In Come Taxation Ft Cases

8/19/2019 In Come Taxation Ft Cases

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fG.R. No. 78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs. MELCHOR J. JAVIER, JR. !" THE COURT OF TA#A$$EALS, respondents.

Elison G. Natividad for accused-appellant.

SARMIENTO, J.:p

Central in this controversy is the issue as to whether or not a taxpayer whomerely states as a footnote in his income tax return that a sum of money that he

erroneously received and already spent is the subject of a pending litigation andthere did not declare it as income is liable to pay the 50% penalty for filing afraudulent return.

This uestion is the subject of the petition for review before the Court of theportion of the !ecision 1 dated "uly #$, &'( of the Court of Tax )ppeals *CT)+ inC.T.). Case o. ((&(, entitled, - elchor ". "avier, "r. vs. /uben . )ncheta, inhis capacity as Commissioner of 1nternal /evenue,- which orders the deletion ofthe 50% surcharge from "avier2s deficiency income tax assessment on his

income for &$$.

The respondent CT) in a /esolution % dated ay #5, &'$, denied theCommissioner2s otion for /econsideration 3 and otion for ew Trial & on thedeletion of the 50% surcharge assessment or imposition.

The pertinent facts as are accurately stated in the petition of private respondent"avier in the CT) and incorporated in the assailed decision now under review,read as follows3

xxx xxx xxx

#. That on or about "une (, &$$, 4ictoria . "avier, the wife of thepetitioner *private respondent herein+, received from the 6rudential

an7 and Trust Company in 6asay City the amount of89:&&&,&$(.$0 remitted by her sister, rs. !olores 4entosa,


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through some ban7s in the 8nited 9tates, among which is ellonan7, .).

(. That on or about "une #&, &$$, ellon an7, .). filed acomplaint with the Court of ;irst 1nstance of /i. That on or about ovember 5, &$$, the City ;iscal of 6asay Cityfiled an 1nformation with the then Circuit Criminal Court *doc7eted asCCC?411?((=&?6.C.+ charging the petitioner *private respondentherein+ and his wife with the crime of estafa, alleging that theymisappropriated, misapplied, and converted to their own personaluse and benefit the amount of 89:&&&,000.00 which they receivedunder an implied trust for the benefit of ellon an7 and as a resultof the mista7e in the remittance by the latter.

5. That on arch 5, &$', '( 4 ')')o! + 4+)2 ' + *4o!" !'( + )!6 f)l " ()* I! o- T R 'u+! fo+ '( ' l y + 1977*(o )! +o** )! o- of $53,053.38 !" ! ' )! o- of$&8,053.88 !" *' ')! )! '( foo'!o' of '( + 'u+! '( '

T 4 y + * + )4) !' of *o- -o! y + )2 " f+o- +o "() ( ( 4+ *u- " 'o )f' u' 'u+! " ou' 'o ! ++o+!" )* !o *u : ' of l)') ')o!.

=. That on or before !ecember 5, &'0, the petitioner *privaterespondent herein+ received a letter from the acting Commissionerof 1nternal /evenue dated ovember >, &'0, together with incomeassessment notices for the years &$= and &$$ , " - !")! '( '4 ')')o! + 4+)2 ' + *4o!" !' ( + )!6 4 y o! o+ fo+; - + 15, 1980 '( -ou!' of $1,


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* " f) ) ! y ** **- !'* for the years &$= and &$$respectively. . . .

$. That on !ecember 5, &'0, the petitioner *private respondentherein+ wrote the ureau of 1nternal /evenue that he was paying thedeficiency income assessment for the year &$= but denying that hehad any undeclared income for the year &$$ and re uested that theassessment for &$$ be made to await final court decision on thecase filed against him for filing an allegedly fraudulent return. . . .

'. That on ovember , &' , the petitioner *private respondentherein+ received from )cting Commissioner of 1nternal /evenue/omulo 4illa a letter dated @ctober ', &' stating in reply to his!ecember 5, &'0 letter?protest that -the amount of ellon an72serroneous remittance which you were able to dispose, is definitelytaxable.- . . . 5

T( Co--)**)o! + l*o )-4o* " 50= f+ u" 4 ! l'y )!*' J 2) +.

!isagreeing, "avier filed an appeal < before the respondent Court of Tax )ppealson !ecember 0, &' .

The respondent CT), after the proper proceedings, rendered the challenged

decision. Ae uote the concluding portion3

Ae note that in the deficiency income tax assessment underconsideration, respondent *petitioner here+ further re uestedpetitioner *private respondent here+ to pay 50% surcharge asprovided for in 9ection $# of the Tax Code, in addition to thedeficiency income tax of 6>,''',= 5.00 and interest due thereon.9ince petitioner *private respondent+ filed his income tax return fortaxable year &$$, the 50% surcharge was imposed, in all

probability, by respondent *petitioner+ because he considered thereturn filed false or fraudulent. This additional re uirement, to ourmind, is much less called for because petitioner *privaterespondent+, as stated earlier, reflected in as &$$ return as footnotethat -Taxpayer was recipient of some money received from abroadwhich he presumed to be gift but turned out to be an error and isnow subject of litigation.-


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;rom this, it can hardly be said that there was actual and intentionalfraud, consisting of deception willfully and deliberately done orresorted to by petitioner *private respondent+ in order to induce theBovernment to give up some legal right, or the latter, due to a false

return, was placed at a disadvantage so as to prevent its lawfulagents from proper assessment of tax liabilities. *), 5= * sic + 9C/) 5 &+,because petitioner literally -laid his cards on the table- forrespondent to examine. rror or mista7e of fact or law is not fraud.*1nsular umber vs. Collector, ?$ 00, )pril #', &5=.+. esides,9ection #& is not too plain and simple to understand. 9ince the

uestion involved in this case is of first impression in this jurisdiction,under the circumstances, the 50% surcharge imposed in the

deficiency assessment should be deleted.7

The Commissioner of 1nternal /evenue, not satisfied with the respondent CT)2sruling, elevated the matter to us, by the present petition, raising the main issue asto3

AD TD / @/ @T 6/14)T / 96@ ! T 19 1) ;@/ TD 50%;/)8! 6 ) TEF 8

@n the other hand, "avier candidly stated in his emorandum, 9 that he -did notappeal the decision which held him liable for the basic deficiency income tax*excluding the 50% surcharge for fraud+.- Dowever, he submitted in thesame memorandum -that the issue may be raised in the case not for the purposeof correcting or setting aside the decision which held him liable for deficiencyincome tax, but only to show that there is no basis for the imposition of thesurcharge.- This subse uent disavowal therefore renders moot and academic theposturings articulated in as Comment 10 on the non?taxability of the amount heerroneously received and the bul7 of which he had already disbursed. 1n anyevent, an appeal at that time *of the filing of the Comments+ would have beenalready too late to be seasonable. The petitioner, through the office of the9olicitor Beneral, stresses that3

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The record however is not ambivalent, as the record clearly showsthat private respondent is self?convinced, and so acted, that he isthe beneficial owner, and of which reason is liable to tax. 6ut another way, the studied insinuation that private respondent may not be the

beneficial owner of the money or income flowing to him as enhancedby the studied claim that the amount is -subject of litigation- is beliedby the record and clearly exposed as a fraudulent ploy, as witnesswhat transpired upon receipt of the amount.

Dere, it will be noted that the excess in the amount erroneouslyremitted by @ ) G for the amount of private respondent2swife was :&&&,000.00 after opening a dollar account with 6rudential

an7 in the amount of :&&&,&&(.$0, private respondent and his wife,

with haste and dispatch, within a span of eleven * + electric days,specifically from "une ( to "une >, &$$, effected a total massivewithdrawal from the said dollar account in the sum of :&$5,000.00 or 6$,0#0,000.00. . . . 11

1n reply, the private respondent argues 3

xxx xxx xxx

The petitioner contends that the private respondent committed fraudby not declaring the -mista7en remittance- in his income tax returnand by merely ma7ing a footnote thereon which read3 -Taxpayer wasthe recipient of some money from abroad which he presumed to bea gift but turned out to be an error and is now subject of litigation .- 1tis respectfully submitted that the said return was not fraudulent. Thefootnote was practically an invitation to the petitioner to ma7e aninvestigation, and to ma7e the proper assessment.

The rule in fraud cases is that the proof -must be clear and

convincing- *Briffiths v. Comm., 50 ; H#dI $'#+, that is, it must bestronger than the -mere preponderance of evidence- which would besufficient to sustain a judgment on the issue of correctness of thedeficiency itself apart from the fraud penalty. *;ran7 ). eddas, >0

T) =$#+. The following circumstances attendant to the case at barshow that in filing the uestioned return, the private respondent was


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guided, not by that -willful and deliberate intent to prevent theBovernment from ma7ing a proper assessment- which constitutefraud, but by an honest doubt as to whether or not the -mista7enremittance- was subject to tax.

;irst, this Donorable Court will ta7e judicial notice of the fact that so?called -million dollar case- was given very, very wide publicity bymediaJ and only one who is not in his right mind would haveentertained the idea that the 1/ would not ma7e an assessment ifthe amount in uestion was indeed subject to the income tax.

9econd, as the respondent Court ruled, -the uestion involved in thiscase is of first impression in this jurisdiction- * See p. 5 of )nnex -)-of the 6etition+. ven in the 8nited 9tates, the authorities are notunanimous in holding that similar receipts are subject to the incometax. 1t should be noted that the decision in the /ut7in case is a five?to?four decisionJ and in the very case before this Donorable Court,one out of three "udges of the respondent Court was of the opinionthat the amount in uestion is not taxable. Thus, even without thefootnote, the failure to declare the -mista7en remittance- is notfraudulent.

Third, when the private respondent filed his income tax return onarch 5, &$' he was being sued by the ellon an7 for the return

of the money, and was being prosecuted by the Bovernment forestafa committed allegedly by his failure to return the money and byconverting it to his personal benefit. The basic tax amounted to6>,'&&,($$.00 * See p. = of the 6etition+ and could not have beenpaid without using part of the mista7en remittance. Thus, it was notunreasonable for the private respondent to simply state in hisincome tax return that the amount received was still under litigation.1f he had paid the tax, would that not constitute estafa for using thefunds for his own personal benefitF and would the Bovernmentrefund it to him if the courts ordered him to refund the money to the

ellon an7F 1%

xxx xxx xxx


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8nder the then 9ection $# of the Tax Code *now 9ection #>' of the &''ational 1nternal /evenue Code+, a taxpayer who files a false return is liable to

pay the fraud penalty of 50% of the tax due from him or of the deficiency tax incase payment has been made on the basis of the return filed before the

discovery of the falsity or fraud.

