2004 Cut Taxation

DOMONDON’s “CUT AND PASTE” 1
TAXATION
Ver. 2004
Analysis of previous Bar Questions shows that there are fundamental

doctrines that are rich sources of Bar Questions. It is for this reason why the
author decided to craft some sentences and phrases which the Bar candidate
may “cut” and “paste” to his answers to the Bar questions. This would also serve
as a ready reference for objective type of questions such as definitions,
enumerations, distinctions, etc. The materials were culled from areas where
previous Bar Questions were sourced and from selected jurisprudence up to
June 2003.
The user of these “cut and paste” materials should be warned that the
sentences should be adjusted to meet the actual requirements of specific Bar
Questions, and not to be written verbatim as the answers.
The user should concentrate on the items marked BAR because they are
the doctrines from where Bar questions were derived for the period 1993 to
2003.
WARNING: Some of the concepts involving the Court of Tax Appeals
should be read in relation to the provisions of Republic Act No. 9282 which took
effect on April 23, 2004.
This version is for the exclusive use of reviewees who have attended the
review lectures of Prof. Abelardo T. Domondon, and other reviewees who were
personally authorized by him. Unauthorized users shall be subject to the law of
karma, such that they will not pass the Bar Exams and if they do so would be
unhappy and unsuccessful in life.
REVIEWEES MUST REPRODUCE OR PRINT THIS AT THEIR EXPENSE
BECAUSE THESE NOTES ARE NOT A PART OF THE HANDOUTS GIVEN
FOR FREE BY YOUR REVIEW CENTER. THESE ARE EXTRA HANDOUTS
NOT PART OF WHAT YOU PAID FOR.
GENERAL PRINCIPLES OF TAXATION

Taxes are the lifeblood of the government for without taxes, the
government can neither exist nor endure. A principal attribute of sovereignty, the
exercise of taxing power derives its source from the very existence of the state
whose social contract with citizens obliges it to promote public interest and
common good. (National Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
BAR: 1. The theory behind the exercise of the power to tax emanates
from necessity, without taxes, government cannot fulfill its mandate of promoting
the general welfare and well-being of the people. (National Power Corporation
v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
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Copyrighted by Prof. ABELARDO T.DOMONDON
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The power to tax includes the power to destroy, where the tax law is valid
because a taxpayer could not seek the nullification of a valid tax law solely upon
the premise that the collection of the tax will impoverish him.
The exercise of the power to tax is not destructive of a taxpayer’s property

where the source is an invalid tax law, which violates the inherent or
constitutional limitation because there is a sympathetic court that shall come to
the succor of the taxpayer and declare such tax law as null and void. It would
not thus be the source of the power to destroy.
In case of doubt, tax laws must be construed strictly against the State and
liberally in favor of the taxpayer because taxes, as burdens which must be
endured by the taxpayer, should not be presumed to go beyond what the law
expressly and clearly declares. (Lincoln Philippine Life Insurance Company,
Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
Tax exemptions are strictly construed against the taxpayer and liberally in
favor of the State and must be clearly shown and based on language in the law
too plain to be mistaken (Davao Gulf Lumber Corporation v. Commissioner of
Internal Revenue, et al., 293 SCRA 76, 88), because taxes are necessary for the
continued existence of the State.
A reversal of a BIR ruling favorable to a taxpayer would not necessarily

create a perpetual exemption in his favor, for after all the government is never
estopped from collecting taxes because of mistakes or errors on the part of its
agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of
Appeals, et al., 293 SCRA 92, 99)
BAR: 2. As a general rule, the right of the government to collect taxes

is imprescriptible because the very existence of the state depends upon the
exercise of this power.
However, statutes may provide for prescriptive periods for the collection of
particular kinds of taxes.
BAR: 3. As a general rule, “No court shall have the authority to grant
an injunction to restrain the collection of any national internal revenue tax, fee or
charge.” (Sec. 218, NIRC)
However, the Court of Tax Appeals is empowered to enjoin the collection
of taxes through administrative remedies when collection could jeopardize the
interest of the government or taxpayer. (Sec. 11, Rep. Act No. 1125)
BAR: 4. The power to tax is an inherent power of the state exercised

through the legislature imposing burdens upon subjects and objects within its
jurisdiction to raise revenues in order to meet the legitimate objects of
government.
It’s nature is that it is both an inherent power of government and an
exercise of legislative power.
The three purposes for the exercise of the taxing power are: (a) the
revenue purpose; (b) the sumptuary purpose; and (3) the compensatory
purpose.
One of the purposes of taxation is to raise revenues to meet the

recognized objects of purposes of government.
The sumptuary purpose of taxation is to protect the health, safety or

morals of the inhabitants. This is in joint exercise of the power of taxation and
police power where regulatory taxes are collected.
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The compensatory purpose of taxation is to implement the social justice

provisions of the constitution through the progressive system of taxation, which
would result to equal distribution of wealth, etc.
BAR: 5. In recent years, the increasing social challenges of the times

expanded the scope of state activity, and taxation has become a tool to realize
social justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar objectives.
(National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9,
2003)
The following are the distinctions between a tax and a license fee:
a. PURPOSE: A tax is imposed for revenue purposes WHILE a license
fee is imposed for regulatory purposes. (Unless it is a joint exercise of both the
police power and the power of taxation)
b. BASIS: A tax is imposed under the power of taxation WHILE a license
fee is imposed under police power.
c. AMOUNT: There is no limit as to the amount of a tax WHILE the
amount of license fee that could be collected is limited to the cost of the license
and the expenses of police surveillance and regulation.
d. TIME OF PAYMENT: Taxes are normally paid after the start of a
business WHILE a license fee before the commencement of business.
e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make the
business illegal WHILE failure to pay a license fee makes the business illegal.
f. SURRENDER: Taxes being the lifeblood of the state, cannot be
surrendered except for lawful consideration WHILE a license fee may be
surrendered with or without consideration.
The Sugar Adjustment Act which increased existing taxes on sugar was
enacted to stabilize the sugar industry to prepare it for the loss of its quota in
the U.S. market was levied for a regulatory purpose to protect and promote the
sugar industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil. 148)
The Philsugin fund, an imposition on sugar, to raise funds to conduct

research for the improvement of the sugar industry, is for the purpose of
stabilizing the sugar industry which one of the pillars of the Philippine economy
which affects the welfare of the State. The levy is not so much an exercise of the
power of taxation, nor the imposition of a special levy, but the exercise of police
power which is for the general welfare of the entire country, therefore for a public
purpose. (Republic v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9,
1966)
Motor vehicle registration fees are now considered revenue or tax

measures. Consequently, entities enjoying tax exemptions are also exempt from
paying motor vehicle registration fees. (PAL v. Edu, G.R. No. L-41383, August
15, 1988)
The tax impost on videogram establishments is not only regulatory but a

revenue measure because the earnings of such establishments have not been
subject to tax depriving the government of an additional source of income. The
is no over regulation as a result of the imposition of the tax because of the need
for regulating a new industry. (Tio v. Videogram Regulatory Board, 151 SCRA
208)
The OPSF designed to reimburse gasoline companies for increases in the

price of crude oil resulting from world price movements and exchange
fluctuations are taxes collected in the exercise of the police power in order to
stabilize prices of gasoline and other petroleum products. (Osmena v. Orbos,
G.R. No. 99886, March 31, 1993)
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The inherent and constitutional limitations to the power of taxation are

safeguards which would prevent abuse in the exercise of this otherwise
unlimited and plenary power.
BAR: 6. The inherent limitations are (a) public purpose; (b) no

improper delegation of legislative authority to tax; (c) territoriality; (d)
recognition of government exemptions; and (e) observance of the principle of
comity.
Some authorities include no double taxation.
The tax revenues are for a public purpose if utilized for the benefit of the
community in general. An alternative meaning is that tax proceeds should be
utilized only to attain the objectives of government.
The power of taxation is exercised by the legislature whose members are

the mere delegates of the people hence the power could not therefore be
delegated by the legislature to other departments of government, like the
executive.
Delegata potestas non potest delegari. A delegated power cannot be

further delegated.
The power to tax should be exercised only within the territorial boundaries
of the taxing authority. In theory, it is only within a state’s territorial boundaries
that a state could give protection, hence it is only within that territory that it could
demand support in the form of taxes.
In par parem, non habet imperium. As between equals there is no

sovereign, hence foreign sovereigns are not to be subject to the sovereign
power of taxation.
Comity is the respect accorded to other sovereign nations. Thus,

properties of other sovereign nations within the territory of the taxing authority
should not be subject to taxation as a measure of respect to a co-equal.
Government exemption should be recognized in order to reduce the

amount of money the government is handling. There is verity in the maxim, “For
the government, exemption is the rule and taxation is the exception.”
BAR: 7. Situs of taxation is the place or the authority that has the
power to collect taxes. It is premised upon the symbiotic relation between the
taxpayer and the State.
The place that gives protection is the place that has the right to demand
that it be supported in the form of taxes so it could continually give protection.
The situs of real property taxes is the place where the property is located
because it is that place that gives protection. The applicable concept is lex situs
or lex rei sitae.
The situs of taxation of tangible personal property is the place where the
owner is located because it is that place that gives protection to the owner which
protection extends to the tangible personal property. The applicable concept is
mobilia sequuntur personam.
Intangible personal property may have obtained a business situs in a

particular place even if located elsewhere. Thus, the dividends earned from
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domestic corporations are considered as income from within, irrespective where

the shares of stock of such domestic corporation is located.
The situs of income taxation is determined by the nationality, residence of

the taxpayer and source of income. Please refer to general principles of income
taxation under income taxation.
The situs of excise taxes is the place where the privilege is exercised
because it is that place that gives protection.
The situs of transfer taxes, such as estate and donor’s taxes, is

determined by the nationality and residence of the taxpayer and the place where
the property is located. Please refer to estate and donor’s taxes.
The situs of taxation of a contract for a project which included the

construction and installation in the Philippines of equipment designed, fabricated
and manufactured in Japan is the Philippine for the construction and installation
work and for the pieces of equipment and Japan for supplies which were
completely designed and engineered in Japan. (Commissioner of Internal
Revenue v. Marubeni Corporation, G.R. No. 137377, December 18, 2001)
The general or indirect constitutional limitations as well as the

specific or direct constitutional limitations.
BAR: 8. The general or indirect constitutional limitations are the

following:
a. Due process clause;
b. Equal protection clause;
c. Freedom of the press;
d. Religious freedom;
e. Non-impairment clause;
f. Law-making process:
1) Bill should embrace only one subject expressed in the title
thereof;
2) Three (3) readings on three separate days;
3) Printed copies in final form distributed three (3) days before
passage.
g. Presidential power to grant reprieves, commutations and pardons and
remittal of fines and forfeiture after conviction by final judgment.
BAR: 9. The specific or direct constitutional limitations are the following:

