1. Tan v.

Del Rosario
G.R. No. 109289. October 3, 1994

Facts: Petitioners assail RA 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue
Code, as violative of the constitutional requirement that taxation shall be "shall be uniform
and equitable." The law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and partnerships.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the
process, what he believes to be an imbalance between the tax liabilities of those covered by
the amendatory law and those who are not.

Issue: Whether or not RA 7496 is violative of the constitutional requirement that taxation
shall be uniform and equitable.

Held: Petition denied. Uniformity of taxation means that (1) the standards that are used
therefore are substantial and not arbitrary, (2) the categorization is germane to achieve
legislative purpose, (3) the law applies, all things being equal, to both present and future
conditions and (4) the classification applies equally well to all those belonging to the same
class.

With the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot
freely delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust as to
amount to confiscation of property, courts will not hesitate to strike it down, for, despite all
its plenitude, the power to tax cannot override constitutional proscriptions. This stage,
however, has not been demonstrated to have been reached within any appreciable distance
in this controversy before us.

LORENZO OA V CIR

GR No. L -19342 | May 25, 1972 | J. Barredo
Facts:
Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A
civil case was instituted for the settlement of her state, in which Oa was appointed
administrator and later on the guardian of the three heirs who were still minors when the project
for partition was approved. This shows that the heirs have undivided interest in 10 parcels of
land, 6 houses and money from the War Damage Commission.
Although the project of partition was approved by the Court, no attempt was made to divide the
properties and they remained under the management of Oa who used said properties in
business by leasing or selling them and investing the income derived therefrom and the proceeds
from the sales thereof in real properties and securities. As a result, petitioners properties and
investments gradually increased. Petitioners returned for income tax purposes their shares in the
net income but they did not actually receive their shares because this left with Oa who invested
them.
Based on these facts, CIR decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners
asked for reconsideration, which was denied hence this petition for review from CTAs decision.
Issue:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax
Held:
Unregistered partnership. The Tax Court found that instead of actually distributing the
estate of the deceased among themselves pursuant to the project of partition, the heirs allowed
their properties to remain under the management of Oa and let him use their shares as part of
the common fund for their ventures, even as they paid corresponding income taxes on their
respective shares.
Yes. For tax purposes, the co-ownership of inherited properties is automatically converted into
an unregistered partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce profits for the heirs in
proportion to their respective shares in the inheritance as determined in a project partition either
duly executed in an extrajudicial settlement or approved by the court in the corresponding testate
or intestate proceeding. The reason is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate and the incomes thereof, for each
of them to manage and dispose of as exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If
after such partition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his share, there
can be no doubt that, even if no document or instrument were executed, for the purpose, for tax
purposes, at least, an unregistered partnership is formed.
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships
The term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on (8 Mertens Law of Federal Income Taxation,
p. 562 Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships within the purview of the
term corporation. It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations. Judgment affirmed.


Evangelista, et al. v. CIR, GR No. L-9996, October 15, 1957

Facts:
Herein petitioners seek a review of CTAs decision holding them liable for income
tax, real estate dealers tax and residence tax. As stipulated, petitioners borrowed from
their father a certain sum for the purpose of buying real properties. Within February 1943
to April 1994, they have bought parcels of land from different persons, the management
of said properties was charged to their brother Simeon evidenced by a document. These
properties were then leased or rented to various tenants.
On September 1954, CIR demanded the payment of income tax on corporations,
real estate dealers fixed tax, and corporation residence tax to which the petitioners seek
to be absolved from such payment.
Issue: Whether petitioners are subject to the tax on corporations.
Ruling:
The Court ruled that with respect to the tax on corporations, the issue hinges on
the meaning of the terms corporation and partnership as used in Section 24 (provides
that a tax shall be levied on every corporation no matter how created or organized
except general co-partnerships) and 84 (provides that the term corporation includes
among others, partnership) of the NIRC. Pursuant to Article 1767, NCC (provides for the
concept of partnership), its essential elements are: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties.
It is of the opinion of the Court that the first element is undoubtedly present for
petitioners have agreed to, and did, contribute money and property to a common fund.
As to the second element, the Court fully satisfied that their purpose was to engage in
real estate transactions for monetary gain and then divide the same among themselves
as indicated by the following circumstances:
1. The common fund was not something they found already in existence nor a
property inherited by them pro indiviso. It was created purposely, jointly borrowing a
substantial portion thereof in order to establish said common fund;
2. They invested the same not merely in one transaction, but in a series of
transactions. The number of lots acquired and transactions undertake is strongly
indicative of a pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of the property
acquired. In other words, one cannot but perceive a character of habitually
peculiar to business transactions engaged in the purpose of gain;
3. Said properties were not devoted to residential purposes, or to other
personal uses, of petitioners but were leased separately to several persons;
4. They were under the management of one person where the affairs relative
to said properties have been handled as if the same belonged to a corporation or
business and enterprise operated for profit;
5. Existed for more than ten years, or, to be exact, over fifteen years, since
the first property was acquired, and over twelve years, since Simeon Evangelista
became the manager;
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence.

The collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein.
Also, petitioners argument that their being mere co-owners did not create a
separate legal entity was rejected because, according to the Court, the tax in question is
one imposed upon "corporations", which, strictly speaking, are distinct and different from
"partnerships". When the NIRC includes "partnerships" among the entities subject to the
tax on "corporations", said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. The qualifying expression
found in Section 24 and 84(b) clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity with the usual requirements of
the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporations. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein referred
to. For purposes of the tax on corporations, NIRC includes these partnerships - with the
exception only of duly registered general co partnerships - within the purview of the term
"corporation." It is, therefore, clear that petitioners herein constitute a partnership, insofar
as said Code is concerned and are subject to the income tax for corporations.
As regards the residence of tax for corporations (Section 2 of CA No. 465), it is
analogous to that of section 24 and 84 (b) of the NIRC. It is apparent that the terms
"corporation" and "partnership" are used in both statutes with substantially the same
meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Finally, on the issues of being liable for real estate dealers tax, they are also
liable for the same because the records show that they have habitually engaged in
leasing said properties whose yearly gross rentals exceeds P3,000.00 a year.

PASCUAL v. Commissioner of Internal Revenue #10 BUSORG
G.R. No. 78133 October 18, 1988
GANCAYCO, J.:
FACTS:
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels
of land were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels
of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioner
realized a net profit in the sale made in 1968 in the amount of P165, 224.70, while they realized a net
profit of P60,000 in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 .
Respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-
owners in the real estate transactions formed an unregistered partnership or joint venture taxable as
a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section
24, both of the National Internal Revenue Code; that the unregistered partnership was subject to
corporate income tax as distinguished from profits derived from the partnership by them which is
subject to individual income tax.
ISSUE:
Whether petitioners formed an unregistered partnership subject to corporate income tax (partnership
vs. co-ownership)
RULING:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:(2) Co-ownership
or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do
or do not share any profits made by the use of the property; (3) The sharing of gross returns does
not of itself establish a partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived;
The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form
a partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality nor
with assets that can be held liable for said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the partnership.

AFISCO INSURANCE CORP. V CA 302 SCRA 1 (January 25,
1999)
Monday, January 26, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Taxation

Facts: AFISCO and 40 other non-life insurance companies entered into
a Quota Share Reinsurance Treaties with Munich, a non-resident
foreigninsurance corporation, to cover for All Risk Insurance Policies over
machinery erection, breakdown and boiler explosion. The treaties required
petitioners to form a pool, to which AFISCO and the others complied. On
April 14, 1976, the pool of machinery insurers submitted a financial
statement and filed an Information Return of Organization Exempt from
Income Tax for the year ending 1975, on the basis of which, it was
assessed by the commissioner of Internal
Revenue deficiency corporatetaxes. A protest was filed but denied by the
CIR.

Petitioners contend that they cannot be taxed as a corporation, because
(a) the reinsurance policies were written by them individually and
separately, (b) their liability was limited to the extent of their allocated
share in the original risks insured and not solidary, (c) there was no
common fund, (d) the executive board of the pool did not exercise control
and management of its funds, unlike the board of a corporation, (e) the
pool or clearing house was not and could not possibly have engaged in
the business of reinsurance from which it could have derived income for
itself. They further contend that remittances to Munich are not dividends
and to subject it to tax would be tantamount to an illegal double taxation,
as it would result to taxing the same premium income twice in the hands
of the same taxpayer. Finally, petitioners argue that the governments
right to assess and collect the subject Information Return was filed by the
pool on April 14, 1976. On the basis of this return, the BIR telephoned
petitioners on November 11, 1981 to give them notice of its letter of
assessment dated March 27, 1981. Thus, the petitioners contend that the
five-year prescriptive period then provided in the NIRC had already
lapsed, and that the internal revenue commissioner was already barred
by prescriptionfrom making an assessment.


