,
and resthouses are considered as “items within the meaning of no. (2), Sec. 27, Art. VI of
the 1987 Constitution that, “ the President shall have the power to veto any particular item
or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or
items to which he does not object.”
In the case of Commissioner of Internal Revenue v. Court of Tax Appeals and
Manila Golf & Country Club, G.R. No. 47421, May 14, 1990 it was held that “hotels,
motels and resthouses” are considered as items which the President has the power to veto.
An “item” in a revenue bill does not refer to an entire section imposing a particular
kind of tax, but rather to the subject of the tax and the tax rate. In the portion of a
revenue bill which actually imposes a tax, a section identifies the tax and enumerates the
persons liable therefore with the corresponding tax rate.
To construe the word “item” as referring to the whole section would tie the
President’s hand in choosing either to approve the whole section at the expense of also
approving a provision therein which he deems unacceptable or veto the entire section at
the expense of foregoing the collection of the kind of tax altogether.
The evil which was sought to be prevented in giving the President the power to
disapprove items in a revenue bill would be perpetrated rendering that power inutile.
(Commonwealth ex. rel. Elkin v. Barnett, 199 Pa. 161, 55 LRA 882 (1913)
*** 22. Mr. Gaerlan is the owner of a 5,000 sq. m. parcel of land located in the
city limits of San Fernando City. He leased the property for P50,000.00 a year to a
religious congregation for a period of fifteen (15) years (1990-2005). The religious
congregation built on a 1,000 sq. m. portion a seminary and a chapel which it used
in connection with its religious activities. It constructed a ten (10) story building on
the remaining 4,000 sq. m. which it rented out to various commercial establishments,
the proceeds of which go to the support of its various seminaries located throughout
the Philippines. These seminaries are organized as non-profit and non-stock
educational institutions.
Is Mr. Gaerlan exempt from the payment of real property taxes ? What
about the religious congregation ? Explain. Is the religious congregation exempt
from the payment of income taxes on the rental receipts ? Explain.

SUGGESTED ANSWER:
Mr. Gaerlan is exempt from the payment of real property taxes on the 1,000 sq. m.
portion of his 5,000 sq. m. lot, as well as on the remaining 4,000 sq.m. On the other hand
the religious congregation should pay real property taxes on the 4,000 sq. m. parcel of
land and the 10-story building.
Mr. Gaerlan is exempt from real property taxation, whether on the 1,000 sq.m. or
on the 4,000 sq. m. because the basis for taxation of real property is use and not
ownership. The religious congregation is exempt from real property taxes on the 1,000
sq. m. parcel of land as well as on the improvements the chapel and the seminary. This is
so be cause they are actually, directly and exclusively used for religious purposes. The
treatment is different with regard to the 4,000 sq. m. lot and its improvement the 10 storey
building. While it is true that the proceeds are used for the support of its seminaries, this
is at the most indirect use, hence not subject to the tax exemption.
The religious congregation is subject to income taxation. (For reasons, refer to
question no. 23, infra) While it is true that all the seminaries are organized as non-profit
non-stock educational institutions, it is not their incomes which is the subject of the

13

problem but that of the religious congregation which is not a non-profit non-stock
educational institution.
*** 23. YMCA was established as “a welfare, educational and charitable nonprofit corporation” earned an income of P600 thousand from leasing out a portion of
its premises to small shop owners, like restaurants an canteen operators, and P44
thousand from parking fees collected from non-members. It was subjected to an
assessment for non-payment of income taxes on the foregoing income.
YMCA claims that it is tax exempt claiming for the reason that the leasing to
small shop owners and the operation of the parking lot are reasonably necessary for
the accomplishment of its objectives. It premises its claim on the provisions of the
1987 Constitution. Is the income derived from rentals of the real property subject to
income tax ? Reason out your answer.
SUGGESTED ANSWER: Yes, the income is subject to income tax. The NIRC
recognizes the exemption from tax of the incomes of civic leagues or organizations not
organized for profit but operated exclusively for the promotion of social welfare, as well
as clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes where no part of the net income inures to the benefit of any private
stockholder or member.
However, the tax exemption so recognized does not flow to income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the disposition
made of such income, which shall be subject to income taxes.
Furthermore, the constitutional tax exemptions refer only to real property that are
actually, directly and exclusively used for religious, charitable or educational purposes, and
that the only constitutionally recognized exemption from taxation of revenues are those
earned by non-profit, non-stock educational institutions which are actually, directly and
exclusively used for educational purposes. YMCA is not an educational institution
embraced under this particular concept. (Commissioner of Internal Revenue v. Court of
Appeals, et al., 298 SCRA 83)
*** 24. Asean Kiddie School, Inc., is a non-profit, non-stock educational
institution. It owns a one hectare lot, one-half of which is occupied by the school
campus and the other half is leased to Agri-Farms, Inc., for use as a flower garden to
meet the export requirements of Agri-Farms, Inc. The rentals collected from AgriFarms are used by Asean to pay for the salaries of its school teachers. Anticipating
higher expenditures for operating the school during the school year 1997-98, the
school increased its tuition fees and started collecting the increased fees as early as
April 1997. The advanced collections were in the meantime deposited in a local
bank where it earns interest. An international organization donated US$10,000.00
on the solitary condition that it should be used to upgrade the salaries of the school
administrators. The school also wants to import some computers for the use of its
students.
You are now consulted to explain the tax implications of the above and give
your advice. What shall you say ?
SUGGESTED ANSWER:
a. The school is exempt from the payment of real property taxes on the one-half
portion of its one hectare lot which is being used as the school campus.
This is so because the same is actually, directly and exclusively used for educational
purposes.
Agri-Farms is subject to the payment of real property taxes on the remaining onehalf that it leases from Asean for the reason that the said portion is used for commercial
purposes and not actually, directly and exclusively for educational purposes. Asean’s tax
exemption privilege does not flow to Agri-Farms because real property taxation is based
on use and not on ownership. While it is true that the rental income is devoted to
educational purposes, it has no bearing in the case as it is the land that should the actually,
directly and exclusively used for educational purposes.

14

b. The income derived from the tuition fees is exempt from the income taxes as
these are to be actually, directly and exclusively used for educational purposes being
devoted to meet the increased school operational expenditures.
c. The passive income in the form of interests on bank deposits may be exempt
from income taxes and the withholding taxes of 20% if they are reflected on the school’s
annual information returns and duly audited financial statements, supported by a
certification from the depository bank as to the amount of interest income earned from
passive investments not subject to the 20% final withholding tax, a resolution of the
school’s Board of Trustees on the proposed projects to be funded out of the money
deposited in the bank, and a certification of actual utilization of said interest income for
actual, direct and exclusive use for educational purposes. (Finance Department Order No.
149-95, issued November 24, 1995 amending Department Order No. 137-87 as amended
by Department Order No. 92-88).
d. While it is true that the US$10,000.00 is to be utilized for administration
purposes, and under Sec. 94(A-3) of the NIRC, may be subject to tax, it is to be noted
that Republic Act No. 7798 which amended B.P. Blg. 232 provides that, “Taxes shall not
be due on donations to educational institutions.” It is to be noted that exemptions to
educational institutions are not subject to the so-called strictissimi juris strict
interpretation against the taxpayer and liberally in favor of the government.
e. The computers could be imported, exempt from the payment of customs duties
and value-added tax as there is showing of their actual, direct and exclusive use for
educational purposes.
25. Why is it important to know the distinctions between a tax and a debt.
What are the distinctions between a tax and a debt ?
SUGGESTED ANSWER: It is important to know the distinctions because nonpayment of a tax (except a poll tax) could subject a person to imprisonment while no
person could be imprisoned for non-payment of a debt. Furthermore, a debt could be
compensated by another debt, but a debt or another tax could not be compensated for a
tax in accordance with the lifeblood doctrine.
*** Distinctions between a tax and a debt:
a. BASIS. Tax is based on law WHILE debt is based on contract or judgment.
b. FAILURE TO PAY. Failure to pay a tax (except a poll tax) may result in
imprisonment WHILE there is no imprisonment for failure to pay a debt.
c. MODE OF PAYMENT. Tax is generally payable in money WHILE debt may
be payable in money, property or services.
d. ASSIGNABILITY. A tax is not assignable WHILE a debt is assignable.
e. INTEREST. A tax does not draw interest unless delinquent WHILE a debt
draws interest if stipulated or delayed.
f. AUTHORITY. Taxes are imposed by public authority WHILE debt can be
imposed by private individuals.
g. PRESCRIPTION. Prescriptive periods for tax are determined under the NIRC
WHILE debt, under the Civil Code.
26. Are there distinctions between a tax and a license fee ? Why is it
important to know the distinctions ?
SUGGESTED ANSWERS: The following are the distinctions between a tax and a
license fee:
a. PURPOSE:A tax is imposed for revenue purposes WHILE a license fee is
imposed for regulatory purposes.
b. BASIS: A tax is imposed under the power of taxation WHILE a license fee is
imposed under police power.
c. AMOUNT: There is no limit as to the amount of a tax WHILE the amount of
license fee that could be collected is limited to the cost of the license and the expenses of
police surveillance and regulation.
d. TIME OF PAYMENT: Taxes are normally paid after the start of a business
WHILE a license fee before the commencement of business.
e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make the
business illegal WHILE failure to pay a license fee makes the business illegal.

15

f. SURRENDER: Taxes being the lifeblood of the state, cannot be surrendered
except for lawful consideration WHILE a license fee may be surrendered with or without
consideration.
It is important to know the distinctions because the limitations for one may not be
applied to the other except in the instance where regulatory taxes are imposed thus, the
power to tax is exercised cojointly with the police power. Furthermore, exemption from
taxes does not include exemption from the payment of license fees and vice-versa.
NOTES AND COMMENTS: Recall the distinctions between the power of
taxation and police power with respect to: Purpose, amount, compensation, property
taken, what is done with the property taken, relation to the non-impairment clause.

THE COURT OF TAX APPEALS AND TAX REMEDIES
27. What is the Court of Tax Appeals ? What is the nature of the Court of
Tax Appeals ? Why was it created ?
SUGGESTED ANSWER:
a. The Court of Tax Appeals is the special tax court created under Republic Act
No. 1125 composed of a Presiding Judge and Two Associate Judges, appointed by the
President of the Philippines from nominees of the Judicial and Bar Council.
b. It is not a mere administrative agency or tribunal but a regular court vested with
exclusive appellate jurisdiction over cases arising under the National Internal Revenue
Code and the Tariff and Customs Code.
*** c. The Court of Tax Appeals was created:
1) To prevent delay in the disposition of tax cases by the then Courts of
First Instance (now RTCs), in view of the backlog of civil, criminal, and cadastral cases accumulating in the dockets of such courts; and
2) To have a body with special knowledge which ordinary Judges of the
then Courts of First Instance (now RTCs), are not likely to possess, thus providing for an adequate remedy for a speedy determination of tax cases.
*** 28. What is the jurisdiction of the Court of Tax Appeals ?
SUGGESTED ANSWER:
a. The Court of Tax Appeals has jurisdiction over decisions of the Commissioner
of Internal Revenue over:
1) Cases involving:
a) Disputed assessments;
b) Refund of internal revenue taxes, fees or other charges;
c) Penalties imposed in relation thereto.
2) Other matters arising under:
a) The National Internal Revenue Code, or
b) Other law or part of law administered by the Bureau of Internal
Revenue.
The appeal to the Court of Tax Appeals must be filed within 30 days from receipt
of the Commissioner’s adverse decision. If there is no decision, the appeal should be
dismissed for lack of jurisdiction.
b. The Court of Tax Appeals has jurisdiction over decisions of the Commissioner
of Customs over:
1) Cases involving:
a) Liability for customs duties, fees or other money charges,
b) Seizures, detention or release of property affected,
c) Fines, forfeitures and other penalties imposed in relation thereto;
2) Other matters arising under:
a) the customs law, or
b) Other law or part of law administered by the Bureau of Customs
The appeal to the Court of Tax Appeals must be filed within 30 days from receipt
of the Commissioner’s adverse decision. If there is no decision, the appeal should be
dismissed for lack of jurisdiction.
*** c. Instances where the Court of Tax Appeals would have jurisdiction even if there
is no decision yet of the Commissioner of Internal Revenue:

16

1) Where the Commissioner has not acted on the disputed assessment after
a period of 180 days from submission of complete supporting documents, the
taxpayer has a period of 30 days from the expiration of the 180 day period within
which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of
1997)
2) Where the Commissioner has not acted on an application for refund or
credit and the two year period from the time of payment is about to expire, the
taxpayer has to file his appeal with the Court of Tax Appeals before the expiration
of two years from the time the tax was paid.
*** d. Instances where the Court of Tax Appeals would have jurisdiction even if there
is no decision of the Commissioner of Customs:
1) Decisions of the Secretary of Trade and Industry or the Secretary of
Agriculture in anti-dumping and countervailing duty cases are appealable to the
Court of Tax Appeals within thirty (30) days from receipt of such decisions.
2) In case of automatic review by the Secretary of Finance in seizure or
forfeiture cases where the value of the importation exceeds P5 million or where the
decision of the Collector of Customs which fully or partially releases the shipment
seized is affirmed by the Commissioner of Customs.
*** 29. Only Commissioner’s final decision denying the dispute is subject of
appeal. Words to the effect that the matter would be referred to the Collection
Enforcement Division for the issuance of a warrant of levy and distraint is not a final
decision appealable to CTA (Solid Cement Corporation vs. Court of Tax Appeals, et al.,
CA-GR SP No. 33516, February 28, 1995). Even the actual issuance of a warrant of
distraint and levy in certain cases still cannot be considered a final decision on a
disputed assessment. (Commissioner of Internal Revenue v. Union Shipping Corp.,
185 SCRA 547)
NOTES AND COMMENTS:
*** a. Acts of BIR Commissioner considered as denial of protest which serve as
basis for appeal to the Court of Tax Appeals:
1) Filing by the BIR of a civil suit for collection of the deficiency tax is
considered a denial of the request for reconsideration. (Commissioner of Internal
Revenue v. Union Shipping Corporation, 185 SCRA 547)
2) An indication to the taxpayer by the Commissioner “in clear and
unequivocal language” of his final denial not the issuance of the warrant of
distraint and levy. What is the subject of the appeal is the final decision not the
warrant of distraint. Commissioner of Internal Revenue v. Union Shipping
Corporation, 185 SCRA 547)
3) A BIR demand letter sent to the taxpayer after his protest of the
assessment notice is considered as the final decision of the Commissioner on the
protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)
4) A letter of the BIR Commissioner reiterating to a taxpayer his previous
demand to pay an assessment is considered a denial of the request for
reconsideration or protest and is appealable to the Court of Tax Appeals.
(Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
*** b. Requisites for validity of the Commissioner’s decision on the dispute. The
decision of the Commissioner or his duly authorized representative shall (a) state the facts,
the applicable law, rules and regulations, or jurisprudence on which such decision is based,
otherwise, the decision shall be void, in which case the same shall not be considered a
decision on the disputed assessment; and (b) that the same is his final decision. (Sec.
3.1.6, Rev. Regs. 12-99)
*** 30. The BIR Commissioner discovered that a taxpayer keeps no records or
that whatever records kept are inadequate, or that there is strong suspicion that the
taxpayer has received income from undisclosed sources, or that no return was filed
or the return filed was false and fraudulent. What methods have been developed by
the BIR in order to determine the income of the taxpayer which should be subject
to tax ? Explain each method briefly but comprehensively.

17

SUGGESTED ANSWER: The following are the general methods developed by
the Bureau of Internal Revenue for reconstructing a taxpayer’s income:
a. Percentage method. The computed amount of revenues based on the
percentage computation is compared to the amount of revenues reflected on the return.
The percentages used may be obtained from the taxpayer, industry publication, prior year’s
audit results, or third parties. The comparison will provide an indication on the possibility
of revenue being understated.
Among the significant ratios and trends to be analyzed are the percentage mark-up,
gross profits ratio or gross margin percentage, profit margin, total assets turnover, and
inventory turnover.
b. Net worth method. A method of reconstructing income which is based on the
theory that if the taxpayer’s net worth has increased in a given year in an amount larger
than his reported income, he has understated his income for that year. The net worth on a
fixed starting date is compared with the net worth on a fixed ending date. Any increase in
net worth is presumed to be income not declared for tax purposes.
The difficulty of establishing the opening net worth of a tax payer has led to the
“Cohan Rule” which means the use estimates or approximations of the amount of cash and
other asserts where the taxpayer lacks adequate records.
c. Bank deposit method. The bank records of the taxpayer are analyzed and the
BIR estimates income on the basis of the total bank deposits after eliminating non-income
items. This method stands on the premise that deposits represent taxable income unless
otherwise explained as being non-taxable items. This method may be used only where the
BIR has been legally allowed access to the taxpayer’s bank records.
d. Cash expenditure method. This method assumes that the excess of a taxpayer’s
expenditures during the tax period over his reported income for that period is taxable to
the extent not disproved otherwise.
e. Unit and value method. The determination or verification of gross receipts may
be computed by applying price and profit figures to the known ascertainable quality of
business of the taxpayer. For example, in order to determine the gross receipts of a pizza
parlor, multiply the pounds of flour used by the number of pizzas per pound which in turn
would then be multiplied by the average price per pizza.
f. Third party information or access to records method. The BIR may require
third parties, public or private to supply information to the BIR.
g. Surveillance and assessment method. (Chapter XIII. Indirect Approach to
Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)
*** 31. The BIR discovered that Elvie, a businesswoman, did not file her income
tax returns for the taxable years 1998 and 1999. A pre-assessment notice for back
taxes was then issued in the amount of P2 million which ultimately matured into an
assessment notice. The BIR arrived at the additional tax due after using the “net
worth” method and access to Elvie’s purchases from her suppliers of raw materials.
She now disputes the assessment for lack of legal basis because of the use of the “net
worth” which is not authorized under the Tax Code, and for violation of her
constitutional rights when her purchase records were accessed from her suppliers.
Rule on her dispute.
SUGGESTED ANSWER: Elvie’s contentions are bereft of merit. Since Elvie did
not file her income tax returns, which reports are required by law as a basis for
assessment, then the BIR Commissioner shall assess the tax on the best evidence available.
The BIR Commissioner is authorized to secure records from public or private entities to
assist him in the assessment. Furrthermore, the BIR may use such method as in the
opinion of the Commissioner clearly reflects the income.
NOTES AND COMMENTS:
a. General Rule. “The taxable income shall be computed upon the basis of the
taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping the books of
such taxpayer; but if no such method of accounting has been so employed, or if the
method employed does not clearly reflect the income, the computation shall be in
accordance with such method as in the opinion of the Commissioner clearly reflects the
income.” (Sec. 43, NIRC of 1997)

18

b. Failure to Submit Required Returns, Statements, Reports or Other Documents.
“When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations
or when there is reason to believe that any such report is false, incomplete or erroneous,
the Commissioner shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time
prescribed by law, or willfully or otherwise files a false or fraudulent return or other
document, the Commissioner shall make or amend the return from his own knowledge and
from such information as he can obtain through testimony or otherwise, which shall be
prima facie correct and sufficient for all legal purposes.” [Sec. 6 (B), NIRC of 1997]
*** c. Power of the Commissioner to Obtain Information. “In ascertaining the
correctness of any return, or in making a return when none has been made, or in
determining the liability of a person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is authorized: xxx
To obtain on a regular basis from any person other than the person whose internal
revenue tax laibility is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities including the
Bangko Sentral ng Pilipinas and government-owned or –controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names , addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating
headquarters or multinational companies, joint accounts, associations, joint ventures or
consortia and registered partnerships, and their members; xxx” [Sec. 5 (B), NIRC of
1997)
32. What is a pre-assessment notice and what is its importance ?
SUGGESTED ANSWER: A pre-assessment notice is a a letter sent by the Bureau
of Internal Revenue to a taxpayer asking him to explain within a period of fifteen (15) days
from receipt why he should not be the subject of an assessment notice.
As a general rule, the BIR could not issue an assessment notice without first
issuing a pre-assessment notice because it is part of the due process rights of a taxpayer to
be given notice in the form of a pre-assessment notice, and for him to explain why he
should be the subject of an assessment notice.
*** NOTES AND COMMENTS: Instances where a pre-assessment notice is not
required before a notice of assessment is sent to the taxpayer:
a. When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
b. When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax liabilities for the
taxable quarter or quarters of the succeeding table year; or
d. When the excess tax due on excisable articles has not been paid; or
e. When an article locally purchased or imported by an exempt person, such as,
but not limited to vehicles, capital equipment, machineries and spare parts, has been sold,
trade or transferred to non-exempt persons. (Sec. 228, NIRC of 1997)
33. On the basis of a Letter of Authority, for the examination of the books of
accounts and other accounting records of Pascor Realty and Development
Corporation (PRDC), BIR examiners recommended the issuance of an assessment
notice in the amounts of P7 million and P 3 million for the years 1986 and 1987
respectively.
On March 1, 1995, the BIR filed a criminal complaint with the Department
of Justice against PRDC, its President and Treasurer alleging evasion of taxes in the
total amount of P10 million. This was supported by an affidavit-report of the
examiners detailing the computation of the alleged tax evasion.
PRDC, its
President
and
Treasurer
filed
an
Urgent
Request
for
Reconsideration/Reinvestigation disputing the tax assessment and tax liability. On