a. No imprisonment for non-payment of a poll tax;
b. Taxation shall be uniform and equitable;
c. Congress shall evolve a progressive system of taxation;
d. All appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives, but the Senate may propose and concur with
amendments;
e. The President shall have the power to veto any particular item or items
in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or
items to which he does not object;
f. Delegated power of the President to impose tariff rates, import and
export quotas, tonnage and wharfage dues:
1) Delegation by Congress
2) Through a law
3) Subject to Congressional limits and restrictions
4) Within the framework of national development program.
g. Tax exemption of charitable institutions, churches, parsonages and
convents appurtenant thereto, mosques, and all lands, buildings and
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improvements of all kinds actually, directly and exclusively used for religious,
charitable or educational purposes;
h. No tax exemption without the concurrence of majority vote of all
members of Congress;
i. No use of public money or property for religious purposes except if
priest is assigned to the armed forces, penal institutions, government orphanage
or leprosarium;
j. Money collected on tax levied for a special purpose to be used only for
such purpose, balance if any, to general funds;
k. The Supreme Court's power to review judgments or orders of lower
courts in all cases involving the legality of any tax, impose, assessment or toll or
the legality of any penalty imposed in relation to the above;
l. Authority of local government units to create their own sources of
revenue, to levy taxes, fees and other charges subject to guidelines and
limitations imposed by Congress consistent with the basic policy of local
autonomy;
m. Automatic release of local government's just share in national taxes;
n. Tax exemption of all revenues and assets of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational
purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative
educational institutions subject to limitations provided by law including
restrictions on dividends and provisions for reinvestment of profits;
p. Tax exemption of grants, endowments, donations or contributions used
actually, directly and exclusively for educational purposes subject to conditions
prescribed by law.
BAR: 10. Equal protection of the law clause is subject to reasonable

classification. If the groupings are characterized by substantial distinctions that
make real differences, one class may be treated and regulated differently from
another. The classification must also be germane to the purpose of the law and
must apply to all those belonging to the same class. (Tiu, et al., v. Court of
Appeals, et al., G.R. No. 127410, January 20, 1999)
BAR: 11. Classification, to be valid, must (a) rest on substantial

distinctions, (b) be germane to the purpose of the law, (c) not be limited to
existing conditions only, and (d) apply equally to all members of the same class.
(Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
A legislative rule which is in the nature of subordinate legislation,

designed to implement a primary legislation by providing the details thereof. In
the same way that laws must have the benefit of public hearing, it is generally
required that before a legislative rule is adopted there must be a hearing and
publication as required under the Administrative Code. (Commissioner of
Internal Revenue v. Court of Appeals, et al., 261 SCRA 236 )
In case of an interpretative rule no hearing or publication is required since

an interpretative rule is designed merely to provide guidelines of the law which
the administrative agency is in charge of enforcing. (Commissioner of Internal
Revenue v. Court of Appeals, et al., 261 SCRA 236 )
BAR: 12. Equality and uniformity of taxation may mean the same as
equal protection. In such a case, the terms would mean that all subjects and
objects of taxation which are similarly situated shall be subject to the same
burdens and granted the same privileges without any discrimination whatsoever.
Uniformity may have a restrictive meaning different from equality and

equal protection. It would mean then that the same rate shall be imposed for the
same subjects and objects within the territorial boundaries of a taxing authority.
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A trial court is not the proper forum for the ventilation of the issues where
it is the legislature to which relief must be sought, because with the legislature
primarily lies the discretion to determine (a) the nature (kind), (b) object
(purpose), (c) extent (rate), (d) coverage (subjects) and (e) situs (place) of
taxation. (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA
617)
It is inherent in the power to tax that the State be free to select the
subjects of taxation, and it has been repeatedly held that, "inequalities which
result from a singling out of one particular class of taxation, or exemption,
infringe no constitutional limitation." (Commissioner of Internal Revenue, et al.,
v. Santos, et al., 277 SCRA 617)
BAR: 13. A fixed annual license fee on those engaged in the business
of general enterprise which also imposed on the sale of bibles by a religious
sect. is this valid violates the constitutionally guaranteed freedom of the press,
and of religion..
As a license fee is fixed in amount and unrelated to the receipts of the
taxpayer, such a license fee, when applied to a religious sect is actually imposed
as a condition for the free exercise of religion. A license fee “restrains in
advance those constitutional liberties of press and religion and inevitably tends
to suppress their exercise.”
The P1,000.00 VAT registration fee imposed on non-VAT enterprises

which includes among others, religious sects which sells and distributes
religious literature is not violative of religious freedom, although a fixed amount
is not imposed for the exercise of a privilege but only for the purpose of
defraying part of the cost of registration.
The registration fee is thus more of an administrative fee, one not
imposed on the exercise of a privilege, much less a constitutional right.
(Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)
Article XII, Sec. 11 of the Constitution provides that the grant of a

franchise for the operation of a public utility is subject to amendment. alteration
or repeal by Congress when the common good requires;
BAR: 14. A lawful tax on a new subject, or an increased tax on an old

one, does not interfere with a contract or impairs its obligation, within the
meaning of the constitution. Even though such taxation may affect particular
contracts, as it may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and release the
burdens of another, still the tax must be paid unless prohibited by the
constitution, nor can it be said that it impairs the obligations of any existing
contract in its true and legal sense. (Tolentino v. Secretary of Finance, et al., and
companion cases, 235 SCRA 630)
BAR: 15. While the Supreme Court has, not too infrequently, referred
to tax exemptions contained in special franchises as being in the nature of
contracts and a part of the inducement for carrying out the franchise, these
exemptions, nevertheless are far from being strictly contractual in nature.
Constitutional tax exemptions, in the real sense of the term and where the
non-impairment clause of the Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by them under enabling
laws in which the government, acting in its private capacity sheds its cloak of
authority and waives its government immunity. (Manila Electric Company v.
Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
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Double taxation in its generic sense, this means taxing the same subject
or object twice during the same taxable period.
In its particular sense, it may mean direct duplicate taxation, which is
prohibited under the constitution because it violates the concept of equal
protection, uniformity and equitableness of taxation. Indirect duplicate taxation
is not anathematized by the above constitutional limitations.
BAR: 16. The elements of direct duplicate taxation are:

a. Same
1) Subject or object is taxed twice
2) Taxing authority
3) Taxing purpose
4) Taxing period
b. Taxing all of the subjects or objects for the first time without taxing all
of them for the second time.
If any of the elements are absent then there is indirect duplicate taxation
which is not prohibited by the constitution.
BAR: 17. Double taxation a valid defense against the legality of a tax
measure if the double taxation is direct duplicate taxation, because it would
violate the equal protection clause of the constitution.
When an item of income is taxed in the Philippines and the same income
is taxed in another country, this would be known as international juridical double
taxation which is the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical grounds.
(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R.
No. 127105, June 25, 1999)
Double taxation usually takes place when a person is a resident of a

contracting state and derives income from or owns capital in, the other
contracting state and both states impose tax on that income or capital.
No. 127105, June 25, 1999)
BAR: 18. The following are the methods of avoiding double taxation:
a. Tax treaties which exempts foreign nationals from local taxation and
local nationals from foreign taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local
taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.
Purpose of tax treaties. To reconcile the national fiscal legislation of the

contracting parties in order to help the taxpayer avoid simultaneous taxation in
two different jurisdictions. More precisely, the tax conventions are drafted with a
view towards the elimination of international juridical double taxation.
No. 127105, June 25, 1999)
Rationale for avoiding international juridical double taxation. To

encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate. (Commissioner of
Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June
25, 1999)
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The mandate to Congress is not to prescribe but to evolve a progressive

system of taxation. Otherwise, sales taxes which perhaps are the oldest form of
indirect taxes, would have been prohibited with the proclamation of the
constitutional provision. Sales taxes are also regressive. (Tolentino v. Secretary
of Finance and companion cases, 249 SCRA 628 )
The Constitution does not really prohibit the imposition of indirect taxes
which, like the VAT, are regressive. The constitutional provision means simply
that indirect taxes should be minimized.
Resort to indirect taxes should be minimized but not avoided entirely
because it is difficult, if not impossible, to avoid imposing such taxes according
to the taxpayer’s ability to pay. (Tolentino v. Secretary of Finance and companion
cases, 249 SCRA 628)
In the case of VAT, the law minimizes the regressive effects of this
imposition by providing for zero rating of certain transactions while granting
exemptions to other transactions. The transactions which are subject to VAT are
those which involve goods and services which are used or availed of mainly by
higher income groups. (Tolentino v. Secretary of Finance and companion cases,
249 SCRA 628)
The Constitution requires that all revenue bills shall originate exclusively
from the House of Representatives. The Constitution simply means that the
initiative for filing revenue, tariff or tax bills must come from the House of
Representatives on the theory that, elected as they are from the districts, the
Members of the House can be expected to be more sensitive to the local needs
and problems. (Tolentino v. Secretary of Finance and companion cases, 249
SCRA 628)
It is not the law - but the revenue bill - which is required by the
Constitution to “originate exclusively” in the House of Representatives because
a bill originating in the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole, and a distinct bill may be
produced. (Tolentino v. Secretary of Finance and companion cases, 235 SCRA
630)
To insist that a revenue statute - not only the bill which initiated the
legislative process culminating in the enactment of the law - must substantially
be the same as the House bill would be to deny the Senate’s power not only to
“concur with amendments” but also to “propose amendments.” It would be to
violate the coequality of legislative power of the two houses of Congress and in
fact make the House superior to the Senate.
Given the power of the Senate to propose amendments, it can propose its
own version even with respect to bills which are required by the Constitution to
originate in the House. (Tolentino v. Secretary of Finance and companion cases,
249 SCRA 628)
Nor does the Constitution prohibit the filing in the Senate of a substitute
bill in anticipation of its receipt of the bill from the House, so long as action by
the Senate as a body is withheld pending receipt of the House bill. (Tolentino v.
Secretary of Finance and companion cases, 235 SCRA 630)
“ the President shall have the power to veto any particular item or items
in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or
items to which he does not object.”
An “item” in a revenue bill does not refer to an entire section imposing a

particular kind of tax, but rather to the subject of the tax and the tax rate. In the
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portion of a revenue bill which actually imposes a tax, a section identifies the tax
and enumerates the persons liable therefore with the corresponding tax rate.
To construe the word “item” as referring to the whole section would tie the
President’s hand in choosing either to approve the whole section at the expense
of also approving a provision therein which he deems unacceptable or veto the
entire section at the expense of foregoing the collection of the kind of tax
altogether.
BAR: 19. Tax exemptions shall be granted only upon majority vote of
all the members of Congress.
EXCEPTIONS:
a. Where the tax exemption is granted through a treaty;
b. Tax exemptions granted by local government units;
c. Tax exemptions granted when the President exercises his powers
under the flexible tariff clause when protective tariffs are removed.
BAR: 20. Charitable institutions, churches and parsonages or convents