Ae are persuaded considerably by the private respondent2s contention that thereis no fraud in the filing of the return and agree fully with the Court of Tax )ppeals2interpretation of "avier2s notation on his income tax return filed on arch 5,

&$' thus3 -Taxpayer was the recipient of some money from abroad which hepresumed to be a gift but turned out to be an error and is now subject of litigationthat it was an -error or mista7e of fact or law- not constituting fraud, that suchnotation was practically an invitation for investigation and that "avier had literally

-laid his cards on the table.-13

1n Aznar v . Court of Tax Appeals , 1& fraud in relation to the filing of income taxreturn was discussed in this manner3

. . . The fraud contemplated by law is actual and not constructive. 1tmust be intentional fraud, consisting of deception willfully anddeliberately done or resorted to in order to induce another to give upsome legal right. egligence, whether slight or gross, is note uivalent to the fraud with intent to evade the tax contemplated bylaw. 1t must amount to intentional wrong?doing with the sole object of avoiding the tax. 1t necessarily follows that a mere mista7e cannotbe considered as fraudulent intent, and if both petitioner andrespondent Commissioner of 1nternal /evenue committed mista7esin ma7ing entries in the returns and in the assessment, respectively,under the inventory method of determining tax liability, it would beunfair to treat the mista7es of the petitioner as tainted with fraud andthose of the respondent as made in good faith.

;raud is never imputed and the courts never sustain findings of fraud uponcircumstances which, at most, create only suspicion and the mereunderstatement of a tax is not itself proof of fraud for the purpose of taxevasion. 15


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) -fraudulent return- is always an attempt to evade a tax, but amerely -false return- may not be, /ic7 v. 8.9., )pp. !.C., = ;. #d'&$, '&'. 1<

1n the case at bar, there was no actual and intentional fraud through willful anddeliberate misleading of the government agency concerned, the ureau of1nternal /evenue, headed by the herein petitioner. The government was notinduced to give up some legal right and place itself at a disadvantage so as toprevent its lawful agents from proper assessment of tax liabilities because "avierdid not conceal anything. rror or mista7e of law is not fraud. The petitioner2s


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G.R. No. &853% Au u*' 31, 199%

HERNAN;O >. CON?I, JAIME E. ;@ LIACCO, VICENTE ;. HERRERA,>ENJAMIN T. IL;EFONSO, ALE#AN;ER LACSON, JR., A;RIAN O.MICIANO, E;UAR;O A. RIAL$, LEAN;RO G. SANTILLAN, !" JAIME A.SOBUES, petitioners,vs. THE HONORA>LE COURT OF TA# A$$EALS !" COMMISSIONER OFINTERNAL REVENUE, respondents.

G.R. No. &8533 Au u*' 31, 199%

ENRIBUE R. A>A; SANTOS, HERNAN;O >. CON?I, TE;;@ L. ;IMA@UGA,

JAIME E. ;@ LIACCO, MELBUIA;ES J. GAM>OA, JR., MANUEL L.GU MAN, VICENTE ;. HERRERA, >ENJAMIN T. IL;EFONSO, ALE#AN;ERLACSON, JR., A;RIAN O. MICIANO, E;UAR;O A. RIAL$ !" JAIME A.SOBUES, petitioners,vs. THE HONORA>LE COURT OF TA# A$$EALS !" COMMISSIONER OFINTERNAL REVENUE, respondents.

Angara, Abello, Concepcion, egala ! Cruz for petitioners .

NOCON, J.:

6etitioners pray that his Court reverse the !ecision of the public respondentCourt of Tax )ppeals, promulgated 9eptember #=, &$$ 1 denying petitioners2claim for tax refunds, and order the Commissioner of 1nternal /evenue to refundto them their income taxes which they claim to have been erroneously or illegallypaid or collected.

)s summari


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Cincinnati, @hio, 8.9.). !uring the years &$0 and 19714 ')')o! +* + **) ! ", fo+ +' )! 4 +)o"*, 'o o'( +*u *)") +) * of $+o ' + D G - l , ou'*)" of '( $()l)44)! *,"u+)! () ( 4 ')')o! +* + 4 )" U.S. "oll +* *

o-4 !* ')o! fo+ * +2) * )! '( )+ fo+ ) ! **) !- !'*. *6aragraphs 111, 6etitions for /eview, C.T.). Cases os. #5 and#5&>, xhs. !, !? to !? &+. Ahen petitioners in C.T.). Case o.#5 filed their income tax returns for the year &$0, they computedthe tax due by applying the dollar?to?peso conversion on the basis of the floating rate ordained under .1./. /uling o. $0?0#$ dated ay

>, &$0, as follows3

;rom "anuary to ;ebruary #0, &$0 at the conversion

rate of 6(.&0 to 8.9. : .00J;rom ;ebruary # to !ecember ( , &$0 at theconversion rate of 6=.#5 to 8.9. : .00

6etitioners in C.T.). Case o. #5&> li7ewise used the aboveconversion rate in converting their dollar income for &$ to6hilippine peso. Dowever, on ;ebruary ', &$( and @ctober ',

&$(, 4 ')')o! +* )! * )" * * f)l " )'( '( off) of '(+ *4o!" !' Co--)**)o! +, - !" " )! o- ' + 'u+!* fo+ '(

o2 - !')o! " y +*, '()* ')- u*)! '( 4 + 2 lu of '(4 *o as prescribed in 9ection >' of /epublic )ct o. #=5 in relationto 9ection = of Commonwealth )ct o. #=5 in relation to 9ection = of Commonwealth )ct o. =&& as the basis for converting theirrespective dollar income into 6hilippine pesos for purposes ofcomputing and paying the corresponding income tax due from them.The aforesaid computation as shown in '( - !" " )! o- '+ 'u+!* + *ul' " )! '( ll " o2 +4 y- !'*, + fu!" !" o+ '

+ ")'. A o+")! ly, l )-* fo+ + fu!" of * )" o2 + 4 y- !'*+ f)l " )'( + *4o!" !' Co--)**)o! + . Aithout awaiting the

resolution of the Commissioner of the 1nternal /evenue on theirclaims, petitioners filed their petitioner for review in the above?mentioned cases.


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/espondent Commissioner filed his )nswer to petitioners2 petition for review in C.T.). Case o. #5 on "uly ( , &$(, while his )nswer inC.T.). Case o. #5&> was filed on )ugust $, &$>.

8pon joint motion of the parties on the ground that these two casesinvolve common uestion of law and facts, that respondent Court ofTax )ppeals heard the cases jointly. 1n its decision dated 9eptember#=, &$$, the respondent Court of Tax )ppeals held that the properconversion rate for the purpose of reporting and paying the6hilippine income tax on the dollar earnings of petitioners are therates prescribed under /evenue emorandum Circulars os. $?$and > ?$ . )ccordingly, the claim for refund andLor tax credit ofpetitioners in the above?entitled cases was denied and the petitions

for review dismissed, with costs against petitioners. Dence, thispetition for review on certiorari . %

6etitioners claim that public respondent Court of Tax )ppeals erred in holding 3

. That petitioners2 dollar earnings are receipts derived from foreign exchangetransactions.

#. T( ' '( 4+o4 + + ' of o!2 +*)o! of 4 ')')o! +* "oll + +!)! * fo+ '4u+4o* * )! '( 4+ 2 )l)! f+ - + ' + ' of ( ! !" !o' '( 4 +2 lu of '( 4 *o J and

(. That the use of the par value of the peso to convert petitioners2 dollar earningsfor tax purposes into 6hilippine pesos is -unrealistic- and, therefore, theprevailing free mar7et rate should be the rate used.

/espondent Commissioner of 1nternal /evenue, on the other hand, refutespetitioners2 claims as follows 3

)t the outset , it is submitted that the subject matter of these twocases are $()l)44)! )! o- ' for the calendar years &$0 *CT)Case o. #5 + and &$ *CT) Case o. #5&>+ and , '( + fo+ ,*(oul" o2 +! " y '( 4+o2)*)o!* of '( N ')o! l I!' +! lR 2 !u Co" !" )'* )-4l - !')! +ul * !" + ul ')o!*, !"!o' y '( 4+o2)*)o!* of C !'+ l > ! C)+ ul + No. &% dated ay# , &5(, as contended by petitioners.


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9ection # of the ational 1nternal /evenue Code, before itsamendment by 6residential !ecrees os. =& and (#( which too7effect on "anuary , &$( and "anuary , &$>, respectively, )-4o* " ' u4o! '( ' l ! ' )! o- + )2 " "u+)!

( ' l y + f+o- ll *ou+ * y )') ! of '($()l)44)! *, ( '( + + *)")! ( + o+ +o ".

$ ')')o! +* + )') !* of '( $()l)44)! * ' -4o+ +)ly + *)")!+o " y 2)+'u of '( )+ -4loy- !' . Thus, in their tax returns for

the period involved herein, they gave their legal residenceLaddressas cLo 6rocter K Bamble 6 C, )yala )ve., a7ati, /i+.

$ ')')o! +* )! *u : ' 'o $()l)44)! )! o- ' , '( )+ "oll ++!)! * *(oul" o!2 +' " )!'o $()l)44)! 4 *o* )!

o-4u')! '( )! o- ' "u '( + f+o-, )! o+" ! )'('( 4+o2)*)o!* of R 2 !u M -o+ !"u- C)+ ul + No. 7 71 dated;ebruary , &$ for &$0 income and /evenue emorandumCircular o. > ?$ dated !ecember # , &$ for &$ income ,which reiterated >IR Rul)! No. 70 0%7 dated ay >, &$0, to wit3

Fo+ )!' +! l + 2 !u ' 4u+4o* *, '( f+ - + ++ ' of o!2 +*)o! R 2 !u C)+ ul +* No*. 7 71 !"&1 716 *(oul" 44l) " )! o+" + 'o " ' +-)! '('+u !" o++ ' 2 lu )! $()l)44)! 4 *o* of '()! o- of 4 ')')o! +* . 3

)fter a careful examination of the records, the laws involved and the jurisprudence on the matter, Ae are inclined to agree with respondents Court ofTax )ppeals and Commissioner of 1nternal /evenue and thus vote to deny thepetition.