19

March 23, 1995, PRDC and its President and Treasurer received a subpoena in
connection with the criminal complaint filed by the BIR against them.
In a letter dated May 17, 1995, the Commissioner denied the urgent request
for reconsideration/reinvestigation filed by PRDC and its officers on the ground that
formal assessment has as yet not been issued by the Commissioner.
Do you agree with the decision of the Commissioner ? Explain briefly.
SUGGESTED ANSWER: Yes, the affidavit-report of the examiners does not
constitute an assessment that may be the subject of a motion for
reconsideration/reinvestigation. The affidavit-report merely contained a computation of
the liabilities. It did not state a demand or a period for payment. It was not addressed to
the taxpayers but to the Department of Justice.
That the affidavit-report contained details of the tax liabilities does not ipso facto
make the same an assessment. Its purpose was merely to support the criminal complaint
for assessment. Clearly, it was not meant to be a notice of the tax due and a demand for
the payment thereof.
The fact that the complaint itself was specifically directed and sent to the
Department of Justice and not to the taxpayer shows that the intent of the BIR was to file
a criminal complaint for tax evasion, not to issue an assessment. Although the revenue
officers recommended the issuance of an assessment, the commissioner instead opted to
file a criminal complaint. What was received by the taxpayer was notice of the filing of the
criminal case not a notice that the BIR had made an assessment. (Commissioner of
Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315,
prom. June 29, 1999)
NOTES AND COMMENTS: The NIRC defines the specific functions and effects
of an assessment. To consider the affidavit-report attached to the criminal complaint as a
proper assessment is to subvert the nature of an assessment and to set a bad precedent that
will prejudice innocent taxpayers.
While an assessment informs the taxpayer that he or she has tax liabilities, not all
documents coming from the BIR containing a computation of the tax liability can be
deemed assessments.
To start with, an assessment must be sent to and received by a taxpayer and must
demand the payment of the taxes therein within a specific period. Thus, the NIRC
imposes a 25% penalty, in addition to the tax due, in case the taxpayer fails to pay the
deficiency tax within the time prescribed for its payment in the notice of assessment.
Likewise, an interest of 20% per annum, or such higher rate as may be prescribed by rules
and regulations, is to be collected from the date prescribed for its payment until full
payment.
The issuance of an assessment is vital in determining the period of limitation
regarding its proper issuance and the period within which to protest it. Necessarily, the
taxpayer must be certain that a specific document constitutes an assessment. Otherwise,
confusion would arise regarding the period within which to make an assessment or to
protest the same; or whether interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the BIR releases, mails or
sends such notice to the taxpayer. Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation, et al., G.R. No. 128315, prom. June 29, 1999)
Pascor has also defined assessment as laying a tax.
NOTES AND COMMENTS: The word assessment when used in connection with
taxation, may have more than one meaning. The ultimate purpose of an assessment to
such a connection is to ascertain the amount that each taxpayer is to pay. More commonly
the word “assessment” means the official valuation of a taxpayer’s property for purpose of
taxation. The above definition of assessment finds application under internal revenue
taxation, tariff and customs taxation as well as local government taxation.
For real property taxation, there may be a special meaning to the burdens that are
imposed upon real properties that have been benefited by a public works expenditure of a
local government. It is sometimes called a special assessment or a special levy.
The prescriptive periods for making assessments are three (3) years from the
last day within which to file a return or when the return was actually filed and ten years

20

from discovery of the failure to file the tax return or discovery of falsity or fraud in the
return.
*** 34. What is meant by “jeopardy assessment” ?
SUGGESTED ANSWER: A delinquency tax assessment which was assessed
without the benefit of complete or partial audit by an authorized revenue officer, who has
reason to believe that the assessment and collection of a deficiency tax will be jeopardized
by delay because of the taxpayer’s failure to comply with the audit and investigation
requirements to present his books of accounts and/or pertinent records, or to substantiate
all or any of the deductions, exemptions, or credits claimed in his return. [Sec. 3.1 (a),
Rev. Regs. No. 6-2000)
NOTES AND COMMENTS:
a. Jeopardy assessment is an indication of the doubtful validity of the
assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. REgs. No. 62000]
*** b. Requirements for validity of formal letter of demand and assessment
notice. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes
shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and assessment notice shall be
void. (Sec. 3.1.4, Rev. Regs. No. 12-99)
*** 35. “X” Corporation filed its income tax returns in January, 1995 for its
income for the year 1994. In October, 1997, March, 1998 and May, 1998, “X”
through it’s authorized representative signed three (3) separate waivers of the
“Statute of Limitations under the NIRC.” The waivers were not signed by the BIR
Commissioner or his agents.
In 1999, the BIR issued letters of demand, accompanied by assessment
notices asking the corporation to pay the deficiency internal revenue taxes for its
income for the year 1994. “X” disputed the assessment and requested a
reinvestigation. The BIR Commissioner denied the protest. “X” appealed to the
Court of Tax Appeals, on the ground of prescription. Decide.
SUGGESTED ANSWER: The BIR’s authority to assess already prescribed. The
three (3) waivers did not suspend the running of the prescriptive period.
The only agreement that could suspend the running of the prescriptive period for
the collection of the tax in question is a written agreement between “X” corporation an the
BIR entered into before the expiration of the three (3) year prescriptive period. extending
the said period.
Since, what is required is the signatures of both the Commissioner and the
taxpayer, a unilateral waiver on the part of the taxpayer does not suspend the prescriptive
period. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712,
February 25, 1999 (Carnation case)
NOTES AND COMMENTS: Grounds for suspending statute of limitations or
prescriptive periods for assessment, beginning or distraint or levy or proceeding in
court.
The holding in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R.
No. 115712, February 25, 1999 (Carnation case) that the waiver of the period for
assessment must be in writing and have the written consent of the BIR Commissioner is
still doctrinal because of the provisions of Sec. 223, NIRC of 1997 which provides:
a. When the Commissioner is prohibited from making the assessment, or beginning
distraint, or levy or proceeding in court and for sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a reinvestigation by the
commissioner;
c. When the commissioner could not be located in the address given by him in the
return filed upon which the tax is being assessed or collected;
d. When the warrant of distraint and levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient discretion, and no
property could be located; and
e. When the taxpayer is out of the Philippines.

21

Law on prescription should be liberally construed in favor of the taxpayer. For the
purpose of safeguarding taxpayers from an unreasonable examination, investigation or
assessment, our tax law provides a statute of limitation on the collection of taxes.
Thus, the law on prescription, being a remedial measure, should be liberally
construed in order to afford such protection. As a corollary, the exceptions to the law on
prescription should perforce be strictly construed. (Commissioner of Internal Revenue v.
B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999)
Requirements for validity of taxpayer’s protest. The taxpayer shall state the
facts, the applicable law, rules and regulations, or jurisprudence on which his protest is
based, otherwise, his protest shall be considered void and without force and effect. If
therer are several issues involved in the disputed assessment and the taxpayer fails to state
the facts, the applicable law, rules and regulations, or jurisprudence in support of his
protest against some of the several issues on which the assessment is based, the same shall
be considered undisputed issue or issues, in which case, the taxpayer shall be required to
pay the corresponding deficiency tax or taxes attributable thereto. (Sec. 3.1.5, Rev. Regs.
12-99)
36. B.F. Goodrich availing of the Parity Amendment to the Constitution
purchased various parcels of land. When the Parity Amendment expired in 1974, it
sold the parcels for P500,000.00 payable in installments and leased back the
properties for 25 years. It filed its 1974 return reporting the sale. A BIR assessment
on its income for 1974 was paid. In 1980 it was assessed donor’s tax because the
BIR considered the consideration for the sale insufficient, and the difference
between the fair market value and the actual purchase price, a taxable donation.
Subsequently, on April 9, 1981 the BIR increased the assessment.
Was there a “false and fraudulent return” within the context of the Tax Code
which would allow assessment beyond the five year [under the present Tax Code,
three (3) years ?
SUGGESTED ANSWER: No, the fact that B.F. Goodrich sold the property for a
price lower than its declared fair market value did not constitute a “false return” which
contains wrong information due to mistake, carelessness or ignorance. It is possible that
real property may be sold for less than adequate consideration for a bona fide business
purpose, in such event, the sale remains an “arms length” transaction. In the case at bar,
B.F. Goodrich was trying to minimize its loss because of the expiration of the Parity
Amendment. Besides, the 25 year lease was another consideration.
B.F. Goodrich declared the sale in its 1974 return submitted to the BIR Within
the prescriptive period, the BIR could have made the assessment because the declared fair
market value of said property was of public record.
That part of the sale transaction was actually a donation, did not erase the fact that
the income had already been reported. B.F. Goodrich already reported its income by filing
an income tax return. Even though a donor’s tax is different from capital gains tax, a tax
on the gain from the sale of the taxpayer’s property forming part of capital assets, the tax
return filed by B.F. Goodrich to report its income for the year 1974 was sufficient
compliance with the legal requirement to file a return.
The BIR’s oversight on the issue of prescription cannot prejudice the taxpayer.
REASON: The prescriptive period was precisely intended to give the taxpayers peace of
mind. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No.
104171, February 24, 1999)
37. Assessment and refund cases could not be consolidated. Reason:
Lifeblood doctrine. If there a pending assessment, refund should not be granted.
***38. 41 non-life insurance corporations organized and existing under the laws
of the Philippines organized a pool of machinery insurers for the purpose of entering
into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (Munich for brevity), a non-resident
foreign insurance corporation.
On April 14, 1976 the pool submitted a financial statement and filed an
“Information Return of Organization Exempt from Income Tax” for the year ending

22

1975, on the basis of which the pool was assessed deficiency corporate income tax of
P1.8 million and withholding tax in the amount of P1.7 million and P89 thousand
and to the pool on dividends paid to Munich and the pool members respectively.
The pool raises the following issues why they should not be subject to the
deficiency taxes:
1. They have not formed an unregistered partnership to be treated as a
corporation for tax purposes;
2. There would be double taxation if they would be made to pay the
deficiency taxes; and
3. The right of the government to collect has already prescribed.
Rule on the issues raised discussing each one of them.
SUGGESTED ANSWERS:
1. They have formed an association which should be taxable like a corporation.
The Tax Code has included under the term “corporation” partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997].
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court already held citing
Mertens that the term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on.
There is no question that the 41 non-life corporations entered into a Pool
Agreement or an association that would handle all the insurance businesses covered under
their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. This
unmistakably indicates a partnership or an association which is considered under the Tax
Code as a partnership or association treated like a corporation.
2. There is no double taxation which means taxing the same property twice when
it should be taxed only once. The Pool is a taxable entity separate and distinct from the
individual corporate entities of the Pool.
3. The prescriptive period was not suspended because it may be suspended only
“if the taxpayer informs the Commissioner of Internal Revenue of any change in the
address.” The fact that the Pool’s information return filed in 1980 indicated therein its
“present address” is not sufficient compliance with the legal requirement.
***NOTES AND COMMENTS: The Bar examination question may be with respect
to the income of an estate that has not been partitioned or to a case where there is coownership.
Certain business organizations do not fall under the category of
“corporations” under the Tax Code, and therefore not subject to tax as corporations.
They include:
1. General professional partnerships;
2. Joint venture or consortium formed for the purpose of undertaking
construction projects engaging in petroleum, coal, geothermal, and other energy
operations, pursuant to an operation or consortium agreement under a service contract
with the Government. [1st sentence, Sec. 22 (B), BIRC of 1997]
39. What is a payment order ?
SUGGESTED ANSWER: A payment order contains the particular kind of tax to
be paid and the corresponding TNC is issued to a taxpayer to be presented by him to the
bank when he pays his taxes. (Evangelista v. People of the Philippines, et al., G.R. Nos.
108135-36, prom. September 30, 1999)
*** 40. Agustin died in December, 1999 leaving to his two sons, Fernando and
Jose, an apartment building. After the settlement of Agustin’s estate, his two sons
decided not to partition the apartment building and just divided the rentals among
themselves for the year 2000.
a. Was a partnership formed which is subject to corporate income taxes for
the year 2000 ? Reason out your answer.
b. If, instead of dividing the rentals in 2000, the brothers invested the same
in the purchase of a house to be rented out. How shall the income from the rentals
of the house be treated for tax purposes ? Explain briefly. Would your answer be

23

different if the house was not purchased for the purpose of renting out the same but
was later sold ? Explain briefly.
SUGGESTED ANSWERS:
a. No. Co-heirs who own inherited properties which produce income should not
automatically be considered as partners of an unregistered corporation subject to income
tax for the following reasons:
1. the sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest
in any property from which the returns are derived. There must be an
unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 436)
2. There is no contribution or investment of additional capital to increase
or expand the inherited properties, merely continuing the dedication of the
property to the use to which it had been put by their forebears. (Ibid.)
3. Persons who contribute property or funds to a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective contribution, are
not thereby rendered partners. They have no common stock capital, and no
community of interest as principal proprietors in the business itself from which the
proceeds were derived. (Elements of the Law of Partnership by Floyd R. Mechem,
2nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)
4. In order to constitute a partnership inter sese there must be: (a) an
intent to form the same; (b) generally participating in both profits and losses; (c)
and such a community of interest, as far as third persons are concerned as enables
each party to make a contract, manage the business, and dispose of the whole
property. (Municipality Paving Co. v. Herring, 150 O. 1067, 50 Ill. 470, Ibid.)
5. The common ownership of property does not itself create a partnership
between the owners, though they may use it for purpose of making gains, and they
may, without becoming partners, are among themselves as to the management and
use of such property and the application of the proceeds therefrom.. (Spurlock v,.
Wilson, 142 S.W. 363, 160 No. App. 14, Ibid.)
b. The income from the rental of the house shall be treated as the income of an
unregistered partnership to be taxable as a corporation because of the clear intention of
the brothers to join together in a venture for making money out of rentals.
The answer would be different because there was no intention to enter into a profit
making venture. They merely formed a co-ownership. This is evident from the following
authorities:
Where the plaintiff, his brother and, and another agreed to become owners of a
single tract of realty holding as tenants in common, and to divide the profits of disposing
of it, the brother and the other not being entitled to share in plaintiff’s commissions, no
partnership existed as between the three parties, whatever their relation may have been as
to third parties. (Magee v. Magee, 123 N.E. 673, 233 Mass. 341 cited in Pascual v.
Commissioner of Internal Revenue, 166 SCRA 560)
41. Liboro is a practicing lawyer who on 15 April 1995 filed his income tax
return for the year 1994. Upon examination, the BIR found his return deficient of
P14,009.84. On 30 September and 30 November 1995, Liboro was notified of his tax
deficiency. He responded with a protest letter dated 19 December 1995.
On 11 May 1996, the Commissioner of Internal Revenue denied Liboro’s
protest for lack of legal basis. He then seasonably filed a petition for review before
the Court of Tax Appeals. On 29 March 1998, the CTA rendered a decision
dismissing the appeal which Liboro received on 29 May 1998. Thus, he had until 13
June 1998 to file a petition for review before the Court of Appeals.
On 11 June 1998, instead of filing a petition for review with the Court of
Appeals, Liboro filed a Notice of Appeal with the Court of Appeals, and on 13 June
1998, a motion for an extension of thirty (30) days to file a petition for review before
the Court of Appeals.

24

May the Court of Appeals grant Liboro an extension of time to file the
petition for review?
SUGGESTED ANSWER: Yes. The prohibition against granting an extension of
time applies only in a case where ordinary appeal is required to perfect an appeal and
nothing more. However, it is different in a petition for review where the pleading is
required to be verified.
A petition for review, unlike an ordinary appeal, requires careful preparation and
research in order to put up a persuasive and formidable position. In other words, the
drafting of a petition for review entails more time and effort than merely filing a notice of
appeal. (Liboro v. Court of Appeals, et al., G.R. No. 101132 and Commissioner of Internal
Revenue v. Court of Appeals, et al., January 29, 1993)
NOTES AND COMMENTS:: Sec. 4, Rule 43 of the 1997 Rules of Civil
Procedure provides, “The appeal shall be taken within fifteen (15) days from notice of
the ... judgment.... Upon proper motion and the payment of the full amount of the docket
fee before the expiration of the reglementary period, the Court of Appeals may grant an
additional period of fifteen (15) days only within which to file the petition for review. No
further extension shall be granted except for the most compelling reason and in no case to
exceed fifteen (15) days.” (paraphrasing supplied)
*** 42. Is there a necessity for an administrative determination that a tax is due
before initiation of criminal prosecution for tax evasion ?
SUGGESTED ANSWER: No, because of the following reasons, which
distinguishes a criminal charge from an assessment:
a. Criminal charge need only be supported by a prima facie showing of failure to
file a required return WHILE the fact of failure to file a return need not be proven by an
assessment.
b. Before an assessment is issued, there is, by practice, a pre-assessment notice
sent to the taxpayer WHILE such is not so with a criminal charge. The charge is filed
directly with the Department of Justice.
c. A criminal complaint is instituted not to demand payment, but to penalize the
taxpayer for violation of the Tax Code WHILE the purpose of the issuance of an
assessment is to collect the tax. (Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation, et al., G.R. No. 128315, June 29, 1999)
NOTES AND COMMENTS: For Bar examination purposes take note of the
distinction between the Fortune Tobacco case (Commissioner of Internal Revenue v. Court
of Appeals, et al., G.R. No. 119322, June 4, 1996) on one hand with the above Pascor
case and that of Ungab v. Cusi, 97 SCRA 877 (1980), which allowed the tax evasion case
to proceed notwithstanding no showing of an administrative finding that a tax is due. In
Ungab, there was a prima facie attempt to evade taxes because of the taxpayer’s failure to
declare in his income tax return “his income derived from banana saplings,” WHILE in the
Fortune Tobacco case, the registered wholesale price of the goods, approved by the BIR is
presumed to be the actual wholesale price, therefore, not fraudulent and unless and until
the BIR has made a final determination of what is supposed to be the correct taxes, the
taxpayer should not be placed in the crucible of criminal prosecution
*** 43. What are the tax cases which may be the subject of a compromise
settlement with the BIR ?
SUGGESTED ANSWER: The following may be the subject matter of
compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest pending in the Regional Offices, Revenue
District Offices, Legal Service, Large Taxpayer Service (LTS), Enforcement Service (ES),
Excise Taxpayer Service (ETS) and Collection Service (CS);
c. Civil tax cases being disputed before the courts, e.g. CTA, CA, SC;
d. Collection cases filed in courts; and
e. Criminal violations, other than those already filed in court, or those involving
criminal tax fraud. (Sec. 2, Rev. Regs. No. 6-2000)
NOTES AND COMMENTS:
a. Tax cases which could not be the subject of compromise:

25

1)
2)
3)
4)
payments.