appurtenant thereto, mosques, non-profit cemeteries, and all ands, buildings and
improvements that are actually, directly and exclusively used for religious,
charitable or educational purposes are exempt from taxation. [Sec.28 (3) Article
VI, 1987 Constitution)
The constitutional tax exemptions refer only to real property that are
actually, directly and exclusively used for religious, charitable or educational
purposes, and that the only constitutionally recognized exemption from taxation
of revenues are those earned by non-profit, non-stock educational institutions
which are actually, directly and exclusively used for educational purposes.
(Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)
BAR: 21. All revenues and assets of non-stock, non-profit educational

institutions that are actually, directly and exclusively used for educational
purposes shall be exempt from taxation.
Revenues and assets of proprietary educational institutions, including

those which are cooperatively owned, may be entitled to exemptions subject to
limitations provided by law including restrictions on dividends and provisions for
reinvestments.
The NIRC recognizes the exemption from tax of the incomes of civic
leagues or organizations not organized for profit but operated exclusively for the
promotion of social welfare, as well as clubs organized and operated exclusively
for pleasure, recreation, and other non-profitable purposes where no part of the
net income inures to the benefit of any private stockholder or member.
The tax exemption so recognized does not flow to income of whatever

kind and character of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted for profit, regardless of
the disposition made of such income, which shall be subject to income taxes.
(Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)
Tax amnesty distinguished from tax exemption:

a. Tax amnesty is an immunity from all criminal, civil and administrative
liabilities arising from nonpayment of taxes (People v. Castaneda, G.R. No. L-
46881, September 15, 1988) WHILE a tax exemption is an immunity from civil
liability only. It is an immunity or privilege, a freedom from a charge or burden to
which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods, hence of retroactive
application (Castaneda, supra) WHILE tax exemption has prospective
application.
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A tax amnesty is a general pardon or intentional overlooking by the State

of its authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or a tax law. (Commissioner of Internal Revenue v.
Marubeni Corporation, G.R. No. 137377, December 18, 2001)
The purpose of tax amnesty is to (a) give tax evaders who wish to relent
a chance to start a clean slate, and to (b) give the government a chance to
collect uncollected tax from tax evaders without having to go through the tedious
process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967,
February 10, 2000)
BAR: 22. Tax avoidance is the use of legally permissible means to

reduce the tax while tax evasion is the use of illegal means to escape the
payment of taxes.
BAR: 23. The differences between the tax avoidance and tax evasion
are the following:
a. Tax avoidance is legal while tax evasion is illegal.
b. The objective of tax avoidance in most instances is merely to reduce
the tax that is due while is tax evasion the object is to entirely escape the
payment of taxes.
BAR: 24. Reasons why national taxes cannot be the subject of

compensation and set-off with debts:
a. The lifeblood theory;
b. Taxes are not contractual obligations but arise out of a duty to, and are
the positive acts of government, to the making and enforcing of which the
personal consent of the individual taxpayer is not required. (Republic v.
Mambulao Lumber Co., 4SCRA 622)
c. The government and the taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is no such debt, demand, contract or
judgment as is allowed to be set-off. (Caltex Philippines, Inc. v. Commission on
Audit, 208 SCRA 726, 756)
Compensation takes place by operation of law, where the local

government and the taxpayer are in their own right reciprocally debtors and
creditors of each other, and that the debts are both due and demandable, in
consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos,
8 SCRA 443)
In case of a tax overpayment, where the BIR’s obligation to refund or set-

off arises from the moment the tax was paid under the principle of solutio
indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172
SRCA 364)
But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6,
2001 which held that in order for the rule on solutio indebeti to apply it is an
essential condition that the petitioner must first show that its payment of the
customs duties was in excess of what was required by the law at the time the
subject 16 importations of milk and milk products were made. Unless shown
otherwise, the disputable presumption of regularity of performance of duty lies in
favor of the Collector of Customs.
BAR: 25. Income tax, estate and donor’s taxes are direct taxes WHILE
value-added tax, excise tax, other percentage taxes and documentary stamp tax
are indirect taxes.
The main difference between direct taxes and indirect taxes is that the
burden of direct taxes could not be shifted by the taxpayer to another while the
burden of indirect taxes could be shifted to another person, such the burden
12
value-added taxes being shifted or transferred by the taxpayer, the seller, to the
buyer.
THE COURT OF TAX APPEALS AND TAX

REMEDIES
The Court of Tax Appeals is the special tax court created under Republic
Act No. 1125, as amended by R. A. No. 9282, and is composed of a Presiding
Justice and five Associate Justices, organized into two divisions.
The Court of Tax Appeals was created:

a. To prevent delay in the disposition of tax cases by the then Courts of
First Instance (now RTCs), in view of the backlog of civil, criminal, and cadastral
cases accumulating in the dockets of such courts; and
b. To have a body with special knowledge which ordinary Judges of the
then Courts of First Instance (now RTCs), are not likely to possess, thus
providing for an adequate remedy for a speedy determination of tax cases.
The factual determination of the Court of Tax Appeals, when supported by

substantial evidence, will not be reversed on appeal unless it is clear that said
court has committed gross error in the process. (Republic of the Philippines
represented by the Commissioner of Customs v. The Court of Tax Appeals, et
al., G.R. No. 139050, October 2, 2001)
The legal remedies under the NIRC of 1997 and other laws available to
an aggrieved taxpayer may be classified into the tax remedies with respect to
assessment and collection, and those with respect to refund of internal revenue
taxes.
The remedies may also be classified into the administrative or the judicial
remedies.
BAR: 26. The legal remedies under the NIRC of 1997 available to an
aggrieved taxpayer at the administrative and judicial levels with respect to
assessment and collection of internal revenue taxes are the following:
a. Upon receipt of a pre-assessment notice, the taxpayer shall respond to
the same within fifteen (15) days from receipt which is the period provided for by
implementing rules and regulations. [3 rd par., Sec. 228 (e), NIRC of 1997]
b. Upon the issuance of an assessment notice, the taxpayer shall protest
administratively by filing a request for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment in such form and manner as may
be prescribed by implementing rules and regulations.
c. Within sixty (60) days from the filing of the protest, all relevant
supporting documents shall be submitted; otherwise the assessment shall
become final. (4th par., Ibid.)
d. If the protest is denied in whole or in part, or
e. is not acted upon within one hundred eighty (180) days from
submission of documents,
f. the taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of the one hundred eighty (180) – day period;
otherwise, the decision shall become final, executory and demandable. [last
par., Sec. 228 (e), NIRC of 1997]
g. On appeal, the taxpayer should apply for the issuance of a writ of
preliminary injunction to enjoin the BIR from collecting the tax subject of the
appeal.
h. A decision of a division of the Court of Tax Appeals adverse to the
taxpayer or the government may be the subject of a motion for reconsideration or
13
new trial, a denial of which is appealable to the Court of Tax Appeals en banc
by means of a petition for review. .
i. A decision of the Court of Tax Appeals en banc adverse to the taxpayer
or the government may be appealed to the Supreme Court through a petition for
review on certiorari filed with fifteen (15) days from notice, and extendible for
justifiable reasons for thirty (30) days only.
BAR: 27. The legal remedies under the NIRC of 1997 available to an
aggrieved taxpayer at the administrative and judicial levels with respect to refund
or recovery of tax erroneously or illegally collected, is to
a. file a claim for refund or credit with the Commissioner of Internal
Revenue. (1st par., Sec. 229, NIRC of 1997)
b. filing of a suit or proceeding with the Court of Tax Appeals
1) before the expiration of two (2) years from the date of payment
of the tax regardless of any supervening cause that may arise after
payment (2nd par., Sec. 229, NIRC of 1997;), or
2) within thirty (30) days from receipt of the denial by the
Commissioner of the application for refund or credit. (Sec. 11, R.A. No.
1125)
The two (2) year period and the thirty (30) day period should be applied
on a whichever comes first basis. Thus, if the 30 days is within the 2 years, the
30 days applies, if the 2 year period is about to lapse but there is no decision yet
by the Commissioner which would trigger the 30-day period, the taxpayer should
file an appeal, despite the absence of a decision. (Commissioners, etc. v. Court
of Tax Appeals, et al., G.R.No. 82618, March 16, 1989, unrep.)
c. A decision of a division of the Court of Tax Appeals adverse to the
d. A decision of the Court of Tax Appeals en banc adverse to the
taxpayer or the government may be appealed to the Supreme Court through a
petition for review on certiorari filed with fifteen (15) days from notice, and
extendible for justifiable reasons for thirty (30) days only.
Where the taxpayer is a corporation the two year prescriptive period from
“date of payment” for refund of income taxes should be the date when the
corporation filed its final adjustment return not on the date when the taxes were
paid on a quarterly basis. (Philippine Bank of Communications v. Commissioner
of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)
Generally speaking it is the Final Adjustment Return, in which amounts of

the gross receipts and deductions have been audited and adjusted, which is
reflective of the results of the operations of a business enterprise. It is only
when the return, covering the whole year, is filed that the taxpayer will be able to
ascertain whether a tax is still due or refund can be claimed based on the
adjusted and audited figures. (Bank of the Philippine Islands v. Commissioner of
Internal Revenue, G.R. No. 144653, August 28, 2001)
Outline of tax remedies of a taxpayer and the government relative to