This basically an income tax case. ;or the proper resolution of these casesINCOME - y " f)! " * ! -ou!' of -o! y o-)! 'o 4 +*o! o+

o+4o+ ')o! )'()! *4 )f) " ')- , ( '( + * 4 y- !' fo+ * +2) *,)!' + *' o+ 4+of)' f+o- )!2 *'- !' . 8nless otherwise specified, it means cash


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or its e uivalent. & I! o- ! l*o '(ou ( of * flo of '( f+u)'* of o! *l o+. 5

6etitioners are correct as to their claim that their dollar earnings are @T receipts

derived from foreign exchange transactions. Fo+ fo+ ) ! ( !'+ !* ')o! )* *)-4ly '( ' '+ !* ')o! )! fo+ ) ! ( ! , fo+ ) !( ! )! '( o!2 +*)o! of ! -ou!' of -o! y o+ u++ ! y of o!

ou!'+y )!'o ! u)2 l !' -ou!' of -o! y o+ u++ ! y of!o'( +. - < Ahen petitioners were assigned to the foreign subsidiaries of 6rocter

K Bamble, they were earning in their assigned nation2s currency and were ) 9@spending in said currency. There was no conversion, therefore, from onecurrency to another.

6ublic respondent Court of Tax )ppeals !1! // when it concluded that thedollar incomes of petitioner fell under 9ection #*f+*g+ and *m+ of C. . Circular o.>#. 7

The issue now is, what exchange rate should be used to determine the pesoe uivalent of the foreign earnings of petitioners for income tax purposes.6etitioners claim that since the dollar earnings do not fall within the classificationof foreign exchange transactions, there occurred no actual inward remittances,and, therefore , '( y + !o' )! lu" " )! '( o2 + of C !'+ l > !

C)+ ul + No. %89 which provides for the specific instances ( ! '( 4 + 2 luof '( 4 *o *( ll not '( o!2 +*)o! + ' u* ". T( y o! lu" '( ' '( )+

+!)! * *(oul" o!2 +' " fo+ )! o- ' 4u+4o* * u*)! '( 4 + 2 luof '( $()l)44)! 4 *o.

R *4o!" !' Co--)**)o! + + u * '( ' C> C)+ ul + No. %89 *4 * of+ )4'* fo+ 4o+' 4+o"u '*, + )4'* of * l of fo+ ) ! ( ! o+ fo+ ) !

o++o )! * !" )!2 *'- !'* >UT NOT INCOME TA#. De also claims that hehad to use the prevailing free mar7et rate of exchange in these cases because of

the need to ascertain the true and correct amount of income in 6hilippine peso of dollar earners for 6hilippine income tax purposes.

) careful reading of said C Circular o. #'& 8 shows that the subject mattersinvolved therein are export products, invisibles, receipts of foreign exchange,foreign exchange payments, new foreign borrowing andinvestments M nothing by way of income tax payments. Thus, 4 ')')o! +* + )!


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++o+ y o! lu")! '( ' *)! C.>. C)+ ul + No. %89 "o * !o' 44ly 'o'( - , the par value of the peso should be the guiding rate used for income taxpurposes.

The dollar earnings of petitioners are the fruits of their labors in the foreignsubsidiaries of 6rocter K Bamble. 1t was a definite amount of money which cameto them within a specified period of time of two yeas as payment for theirservices.

9ection # of the ational 1nternal /evenue Code, amended up to )ugust >,&=&, states as follows3

9ec. # . ates of tax on citizens or residents . " A ' )* ( + y)-4o* " u4o! '( ' l ! ' )! o- + )2 " "u+)! (' l y + f+o- ll *ou+ * y 2 +y )!")2)"u l, ( '( +

)') ! of '( $()l)44)! * + *)")! '( + )! o+ +o " o+ ! l) !+ *)")! )! '( $()l)44)! *, determined in accordance with thefollowing schedule3

xxx xxx xxx

)nd in the implementation for the proper enforcement of the ational 1nternal/evenue Code, 9ection ((' thereof empowers the 9ecretary of ;inance to

-promulgate all needful rules and regulations- to effectively enforce itsprovisions. 9

6ursuant to this authority, R 2 !u M -o+ !"u- C)+ ul + No*. 7 71 10 !"&1 7111 + )**u " 'o 4+ * +) " u!)fo+- + ' of ( ! f+o- US"oll +* 'o $()l)44)! 4 *o* fo+ INTERNAL REVENUE TA# $UR$OSES for theyears &$0 and &$ , respectively. 9aid revenue circulars were a valid exerciseof the authority given to the 9ecretary of ;inance by the egislature whichenacted the 1nternal /evenue Code. )nd these are presumed to be a valid

interpretation of said code until revo7ed by the 9ecretary of ;inance himself.1%

6etitioners argue that since there were no remittances and acceptances of theirsalaries and wages in 89 dollars into the 6hilippines, they are exempt from thecoverage of such circulars . 6etitioners forget that they are citi


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without, are subject to income tax. 9ec. # , 1/C, as amended, does not broo7any exemption.

9ince petitioners have already paid their &$0 and &$ income taxes under theuniform rate of exchange prescribed under the aforestated /evenue

emorandum Circulars, there is no reason for respondent Commissioner torefund any taxes to petitioner as said /evenue emorandum Circulars, being oflong standing and not contrary to law, are valid. 13

)lthough it has become a worn?out cliche, the fact still remains that -taxes arethe lifeblood of the government- and one of the duties of a ;ilipino citi


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@n arch #, &$( "ose @billos, 9r. completed payment to @rtigas K Co., td. ontwo lots with areas of , #> and &=( s uare meters located at Breenhills, 9an"uan, /i>, /ollo+.6resumably, '( To++ !* ')'l * )**u " 'o '( - oul" *(o '( ' '( y + oo ! +* of '( ' o lo'*.

1n &$>, or after having held the two lots for more than a year , '( 4 ')')o! +*+ *ol" '( - 'o '( ? ll " C)'y S u+)') * Co+4o+ ')o! !" Ol C+u C !"for the total sum of $313,050 * xh. C and !+. They derived from the sale a totalprofit of 6 (>,(> .'' or 6((,5'> for each of them. T( y '+ ' " '( 4+of)' *

4)' l )! !" 4 )" ! )! o- ' o! o! ( lf '( + of o+ of $1*b+ of the Tax Code *Collector of 1nternal /evenue vs. atangasTrans. Co., 0# 6hil. '##+.

The petitioners contested the assessments. Two "udges of '( T Cou+'*u*' )! " '( * - . "udge /oa uin dissented. Dence, the instant appeal.


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? (ol" '( ' )' )* ++o+ 'o o!*)" + '( 4 ')')o! +* * ( 2)! fo+- " 4 +'! +*()4 under article $=$ of the Civil Code simply because they allegedlycontributed 6 $',$0'. 1% 'o uy '( ' o lo'*, + *ol" '( * - !" ")2)" " '(4+of)' -o! '( -* l2 *.

To regard the petitioners as having formed a taxable unregistered partnershipwould result in oppressive taxation and confirm the dictum that the power to taxinvolves the power to destroy. That eventuality should be obviated.

)s testified by "ose @billos, "r., they had no such intention. They were co?ownerspure and simple. To consider them as partners would obliterate the distinctionbetween a co?ownership and a partnership. The petitioners were not engaged inany joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. 1f later onthey found it not feasible to build their residences on the lots because of the highcost of construction, then they had no choice but to resell the same to dissolvethe co?ownership. The division of the profit was merely incidental to thedissolution of the co?ownership which was in the nature of things a temporarystate. 1t had to be terminated sooner or later. Castan TobeNas says3

Como establecer el deslinde entre la comunidad ordinaria ocopropiedad y la sociedadF

l criterio diferencial?segun la doctrina mas generali


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sociedad, y mera conservacion y aprovechamiento en la comunidad.*!erecho Civil spanol, 4ol. #, 6art , 0 d., &$ , (#'? (#&+.

)rticle $=&*(+ of the Civil Code provides that -the sharing of gross returns doesnot of itself establish a partnership, whether or not the persons sharing themhave a joint or common right or interest in any property from which the returnsare derived-. There must be an unmista7able intention to form a partnership or

joint venture.

9uch intent was present in G ' ( l) ! vs. Collector of 1nternal /evenue, =$ 6hil.===, where 15 4 +*o!* o!'+) u' " *- ll -ou!'* 'o 4u+ ( * ' o 4 *o* 4*' * ') ' )'( '( + - !' '( ' '( y oul" ")2)" '( 4+) Thetic7et won the third pri


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otherwise, would be to subject the income of allco-o&ners$ips of inherited properties to the tax on corporations,inasmuch as if a property does not produce an income at all, it is notsubject to any 7ind of income tax, whether the income tax on

individuals or the income tax on corporation. *!e eon vs. C1 /, CT)Case o. $(', 9eptember , &= , cited in )raNas, &$$ Tax Code )nnotated, 4ol. , &$& d., pp. $$?$'+.

Commissioner of 1nternal /evenue, ? &(>#, ay #5, &$#, >5 9C/) $>, whereafter an extrajudicial settlement the o ( )+* u* " '( )!( +)' ! o+ '()! o- * " +)2 " '( + f+o- * o--o! fu!" 'o 4+o"u 4+of)'* fo+'( -* l2 *, )' * ( l" '( ' '( y + ' l * ! u!+ )*' + "4 +'! +*()4.

1t is li7ewise different from R y * vs. Commissioner of 1nternal /evenue, #>9C/) &' , ( + f '( + !" *o! 4u+ ( * " lo' !" u)l")! , !'+u*' "'( "-)!)*'+ ')o! of '( u)l")! 'o ! "-)!)*'+ 'o+ !" ")2)" " u lly'( ! ' )! o- , and from E2 ! l)*' a vs. Collector of 1nternal /evenue, 0#6hil. >0, where '( '(+ E2 ! l)*' *)*' +* ou (' fou+ 4) * of + l4+o4 +'y () ( '( y l * " 'o 2 +)ou* ' ! !'* !" " +)2 " + !' l*'( + f+o- . Cl +ly, '( 4 ')')o! +* )! '( * ' o * * ( " fo+- " !u!+ )*' + " 4 +'! +*()4 .

1n the instant case, what the Commissioner should have investigated waswhether the father donated the two lots to the petitioners and whether he paid thedonor2s tax *9ee )rt. >>', Civil Code+. Ae are not prejudging this matter. 1tmight have already prescribed.

AD / ;@/ , the judgment of the Tax Court is reversed and set aside. Theassessments are cancelled. o costs.

9@ @/! / !.

G.R. No. 195909 S 4' - + %


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COMMISSIONER OF INTERNAL REVENUE, 6 T1T1@ /,vs. ST. LU E S ME;ICAL CENTER, INC., / 96@ ! T.

x ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? x

G.R. No. 19595 of the/ules of Court assailing the !ecision of & ovember #0 0 of the Court of Tax

)ppeals *CT)+ n anc and its /esolution # of arch #0 in CT) Case o.=$>=. This Court resolves this case on a pure uestion of law, which involves theinterpretation of 9ection #$* + vis?P?vis 9ection (0* + and *B+ of the ational1nternal /evenue Code of the 6hilippines * 1/C+, on the income tax treatment ofproprietary non?profit hospitals.