Withholding tax cases;
Criminal tax fraud cases;
Criminal violations already filed in court; and
Delinquent accounts with duly approved schedule of installment
(Sec. 2, Rev. Regs. No. 6-2000)

*** 44. On June 15, 1996, Mr. Grant O. Neal, paid his income tax for the year
1995. On March 15, 1998, he discovered that the BIR excessively collected from his
the amount of P75,000.00. Thus, on the same day he filed with the Commissioner of
Internal Revenue a written claim for refund. On August 15, 1998 he received the
Commissioner’s letter denying his claim for refund. On September 1, 1998, or
within thirty (30) days from receipt of the letter, he filed a petition for review with
the Court of Appeals for the refund of the P75,000.00. In conformance with the
material data rule, he alleged that Section 11 of Republic Act No. 1125, provides that
a taxpayer adversely affected by a ruling or decision of the Commissioner of Internal
Revenue may appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the adverse decision. Decide the case.
SUGGESTED ANSWER: The petition should be dismissed for having been filed
out of time. Sec. 229, NIRC of 1997 provides that court action for the recovery of internal
revenue tax should be filed within two (2) years from the date such tax was paid.
The petition should have been filed no later than June 16, 1998. There was as yet
no decision of the Commissioner to be appealed but this contention is bereft of merit, as it
would leave the taxpayer at the mercy of the BIR Commissioner without any positive and
expedient relief from the Court. It is disheartening enough to a taxpayer to be kept
waiting for an indefinite period for the ruling,. It would make matters more exasperating
for the taxpayer if the doors of justice would be closed for such a relief until after the
Commissioner, would have, at his personal convenience, given his go signal.
(Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, prom.
March 16, 1989, unrep.)
*** 45. Philippine Bank of Communications filed its quarterly income tax
returns for the first and second quarters of 1985, reporting profits and paid the total
income tax of P5 million. The taxes due were settled by applying the Bank’s tax
credit memos, and accordingly, the BIR issued the appropriate Tax Debit Memos.
Subsequently, the Bank suffered losses so that when it filed its Annual Income
Tax Returns for the year-ended December 31, 1985, it declared a net loss of P25
million, thereby showing no tax liability. For the succeeding year, ending December
31, 1986, it likewise reported a net loss of P14 million and thus declared no income
tax payable for the year.
During 1985 and 1986, the Bank earned rental income from leased properties
from where the lessees withheld and remitted to the BIR withholding creditable
taxes of P282 thousand for 1985, and P234 thousand for 1986.
On August 7, 1987, the Bank requested the Commissioner of Internal
Revenue, among others for a tax credit of P5 million representing the overpayment
of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, the
Bank filed a claim for refund of creditable taxes withheld by its lessees from
property rentals in 1985 and in 1986. Both the request and the claim were
seasonably filed within the ten (10) year period for filing claims of excess quarterly
income tax payments as provided for in RMC 7-85 issued by the then Actg. BIR
Commissioner.
On November 18, 1988 the Bank instituted a Petition for Review before the
Court of Tax Appeals. Would the petition prosper ?
SUGGESTED ANSWER: No. It was filed out of time and since the taxpayer
decided to avail of the tax credit it could not anymore seek a refund.
The two (2) year prescriptive period should be computed from the time of filing
the Adjustment Return and final payment of the tax for the year. (Philippine Bank of
Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January
28, 1999)

26

The claim for refund should be exercised within the time fixed by law. REASON:
The Bureau of Internal Revenue being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters. (Ibid.)
The issuance of RMC 7-85 changing the statutory prescriptive period of two (2)
years to ten (10) years on claims of excess quarterly income tax payments did not merely
interpret the law, rather it legislated guidelines contrary to the statute passed by Congress.
Revenue Memorandum Circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty it is to enforce
it, is entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Rules and regulations
issued by administrative officials to implement a law cannot go beyond the terms and
provisions of the latter. Further, fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or agents. (supra)
Finally, Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that
any excess of the total quarterly payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax liabilities
for the quarters of the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative and the choice of one precludes the other.
Since the Bank has chosen the tax credit approach it cannot anymore avail of the tax
refund.. (supra)
*** 46. On July 18, 1986, the BIR issued to Salud V. Hizon a deficiency income
tax assessment. Since the assessment was not contested, the BIR on January 12,
1989, served warrants of distraint and levy to collect the tax deficiency. For
unknown reasons, the BIR did not proceed to dispose of the attached properties.
On November 3, 1992, Salud wrote the BIR requesting a reconsideration of
her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied.
On January 1, 1997, the BIR filed with the RTC a case to collect the tax deficiency.
The complaint was signed by the Chief of the Legal Division of the Region and
verified by the Regional Director.
Salud now seeks the dismissal of the case on the following grounds:
a. The complaint was not filed upon authority of the BIR Commissioner as
required under Section 220 of the Tax Code;
b. The action has already prescribed. Resolve the issues raised.
SUGGESTED ANSWERS:
a. Revenue Administrative Order No. 10-95 specifically authorizes the Litigation
and Prosecution Section of the Legal Division of the regional district offices to institute
the necessary civil and criminal actions for tax collection. As the complaint filed in this
case was signed by the BIR’s Chief of Legal Division for the region and verified by the
Regional Director, there was, therefore, compliance with the law. Sec. 7 of the present
Tax Code authorizes the BIR Commissioner to delegate some of his powers.
b .Sec. 228 of the NIRC of 1997 mandates that a request for reconsideration must
be made within 30 days from the taxpayer’s receipt of the tax deficiency assessment,
otherwise the assessment becomes final, unappealable and, therefore demandable. The
notice was received by Salud on July 18, 1986 and she made her request for
reconsideration thereof only on November 3, 1992. Even assuming that she first learned
of the notice on the day the warrants were served on January 12, 1989, her request for
reconsideration was still filed beyond the 30 day period. Hence, her request for
reconsideration did not suspend the running of the prescriptive period. Although the
Commissioner acted on Salud’s request, eventually denying it on August 11, 1994, this is
of no moment and does not detract from the fact that the assessment had long become
demandable. (Republic of the Philippines, etc. v. Hizon, G.R. No. 1304, prom. December
13, 1999)
NOTES AND COMMENTS:
a. Effect of service of warrant of distraint or levy. The timely service of a
warrant of distraint or levy suspends the running of the period to collect the tax deficiency

27

in the sense that the disposition of the attached properties might well take time to
accomplish, extending even after the lapse of the statutory period for collections.
(Advertising Associates, Inc., v. Court of Appeals, 133 SCRA 765; Palanca v.
Commissioner of Internal Revenue, 114 Phil. 203). In those cases, the BIR did not file
any collection case but merely relied on the summary remedy of distraint and levy to
collect the tax deficiency.
Thus, the enforcement of tax collection through summary proceedings may be
carried out beyond the statutory period. (Republic of the Philippines, etc. v. Hizon, G.R.
No. 1304, prom. December 13, 1999) The statutory period for collection applies only
where a court suit is availed of for collection.
b. Form and Mode of Proceeding in Actions Arising under the Tax Code.
“Civil and criminal actions and proceedings instituted in behalf of the Government under
the authority of this Code or other law enforced by the Bureau of Internal Revenue shall
be brought in the name of the Government of the Philippines and shall be conducted by
legal officers of the Bureau of Internal Revenue but no civil or criminal action for the
recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code
shall be filed in court without the approval of the Commissioner." (Sec. 220, NIRC of
1997)
*** 47. After dissolution of Paramount on March 31, 1986, BPI acted as
liquidator. On May 30, 1985 Paramount paid P308,779.00 in income taxes for the
1st quarter; for the 2nd quarter, it paid P626,000.00 on August 29, 1985; for the 3 rd
quarter, it paid P284,161.00 on November 29, 1985.
On April 2, 1986, Paramount filed its corporate annual income tax return for
the calendar year ending December 31, 1985. All in all, Paramount paid the total
amount of P1,218,940.00 thereby showing a refundable amount of P65,259.00.
On April 14, 1988, BPI, as liquidator of Paramount, filed with the Court of
Tax Appeals a letter dated April 12, 1988 reiterating its claim for the refund of
P65,259.00 as overpaid income tax for calendar year 1985. On April 15, 1988, the
Paramount representative, filed with the Court of Tax Appeals a petition to toll the
running of the prescriptive period for filing a claim for refund of overpaid income
taxes.
The Court of Tax Appeals ruled that the two-year prescriptive period
commenced to run from April 15, 1986, the last day for filing the corporate income
tax return and granted the refund. Was the grant of the refund proper ?
SUGGESTED ANSWER: No. The two-year prescriptive period for actions for
refund of corporate income tax should be computed from the time of actual filing of the
Final Adjustment Return or Annual Income Tax Return. REASON: At That point, it can
already be determined whether there has been an overpayment made by the taxpayer.
Moreover, payment is made at the time the return is filed.
Since Paramount filed its corporate annual income tax return on April 2, 1986, it
had only two-years from date within which to file its written claim for refund. When it
filed a written claim for refund on April 14, 1988, and a petition for refund only on April
15, 1988, both claim and action for refund were thus barred by prescription.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 117254, January
21, 1999)
NOTES AND COMMENTS: For corporations, the two year prescriptive period
under Sec. 230 (now Sec. 229, NIRC of 1997), for instituting tax refund cases in court
commence to run only from the time the refund is ascertained, which can only be
determined after a final adjustment return is accomplished. Two years not jurisdictional
and may be suspended. ( Commissioner of Internal Revenue v. The Philippine Life
Insurance Co.,et al. G.R. No. 105208, May 29, 1995 reiterating the TMX case).
The two year period applies only to recovery of taxes or penalties NOT to tax
credits availment. Absent a specific provision in the Tax Code or special laws, the period
would be 10 years. (Justice Vitug, concurring in the above case )
A simultaneous filing of the application with the BIR for refund/credit and the
institution of the court suit with the CTA is allowed. No need to wait for a BIR denial.
REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997);

28

b. The doctrine that delay of the Commissioner in rendering decision does not
extend the peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for refund with the
Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for
filing suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in
protests of assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the
period (thirty days from receipt of decision) for appealing to the court, thus clearly
implying that the prior decision of the Commissioner is necessary to take cognizance of
the case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CAG.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue and Court
of Tax Appeals, 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)
If the protest is denied in whole or in part or n the instance where the
Commissioner of Internal Revenue does not act within one hundred eighty (180) days
from submission of documents, the taxpayer adversely affected 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) days, otherwise the decision shall become final, executory
and demandable. (last par., Sec. 228, NIRC of 1997)
48. Philippine Home Assurance Corporation paid documentary stamp taxes
on certain non-life insurance policies it issued. However, the premiums were not
paid. The company on basis the provisions of Section 77 of the Insurance Code to
the effect that, “Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless
and until the premium thereof has been paid xxx,” now claims for a refund of the
documentary stamps it paid because the policies never became effective. Should the
refund be granted ? Alternatively, could there be a refund of documentary stamp
tax payments ?
SUGGESTED ANSWER: No. Documentary stamp taxes are levied upon the
privilege, opportunity, or facility to execute certain instruments irrespective of whether
the contracts are subsequently declared to be rescissible, void, voidable or unenforceable.
The documentary stamp taxes are imposed on the mere issuance of the policies even if
these policies subsequently are considered as not valid or binding under the law.
(Philippine Home Assurance Corporation, et al., v. Court of Appeals, et al., G.R. No.
119446, prom. January 21, 1999)
49. Should interest be paid where a tax is refunded by the Government to a
taxpayer ?
SUGGESTED ANSWER: The rule is that no interest on refund of tax can be
awarded unless authorized by law or the collection of the tax was attended by
arbitrariness. An action is not arbitrary when exercised honestly and upon due
consideration where there is room for two opinions, however much it may be believed that
an erroneous conclusion was reached. Arbitrariness presupposes inexcusable or obstinate
disregard of legal provisions. (Philex Mining Corporation v. Commissioner of Internal
Revenue, et al., G.R. No. 120324, prom. April 21, 1999)
50. What is the nature of a tax amnesty ?
SUGGESTED ANSWER: A tax amnesty is a general pardon to taxpayers who
want to start a clean slate. It also gives the government a chance to collect uncollected
tax from tax evaders without having to go through the tedious process of a tax case. To
avail of a tax amnesty granted by the government, and to be immune from suit on its
delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income
and must have paid the corresponding tax on such previously untaxed income.
A tax amnesty, much like a tax exemption, is never favored nor presumed in law
and if granted by statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.
(Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, prom. February 10, 2000)

NATIONAL INTERNAL REVENUE CODE

29

THE BUREAU OF INTERNAL REVENUE
51. An internal revenue officer, having been reliably informed by an
unimpeachable source, that cigars, jewelries, liquor and other articles subject to
excise taxes are kept in the house of Mr. Tomas, entered said house, seized the
articles and arrested Mr. Tomas on the strength of a warrant signed by the
Commissioner of Internal Revenue.
a. Mr. Tomas denounced the search, seizure and his arrest as violative of the
constitution because it was effected without a search warrant and warrant of arrest
issued by the appropriate court. Under the circumstances, is the actuation of the
internal revenue officer sanctioned by law? Why?
b. Would your answer be the same if the search, seizure and arrest was
effected by customs officers by virtue of a warrant of seizure and detention signed
by the collector of customs? Explain.

SUGGESTED ANSWER:
a. Yes. Any internal revenue officer in the discharge of his official duties may enter
any house, building or place where articles subject to excise taxes are produced or kept, or
are believed by him upon reasonable grounds to be produced or kept so far as may be
necessary to examine, discover or seize the same. (1st par., Sec. 171, NIRC of 1997)
Internal revenue officers shall have authority to make arrests and seizures for
violation of any penal law or regulation administered by the Bureau of Internal Revenue.
Any person so arrested shall forthwith be brought before a court, there to be dealt with
according to law. (Sec. 13, NIRC of 1997)
No search warrant or warrant of arrest is required under the doctrine of primary
jurisdiction which posits that in technical matters where the administrative bodies have
obtained expertise, the courts will defer. This is likewise premised on the lifeblood theory
which mandates the immediate collection of taxes to ensure the continued existence of the
State.
b. My answer would be different because customs authorities may search a
dwelling place only upon a warrant issued by a Judge of the appropriate court upon sworn
application showing probable cause and particularly describing the place to be searched
and person or thing to be seized. (Sec. 2208, 2209, Tariff & Customs Code). The customs
authorities could detain persons only if they are coming to the Philippines from foreign
countries (Sec. 2212, Ibid.) not in the above entitled problem where they are already in the
Philippines.
52. Explain the rule making power of BIR.
SUGGESTED ANSWER:
a. There are two kinds of rulings the BIR may issue - interpretative rulings and
legislative rulings.
Interpretative rules are designed to provide guidelines to the law which the
administrative agency is in charge of enforcing. No notice, hearing or publication is
required, as they are issued merely for the guidance of administrative officers. Illustration:
Revenue Memorandum Circular No. 47-91 classifying copra as an agricultural non-food
item declaring it exempt from VAT only if the sale is made by the primary producer.
(Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,
et al., 238 SCRA 63 [1994].
Legislative rules are in the nature of subordinate legislation, designed to implement
a primary legislation by providing the details thereof. They are issued under the quasilegislative authority of the BIR Commissioner. There is a requirement for notice, hearing
and publication. Illustration: Revenue Memorandum Circular No. 37-93 which placed
Hope Luxury, Premium More and Champion cigarettes within the scope of the
amendatory law R.A. No. 7654 and subjected them to the increased tax rate requires
notice, hearing and publication. (Commissioner of Internal Revenue v. Court of Appeals,
et al., 261 SCRA 236)
NOTES AND COMMENTS:
The rulings and circulars promulgated by the Commissioner do not have
retroactive application if the revocation, modification, or reversal would be prejudicial to

30

the taxpayers. (Sec. 246, NIRC of 1997; Commissioner of Internal Revenue v. Court of
Appeals, et al., 267 SCRA 557)
Exceptions: Instances when revenue rulings and regulations have retroactive effect
even if prejudicial to the taxpayer:
a. Where the taxpayer deliberately misstates or omits material facts from his return
or in any document required of him by the BIR;
b. Where the facts subsequently gathered by the BIR are materially different from
the facts on which the ruling is based, or
c. Where the taxpayer acted in bad faith. (Sec. 246, NIRC of 1997)
53. In what instances may the Bureau of Internal Revenue suspend or
temporarily close the business establishment of a taxpayer ? How long does the
suspension last ?
SUGGESTED ANSWER: The Commissioner or his authorized representative is
empowered to suspend the business operations and temporarily close the business
establishment of any person for any of the following violations”
a. In case of a VAT-registered person:
1) Failure to issue receipts or invoices;
2) Failure to file a VAT return as required under the Tax Code;
3) Understatement of taxable sales or receipts by 30% or more of his
correct taxable sales or receipts for the taxable quarter.
b. Failure to register under the VAT provisions of the Tax Code. The temporary
closure of the establishment shall for the duration of not less than five (5) days and shall be
lifted only upon compliance with whatever requirements prescribed by the Commissioner
in the closure order.
(Atlas Consolidated Mining & Development Corporation v.
Commissioner of Internal Revenue, G.R. No. 134467, prom. November 17, 1999)
*** 54. The Commissioner of Internal Revenue is authorized under the Tax Code
to delegate the powers vested in him under the pertinent provisions of the Tax Code
to any subordinate official with the rank equivalent to a division chief or higher.
What are the exceptions to this rule on delegation or alternatively speaking,
what are the powers of the Commissioner that he could not delegate ?
SUGGESTED ANSWER: The following are some of the powers that he could
not delegate:
a. The power to recommend the rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or to reverse, revoke, or modify
any existing ruling of the Bureau;
c. The power to compromise or abate, any tax deficiency, Provided, however, that
assessments issued by the Regional Offices involving basic deficiency taxes of
P500,000.00 or less, and minor criminal violations as may be determined by rules and
regulations to be promulgated by the Secretary of Finance, upon the recommendation of
the Commissioner, discovered by regional and district officials, may be compromised by a
regional evaluation board which shall be composed of the Regional Director as Chairman,
the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions
and the Revenue District Officer having jurisdiction over the taxpayer, as members; and
d. The power to assign or reassign internal revenue officers to establishments
where articles subject to excise tax are produced or kept. (Sec. 7, NIRC of 1997 cited in
Republic of the Philippines, etc. v. Hizon, G.R. No. 130430, prom. December 13, 1999)

INCOME TAXATION
*** 55. Define income in income tax law.
“An amount of money coming to a person within a specified time, whether as
payment for services, interest, or profit from investment.” It means cash or its equivalent.
It is gain derived and severed from capital, from labor or from both combined. For
example, to tax a stock dividend would be to tax a capital increase rather than the income.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January
20, 1999)
NOTES AND COMMENTS: Income distinguished from capital:

31

a. Capital is wealth or fund, WHILE income is profit or gain from the flow of
wealth. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576,
January 20, 1999)
Capital is a fund of property existing at an instant of time WHILE income is that
flow of services rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a period of time.
b. Capital is wealth WHILE income is the service of wealth; and
c. Capital is the tree WHILE income is the fruit. (Madrigal v. Rafferty, 38 Phil.
414)
Realization is determinative of earning process resulting to income. Without
realization, there is no income.
The determining factor for the imposition of income tax is whether any gain or
profit was derived from the transaction. In the metaphor of Eisner v. Macomber, 252 U.S.
426, income is not deemed “realized” until the fruit has fallen
*** 56. What are the general principles of income taxation in the Philippines ?
a. A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.
b. A nonresident citizen is taxable only on income derived from sources within the
Philippines.
c. An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income from sources within
the Philippines, Provided, That a seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade shall be treated as an overseas contact
worker.
d. An alien individual, whether a resident or not of the Philippines, is taxable only
on income derived from sources within the Philippines.
e. A domestic corporation is taxable on all income derived from sources within
and without the Philippines.
f. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines. (Sec.
23, NIRC of 1997)
57. Are stock dividends subject to income taxation ?
SUGGESTED ANSWER: Stock dividends are unrealized gain and cannot be
subject to income tax until the gains have been realized.
Stock dividends represent capital and do not constitute income to its recipient.
The mere issuance thereof is not subject to income tax as they are nothing but an
“enrichment through increase in value of capital investment.”
As capital, stock dividends postpone the realization of profits because the “fund
represented by the new stock has been transferred from surplus to capital and no longer
available for actual distribution.”
Before realization, stock dividends are nothing but a representation of an interest
in the corporate properties. As capital, it is not yet subject to income tax. (Commissioner
of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
58. What is meant by redemption of shares of stock ?
SUGGESTED ANSWER: Redemption is repurchase, a reacquisition of stock by a
corporation which issued the stock in exchange for property, whether or not the acquired
stock is cancelled, retired or held in treasury.
Essentially, the corporation gets back some of its stock, distributes cash or
property to the shareholder in payment for the stock, and continues in business as before.
The redemption of stock dividends previously issued is used as a veil for the constructive
distribution of cash dividends. (Commissioner of Internal Revenue v. Court of Appeals, et
al., G.R. No. 108576, January 20, 1999)
NOTES AND COMMENT: Taxability of redemption by issuing corporation of
shares of stock. It is suggested that the Bar reviewee ignores the concepts of taxability of
redemption of shares is stock by the issuing corporation as discussed in Commissioner of