Held: A pool is considered a corporation for taxation purposes. Citing
the case of Evangelista v. CIR, the court held that Sec. 24 of the NIRC
covered these unregistered partnerships and even associations or joint
accounts, which had no legal personalities apart from individual members.
Further, the pool is a partnership as evidence by a common fund, the
existence of executive board and the fact that while the pool is not in
itself, a reinsurer and does not issue any insurance policy, its work is
indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have
received their premiums.

As to the claim of double taxation, the pool is a taxable entity distinct
from the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on the dividends received by
the said companies. Clearly, there is no double taxation.

As to the argument on prescription, the prescriptive period was totaled
under the Section 333 of the NIRC, because the taxpayer cannot be
located at the address given in the information return filed and for which
reason there was delay in sending the assessment. Further, the law
clearly states that the prescriptive period will be suspended only if the
taxpayer informs the CIR of any change in the address.


CIR vs. British Overseas Airways Corporation (BOAC)
Post under case digests, Taxation at Sunday, February 26, 2012 Posted by Schizophrenic Mind
Facts: British Overseas Airways Corp (BOAC) is a
100% British Government-owned corporation engaged
in international airline business and is a member of the
Interline Air Transport Association, and thus, it operates
air transportation services and sells
transportation tickets over the routes of the other airline
members.

From 1959 to 1972, BOAC had no landing rights for
traffic purposes in the Philippines and thus, did not carry
passengers and/or cargo to or from the Philippines but
maintained a general sales agent in the Philippines -
Warner Barnes & Co. Ltd. and later, Qantas Airways -
which was responsible for selling BOAC tickets covering
passengers and cargoes. The Commissioner of Internal
Revenue assessed deficiency income taxes against
BOAC.

Issue: Whether the revenue derived by BOAC from
ticket sales in the Philippines, constitute income of
BOAC from Philippine sources, and accordingly taxable.

Held: The source of an income is the property, activity,
or service that produced the income. For the source of
income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activity
within the Philippines. Herein, the sale of tickets in the
Philippines is the activity that produced the income.
The tickets exchanged hands here and payment for
fares were also made here in the Philippine currency.

The situs of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within
Philippine territory, enjoying the protection accorded by
the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government. PD 68, in relation to PD
1355, ensures that international airlines are taxed on
their income from Philippine sources. The 2 1/2% tax on
gross billings is an income tax. If it had been intended as
an excise tax or percentage tax, it would have been
placed under Title V of the Tax Code covering taxes on
business.


N.V REEDERIJ AMSTERDAM AND ROYAL
INTEROCEAN LINES VS. COMMISSIONER OF INTERNAL
REVENUE
FACTS:
Both vessels of petitioner N.V. Reederij Amsterdam called on Philippine ports to load cargoes for
foreign destinations.
The freight fees for these transactions were paid in abroad. In these two transactions, petition Royal
Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax
has been paid by Amsterdam on the freight receipts.
As a result, Commissioner of Internal Revenue filed the corresponding income tax returns for the
petitioner. Commissioner assessed petitioner for deficiency of income tax, as a non-resident foreign
corporation NOT engaged in trade or business.
On the assumption that the said petitioner is a foreign corporation engaged in trade or business in
the Philippines, petitioner Royal Interocean Lines filed an income tax return of the aforementioned
vessels and paid the tax in pursuant to their supposed classification.
On the same date, petitioner Royal Interocean Lines, as the husbanding agent of Amsterdam, filed
a written protest against the abovementioned assessment made by the respondent Commissioner.
The protest was denied.
On appeal, CTA modified the assessment by eliminating the 50% fraud compromise penalties
imposed upon petitioners. Petitioner still was not satisfied and decided to appeal to the SC.