The ;acts

S'. Lu * M ") l C !' +, I! . S'. Lu *6 )* (o*4)' l o+ !) " * !o!*'o !" !o! 4+of)' o+4o+ ')o! . 8nder its articles of incorporation, among itscorporate purposes are3

*a+ To establish, e uip, o4 + ' !" - )!' )! !o! *'o , !o! 4+of)'C(+)*') !, ! 2ol !', ( +)' l !" * ) !')f) (o*4)' l () ( *( ll

)2 u+ ')2 , + ( )l)' ')2 !" *4)+)'u l + 'o '( *) , ")* * "!" ")* l " 4 +*o!* J provided that purely medical and surgical services

shall be performed by duly licensed physicians and surgeons who may befreely and individually contracted by patientsJ

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*b+ To provide a career of health science education and provide medicalservices to the community through organiIR6 ** ** " S'.Lu * " f) ) ! y ' * -ou!')! 'o$ 7IR, S ')o! %7 >6, )!'+o"u " )!1997, )* ! 4+o2)*)o! )!' !" " 'o - !" '( -4')o! o! !o! 4+of)'(o*4)' l* '( ' + 4+ 2)ou*ly ' o+) " * !o! *'o , !o! 4+of)'

o+4o+ ')o!* u!" + S ')o! %< of '( 1997 T Co" x x x.- 5 1t is a specific

provision which prevails over the general exemption on income tax granted under 9ection (0* + and *B+ for non?stoc7, non?profit charitable institutions and civicorganiIR l )- " '( ' S'. Lu * * 'u lly o4 + ')! fo+ 4+of)' )! 1998u* o!ly 13= of )'* + 2 !u * - f+o- ( +)' l 4u+4o* * .

oreover, the hospital2s board of trustees, officers and employees directly benefit

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from its profits and assets. 9t. u7e2s had total revenues of 6 ,$(0,(=$,&=5 orapproximately 6 .$( billion from patient services in &&'. $

S'. Lu * o!' !" " '( ' '( >IR *(oul" !o' o!*)" + )'* 'o' l + 2 !u *,u* )'* f+ * +2) * 'o 4 ') !'* *$%18,187,&98 o+ ,=>#,= 5. ' 9t. u7e2s also claimed that its income does not inure to thebenefit of any individual.

S'. Lu * - )!' )! " '( ' )' )* !o! *'o !" !o! 4+of)' )!*')'u')o! fo+( +)' l !" *o ) l lf + 4u+4o* * u!" + S ')o! 30 E6 !" G6 of '(

NIRC. I' + u " '( ' '( - )! of 4+of)' 4 + * "o * !o' " *'+oy )'* )! o-' -4')o!.

The petition of the 1/ before this Court in B./. o. &5&0& reiterates itsarguments before the CT) that 9ection #$* + applies to 9t. u7e2s. The petitionraises the sole issue of ( '( + '( ! '- !' of S ')o! %7 >6 ' *4+o4+) ' +y !o! 4+of)' (o*4)' l* ou' of '( )! o- ' -4')o! u!" +S ')o! 30 of '( NIRC !" )!*' ", )-4o* * 4+ f + !') l + ' of 10= o!'( )+ ' l )! o- . The 1/ prays that 9t. u7e2s be ordered topay 6 5$,=5&,&' . & as deficiency income and expanded withholding tax for &&'with surcharges and interest for late payment.

The petition of 9t. u7e2s in B./. o. &5&=0 raises factual matters on thetreatment and withholding of a part of its income, & as well as the payment ofsurcharge and delin uency interest. There is no ground for this Court tounderta7e such a factual review. 8nder the Constitution 0 and the /ules ofCourt, this Court2s review power is generally limited to -cases in which only anerror or uestion of law is involved.- # This Court cannot depart from thislimitation if a party fails to invo7e a recogni


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( + y CANCELLE; !" ?ITH;RA?N . Dowever, petitioner is hereby@/! / ! to 6)E deficiency income tax and deficiency expanded withholdingtax for the taxable year &&' in the respective amounts of 65,>&=,&=(.5>and6$$',>0=.'> or in the sum of 6 =,#$5,($0.(', x x x.

x x x x

1n addition, petitioner is hereby @/! / ! to 6)E twenty percent *#0%+delin uency interest on the total amount of 6 =,#$5,($0.(' counted from @ctober

5, #00( until full payment thereof, pursuant to 9ection #>&*C+*(+ of the 1/C of&&$.

9@ @/! / !. (

The deficiency income tax of 6 5,>&=,&=(.5>, ordered by the CT) n anc to bepaid, arose from the failure of 9t. u7e2s to prove that part of its income in &&'*declared as -@ther 1ncome? et-+ > came from charitable activities. The CT)cancelled the remainder of the 6=(, (,&5#.$& deficiency assessed by the 1/based on the 0% tax rate under 9ection #$* + of the 1/C, which the CT) n

anc held was not applicable to 9t. u7e2s. 5

T( CTA +ul " '( ' S'. Lu * )* !o! *'o !" !o! 4+of)' ( +)' l)!*')'u')o! o2 + " y S ')o! 30 E6 !" G6 of '( NIRC . This ruling would

exempt all income derived by 9t. u7e2s from services to its patients, whetherpaying or non?paying. The CT) reiterated its earlier decision in 9t. u7e2s edicalCenter, 1nc. v. Commissioner of 1nternal /evenue, = which -)! " '(4+)- +y 4u+4o* * of S'. Lu * u!" + )'* +') l * of )! o+4o+ ')o! !"2 +)ou* "o u- !'* 17 )" !')fy)! S'. Lu * * ( +)' l )!*')'u')o!.

The CT) adopted the test in Dospital de 9an "uan de !ios, 1nc. v. 6asayCity, ' which states that - ( +)' l )!*')'u')o! "o * !o' lo* )'* ( +)' l

( + ' + !" )'* o!* u !' -4')o! f+o- ' ')o! - + ly u*

+ )4) !'* of )'* ! f)'* (o + l 'o 4 y + + u)+ " 'o "o *o, ( +fu!"* " +)2 " )! '()* - !! + + " 2o' " 'o '( ( +)' l 4u+4o* * of '()!*')'u')o! x x x.- & The ! + ')o! of )! o- f+o- 4 y)! 4 ') !'* "o * !o'4 + * " *'+oy '( ( +)' l ! 'u+ of S'. Lu *.

Dospital de 9an "uan cited "esus 9acred Deart College v. Collector of 1nternal/evenue, #0 which ruled that the old 1/C *Commonwealth )ct o. >==, as

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amended+ # -positively exempts from taxation those corporations or associationswhich, otherwise, would be subject thereto, because of the existence of x x x netincome.- ## The 1/C of &&$ substantially reproduces the provision oncharitable institutions of the old 1/C. Thus, in rejecting the argument that tax

exemption is lost whenever there is net income, the Court )! J *u* S + "H +' Coll declared3 -HE 2 +y + *4o!*) l o+ !) ')o! -u*' +u! 'o 'l *' )!*u+ )'* )*' ! , y o4 + ')! )'()! '( l)-)'* of )'* o !+ *ou+ *, *4 ) lly )'* + ul + )! o- . I! o'( + o+"*, )' *(oul" l y**'+)2 , ( ! 2 + 4o**) l , 'o ( 2 *u+4lu*. #(

T( CTA ( l" '( ' S ')o! %7 >6 of '( 4+ * !' NIRC "o * !o' 44ly 'o S'.Lu *. #> The CTA 4l )! " '( ' 'o 44ly '( 10= 4+ f + !') l + ' , S ')o!%7 >6 + u)+ * (o*4)' l 'o !o! 4+of)'. @n the other hand, Congress

specifically used the word -non?stoc7- to ualify a charitable -corporation orassociation- in 9ection (0* + of the 1/C. )ccording to the CT), this is uni ue inthe present tax code, indicating an intent to exempt this type of charitableorgani


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This Court does not see how the CT) overloo7ed relevant facts. 9t. u7e2s itselfstated that the CT) -disregarded the testimony of HitsI witness, /omeo . ary,being allegedly self?serving, to show the nature of the 2@ther 1ncome? et2 x xx.- #' This is not a case of overloo7ing or failing to consider relevant evidence.

The CT) obviously considered the evidence and concluded that it is self?serving.The CT) declared that it has -gone through the records of this case and found noother evidence aside from the self?serving affidavit executed by HtheI witnessesHof 9t. u7e2sI x x x.- #&

The deficiency tax on -@ther 1ncome? et- stands. Thus, 9t. u7e2s is liable to paythe #5% surcharge under 9ection #>'*)+*(+ of the 1/C. There is -HfIailure to paythe deficiency tax within the time prescribed for its payment in the notice ofassessmentH.I- (0 9t. u7e2s is also liable to pay #0% delin uency interest under

9ection #>&*C+*(+ of the 1/C.(

)s explained by the CT) n anc, the amountof 6=,#$5,($0.(' in the dispositive portion of the CT) ;irst !ivision !ecisionincludes only deficiency interest under 9ection #>&*)+ and * + of the 1/C andnot delin uency interest. (#

T( M )! I**u

The issue raised by the 1/ is a purely legal one . I' )!2ol2 * '( ff ' of '()!'+o"u ')o! of S ')o! %7 >6 )! '( NIRC of 1997 2)* P 2)* S ')o! 30 E6

!" G6 o! '( )! o- ' -4')o! of ( +)' l !" *o ) l lf +)!*')'u')o!* . T( 10= )! o- ' + ' u!" + S ')o! %7 >6 *4 )f) lly4 +' )!* 'o 4+o4+) ' +y "u ')o! l )!*')'u')o!* !" 4+o4+) ' +y !o! 4+of)'(o*4)' l*. The 1/ argues that Congress intended to remove the exemption thatnon?profit hospitals previously enjoyed under 9ection #$* + of the 1/C of &$$, which is now substantially reproduced in 9ection (0* + of the 1/C of

&&$.(( 9ection #$* + of the present 1/C provides3

9 C. #$. /ates of 1ncome Tax on !omestic Corporations. ?

x x x x

* + 6roprietary ducational 1nstitutions and Dospitals. ? 6roprietary educationalinstitutions and hospitals which are non?profit shall pay a tax of ten percent * 0%+on their taxable income except those covered by 9ubsection *!+ hereof36rovided, That if the gross income from unrelated trade, business or otheractivity exceeds fifty percent *50%+ of the total gross income derived by such

