Inctaxcases1.docx

2.

Conwi v. CTA Aug. 31, 1992

Facts: Petitioners are employees of P &G (Philippine Manufacturing Corporation, subsidiary of P&G, a foreign corporation). During 1970 and 1971, they were assigned to other subsidiaries of P&G outside the Philippines, for which they were paid US dollars as compensation. They filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion under BIR Ruling No. 70-027. In 1973, they filed amened ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund were filed. They claim that since their dollar earnings do not fall within the classification of foreign exchange transactions, there occurred no actual inward remittances, and, therefore, they are not included in the coverage of CB Circular No. 289 which provides for the specific instances when the par value of the peso shall not be the conversion rate used. CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed under RMC Nos. 7-71 and 41-71 w/c reiterated BIR Ruling 70-027. The refund claims were denied. Issue WON conversion rate to be used for income tax purposes is the par value of peso. Ruling No. SC ruled that this is basically an income tax case. Income may be defined as an amount of money coming to a personwithin a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be though of as flow of the fruits of one's labor. Per NIRC, a tax is imposed upon the taxable net income received during each taxable year from all sources by every individual, whether a citizen of the Philippines residing therein or abroad or an alien residing in the Philippines. And in the implementation for the proper enforcement of NIRC, the Sec. of Finance is empowered by Legislature to "promulgate rules and regulations" . Pursuant to this authority, RMC Nos. 7-71 10 and 41-71 11 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971. Although petitioners are correct that their earnings do not fall w/in FX transaction, they forgot that they are citizens of the Phils, and their income, within or outside are subject to income tax.

3.

OBILLOS v. CIR Oct 29, 1985

Facts: In 1973, Jose Obillos completed payt on 2 lots located in Greenhills, San Juan. The next day, he transferred his rights to his 4 children for them to build their own residences. The Torrens title showed that they were co-owners of the two lots. However, the children resold them to Walled City Securities Corp and Olga Cruz Canda for P313k or P33k profit for each of them. They treated the profit as capital gains and paid P16,792.00

The CIR assessed the petitioners to pay the corporate income tax of their shares, as this entire assessment is based on the alleged partnership under Article 1767 of the Civil Code; simply because they contributed each to buy the lots, resold them and divided the profits among them. But as testified by Obillos, they have no intention to form the partnership and that it was merely incidental since they sold the said lots due to high demand of construction.

Issue: WON there a partnership created, hence, subject to corporate income taxes. Ruling: No. The court ruled that there was no partnership. To regard them as having a taxable partnership would result in oppressive taxation and obliterate the distinction between a co-ownership and a partnership. The children had no intention of forming a partnership. The transaction was isolated. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the natureof things a temporary state. The sharing of gross returns does not of itself establish a joint partnership whether or not the persons sharing them have a joint or common right or interest in the property from which the returns are derived. There must instead be an unmistakable intention to form that partnership or joint venture There must be an unmistakeable intention to form a partnership or joint venture. In this case, the Commissioner should have investigated if the father paid donor's tax to establish the fact that there was really no partnership.

4.

CIR v. ST. LUKE MEDICAL CENTER Sep 26, 2012

Facts: St. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit corporation. The BIR assessed them deficiency taxes amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, VAT, w/holding tax on compensation and expanded w/holding tax. Luke’s filed an administrative protest with the BIR against the deficiency tax assessments. BIR argued before the CTA that Sec 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke. BIR claimed that St. Luke’s was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the hospital’s board of trustees, officers and employees directly benefit from its profits and assets. St. Luke’s had total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in 1998. St. Luke’s contended that the BIR should not consider its total revenues, because its free services to patients was P218,187,498 or 65.20% of its 1998 operating income of P334,642,615. St. Luke’s also claimed that its income does not inure to the benefit of any individual. Luke’s maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

Issue WON St. Luke's is liable for deficiency income tax in 1998 under Sec 27(B) of the NIRC, w/c imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

Ruling Yes. Generally, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution Section 30(E) of the NIRC provides that a charitable institution must be: (1) A non-stock corporation or association; (2) Organized exclusively for charitable purposes; (3) Operated exclusively for charitable purposes; and (4) No part of its net income or asset shall belong to or inure to the `benefit of any member, organizer, officer or any specific person. St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. It is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. However, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax. St. Luke remains a proprietary non-profit hospital under Sec 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes, thus it is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.