32

Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999 (the
ANSCOR case), where the present provisions of the Tax Code on transaction tax [Sec.
127 (A), NIRC of 1997], and capital gains tax find application. The only concepts that
should be retained is the definition of redemption, and the applicability of the ANSCOR
case concept of redemption where the shares of stock that are redeemed are ordinary
assets. The tax treatment of redemption of shares of stock, under the present provisions of
the Tax Code shall be discussed below.
Tax treatment of redemption by issuing corporation of shares of stock under
the present provisions of the Tax Code, not under the former provisions of the Tax
Code as interpreted in the ANSCOR case. The tax treatment would be dependent upon
the following factors:
a. The nature of the shares of stock being disposed of, whether the shares are
capital assets or ordinary assets;
b. Whether or not the shares of stock are listed and traded and listed in the stock
exchange.
Taxability of sales, barter or exchange of shares of stocks:
a. Shares of stock are capital assets and not listed and traded in the stock
exchange. Where the shares of stock are capital assets because the seller is not engaged
in the business of buying and selling shares of stock (a dealer in securities), and not listed
and traded in the stock exchange, the sale is subject to a 5% tax on net capital gain not
over P100,000.00 while the net capital gain over P100,000.00 is subject to a tax of 10%.
Note that the holding period is not applied. The capital gains tax is an income tax because
the tax falls under title II of the Tax Code, entitled, “Income Tax”
b. Shares of stock whether capital or ordinary assets but are listed and
traded in the stock exchange are subject to the transaction tax of ½ of 1% of the gross
selling or transaction price. The holding period is not applied and the transaction tax is in
lieu of all income taxes that may be collected.
c. Shares of stock ordinary assets but not listed and traded in the stock
exchange. If the shares of stock are ordinary assets because the seller is engaged in the
business of buying and selling shares of stock (dealer in securities), the transaction shall be
subject to inclusion in the income tax return depending on certain circumstances. See
discussion on tax treatment of redemption of shares of sock where the shares that are
redeemed are ordinary assets and not listed and traded in the stock exchange.
Tax treatment of redemption of shares of stock where the shares that are
redeemed are ordinary assets and not listed and traded in the stock exchange.
Whether the transaction is to be subject to income taxation or not would be
dependent upon the nature and character of the shares of stock that are the subject of
redemption.
If the source is the original capital subscriptions upon the establishment of the
corporation or from initial capital investment in an existing enterprise, the redemption to
the concurrent value of acquisition is not subject to income taxation, as it is not income
but a mere return of capital.
On the contrary, if the redeemed shares are from stock dividend declarations other
than as initial capital investment, the proceeds of the redemption is additional wealth, for it
is not merely a return of capital but a gain therefrom.
The test for taxability therefor, as would make the redemption “essentially
equivalent to the distribution of a taxable dividend,” is whether the redemption resulted
into a flow of wealth. If no wealth is realized from the redemption, there may not be a
dividend equivalence treatment. (Commissioner of Internal Revenue v. Court of Appeals,
et al., G.R. No. 108576, January 20, 1999)
*** 59. What are improperly accumulated earnings ?
SUGGESTED ANSWER: These are the earnings or profits of a corporation
which are permitted to accumulate instead of being divided by a corporation to its
shareholders for the purpose of avoiding the income tax with respect to its shareholders or
the shareholders of another corporation. If the income were divided and distributed, they
would have been taxed as dividends.
NOTES AND COMMENTS:

33

a. Improperly accumulated earnings tax. In addition to other income taxes,
there is imposed for each taxable year on the improperly accumulated taxable income of
each corporation, an improperly accumulated earnings tax equal to ten percent of the
improperly accumulated taxable income. [Sec. 29 (A), NIRC of 1997]
b. Corporations liable for the improperly accumulated earnings tax. Every
corporation formed or availed for the purpose of avoiding income tax with respect to its
shareholders or the shareholders of another corporation, by permitting earnings and profits
to accumulate instead of being divided or distributed. [Sec. 29 (B) (1), NIRC of 1997]
*** c. Corporations exempt from the improperly accumulated earnings tax:
1) Publicly-held corporations;
2) Banks and other nonbank financial intermediaries; and
3) Insurance companies. [Sec. 29 (B) (2), NIRC of 1997]
d. Evidence determinative of purpose to avoid tax upon shareholders. The
fact that the earnings or profits of a corporation are permitted to accumulated beyond the
reasonable needs of the business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary. [Sec. 29 (C) (2), NIRC of 1997]
Reasonable needs of business includes the reasonably anticipated needs of the
business. [Sec. 29 (E), NIRC of 1997]
In order to determine whether profits are accumulated for the reasonable needs of
the business to avoid the surtax upon shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of the accumulation, not intentions
declared subsequently, which are mere afterthoughts. Furthermore, the accumulated
profits must be used within a reasonable time after the close of the taxable year.
(Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R. No. 108067, prom. January
20, 2000)
*** e. Tests to determine justified accumulation not subject to tax.
1) Immediacy Test. “Reasonable needs of the business” means the
immediate needs of the business, and it was generally held that if the corporation
did not prove an immediate need for the accumulation of the earnings and profits,
the accumulation was not for the reasonable needs of the business and the penalty
tax would apply. (Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R. No.
108067, prom. January 20, 2000 citing Manila Wine Merchants, Inc. v.
Commissioner of Internal Revenue in turn citing Mertens)
2) “2 to 1” Rule. The ratio of current assets to current liabilities and the
adoption of the industry standard. The ratio of current assets to current liabilities
is used to determine the sufficiency of working capital. Ideally, the working capital
should equal the current liabilities and there must be 2 units of current assets for
every unit of current liability, hence the so-called “2 to 1” Rule. (Ibid.)
3) “Bardahl” Formula. Allows retention as working capital reserve,
sufficient amounts of liquid assets to carry the company through one operating
cycle. The formula requires an examination of whether the taxpayer has sufficient
liquid assets to pay all its current liabilities and any extraordinary expenses
reasonably anticipated, plus enough to operate the business during one operating
cycle.
Operating cycle is the period of time it takes to convert cash into raw
materials, raw materials into inventory, and inventory into sales, including the time
it takes to collect payment for the sales. There are variations in the application of
the “Bardahl” formula, such as average operating cycle or peak oiperating cycle.
In times when there is no recurrence of a business cycle, the working capital needs
cannnot be predicted with accuracy.
Although the “Bardahl” formula is well-established and routinely applied by
the courts, it is not a precise rule. It is used only for administrative convenience.
(Ibid.)
60. What is meant by the accrual method of accounting ?
SUGGESTED ANSWER: Income is reportable when all the events have occurred
that fix the taxpayer’s right to receive the income, and the amount can be determined with

34

reasonable accuracy. Thus it is the right to receive income, and not the actual receipt, that
determines when to include the amount in gross income.
Consequently, the following are the requisites:
1) That the right to receive the income must be valid, unconditional and
enforceable, i.e. not contingent upon future time;
2) The amount must be reasonably susceptible of accurate estimate; and
3) There must be a reasonable expectation that the amount will be paid in due
course. (Filipinas Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 &
124377, prom. October 12, 1999)
NOTES AND COMMENTS:
a. The two (2) principal accounting methods for recognition of income are the
1) accrual method; and the (2) cash method.
Under the cash method income is to be construed as income for tax purposes only
upon actual receipt of the cash payment. It is also referred to as the “cash receipts and
disbursements method” because both the receipt and disbursements are considered. Thus,
income is recognized only upon actual receipt of the cash payment but no deductions are
allowed from the cash income unless actually disbursed through an actual payment in cash.
Example of the two methods. Leon the owner of a building leased the same to
Miguel.for P50,000.00 monthly, payable every 1st day of the month. If Leon uses the
accrual method of income recognition, he would have an income of P50,000.00 on the 1 st
day of each month irrespective of whether he receives the rent from Miguel. On the other
hand, if Leon uses the cash method, he would have income only when he physically
receives the cash from Miguel.
b. Other methods of accounting:
1) Completion of Contract basis. Under this method, gross income is to
be reported in the taxable year in which the contract is fully completed and
accepted by the contractee if the taxpayer elected it as a consistent practice to treat
such income, provided that such method clearly reflects the net income. This
method is applicable to contractors in the construction of building, installation of
equipment and other fixed assets, or other construction work covering a period in
excess of one year. This is not recognized under the NIRC of 1997.
2) Percentage of completion basis.
3) Installment basis which is a method considered when collections
extend over relatively long periods of time and there is a strong possibility that full
collection will not be made. As customers make installment payments, the seller
recognizes the gross profit on sale in proportion to the cash collected. (Chapter II,
Accounting Methods, Handbook on Audit Procedures and Techniques – Volume I,
Revision 2000, pp. 3-4)
61. What is a fringe benefits tax ?
SUGGESTED ANSWER: A final withholding tax imposed on the grossed-up
monetary value of fringe benefits furnished, granted or paid by the employer to the
employee, except rank and file employees. (1st par., Sec. 2.33 [A], Rev. Regs. No. 3-98)
62. What are considered as fringe benefits for purposes of taxation ?
SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any
good, service, or other benefit furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees), such as but not limited to:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his dependents; and

35

j. Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 st par., Sec. 2.33
(B), Rev. Regs. No. 3-98]
*** 63. What are the kinds of fringe benefits that are not subject to the fringe
benefits tax ?
SUGGESTED ANSWER:
a. When the fringe benefit is required by the nature of, or necessary to the trade,
business or profession of the employer; or
b. When the fringe benefit is for the convenience or advantage of the employer.
[Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c. Fringe benefits which are authorized and exempted from income tax under the
Tax Code or under any special law;
d. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
e. Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
f. De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue.
[1st par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]
*** 64. What are de minimis benefits ?
SUGGESTED ANSWER: Facilities and privileges (such as entertainment, medical
services, or so-called “courtesy discounts” on purchases), furnished or offered by an
employer to his employees. They are not considered as compensation subject to income
tax and consequently to withholding tax, if such facilities are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or efficiency
of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 82000]
*** 65. What are considered as de minimis benefits not subject to withholding
tax on compensation income of both managerial and rank and file employees ?
SUGGESTED ANSWER: The following shall be considered as de minimis
benefits not subject to withholding tax on compensation income of both managerial and
rank and file employees:
a. Monetized unused vacation leave credits of employees not exceeding ten (10)
days during the year;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
c. Rice subsidiy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting
to not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible persona property other than cash or
gift certificate, with an annual monetary value not exceeding P10,000.00 received by an
employee under an established written plan which does not discriminate in favor of highly
paid employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
i. Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and
j. Daily meal allowance for overtime work not exceeding twenty five percent
(25%) of the basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein prescribed
shall not be considered in determining the P30,000 ceiling of “other benefits” provided
under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the
ceiling prescribed by these regulations, the excess shall be taxable to the employee

36

receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided,
further, that any amount given by the employer as benefits to its employees, whether
classified as de minimis benefits or fringe benefits, shall constitute as deductible expense
upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No.
8-2000]
NOTES AND COMMENTS: The above provision of Rev. Regs. No. 8-2000
likewise modified Sec. 2.33 (C), Rev. Regs. No. 3-98, which enumerates the de minimis
benefits exempt from fringe benefits taxes.
*** 66. The following were the events and transactions of Rosalinda, a resident
alien, in 2000:
a. Received P7.0 million as commissions for being the agent of actor Mikey
and actress Meggy;
b. Received P2.0 million as blackmail money for not exposing the
indiscretions of movie actress Alma;
c. Sold her residential condominium at Ayala Avenue for P30 million. She
bought the same in 1997 for only P10 million;
d. Made a “killing” at the stock market when she sold for P5.0 million
Primus, Inc. shares which were not traded in the stock exchange. She bought the
shares in 1985 for only P500,000.00;
e. During her birthday, Mrs. Water Lily, the famous producer gave her a ten
carat diamond ring worth P750,000.00;
f. Received P360,000.00 annual salary as P.R.O. of Regal Productions;
g. Awarded P1.5 million damages from the libel suit she filed against actress
Natalia;
h. Was sent by Regal Productions to Hollywood, U.S.A. to observe movie
making at various studios. She traveled at Regal ’s expense through First Class
Airfare, and Regal spent US$500.00 a day for her hotel and accommodations which
were all reimbursed to Rosalinda;
i. Received P750,000.00 from Regal Productions as separation pay when
she was terminated as the result of her involvement in a well publicized scandal;
j. Upon nomination of her friend, Rosalinda was awarded the best P.R.O. of
the year with the accompanying trophy worth P50,000.00 and cash price of
P100,000. She was required to deliver at least 12 lectures before P.R.O.s;
k. Won a brand new Mercedes Benz C600Z worth P6,500,000.00 during a
raffle conducted by a well-known supermarket;
l. P250,000.00 proceeds of a bouncing check she issued to her friend Ms. Cris
Ty, who instituted a criminal case for violation of B.P. Blg. 22; and
m. P500,000.00 which constituted the sales proceeds of the jewelry she stole
from movie producer, Aling Pepa.
1) What items are to be included as part of Rosalinda’'s compensation
income, or income from self-employment? Explain.
2) Why were the items you excluded not includible as part of Rosalinda’s
compensation income or income from self-employment? Explain.

SUGGESTED ANSWER:

a. The following are the items to be included as part of Rosalinda’s compensation
income because they were derived from employer-employee relationship from Regal
Productions:
1.) The P360,000.00 annual salary as P.R.O. of Regal Productions.
2.) The cost of the First Class Airfare Ticket exceeding the cost of a
business class ticket for the travel to Hollywood in pursuit by Rosalinda of Regal's trade
and business is includible as part of Rosalinda’s compensation income. (No. 3, 3.1,
Revenue Audit Memorandum No. 1-87).
3.) The amount reimbursed to Rosalinda for meals and lodging during her
stay in the U.S.A. exceeding U.S.$150.00 per day or in the problem U.S.$350.00 per day
forms part of Rosalinda’s compensation income. (No. 3, 3.2, Ibid.)
The following are the items to be included as part of Rosalinda’s income from selfemployment engaged in the business of being an agent for actors and actresses:

37

1) The P7.0 million commissions for being the agent of actor Mikey and
actress Meggy;
2) The P2.0 million blackmail money is considered as other income coming
from sources other than those mentioned in Sec. 3(A) of Revenue Regulation No. 2-93 as
well as income from whatever source derived. (Section 32 [A], NIRC of 1997) The same
is true with the P250,000.00 proceeds of the bouncing check and the P500,000.00 sales
proceeds of the jewelry she stole. Thus, all incomes, illegal or legal, are included. For
Philippine tax purposes all income not expressly excluded or exempted from the class of
taxable income, irrespective of the voluntary or involuntary action of the taxpayer in
producing the income are subject to income taxation.
NOTES AND COMMENTS: The rule is different in the United States. In
Commissioner of Internal Revenue v. Wilcox, 286 U.S. 417, the U.S. Supreme Court held
that a swindler, embezzler, thief or robber has an unqualified duty and obligation to return
the money. to collect a tax would give the government an unjustified preference as to the
part of the money which rightfully belongs to the victim.
In U.S. v. Lozia, 104, 104 F. Supp. (D.C.J.D.N.Y. 1952), it was held that the
money or other proceeds of the sale or other disposition of stolen property is subject to
income tax because the felon has an obligation to return the property taken. The proceeds
were not the property taken. The proceeds may not even be the equivalent of the property
taken.
3) P1.5 million damages, because they are not compensation arising from
under Sec. 32 (B) [4] of the NIRC of 1997. These are not damages which arose from
personal injuries, hence subject to income tax.
4) The P50,000.00 prize as Best P.R.O. While it is true that Rosalinda
was selected without any action on her part to enter the contest or proceeding, she is
required to deliver 15 lectures, which is considered as substantial future services as a
condition to receiving the prize. (Sec. 32 [B] {7} (c) {ii} of the NIRC of 1997)
b. The following are the excluded items and reasons for their exclusion:
1) P30 million proceeds from the sale of her residential condominium
because the same is subject to final taxes in the form presumed capital gains taxes from the
sale of real property under Sec. 24 (D) of the NIRC of 1997).
2) The gains from the sale of Primus shares because the gains are subject
to final taxes for the capital gains from sales of stock not traded in the stock exchange
under Sec. 24 (C) of the NIRC of 1997.
3) The P750,000.00 diamond ring because it is a gift excluded from gross
income (Sec. 32 [B] {3} of the NIRC of 1997) It is subject to gift taxes under Sec. 98 of
the NIRC of 1997. The giving of the gift was a pure act of liberality and not in
consideration of any service.
4) P750,000.00 separation pay as Rosalinda’s services were terminated for
a cause beyond her control in accordance with Sec. 32 (B) [6] {b} of the NIRC of 1997,
hence excluded from gross income.
5) The P6,500,000.00 value of the Mercedes Benz she won because it is
subject to a final tax of 20% on passive income under the provisions of Sec. 24 (B) [1] of
the NIRC of 1997.
67. In 1998, Mang Joe Liby after thirty (30) years experience as a mechanic
for Mercedes Benz decided to establish his own auto repair shop with two of his
former supervisors as his partners. For the year 2000, the auto repair shop incurred
the following:
a. Advertising expenses;
b. Donations to the Samahang Rizalista, a non-profit, non-stock religious
corporation which venerates as its God, the hero Jose Rizal;
c. Taxes paid on the importation of auto repair equipment;
d. Losses when the auto repair shop was burned;
e. Insurance premiums on the life of Mang Joe Liby payable to the
partnership;
f. Salaries of mechanics.

38

Mang Joe and his partners now asks you how their partnership income shall
be taxed in the light of the provisions of the NIRC of 1997. What advise shall you
give?

SUGGESTED ANSWER:
Mang Joe and his partners shall be taxed like a corporation. As defined under
Sec. 22 (B), of the NIRC of 1997, a corporation includes partnerships no matter how
created or organized, but does not include general professional partnership. Since what
was formed by Mang Joe and his partners was a business partnership, they should be
considered as having formed a corporation for tax purposes.
Since the partnership was organized and existing under Philippine law, its taxable
income shall be subject to the reduced rate of 32% on taxable income effective January 1,
2000. (Sec. 27 [A], NIRC of 1997) To arrive at its taxable income, the partnership is
allowed to use the allowed itemized deduction under Sec. 34 also of the NIRC of 1997.
All of the above expenses, except the insurance premium are all deductible.
The partnership shall not be subject to the minimum corporate income tax on
domestic corporations, because it is only on its second taxable year immediately following
the commencement of its business operations. The minimum corporate income tax is
computed only beginning the fourth taxable year immediately following the year the
taxpayer corporation commenced business. (Sec. 27 [E] {1}, NIRC of 1997)
Should the partnership distribute its net income after tax to Mang Joe and his
partnerships, their individual shares in the distribution shall be subject to tax on dividends.
(Sec. 24 [B] {2}, NIRC of 1997)
68. After ten (10) years experience working as the General Manager of a
fastfood chain, Wendy decided to become self employed and opened an eatery which
she called “McWendy’s Pizza.” She registered the eatery as a single proprietorship.
In 2000, Wendy had the following income items:
a. Gross receipts from operation of “McWendy’s Pizza” amounting to P5
million.
b. Proceeds from the sale of her house and lot amounting to P3 million which
she invested in “McWendy’s Pizza”.
c. Cash prize of P15,000 which she won in a singing contest.
d. Cash dividends of P35,000.00 which she received from MERALCO, a
domestic corporation.
e. Life insurance proceeds which she received from the death of her pet dog
amounting to P15,000.00.
f. P25,000.00 cash prize for being the Best Pizza Parlor in Metro Manila.
The award was made by an independent body comprised of selected pizza parlor
operators which, without the knowledge of pizza parlor operators, went around
Metro Manila sampling the food, rating the facilities and personnel. There were no
entries to the contest as the winners were chosen by the independent body.
g. Two round trip tickets for the U.S.A. valued at U.S. $3,500.00 with U.S.
$5,000.00 pocket money won from the annual raffle of her depository bank.
h. P45,000.00 interest earned from her time deposit with a local bank.
I. P40,000.00 dowry from her prospective mother-in-law, an American living
in New York, U.S.A., as Wendy was getting married in 1999.
j. P50,000.00 net profit from the sale of Primus Corporation stocks which
were not traded at the Phil. Stock Exchange.
Upon the other hand, Wendy had the following disbursements:
a. P50,000.00 legal fees for the organization of “McWendy’s Pizza;”
b. P120,000.00 for radio and TV time to advertise “McWendy’s Pizza;”
c. P25,000.00 as contribution to the First Lady’s “Doctor for the Poor”
Programs;
d. P35,000.00 worth of food which Wendy personally distributed to families
displaced by lahar in Pampanga, a calamity-stricken area declared by the President;
e. P10,000.00 donation to her alma mater, the University of the Philippines;
f. P150,000.00 value of spoiled food resulting from a brown-out;
g. P25,000.00 customs duties and value added taxes on the importation of
food heaters;

39

h. P12,000.00 paid to the independent CPA who audited McWendy’s Books
of Accounts;
I. P35,000.00 medical expenses for one of her waiters who was injured in a
job related accident;
j. P85,000.00 paid as interest to her sister who lent her P500,000.00 as part of
the initial capitalization for McWendy’s;
k. P35,000.00 interest payments for the car Wendy bought on installment
basis which car was bought from a car company but financed by CITYTRUST, a
bank authorized to operate by the Bangko Sentral ng Pilipinas; and
l. P150,000.00 which Wendy spent in observing trends in the fastfood
business in the United States and Europe.
a. Which of the above income items should be reported by Wendy on her
2000 Income Tax Return? Explain.
b. Which of the above disbursements are properly deductible in computing
the taxable income of Wendy? Explain.