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educational institutions or hospitals from all sources, the tax prescribed in9ubsection *)+ hereof shall be imposed on the entire taxable income. ;orpurposes of this 9ubsection, the term 2unrelated trade, business or other activity2means any trade, business or other activity, the conduct of which is not

substantially related to the exercise or performance by such educationalinstitution or hospital of its primary purpose or function. ) 2proprietary educationalinstitution2 is any private school maintained and administered by privateindividuals or groups with an issued permit to operate from the !epartment of

ducation, Culture and 9ports *! C9+, or the Commission on Digher ducation*CD !+, or the Technical ducation and 97ills !evelopment )uthority *T 9!)+,as the case may be, in accordance with existing laws and regulations. * mphasissupplied+

S'. Lu * l )-* ' -4')o! u!" + S ')o! 30 E6 !" G6 of '( NIRC. I'o!' !"* '( ' )' )* ( +)' l )!*')'u')o! !" ! o+ !) ')o! 4+o-o')!*o ) l lf + . The arguments of S'. Lu * fo u* o! '( o+")! of S ')o!30 E6 -4')! f+o- )! o- ' !o! *'o , !o! 4+of)' ( +)' l)!*')'u')o!*. (> 9t. u7e2s asserts that the legislative intent of introducing 9ection#$* + was only to remove the exemption for -proprietary non?profit-hospitals. (5 The relevant provisions of 9ection (0 state3

9 C. (0. xemptions from Tax on Corporations. ? The following organi


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otwithstanding the provisions in the preceding paragraphs, '( )! o- ofwhatever 7ind and character of the foregoing organi6 of '( NIRC "o * NOT + -o2 '()! o- ' -4')o! of 4+o4+) ' +y !o! 4+of)' (o*4)' l*u!" + S ')o! 30 E6 !" G6. 9ection #$* + on one hand, and 9ection(0* + and *B+ on the other hand, can be construed together without the removalof such tax exemption. T( ff ' of '( )!'+o"u ')o! of S ')o! %7 >6 )* 'o

*u : ' '( ' l )! o- of ' o *4 )f) )!*')'u')o!* , namely, proprietary!o! 4+of)' "u ')o! l )!*')'u')o!* (= and 4+o4+) ' +y !o! 4+of)' (o*4)' l* ,among the institutions covered by 9ection (0 , 'o '( 10= 4+ f + !') l + 'u!" + S ')o! %7 >6 )!*' " of '( o+")! +y 30= o+4o+ ' + ' under thelast paragraph of 9ection (0 in relation to 9ection #$*)+* +.

S ')o! %7 >6 of '( NIRC )-4o* * 10= 4+ f + !') l ' + ' o! '()! o- of 16 4+o4+) ' +y !o! 4+of)' "u ')o! l )!*')'u')o!* !" %64+o4+) ' +y !o! 4+of)' (o*4)' l*. T( o!ly u l)f) ')o!* fo+ (o*4)' l* +

'( ' '( y -u*' 4+o4+) ' +y !" !o! 4+of)'. -$+o4+) ' +y- !* 4+)2 ' , following the definition of a -proprietary educational institution-as -any 4+)2 ' * (ool - )!' )! " !" "-)!)*' + " y 4+)2 ' )!")2)"u l*o+ +ou4* )'( o2 +!- !' 4 +-)' . -No! 4+of)' - !* !o ! ' )! o-o+ ** ' +u * 'o o+ ! f)'* !y - - + o+ *4 )f) 4 +*o! , )'( ll '(! ' )! o- o+ ** ' " 2o' " 'o '( )!*')'u')o! * 4u+4o* * !" ll )'*

')2)') * o!"u ' " !o' fo+ 4+of)' .

-No! 4+of)' "o * !o' ! ** +)ly - ! ( +)' l . 1n Coll 'o+ of I!' +! lR 2 !u 2. Clu F)l)4)!o I! . " C u, 37 '()* Cou+' o!*)" + " * !o! 4+of)'

*4o+'* lu organi


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T( *4o+'* lu )! Clu F)l)4)!o I! . " C u - y !o! 4+of)', u' )' *!o' ( +)' l . The Court defined ( +)'y in ung Center of the 6hilippinesv. Que0 as - )f', 'o 44l) " o!*)*' !'ly )'( )*')! l *, fo+'( ! f)' of ! )!" f)!)' !u- + of 4 +*o!*, )'( + y +)! )! '( )+

-)!"* !" ( +'* u!" + '( )!flu ! of "u ')o! o+ + l) )o!, y **)*')!'( - 'o *' l)*( '( -* l2 * )! l)f o+ Q y o'( + )* l ** !)! '( u+" !of o2 +!- !'. > ) non?profit club for the benefit of its members fails this test.A! o+ !) ')o! - y o!*)" + " * !o! 4+of)' )f )' "o *!o' ")*'+) u' !y 4 +' of )'* )! o- 'o *'o (ol" +* o+- - +* . Dowever, " *4)' )'* )! ' -4' )!*')'u')o!,

!y )! o- *u ( )!*')'u')o! +!* f+o- ')2)') * o!"u ' " fo+4+of)' )* ' l , * 4+ **ly 4+o2)" " )! '( l *' 4 + + 4( ofS ')o! 30.

To be a charitable institution, however, an organi> because an

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exemption restricts the collection of taxes necessary for the existence of thegovernment.

T( Cou+' )! Lu! C !' + " l + " '( ' '( Lu! C !' + of '( $()l)44)! *)* ( +)' l )!*')'u')o! fo+ '( 4u+4o* of -4')o! f+o- + l 4+o4 +'y' *. This ruling uses the same premise as Dospital de 9an "uan >5 and "esus9acred Deart College >= which says '( ' + )2)! )! o- f+o- 4 y)!4 ') !'* "o * !o' " *'+oy '( ( +)' l ! 'u+ of (o*4)' l.

)s a general principle , ( +)' l )!*')'u')o! "o * !o' lo* )'*( + ' + * *u ( !" )'* -4')o! f+o- ' * *)-4ly u* )' " +)2 *

)! o- f+o- 4 y)! 4 ') !'* , whether out?patient, or confined in the hospital,o+ + )2 * *u *)") * f+o- '( o2 +!- !', *o lo! * '( -o! y + )2 "

)* " 2o' " o+ u* " l'o '( + 'o '( ( +)' l o : ' () ( )' )* )!' !" " 'o() 2 J and !o -o! y )!u+ * 'o '( 4+)2 ' ! f)' of '( 4 +*o!*- ! )! o+ o4 + ')! '( )!*')'u')o!. >$

Fo+ REAL $RO$ERT@ TA#ES, '( )! )" !' l ! + ')o! of )! o- )*4 +-)**) l u* '( ' *' of -4')o! )* '( USE of '( 4+o4 +'y . TheConstitution provides that -HcIharitable institutions, churches and personages orconvents appurtenant thereto, mos ues, non?profit cemeteries, and all lands,buildings, and improvements, actually, directly, and exclusively used for religious,charitable, or educational purposes shall be exempt from taxation.- >' The test ofexemption is not strictly a re uirement on the intrinsic nature or character of theinstitution. The test re uires that the institution use the property in a certain way,i.e. for a charitable purpose. Thus , '( Cou+' ( l" '( ' '( Lu! C !' + of '($()l)44)! * ")" !o' lo* )'* ( +)' l ( + ' + ( ! )' u* " 4o+')o! of)'* lo' fo+ o-- + ) l 4u+4o* *. T( ff ' of f )l)! 'o - ' '( u*+ u)+ - !' )* *)-4ly 'o + -o2 f+o- '( ' -4')o! '( ' 4o+')o!of '( 4+o4 +'y !o' " 2o' " 'o ( +)'y.

T( Co!*')'u')o! -4'* ( +)' l )!*')'u')o!* o!ly f+o- + l4+o4 +'y ' * . 1n the 1/C, Congress decided to extend the exemption toincome taxes. Dowever, the way Congress crafted 9ection (0* + of the 1/C ismaterially different from 9ection #'*(+, )rticle 41 of the Constitution. 9ection(0* + of the 1/C defines the corporation or association that is exempt fromincome tax. @n the other hand, 9ection #'*(+, )rticle 41 of the Constitution does

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not define a charitable institution, but re uires that the institution -actually, directlyand exclusively- use the property for a charitable purpose.

S ')o! 30 E6 of the 1/C provides that a charitable institution must be3

16 A NON STOC o+4o+ ')o! o+ **o ) ')o!

%6 ORGANI E; E#CLUSIVEL@ fo+ ( +)' l 4u+4o* *

36 O$ER TE; E#CLUSIVEL@ fo+ ( +)' l 4u+4o* * !"

&6 NO 4 +' of )'* NET INCOME OR ASSET *( ll lo! 'o o+ )!u+ 'o'( ! f)' of !y - - +, o+ !) +, off) + o+ !y *4 )f) 4 +*o!.

T(u*, o'( '( o+ !) ')o! !" o4 + ')o!* of '( ( +)' l)!*')'u')o! -u*' " 2o' " lu*)2 ly fo+ ( +)' l4u+4o* * . T( o+ !) ')o! of '( )!*')'u')o! + f +* 'o )'* o+4o+ 'fo+-, * *(o ! y )'* +') l * of )! o+4o+ ')o!, y l * !" o'( +

o!*')'u')2 "o u- !'*. 9ection (0* + of the 1/C specifically re uires that thecorporation or association be non?stoc7, which is defined by the CorporationCode as -one where no part of its income is distributable as dividends to itsmembers, trustees, or officers- >& and that any profit -obtainHedI as an incident toits operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organi


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ven if 9t. u7e2s meets the test of charity, a charitable institution is not ipso factotax exempt.

To -4' f+o- + l 4+o4 +'y ' * , S ')o! %8 36, A+') l VI of

'( Co!*')'u')o! + u)+ * '( ' ( +)' l )!*')'u')o! u* '( 4+o4 +'y'u lly, ")+ 'ly !" lu*)2 ly fo+ ( +)' l 4u+4o* * . To -4' f+o- )! o- ' * , S ')o! 30 E6 of '( NIRC + u)+ * '( '

( +)' l )!*')'u')o! -u*' o+ !) " !" o4 + ' " lu*)2 ly fo+( +)' l 4u+4o* *. i7ewise, to be exempt from income taxes, S ')o!