5.

CIR v. DE LA SALLE Nov 9, 2016

Facts In 2004, BIR issued to DLSU LOA No. 2794 to examine it's books of accounts and other accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior Years. BIR issued a PAN to DLSU and then through a Formal Letter of Demand assessing the ff deficiency taxes: (1) IT on rental earnings from restaurants/canteens and bookstores operating within the campus; (2) VAT on business income; and (3) DST on loans and lease contracts. The BIR demanded the payment of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and 2003. DLSU protested the assessment contending that it is a non-stock, non-profit educational institution, falling under Art XIV, Sec 4 (3)of the Constitution, which reads: (3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. CTA ruled that DST assessment on the loan transactions is CANCELLED. However, it was ORDERED TO PAY deficiency IT, VAT and DST on its lease contracts, plus 25% surcharge for the fiscal

years 2001, 2002 and 2003. It was also held liable to pay 20% delinquency interest on the total amount due computed from Sep 30, 2004 until full payment thereof. The compromise penalties imposed by were excluded, there being no compromise agreement between the parties. Commissioner appealed to the CTA En Banc arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes removed these items from the exemption coverage under the Constitution. DLSU formally offered to the CTA supplemental pieces of documentary evidence to prove that its rental income was used actually, directly and exclusively for educational purposes w/c the Commissioner did not object to the formal offer. CTA Division, w/ the supplemental evidence submitted, reduced the amount of DLSU's tax deficiencies. Commissioner supplemented its petition with the CTA and argued that the CTA erred in admitting DLSU's additional evidence. Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the CTA on the following grounds: (1) the entire assessment should have been cancelled because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU submitted evidence similar to those submitted by Ateneo in a separate case where the CTA cancelled Ateneo's tax assessment; and (3) the CTA Division erred in finding that a portion of DLSU's rental income was not proved to have been used actually, directly and exclusively for educational purposes. The issue of the LOA' s validity was raised during trial hence, the issue was deemed properly submitted for decision and reviewable on appeal.

Issues (1) WON DLSU' s income and revenues proved to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes. (2) WON entire assessment should be voided because of the defective LOA. (3) WON CTA correctly admitted DLSU's supplemental pieces of evidence. (4) WON CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed by the Court.

Ruling (1) Yes. Income, revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes. DLSU falls under non-stock, non-profit educational institutuon. When a NS, NP educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. When it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted from RPT. (2) LOA issued to DLSU is valid for taxable year 2003 only. RMO-43-90 provideds that an LOA should cover a 1 yr taxable period. If the audit shall include more than 1 taxable period, the other periods or years shall be specifically indicated. This provision clearly prohibits the practice of issuing LOAs covering audit of unverified prior years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely prescribes that if the audit includes more than one taxable period, the other periods or years must be specified. Validity of LOA was raised during the trial and appeal contrary to claim of Commissioner w/c they had the opportunity to argue but never did. (3) CTA correctly admitted DLSU's formal offer of supplemental evidence. CTA's admission of the supplemental evidence was upheld by SC on distinct but mutually reinforcing grounds, to wit:

(1) the Commissioner failed to timely object to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence. (4) CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion. SC finds that the fact-finding process undertaken by the CTA shows that it based its ruling on the evidence on record, which were examined and verified by the Independent CPA thus, see no persuasive reason to deviate from these factual findings. However, it does not mean that SC is bound by CTA’s conclusions. In the present case, SC does not agree with the method used by the CTA to arrive at DLSU' s unsubstantiated rental income so there was a recomputation made.

6.