ISSUE: Whether or not N.V. Reederij Amsterdam should be taxed as
a foreign corporation not engaged in trade or business in the
Philippines?

HELD:
Petitioner is a foreign corporation not authorized or licensed to do business in the Philippines. It
does not have a branch in the Philippines, and it only made two calls in Philippine ports, one in 1963
and the other in 1964.
In order that a foreign corporation may be considered engaged in trade or business, its business
transactions must be continuous. A casual business activity in the Philippines by a foreign corporation
does not amount to engaging in trade or business in the Philippines for income tax purposes.
A foreign corporation doing business in the Philippines is taxable on income solely from sources
within the Philippines. It is permitted to claim deductions from gross income but only to the extent
connected with income earned in the Philippines. On the other hand, foreign corporations not doing
business in the Philippines are taxable on income from all sources within the Philippines . The tax is
30% (now 35% for non-resident foreign corp which is also known as foreign corp not engaged in trade
or business) of such gross income. (*take note that in a resident foreign corp, what is being taxed is
the taxable income, which is with deductions, as compared to a non-resident foreign corp which the
tax base is gross income)
Petiioner Amsterdam is a non-resident foreign corporation, organized and existing under the laws
of the Netherlands with principal office in Amsterdam and not licensed to do business in the
Philippines.

Commissioner of Internal Revenue vs. CA G.R. No. 124043,
October 14, 1998
Sunday, January 25, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Political Law

Facts: Private respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the
public, especially the young people, pursuant to its religious, educational
and charitable objectives. YMCA earned an income from leasing out a
portion of its premises to small shop owners and from parking fees
collected from non-members. The Commissioner of Internal Revenue
(CIR) issued an assessment for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and
deficiency withholding tax on wages. YMCA protested the assessment.


Issue: Whether or not the income of private respondent YMCA from
rentals of small shops and parking fees is exempt from taxation


Held: YMCA argues that Art. VI, Sec. 28(3) of the Constitution
exempts charitable institutions from the payment not only of property
taxes but also of income tax from any source. The Court is not persuaded.
The debates, interpellations and expressions of opinion of the framers of
the Constitution reveal their intent. Justice Hilario Davide Jr., a former
constitutional commissioner, stressed during the Concom debate that
what is exempted is not the institution itself; those exempted from real
estate taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes. Fr.
Joaquin Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption
created by said provision pertained only to property taxes. In his treatise
on taxation, Justice Jose Vitug concurs, stating that the tax exemption
covers property taxes only. Indeed, the income tax exemption claimed by
YMCA finds no basis in Art. VI, Sec. 28(3) of the Constitution.

YMCA also invokes Art. XIV, Sec. 4(3) of the Constitution claiming that
YMCA is a non-stock, non-profit educational institution whose revenues
and assets are used actually, directly and exclusively for educational
purposes so it is exempt from taxes on its properties and income. The
Court reiterates that YMCA is exempt from the payment of property tax,
but not income tax on the rentals from its property. The bare allegation
alone that it is a non-stock, non-profit educational institution is
insufficient to justify its exemption from the payment of income tax. Laws
allowing tax exemption are construed strictissimi juris. Hence, for the
YMCA to be granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence that: 1. it falls under
the classification non-stock, non-profit educational institution; and 2. the
income it seeks to be exempted from taxation is used actually, directly
and exclusively for educational purposes. However, the Court notes that
not a scintilla of evidence was submitted by YMCA to prove that it met the
said requisites.
YMCA is not an educational institution within the purview of Art. XIV, Sec.
4(3) of the Constitution. The term educational institution, when used in
laws granting tax exemptions, refers to a school, seminary, college or
educational establishment. Therefore, YMCA cannot be deemed one of the
educational institutions covered by the said constitutional provision.
Moreover, the Court notes that YMCA did not submit proof of the
proportionate amount of the subject income that was actually, directly
and exclusively used for educational purposes.


CASE DIGEST
Facts:

St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized as a non-stock and non-
profit corporation.

The BIR assessed St. Lukes deficiency taxes for 1998 comprised of deficiency income tax,
value-added tax, and withholding tax. The BIR claimed that St. Lukes should be liable for income tax
at a preferential rate of 10% as provided for by Section 27(B). Further, the BIR claimed that St. Lukes
was actually operating for profit in 1998 because only 13% of its revenues came from charitable
purposes. Moreover, the hospitals board of trustees, officers and employees directly
benefit from its profits and assets.