ASSESSMENT of internal revenue taxes.
a. The taxpayer files his tax return.
b. A Letter of Authority is issued authorizing BIR examiner to audit or
examine the tax return and determines whether the full and complete taxes have
been paid.
c. If the examiner is satisfied that the tax return is truly reflective of the
taxable transaction and all taxes have been paid, the process ends. However, if
the examiner is not satisfied that the tax return is truly reflective of the taxable
transaction and that the taxes have not been fully paid, a Notice of Informal
14
Conference is issued inviting the taxpayer to explain why he should not be

subject to additional taxes.
d. If the taxpayer attends the informal conference and the examiner is
satisfied with the explanation of the taxpayer, the process is again ended.
If the taxpayer ignores the invitation to the informal conference, or if the
examiner is not satisfied with taxpayer’s explanation,, and he believes that
proper taxes should be assessed, the Commissioner of Internal Revenue or his
duly authorized representative shall then notify the taxpayer of the findings in the
form of a pre-assessment notice. The pre-assessment notice requires the
taxpayer to explain within fifteen (15) days from receipt why no notice of
assessment and letter of demand for additional taxes should be directed to him.
e. If the Commissioner is satisfied with the explanation of the taxpayer,
then the process is again ended.
If the taxpayer ignores the pre-assessment notice by not responding or
his explanations are not accepted by the Commissioner, then a notice of
assessment and a letter of demand is issued.
The notice of assessment must be issued by the Commissioner to the
taxpayer within a period of three (3) years from the time the tax return was filed
or should have been filed whichever is the later of the two events. Where the
taxpayer did not file a tax return or where the tax return filed is false or
fraudulent, then the Commissioner has a period of ten (10) years from discovery
of the failure to file a tax return or from discovery of the fraud within which to
issue an assessment notice. The running of the above prescriptive periods may
however be suspended under certain instances.
The notice of assessment must be issued within the prescriptive period
and must contain the facts, law and jurisprudence relied upon by the
Commissioner. Otherwise it would not be valid.
f. The taxpayer should then file an administrative protest by filing a
request for reconsideration or reinvestigation within thirty (30) days from receipt
of the assessment notice.
The taxpayer could not immediately interpose an appeal to the Court of
Tax Appeals because there is no decision yet of the Commissioner that could be
the subject of a review.
To be valid the administrative protest must be filed within the prescriptive
period, must show the error of the Bureau of Internal Revenue and the correct
computations supported by a statement of facts, and the law and jurisprudence
relied upon by the taxpayer. There is no need to pay under protest. If the
protest was not seasonably filed the assessment becomes final and collectible
and the Bureau of Internal Revenue could use its administrative and judicial
remedies in collecting the tax.
g. Within sixty (60) days from filing of the protest, all relevant supporting
documents shall be submitted, otherwise the assessment shall become final and
collectible and the BIR could use its administrative and judicial remedies to
collect the tax.
Once an assessment has become final and collectible, not even the BIR
Commissioner could change the same. Thus, the taxpayer could not pay the tax,
then apply for a refund, and if denied appeal the same to the Court of Tax
Appeals.
h. If the protest is denied in whole or in part, or is not acted upon within
one hundred eighty (180) days from the submission of documents, the taxpayer
adversely affected by the decision or inaction may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of the adverse decision, or from the
lapse of the one hundred eighty (180-) day period, with an application for the
issuance of a writ of preliminary injunction to enjoin the BIR from collecting the
tax subject of the appeal.
If the taxpayer fails to so appeal, the denial of the Commissioner or the
inaction of the Commissioner would result to the notice of assessment becoming
final and collectible and the BIR could then utilize its administrative and judicial
remedies to collect the tax.
15
i. A decision of a division of the Court of Tax Appeals adverse to the

The Court of Tax Appeals, has a period of twelve (12) months from
submission of the case for decision within which to decide.
j. If the decision of the Court of Tax Appeals en banc affirms the denial of
the protest by the Commissioner or the assessment in case of failure by the
Commissioner to decide the taxpayer must file a petition for review on certiorari
with the Supreme Court within fifteen (15) days from notice of the judgment on
questions of law. An extension of thirty (30) days may for justifiable reasons be
granted. If the taxpayer does not so appeal, the decision of the Court of Tax
Appeals would become final and this has the effect of making the assessment
also final and collectible. The BIR could then use its administrative and judicial
remedies to collect the tax
Jurisdiction of the Court of Tax Appeals:

a. Exclusive appellate jurisdiction to review by appeal
b. Jurisdiction over criminal offenses
1) Exclusive original jurisdiction
2) Exclusive appellate jurisdiction
c. Jurisdiction over tax collection cases
1) Exclusive original jurisdiction
2) Exclusive appellate jurisdiction
Exclusive appellate jurisdiction of CTA to review by appeal

a. Decisions of the Commissioner of Internal Revenue
b. Inaction by the Commissioner of Internal Revenue
c. Decisions, or resolutions of the Regional Trial Courts
d. Decisions of the Commissioner of Customs
e. Decisions of the Central Board of Assessment Appeals
f. Decisions of the Secretary of Finance
g. Decisions of the Secretary of Trade and Industry and the Secretary
of Agriculture. (Sec. 7, R. A. No. 1125, as amended by R. A. No. 9282)
BAR: 28. The jurisdiction of the Court of Tax Appeals:

“a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties, in relation thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue’;
2. Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds or internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matter arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial;
16
3. Decisions, orders or resolutions of the Regional Trial Courts in

local tax cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction;
4. Decisions of the Commissioner of Customs in cases involving
liability for customs duties, fees or other money charges, seizure, detention
or release of property affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
5. Decisions of the Central Board of Assessment Appeals in the
exercise of its appellate jurisdiction over cases involving the assessment
and taxation of real property originally decided by the provincial or city board
of assessment appeals;
6. Decisions of the Secretary of Finance on customs cases elevated
to him automatically for review from decisions of the Commissioner of
Customs which are adverse to the Government under Section 2315 of the
Tariff and Customs Code;
7. Decisions of the Secretary of Trade and Industry, in case of
nonagricultural product, commodity or article, and the Secretary of
Agriculture in the case of agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301 and 302, respectively,
of the Tariff and Customs Code, and safeguard measures under Republic Act
No. 8800, where either party may appeal the decision to impose or not to
impose said duties.
b. Jurisdiction over cases involving criminal offenses as herein
provided:
1. Exclusive original jurisdiction over all criminal cases arising from
violations of the national Internal Revenue Code or Tariff and Customs Code
and other laws administered by the Bureau of Internal Revenue or the
Bureau of Customs: Provided, however, That offenses or felonies mentioned
in this paragraph where the principal amount of taxes and fees, exclusive of
charges and penalties claimed, is less than One million pesos
(P1,000,000.00) or where there is no specified amount claimed shall be tried
by the regular Courts and the jurisdiction of the CTA shall be appellate. Any
provision of law or the Rules of Court to the contrary notwithstanding, the
criminal action and the corresponding civil action for the recovery of civil
liability for taxes and penalties shall at all times be simultaneously instituted
with, and jointly determined in the same proceeding by the CTA, the filing of
the criminal action being deemed to necessarily carry with it the filing of the
civil action, and no right to reserve the filing of such civil action separately
from the civil action will be recognized.
2. Exclusive appellate jurisdiction in criminal offenses:
a. Over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax cases originally decided by them, in their
respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions
orders of the Regional Trial Courts in the exercise of their appellate
jurisdiction over tax cases originally decided by the Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their
respective jurisdiction.
c. Jurisdiction over tax collection cases:
1. Exclusive original jurisdiction in tax collection cases involving final
and executory assessments for taxes, fees, charges and penalties:
Provided, however, That collection cases where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is less than One
17
million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court,
Metropolitan Trial Court and Regional Trial Court.
2. Exclusive appellate jurisdiction in tax collection cases:
a. Over appeals from judgments, resolutions, or orders of the
Regional Trial Courts in tax collection cases originally decided by them,
in their respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the exercise of their appellate
jurisdiction over tax collection cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit
Trial Courts, in their respective jurisdiction.” (Sec. 7, R. A. No. 1125, as
amended by R. A. No. 9282, emphasis supplied)
Exclusive appellate jurisdiction of Court of Tax Appeals to review by appeal
decisions of the Commissioner of Internal Revenue.
a. Cases involving:
1) Disputed assessments;
1) Refunds of internal revenue taxes, fees or other charges;
2) Penalties imposed in relation thereto.
b. Other matters arising under:
1) The National Internal Revenue Code, or
2) Other laws administered by the Bureau of Internal Revenue. (Sec. 7,
R. A. No. 1125, as amended by R. A. No. 9282).
The Court of Tax Appeals has jurisdiction over decisions of the

Commissioner of Customs over:
a. Cases involving:
1) Liability for customs duties, fees or other money charges,
2) Seizures, detention or release of property affected,
3) Fines, forfeitures and other penalties imposed in relation
thereto;
b. Other matters arising under:
1) the customs law, or
2) Other law or part of law administered by the Bureau of Customs
Exclusive appellate jurisdiction of Court of Tax Appeals to review by

appeal decisions, orders or resolutions of the Regional Trial Courts
a. In local tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction. (Sec. 7, R. A. No. 1125, as
amended by R. A. No. 9282)
b. Over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax collection cases decided by them, in their respective
territorial jurisdiction. (Ibid.)
c. Over petitions for review of the judgments, resolutions or orders of
the Regional Trial Courts in the exercise of their appellate jurisdiction over tax
collection cases originally decided by the Metropolitan Trial Courts, Municipal
Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.
(Ibid.)
Exclusive original jurisdiction of Regional Trial Courts in tax collection

cases. Civil actions for tax collection where the principal amount of taxes and
fees, exclusive of charges and penalties claimed exceeds Two hundred
thousand pesos (P200,000.00), or in Metro Manila where the amount of the
demand exceeds Four hundred thousand pesos (P400,000.00), provided that
18
the amount claimed is less than One million pesos (P1,000,000.00). (Sec. 19,
B.P .Blg. 129,as amended by R. A. No. 7691 in relation to Sec. 5, R.A. No. 7691
and Sec. 7, R. A. No. 1125 as amended by R. A. No. 9282)
NOTE: Tax collection cases that are below the threshold amounts of
P200,000.00 and P400,000.00 fall within the jurisdiction of the Municipal Trial
Courts, the Municipal Trial Courts in Cities, the Municipal Circuit Trial Courts, or
the Metropolitan Trial Courts. Where the amount exceeds P1 million, exclusive
original jurisdiction is vested with the Court of Tax Appeals.
Exclusive appellate jurisdiction of Regional Trial Courts in tax collection
cases. Regional Trial Courts shall exercise appellate jurisdiction over all cases
decided by Metropolitan Trial Courts, Municipal Trial Courts and Municipal
Circuit Trial Courts in their respective territorial jurisdiction. (Sec. 22, B. P. Blg.
129)
Exclusive appellate jurisdiction of the Court of Tax Appeals to review by

appeal decisions of Commissioner of Customs:
a. In cases involving:
1) Liability for customs duties, fees or other money charges;
2) Seizure, detention or release of property affected;
3) Fines, forfeitures or other penalties imposed in relation thereto;
b. Other matters arising under;
1) the Customs Law, or
2) Other laws administered by Bureau of Customs. (Sec. 7, R. A .
No. 1125, as amended by Sec. 7.a.4, R. A. No. 9282)
BAR: 29. The following are the acts of BIR Commissioner considered
as denial of a protest which serve as basis for appeal to the Court of Tax
Appeals:
a. Filing by the BIR of a civil suit for collection of the deficiency tax is
considered a denial of the request for reconsideration. (Commissioner of
Internal Revenue v. Union Shipping Corporation, 185 SCRA 547)
b. An indication to the taxpayer by the Commissioner “in clear and
unequivocal language” of his final denial not the issuance of the warrant of
distraint and levy. What is the subject of the appeal is the final decision not the
warrant of distraint. (Commissioner of Internal Revenue v. Union Shipping
Corporation, 185 SCRA 547)
c. A BIR demand letter sent to the taxpayer after his protest of the
assessment notice is considered as the final decision of the Commissioner on
the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA
523)
A letter of the BIR Commissioner reiterating to a taxpayer his previous
demand to pay an assessment is considered a denial of the request for
reconsideration or protest and is appealable to the Court of Tax Appeals.
(Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
The actual issuance of a warrant of distraint and levy in certain cases

cannot be considered a final decision on a disputed assessment. The taxpayer
should appeal, by way of a petition for review, to the Court of Tax Appeals not on
the ground of the denial of the protest but on other matter arising under the
provisions of the National Internal Revenue Code. Furthermore, an application
should likewise be made for the issuance of an injunctive writ to enjoin the BIR
from collecting during the pendency of the petition. (Commissioner of Internal
Revenue v. Union Shipping Corp., 185 SCRA 547)
19
Final notice before seizure considered as commissioner’s decision of

taxpayer’s request for reconsideration who received no other response.
Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No.
135210, July 11, 2001 held that not only is the Notice the only response
received: its content and tenor supports the theory that it was the CIR’s final act
regarding the request for reconsideration. The very title expressly indicated that
it was a final notice prior to seizure of property. The letter itself clearly stated
that the taxpayer was being given “this LAST OPPORTUNITY” to pay; otherwise,
its properties would be subjected to distraint and levy.
To a valid decision on a disputed assessment, the decision of the