CIR v. YMCA Oct 14, 1998

Facts YMCA, a non-stock, non-profit institution which conducts various programs beneficial to the public pursuant to its religious, educational, and charitable objectives LEASES OUT a portion of its premises to small shop owners, like restaurants and canteen operator. YMCA earned an income of 676,829.80 from leasing and 44,259 from parking fees collected from non-members. CIR issued an assessment to private respondent (YMCA) for Deficiencies on the following: 1. Income tax, 2. EWT on rentals and professional fees and 3. W/holding tax on wages. YMCA opposed arguing that its rental income is not subject to tax mainly because of the provisions of Sec 27 of the NIRC which provides that “civic leagues or organizations not organized for profit but operate exclusively for promotion of social welfare and those organized exclusively for pleasure, recreation and other non-profitable businesses SHALL NOT BE TAXED.” Issue WON rental income of YMCA is taxable. Ruling Yes. Although YMCA falls under the exempted corp. under Sec 26 of NIRC, the exemption does not apply to income derived "from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income". The phrase "any of their activities conducted for profit" does not qualify the word "properties." This makes income from the property of the organization taxable, regardless of how that income is used - whether for profit or for lofty non-profit purposes. The rental income cannot be exempted on the solitary but unconvincing ground that said income is not collected for profit but is merely incidental to its operation. The law does not make a distinction. Where the law does not distinguish, neither should we distinguish. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. YMCA is exempt from the payment of property taxes only but not income taxes because it is not an educational institution devoting its income solely for educational purposes. Furthermore, a claim of statutory exemption from taxation should be Manifest and unmistakable from the language of the law on which it is based.

7.

SMI-ED Phi. Tech v. CIR Nov 12, 2014

Facts SMI-ED is a PEZA registered corporation under R.A. 7916 on Jun 29, 1998. It constructed a building and purchased machineries and equipment amounting to P3,150,925,917 as Dec 31, 1999. Because of the Asian financial crisis, SMI-ED failed to start operations and closed its factory on Oct 15, 1999. SMI-ED sold its properties on Aug 1, 2000 to another PEZA registered corporation, Ibiden Phils. Inc for P893,550,000 and was dissolved on Nov 30, 2000. In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross sales of its properties to 5% final tax on PEZA registered corporations and paid taxes amounting to ₱44,677,500. After requesting for cancellation of its PEZA Registration on Jun 2001, and amending its Articles of Incorporation, it filed claim for refund of P44,677,500 with the BIR for alleged erroneously paid tax. It also alleged that it incurred a net loss P2,233,464,538. The BIR did not act on the claim so SMI-ED filed Petition for Review with the CTA on Sep 9, 2002 which was denied on Dec 29, 2004 for having been filed beyond the 2 yr prescription period and and also contending it is not entitled to the PEZA preferential rate for not having commenced operations. The CTA ruled that SMI-ED should have paid 6% capital gains tax (CGT) of P53,613,000 on the sale therefore, it still needs to pay the balance of P8,935,500 deficiency tax instead of a tax refund. Its appeal to the CTA-En banc was denied, hence, it appealed to the SC on Dec 27, 2006 claiming that the CTA acted beyond its jurisdiction when it assessed for deficiency tax in the first instance and that machineries and equipment are not subject to CGT under NIRC. Also, the power to make assessment had prescribed under Sec 203 of the NIRC which is 3 years after filing of the return.

Issue (1) WON CTA has jurisdiction to assess for deficiency tax. (2) WON SMI-ED is entitled to benefits given to PEZA-registered enterprises.