SUGGESTED ANSWER:
a. The following are the income items to be reported by Wendy in her 2000
income tax return:
1) P5 million gross receipts from operation of McWendy’s Pizza derived as
income from self-employment under sec. 1(12) Rev. Regs. No. 2-93.
2) P15,000.00 life insurance proceeds derived from the death of her dog.
The tax imposed on income from self-employment is imposed on income received from all
sources other than compensation income, certain passive incomes, capital gains from the
sales of shares of stock and capital gains from sales of real property (Sec. 3(A) Rev. Regs.
2-93) While the P15,000.00 is sourced from life insurance proceeds, the same is not
excluded under Sec. 32 (B) [1] of the NIRC of 1997 because the exclusion presupposes
life insurance proceeds from the death of a person and not of animals.
3) P25,000.00 cash prize as the Best Pizza Parlor because this is a prize
was not given primarily in recognition religious, charitable, scientific, educational, artistic,
literary or civic achievement but rather as part of business activity. It does not matter that
McWendy’s Pizza was selected without any action on its part to enter the contest or
proceeding and McWendy’s Pizza is not required to render substantial future services as a
condition to receiving the prize. (Sec. 32 (B) {7} (c), NIRC of 1997)
The following items are excluded from her income reportable in her income tax
returns:
1) P3 million proceeds from sale of house and lot as subject to capital
gains from sale of real property which is a final tax. (Sec. 24 [D], NIRC of 1997)
2) P35,000.00 dividends from MERALCO, a domestic corporation is
subject to a final tax on dividends under Sec. 24 (B) [2], NIRC of 1997.
3) P15,000.00 won in a singing contest as this is a prize exceeding
P10,000.00 subject to a final tax on passive income in accordance with Sec. 24 (B) [1],
NIRC of 1997.
4) Value of the tickets and pocket money won from the annual raffle of
Wendy’s Bank for the same reason as above.
5) P45,000.00 interest income for the same reason as above.
6) Net profit from sale of Primus shares as these are subject to final tax on
the sales of shares of stock not traded in the stock exchange under Sec. 24 (C) of the
NIRC of 1997.
7) P40,000.00 dowry because it is a gift. (Sec. 32 [B] {3}, NIRC of
1997)
b. Only the P50,000.00 donation to the University of the Philippines is allowed to
be deducted from Wendy’s income from self-employment to arrive at her taxable income.
This is so, because it is a donation to the government under Sec. 34 (H) [2] {a}, NIRC of
1997.
The government as used here refers to the Government of the Philippines or any of
its agencies or political subdivisions and includes among others state colleges and

40

universities. The University of the Philippines is a state university (Sec. 3(b)(f) Rev. Regs.
No. 2-93).
c. The P50,000.00 legal fees, the P120,000.00 advertising expenses for radio and
TV time; the P150,000.00 value of the spoiled food, the P25,000.00 taxes, the P12,000.00
audit fee, the P35,000.00 medical expenses and the P150,000.00 expenses to observe
trends in the fastfood business are deductible as ordinary and necessary expenses incurred
in connection with Wendy's trade and business.
The following are not deductible from her gross income:
1. P25,000.00 contribution to the “Doctor for the Poor Program” because it is a
contribution to a private organization and not to the government.
2. While it is true that the P35,000.00 worth of food was distributed to families in
a calamity stricken area declared by the President, the same was not donated to the
government or to a relief organization duly accredited as such by the Department of
Social Welfare and the Bureau of Internal Revenue.
3. The interest paid to her sister amounting to P85,000.00 because her sister is a
related party.
4. The P35,000.00 interest payments to CITYTRUST because there is no showing
in the problem that it has been paid or incurred in connection with the conduct of Wendy’s
business.
Since she is a resident, Wendy could, instead of availing of the itemized
deductions, choose to avail of the optional standard deduction of ten percent (10%) of
gross income.
69. What is considered as conclusive proof of serious business losses ?
SUGGESTED ANSWER: Financial statements audited by in dependent external
auditors constitute the normal method of proof of the profit and loss performance of a
company. A comparative statement of revenue and expenses for two years, by itself, is not
conclusive proof of serious business losses. (Bogo-Medellin Sugarcane Planters
Association, Inc. v. NLRC, et al., 296 SCRA 108, 121)
NOTES AND COMMENTS: The above definition was for a labor case. For tax
purposes, business losses have to be proven by more stringent rules than through mere
audited financial statements. The author believes that, there must be proof to support each
transaction which contributed to a major extent to the business losses.
70. What are bad debts ?
SUGGESTED ANSWER: Those debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from
money lent or from uncollectible amounts of income from goods sold or services rendered.
(Sec. 2.a, Rev. Regs. 5-99)
***71. Philippine Refining Company was assessed by the Bureau of Internal
Revenue deficiency taxes because of disallowances of “bad debts” expense. What
are the requirements before “bad debts” expense are allowed to be deductible ?
SUGGESTED ANSWER:
a. In general, the requisites for deductibility of bad debts are:
1) There must be an existing indebtedness due to the taxpayer which must
be valid and legally demandable;
2) The same must be connected with the taxpayer’s trade, business or
practice of profession;
3) The same must not be sustained in a transaction entered into between
related parties as enumerated under the Tax Code of 1997;
4) The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
5) The same must be actually ascertained to be worthless and uncollectible
as of the end of the taxable year. (Sec. 3, Rev. Regs. 5-99)
b. The following steps must be undertaken by the taxpayer to proved that it
exerted diligent efforts to collect the debts:
1) Sending of statements of accounts;

41

2) Sending of collection letters;
3) Giving the account to a lawyer for collection;
4) Filing a collection case in court. While it is not required to file suit, a
taxpayer is at least expected by the law to produce reasonable proof that the debts
are uncollectible although diligent efforts were exerted to collect the same. (Phil.
Refining Company, etc., v. Court of Appeals, 256 SCRA 667)
NOTES AND COMMENTS: Related parties.
a. Members of the same family. The family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants;
b. An individual and a corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
72. What is meant by the “tax benefit rule” ? Illustrate by example.
SUGGESTED ANSWER: The recovery of bad debts previously allowed as
deduction in the preceding year or years shall be included as part of the taxpayer’s gross
income in the year of such recovery to the extent of the income tax benefit of said
deduction.
For example: If in the year the taxpayer claimed deduction of bad debts writtenoff, he realized a reduction of the income tax due from him on account of the said
deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of
realized taxable income. Conversely, if the said taxpayer did not benefit from the
deduction of the said bad debt written-off because it did not result to any reduction of his
income tax in the year of such deduction (i.e. where the result of his business operation
was a net loss even without deduction of the bad debts written-off), then his subsequent
recovery thereof shall be treated as a mere recovery or a return of capital, hence, not
treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
73. What is meant by depreciation. What are the different methods of
depreciation allowed under the law ?
SUGGESTED ANSWER:
a. Depreciation is the gradual diminution in the useful value of tangible property
resulting from ordinary wear and tear and from normal obsolescence. The term is also
applied to amortization of the value of intangible assets the use of which in the trade or
business is definitely limited in duration.
b. The methods of depreciation are the following:
1) Straight line method;
2) Declining balance method;
3) Sum of years digits method; and
4) Any other method prescribed by the Secretary of Finance upon the
recommendation of the Commissioner of Internal Revenue:
a) Apportionment to units of production;
b) Hours of productive use;
c) Revaluation method; and
d) sinking fund method.
*** 74. What are ordinary and necessary expenses for tax purposes. What are
the requirements before business expenses may be deducted from gross income ?
SUGGESTED ANSWER:
a. Ordinary expenses are those which are common to incur in the trade or business
of the taxpayer WHILE capital expenditures are those incurred to improve assets and
benefits for more than one taxable year. Ordinary expenses are usually incurred during a

42

taxable year and benefits such taxable year. Necessary expenses are those which are
appropriate or helpful to the business.
b. The following are the requisites for deductibility of business expenses:
1) Compliance with the business test:
a) Must be ordinary and necessary;
b) Must be paid or incurred within the taxable year;
c) Must be paid or incurred in carrying on a trade or business.
d) Must not be bribes, kickbacks or other illegal expenditures
2) Compliance with the substantiation test. Proof by evidence or records
the deductions allowed by law including compliance with the business test.
75. In 2000, Mara, Inc., incurred P350,000.00 in order to promote the sale of
its line of ladies dresses which were specially designed and targetted the Valentine’s
day market for that year. It likewise incurred P500,000.00 to promote its image in
the local market and another P250,000.00 to promote the sale of its shares of stock
which it was offering to the general public for sale.
It asks your advice on how to treat these advertising expenses.
SUGGESTED ANSWER:
a. It should deduct the P350,000.00 from its 2000 gross income as ordinary and
necessary expenses because these are advertising expenses used to stimulate the current
sale of merchandise.
b. It should not deduct the P500,000.00 advertising expense from its 2000 gross
income as these are advertising expenses designed to stimulate the future sale of
merchandise. These are expenditures in order to create or maintain some form of goodwill
for Mara, Inc.’s trade or business. These expenditures are to be spread over a reasonable
period of time because they are considered that a capital asset which has a determinable
life has been acquired. (General Foods [Phils.], Inc. v. Commissioner of Internal Revenue,
CTA Case No. 4386, prom. February 8, 1994)
c. It should likewise spread the P250,000.00 over a reasonable period of time
because these are expenses incurred to create a favorable image for the corporation to
generate sales of its shares of stock. These constitute capital investment because the
particular advertising expense was incurred in relation to the capital asset or equity of the
company. (Atlas Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue, 102 SCRA 246)
** *76. Mikey Corporation issued preferred shares with the following condition:
“The holders of preferred shares shall be entitled to an annual 7% interest, and shall
likewise participate in the general distribution of dividends to common shares.” In
2000 Mikey Corporation paid P4 million to its preferred shareholders representing
the 7% interest. It seeks your advise whether it could deduct the said amount from
its gross income. What would your advice be ?
SUGGESTED ANSWER: It is not allowed to deduct said interests. Preferred
shares are considered capital regardless of the conditions under which such shares are
issued and dividends or “interests” paid thereon are not allowed as deductions from the
gross income of corporations. (Revenue Memorandum Circular No. 17-71)
*** 77. Jack, 45 years old with 10 years service with his employer, decided to
avail of the liberal early voluntary retirement program offered by his employer. The
program was part of the profit improvement program of the company. The positions
of those who would avail of the program would not be filled up once they are
vacated as a result of the voluntary early retirement. Are any amounts received by
Jack as a result of his availment of such program tax-free ? What should be done in
order to have his retirement pay be exempt from taxation ? Explain briefly.
SUGGESTED ANSWER: Any amount he shall receive shall be subject to tax,
considering that he is below 50 years of age and that his retirement is voluntary in
character.
For Jack to avail of the tax exemption his employer should “fire” him. Hence, any
amount he would be receiving would be as a consequence of his separation for a cause

43

beyond his control such as retrenchment. [1 st par., Sec. 2.78.1 (B) {1} {b}, Rev. Regs. No.
2-98]
NOTES AND COMMENTS:
*** a. Conditions for excluding retirement benefits from gross income:
1) Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with the employer’s reasonable private benefit plan
approved by the BIR.
2) Retiring official or employee
a) In the service of the same employer for at least ten (10) years;
b) Not less than fifty (50) years of age at time of retirement;
c) Availed of the benefit of exclusion only once. [Sec. 32 (B) {6}
{a}, NIRC of 1997]. The retiring official or employee should not have
previously availed of the privilege under the retirement plan of the same or
another employer. [1st par., Sec. 2.78 (B) {1}, Rev. Regs. No. 2-98]
*** b. Separation (retirement) pay excluded from gross income, hence taxexempt.
1) Any amount received by an official, employee or by his heirs,
2) From the employer
3) As a consequence of separation of such official or employee from the
service of the employer because of
a) Death, sickness or other physical disability; or
b) For any cause beyond the control of said official or employee
[Sec. 32 (B) {6} {b}, NIRC of 1997], such as retrenchment, redundancy
and cessation of business. [1st par., Sec. 2.78 (B), {1} {b}, Rev. Regs. No.
2-98]
78, What are the prizes that are excluded from gross income, hence not
taxable ?
SUGGESTED ANSWER:
a. Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if
1) The recipient was selected without any action on his part to enter the
contest or proceeding; and
2) The recipient is not required to render substantial future services as a
condition to receiving the prize or award. [Sec. 32 (B) {7} {c}, NIRC of 1997]
b. All prizes and awards
1) Granted to athletes
2) In local and international sports tournaments and competitions
3) Whether held in the Philippines or abroad, and
4) Sanctioned by their national sports associations [Sec. 32(B) {7} {d},
NIRC of 1997], which per BIR ruling is accreditation with the Philippine Olympic
Committee. Note that the exemption refers only to amateur sports. For
professional boxing, a special law grants the exemption not the NIRC.
*** 79. “A” was seriously injured in a vehicular accident. As a result of his
injuries, he was able to recover P1 million representing unearned income, and P5
million for moral and exemplary damages. Are the amounts subject to tax ?
SUGGESTED ANSWER: No. Excluded from gross income, hence exempt from
income tax are amounts received as compensation for personal injuries plus the amounts
of any damages received whether by suit or agreement on account of such injuries. [Sec.
32 {B} {4}, NIRC of 1997; Sec. 2.78 (B) {9}, Rev. Regs. No. 2-98]
NOTES AND COMMENTS: The above is the prevailing view. The author
submits that the amount of P1 million, being in the nature of replacement of income lost is
taxable. This is so, because exclusions are in the nature of tax exemptions, hence they
must be strictly construed against the taxpayer.
*** 80. In 1986 Bella purchased a parcel, of land adjoining the City Camp
Lagoon in Baguio City for P2.5 million. She intended to build her family home on

44

the said parcel of land. Unfortunately for her, the embankment was destroyed
during the July 6, 2001 flash floods causing erosion which led to a deterioration of
the market value to only P1.5 million. The City Assessor assessed the property for
tax purposes at P1.2 million while the BIR zonal valuation is P1.4 million.
a. Supposing that on August 31, 2001, the owner of the adjoining property
buys the property at P1.3 million, what would be the tax consequences to Bella
considering that she suffered a loss? Explain.
b. Would your answer be the same if the government expropriated the
property at its present market value of P1.5 million? Why?
SUGGESTED ANSWERS:
a. The parcel of land is a capital asset of Bella. This is so because it is not her
stock in trade, or property includible as part of her inventory at the end of the taxable
year, or property primarily held by her for sale to customers in the ordinary course of
trade or business, or property used in trade or business subject to depreciation, or real
property used by Bella in her trade or business. (Sec. 33 [A] {1}, NIRC of 1997)
Consequently, irrespective of the holding period under the provisions of Sec. 39
(B) of the NIRC of 1997, the capital gains presumed to have been realized from the sale
shall be taxed at the rate of 6% based on the gross selling price or the fair market value at
the time of the sale whichever is higher. (Sec. 24 [D], NIRC of 1997) Since the market
value of P1.5 million is higher than the gross selling price of P1.3 million, then the
presumed capital gains tax of 6% should be based on P1.5 million not P1.3 million.
The tax is denominated as a presumed capital gains tax hence it is imposed even if
there was a loss.
b. No. The taxpayer, in this case Bella, has the option of reporting her actual
gains from the expropriation as part of her income subject to the rates for compensation
income under Sec 21(a) of the National Internal Revenue Code or to pay a 6% presumed
capital gains tax based on the fair market value of P1.5 million. (Sec. 24 (D) [1], NIRC of
1997) Since she suffered a loss and there is no gain, she should choose the first option;
she should not be subjected to any tax.
81. In 1994, a domestic corporation engaged in the manufacture of semiconductor devices bought a parcel of land for P2.0 million. On August 27, 2001, it
sold the parcel of land for P5.5 million. The fair market value at the time was P5.7
million, the assessed value was P4.5 million and the BIR zonal valuation was P5.6
million. The corporation realized a net profit of P3.5 million on the transaction.
The land was not part of the corporation’s stock in trade, or property
includible as part of its inventory at the end of the taxable year, or property
primarily held by it for sale to customers in the ordinary course of trade or business
or property used in trade or business subject to depreciation, or real property used
by the corporation in its trade or business.
To what tax should the corporation be subject to and why?
SUGGESTED ANSWER:
A final tax of six percent (6%) based on the gross selling price or fair market value
as determined by the Commissioner of Internal Revenue or as shown in the schedule of
values of the Provincial and City Assessors. (Sec. 27 [D] {5}, NIRC of 1997 in relation to
Sec. 6 [E])
82. Define net loss carry-over and net operating loss carry-over. Distinguish
the two concepts and discuss tax implications of each.
SUGGESTED ANSWER:
a. Net loss carry-over means the deduction from net capital gains of a succeeding
year the net capital loss suffered during the prior year. Net operating loss carry-over is the
deduction from gross income for the next three (3) consecutive taxable years following the
year of such loss, the excess of allowable deduction over the gross income .
b. Distinctions between net loss carry-over and net operating loss carry-over.
Source: The source of net loss carry-over are capital losses only WHILE the source of net
operating loss carry-over are from the ordinary trade and business of the taxpayer. Who
may enjoy the carry-over: Only taxpayers other than corporations may enjoy net loss
carry-over WHILE only corporations may enjoy the net operating loss carry-over.