Commissioner or his duly authorized representative shall (a) state the facts, the
applicable law, rules and regulations, or jurisprudence on which such decision is
based, otherwise, the decision shall be void, in which case the same shall not be
considered a decision on the disputed assessment; and (b) that the same is his
final decision. (Sec. 3.1.6, Rev. Regs. 12-99)
As a general rule, there must always be a decision of the Commissioner

of Internal Revenue or Commissioner of Customs before the Court of Tax
Appeals, would have jurisdiction. If there is no such decision, the would be
dismissed for lack of jurisdiction unless the case falls under any of the following
exceptions.
Instances where the Court of Tax Appeals would have jurisdiction even if
there is no decision yet by the Commissioner of Internal Revenue:
a. Where the Commissioner has not acted on the disputed assessment
after a period of 180 days from submission of complete supporting documents,
the taxpayer has a period of 30 days from the expiration of the 180 day period
within which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC
of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R.
No. 135210, July 11, 2001)
b. Where the Commissioner has not acted on an application for refund or
credit and the two year period from the time of payment is about to expire, the
taxpayer has to file his appeal with the Court of Tax Appeals before the
expiration of two years from the time the tax was paid.
It is disheartening enough to a taxpayer to be kept waiting for an indefinite
period for the ruling,. It would make matters more exasperating for the taxpayer
if the doors of justice would be closed for such a relief until after the
Commissioner, would have, at his personal convenience, given his go signal.
(Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No.
82618, March 16, 1989, unrep.)
Instances where the Court of Tax Appeals would have jurisdiction even if
there is no decision of the Commissioner of Customs:
a. Decisions of the Secretary of Trade and Industry or the Secretary of
Agriculture in anti-dumping and countervailing duty cases are appealable to the
Court of Tax Appeals within thirty (30) days from receipt of such decisions.
b. In case of automatic review by the Secretary of Finance in seizure or
forfeiture cases where the value of the importation exceeds P5 million or where
the decision of the Collector of Customs which fully or partially releases the
shipment seized is affirmed by the Commissioner of Customs.
c. In case of automatic review by the Secretary of Finance of a decision
of a Collector of Customs acting favorably upon a customs protest.
“The taxable income shall be computed upon the basis of the taxpayer’s
annual accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping the
books of such taxpayer; but if no such method of accounting has been so
employed, or if the method employed does not clearly reflect the income, the
20
computation shall be in accordance with such method as in the opinion of the

Commissioner clearly reflects the income.” (Sec. 43, NIRC of 1997)
“When a report required by law as a basis for the assessment of any

national internal revenue tax shall not be forthcoming within the time fixed by
laws or rules and regulations or when there is reason to believe that any such
report is false, incomplete or erroneous, the Commissioner shall assess the
proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the
time prescribed by law, or willfully or otherwise files a false or fraudulent return
or other document, the Commissioner shall make or amend the return from his
own knowledge and from such information as he can obtain through testimony or
otherwise, which shall be prima facie correct and sufficient for all legal
purposes.” [Sec. 6 (B), NIRC of 1997]
BAR: 30. The following are the general methods developed by the
Bureau of Internal Revenue for reconstructing a taxpayer’s income where the
records do not show the true incomne or where no return was filed or what was
filed was a false and fraudulent return (a) Percentage method; (b) Net worth
method.; (c) Bank deposit method; (d) Cash expenditure method; (e) Unit and
value method; (f) Third party information or access to records method; (g)
Surveillance and assessment method. (Chapter XIII. Indirect Approach to
Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp.
68-74)
Under the percentage method, the computed amount of revenues based

on the percentage computation is compared to the amount of revenues reflected
on the return. The percentages used may be obtained from the taxpayer,
industry publication, prior year’s audit results, or third parties. The comparison
will provide an indication on the possibility of revenue being understated.
Among the significant ratios and trends to be analyzed are the percentage
mark-up, gross profits ratio or gross margin percentage, profit margin, total
assets turnover, and inventory turnover. (Chapter XIII. Indirect Approach to
68-74)
The net worth method is a method of reconstructing income which is

based on the theory that if the taxpayer’s net worth has increased in a given year
in an amount larger than his reported income, he has understated his income for
that year. The net worth on a fixed starting date is compared with the net worth
on a fixed ending date. Any increase in net worth is presumed to be income not
declared for tax purposes. (Chapter XIII. Indirect Approach to Investigation,
Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)
The difficulty of establishing the opening net worth of a tax payer has led
to the “Cohan Rule” which is the use of estimates or approximations of the
amount of cash and other asserts where the taxpayer lacks adequate records.
(Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures
and Techniques – Volume I, pp. 68-74)
Under the bank deposit method, the bank records of the taxpayer are
analyzed and the BIR estimates income on the basis of the total bank deposits
after eliminating non-income items. This method stands on the premise that
deposits represent taxable income unless otherwise explained as being non-
taxable items. This method may be used only where the BIR has been legally
allowed access to the taxpayer’s bank records. (Chapter XIII. Indirect Approach
to Investigation, Handbook on Audit Procedures and Techniques – Volume I, pp.
68-74)
21
The cash expenditure method assumes that the excess of a taxpayer’s

expenditures during the tax period over his reported income for that period is
taxable to the extent not disproved otherwise. (Chapter XIII. Indirect Approach to
68-74)
Under the unit and value method, the determination or verification of

gross receipts may be computed by applying price and profit figures to the
known ascertainable quality of business of the taxpayer. (Chapter XIII. Indirect
Approach to Investigation, Handbook on Audit Procedures and Techniques –
Volume I, pp. 68-74)
For example, in order to determine the gross receipts of a pizza parlor,
multiply the pounds of flour used by the number of pizzas per pound which in
turn would then be multiplied by the average price per pizza.
BAR: 31. Third party information or access to records method. The

BIR may require third parties, public or private to supply information to the BIR,
and thus, “obtain on a regular basis from any person other than the person
whose internal revenue tax liability is subject to audit or investigation, or from
any office or officer of the national and local governments, government agencies
and instrumentalities including the Bangko Sentral ng Pilipinas and government-
owned or –controlled corporations, any information such as, but not limited to,
costs and volume of production, receipts or sales and gross incomes of
taxpayers, and the names , addresses, and financial statements of corporations,
mutual fund companies, insurance companies, regional operating headquarters
or multinational companies, joint accounts, associations, joint ventures or
consortia and registered partnerships, and their members; xxx” [Sec. 5 (B),
NIRC of 1997)
A pre-assessment notice is a letter sent by the Bureau of Internal

Revenue to a taxpayer asking him to explain within a period of fifteen (15) days
from receipt why he should not be the subject of an assessment notice. It is part
of the due process rights of a taxpayer.
As a general rule, the BIR could not issue an assessment notice without
first issuing a pre-assessment notice because it is part of the due process rights
of a taxpayer to be given notice in the form of a pre-assessment notice, and for
him to explain why he should not be the subject of an assessment notice.
BAR: 32. Instances where a pre-assessment notice is not required

before a notice of assessment is sent to the taxpayer.
a. When the finding for any deficiency tax is the result of mathematical
error in the computation of the tax as appearing on the face of the return; or
b. When a discrepancy has been determined between the tax withheld
and the amount actually remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have carried
over and automatically applied the same amount claimed against the estimated
tax liabilities for the taxable quarter or quarters of the succeeding table year; or
d. When the excess tax due on excisable articles has not been paid; or
e. When an article locally purchased or imported by an exempt person,
such as, but not limited to vehicles, capital equipment, machineries and spare
parts, has been sold, trade or transferred to non-exempt persons. (Sec. 228,
NIRC of 1997)
For internal revenue taxation assessment as laying a tax. The ultimate

purpose of an assessment to such a connection is to ascertain the amount that
each taxpayer is to pay. (Commissioner of Internal Revenue v. Pascor Realty
and Development Corporation, et al., G.R. No. 128315, June 29, 1999)
22
The word assessment when used in connection with taxation, may have
more than one meaning.. More commonly the word “assessment” means the
official valuation of a taxpayer’s property for purpose of taxation. The above
definition of assessment finds application under tariff and customs taxation as
well as local government taxation.
For real property taxation, there may be a special meaning to the burdens
that are imposed upon real properties that have been benefited by a public
works expenditure of a local government. It is sometimes called a special
assessment or a special levy. (Commissioner of Internal Revenue v. Pascor
Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)
An assessment is a notice duly sent to the taxpayer which is deemed

made only when the BIR releases, mails or sends such notice to the taxpayer.
(Commissioner of Internal Revenue v. Pascor Realty and Development
Corporation, et al., G.R. No. 128315, June 29, 1999)
An affidavit-report of the examiners used to support a criminal complaint

for tax evasion does not constitute an assessment that may be the subject of a
motion for reconsideration/reinvestigation. The affidavit-report merely contains a
computation of the liabilities. It does not state a demand or a period for payment.
It is not addressed to the taxpayers but to the Department of Justice. Clearly, it
was not meant to be a notice of the tax due and a demand for the payment
thereof. (Commissioner of Internal Revenue v. Pascor Realty and Development
Corporation, et al., G.R. No. 128315, June 29, 1999)
BAR: 33. The prescriptive periods for making assessments are:

a. three (3) years from the last day within which to file a return or when
the return was actually filed, whichever is later;
b. ten years from discovery of the failure to file the tax return or
discovery of falsity or fraud in the return; or
c. within the period agreed upon between the government and the
taxpayer where there is a waiver of the prescriptive period for assessment.
A “jeopardy assessment” is a delinquency tax assessment which was

assessed without the benefit of complete or partial audit by an authorized
revenue officer, who has reason to believe that the assessment and collection of
a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to
comply with the audit and investigation requirements to present his books of
accounts and/or pertinent records, or to substantiate all or any of the deductions,
exemptions, or credits claimed in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-
2000)
Jeopardy assessment is an indication of the doubtful validity of the

assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. Regs.
No. 6-2000]
Requirements for validity of formal letter of demand and assessment

notice:
a. There must have been previously issued a pre-assessment notice until
excepted;
b. It must have been issued prior to the prescriptive period; and
c. The letter of demand calling for payment of the taxpayer’s deficiency
tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence
on which the assessment is based, otherwise, the formal letter of demand and
assessment notice shall be void. (Sec. 3.1.4, Rev. Regs. No. 12-99)
BAR: 34. The holding in Commissioner of Internal Revenue v. Court of

Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case) that the
23
waiver of the period for assessment must be in writing and have the written
consent of the BIR Commissioner is still doctrinal because of the provisions of
Sec. 223, NIRC of 1997 which provides for the suspension of the prescriptive
period:
a. When the Commissioner is prohibited from making the assessment, or
beginning distraint, or levy or proceeding in court and for sixty (60) days
thereafter;
b. When the taxpayer requests for and is granted a reinvestigation by the
commissioner;
c. When the taxpayer could not be located in the address given by him in
the return filed upon which the tax is being assessed or collected;
d. When the warrant of distraint and levy is duly served upon the
taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and
e. When the taxpayer is out of the Philippines.
The signatures of both the Commissioner and the taxpayer, are required
for a waiver of the prescriptive period, thus a unilateral waiver on the part of the
taxpayer does not suspend the prescriptive period. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999
(Carnation case)
BAR: 36. The following are the requirements for the validity of a
taxpayer’s protest:
a. It must be filed within the reglementary period of thirty (30) days from
receipt of the notice of assessment.
b. The taxpayer must show the errors of the Bureau of Internal Revenue
as well as the correct computation through
1) A statement of the facts, the applicable law, rules and
regulations, or jurisprudence on which the taxpayer’s protest is based,
2) If there are several issues involved in the disputed assessment
and the taxpayer fails to state the facts, the applicable law, rules and
regulations, or jurisprudence in support of his protest against some of the
several issues on which the assessment is based, the same shall be
considered undisputed issue or issues, in which case, the taxpayer shall
be required to pay the corresponding deficiency tax or taxes attributable
thereto. (Sec. 3.1.5, Rev. Regs. 12-99)
c. Within sixty (60) days from filing of the protest, the taxpayer shall
submit all relevant supporting documents. [4 th par., Sec. 228 (e), NIRC of 1997]
Laws on prescription should be liberally construed in favor of the

taxpayer. For the purpose of safeguarding taxpayers from an unreasonable
examination, investigation or assessment, our tax law provides a statute of
limitation on the collection of taxes.
The prescriptive period was precisely intended to give the taxpayers
peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc.,
et al., G.R. No. 104171, February 24, 1999)
Assessment and refund cases could not be consolidated. Reason:

Lifeblood doctrine. If there a pending assessment, refund should not be
granted.
Assessment not necessary before a taxpayer may be prosecuted for

willfully attempting in any manner to evade or defeat any tax imposed by the
Internal Revenue Code.
A criminal charge for tax evasion is different from a tax assessment:

24
a. Criminal charge need only be supported by a prima facie showing of

failure to file a required return WHILE the fact of failure to file a return need not
be proven by an assessment.
b. Before an assessment is issued, there is, by practice, a pre-
assessment notice sent to the taxpayer WHILE such is not so with a criminal
charge. The charge is filed directly with the Department of Justice.
c. A criminal complaint is instituted not to demand payment, but to
penalize the taxpayer for violation of the Tax Code WHILE the purpose of the
issuance of an assessment is to collect the tax. (Commissioner of Internal
Revenue v. Pascor Realty and Development Corporation, et al., G.R. No.
128315, June 29, 1999)
The doctrines in Commissioner of Internal Revenue v. Court of Appeals,

et al., G.R. No. 119322, June 4, 1996, Commissioner of Internal Revenue v.
Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29,
1999 and Ungab v. Cusi, 97 SCRA 877, are different from one another.
In Ungab, there was a prima facie attempt to evade taxes because of the
taxpayer’s failure to declare in his income tax return “his income derived from
banana saplings” hence the case was filed despite the absence of a notice of
assessment.
In the Fortune Tobacco case no criminal case was filed, because the
registered wholesale price of the goods, approved by the BIR is presumed to be
the actual wholesale price, therefore, not fraudulent and unless and until the BIR
has made a final determination of what is supposed to be the correct taxes, the
taxpayer should not be placed in the crucible of criminal prosecution.
While it is true as stated on Commissioner v. Pascor Realty and

Development Corporation, that a criminal complaint is instituted not to demand
payment, but to penalize the taxpayer for violation of the Tax Code, “The
judgment in the criminal case shall not only impose the penalty but shall also
order payment of the taxes subject of the criminal case as finally decided by the
Commissioner.” [3rd par., Sec. 205 (b), NIRC of 1997]
A compromise is a contract whereby the parties, through mutual

agreement and by making reciprocal concessions, avoid a litigation or put an
end to one already commenced. (Art. 2028, Civil Code)
BAR: 37. A compromise penalty could not be imposed by the BIR, if the
taxpayer did not agree. A compromise being, by its nature, mutual in essence
requires agreement. The payment made under protest could only signify that
there was not agreement that had effectively been reached between the parties.
(Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G.R.No.
138485, September 10, 2001)
BAR: 38. The following cases may, upon taxpayer’s compliance with
the basis for compromise, be the subject matter of compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest after issuance of the Final
Assessment Notice to the taxpayer which are still pending in the Regional
Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and other offices in the National Office;
c. Civil tax cases being disputed before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than those already filed in court, or those
involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)
57. Tax cases which could not be the subject of compromise:

25
a. Withholding tax cases unless the applicant-taxpayer invokes

provisions of law that cast doubt on the taxpayer’s obligation to withhold.;
b. Criminal tax fraud cases, confirmed as such by the Commissioner of
Internal Revenue or his duly authorized representative;
c. Criminal violations already filed in court;
d. Delinquent accounts with duly approved schedule of installment
payments;
e. Cases where final reports of reinvestigation or reconsideration have
been issued resulting to reduction in the original assessment and the taxpayer is
agreeable to such decision by signing the required agreement form for the
purpose. On the other hand, other protested cases shall be handled by the
Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a
case to case basis;
f. Cases which become final and executory after final judgment of a court
where compromise is requested on the ground of doubtful validity of the
assessment; and
g. Estate tax cases where compromise is requested on the ground of
financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)
58. The Commissioner may compromise the payment of any internal

revenue tax when:
a. A reasonable doubt as to the validity of the claim against the taxpayer
exists provided that the minimum compromise entered into is equivalent to forty
percent (40%) of the basic tax; or
b. The financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax provided that the minimum compromise entered into is
equivalent to ten percent (10%) of the basic assessed tax
In the above instances the Commissioner is allowed to enter into a
compromise only if the basic tax involved does not exceed One million pesos
(P1,000,000.00), and the settlement offered is not less than the prescribed
percentages. [Sec. 204 (A), NIRC of 1997]
In instances where the Commissioner is not authorized, the compromise
shall be subject to the approval of the Evaluation Board composed of the
Commissioner and the four (4) Deputy Commissioners.
BAR: 39. The Commissioner of Internal Revenue is authorized to abate

or cancel a tax liability, when:
a. The tax or any portion thereof appears to be unjustly or excessively
assessed; or
b. The administration and collection costs involved do not justify the
collection of the amount due. [Sec. 204 (B), NIRC of 1997]
The offer to compromise a delinquent account or disputed assess-ment

on the ground of reasonable doubt as to the validity of the assessment may be
accepted when it is shown that:
a. The delinquent account or disputed assessment is one resulting from a
jeopardy assessment. or
b. The assessment seems to be arbitrary in nature, appearing to be
based on presumptions and there is reason to believe that it is lacking in legal
and/or factual basis; or
c. The taxpayer failed to file an administrative protest on account of the
alleged failure to receive notice of assessment and there is reason to believe
that the assessment is lacking in legal and/or factual basis; or
d. The taxpayer failed to file a request for reinvestigation/reconsideration
within 30 days from receipt of final assessment notice and there is reason to
believe that the assessment is lacking in legal and/or factual basis; or
e. The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an
adverse decision of the Commissioner, or his authorized representative, in some
26
cases, within 30 days from receipt thereof and there is reason to believe that the
assessment is lacking in legal and/or factual basis; or
f. The assessments were issued on or after January 1, 1998, where the
demand notice allegedly failed to comply with the formalities under Sec. 228 of
the National Internal Revenue Code of 1997; or
g. Assessments made based on the “Best Evidence Obtainable Rule” and
there is reason to believe that the same can be disputed by sufficient and
competent evidence; or
h. The assessment was issued within the prescriptive period for
assessment as extended by the taxpayer’s execution of Waiver of the Statute of
Limitations the validity or authenticity of which is being questioned or at issue
and there is strong reason to believe and evidence to prove that it is not
authentic. (Sec. 3, 1, Rev. Regs. No. 30-3002)
The offer to compromise based on financial incapacity may be accepted