(3) WON sale made by SMI-ED is subject to 6% capital gains tax. (4) WON SMI-ED is entitled to a refund. Ruling (1) No. CTA has no power to make an assessment at the first instance. CTA’s jurisdiction is appellate in nature on matters such as tax collection, tax refund, and others related to the national internal revenue taxes. However, in stating that SMI-ED transactions are subject to CGT, CTA was not making an assessment but merely determining the proper category of tax that should have been paid, which in this case is a claim that it erroneously paid the 5% preferential tax imposed upon PEZA-registered enterprises. (2) No. SMI-ED is not entitled to benefits and incentives given to PEZA-registered enterprises, including the 5% preferential tax rate under RA 7916 (Special Economic Zone Act of 1995), since it never began operation. (3) Yes, insofar as sale of land and building are concerned which is imposed a 6% CGT on the presumed gain realized. NIRC does not impose the 6% CGT on the gains realized from the sale of machineries and equipment but rather the income from the sale of machineries and equipment is subject to the provisions on normal corporate income tax. (4) Yes. To compute if it is entitled to refund, the amount of 6% CGT for the sold land and building and the amount of corporate income tax for the sale of machineries and equipment should be deducted from the total final tax paid. Since in its Mar 1, 2001 ITR, SMI-ED suffered a net loss w/c was not disputed by BIR and since it haven’t started operating, it also is not subject to the MCIT of 2% on gross income, thus, it is not liable for any income tax. BIR is ordered to refund SMI-Ed the amount of 5% final tax paid to the BIR, less the 6% CGT on the sale of land and building. Due to lapse of the prescriptive period for assessment, any CGT accrued from the sale of its land and building that is in excess of the 5% final tax paid to the BIR may no longer be recovered.

8.

RP v. Arlene Soriano Feb 25, 2015

Facts. RP, represented by DPWH, filed a Complaint for expropriation against Arlene R. Soriano, the registered owner of a parcel of land. Petitioner averred that pursuant to RA No. 8974, otherwise known as "An Act to Facilitate the Acquisition of Right-Of-Way, Site or Location for National Government Infrastructure Projects and for other Purposes," the property sought to be expropriated shall be used in implementing the construction of the NLEX- Harbor Link Project from NLEX to MacArthur Highway, Valenzuela City. Consequently, RTC ordered the issuance of a Writ of Possession and a Writ of Expropriation. RTC considered Soriano to have waived her right to adduce evidence and to object to the evidence submitted by DPWH for her continued absence despite several notices to do so. On Nov 15, 2013, the RTC rendered its Decision (1) Ordering the plaintiff to pay Soriano the sum of Php420,000.00 for the 200 square meters as fair, equitable, and just compensation with legal interest at 12% per annum from the taking of the possession of the property, subject to the payment of all unpaid real property taxes and other relevant taxes, if there be any; (2) Plaintiff is likewise ordered to pay the defendant consequential damages which shall include the value of the transfer tax necessary for the transfer of the subject property from the name of the Soriano to that of the plaintiff Petitioner now claims that contrary to the RTC’s instruction, transfer taxes, in the nature of Capital Gains Tax and Documentary Stamp Tax, necessary for the transfer of the subject property

from the name of the respondent to that of the petitioner are liabilities of respondent and not petitioner.

Issue (1) WON imposition of legal interest of 6% p.a. on the amount of just compensation as there was no delay on the part of petitioner is proper. (2) WON transfer taxes in the nature of CGT and DST are for account of seller. Ruling (1) No. The records of this case reveal that there was no delay in its payment of just compensation as it had deposited the amount in full due 4 months before the taking w/c was deemed by the trial court to be just, fair, and equitable, taking into account the well-established factors in assessing the value of land, such as its size, condition, location, tax declaration, and zonal valuation as determined by the BIR. The imposition of interest therfore is unjustified and should be deleted. (2) Pursuant to Sec 24(D) and 56(A)(3) of the NIRC, capital gains tax due on the sale of real property is a liability for the account of the seller. Thus, it has been held that since capital gains is a tax on passive income, it is the seller, not the buyer, who generally would shoulder the tax. Accordingly, BIR Ruling No. 476-2013 constituted the DPWH as a withholding agent to withhold the 6% final withholding tax in the expropriation of real property for infrastructure projects. Therefore, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain from the sale of the real estate. As to the DST, Court finds it as petitioner’s liability. According to the BIR, all the parties to a transaction are primarily liable for the DST, as provided by Sec 2 of BIR RR No. 9-2000. As a general rule, any of the parties to a transaction shall be liable for the full amount of the documentary stamp tax due, unless they agree among themselves on who shall be liable for the same. In this case, there is no agreement as to the party liable. However, the Citizen’s Charter, issued by petitioner DPWH itself, explicitly provides that the documentary stamp tax, transfer tax, and registration fee due on the transfer of the title of land in the name of the Republic shall be shouldered by the implementing agency of the DPWH, while the capital gains tax shall be paid by the affected property owner. Thus, while there is no specific agreement between petitioner and respondent, petitioner's Citizen's Charter contains a clear and unequivocal assumption of accountability for the documentary stamp tax.

