Tax Digests

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CIR v. PINEDA
21 SCRA 105 / GR No. L-22734, September 15, 1967

FACTS: Atanasio Pineda died, survived by his wife, FelicisimaBagtas, and 15 children,
the eldest of whom is Atty. Manuel Pineda. Estate proceedings were commenced in
Court so that the estate was divided among and awarded to the heirs. Atty Pineda's
share amounted to about P2,500.00. After the estate proceedings were closed, the BIR
investigated the income tax liability of the estate for the years 1945, 1946, 1947 and 1948
and it found that the corresponding income tax returns were not filed. Thereupon, the
representative of the Collector of Internal Revenue filed said returns for the estate
issued an assessment and charged the full amount to the inheritance due to Atty.
Pineda who argued that he is liable only to extent of his proportional share in the
inheritance.

ISSUE: Can BIR collect the full amount of estate taxes from an heir's inheritance.

HELD: Yes. The Government can require Atty. Pineda to pay the full amount of the
taxes assessed.
The reason is that the Government has a lien on the P2,500.00 received by him from the
estate as his share in the inheritance, for unpaid income taxes for which said estate is
liable. By virtue of such lien, the Government has the right to subject the property in
Pineda's possession to satisfy the income tax assessment. After such payment, Pineda
will have a right of contribution from his co-heirs, to achieve an adjustment of the
proper share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going
after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received; and second, is by subjecting said property of
the estate which is in the hands of an heir or transferee to the payment of the tax due.
This second remedy is the very avenue the Government took in this case to collect the
tax. The Bureau of Internal Revenue should be given, in instances like the case at bar,
the necessary discretion to avail itself of the most expeditious way to collect the tax as
may be envisioned in the particular provision of the Tax Code above quoted, because
taxes are the lifeblood of government and their prompt and certain availability is an
imperious need.

PHILIPPINE ACETYLENE CO. INC. VS. COMMISSIONER
GR L-19707, 17 August 1967
Facts: Philippine Acetylene Co. Inc. is engaged in the manufacture and sale of oxygen
and acetylene gases. It sold its products to the National Power Corporation (Napocor),
an agency of the Philippine Government, and the Voice of America (VOA), an agency of
the United States Government. The Commissioner assessed deficiency sales tax and
surcharges against the company. The company denied liability for the payment of tax
on the ground that both Napocor and VOA are exempt from taxes.

Issue: Whether Philippine Acetylene Co. is exempt from the tax.

Held: Sales tax are paid by the manufacturer or producer who must make a true and
complete return of the amount of his, her or its gross monthly sales, receipts or earnings
or gross value of output actually removed from the factory or mill, warehouse and to
pay the tax due thereon. The tax imposed by Section 186 of the Tax Code is a tax on the
manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly, its levy on the sales made to taxexempt entities like the Napocor is permissible. On the other hand, there is nothing in
the language of the Military Bases Agreement to warrant the general exemption granted
by General Circular V-41 (1947). Thus, the expansive construction of the tax exemption
is void; and the sales to the VOA are subject to the payment of percentage taxes under
Section 186 of the Tax Code. Therefore, tax exemption is strictly construed and
exemption will not be held to be conferred unless the terms under which it is granted
clearly and distinctly show that such was the intention.

COMMISSIONER VS. AMERICAN RUBBER
GR L-19667, 29 November 1966
Facts: American Rubber Company sold its rubber products locally and as prescribed by
the Commissioner’s regulation, the company declared the same for tax purposes in
which the Commissioner accordingly assessed. The company paid under protest the
corresponding sales taxes thereon, claiming exemption under Section 188 (b) of the Tax
Code, and subsequently claimed refund. With the Commissioner refusing to do so, the
case was brought before the Court of Tax Appeals, which upheld the Commissioner’s
stand that the company is not entitled to recover the sales tax that had been separately
billed to its customers, and paid by the latter.

Issue: Whether the company can recover the sales tax paid.

Held: The sales tax is by law imposed directly, not on the thing sold, but on the act
(sale) of the manufacturer, producer, or importer, who is exclusively made liable for its
timely payment. Where the tax money paid by the company came from is really no
concern of the Government, but solely a matter between the company and its
customers. Once recovered, the company must hold the refunded taxes in trust for the
individual purchasers who advanced payment thereof, and whose names must appear
in company records. Herein, the company sales between 24 August 1956 (approval of
RA 1612) to 22 June 1957 (when RA 1856 restored the exemption of agricultural
products “whether in their original form or not”) were properly taxed. Such amount
corresponding to the period are not recoverable.