upon showing that:
a. The corporation ceased operation or is already dissolved Provided,
that tax liabilities corresponding to the Subscription Receivable or Assets
distributed/distributable to the stockholders representing return of capital at the
time of cessation of operation or dissolution of business shall not be considered
for compromise; or
b. The taxpayer, as reflected in its latest Balance Sheet supposed to be
filed with the Bureau of Internal Revenue, is suffering from surplus or earnings
deficit resulting to impairment in the original capital by at least 50%, provided
that amounts payable to due to stockholders other than business-related
transactions which are properly ineludible in the regular “accounts payable” are
by fiction of law considered as part of capital and not liability, and provided
further that the taxpayer has no sufficient liquid asset to satisfy the tax liability; or
c. The taxpayer is suffering from a networth deficit (total liabilities exceed
total assets) computed by deducting total liabilities (net of deferred credits and
amounts payable to stockholders/owners reflected as liabilities, except business-
related transactions) from total assets (net of prepaid expenses, deferred
charges, pre-operating expenses, as well as appraisal increases in fixed assets)
taken from the latest audited financial statements, provided that in the case of an
individual taxpayer, he has no other leviable properties under the law other than
his family home; or
d. The taxpayer is a compensation income earner with no other source of
income and the family’s gross monthly compensation income does not exceed, if
single, P10,500 or less, or if married, whose salary together with his spouse is
P21,000 per month, or less, and it appears that the taxpayer possesses no other
leviable/distrainable assets other than his family home; or
e. The taxpayer has been declared by any competent tribunal/
authority/body/government agency as bankrupt or insolvent. (Sec. 3. 2, Rev. in
relation to Sec.4.1.1 both of Regs. No. 30-3002)
BAR: 40. The filing of an administrative claim for refund with the BIR,
before filing a case with the Court of Tax Appeals, is necessary for the following
reasons:
a. To afford the Commissioner an opportunity to correct his errors or that
of subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA 79)
b. To notify the Government that such taxes have been questioned and
the notice should be borne in mind in estimating the revenue available for
expenditures. (Bermejo v. Collector, G.R. No. L-3028, July 28, 1950)
BAR: 41. The failure to first file a written claim for refund or credit is not
fatal to a petition for review involving a disputed assessment.
To hold that the taxpayer has now lost the right to appeal from the ruling
on the disputed assessment and require him to file a claim for a refund of the
taxes paid as a condition precedent to his right to appeal, would in effect require
27
of him to go through a useless and needless ceremony that would only delay
the disposition of the case, for the Commissioner would certainly disallow the
claim for refund in the same way as he disallowed the protest against the
assessment. The law, should not be interpreted as to result in absurdities . (vda.
de San Agustin., etc.,v. Commissioner of Internal Revenue, G.R. No. 138485,
September 10, 2001 citing Roman Catholic Archbishop of Cebu v. Collector of
Internal Revenue, 4 SCRA 279)
Reconciliation between no. 40 and 41. An application for refund or credit

under Sec. 229 of the NIRC of 1997 is required where the case filed before the
CTA is a refund case, which is not premised upon a disputed assessment. There
is no need for a prior application for refund or credit, if the refund is merely a
consequence of the resolution of the BIR’s denial of a protested assessment.
Sec. 69 of the 1977 NIRC (now Sec. 76 of the NIRC of 1997) provides
that any excess of the total quarterly payments over the actual income tax
computed in the adjustment or final corporate income tax return, shall either (a)
be refunded to the corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the succeeding taxable year.
To ease the administration of tax collection, these remedies are in the alternative
and the choice of one precludes the other. Since the Bank has chosen the tax
credit approach it cannot anymore avail of the tax refund. (Philippine Bank of
Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024,
January 28, 1999)
The timely service of a warrant of distraint or levy suspends the running

of the period to collect the tax deficiency in the sense that the disposition of the
attached properties might well take time to accomplish, extending even after the
lapse of the statutory period for collections. (Advertising Associates, Inc., v.
Court of Appeals, 133 SCRA 765; Palanca v. Commissioner of Internal Revenue,
114 Phil. 203)
The enforcement of tax collection through summary proceedings may be

carried out beyond the statutory period. (Republic of the Philippines, etc. v.
Hizon, G.R. No. 1304, December 13, 1999) The statutory period for collection
applies only where a court suit is availed of for collection.
BAR: 42. Civil and criminal actions and proceedings instituted in behalf
of the Government under the authority of the NIRC of 1997 or other law enforced
by the Bureau of Internal Revenue shall be brought in the name of the
Government of the Philippines and shall be conducted by legal officers of the
Bureau of Internal Revenue but no civil or criminal action for the recovery of
taxes or the enforcement of any fine, penalty or forfeiture under the NIRC of
1997 shall be filed in court without the approval of the Commissioner of Internal
Revenue. (Sec. 220, NIRC of 1997)
The two year period applies only to recovery of taxes or penalties NOT to
tax credits availment. Absent a specific provision in the Tax Code or special laws,
the period would be 10 years. (Justice Vitug, concurring in Commissioner of
Internal Revenue v. The Philippine Life Insurance Co., et al. G.R. No. 105208,
May 29, 1995 reiterating the TMX case)
Where a corporation is dissolved It becomes necessary for the bank to

file its income tax return within 30 days after approval by the SEC of its plan or
resolution of dissolution. Indeed, it would be absurd for the bank to wait until the
fifteenth day of April, after it ceased its operations, before filing its income tax
return.
Thus, the two-year prescriptive period should be counted from 30 days
after the approval by the SEC of its plan for dissolution. There is no need to file
28
a Final Adjustment Return because there is nothing to adjust or to audit. After

the corporation ceased operation its taxable year would be shortened. (Bank of
the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653,
August 28, 2001)
A simultaneous filing of the application with the BIR for refund/credit and
the institution of the court suit with the CTA is allowed. There is no need to wait
for a BIR denial. REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of
1997);
b. The doctrine that delay of the Commissioner in rendering decision
does not extend the peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for refund
with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of
1997), and for filing suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of
1997), unlike in protests of assessments under Sec. 229 (now Sec. 228, NIRC
of 1997), which fixed the period (thirty days from receipt of decision) for
appealing to the court, thus clearly implying that the prior decision of the
Commissioner is necessary to take cognizance of the case. (Commissioner of
Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No.
34102, September 9, 1994; Gibbs v. Collector of Internal Revenue, et al., 107
Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)
The rule is that no interest on refund of tax can be awarded unless

authorized by law or the collection of the tax was attended by arbitrariness. An
action is not arbitrary when exercised honestly and upon due consideration
where there is room for two opinions, however much it may be believed that an
erroneous conclusion was reached. Arbitrariness presupposes inexcusable or
obstinate disregard of legal provisions. (Philex Mining Corporation v.
Commissioner of Internal Revenue, et al., G.R. No. 120324, April 21, 1999)
The institution or commencement before a proper court of civil and

criminal actions and proceedings arising under the Tax Reform Act , such as
recovery of taxes or the enforcement of any fine, penalty or forfeiture, shall be
conducted by legal officers of the Bureau of Internal Revenue with the approval
of the Commissioner.
On the other hand, it is the Solicitor General who has the primary
responsibility to appeal for the government in appellate proceedings.
(Commissioner of Internal Revenue v. La Suerte Cigar and Cigarette Factory, G.
r. No. 144942, July 4, 2002)
NATIONAL INTERNAL REVENUE CODE
THE BUREAU OF INTERNAL REVENUE
Any internal revenue officer in the discharge of his official duties may
enter any house, building or place where articles subject to excise taxes are
produced or kept, or are believed by him upon reasonable grounds to be
produced or kept so far as may be necessary to examine, discover or seize the
same. (1st par., Sec. 171, NIRC of 1997)
Internal revenue officers shall have authority to make arrests and seizures
for violation of any penal law or regulation administered by the Bureau of
Internal Revenue. Any person so arrested shall forthwith be brought before a
court, there to be dealt with according to law. (Sec. 13, NIRC of 1997)
No search warrant or warrant of arrest is required under the doctrine of

primary jurisdiction which posits that in technical matters where the
29
administrative bodies have obtained expertise, the courts will defer. This is
likewise premised on the lifeblood theory which mandates the immediate
collection of taxes to ensure the continued existence of the State.
There are two kinds of rulings the BIR may issue - interpretative rulings
and legislative rulings.
Interpretative rules are designed to provide guidelines to the law which

the administrative agency is in charge of enforcing. No notice, hearing or
publication is required, as they are issued merely for the guidance of
administrative officers. Illustration: Revenue Memorandum Circular No. 47-91
classifying copra as an agricultural non-food item declaring it exempt from VAT
only if the sale is made by the primary producer. (Misamis Oriental Association of
Coco Traders, Inc. v. Department of Finance Secretary, et al., 238 SCRA 63
[1994]
Legislative rules are in the nature of subordinate legislation, designed to

implement a primary legislation by providing the details thereof. They are issued
under the quasi-legislative authority of the BIR Commissioner. There is a
requirement for notice, hearing and publication. Illustration: Revenue
Memorandum Circular No. 37-93 which placed Hope Luxury, Premium More and
Champion cigarettes within the scope of the amendatory law R.A. No. 7654 and
subjected them to the increased tax rate requires notice, hearing and
publication. (Commissioner of Internal Revenue v. Court of Appeals, et al., 261
SCRA 236)
The rulings and circulars promulgated by the Commissioner do not have

retroactive application if the revocation, modification, or reversal would be
prejudicial to the taxpayers. (Sec. 246, NIRC of 1997; Commissioner of Internal
Revenue v. Court of Appeals, et al., 267 SCRA 557)
Instances when revenue rulings and regulations have retroactive effect

even if prejudicial to the taxpayer:
a. Where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the BIR;
b. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based, or
c. Where the taxpayer acted in bad faith. (Sec. 246, NIRC of 1997)
9. The Commissioner or his authorized representative is empowered to

suspend the business operations and temporarily close the business
establishment of any person for any of the following violations:
a. In case of a VAT-registered person:
1) Failure to issue receipts or invoices;
2) Failure to file a VAT return as required under the Tax Code;
3) Understatement of taxable sales or receipts by 30% or more of
his correct taxable sales or receipts for the taxable quarter.
b. Failure to register under the VAT provisions of the Tax Code. The
temporary closure of the establishment shall for the duration of not less than five
(5) days and shall be lifted only upon compliance with whatever requirements
prescribed by the Commissioner in the closure order. (Atlas Consolidated
Mining & Development Corporation v. Commissioner of Internal Revenue, G.R.
No. 134467, November 17, 1999)
The Commissioner of Internal Revenue is authorized under the Tax Code

to delegate the powers vested in him under the pertinent provisions of the Tax
Code to any subordinate official with the rank equivalent to a division chief or
higher.
30
The following are some of the powers that the Commissioner of Internal
Revenue could not delegate:
a. The power to recommend the rules and regulations by the Secretary of
Finance;
b. The power to issue rulings of first impression or to reverse, revoke, or
modify any existing ruling of the Bureau;
c. The power to compromise or abate, any tax deficiency, Provided,
however, that assessments issued by the Regional Offices involving basic
deficiency taxes of P500,000.00 or less, and minor criminal violations as may be
determined by rules and regulations to be promulgated by the Secretary of
Finance, upon the recommendation of the Commissioner, discovered by regional
and district officials, may be compromised by a regional evaluation board which
shall be composed of the Regional Director as Chairman, the Assistant Regional
Director, heads of the Legal, Assessment and Collection Divisions and the
Revenue District Officer having jurisdiction over the taxpayer, as members; and
d. The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are produced or kept. (Sec.
7, NIRC of 1997 cited in Republic of the Philippines, etc. v. Hizon, G.R. No.
130430, December 13, 1999)
The Commissioner of Internal Revenue has the power to obtain on a

regular basis from any person other than the person whose internal revenue tax
liability is subject to audit or investigation, an information such as, but not limited
to, costs and volume of production, receipts or sales and gross income
taxpayers, among others. [Sec. 5 (B), NIRC of 1997]
BAR: 43. Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits
inquiry into bank deposits. As exceptions to Rep. Act No. 1405, the
Commissioner of Internal Revenue is only authorized to inquire into the bank
deposits of:
a. a decedent to determine his gross estate; and
b. any taxpayer who has filed an application for compromise of his tax
liability by reason of financial incapacity to pay his tax liability. [Sec. 5 (F), NIRC
of 1997]
c. A taxpayer who authorizes the Commissioner to inquire into his bank
deposits.
INCOME TAXATION
The Tax Code has included under the term “corporation” partnerships, no
matter how created or organized, joint-stock companies, joint accounts (cuentas
en participacion), associations, or insurance companies. [Sec. 24 now Sec. 24
(B) of the NIRC of 1997]
In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing
Mertens that the term partnership includes a syndicate, group, pool, joint venture
or other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on.
Certain business organizations do not fall under the category of