9.

Supreme Transliner Inc. V. BPI Family Feb. 25, 2011

Facts: Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of P9,853,000.00 from BPI Family with a 714-square meter lot as collateral. Due to non-payt of the loan, the mortgage was extrajudicially foreclosed and the property was sold to the bank as the highest bidder. Before the expiration of the 1-year redemption period, the mortgagors notified the bank of their intention to redeem the property. Mortgagors filed a complaint against the bank to recover the allegedly unlawful and excessive charges totaling P5,331,237.77, with prayer for damages and attorney's fees. Bank asserted that the redemption price reflecting the stipulated interest, charges and/or expenses, is valid, legal and in accordance with documents duly signed by the mortgagors. The bank further contended that the claims are deemed waived and the mortgagors are already estopped from questioning the terms and conditions of their contract.

According to the trial court, plaintiffs-mortgagors are estopped from questioning the correctness of the redemption price as they had freely and voluntarily signed the letter-agreement prepared by the defendant bank

Issues: WON the foreclosing mortgagee should pay capital gains tax upon execution of the certificate of sale, and if paid by the mortgagee, whether the same should be shouldered by the redemptioner.

Ruling: No. There is no legal basis for the inclusion of this charge in the redemption price. Where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered by brief memorandum thereof made by the Register of Deeds upon the certificate of title. It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption. RR No. 4-99 issued on Mar 16, 1999, further amends RMO No. 6-92 relative to the payment of CGT and DST on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies. SEC. 3. CAPITAL GAINS TAX. – (1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. SEC. 4. DOCUMENTARY STAMP TAX. –(1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration. BPI is hereby ordered to RETURN the amounts representing CGT and DST as reflected in the SOA To Redeem as of April 7, 1997 and to retain only the sum provided in RR No. 4-99 as documentary stamps tax due on the foreclosure sale. BPI is hereby declared entitled to the attorney’s fees and liquidated damages included in the total redemption price paid by Supreme Transliner.

10. BDO v. RP Jan 13, 2015

Facts The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on Oct 18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of Development NGO Networks). On October 7, 2011, CIR issued BIR Ruling No. 370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity on Oct 18, 2011

This case involves P35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury (BTr) denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds. These PEACe Bonds would initially be purchased by a special purpose vehicle on behalf of Caucus of Development NGO Networks (CODE-NGO), repackaged and sold at a premium to investors. The net proceeds from the sale will be used to endow a permanent fund to finance meritorious activities and projects of accredited non-government organizations (NGOs) throughout the country. In relation to this, CODE-NGO wrote a letter to the Bureau of Internal Revenue (BIR) to inquire as to whether the PEACe Bonds will be subject to withholding tax of 20%. The BIR issued several rulings beginning with BIR Ruling No.020-2001 (issued on May 31, 2001) and was subsequently reiterated its points in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120. The rulings basically say that in determining whether financial assets such as a debt instrument are deposit substitute, the “20 or more individual or corporate lenders rule” should apply. Likewise, the “at any one time” stated in the rules should be construed as “at the time of the original issuance.” With this BTr made a public offering of the PEACe Bonds to the Government Securities Eligible Dealers (GSED) wherby RCBC won as the highest bidder for approximately 10.17 billion, resulting in a discount of approximately 24.83 billion. RCBC Capital Capital entered into an underwriting agreement with CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. In Oct 7, 2011, BIR issued BIR RULING NO. 370-2011 in response to the query of the Secretary of Finance as to the proper tax treatment of the discounts and interest derived from Government Bonds. It cited three other rulings issued in 2004 and 2005. The above ruling states that the all treasury bonds (including PEACe Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and purchase price/discounted value of the bond) is treated as interest income of the purchaser/holder.