On the other hand, St. Lukes maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes exempt from income tax 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:

The sole issue is whether St. Lukes is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profit
hospitals.

Ruling:

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the
other hand, can be construed together without the removal of such tax exemption.

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary and non-
profit. Proprietary means private, following the definition of a proprietary educational institution
as any private school maintained and administered by private individuals or groups with a
government permit. Non-profit means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to the institutions purposes
and all its activities conducted not for profit.

Non-profit does not necessarily mean charitable. In Collector of Internal Revenue v.
Club Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation
and entertainment of its stockholders and members. The club was primarily funded by membership
fees and dues. If it had profits, they were used for overhead expenses and improving its golf course.
The club was non-profit because of its purpose and there was no evidence that it
was engaged in a profit-making enterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable.
The Court defined charity in Lung Center of the Philippines v.
Quezon City as a gift, to be applied consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or [by] otherwise lessening
the burden of government. However, despite its being a tax exempt institution, any income such
institution earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Sec. 30.

To be a charitable institution, however, an organization must meet the
substantive test of charity in Lung Center. The issue in Lung Center concerns exemption from
real property tax and not income tax. However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes
which should have been spent to address public needs, because certain private entities already
assume a part of the burden. This is the rationale for
the tax exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded by appropriations
from the Treasury

The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way Congress
crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. (Emphasis supplied)

Section 30(E) of the NIRC defines the corporation or association that is exempt from income
tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution actually, directly and exclusively use the property for a
charitable purpose. (Emphasis supplied)

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires
that a charitable institution use the property actually, directly and exclusively for charitable
purposes.(Emphasis supplied)

To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be organized and operated exclusively for charitable
purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be operated exclusively for social welfare. (Emphasis supplied)

However, the last paragraph of Section 30 of the NIRC qualifies the words organized and
operated exclusively by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts any activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt.

Thus, 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. Prior to the introduction of Section 27(B), the tax rate on such
income from for-profit activities was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%.(Emphasis supplied)

The Court finds that St. Lukes is a corporation that is not operated exclusively for charitable
or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution
be operated exclusively for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income from for-profit activities, under the last paragraph
of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at
the preferential 10% rate pursuant to Section 27(B). (Emphasis supplied)

St. Lukes fails to meet the requirements under Section 30(E) and (G) of the NIRC to
becompletely tax exempt from all its income. However, it remains a proprietary non-profit hospital
under Section 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. St. Lukes, as a proprietary non-profit
hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Lukes is therefore liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC. However, St. Lukes has good reasons to rely on the letter dated 6 June 1990 by the BIR,
which opined that St. Lukes is a corporation for purely charitable and social welfare purposes and
thus exempt from income tax.

In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that good
faith and honest belief that one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest.

WHEREFORE, St. Lukes Medical Center, Inc. is ORDERED
TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax
rate under Section 27(8) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of
the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court
of Tax Appeals are AFFIRMED.

Marubeni vs. CIR
Post under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic Mind
Facts: Petitioner Marubeni s a foreign corporation duly
organized under the existing laws of Japan and duly
licensed to engage in business under Philippine laws.

Marubeni of Japan has equity investments in Atlantic
Gulf & Pacific Co. of Manila.

AG&P declared and directly remitted the cash dividends
to Marubenis head office in Tokyo net of the final
dividend tax and withholding profit remittance tax.

Thereafter, Marubeni, through SGV, sought a ruling from
the BIR on whether or not the dividends it received from
AG&P are effectivelyconnected with its business in the
Philippines as to be considered branch profits subject to
profit remittance tax.

The Acting Commissioner ruled that the dividends
received by Marubeni are not income from the business
activity in which it is engaged. Thus, the dividend if
remitted abroad are not considered branch profits
subject to profit remittance tax.

Pursuant to such ruling, petitioner filed a claim for refund
for the profit tax remittance erroneously paid on the
dividends remitted by AG& P.

Respondent Commissioner denied the claim. It ruled
that since Marubeni is a non resident corporation not
engaged in trade or business in the Philippines it shall
be subject to tax on income earned from Philippine
sources at the rate of 35% of its gross income.