30 G6 of '( NIRC + u)+ * '( ' '( )!*')'u')o! o4 + ' " lu*)2 ly fo+*o ) l lf + .

Dowever, the last paragraph of 9ection (0 of the 1/C ualifies the words-organi


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of *u ( )! o- , *( ll *u : ' 'o ' . 6rior to the introduction of 9ection#$* +, the tax rate on such income from for?profit activities was the ordinarycorporate rate under 9ection #$*)+. ?)'( '( )!'+o"u ')o! of S ')o! %7 >6, '(' + ' )* !o 10=.

1n &&', 9t. u7e2s had total revenues of 6 ,$(0,(=$,&=5 from services to payingpatients . I' !!o' ")*4u' " '( ' (o*4)' l () ( + )2 *

44+o )- ' ly $ 1.73 )ll)o! f+o- 4 y)! 4 ') !'* )* NOT ! )!*')'u')o!o4 + ' " lu*)2 ly fo+ ( +)' l 4u+4o* * . Clearly, + 2 !u * f+o-

4 y)! 4 ') !'* + )! o- + )2 " f+o- ')2)') * o!"u ' " fo+4+of)'. 5# 1ndeed, 9t. u7e2s admits that it derived profits from its paying patients.9t. u7e2s declared6 ,$(0,(=$,&=5 as -/evenues from 9ervices to 6atients- incontrast to its -;ree 9ervices- expenditure of6# ', '$,>&'. 1n its Comment in

B./. o. &5&0&, 9t. u7e2s showed the following -calculation- to support itsclaim that =5.#0% of its -income after expenses was allocated to free orcharitable services- in &&'. 5(

REVENUES FROM SERVICES TO $ATIENTS 6 ,$(0,(=$,&=5.00

O$ERATING E#$ENSES

6rofessional care of patients 6 ,0 =,=0',(&>.00

)dministrative #'$,( &,((>.00

Dousehold and 6roperty & ,$&$,=##.00

6 ,(&5,$#5,(50.00

1 C@ ;/@ @6 /)T1@ 9 6((>,=>#,= 5.00 00%

F+ S +2) * %18,187,&98.00 55, $.00 (>.'0%

@TD / 1 C@ $,>'#,(0>.00



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E#CESS OF REVENUES OVER E#$ENSES $133,937,&%1.00

1n ung Center, this Court declared3

-HeIxclusive- is defined as possessed and enjoyed to the exclusion of othersJdebarred from participation or enjoymentJ and -exclusively- is defined, -in amanner to excludeJ as enjoying a privilege exclusively.- x x x The words-dominant use- or -principal use- cannot be substituted for the words -usedexclusively- without doing violence to the Constitution and the law. 9olely issynonymous with exclusively. 5>

The Court cannot expand the meaning of the words -operated exclusively-without violating the 1/C . S +2) * 'o 4 y)! 4 ') !'* + ')2)') *

o!"u ' " fo+ 4+of)'. They cannot be considered any other way. There is a-purpose to ma7e profit over and above the cost- of services. 55 The 6 .$( billiontotal revenues from paying patients is not even incidental to 9t. u7e2s charityexpenditure of 6 # ', '$,>&' for non?paying patients.

9t. u7e2s claims that its charity expenditure of 6# ', '$,>&' is =5.#0% of itsoperating income in &&'. Dowever, if a part of the remaining (>.'0% of theoperating income is reinvested in property, e uipment or facilities used forservices to paying and non?paying patients, then it cannot be said that theincome is -devoted or used altogether to the charitable object which it is intendedto achieve.- 5= The income is plowed bac7 to the corporation not entirely forcharitable purposes, but for profit as well. 1n any case, the last paragraph of9ection (0 of the 1/C expressly ualifies that income from activities for profit istaxable -regardless of the disposition made of such income.-

"esus 9acred Deart College declared that there is no official legislative recordexplaining the phrase -any activity conducted for profit.- Dowever, it uoted adeposition of 9enator ariano "esus Cuenco, who was a member of theCommittee of Conference for the 9enate, which introduced the phrase -or fromany activity conducted for profit.-

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6. Cuando ha hablado de la 8niversidad de 9anto TomRs ue tiene un hospital, no cree4d. ue es una actividad esencial dicho hospital para el funcionamiento del colegio demedicina de dicha universidadF

/. 9i el hospital se limita a recibir enformos pobres, mi contestaciSn seria afirmativaJpero considerando ue el hospital tiene cuartos de pago, y a los mismos generalmentevan enfermos de buena posiciSn social econSmica, lo ue se paga por estos enfermosdebe estar sujeto a 2income tax2, y es una de las ra )! !o! *'o !" !o! 4+of)' o+4o+ ')o! "o * !o', y '()* + *o!

lo! , o-4l ' ly -4' ! )!*')'u')o! f+o- ' . A! )!*')'u')o! !!o' u*)'* o+4o+ ' fo+- 'o 4+ 2 !' )'* 4+of)' l ')2)') * f+o- )! ' ".

T( Cou+' f)!"* '( ' S'. Lu * )* o+4o+ ')o! '( ' )* !o' o4 + ' "lu*)2 ly fo+ ( +)' l o+ *o ) l lf + 4u+4o* * )!*of + * )'*

+ 2 !u * f+o- 4 y)! 4 ') !'* + o! +! " . This ruling is based not only ona strict interpretation of a provision granting tax exemption, but also on the clearand plain text of 9ection (0* + and *B+. 9ection (0* + and *B+ of the NIRC+ u)+ * '( ' ! )!*')'u')o! o4 + ' " lu*)2 ly fo+ ( +)' l o+*o ) l lf + 4u+4o* * 'o o-4l ' ly -4' f+o- )! o- ' .

A! )!*')'u')o! u!" + S ')o! 30 E6 o+ G6 "o * !o' lo* )'* ' -4')o! )f

)' +!* )! o- f+o- )'* fo+ 4+of)' ')2)') *. Su ( INCOME f+o- fo+ 4+of)'')2)') *, u!" + '( l *' 4 + + 4( of S ')o! 30, )* - + ly *u : ' 'o

)! o- ' , 4+ 2)ou*ly ' '( o+")! +y o+4o+ ' + ' u' !o ' '(4+ f + !') l 10= + ' 4u+*u !' 'o S ')o! %7 >6.

) tax exemption is effectively a social subsidy granted by the 9tate because an exemptinstitution is spared from sharing in the expenses of government and yet benefits from



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[G.R. No. 124043. October 14, 1998]

COMMISSIONER OF INTERNAL RE EN!E, petitioner, vs. CO!RT OF

A""EALS, CO!RT OF TA# A""EALS $%& 'O!NG MENS C(RISTIANASSOCIATION OF T(E "(ILI""INES, INC., respondents.

) E C I S I O N

"ANGANI*AN, J .+

Is the INCOME derived from RENTALS of real property owned by the Yo n! MensChristian Asso"iation of the #hilippines$ In"% &YMCA' established as a welfare$ed "ational and "haritable non(profit "orporation (( s b)e"t to INCOME TA* nder the

National Internal Reven e Code &NIRC' and the Constit tion+

T e C$-e

This is the main , estion raised before s in this petition for reviewon certiorari "hallen!in! two Resol tions iss ed by the Co rt of Appeals -./ on September 01$ .223 -0/ and 4ebr ary 02$ .225 -6/ in CA(7R S# No% 60889% :oth Resol tions affirmedthe ;e"ision of the Co rt of Ta< Appeals &CTA' allowin! the YMCA to "laim ta<

ee resta rants and "anteenoperators$ and# ==$032%88 from par>in! fees "olle"ted from non(members% On ? ly 0$.21=$ the "ommissioner of internal reven e &CIR' iss ed an assessment to privaterespondent$ in the total amo nt of# =.3$5.3%8. in"l din! s r"har!e and interest$ for defi"ien"y in"ome ta


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fees and defi"ien"y withholdin! ta< on wa!es%#rivate respondent formally protested theassessment and$ as a s pplement to its basi" protest$ filed a letter dated O"tober 1$.213% In reply$ the CIR denied the "laims of YMCA%

Contestin! the denial of its protest$ the YMCA filed a petition for review at the Co rtif Ta< Appeals &CTA' on Mar"h .=$ .212% In d e "o rse$ the CTA iss ed this r lin! infavor of the YMCA@

ers on the windshields of their "ars and they "har!ed #%38 for non(members% The rentals and par>in! fees were ) st eno !h to "over the "osts of operationand maintenan"e only% The earnin!-s/ from these rentals and par>in! "har!es in"l din!those from lod!in! and other "har!es for the se of the re"reational fa"ilities "onstit te-the/ b l> of its in"ome whi"h -is/ "hanneled to s pport its many a"tivities and attainmentof its ob)e"tives% As pointed o t earlier$ the membership d es are very ins ffi"ient tos pport its pro!ram% Be find it reasonably ne"essary therefore for -private respondent/ toma>e -the/ most o t -of/ its e


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< < < < < < < < <

B ERE4ORE$ in view of all the fore!oin!$ the followin! assessments are herebydismissed for la"> of merit@

.218 ;efi"ien"y 4iin! lot are reasonably in"idental toand reasonably ne"essary for the a""omplishment of the ob)e"tives of the petitioners$H andthe in"ome derived therefrom are ta< e


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The findin!s of fa"ts of the # bli" Respondent Co rt of Ta< Appeals bein! s pported by s bstantial eviden"e -are/ final and "on"l sive%

II

The "on"l sions of law of -p/ bli" -r/espondent ein! fees do not res lt in the loss of the e%

The Co rt$ therefore$ finds the se"ond !ro nd of the motion to be meritorio s and ina""ord with law and ) rispr den"e%

B ERE4ORE$ the motion for re"onsideration is 7RANTE;D the respondent CTAsde"ision is A44IRME; in toto %-2/

The internal reven e "ommissioners own Motion for Re"onsideration was denied byRespondent Co rt in its se"ond assailed Resol tion of 4ebr ary 02$ .225% en"e$ this

petition for review nder R le =3 of the R les of Co rt% -.8/

T e I-- e-

:efore s$ petitioner imp tes to the Co rt of Appeals the followin! errors@

I

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In holdin! that it had departed from the findin!s of fa"t of Respondent Co rt of Ta<Appeals when it rendered its ;e"ision dated 4ebr ary .5$ .22=D and

II

In affirmin! the "on"l sion of Respondent Co rt of Ta< Appeals that the in"ome of private respondent from rentals of small shops and par>in! fees -is/ ein! fees shall fall nder the last

para!raph of Se"tion 09 of the National Internal Reven e Code of .299$ as amended% -.3/

Clearly$ the CA did not alter any fa"t or eviden"e% It merely resolved theaforementioned iss e$ as indeed it was e


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The distin"tion between a , estion of law and a , estion of fa"t is "lear(" t% It has been held that -t/here is a , estion of law in a !iven "ase when the do bt or differen"earises as to what the law is on a "ertain state of fa"tsD there is a , estion of fa"t when thedo bt or differen"e arises as to the tr th or falsehood of alle!ed fa"ts% -.5/ In the present

"ase$ the CA did not do bt$ m "h less "han!e$ the fa"ts narrated by the CTA% It merelyapplied the law to the fa"ts% That its interpretation or "on"l sion is different from that of the CTA is not irre! lar or abnormal%

Seco%& I-- e+ Is the Rental Income of the YMCA Taxa le!