Summary of arguments In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that: 1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 NIRC when it declared that all government debt instruments are deposit substitutes regardless of the 20-lender rule; and 2. The 2011 BIR Ruling cannot be applied retroactively because: a) It will violate the contract clause; ● It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds, represented by the government as an inducement and important consideration for the purchase of the Bonds; b) It constitutes deprivation ofproperty without due process because there was no prior notice to bondholders and hearing and publication; c) It violates the rule on non-retroactivity under the 1997 NIRC; d) It violates the constitutional provision on supporting activities of non-government organizations and development of the capital market; and e) The assessment had already prescribed.

Respondents counter that: 1) Respondent CIR did not act with grave abuse of discretion in issuing the challenged 2011 BIR Ruling: a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the CIR’s power to interpret the provisions of the 1997 National Internal Revenue Code and other tax laws; b. CIR merely restates and confirms the interpretations contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which have already effectively abandoned or revoked the 2001 BIR Rulings; c. CIR is not bound by his or her predecessor’s rulings especially when the latter’s rulings are not in harmony with the law; and d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.

2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law: a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they allege to have been wrongfully collected; and b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.

Issue I. WON the PEACe Bonds are "deposit substitutes" and thus subject to 20% FWT under the 1997 NIRC. Related to this question is the interpretation of the phrase "borrowing from 20 or more individual or corporate lenders at any one time" under Sec 22(Y) of the 1997 NIRC, particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," WON the government or BIR is estopped from imposing and/or collecting the 20% FWT from the face value of these Bonds

a. Will the imposition of the 20% FWT violate the non-impairment clause of the Constitution? b. Will it constitute a deprivation of property without due process of law? c. Will it violate Section 245 of the 1997 NIRC on non-retroactivity of rulings?

Ruling The doctrine of exhaustion of administrative remedies is not applicable because of the ff factors: 1) when the issue involved is purely a legal question 2) when there are circumstances indicating the urgency of judicial intervention

The nature and importance of the issues raised to the investment and banking industry with regard to a definitive declaration of whether government debt instruments are deposit substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this court in the first instance. The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or product that may be issued and traded in the market. Due to the changing positions of the Bureau of Internal Revenue on this issue, there isa need for a final ruling from this court to stabilize the expectations in the financial market.

I. SC did not consider the PEACe Bonds as deposit substitutes and therefore not subject to the 20 percent final withholding tax on the interest on deposit substitutes, due to the failure to adequately show that there was borrowing from the public. There was, however, a qualification that should there have been a simultaneous sale of the bonds from BTr and RCBC/CODE-NGO and from RCBC/CODE-NGO to the undisclosed investors, and the total number of the investor/lender exceeded twenty (20), the PEACe Bonds would have been considered as deposit substitutes. Decision of the SC enlarged the meaning of the phrase “at any one time” to include not only the original issuance of the bonds, as previously interpreted by the earlier BIR issuances, but also transactions within the secondary market. In effect, where a simultaneous sale referred above occurred, the bondholder who sells or trades his bonds to another lender/investor is now constituted as a withholding agent of the 20 percent final withholding tax.

II. SC held that "memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action because there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same." Administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend the law."

11. Dumaguete Cathedral v. CIR Jan 22, 2010

Facts: Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative duly registered with and regulated by the Cooperative Development Authority (CDA). On Nov 27, 2001, the BIR Operations Group Deputy Commissioner, Lilian B. Hefti, issued LoA Nos. 63222 and 63223, authorizing BIR officers to examine petitioners books of accounts and other accounting records for all internal revenue taxes for the taxable years 1999 and 2000. On Oct 16, 2002, petitioner received two other Pre-Assessment Notices for deficiency withholding taxes also for taxable years 1999 and 2000. The deficiency withholding taxes cover the payments of the honorarium of the Board of Directors, security and janitorial services, legal and professional fees, and interest on savings and time deposits of its members. On Oct 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that it would only pay the deficiency withholding taxes corresponding to the honorarium of the Board of Directors, security and janitorial services, legal and professional fees for the year 1999 in the amount of P87,977.86, excluding penalties and interest.