On the other hand, Marubeni contends that, following
the principal-agent relationship theory, Marubeni Japan
is a resident foreign corporation subject only to final tax
on dividends received from a domestic corporation.

Issue: Whether or not Marubeni Japan is a resident
foreign corporation.

Held: No. The general rule is a foreign corporation is the
same juridical entity as its branch office in the
Philippines . The rule is based on the premise that the
business of the foreign corporation is conducted through
its branch office, following the principal-agent
relationship theory. It is understood that the branch
becomes its agent.

However, when the foreign corporation transacts
business in the Philippines independently of its branch,
the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not
of the branch. Consequently, the taxpayer is the foreign
corporation, not the branch or the resident foreign
corporation.

Thus, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in
Japan which is considered as a separate and distinct
income taxpayer from the branch in the Philippines.

In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted abroad.
There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is
imposed on the amount sent abroad, and the law calls for nothing further.

FACTS:
1. Bank of America is a foreign corporation licensed to engage in business in the Philippines through
a branch in Makati.
2. Bank of America paid 15% branch profit remittance tax amounting to PhP7.5M from its REGULAR
UNIT OPERATIONS and another 405K PhP from its FOREIGN CURRENCY DEPOSIT
OPERATIONS
3. The tax was based on net profits after income tax without deducting the amount corresponding to
the 15% tax.
4. Bank of America thereafter filed a claim for refund with the BIR for the portion the corresponds with
the 15% branch profit remittance tax. BOAs claim: BIR should tax us based on the profits actually
remitted (45M), and NOT on the amount before profit remittance tax (53M)... The basis should be the
amount actually remitted abroad.
5. CIR contends otherwise and holds that in computing the 15% remittance tax, the tax should be
inclusive of the sum deemed remitted.

ISSUES: Whether or not the branch profit remittance tax should be
base on the amount actually remitted?

HELD: YES.
1. It should be based on the amount actually committed, NOT what was applied for.
2. There is nothing in Section 24which indicates that the 15% tax/branch profit remittance is on the
total amount of profit; where the law does NOT qualify that the tax is imposed and collected at source,
the qualification should not be read into law.
3. Rationale of 15%: To equalize/ share the burden of income taxation with foreign corporations

CIR vs WANDER PHILIPPINES, INC. - CASE DIGEST
G.R. NO. L-68275, April 15, 1988
Commissioner of Internal Revenue, petitioner
vs
WANDER Philippines, Inc., and the Court of Tax Appeals, respondents

FACTS:
Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized
under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss
corporation not engaged in trade for business in the Philippines.

Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company
Glaro dividends from which 35% withholding tax was withheld and paid to the BIR.

In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for
reimbursement, contending that it is liable only to 15% withholding tax in accordance with sec. 24
(b) (1) of the Tax code, as amended by PD nos. 369 and 778, and not on the basis of 35% which
was withheld ad paid to and collected by the government. petitioner failed to act on the said claim
for refund, hence Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a
refund and/or tax credit. CIR's petition for reconsideration was denied hence the instant petition
to the Supreme Court.

ISSUE:

Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.

HELD:

Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this
case, reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby
further amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not
engaged in trade or business in the Philippines, including a foreign life insurance company not
engaged in life insurance business in the Philippines, shall pay a tax equal to 35% of the gross
income received during its taxable year from all sources within the Philippines, as interest
(except interest on a foreign loans which shall be subject to 15% tax), dividends, premiums,
annuities, compensation, remuneration for technical services or otherwise emolument, or other
fixed determinable annual, periodical ot casual gains, profits and income, and capital gains: xxx
Provided, still further that on dividends received from a domestic corporation liable to tax under
this chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as
provided in sec 53 (d) of this code, subject to the condition that the country in which the non-
resident foreign corporation is domiciled shall allow a credit against tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which
represents the difference between the regular tax (35%) on corporation and the tax (15%)
dividends as provided in this section: xxx."

From the above-quoted provision, the dividends received from a domestic corporation liable to
tax, the tax shall be 15% of the dividends received, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the Philippines
equivakent to 20% which represents the difference betqween the regular tax (35%) on
corpoorations and the tax (15%) on dividends.