45

c. Any taxpayer, other than a corporation (individuals including trusts and estates),
who sustains in any taxable year a net capital loss from capital transactions involving
capital assets (other than real property or shares of stock not listed or traded in the stock
exhange), is allowed to treat during the succeeding year such net capital loss as a loss
from the sale or exchange of a capital asset (other than real property or shares of stock not
listed and traded in the stock exchange), held for more than twelve months. (Sec. 39 [D],
NIRC of 1997)
83. In 1995, Ms. Ma Ganda bought a diamond ring worth P75,000.00 for use
during her debut. On September 5, 2001, having no further use for the ring, she
decided to sell it to Mrs. M. Ayaman for P350,000.00. Without going into
arithmetical computations, how should Ms. Ganda be taxed on the sale of her ring .
SUGGESTED ANSWER:
The ring is Ms. Ganda’s capital asset because she is not in the business of buying
and selling jewelry. She bought the ring for her personal use and not for trade or business.
Consequently, she should determine the net profit from the sales of the ring and applying
the holding period should report fifty percent (50%) of such net profit in her income tax
return for 1999 as part of ordinary income. The holding period should be applied because
she held the diamond ring, her capital asset, for more than twelve (12) months.
*** 84. In 1980, 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.
Subsequently, First CBC Capital (Asia), Ltd., has become insolvent. China
Banking treated the investment in its 1987 Income Tax Return as a bad debt or as
an ordinary loss deductible from its gross income. The BIR disallowed the
deduction because the investment should not be classified as “worthless.” Rule on
the disallowance.
SUGGESTED ANSWER: BIR was correct. The equity investment is capital in
character, the loss of which could be deductible only from capital gains, and not from any
other income of the taxpayer.
First CBC Capital (Asia), Ltd., the investee corporation, is a subsisidary
corporation of China Banking whose shares in said investee corporation are not intended
for purchase or sale but an investment. (China Banking Corporation v. Court of Appeals,
et al., G.R. No. 12508, prom. July 19, 2000)
NOTES AND COMMENTS:
*** a. When securities become worthless, the law deems the loss to be a loss from
the sale or exchange of capital assets. 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.
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.”
(China Banking Corporation v. Court of Appeals, et al., G.R. No. 12508, prom. July 19,
2000)
b. Securities, defined for deductibility of bad debts. Shares of stock in a
corporation and rights to subscribe for or to receive such shares. The term includes
bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any
corporation, including those issued by a government or political subdivision thereof, with
interest coupons or in registered form. (Sec. 2.b, Rev. Regs. No. 5-99)
*** c. Tax treatment of securities becoming worthless. If securities, as defined
under Sec. 2 (b) hereof, held as capital asset, are ascertained to be worthless and charged

46

off within the taxable year, the loss resulting therefrom shall be considered as a loss from
the sale or exchange of capital asset made on the last day of such taxable year. The
taxpayer, however, has to prove through clear and convincing evidence that the securities
are in fact worthless.
This rule, however, is not true in the case of banks or trust companies incorporated
under the laws of the Philippines, a substantial part of whose business is the receipt of
deposits. (Sec. 5, Rev. Regs. No. 5-99)
***85. XYZ Corporation has an authorized capital stock of P5 million divided
into 50,000 shares with par value of P100.00 per share. P2 million of the authorized
capital stock were subscribed, by various stockholders including Mr. Flores who
subscribed for stocks with par value of P1.5 million. To fully pay for his
subscription, Mr. Flores transferred in 2000 to XYZ Corporation a parcel of land. It
was subsequently discovered by the Bureau of Internal Revenue that the parcel of
land had a fair market value of only P1 million.
a. Since the value of the parcel of land was only P1 million while Mr. Flores
received shares of stock worth P1.5 million did Mr. Flores earn income amounting to
P500,000.00 which should be subject to income tax ? On the other hand, should the
corporation be allowed to deduct a loss amounting to P500,000.00 ?
b. What would be the tax treatment, if in 2001, Mr. Flores sold the shares of
stock in XYZ Corporation which are not listed or traded in the stock exchange for
P1.2 million ?
c. Supposing that in 2001 XYZ Corporation sold the parcel of land for P1
million which is its zonal valuation in 2001. XYZ is not engaged in the real estate
business. What would be the tax treatment for such a sale ?
SUGGESTED ANSWER:
a. Mr. Flores did not earn any income subject to tax neither did XYZ incur a loss
which it could deduct from its 2000 gross income.
The transaction is known as a tax-free exchange solely in kind, hence no gain or
loss is recognized. It is an exchange solely in kind because property (land) was exchanged
for another property (shares of stock). It is a tax- free exchange because as a result of the
exchange, Mr. Flores by himself was able to obtain control of the corporation.
b. If in 2001, Mr. Flores sold the shares of stock for P1.2 million, the basis for the
shares of stock would be the value of the parcel of land. In this case, it would be
considered as if Mr. Flores acquired the shares of stock for P1 million the value of the
property he has exchanged for the shares of stock. Since there is no showing in the
problem that Mr. Flores is engaged in the business of buying and selling shares of stock,
then the net gain should be computed, by deducting the acquisition price (P1 million) from
the selling price (P1.2 million). Thus, the net gain is P200,000.00. On the first
P100,000.00 net gain the tax should be 5% and on the amount exceeding the first
P100,000.00 net gain then the tax should be 10%. It is to be noted that the holding period
is not applied.
c. A corporation is now subject to capital gains taxes and all proceeds from sales of
real property owned by a corporation which are not used in trade or business is subject to
the 6% presumed capital gains tax.
NOTES AND COMMENTS: Remember that the first transaction is tax-free but
the second transaction is taxable. The problem that may be given may involve a merger or
consolidation in which case the above principles also find application. Likewise, if there
are more parties involved than Mr. Flores, then Mr. Flores together with others not more
than four should obtain control of the corporation. If the exchange is not solely in kind
(for example, money plus property was exchanged or shares of stock or vice-versa), then
there is no tax-free exchange because the gain is taxed but the loss is not allowed to be
deductible.
86. In tax-free exchanges solely in kind, what is meant by boot ? What about
basis ?

SUGGESTED ANSWER:

47

Boot is the property exchanged for stocks or securities. For example, Mr. Leon
exchanges his parcel of land for shares of stock in Mickey, Inc. The boot is the parcel of
land. Basis is the value assigned to the land or the shares of stock.

TRANSFER TAXES
*** 87. Don Cesar Soriano, a Spanish national, died on September 5, 2000 in his
villa at Lucerne, Switzerland. He executed a will before his death leaving all of his
properties to his girl friend Maricel Montano, a Filipino residing in Bruge, Belgium.
The girl friend decided to bring the remains of Don Cesar, who was a resident of the
Philippines from 1935 up to 1997 to the Philippines for burial because that was his
wish as most of his friends are still living in the Philippines. She spent about
P750,000.00 for funeral expenses. On September 17, 2000 Maricel met you in
Hongkong and engaged your services in order to settle the estate of Don Cesar in
accordance with the will which was properly probated in Switzerland. She presents
to you an inventory of the properties left by Don Cesar with their corresponding
values as of September 5, 2000, Don Cesar’s date of death. The villa in Switzerland
US$1 million; an apartment building located in New York, US$5 million; a
hacienda in Davao P25 million but the present valuation is now P40 million because
of road constructions which enhanced the value of the property; US$15 million the
value of life insurance proceeds from an insurance taken out by Don Cesar on his
own life designating his estate as beneficiary from the Canton Swiss Insurance at
Canton, Switzerland; P25 million proceeds of life insurance taken by Don Cesar on
his own life from Philamlife Insurance in the Philippines payable to Maricel as
irrevocable beneficiary; outstanding bank balance with Philippine Bank of
Commerce in the amount of P5 million with Nanette as his and/or co-depositor.
Shares of stock of a Hongkong company but managed from the Philippines and a
P15 million apartment located in Manila, Philippines which he donated to his close
friend on April 25, 1989 subject to the condition that the friend remits to Don Cessar
all the rentals of the property during the lifetime of Don Cesar.
a. What should be reported as part of Don Cesar’s gross estate and what
deductions are allowable to determine his net estate? Explain.
b. Are the proceeds of the P25 million life insurance to be considered as part
of the gross estate of Don Cesar or Maricel’s income? Why?
c. Supposing Maricel wants to withdraw the P5 million from the bank, what
advise should you give her?
d. Is Maricel being the sole beneficiary liable for the payment of the estate
taxes?
SUGGESTED ANSWER:
a. Since Don Cesar was a “non-resident decedent who at the time of his death was
not a citizen of the Philippines, only that part of the entire gross estate which is situated in
the Philippines, shall be included in his taxable estate.” (Sec. 85, NIRC of 1997) The
problem is clear that Don Cesar resided in the Philippines only from 1935 to 1997.
Specifically, the part of his gross estate which are situated outside of the
Philippines and excluded from the taxable estate are the US$1 million villa in Switzerland,
the US$5 million apartment building in New York, U.S.A., and the proceeds of the US$15
million life insurance from the Canton Swiss Insurance.
The following properties are part of his gross estate because they are situated in
the Philippines. The P25 million Davao Hacienda, the P5 million bank balance with the
Philippine Bank of Commerce, the shares of stock in the Hongkong corporation and the
P15 million apartment.
The shares of stock have acquired a business situs in the Philippines because the
foreign corporation is managed from the Philippines hence, includible as part of Don
Cesar’s’s gross estate.
The P15 million apartment is part of the gross estate because it was transferred in
contemplation of death. Don Cesar has retained for his life the enjoyment of the fruits of
the property. (Sec. 85 (B), NIRC of 197)
b. The proceeds of the P25 million life insurance is neither part of the gross estate
nor income to Maricel. The proceeds are not part of the estate because the beneficiary is

48

not the estate of Don Cesar, his executor or administrator and the designation of the
beneficiary is irrevocable. (Sec. 85 (E), NIRC of 1997) The P25 million is not also
income to Maricel because life insurance proceeds paid to beneficiaries upon the death of
the insured are exclusions from gross income. (Sec. 32 [B] {1}, NIRC of 1997)
c. I would advise Maricel to first secure a certification from the Commissioner of
Internal Revenue that the appropriate estate taxes were already paid. If the amount to be
withdrawn does not exceed P20,000.00, she should secure an authorization from the
Commissioner even if said taxes have not yet been paid. (2nd par., Sec. 97, NIRC of
1997)
d. If Maricel is at the same time the executor or administrator of the estate, then
she is primarily liable. If she is not the executor or administrator, then being the
beneficiary, she is subsidiary liable to the said executor or administrator. (Sec. 91 [C},
NIRC of 1997)
NOTES AND COMMENTS: The valuation to be used is the valuation at the time
of the decedent’s death NOT at the time of filing return or payment of estate tax.
*** 88. The NIRC of 1997 allows as a deduction from the gross estate of a citizen
or resident of the Philippines “judicial expenses of the testamentary or intestate
proceedings” in order to arrive at the net estate subject to estate taxes. [Sec. 86 (A)
(b)]. Are notarial fees paid for the extrajudicial settlement of the estate as well as
attorneys fees for the guardian deductible from the gross estate as “judicial
expenses” ? Explain briefly.
SUGGESTED ANSWER: Yes. The notarial fee paid for the extrajudicial
settlement is clearly a deductible expense since such settlement effected a distribution of
the estate to his lawful heirs, Similarly, the attorney’s fees for a guardian of the property
during the decedent’s lifetime should also be considered as a deductible administration
expense. The guardian gives a detailed accounting of decedent’s property and gives
advice as to the proper settlement of the estate, acts which contributed towards the
collection of decedent’s assets and the subsequent settlement of the case. (Commissioner
of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, prom. March 22, 2000)
NOTES AND COMMENTS: Judicial expenses are expenses of administration.
Administration expenses, as an allowable deduction from gross estate of the decedent for
purposes of arriving at the value of the net estate, have been construed to include all
expenses “essential to the collection of the assets, payment of debts or the distribution of
the property to the persons entitled to it.” In other words, the expenses must be essential
to the proper settlement of the estate.
Not deductible are expenditures incurred for the individual benefit of the heirs,
devisees or legatees. Thus, in Lorenzo v. Posadas, the Court construed the phrase
“judicial expenses of the testamentary or intestate proceedings” as not including the
compensation paid to a trustee of the decedent’s estate when it appeared that such trustee
was appointed for the purpose of managing the decedent’s real property for the benefit of
the testamentary heir. In another case, the Court disallowed the premiums paid on the
bond filed by the administrator as an expense of administration since the giving of a bond
is in the nature of a qualification for the office, and not necessary in the settlement of the
estate. Neither may attorney’s fees incident to litigation incurred by the heirs in asserting
their respective rights be claimed as a deduction from the gross estate. (Commissioner of
Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, prom. March 22, 2000)
89. In 1999 Atty. Chari T. Able made the following donations:
a. P 250,000.00 alumni association of her alma mater, the University
of the Philippines;
b. P350,000.00 to Quezon City High School, a public school located
in Kamuning, Quezon City;
c. P500,000.00 as prize to M. Alakas, a Filipino athlete who garnered
the gold medal in an international weight lifting contest held in Moscow
which contest was sanctioned by the Philippine Weightlifting Association,
the national weightlifting association;
d. P50,000.00 to a friend she has not seen for a long time;
e. On December 31, 1998 she donated one-half of her parcel of land

49

worth P2.5 million to her son, and on January 2, 1999, she donated the remaining one-half of the same parcel of land to the same son; and
f. P750,000.00 to the Holy Order of Friars, a religious congregation
to be used for the construction of a church.
Atty. Chari T. Able derives her income solely from the practice of her
profession. a) Should she be subject to donor’s taxes on the above donations ? b) Is
she entitled to any exemptions ? c) Should the donation made to her son be treated
as a single donation because only two days separate the donations ? d) Should she
be allowed to deduct the donations from her income derived from the exercise of her
profession ?
SUGGESTED ANSWER:
a. Atty. Able is subject to the payment of donor’s taxes on the following
donations: 1) P250,000.00 donation to the alumni association of the University of the
Philippines because the alumni association is not a school; 2) The P50,000.00 donation to
a friend (not related to Atty. Able by consanguinity within the fourth degree) which is
considered as a donation to a stranger hence subject to a donor’s tax of thirty percent
(30%) of the net gift; and 3) the donation to her son.
b. She is entitled to an exemption on the first P100,000.00 of the 1999 net
donations. Furthermore, the following donations are exempt from donor’s taxes: 1)
P250,000.00 donation to Quezon City High School as the same is considered as a
donation to the government; 2) the donation to M.A. Lakas under the provisions of
Republic Act No. 7549, as it is clear that the conditions in the said law are met; and 3) the
donation to the religious congregation because it is evident that the whole amount is not
to be used for administration purposes.
c. The donation to the son should be treated as separate donations because
donor’s taxes are computed on the basis of net gifts made during a calendar year.
d. The donation to M.A. Lakas is allowed as a deduction because it is a prize to
an athlete in an international sports tournament held abroad and sanctioned by the national
sports association. (Sec. 1, R.A. No. 7549) Also allowed as a deduction is the donation
to Quezon City High School.
90. On September 29, 1989, former President Marcos died in Hawaii, U.S.A.
A special audit team created to conduct investigations and examinations of the tax
liability of the late president disclosed that the Marcoses failed to file a written
notice of death of the decedent and an estate tax return in violation of the NIRC.
The Commissioner of Internal Revenue thereby caused the preparation and
filing of the Estate Tax Return for the estate of the late president. On July 26, 1991,
the BIR issued a deficiency tax assessment against the estate which were served
constructively upon Ms. Imelda Marcos (through her caretaker Mr. Martinez) at
her last known address at No. 204 Ortega St., San Juan, M .M.
The deficiency tax assessment was not protested administratively by Mrs.
Marcos and the other heirs of the late president. On February 22, 1993, the BIR
Commissioner issued twenty-two notices of levy on real property against certain
parcels of land owned by the Marcoses - to satisfy the alleged estate tax, among
others.
Other notices of levy were made until the properties were sold at public
auction, with the lots being forfeited in favor of the government for lack of bidders.
The validity of the BIR's actions is now raised.
SUGGESTED ANSWER: The approval of the court sitting in probate, or as a
settlement tribunal over the estate of the deceased is not a mandatory requirement for the
collection of the estate. The probate court is determining issues which are not against the
property of the decedent, or a claim against the estate as such, but is against the interest or
property right which the heir, legatee, devisee, etc. has in the property formerly held by the
decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the same can
no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals,
et al., 273 SCRA 47)

50

91. Mr. Fil I. Pino, a Canadian citizen and a resident of Ontario, Canada,
sends a gift of US$20,000.00 to his future daughter-in-law who is to be married to
his only son in the Philippines. The marriage actually took place on the date the gift
was received.
a. Is the donation by Mr. Pino subject to tax ? Explain. Would your answer
be the same if Mr. Pino is a Filipino citizen but is a non-resident ?
b. What is the tax consequence, if any, to the Mr. Pino’s daughter-in-law ?
SUGGESTED ANSWER:
a. Yes, because a non-resident alien is exempt only from the payment of donor’s
taxes if his gifts are made to or for the use of the National Government or any entity
created by any of its agencies which is not conducted for profit, or to any political
subdivision of the said Government.
He is subject to tax because the gift was not made in favor of an educational
and/or charitable, religious, cultural or social welfare corporation, institution, foundation,
trust or philanthropic organization or research institution or corporation which does not
use more than 30% of the donation for administration purposes.
If Mr. Pino was a non-resident Filipino my answer would still be the same.
b. None. the amount should not be considered as part of her income as the same
is one of the exclusions, Neither is there any donor’s tax due from her because the tax is
to be paid by the donor and not the recipient.

RETURNS
92. What is the probative value of income tax returns as evidence ?
SUGGESTED ANSWER: Income tax returns being public documents, until
controverted by competent evidence, are competent evidence, are prima facie correct
with respect to the entries therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317)
NOTES AND COMMENTS: While the above cited case is a labor case, the
author suggests that the same could find application in taxation as well.
93. Bill and Hillary are married to each other. Bill is employed as a
government employee deriving annual gross compensation income amounting to
P120,000.00 while Hillary derives income from selling baby dresses. Her monthly
income fluctuates, but for the year 2000, she grossed P500,000.00. The couple have
no children. Are they allowed to file separate income tax returns ? Why ?
SUGGESTED ANSWER: No. As a general rule, they are not allowed to file
separate returns as only married individuals who are both earning purely compensation
income are allowed to file separate income tax returns.
Section 51 (D) of the NIRC of 1997 provides that, “Married individuals, whether
citizens, resident or non-resident aliens, who do not derive income purely from
compensation shall file a return for the taxable year to include the income of both spouses,
but where it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the Bureau for
purposes of verification” There is no showing in the problem that it is impracticable for
Bill and Hillary to file one return, hence they should file a single return.
*** 94. Who are the individuals required to file an income tax return ?
SUGGESTED ANSWER:
a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on his income from
sources within the Philippines;
c. Every alien residing in the Philippines on income derived from sources within
the Philippines; and
d. Every nonresident alien engaged in trade or business or in the exercise of
profession in the Philippines. (Sec. 51 [A] {1}, NIRC of 1997)
***95. Who are the individuals who are not required to file an income tax return ?
SUGGESTED ANSWER:

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a. An individual whose gross income does not exceed his total personal and
additional exemptions for dependents, Provided, That a citizen of the Philippines and any
alien individual engaged in business or practice of profession within the Philippines shall
file an income tax return regardless of the amount of gross income;
b. An individual with respect to pure compensation income for services in
whatever form paid, including, but not limited to fees, salaries, wages, commissions, and
similar items, derived from sources within the Philippines, the income tax on which has
been correctly withheld, Provided, That an individual deriving compensation concurrently
from two or more employers at any time during the taxable year shall file an income tax
return: Provided, further, That an individual whose pure compensation income derived
from sources within the Philippines exceeds Sixty thousand pesos (P60,000.00), shall also
file an income tax return;
c. An individual whose sole income has been subject to final withholding tax;
d. An individual who is exempt from income tax pursuant to the provisions of the
NIRC of 1997, and other laws, general or special. (Sec. 51 [A] {2}, NIRC of 1997)
NOTES AND COMMENTS: An individual who is not required to file an income
tax return may nevertheless be required to file an information return. (Sec. 51 [A] {3},
NIRC of 1997)
96. “F” Corporation brought to court the issue of whether it should be made
liable for the payment of the withholding tax at source since it is merely an agent
and not the tax payer. Rule on the issue with reasons.
SUGGESTED ANSWER: “F” Corporation as the withholding agent is explicitly
made personally liable under the Tax Code for the payment of the tax required to be
withheld.
Reason: The law sets no condition for the personal liability of the withholding
agent to attach. This is in order to compel the withholding agent to withhold the tax under
any and all circumstances. In effect, the responsibility for the collection of the tax as well
as the payment thereof is concentrated upon the person over whom the Government has
jurisdiction.
Thus, the withholding agent is the constituted agent both of the government and
the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government’s agent. In regard to the filing of the necessary income tax return and the
payment to the Government, he is the agent of the taxpayer. The withholding agent,
therefore, is no ordinary government agent especially because under the Tax Code he is
personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of
Internal Revenue and his deputies are not made liable under the law. (Filipinas Synthetic
Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, prom.
October 12, 1999)
NOTES AND COMMENTS: Do not confuse the above holding with question no.
97, infra. The issue in this question is the liability of the withholding agent for the unpaid
taxes WHILE under question no. 97 the issue is whether a withholding agent is within
legal contemplation a taxpayer who could avail of the tax amnesty.
The two (2) types of withholding at source are the 1) final withholding tax; and 2)
creditable withholding tax.
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income due from the
payee on the said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the withholding
agent.. Thus, in case of his failure to withhold the tax or in case of under withholding, the
deficiency tax shall be collected from the payor withholding agent. The payee is not
required to file an income tax return for the particular income.
Example: Mara won P200,000.00 from the Pera or Bayong contest. It should be
the sponsor-payor who is required to deduct the appropriate withholding tax from the
P200,000.00 prize before it is given to Mara. Mara, the payee is not required to file an
income tax return for the P200,000.00. Failure to withhold subjects the sponsor-payee to
the tax.
Under the creditable withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate he tax due from the payee on the