On Nov 29, 2002, petitioner availed of the VAAP (Voluntary Assessment & Abatement Program) and paid the amounts of P105,574.62 and P143,867.24. corresponding to the withholding taxes on the payments for the compensation, honorarium of the Board of Directors, security and janitorial services, and legal and professional services, for the years 1999 and 2000, respectively. On Apr 24, 2003, petitioner received from the BIR Regional Director Flores, Letters of Demand ordering petitioner to pay the deficiency withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of P1,489,065.30 and P1,462,644.90, respectively.

Issue: WON it is liable to pay the deficiency w/holding taxes on interest from savings and time deposits of its members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per annum.

Held: Petitioners invocation of BIR Ruling No. 551-888, reiterated in BIR Ruling [DA-591-2006], is proper. On Nov 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members. According to the CTA En Banc, the BIR Ruling was based on the premise that the savings and time deposits were placed by the members of the cooperative in the bank. Consequently, it ruled that the BIR Ruling does not apply when the deposits are maintained in the cooperative such as the instant case. There is nothing in the ruling to suggest that it applies only when deposits are maintained in a bank. Rather, the ruling clearly states, without any qualification, that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members.

No. Petitioner is not liable to pay the assessed deficiency w/holding taxes on interest from the savings and time deposits of its members, as well as the delinquency interest of 20% per annum. Being a credit cooperative duly registered with the Cooperative Development Authority (CDA), Sec 24(B)(1) of the NIRC must be read together with RA 6938, as amended by RA 9520. Under Art 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. Thus, to encourage the formation of cooperatives and to create an atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax treatment. No less than our Constitution guarantees the protection of cooperatives. Sec 15, Art XII of the Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Sec 10 of Art II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. In relation thereto, Sec 2 of Art XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, we find that an interpretation exempting the members of cooperatives from the

imposition of the final tax under Sec 24(B)(1) of the NIRC is more in keeping with the letter and spirit of our Constitution. Cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax must give way to foster the creation and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: "The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice."

12. Santos v. Servier Phils. Nov 28, 2008 Facts Petitioner Isabel T. Santos was the HR Manager of Servier Philippines, Inc. While attending a meeting in France, she got sick while having dinner and was brought to a hospital where she fell into coma for 21 days and stayed at the ICU for 52 days. Hospitalization expenses, as well as those of her husband and son, were paid by Servier. Eventually they returened in the Phils and she was then confined at the St. Luke's Medical Center for rehabilitation During the period of rehabilitation, Servier continued to pay the former's salaries; and to assist her in paying her hospital bills. Servier’s physician concluded that Santos had not fully recovered mentally and physically so the company was constrained to terminate her services effective August 31, 1999 and company offered a retirement package. Of the promised retirement benefits amounting to P1,063,841.76, only P701,454.89 was released to petitioner's husband, the balance thereof was withheld allegedly for taxation purposes. Petitioner, represented by her husband, instituted the instant case at NLRC for unpaid salaries; unpaid separation pay; unpaid balance of retirement package plus interest; insurance pension for permanent disability; educational assistance for her son; medical assistance; reimbursement... of medical and rehabilitation expenses; moral, exemplary, and actual damages, plus attorney's fees.

Issue WON retirement benefits is taxable. Ruling Yes. For the retirement benefits to be exempt from the w/tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once. In this case, Santos was qualified for disability retirement. However, she was only 41 years of age; and had been in the service for more or less 8 years. Exemption from tax is not applicable for failure to comply with the age and length of service requirements.

13. CIR v. Isabela Cultural Corp. Feb 12, 2007 Facts

On Feb 23, 1990, ICC received from BIR Assessment Notice for deficiency income tax in the amount of P333,196.86, and Assessment Notice for deficiency EWT in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986. The deficiency income tax of P333,196.86, arose from: (1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and security services billed to and paid by ICC in 1986, to wit: (a) Expenses for the auditing services of SGV & Co., for the year ending December 31, 1985; (b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985 (c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May 1986. (2) The alleged understatement of ICC’s interest income on the three promissory notes due from Realty Investment, Inc. The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services. ICC contested such assessment. CTA held that petition is premature because final notice of assessment cannot beconsidered as a final decision appealable to the tax court. CA reversed.