Be now "ome to the "r "ial iss e @ Is the rental in"ome of the YMCA from its real

estate s b)e"t to ta


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derived


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n"onvin"in! !ro nd that the said in"ome is not "olle"ted for profit b t is merelyin"idental to its operation% The law does not ma>e a distin"tion . T e re%t$ /%co e /-t$ $b e re $r& e-- o e%ce - c /%co e /- &er/;e& $%& o /t -e& or &/-5o-e&o . Bhere the law does not distin! ish$ neither sho ld we%

Constitutional "rovisionson Taxation

Invo>in! not only the NIRC b t also the f ndamental law$ private respondent s bmitsthat Arti"le GI$ Se"tion 01 of par% 6 of the .219 Constit tion$ -0=/ e


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the Constit tion and also a member of the Con"om$ adhered to the same view that thee


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establishment ed

Cases Cited % "rivate Respondent Inapplica le

The "ases -=2/ relied on by private respondent do not s pport its "a se% "#C$ of #anila v. Collector of Internal Revenue -38/ and $bra Valle College% Inc. v. $&uino -3./ arenot appli"able$ be"a se the "ontroversy in both "ases involved e


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not !iven any proof that it is an ed "ational instit tion$ or that of its rent in"ome isa"t ally$ dire"tly and es% : tthe Co rt re!rets that$ !iven its limited "onstit tional a thority$ it "annot r le on thewisdom or propriety of le!islation% That prero!ative belon!s to the politi"al departmentsof !overnment%Indeed$ some of the member of the Co rt may even believe in the wisdomand pr den"e of !rantin! more ta< e


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G.R. No. 175&10 No2 - + 1%, %01&

SMI E; $HILI$$INES TECHNOLOG@, INC., 6etitioner,vs. COMMISSIONER OF INTERNAL REVENUE, /espondent.

! C 1 9 1 @

LEONEN, J.:

I! ! ')o! fo+ '( REFUN; of ' * ll "ly ++o! ou*ly 4 )", '( Cou+'of T A44 l* - y " ' +-)! ( '( + '( + + ' * '( ' *(oul" ( 2

! 4 )" )! l) u of '( ' * 4 )". ; ' +-)!)! '( 4+o4 + ' o+y of ''( ' *(oul" ( 2 ! 4 )" )* !o' ! ** **- !'. I' )* )! )" !' l 'o" ' +-)!)! ( '( + '( + *(oul" + fu!".

A $()l)44)! E o!o-) o! Au'(o+)'y $E A6 + )*' + " o+4o+ ')o! '( '( * ! 2 + o-- ! " o4 + ')o!* - y NOT 2 )l '( ' )! !')2 * !"4+ f + !') l + ' * )2 ! 'o $E A + )*' + " !' +4+)* * . Su ( o+4o+ ')o! )**u : ' 'o o+")! +y ' + ' * under the ational 1nternal /evenue Code of

&&$.

This is a petition for review on certiorari of the ovember (, #00= Court of Tax )ppeals n anc decision. # 1t affirmed the Court of Tax )ppeals 9econd

!ivision s decision(

and resolution>

denying petitioner 9 1? d 6hilippinesTechnology, 1nc. s *9 1? d 6hilippines+ claim for tax refund. 5

9 1? d 6hilippines is a 6 U)?registered corporation authori


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I! )'* u +' +ly )! o- ' + 'u+! for year #000 , SMI E" $()l)44)! **u : ' " '( !')+ +o** * l * of )'* 4+o4 +') * 'o 5= f)! l ' o! $E A+ )*' + " o+4o+ ')o!*. SMI E" $()l)44)! * 4 )" ' * amountingto 6>>,=$$,500.00.

@n ;ebruary #, #00 , f' + + u *')! '( ! ll ')o! of )'* $E A+ )*'+ ')o! !" - !")! )'* +') l * of )! o+4o+ ')o! 'o *(o+' ! )'*

o+4o+ ' ' +-, SMI E" $()l)44)! * f)l " ! "-)!)*'+ ')2 l )- fo+ '(+ fu!" of$ &&,u+ u of I!' +! l R 2 !u >IR +.9 1 d6hilippines alleged that the amountwas erroneously paid. 1t also indicated therefundable amount in its final income tax return filed on arch , #00 . 1t alsoalleged that it incurred a net loss of 6#,#((,>=>,5('.00. #

T( >IR ")" !o' ' o! SMI E" $()l)44)! * l )-, () ( 4+o-4' " '( l '' + 'o f)l 4 ')')o! fo+ + 2) fo+ '( Cou+' of T A44 l* on 9eptember &,#00#. (

T( Cou+' of T A44 l* S o!" ;)2)*)o! " !) " SMI E" $()l)44)! * l )-fo+ + fu!" in the decision dated !ecember #&, #00>. >

The Court of Tax )ppeals 9econd !ivision found that 9 1? d 6hilippinesadministrative claim for refund and the petition for review with the Court of Tax

)ppeals were filed within the two?year prescriptive period. 5 Ho 2 +, f)* l)! !')2 * )2 ! 'o $E A + )*' + " !' +4+)* * - y 2 )l " o!ly y$E A + )*' + " !' +4+)* * '( ' ( " l+ "y o-- ! "o4 + ')o!* . = S)! SMI E" $()l)44)! * ( " !o' o-- ! " o4 + ')o!*, )'

* !o' !')'l " 'o '( )! !')2 * of )'( + '( )! o- ' (ol)" y o+ '( 5=4+ f + !') l ' + ' . 17 $ y- !' of '( 5= 4+ f + !') l ' -ou!')!'o $ &&,


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loo7 into.- ## The dispositive portion of the Court of Tax )ppeals 9econd !ivision sdecision reads3

AD / ;@/ , premises considered, the instant petition is hereby ! 1 !.

9@ @/! / !. #(

The Court of Tax )ppeals denied 9 1? d 6hilippines motion for reconsiderationin its "une 5, #005 resolution. #>

@n "uly $, #005, 9 1? d 6hilippines filed a petition for review before the Courtof Tax )ppeals n anc. #5 1t argued that the Court of Tax )ppeals 9econd!ivision erroneously assessed the =% capital gains tax on the sale of 9 1? d6hilippines e uipment, machineries, and buildings .#= 1t also argued that the Court

of Tax )ppeals 9econd !ivision cannot ma7e an assessment at the firstinstance. #$ ven if the Court of Tax )ppeals 9econd !ivision has such power, theperiod to ma7e an assessment had already prescribed .#'

1n the decision promulgated on ovember (, #00=, the Court of Tax )ppeals nanc dismissed 9 1? d 6hilippines petition and affirmed the Court of Tax

)ppeals 9econd !ivision s decision and resolution. #& The dispositive portion ofthe Court of Tax )ppeals n anc s decision reads3

AD / ;@/ , finding no reversible error to reverse the assailed !ecisionpromulgated on !ecember #&, #00> and the /esolution dated "une 5, #005, theinstant petition for review is hereby !19 199 !. )ccordingly, the assailed!ecision and /esolution are hereby );;1/ !. 9@ @/! / !. (0

9 1? d 6hilippines filed a petition for review before this court on !ecember #$,#00=, ( praying for the grant of its claim for refund and the reversal of the Courtof Tax )ppeals n anc s decision. (#

9 1? d 6hilippines assigned the following errors3

). The honorable CT) n anc grievously erred and acted beyond its jurisdiction when it assessed for deficiency tax in the first instance.

. ven assuming that the honorable CT) n anc has the right to ma7ean assessment against the petitioner?appellant, it grievously erred in

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finding that the machineries and e uipment sold by the petitioner?appellantis subject to the six percent *=%+ capital gains tax under 9ection #$*!+*5+of the Tax Code. ((

6etitioner argued that the Court of Tax )ppeals has no jurisdiction to ma7e anassessment since its jurisdiction , with respect to the decisions of respondent, ismerely appellate. (> oreover , the power to ma7e assessment had alreadyprescribed under 9ection #0( of the ational 1nternal /evenue Code of &&$since the return for the erroneous payment was filed on 9eptember (, #000.This is more than three *(+ years from the last day prescribed by law for the filingof the return. (5

6etitioner also argued that the Court of Tax )ppeals n anc erroneouslysubjected petitioner s machineries to =% capital gains tax .(= 9ection #$*!+*5+ ofthe ational 1nternal /evenue Code of &&$ is clear that the =% capital gains taxon domestic corporations applies only on the sale of lands and buildings and notto machineries and e uipment. ($ 9ince V ,$00,000,000.00 of the

V#, 00,000,000.00 constituted the consideration for the sale of petitioner smachineries, only V>00,000,000.00 or 6 $0,#00,000.00 should be subjected tothe =% capital gains tax. (' 6etitioner should be liable only for 6 0,# #,000.00. (& 1tshould be entitled to a refund of 6(>,>=>,500.00 after deducting 6 0,# #,000.00from the erroneously paid final tax of 6>>,=$$,500.00. >0

1n its comment, respondent argued that the Court of Tax )ppeals determinationof petitioner s liability for capital gains tax was not an assessment. 9uchdetermination was necessary to settle the uestion regarding the taxconse uence of the sale of the properties. > This is clearly within the Court of Tax

)ppeals jurisdiction under 9ection $ of /epublic )ct o. '#. ># /espondentalso argued that -petitioner failed to justify its claim for refund.- >(

The petition is meritorious.

1

"urisdiction of the Court of Tax )ppeals

The term - ** **- !' refers to '( " ' +-)! ')o! of -ou!'* "u f+o- 4 +*o! o l) ' " 'o - 4 y- !'*. 1n the context of national internal revenue

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collection, it refers '( " ' +-)! ')o! of '( ' * "u f+o- ' 4 y + u!" +'( N ')o! l I!' +! l R 2 !u Co" of 1997 .