MACEDA VS. MACARAIG
GR 88291, 31 May 1991
Facts: Commonwealth Act 120 created NAPOCOR as a public corporation to undertake
the development of hydraulic power and the production of power from other sources.
RA 358 (1949) granted NAPOCOR tax and duty exemption privileges. RA 6395 (1971)
revised the charter of the NAPOCOR, tasking it to carry out the policy of the national
electrification, and provided in detail NAPOCOR’s tax exceptions. PD 380 (1974)
specified that NAPOCOR’s exemption includes all taxes, etc. imposed “directly or
indirectly.” PD 938 integrated the exemptions in favor of GOCCs including their
subsidiaries; however, empowering the President or the Minister of Finance, upon
recommendation of the Fiscal Incentives Review Board (FIRB) to restore, partially or
completely, the exemptions withdrawn or revised. The FIRB issued Resolution 10-85 (7
February 1985) restoring the duty and tax exemptions privileges of NAPOCOR for
period 11 June 1984- 30 June 1985. Resolution 1-86 (1January 1986) restored such
exemption indefinitely effective 1 July 1985. EO 93 (1987) again withdrew the
exemption. FIRB issued Resolution 17-87 (24 June 1987) restoring NAPOCOR’s
exemption, which was approved by the President on 5 October 1987. Since 1976, oil
firms never paid excise or specific and ad valorem taxes for petroleum products sold
and delivered to NAPOCOR. Oil companies started to pay specific and ad valorem
taxes on their sales of oil products to NAPOCOR only in 1984. NAPOCOR claimed for a
refund (P468.58 million). Only portion thereof, corresponding to Caltex, was approved
and released by way of a tax credit memo. The claim for refund of taxes paid by
PetroPhil, Shell and Caltex amounting to P410.58 million was denied. NAPOCOR
moved for reconsideration, starting that all deliveries of petroleum products to
NAPOCOR are tax exempt, regardless of the period of delivery.
Issue: Whether NAPOCOR cease to enjoy exemption from indirect tax when PD 938
stated the exemption in general terms.
Held: NAPOCOR is a non-profit public corporation created for the general good and
welfare, and wholly owned by the government of the Republic of the Philippines. From
the very beginning of the corporation’s existence, NAPOCOR enjoyed preferential tax
treatment “to enable the corporation to pay the indebtness and obligation” and effective
implementation of the policy enunciated in Section 1 of RA 6395. From the preamble of
PD 938, it is evident that the provisions of PD 938 were not intended to be strictly
construed against NAPOCOR. On the contrary, the law mandates that it should be
interpreted liberally so as to enhancethe tax exempt status of NAPOCOR. It is
recognized principle that the rule on strict interpretation does notapply in the case of
exemptions in favor of government political subdivision or instrumentality. In the case
of property owned by the state or a city or other public corporations, the express
exception should not be construed with the same degree of strictness that applies to
exemptions contrary to the policy of the state, since as to such property “exception is
the rule and taxation the exception.”

COMMISSIONER VS. GOTAMCO
GR L-31092, 27 February 1987
Facts: The World Trade Organization (WHO) decided to construct a building to house
its offices, as well as the other United Nations Offices in Manila. In inviting bids for the
construction of the building, the WHO informed the bidders of its tax exemptions. The
contract was awarded to John Gotamco and Sons. The Commissioner opined that a 3%
contractor’s tax should be due from the contractor. The WHO issued acertification that
Gotamco should be exempted, but the Commissioner insisted on the tax. Raised in the
Court of Tax Appeals, the court ruled in favor of Gotamco.

Issue: Whether Gotamco is likewise from the contractor’s tax in lieu of WHO’s
exemption from indirect taxes.

Held: Direct taxes are those that are demanded from the very person who, it is intended
or desired, should pay them; while indirect taxes are those that are demanded in the
first instance from one person in the expectation and intention that he can shift the
burden to someone else. Herein, the contractor’s tax is payable by the contractor but it is
the owner of the building that shoulders the burden of the tax because the same is
shifted by the contractor to the owner as a matter of self-preservation. Such tax is an
“indirect tax” on the organization, as the payment thereof or its inclusion in the bid
price would have meant an increase in the construction cost of the building. Hence, the
Contractee’s (WHO) exemption from “indirect taxes” implies that contractor (Gotamco)
is exempt from contractor’s tax.

REPUBLIC VS. MAMBULAO LUMBER
GR L-17725, 28 February 1962
Facts: Mambulao Lumber Company paid the Government a total of P9,127.50 as
reforestation charges. Having found liable for an aggregate amount of P4,802.37 for
forest charges, it contended that since the Republic (Government) has not made use of
the reforestation charges for reforesting the denuded area of the land covered by the
company’s license, the Republic should refund said amount or, if it cannot be refunded,
at least the company should be compensated with what it owed the Republic for
reforestation charges.

Issue: Whether taxes may be subject of set-off or compensation.

Held: Internal revenue taxes, such as forest charges, cannot be the subject of set-off or
compensation. A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of setoff, which are construed uniformly, in the
light of public policy, to exclude the remedy in an action or any indebtedness of the
State or municipality to one who is liable to the State or municipality for taxes. Neither
are they subject of recoupment since they do not arise out of the contract or transaction
sued on. Taxes are not in the nature of contracts between the parties but grow out of a
duty to, and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required.