While it may be true that claims for refund construed strictly against the claimant, nevertheless,
the fact that Switzerland did not impose any tax on the dividends received by Glaro from the
Philippines should be considered as a full satisfaction if the given condition. For, as aptly stated
by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided
for under PD No. 369 amending section 24 (b) (1) of the Tax Code, would run counter to the very
spirit and intent of said law and definitely will adversely affect foreign corporations interest here
and discourage them for investing capital in our country.


FACTS:
CTA set aside petitioners revenue commissioners assessment of 1.1 M as the 25% surtax on
private respondents unreasonable accumulation of surplus for the year 1975-1978.
Private respondent protested the assessment on the ground that the accumulation of surplus profits
during the years in question was solely for the purpose of expanding its business operations as a real
estate broker.
Private res. Filed a petition that pending determination of the case, an order be issued restraining
the commissioner and/or his reps from enforcing the warrants of distraint and levy. Writ of injunction
was issued by tax court.
Due to the reversal of CTA of the commissioners decision, CIR appeals to the SC.

ISSUES:
1. Whether or not private respondent is a holding company and/or investment company?
2. Whether or not Antonio accumulated surplus for years 75-78
3. Whether or not Tuason Inc. is liable for the 25% surtax on undue accumulation of surplus for 75-78

HELD: Yes to all. Antionio is liable for the 25% surtax assessed.
Sec. 25. Additional tax on corporation improperly accumulating profits or surplus.
(a) Imposition of tax. If any corporation, except banks, insurance companies, or personal holding
companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such corporation, for each taxable year, a
tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus
which shall be in addition to the tax imposed by section twentyfour, and shall be computed, collected
and paid in the same manner and subject to the same provisions of law, including penalties, as that
tax.

(b) Prima facie evidence. The fact that any corporation is a mere holding company shall be prima
facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption
will lie in the case of an investment company where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned, directly or indirectly, by one person.

In this case, Tuason Inc, a mere holding company for the corporation did not involve itself in the
development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It
derived its income mostly from interest, dividends, and rentals realized from the sale of realty.

Tuason Inc is also owned by Antonio himself. While these profits were actually made, the
commissioner points out that the corp. did not use up its surplus profits. Antonio claims that he spent
the money to build an apartment in urdaneta but theres a large discrepancy bet. The market value
and the alleged investment cost.

The importance of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using
the undistributed earnings & profits for the reasonable needs of the business, that purpose would not
fall to overcome the presumption and correctness of CIR.

CIR VS. ANTONIO TUASON INC.-

Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985
the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid
protested the assessments particularly the 25% surtax for undue accumulation of earnings. It claimed
that said profits were retained to increase petitioners working capital and it would be used for
reasonable business needs of the company. The CIR refused to allow the cancellation of the
assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the
assessment because 1) it accumulated its earnings and profits for reasonable business requirements
to meet working capital needs and retirement of indebtedness 2) it is a wholly owned subsidiary of
American Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY
Stock Exchange. The CTA denied the petition stating that the law permits corporations to set aside a
portion of its retained earnings for specified purposes under Sec. 43 of the Corporation Code but that
petitioners purpose did not fall within such purposes. It found that there was no need to set aside
such retained earnings as working capital as it had considerable liquid funds. Those corporations
exempted from the accumulated earnings tax are found under Sec. 25 of the NIRC, and that the
petitioner is not among those exempted. The CA affirmed the CTAs decision.

Issue: Whether or not the accumulation of income was justified.

Held:
In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer
is manifested at the time of the accumulation, not intentions subsequently, which are mere
afterthoughts. The accumulated profits must be used within reasonable time after the close of the
taxable year. In the instant case, petitioner did not establish by clear and convincing evidence that
such accumulated was for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have invented the
Immediacy Test which construed the words reasonable needs of the business to mean the
immediate needs of the business, and it is held that if the corporation did not prove an immediate
need for the accumulation of earnings and profits such was not for reasonable needs of the business
and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of
a business depend on the nature of the business, its credit policies, the amount of inventories, the
rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and
other similar factors. The Tax Court opted to determine the working capital sufficiency by using the
ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the
assessment is correct. With the petitioners failure to prove the CIR incorrect, clearly and conclusively,
the Tax Courts ruling is upheld.