52

said income. The income recipient is still required to file an income tax return and/or pay
the difference between the tax withheld and the tax due on the income. [1st and 2nd
sentences, Sec. 257(B), Rev. Regs. No. 2-98]
The two kinds of creditable withholding taxes are 1) taxes withheld on income
payments covered by the expanded withholding tax; and 2) taxes withheld on
compensation income.
Exemptions from the requirement of withholding or when no withholding taxes
required: Payments to the following:
1. National Government and its instrumentalities including provincial, city, or
municipal governments;
2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special, such as but not limited to the following:
a. Sales of real property by a corporation which is registered with and
certified by the HLURB or HUDCC as engaged in socialized housing project
where the selling price of the house and lot or only the lot does not exceed
P180,000.00 in Metro Manila and other highly urbanized areas and P150,000.00
in other areas or such adjusted amount of selling price for socialized housing as
may later be determined and adopted by the HLURB;
b. Corporations registered with the Board of Investments and enjoying
exemptions from income under the Omnibus Investment Code of 1997;
c. Corporations exempt from income tax under Sec. 30, of the Tax Code,
like the SSS, GSIS, the PCSO, etc. However, income payments arising from any
activity which is conducted for profit or income derived from real or personal
property shall be subject to a withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)
97. Andres Soriano, a U.S. citizen and resident, formed “A. Soriano Y Cia,”
which was subsequently renamed ANSCOR. He owned originally issued common
shares which subsequently earned stock dividends. When he died, part of the shares
passed on to his widow and another part to his estate. Stock dividends were again
declared. Subsequently, ANSCOR reclassified its existing common shares into
common and preferred shares. The widow and the estate exchanged their common
stockholdings for preferred shares, with the estate retaining some common shares.
ANSCOR then redeemed the common shares belonging to the estate after
which the BIR assessed ANSCOR for deficiency withholding tax-at source on the
transactions of exchange and redemption of stocks.
May ANSCOR, as the withholding agent avail of the beneficent provisions of
P.D. No. 67, which condones, “the collection of all internal revenue taxes including
the increments of penalties on account of non-payment as well as all civil, criminal
or administrative liabilities arising from or incident to” (voluntary) disclosures
under the NIRC of previously untaxed income and/or wealth “realized here or
abroad by any taxpayer, natural or juridical.” ?
SUGGESTED ANSWER: No. In the operation of the withholding tax system, the
withholding agent is the payor, a separate entity acting no more than an agent of the
government for the collection of the tax in order to ensure its payments. The payor of the
tax is the taxpayer, he is the person subject to tax imposed by law; and the payee is the
taxing authority.
In other words, the withholding agent is merely a tax collector, not a taxpayer.
Under the withholding system, however, the agent-payor becomes a payee by
fiction of law. His (agent) liability is direct and independent from the taxpayer, because
the income tax is still imposed on and due from the latter. The agent is not liable for the
tax as no wealth flowed into him, he earned no income. The Tax Code only makes the
agent personally liable for the tax arising from the breach of its legal duty to withhold as
distinguished from its duty to pay tax since, the government cause of action against the
withholding agent is not for the collection of income tax, but for the enforcement of the
withholding provisions of the Tax Code, compliance with which is imposed on the
withholding agent and not upon the taxpayer.
A withholding agent, not being a taxpayer is not covered by the protective embrace
of a tax amnesty because the provisions of the implementing rules of P.D. No. 370 which
expanded amnesty on previously untaxed income is explicit in excluding tax liabilities on

53

withholding tax at source. (Commissioner of Internal Revenue v. Court of Appeals, et al.,
G.R. No. 108576, January 20, 1999)
NOTES AND COMMENTS:
The above Commissioner of Internal Revenue v. Court of Appeals, et al.,
(ANSCOR), case may have an impact on the doctrine enunciated in Commissioner of
Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA
377, 383-386.
Procter & Gamble held that a taxpayer is defined under the NIRC as “any person
subject to tax.” Since, the withholding agent who is “required to deduct and withhold any
tax” is made “personally liable for such tax,” subject to and liable for deficiency
assessments, surcharges and penalties should the amount of the tax be finally determined
to be less than that required to he withheld by law, then he is a taxpayer. He has sufficient
legal interest to bring a suit for refund of taxes he believes were illegally collected from
him. (citing Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 15
SCRA 1)
The reader should take note that, in case of doubt, tax amnesties are to be strictly
construed against the government. Tax statutes being burdens are not to be presumed
beyond what the tax amnesty expressly and clearly declares. (Republic v. Intermediate
Appellate Court, 196 SCRA 335)
To summarize, if the issue is application for refund, the withholding agent is a
taxpayer (Procter & Gamble), but for tax amnesty purposes, he is not. (Anscor)

TARIFF AND CUSTOMS CODE
98. When does importation begin and when does it end ?
SUGGESTED ANSWER: Importation begins when the conveying vessel or
aircraft enters the jurisdiction of the Philippines with intention to unlade therein.
Importation is deemed terminated upon payment of the duties, taxes and other
charges due upon the agencies, or secured to be paid, at the port of entry and the legal
permit for withdrawal shall have been granted.
In case the articles are free of duties, taxes and other charges, until they have
legally left the jurisdiction of the customs. (Sec. 1202, TCCP)
99. What is meant by the flexible tariff clause ?
SUGGESTED ANSWER: This is a provision in the Tariff and Customs Code,
which implements the constitutionally delegated power of the President of the Philippines,
in the interest of national economy, general welfare and/or national security upon
recommendation of the NEDA to increase, reduce or remove existing protective rates of
import duty, PROVIDED THAT, the increase should not be higher than 100% ad valorem;
to establish import quota or to ban imports of any commodity, to impose additional duty
on all imports not exceeding 10% ad valorem.
*** 100. The Tariff and Customs Code provides for the imposition of special
customs duties. What are these duties and what is their nature and purpose ?
SUGGESTED ANSWER: Special customs duties are additional import duties
imposed on specific kinds of imported articles under certain conditions.
The special customs duties are the anti-dumping duty, the countervailing duty, the
discriminatory duty and the marking duty.
The special customs duties are imposed for the protection of consumers and
manufacturers, as well as Philippine products.
*** 101. Explain briefly what is meant by anti-dumping duty and when is it
imposed ?
SUGGESTED ANSWERS: A special duty imposed on the importation of a
product, commodity or article of commerce into the Philippines at less than its normal
value when destined for domestic consumption in the export country, which is the
difference between the export price and the normal value of such product, commodity or
article. (Sec. 301 (s) (1), TCC, as amended by R.A. No. 8752, “Anti-Dumping Act of
1999.”)

54

The anti-dumping duty is imposed where the importation of the product,
commodity or article of commerce described above is causing or is threatening to cause
material injury to a domestic industry, or materially retards the establishment of a domestic
industry producing the like product. (Sec. 301 (a), TCC, Ibid.”)
NOTES AND COMMENTS:
The definition under the R.A. No. 8752, the “Anti-Dumping Act of 1999,” is
substantially the definition provided for under R.A. No. 7843, the “Anti-Dumping Act of
1994.”
102. Explain the meaning of normal value for purposes of imposing the antidumping duty.
SUGGESTED ANSWER: It is the comparable price at the date of sale of like
product, commodity, or article in the ordinary course of trade when destined for
consumption in the country of export. (Sec. 301 (s) (3 ), TCC, as amended by R.A. No.
8752, “Anti-Dumping Act of 1999.”)
103. What is meant by dumped import/product ?
SUGGESTED ANSWER: Any product, commodity or article of commerce
introduced into the Philippines at an export price less than its normal value in the ordinary
course of trade, for the like product, commodity or article destined for consumption in the
exporting country, which is causing or is threatening to cause material injury to a domestic
industry, or materially retarding the establishment of a domestic industry producing the
like product. (Sec. 301 (s) (5), TCC, as amended by R.A. No. 8752, “Anti-Dumping Act
of 1999.”)
*** 104. Who imposes the anti-dumping duty.
SUGGESTED ANSWER: The Secretary of Trade and Industry in the case of nonagricultural product, commodity, or article or the Secretary of Agriculture, in the case of
agricultural product, commodity or article, after formal investigation and affirmative
finding of the Tariff Commission.
Even when all the requirements for the imposition have been fulfilled, the decision
on whether or not to impose a definitive anti-dumping duty remains the prerogative of the
Tariff Commission. (Sec. 301 (a), TCC, as amended by R.A. No. 8752, “Anti-Dumping
Act of 1999.”)
NOTES AND COMMENTS: R.A. No. 8752, “Anti-Dumping Act of 1999”
abolished the Special Committee on Anti-Dumping created under R.A. No. 7843, the
“Anti-Dumping Act of 1994”.
Criteria used by the Tariff Commission whether or not to impose the antidumping duty. It may consider among others, the effect of imposing an anti-dumping
duty on the welfare of the consumers and/or the general public, and other related local
industries. (Sec. 301 (a), TCC, as amended by R.A. No. 8752, “Anti-Dumping Act of
1999.”)
*** 105. What is the amount of anti-dumping duty that may be imposed ?
SUGGESTED ANSWER: The difference between the export price and the normal
value of such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by R.A.
No. 8752, “Anti-Dumping Act of 1999.”)
The anti-dumping duty shall be equal to the margin of dumping on such product,
commodity or article thereafter imported to the Philippines under similar circumstances, in
addition to ordinary duties, taxes and charges imposed by law on the imported product,
commodity or article,
*** 106. What are countervailing duties ?
SUGGESTED ANSWER: Additional customs duties imposed on any product,
commodity or article of commerce which is granted directly or indirectly by the
government in the country of origin or exportation, any kind or form of specific subsidy
upon the production, manufacture or exportation of such product commodity or article,
and the importation of such subsidized product, commodity, or article has caused or
threatens to cause material injury to a domestic industry or has materially retarded the

55

growth or prevents the establishment of a domestic industry. (Sec. 302, TCCP as
amended by Section 1, R.A. No. 8751)
*** 107. What are marking duties ?
SUGGESTED ANSWER: Additional customs duties imposed on foreign articles
(or its containers if the article itself cannot be marked), not marked in any official language
in the Philippines, in a conspicuous place as legibly, indelibly and permanently in such
manner as to indicate to an ultimate purchaser in the Philippines the name of the country
of origin.
*** 108. What is a discriminatory duty ?
SUGGESTED ANSWER: New and additional customs duty imposed upon articles
wholly or in part the growth or product of, or imported in a vessel, of any foreign country
which imposes, directly or indirectly, upon the disposition or transportation in transit
through or reexportation from such country of any article wholly or in part the growth or
product of the Philippines, any unreasonable charge, exaction, regulation or limitation
which is not equally enforced upon like articles of every foreign country, or discriminates
against the commerce of the Philippines, directly or indirectly, by law or administrative
regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge,
exaction, classification, regulation, condition, restriction or prohibition, in such manner as
to place the commerce of the Philippines at a disadvantage compared with the commerce
of any foreign country.
109. What is the doctrine of primary jurisdiction ?
SUGGESTED ANSWER: The Bureau of Customs has exclusive administrative
jurisdiction to conduct searches, seizures and forfeitures of contraband without
interference from the courts. It could conduct searches and seizures without need of a
judicial warrant except if the search is to be conducted in a dwelling place.
***110. The Collector of Customs issued a Warrant of Seizure and Detention of
25,000 baga of rice, bearing the name of “SNOWMAN, Milled in Palawan” shipped
on board the M/V “Alberto” which was then docked at Pier 6 at Cebu City. The
warrant was issued on the basis of a report that the rice had been illegally imported
as it was landed in Palawan by a foreign vessel and then placed in sacks marked
“SNOWMAN, Milled in Palawan.” It was then shipped to Cebu City on board the
M/V “Alberto.” Forfeiture proceedings were then started in the Cebu City customs
office.
The consignee then filed a civil suit for injunction before the Cebu City RTC,
which issued the injunction because there was alleged lack of probable cause for
customs to effect the seizure. Was the issuance of the injunction proper ?
SUGGESTED ANSWER: No. There is no question that RTC’s are devoid of any
competence to pass upon the validity or regularity of seizure and forfeiture proceedings
conducted by the Bureau of Customs and to enjoin or otherwise interfere with these
proceedings. The Collector of Customs sitting in seizure and forfeiture proceedings has
exclusive jurisdiction to hear and determine all questions touching on the seizure and
forfeiture of dutiable goods. RTCs are precluded from assuming cognizance over such
matters even through petitions of certiorari, prohibition or mandamus. (The Bureau of
Customs, et al., v. Ogario, et al., G.R. No. 138081, prom. March 20, 2000)
NOTES AND COMMENTS:
a. The Tariff and Customs Code and the Act Creating the Court of Tax
Appeals specify the proper fora and procedure for the ventilation of ant legal objections
or issues raised concerning seizure and forfeiture proceedings. Thus, actions of the
Collector of Customs are appealable to the Commissioner of Customs, whose decision, in
turn, is subject to the exclusive appellate jurisdiction of the Court of Tax Appeals and from
there to the Court if Appeals.
The rule that RTCs have no review powers over such proceedings is anchored
upon the policy of placing no unnecessary hindrance on the government’s drive, not only
to prevent smuggling and other frauds upon Customs, but more importantly, to render
effective and efficient the collection of import and export duties due the State, which
enables the government to carry out the functions it has been instituted to perform.

56

b. The customs authorities do not have to prove to the satisfaction of the
court that the articles on board a vessel were imported from abroad or are intended
to be shipped abroad before they may exercise the power to effect customs searches,
seizures, or arrests provided by law and continue with the administrative hearings.
(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, prom. March 20,
2000)
111. Acting on information that a shipment from Hongkong on board the S/S
Sa Dragon violated the Tariff and Customs Code, as amended, agents of the EIIB
seized the shipment. It was found that the 40 ft. van was made to appear as a
consolidation shipment consisting of 232 packages with Translink Int’l. Freight
Forwarded as shipper and Transglobe Int’l. Inc., as consignee; that there were eight
(8) shippers and eight (8) consignees declared as co-loaders and co-owners of the
contents of the van, when in truth the entire shipment belongs only to one entity;
that the items as declared (various industrial items) were found in the van, instead it
was found to be fully stuffed with textile piece goods.
As a result of the above, the appropriate warrant of seizure was issued and
the goods forfeited in favor of the government.
The consignee filed a petition for redemption of the shipment and the hearing
officer recommended the release of the shipment upon the payment of its domestic
value as “the shipment consists of goods which are in legal contemplation not
prohibited, nor the release thereof to the claimant contrary to law.”
The Commissioner of Customs denied the offer of redemption on the grounds
(1) that the shipment was made to appear an innocuous consolidation shipment
destined for shipment outside of the CY-CFS in order to conceal the textile fabrics;
(2) the eight co-loaders/consignes of the shipment are all fictitious; and (3) CMO
87-92 provides for a denial of an offer of redemption when the seized shipment is
consigned to a fictitious person.
Would you allow the redemption ? Why ?
SUGGESTED ANSWER: Yes. There is absent the following circumstances hence,
it would be proper to allow the redemption of forfeited property upon payment of its
computed domestic market value. (Transglobe International, Inc. v. Court of Appeals, et
al., G.R. No. 126634, January 25, 1999)
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law. (Ibid.)
Misdeclarations in manifest and rider cannot be ascribed to a consignee since it
was not the one that prepared them. As said in Farolan, if at all, the wrongful making or
falsity of the documents can only be attributed to the foreign suppliers or shippers. .(Ibid.)
NOTES AND COMMENTS: Fraud as defined in Sec. 1, par. 1.a., CMO-87-92
must be actual, not constructive.
Sec. 1.a., CMO-87-92 is of the same tenor as Sec. 2530, pars., (f) and (m),
subpars. 3, 4 and 5, which deals with falsities committed by the owner, importer, exporter
or consignee or importation/exportation through any other practice or device.
In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court
of Tax appeals, et al., 217 SCRA 298, the Supreme court clarified that the fraud
contemplated by law must be actual and not constructive. It must be intentional,
consisting of deception, willfully and deliberately done or resorted to in order to induce
another to give up some right.
*** Forfeiture proceedings are in the nature of proceedings in rem.
Forfeiture of seized goods in the Bureau of Customs is a proceeding against the
goods and not against the owner.
It is in the nature of a proceeding in rem, i.e. directed against the res or imported
goods and entails a determination of the legality of their importation. In this proceeding, it
is in legal contemplation the property itself which commits the violation and is treated as
the offender, without reference whatsoever to the character or conduct of the owner.
The issue is limited to whether the imported goods should be forfeited and
disposed of in accordance with law for violation of the Tariff and Customs Code. .

57

(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25,
1999)
The one-year prescriptive period for forfeiture proceedings applies only in the
absence of fraud. (Commissioner of Customs v. Clurt of Tax Appeals, et al., G.R. No.
132929, prom. March 27, 2000)
112. On April 10, 1997, the Collector of Customs conducted a public auction
sale of Lot No. 15 consisting of various marble processing machine and grinding
machine which included a Special Circular Saw and a Diamond Sawing Machine.
The award was made to Engr. Franklin Policarpio, the highest bidder. After Engr.
Policarpio signed the Gate Pass evidencing withdrawal of Lot No. 15 from customs
custody, he found that the two saws were missing and upon his investigation found
that the items were installed in the compound of Carrara Marble Philippines, Inc.
Consequently, for alleged violations of Section 2536 (non-payment of duties
and taxes) and Section 2530 [e] (illegal removal of articles from warehouse) of the
Tariff and Customs Code (TCC) the saws were seized by authority of a Warrant of
Seizure and Detention dated May 29, 1991, from the compound of Carrara Marble.
Carrara Marble failed to present evidence of payment of duties and taxes and
its defense is an alleged local sale evidenced by notarized Deeds of Sale. In the
meantime, Engr. Policarpio intervened and claimed ownership of the saws. Carrara
Marble then offered to settle the case in accordance with the provisions of the TCC.
However, the offer was refused by the Bureau of Customs, which then declared the
articles forfeited in favor of the Government.
Resolve the following issues
explaining briefly the reasons for your answer:
a. Is it valid to forfeit an article found in the possession of a third party after
the sale at public auction ?
b. Has the importation been terminated ?
c. Who has the right to retain possession over the two (2) saws ?
SUGGESTED ANSWERS:
a. Yes, because there is showing that the imported saws were acquired by Carrara
Marble while they were in customs custody without showing that the correct duties and
taxes were paid thereon.
The TCC subjects to forefeiture any article which is removed contrary to law from
any public or private warehouse under customs supervision, or released irregularly from
customs custody. Before forfeiture proceedings are instituted, the law requires the
presence of probable cause. Once established the burden of proof is shifted to the
claimant. Customs officers with proper authorization from the Commissioner in writing,
may demand evidence of payment of duties and taxes on foreign articles openly offered for
sale or kept in storage; and if no such evidence can be produced, such articles may be
seized and subjected to forfeiture proceeding; provided however, that during such
proceedings the person or entity from whom such articles were seized shall be given an
opportunity to prove or show the source of such articles and the payment of duties and
taxes thereon. Under the circumstances, it is clear that before the delivery of the items to
Engr. Policarpio, the Bureau of Customs had custody of said saws. It was only when the
whole was handed over to Engr. Policarpio that it was discovered that the two saws were
missing.
In this case the forfeiture takes effect immediately upon the commission of the
offense. The forfeiture of the subject machineries, retroacted to the date they were
illegally withdrawn from customs custody. The government’s right to recover the
machineries proceeds from its right as lawful owner and possessor thereof upon
abandonment by the importer. Such right may be asserted no matter in whose hands the
property may have come, and the condemnation when obtained avoids all intermediate
alienations.
The forfeiture of the saws rests on a different statutory basis from Policarpio’s
right to receive the property as the winning bidder in the auction sale. It was based upon
the government’s right to recover property illegally withdrawn from its custody.
b. Importation was already terminated after Engr. Policarpio has signed the Gate
Pass evidencing withdrawal of Lot 15 from customs custody.