DOMINGO VS. GARLITOS
GR L-18993, 29 June 1963
FACTS: InDomingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final
and executory the order of the Court of First Instance of Leyte for the payment of estate
and inheritance taxes, charges and penalties amounting to P40,058.55 by the Estate of
the late Walter Scott Price. The petition for execution filed by the fiscal, however, was
denied by the lower court. The Court held that the execution is unjustified as the
Government itself is indebted to the Estate for 262,200; and ordered the amount of
inheritance taxes be deducted from the Government’s indebtedness to the Estate.

ISSUE: Whether a tax and a debt may be compensated.

HELD: The court having jurisdiction of the Estate had found that the claim of the Estate
against the Government has been recognized and an amount of P262,200 has already
been appropriated by a corresponding law (RA 2700). Under the circumstances, both
the claim of the Government for inheritance taxes and the claim of the intestate for
services rendered have already become overdue and demandable as well as fully
liquidated. Compensation, therefore, takes place by operation of law, in accordance
with Article 1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount.

FRANCIA VS. INTERMEDIATE APPELLATE COURT
GR L-67649, 28 June 1988
Facts: EngracioFrancia was the registered owner of a house and lot located in Pasay
City. A portion of such property was expropriated by the Republic of the Philippines in
1977. It appeared that Francia did not pay his real estate taxes from 1963 to 1977. Thus,
his property was sold in a public auction by the City Treasurer of Pasay City.

Issue: Whether the expropriation payment may compensate for the real estate taxes due.

Held: There can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person canot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax annot await the results of a lawsuit against the government. Internal
revenue taxes cannot be the subject of compensation. The Government and the taxpayer
are not mutually creditors and debtors of each other under Article 1278 of the Civil
Code and a claim of taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.

GASCON V. ARROYO
G.R. No. 78389 October 16, 1989
FACTS:
The Lopez family owned 2 television stations. When martial law was
declared, the stations were seized by the military. Thereafter the facilities were taken
over by Kanlaon Broadcasting System and operated it as commercial TV stations. In
1978, the facilities were taken over by the . the National Media Production Center and
operated as the Maharlika Broadcasting System TV 4 After the Marcos regime was
toppled, the Presidential Committee on Good Governance (PCGG) sequestered / seized
the stations. April 1986, Mr Lopez requested the return of the stations. An agreement to
arbitrate was entered into regarding this matter. Thereupon, petitioners as taxpayers
sought to set aside the agreement to arbitrate. On. April 17, 1986, the Lopez family
requested Pres. Aquino to order to return to them Chs. 2 and 4. On October 18 1986, Ch
2 was returned to the Lopez family. Upon the Lopez family's request, the respondent
Executive Secretary, by the authority of the President, entered into with ABS-CBN,
represented by its Pres. Eugenio Lopez, Jr., an "Agreement to Arbitrate" Arbitration
Committee was created composed of Atty. Catalino Macaraig, Jr., for RP and Atty.
Pastor del Rosario for ABS-CBN, and retired Justice Vicente Abad Santos as Chairman
ISSUE: Whether petitioners as taxpayers have legal standing to sue
HELD: No. Petitioners have not shown that they have a legal interest in the TV
stations and that they would be adversely affected if and when the station is returned to
the Lopez family. The present case is not an action to question the constitutionality or
validity of a law.

COMMISSIONER VS. ALGUE
L-28890, 17 February 1988
FACTS: The Philippine Sugar Estate Development Company (PSEDC) appointed Algue
Inc., an engineering and construction firm, as its agent, authorizing it to sell its land,
factories, and oil manufacturing process. Pursuant to such authority, Alberto Guevara,
Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for
the formation of the Vegetable Oil Investment Corporation (VOIC), inducing other
persons to invest in it. Ultimately, after its incorporation largely through the promotion
of the said persons, this new corporation purchased the PSEDC properties. For this sale,
Algue received as agent a commission of P126,000.00. From this commission, it paid
Guevara et.al. P75,000.00 as promotional fees. Algue claimed as deductions.
CIR
disallowed it contending that it pertains to the company. The payment is fictitious
considering that payees are mostly members of the family in control of Algue. CTA
agree with Algue and held that the said amount had been legitimately paid by Algue
for actual services rendered. The payment was in the form of promotional fees. These
were collected by the Payees for their work in the creation of the VOIC and its
subsequent purchase of the properties of the Philippine Sugar Estate Development
Company.
ISSUE: Whether the P75,000 taken from the company’s commission and paid to the
persons who actually labored for the formation of VOIC reasonable expense
HELD: Yes. The amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties. This finding of the respondent court
is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be
allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually
rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included
a reasonable allowance for salaries or other compensation for personal services
actually rendered. The test of deductibility in the case of compensation

payments is whether they are reasonable and are, in fact, payments purely for
service.

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