T( 4o + !" "u'y 'o ** ** ! ')o! l )!' +! l + 2 !u ' * + lo" ")'( '( >IR .>> 9ection # of the ational 1nternal /evenue Code of &&$

provides3

9 C. #. 6owers and !uties of the ureau of 1nternal /evenue. ? The ureau of1nternal /evenue shall be under the supervision and control of the !epartment of ;inance and its powers and duties shall comprehend the assessment andcollection ofall national internal revenue taxes, fees, and charges, and theenforcement of all forfeitures, penalties, and fines connected therewith, includingthe execution of judgments in all cases decided in its favor by the Court of Tax

)ppeals and the ordinary courts. The ureau shall give effect to and administerthe supervisory and police powers conferred to it by this Code or other laws.* mphasis supplied+ The 1/ is not mandated to ma7e an assessment relative toevery return filed with it. Tax returns filed with the 1/ enjoy the presumption thatthese are in accordance with the law. >5 Tax returns are also presumed correctsince these are filed under the penalty of perjury. >= Benerally, however, the 1/assesses taxes when it appears, after a return had been filed, that the taxes paidwere incorrect, >$ false, >' or fraudulent. >& The 1/ also assesses taxes when taxesare due but no return is filed. 50 Thus3

9 C. =. 6ower of the Commissioner to a7e assessments and 6rescribeadditional /e uirements for Tax )dministration and nforcement.W

*)+ xamination of /eturns and !etermination of Tax !ue. ? )fter a return hasbeen filed as re uired under the provisions of this Code, the Commissioner or hisduly authori


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*a+ 1n the case of a false or fraudulent return with intent to evade tax or of failureto file a return, the tax may be assessed, or a preceeding in court for thecollection of such tax may be filed without assessment, at any time within ten* 0+ years after the discovery of the falsity, fraud or omission3 6rovided, That in a

fraud assessment which has become final and executory, the fact of fraud shallbe judicially ta7en cogni


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ii. /efunds of internal revenue taxes, fees, or other charges,penalties in relation theretoJ and

iii. @ther matters arising under the ational 1nternal /evenueCode of &&$.

b+ Commissioner of 1nternal /evenue s decision or inaction in a casesubmitted to him or her

Thus, '( >IR f)+*' ( * 'o - ! ** **- !' of '( ' 4 y + * l) )l)') * .Ahen the 1/ ma7es the assessment, the taxpayer is allowed to dispute thatassessment before the 1/ . If '( >IR )**u * " )*)o! '( ' )* u!f 2o+ l 'o'( ' 4 y + o+ )f '( >IR FAILS 'o ' o! ")*4u' +ou (' y '( ' 4 y +,'( >IR * " )*)o! o+ )! ')o! - y +ou (' o! 44 l 'o '( Cou+' of TA44 l* . The Court of Tax )ppeals then ac uires jurisdiction over the case.

Ahen the 1/ s unfavorable decision is brought on appeal to the Court of Tax )ppeals, the Court of Tax )ppeals reviews the correctness of the 1/ sassessment and decision . I! + 2) )! '( >IR * ** **- !' !" " )*)o!,'( Cou+' of T A44 l* ( " 'o - )'* o ! " ' +-)! ')o! of '(' 4 y + * ' l) )l)') *. T( Cou+' of T A44 l* - y !o' - *u (" ' +-)! ')o! fo+ '( >IR - * )'* ** **- !' !" fo+ ")*4u')!2ol2)! *u ( ** **- !' )* +ou (' 'o '( Cou+' of T A44 l* o!

44 l.

T( Cou+' of T A44 l* :u+)*") ')o! )* !o' l)-)' " 'o * * ( ! '( >IR- * ! ** **- !' o+ " )*)o! u!f 2o+ l 'o '( ' 4 y + . ecause/epublic )ct o. #5 5( l*o 2 *'* '( Cou+' of T A44 l* )'( :u+)*") ')o!o2 + '( >IR * INACTION o! ' 4 y + * + fu!" l )- , there may beinstances when the Court of Tax )ppeals has to ta7e cogniIR ! " NOT - ! ** **- !'.

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The self?assessing and voluntarily paying taxpayer, however, may later find thathe or she has erroneously paid taxes. rroneously paid taxes may come in theform of amounts that should not have been paid. Thus, a taxpayer may find thathe or she has paid more than the amount that should have been paid under the

law. rroneously paid taxes may also come in the form of tax payments for thewrong category of tax. Thus, a taxpayer may find that he or she has paid acertain 7ind of tax that he or she is not subject to.

1n these instances, '( ' 4 y + - y * fo+ + fu!" . If '( >IR f )l* 'o 'o! '( + u *' fo+ + fu!", '( ' 4 y + - y +)! '( - '' + 'o '(Cou+' of T A44 l*.

;rom the taxpayer s self?assessment and tax payment up to his or her re uest

for refund and the 1/ s inaction, the 1/ s participation is limited to the receipt of the taxpayer s payment. The 1/ does not ma7e an assessmentJ the 1/ issuesno decisionJ and there is no dispute yet involved. S)! '( + )* !o >IR

** **- !' y ', '( Cou+' of T A44 l* - y NOT " ' +-)! '( -ou!'of ' * "u f+o- '( ' 4 y +. T( + )* l*o !o " )*)o! y ' 'o + 2) .Ho 2 +, '( + * INACTION o! '( 4 +' of '( >IR. T( ' )! ')o! )* )'()!'( Cou+' of T A44 l* :u+)*") ')o!.

1n other words, '( Cou+' of T A44 l* - y u)+ :u+)*") ')o! o2 + * *

2 ! )f '( y "o !o' )!2ol2 >IR ** **- !'* o+ " )*)o!*.I! '()* * , '( Cou+' of T A44 l* :u+)*") ')o! * u)+ " u*4 ')')o! + +ou (' '( * o! 44 l fo+ '( Cou+' of T A44 l* f' +'( >IR ( " f )l " 'o ' o! 4 ')')o! + * l )- fo+ REFUN; ofERRONEOUSL@ 4 )" ' *. T( Cou+' of T A44 l* ")" !o' u)+

:u+)*") ')o! * + *ul' of ")*4u' " ** **- !' of >IR " )*)o!.

6etitioner argued that the Court of Tax )ppeals had no jurisdiction to subject it to=% capital gains tax or other taxes at the first instance . The Court of Tax )ppealshas no power to ma7e an assessment.

)s earlier established, the Court of Tax )ppeals has no assessment powers. 1nstating that petitioner s transactions are subject to capital gains tax, however , '(Cou+' of T A44 l* * NOT - )! ! ** **- !'. I' * - + ly" ' +-)!)! '( $RO$ER CATEGOR@ of ' '( ' 4 ')')o! + *(oul" ( 2


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4 )", in view of its claim that it erroneously imposed upon itself and paid the 5%final tax imposed upon 6 U)?registered enterprises.

T( " ' +-)! ')o! of '( 4+o4 + ' o+y of ' '( ' 4 ')')o! + *(oul" ( 24 )" )* ! )! )" !' l - '' + ! ** +y fo+ '( + *olu')o! of '( 4+)! )4 l)**u , which is ( '( + 4 ')')o! + * !')'l " 'o + fu!" .5>

The issue of petitioner s claim for tax refund is intertwined with the issue of theproper taxes that are due from petitioner. ) claim for tax refund carries theassumption that the tax returns filed were correct. 55 1f the tax return filed was notproper, the correctness of the amount paid and, therefore, the claim for refundbecome uestionable. 1n that case, the court must determine if a taxpayerclaiming refund of erroneously paid taxes is more properly liable for taxes otherthan that paid.

1nSou'( Af+) ! A)+ y* 2. Co--)**)o! + of I!' +! l R 2 !u ,5= 9outh )frican )irways claimed for refund of its erroneously paid #X% taxes on its gross6hilippine billings. This court did not immediately grant 9outh )frican s claim forrefund. This is because although this court found that 9outh )frican )irways wasnot subject to the #X% tax on its gross 6hilippine billings, this court also foundthat it was subject to (#% tax on its taxable income. 5$

I! '()* * , 4 ')')o! + * l )- '( ' )' ++o! ou*ly 4 )" '( 5= f)! l ' )* !"-)**)o! '( ' '( u +' +ly ' + 'u+! )' f)l " )! %000 * )-4+o4 + . H ! ,

'o " ' +-)! )f 4 ')')o! + * !')'l " 'o '( + fu!" )! l )- ", '(Cou+' of T A44 l* ( * '( "u'y 'o " ' +-)! )f 4 ')')o! + * )!" " !o'l) l fo+ '( 5= f)! l ' !", )!*' ", l) l fo+ ' * o'( + '( ! '( 5=f)! l ' . )s in 9outh )frican )irways, petitioner s re uest for refund can neitherbe granted nor denied outright without such determination. 5'

If '( ' 4 y + )* fou!" l) l fo+ ' * o'( + '( ! '( ++o! ou*ly 4 )" 5=f)! l ' , '( -ou!' of '( ' 4 y + * l) )l)'y *(oul" o-4u' " !"

" "u ' " f+o- '( + fu!" l -ou!'.

A!y l) )l)'y )! ** of '( + fu!" l -ou!', (o 2 +, - y !o' oll ' " )! * )!2ol2)! *ol ly '( )**u of '( ' 4 y + * !')'l - !'

'o + fu!". The uestion of tax deficiency is distinct and unrelated to the uestionof petitioner s entitlement to refund.

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T " f) ) ! ) * *(oul" *u : ' 'o ** **- !' 4+o "u+ * !" '( +ul *of 4+ * +)4')o!. The court cannot be expected to perform the 1/ s dutieswhenever it fails to do so either through neglect or oversight. either can courtprocesses be used as a tool to circumvent laws protecting the rights of

taxpayers.

11

6etitioner s entitlement to benefits given to 6 U)?registered enterprises

$ ')')o! + )* !o' !')'l " 'o ! f)'* )2 ! 'o $E A + )*' + " !' +4+)* *,)! lu")! '( 5= 4+ f + !') l ' + ' u!" + R 4u l) A ' No. 791< o+ '(S4 ) l E o!o-) o! A ' of 1995 . T()* )* u* )' ! 2 + ! )'*o4 + ')o!.

ssentially, the purpose of /epublic )ct o. $& = is to promote development andencourage investments and business activities that will generateemployment. 5& Biving fiscal incentives to businesses is one of the means devisedto achieve this purpose. 1t comes with the expectation that persons who will availthese incentives will contribute to the purpose s achievement. Dence, 'o 2 )l'( f)* l )! !')2 * u!" + R 4u l) A ' No. 791.9 C. #>. xemption from Taxes 8nder the ational 1nternal /evenue Code. M

)ny provision of existing laws, rules and regulations to the contrarynotwithstanding, no taxes, local and nationa

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