Issue (1) WON the deductions were properly claimed by Isabela Cultural Corporation. (2) Under accrual method, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense.

Ruling (1) The deductions for expenses for professional fees consisting of legal and auditing services are NOT allowable. However, the deductions for expenses for security services were properly claimed by Isabela Cultural Corporation. For the legal and auditing services, ICC could have reasonably known the fees of those firms that it hired, thus satisfying the all-events test.´ As such, per RAMO No. 1-2000, they cannot validly be deducted from its gross income for the said year and were therefore properly disallowed by the BIR. As for the security services, because they were incurred in 1986, they could be properly claimed as deductions for the said year. The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: a. The expense must be ordinary and necessary; b. It must have been paid or incurred during the taxable year; c. It must have been paid or incurred in carrying on the trade or business of the taxpayer; and d. It must be supported by receipts, records, or other pertinent papers. RAMO No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed

as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.

(2) Accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year.

14. CIR v. Filinvest Devt Corp. Jul 19, 2011

Facts Filinvest Development Corporation extended advances in favor of its affiliates and supported the same with instructional letters and cash and journal vouchers. The BIR assessed Filinvest for deficiency income tax by imputing an “arm’s length” interest rate on its advances to affiliates. Filinvest disputed this by saying that the CIR lacks the authority to impute theoretical interest and that the rule is that interests cannot be demanded in the absence of a stipulation to the effect.

ISSUE: Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates?

HELD: NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income under (now) Section 50 of the Tax Code, the same does not include the power to impute theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if the CIR is able to prove that interest expense (on its own loans) was in fact claimed by the lending entity. The term in the definition of gross income that even those income “from whatever source derived” is covered still requires that there must be actual or at least probable receipt or realization of the item of gross income sought to be apportioned, distributed, or allocated. Finally, the rule under the Civil Code that “no interest shall be due unless expressly stipulated in writing” was also applied in this case.

15. CIR v. General Foods Apr 24, 2003 Facts General Foods (Phils), which is engaged in the manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its ITR for the fiscal year ending February 1985 and claimed as deduction, among other business expenses, P9,461,246 for media advertising for “Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied. General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by CTA dismissing the company’s appeal. Issue WON the subject media advertising expense for "Tang" incurred by respondent corporation was an ordinary and necessary expense fully deductible under NIRC. Ruling No. Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. He who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. To be deductible, an advertising expense should not only be necessary but also ordinary. CIR maintains that the subject advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: first, “reasonableness” of the amount incurred and second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or private respondent’s business. Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time. There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation. The Court finds the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC. Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.

The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year under review. Petition granted, judgment reversed and set aside.

Advertising expenses. — In 1995, respondent paid P9.4 million for advertising a product, which was deducted from its gross income for the year. This was disallowed by the BIR as ordinary and necessary expense, which considered the same as capital expenditure, since the amount was staggering and it was incurred to create or maintain some form of goodwill for the taxpayer's trade or business or for the industry or profession of which the taxpayer is a member. The court held that "goodwill" generally denotes the benefit arising from connection and reputation, and efforts to establish reputation are akin to acquisition of capital assets. Therefore, expenses related thereto are not business expenses but capital expenditures (Commissioner vs. General Foods Phil., G.R. No. 143672, Apr. 24, 2003). Being capital expenditures, the amount should be allocated among the taxable years for which benefits of advertising shall accrue.

16. H. Tabunting Pawnshop v. CIR Jul 29, 2-13 Facts

Ruling As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The subasta books it presented were not the proper evidence of such losses from the auctions because they did not reflect the true amounts of the proceeds of the auctions due to certain items having been left unsold after the auctions. The rematado books did not also prove the amounts of capital because the figures reflected therein were only the amounts given to the pawnees. It is interesting to note, too, that the amounts received by the pawnees were not the actual values of the pawned articles but were only fractions of the real values.