58

Importation is deemed terminated upon payment of duties, taxes and other charges
due or secured to be paid upon the articles at a port of entry, and upon the grant of a legal
permit for withdrawal; or in case said articles are free of duties, taxes and other charges,
until they have legally left the jurisdiction of the customs. The forfeiture of the subject
saws however, is not dependent on whether or not the importation was terminated; rather
it is premised on the illegal withdrawal of goods from customs custody.
Thus, regardless of the termination of importation, customs authorities may validly
seize goods which, for all intents and purposes, still belong to the government.
c. Compromise could not be allowed anymore since the subject machineries had
already been awarded to Policarpio, being the highest bidder in the public auction. The
government has the rightful possession of the saws but it should turnover the same to
Policarpio. (Carrara Marble Philippines, Inc., v. Commissioner of Customs, G.R. No.
129680, prom. September 1, 1999)
NOTES AND COMMENTS: Administrative and judicial procedures relative to
customs searches, seizures and forfeitures:
a. Determination of probable cause and issuance of warrant. The Collector of
Customs upon probable cause that the articles are imported or exported, or are attempted
to be imported or exported, in violation of the tariff and customs laws shall issue a warrant
of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then a search
warrant should be issued by the regular courts not the Bureau of Customs.
There may be instances where no warrants issued by the Bureau of Customs or the
regular courts is required, as in search and seizures of motor vehicles and vessels.
b. Actual seizure of the articles. Master this procedure.
Requirements for release under bond of seized articles: This is a probable area
so master.
Settlement of seizure case by payment of fine or redemption of forfeited
property.
This is another probable area.

LOCAL TAXATION
*** 113. What are the fundamental principles of local taxation ?
SUGGESTED ANSWER: The fundamental principles of local taxation are:
a. Uniformity;
b. Taxes, fees, charges and other impositions shall be equitable and based on
ability to pay, for public purposes, not unjust, excessive, oppressive or confiscatory, not
contrary to law, public policy, national economic policy or in restraint of trade;
c. The levy and collection shall not be let to any private person;
d. Inures solely to the local government unit levying the tax;
e. The progressivity principle must be observed.
*** 114. On June 26, 1992, the Sangguniang Panlalawigan of Bulacan passed
Provincial Ordinance No. 3, to take effect on July 1, 1992, which levies a tax of 10%
of the fair market value in the locality per cubic meter of ordinary stones, gravel,
sand, earth and other quarry resources extracted from areas of public land within its
territorial jurisdiction.
It now collects the said tax upon quarry resources extracted from private
lands by Republic Cement. It claims authority to do so under the provisions of the
Local Government Code as well as under the Regalian theory of State ownership
over all natural resources. Is the collection correct ?
SUGGESTED ANSWER: No, because the authority under the Local Government
Code to collect taxes on quarry resources applies only to those extracted from public
lands. (Sec. 134 in relation to Sec. 138, Local Government Code)
Furthermore, the Local Government Code prohibits local government units from
collecting excise taxes on articles enumerated under the NIRC, and taxes, fees or charges
on petroleum products. (Sec. 133 [h], Local Government Code in relation to the Tax
Code) The tax imposed is an excise tax upon the performance, carrying on, or the
exercise of an activity. While the Tax Code levies a tax on all quarry resources, regardless

59

of origin, whether extracted from public or private lands, the Local Government Code
authorizes the local government unit to impose such taxes on those taken from public
lands. Thus, those extracted from private lands are taxable under the NIRC and not by
local government units.
The Regalian doctrine may not be applied because taxes, being burdens, are not to
be presumed beyond what the applicable statute expressly and clearly declares, tax statutes
being construed stricitssimi juris against the government. (The Province of Bulacan, et
al., v. The Court of Appeals, etc., et al., 299 SCRA 442)
*** 115. Philippine Basketball Association contested the deficiency amusement
tax assessed against it by the BIR for conducting the professional basketball games
and for the cession of advertising and streamer spaces to Vintage Enterprises, Inc.
a) Should the amusement taxes be paid to the local government instead of
the BIR ?
b) Is the cession of advertising and streamer spaces to Vintage Enterprises,
Inc. subject to the payment of amusement taxes ?
SUGGESTED ANSWER:
a. No. Professional basketball games should pay the amusement taxes collected
by the BIR and not the amusement taxes collected by the local governments. The
amusement tax which provinces and cities are allowed to collect under Sec. 140 of the
Local Government Code, refers to “an amusement tax to be collected from proprietors,
lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other
places of amusement.” The authority to tax professional basketball games is not included
therein because it is a national tax provided for under Sec. 125 of the 1997 Tax Code
which provides that, “There shall be collected from the proprietor, lessee or operator of
cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games,
Jai-Alai and racetracks, a tax equivalent to: xxxx (d) Fifteen percent (15%) in the case of
professional basketball games envisioned in Presidential Decree No. 971: Provided,
however, That the tax herein shall be in lieu of all other percentage taxes of whatever
nature and description; xxx”
b) Yes. The second to the last paragraph of Sec. 125 of the 1997 Tax Code
provides that, the term “gross receipts embraces all the receipts of the proprietor, lessee or
operator of the amusement place.. This term is broad enough to embrace the cession of
advertising and streamer spaces as the same embraces all the receipts of the proprietor,
lessee or operator of the amusement place. It is thus, a national tax not a local tax.
The recognition by the BIR of such income from cession as a local tax is of no
moment because the Government is never estopped by the mistake or error on the part of
its agents, specially on the matter of taxes. (Philippine Basketball Association v. Court of
Appeals, et al., G.R. No. 119122, prom. August 8, 2000)
116. The City Treasurer discovered that the Knechts failed to pay their real
property taxes on their property consisting of a parcel of land with an area of 8,102
sq.m. The property was subsequently sold at public auction for the tax delinquency.
However, the Knechts did not receive any notice of their tax delinquency and that
the Rgister of Deeds did not order them to surrender their owner’s duplicate for
annotation of the tax lien prior to the sale. Neither did they have notice of the
auction sale nor was the certificate of sale annotated on their title nor with the title
in the possession of the Register of Deeds.
Is the tax sale valid ? Reason out your answer.
SUGGESTED ANSWER: No. It has been ruled that the notice and publication,
as well as the legal requirements for a tax delinquency sale, are mandatory, and the failure
to comply therewith can invalidate the sale. The prescribed notices must be sent to
comply with the requirements of due process. (De Knecht, et al,. v. Court of Appeals; De
Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)
The reason behind the notice requirement is that tax sales are administrative
proceedings which are in personam in nature. (Puzon v. Abbellera, 169 SCRA 789, 795;
De Asis v. I.A. C., 169 SCRA 314)
NOTES AND COMMENTS: All of the above cases were decided interpreting the
provisions of C.A. No. 470, the old Assessment Law, and P.D. No. 464, the Real Property

60

Tax Code, both of which required personal notice to the taxpayer in addition to the
requisite advertisement.
The provisions of Sec. 260 of the Local Government Code on “Advertisement and
Sale” does not require personal notice to the delinquent taxpayer.
In view of the above, the author believes that personal notice of the auction sale is
not required anymore under the provisions of the Local Government Code of 199 which
repealed C.A. No. 470 and P.D. No. 464)

REAL PROPERTY TAXATION
***117. What are the fundamental principles of real property taxation ?
a. Appraisal at current and fair market value;
b. Classification for assessment on the basis of actual use;
c. Assessment on the basis of uniform classification;
d. Appraisal, assessment, levy and collection shall not be let to a private person;
e. Appraisal and assessment shall be equitable.
118. Determination of various items:
a. The reasonable market value is determined by the assessor in the form of a
schedule of fair market values. The schedule is then enacted by the local sanggunian.
b. The assessment level is fixed by ordinances of the appropriate sanggunian.
c. The tax rate is also fixed by ordinances of the appropriate sanggunian.
119. Property exempt from the payment of real property tax:
a. Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted to a taxable person
for a consideration or otherwise;
b. Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries, and all lands, buildings and improvements
actually, directly and exclusively used for religious, charitable and educational purposes;
c. Machineries and equipment, actually, directly and exclusively used by local
water districts; and government owned and controlled corporations engaged in the supply
and distribution of water and generation and transmission of electric power;
d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and environmental
protection.
120. The protest contemplated under Section 252 of R.A. No. 7160 is needed
where there is a question of reasonableness of the amount assessed, not where the
question raised is on the very authority and power of the assessor to impose the
assessment and of the treasurer to collect the tax. (Ty v. Trampe, 250 SCRA 500)
121. On April 3, 1987, Raul purchased from Estrella two lots, both located in
Cebu City. Lot no. 1 contained an area of 49 sq.m. while lot no. 2 contained an area
of 48 sq.m. more or less. Both lots had improvements, which were described as "a
residential house of strong materials constructed on the lots above-mentioned."
Raul declared the real property constructed on the said lots for purposes of
tax assessment as a residential house of strong materials with a floor area of 60 sq.m.
Effective 1987, the declared property was assessed by the City Assessor under Tax
Declaration 1 at a market value of P60,000.00 and an assessed value of P36,900.00.
During a tax-mapping operation conducted in February 1996, the City
Assessor discovered that the real property declared and assessed under Tax
Declaration No. 1 was actually a residential building consisting of four (4) storeys
with a fifth storey used as a roof deck. The building has a total floor area of 500.20
sq. m. The area for each floor was 100.04 square meters.
As a result of the findings, the City Assessor issued Tax Declaration No. 2
effective in the year 1996, canceling the previous Tax Declaration and assessing the
building therein at a net market value of P499,860.00 and an assessed value of

61

P374,900.00. The 1987-1991 Schedule of Market Value was applied in the
assessment.
Raul protested the new assessment for being "excessive and unconscionable,"
contending that it was increased by more than 1,000% as compared to its previous
market of P60,000.00 or assessed value of P36,900.00 under Tax Declaration No. 0220454 and "that he bought the building including the lots for only P100,000.00 on
April 3, 1987, which amount should be the market value of the building for purposes
of determining its assessed value." He questioned the new assessment before the
Local Board of Assessment Appeals of Cebu City, which dismissed his appeal on
January 11, 1997. Raul elevated his case to the Central Board of Assessment
Appeals.
On September 17, 1998, the CBAA rendered a decision ordering the Cebu
City Assessor to issue a new Tax Declaration in the amount of P281,588.00. Raul
then filed a motion for the reconsideration of the CBAA's decision. Raul and the
City Assessor jointly agreed that the revised valuation of the property is P78,330.00
as assessed value, classifying the property at P1,110 per sq. m., the building having
been completed and occupied in 1957 or forty-two (42) years ago.
The CBAA then ruled that for purposes of determining the back taxes due on
the excess area of subject building from 1988 to 1996, the Cebu City Assessor should
issue in accordance with Sec. 222 of the Local Government Code:
a. Tax Declaration effective 1988 to June 30, 1996, based on the minimum
rate per sq. m. for the type of building in accordance with the 1985-1986 Schedule of
Values;
b. Tax Declaration to supersede Tax Declaration No. 1 to be effective from
July 1, 1994 to the year 1995, based on the minimum rate per sq. m. for the type of
building, in accordance with the 1988-1991 Schedule of Values; and
c. Tax Declaration to supersede Tax Declaration No. 2 to take effect in 1996,
based on the revised valuation of the property as agreed upon by the parties.
Raul disagrees with the above findings, based on the following:
a) The CBAA erred in resolving the issue of back taxes from 1988 to 1995,
despite the fact that such issue was not raised in the appeal to it, under its pretext
that it is applying Sec. 222 of the Local Government Code.
b) The CBAA erred in not strictly applying par. (l), Sec. 199 of the Local
Government Code, defining "Fair Market Value" as basis for computing the
"assessed value."
c)
The CBAA's ruling is discriminatory, unjust, confiscatory and
unconstitutional.
To what court should Raul elevate the adverse decision of the CBAA ?
Would his appeal prosper ?
SUGGESTED ANSWER:
Raul should appeal the decision of the CBAA to the Court of Appeals, under Rule
43 of the 1997 Rules of Civil Procedure, by filing a petition for review within a period of
fifteen (15) days from receipt of the adverse CBAA decision.
Raul's appeal would not prosper for the following reasons:
a. The facts of the case do not show that Raul has paid under protest the tax
assessed against his property. This is a mandatory requirement under Sec. 252 of the Local
Government Code. This is so, because the issue is reasonableness of the amount assessed
and not on the very authority and power of the assessor to impose the assessment and of
the treasurer to collect the tax. (Ty v. Trampe, 250 SCRA 500)
b. Appellate courts as well as appellate administrative agencies, have inherent
authority to review unassigned errors (1) which are closely related to an error properly
raised, or (2) upon which the determination of the error properly assigned is dependent,
or (3) where the court or administrative agency finds that consideration of them is
necessary in arriving at a just decision of the case. There was no error, because Raul
himself is assailing the subject assessment as "excessive and unconscionable." Thus,
CBAA was duty-bound to review the factual antecedents of the case and to apply hereon
the pertinent provisions of law. In the process, CBAA has to apply Sec. 222 of the Local
Government Code which authorizes the collection of back taxes.

62

c. The excess areas resulting from the revision must be understood as never
having been declared before. This is evident from the provisions of Sec. 222 of the Local
Government Code which reads:
"Sec. 222. Assessment of Property Subject to Back Taxes. -Real property declared
for the first time shall be assessed for taxes for the period during which it would have been
liable but in no case for more than ten (10) years prior to the date of initial assessment:
Provided, however, That such taxes shall be computed on the basis of the applicable
schedule of values in force during the corresponding period."
It is neither just that a landowner should be permitted by an involuntary mistake or
through other causes, not to say bad faith, to state an area far less than that actually
contained in his land and pay a tax to the State a tax far below that which he should really
pay.
d. Raul's contention on the use of market value for the computation of the
assessed value is erroneous. Par. (l) Sec. 199 of the Local Government Code merely
defines "Fair Market Value." It does not in any way direct that the "Fair Market Value"
should be used as a basis for purposes of real property taxation. On the other hand, par.
(a), Sec. 198 of the same Code provides unequivocally that, "Real property shall be
appraised at its current and fair market value." The current value of like properties and
their actual or potential uses, among others, are also considered.
Unscrupulous sellers of real estate often understate the selling price in the deed of
sale to minimize their tax liability. Moreover, the value of real property does not remain
stagnant, it is unrealistic to expect that the current market value of a property is the same
as its cost of acquisition ten years ago. In this light, a general revision of real property
assessment is required by law within two (2) years after the effectivity of the Local
Government Code and every three (3) years thereafter. (Sec. 219, Local Government
Code)
e. When back taxes were imposed on Raul's property, there was no violation of the
rule that laws shall have only prospective applicability. The provisions of Sec. 25 of P.D.
No. 464, The Real Property Tax Code (now Sec. 222 of the Local Government Code) is
not penal in character, hence it may not be considered as an ex post facto law. (Sesbreno
v. Central Board of Assessment Appeals, et al., G.R. No. 106588, March 24, 1997)
122. What are the administrative remedies that are provided for under the
provisions of R.A. No. 7160, the Local Government Code, before resort to courts is
made relative to real property taxes ?
SUGGESTED ANSWER: A taxpayer may question the constitutionality or
legality of a tax ordinance on appeal within thirty (30) days from effectivity thereof, to the
Secretary of Justice. The taxpayer after finding that his assessment is unjust, confiscatory,
or excessive, must bring the case before the Secretary of Justice for questions of legality
or constitutionality of a city ordinance.
An owner of real property who is not satisfied with the assessment of his property
may, within sixty (60) days from notice of assessment, appeal to the Local Board of
Assessment Appeals.
Should the taxpayer question the excessiveness of the amount of tax, he must first
pay the amount due. Then, he must request the annotation of the phrase “paid under
protest” and accordingly appeal to the Local Board of Assessment Appeals by filing a
petition under oath together with copies of the tax declarations and affidavits or
documents to support his appeal. (Lopez v. City of Manila, et al., G.R. No. 127139,
February 19, 1999)
NOTES AND COMMENTS:
Remedies of real property owner who questions validity of tax ordinance:
Secretary of Justice can take cognizance of a case involving the constitutionality or
legality of tax ordinances where there are factual issues involved. (Figuerres v. Court of
Appeals, et al., G.R. No. 119172, March 25, 1999)
Questions on validity or legality of a tax ordinance. Taxpayer files appeal to
the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary
decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to
court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could
already seek relief in court.

63

These three separate periods are clearly given for compliance as a prerequisite
before seeking redress in a competent court. Such statutory periods are set to prevent
delays as well as enhance he orderly and speedy discharge of judicial functions. For this
reason the courts construe these provisions of statutes as mandatory. (Reyes, et al., v.
Court of Appeals, et al., G.R. No. 118233, prom. December 10, 1999)
Public hearings are mandatory prior to approval of tax ordinance, but this still
requires the taxpayer to adduce evidence to show that no public hearings ever took place.
(Ibid.)
123. What are the steps to be followed for the mandatory conduct of General
Revision of Real Property Assessments ?
a. Preparation of Schedule of Fair Market Values;
b . Enactment of Ordinances;
1) levying an annual “ad valorem” tax on real property and an
additional tax accruing to the Special Education Fund;
2) Fixing the assessment levels to be applied to the market values of real
properties;
3) Providing the necessary appropriations to defray expenses incident to
general revision of real property assessments,; and
4) Adopting the Schedule of Fair Market Values prepared by the assessors.
(Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)
NOTES AND COMMENTS:
Public hearings are required to be conducted prior to the enactment of an
ordinance imposing real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No.
119172, March 25, 1999)
124. What are the steps to be followed in the preparation of fair market
values ?
a. The city or municipal assessor shall prepare a schedule of fair market values for
the different classes of real property situated in their respective Local Government Units
for the enactment of an ordinance by the sanggunian concerned; and
b. The schedule of fair market values shall be published in a newspaper of general
circulation in the province, city or municipality concerned or the posting in the provincial
capitol or other places as required by law. (Lopez v. City of Manila, et al., G.R. No.
127139, February 19, 1999)
NOTES AND COMMENTS: Proposed fair market values of real property in a
local government unit as well as the ordinance containing the schedule must be published
in full for three (3) consecutive days in a newspaper of local circulation, where available,
within ten (10) days of its approval, and posted in at lease two (2) prominent places in the
provincial capitol, city, municipal or barangay hall for a minimum of three (3) consecutive
weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)
125. What is the procedure to be followed in computing real property taxes ?
SUGGESTED ANSWER:
a. Ascertain the assessment level of the property;
b. Multiply the market value by the applicable assessment level of the property;
and
c. Find the tax rate which corresponds to the class (use) of the property and
multiply the assessed value by the applicable tax rate. For easy reference, the computation
of real property tax is cited below:
Market value
Pxxx
Multiplied by Assessment Level
( x %)
Assessed value
Pxxx
Multiplied by Rate of Tax
( x %)
Real Property Tax
P x x x (Lopez v. City of Manila, et
al., G.R. No. 127139, prom. February 19, 1999)
NOTES AND COMMENTS: It is farfetched that the above question would be
given. It was included only for illustrative purposes. However the following concept

64

relative to the determination of real property taxes in order to ease the predicament of the
low and middle-income groups of taxpayers, may be asked:
With the introduction of assessment levels, tax rates could be maintained, although
tax payments can be made either higher or lower depending on their percentage
(assessment level) applied to the fair market value of property to derive its assessed value
which is subject to tax. Moreover, classes and values of real properties can be given
proper consideration, like assigning lower assessment levels to residential properties and
higher levels to properties used in business. (Lopez v. City of Manila, et al., G.R. No.
127139, prom. February 19, 1999)

GOOD LUCK AND PRAYERS FOR YOUR PASSING THE BAR.