“corporations” under the Tax Code, and therefore not subject to tax as
corporations, include:
a. General professional partnerships;
b. Joint venture or consortium formed for the purpose of undertaking
construction projects engaging in petroleum, coal, geothermal, and other energy
operations, pursuant to an operation or consortium agreement under a service
contract with the Government. [1 st sentence, Sec. 22 (B), BIRC of 1997]
31
BAR: 44. Co-heirs who own inherited properties which produce income
should not automatically be considered as partners of an unregistered
corporation subject to income tax for the following reasons:
a. the sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest
in any property from which the returns are derived. There must be an
unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 436)
b. There is no contribution or investment of additional capital to increase
or expand the inherited properties, merely continuing the dedication of the
property to the use to which it had been put by their forebears. (Ibid.)
c. Persons who contribute property or funds to a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective contribution, are
not thereby rendered partners. They have no common stock capital, and no
community of interest as principal proprietors in the business itself from which
the proceeds were derived. (Elements of the Law of Partnership by Floyd R.
Mechem, 2nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal
Revenue, 166 SCRA 560)
5. In order to constitute a partnership inter sese there must be:

a. an intent to form the same;
b. generally participating in both profits and losses;
c. and such a community of interest, as far as third persons are
concerned as enables each party to make a contract, manage the business, and
dispose of the whole property. (Municipality Paving Co. v. Herring, 150 O. 1067,
50 Ill. 470, cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA
560)
BAR: 45. The common ownership of property does not itself create a
partnership between the owners, though they may use it for purpose of making
gains, and they may, without becoming partners, are among themselves as to
the management and use of such property and the application of the proceeds
therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in
Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
The income from the rental of the house, bought from the earnings of co-
owned properties, shall be treated as the income of an unregistered partnership
to be taxable as a corporation because of the clear intention of the brothers to
join together in a venture for making money out of rentals.
Where the plaintiff, his brother and, and another agreed to become
owners of a single tract of realty holding as tenants in common, and to divide the
profits of disposing of it, the brother and the other not being entitled to share in
plaintiff’s commissions, no partnership existed as between the three parties,
whatever their relation may have been as to third parties. (Magee v. Magee,
123 N.E. 673, 233 Mass. 341 cited in Pascual v. Commissioner of Internal
Revenue, 166 SCRA 560)
Income is an amount of money coming to a person within a specified time,

whether payment for services, interest, or profit from investment.” It means cash
or its equivalent.
Income is gain derived and severed from capital, from labor or from both
combined. For example, to tax a stock dividend would be to tax a capital
increase rather than the income. (Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 108576, January 20, 1999)
Distinctions between wealth and income.

32
a. Capital is wealth or fund, WHILE income is profit or gain from the flow
of wealth. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R.
No. 108576, January 20, 1999)
b. Capital is a fund of property existing at an instant of time WHILE
income is that flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such fund
through a period of time.
c. Capital is wealth WHILE income is the service of wealth; and
d. Capital is the tree WHILE income is the fruit. (Madrigal v. Rafferty, 38
Phil. 414)
Realization is determinative of earning process resulting to income.

Without realization, there is no income.
The determining factor for the imposition of income tax is whether any
gain or profit was derived from the transaction. In the metaphor of Eisner v.
Macomber, 252 U.S. 426, income is not deemed “realized” until the fruit has
been plucked from the tree.
BAR: 46. The term taxable income means the pertinent items of gross
income specified in the Tax Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by the Tax
Code or other special laws. (Sec. 31, NIRC of 1997)
BAR: 47. The cancellation and forgiveness of indebtedness may

amount to (a) payment of income; (b) gift; or to a (c) capital transaction
depending upon the circumstances.
If an individual performs services for a creditor who, in consideration

thereof, cancels the debt, it is income to the extent of the amount realized by the
debtor as compensation for his services.
An insolvent debtor does not realize taxable income from the cancellation
or forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10 th)
The insolvent debtor realizes income resulting from the cancellation or

forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co.,
v. Commissioner 36 BTA (F) 289)
If a creditor merely desires to benefit a debtor and without any

consideration therefor cancels the amount of the debt it is a gift from the creditor
to the debtor and need not be included in the latter’s income.
If a corporation to which a stockholder is indebted forgives the debt, the

transaction has the effect of payment of a dividend. (Sec. 50, Rev.Regs. No. 2)
The Global system of income taxation is a system employed where the tax
system views indifferently the tax base and generally treats in common all
categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237
SCRA 324, 331)
The Schedular system of income taxation is a system employed where the

income tax treatment varies and is made to depend on the kind or category of
taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
Under the National Internal Revenue Code the global system is

applicable to taxable corporations and the schedular to individuals.
33
BAR: 48. The general principles of income taxation in the Philippines

OR the situs of income taxation in the Philippines OR the source rule of income
taxation as applied in the Philippines.
a. A citizen of the Philippines residing therein is taxable on all income
derived from sources within and without the Philippines.
b. A nonresident citizen is taxable only on income derived from sources
within the Philippines.
c. An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only on income
from sources within the Philippines: Provided, That a seaman who is a citizen of
the Philippines and who receives compensation for services rendered abroad as
a member of the complement of a vessel engaged exclusively in international
trade shall be treated as an overseas contract worker.
d. An alien individual, whether resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines.
e. A domestic corporation is taxable on all income derived from sources
within and without the Philippines.
f. A foreign corporation, whether engaged or not in trade or business in
the Philippines, is taxable only on income derived from sources within the
Philippines. (Sec. 23, NIRC of 1997)
BAR: 49. Compensation income is considered as having been earned

in the place where the service was rendered and not considered as sourced
from the place of origin of the money.
BAR: 50. Payment for services, other than compensation income, is

considered as having been earned at the place where the money originated and
not at the place where the activity or service was performed.
A non-resident alien, who has stayed in the Philippines for an aggregate

period of more than 180 days during the calendar year 2001, shall be
considered as a non-resident alien doing business in the Philippines.
Consequently, he shall be subject to income tax on his income derived from
sources from within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal
and additional exemptions subject to the rule on reciprocity.
Improperly accumulated earnings are the earnings or profits of a

corporation which are permitted to accumulate instead of being divided by a
corporation to its shareholders for the purpose of avoiding the income tax on
dividends with respect to its shareholders or the shareholders of another
corporation. If the income were divided and distributed, they would have been
taxed as dividends.
In addition to other income taxes, there is imposed for each taxable year
on the improperly accumulated taxable income of each corporation, an
improperly accumulated earnings tax equal to 10% of the improperly
accumulated taxable income. [Sec. 29 (A), NIRC of 1997]
Every corporation formed or availed for the purpose of avoiding income

tax with respect to its shareholders or the shareholders of another corporation,
by permitting earnings and profits to accumulate instead of being divided or
distributed. [Sec. 29 (B) (1), NIRC of 1997]
Corporations exempt from the improperly accumulated earnings tax:

a. Publicly-held corporations;
b. Banks and other nonbank financial intermediaries; and
c. nsurance companies. [Sec. 29 (B) (2), NIRC of 1997]
34
The fact that the earnings or profits of a corporation are permitted to

accumulated beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by clear preponderance of evidence, shall prove the
contrary. [Sec. 29 (C) (2), NIRC of 1997]
Reasonable needs of business includes the reasonably anticipated needs

of the business. [Sec. 29 (E), NIRC of 1997]
In order to determine whether profits are accumulated for the reasonable
needs of the business to avoid the surtax upon shareholders, it must be shown
that the controlling intention of the taxpayer is manifested at the time of the
accumulation, not intentions declared subsequently, which are mere
afterthoughts. Furthermore, the accumulated profits must be used within a
reasonable time after the close of the taxable year. (Cyanamid Philippines, Inc.
v. Court of Appeals, et al., G.R. No. 108067, January 20, 2000)
The tests to determine justified accumulation of earnings, and not subject

to tax are (a) the immediacy test; (b) the “2 to 1” ratio; and the (c) the Bardahl
formula.
Under the “immediacy test,” “reasonable needs of the business” means

the immediate needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the
business and the penalty tax would apply. (Cyanamid Philippines, Inc. v. Court of
Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila Wine
Merchants, Inc. v. Commissioner of Internal Revenue in turn citing Mertens)
Under the “2 to 1” rule, the ratio of current assets to current liabilities is

used to determine the sufficiency of working capital. Ideally, the working capital
should equal the current liabilities and there must be 2 units of current assets for
every unit of current liability, hence the so-called “2 to 1” Rule. (Cyanamid
Philippines, Inc. v. Court of Appeals, et al., G.R. No. 108067, January 20, 2000
citing Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue in turn
citing Mertens)
The “Bardahl” formula allows retention as working capital reserve,

sufficient amounts of liquid assets to carry the company through one operating
cycle. The formula requires an examination of whether the taxpayer has
sufficient liquid assets to pay all its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the business during
one operating cycle. (Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R.
No. 108067, January 20, 2000 citing Manila Wine Merchants, Inc. v.
Commissioner of Internal Revenue in turn citing Mertens)
Although the “Bardahl” formula is well-established and routinely applied

by the courts, it is not a precise rule. It is used only for administrative
convenience. (Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R. No.
108067, January 20, 2000 citing Manila Wine Merchants, Inc. v. Commissioner
of Internal Revenue in turn citing Mertens)
The operating cycle is the period of time it takes to convert cash into raw
materials, raw materials into inventory, and inventory into sales, including the
time it takes to collect payment for the sales. There are variations in the
application of the “Bardahl” formula, such as average operating cycle or peak
operating cycle. In times when there is no recurrence of a business cycle, the
working capital needs cannot be predicted with accuracy. (Cyanamid Philippines,
Inc. v. Court of Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila
35
Wine Merchants, Inc. v. Commissioner of Internal Revenue in turn citing

Mertens)
The two (2) principal accounting methods for recognition of income are
the (a) accrual method; and the (b) cash method.
Under the accrual method of accounting, income is reportable when all

the events have occurred that fix the taxpayer’s right to receive the income, and
the amount can be determined with reasonable accuracy. Thus it is the right to
receive income, and not the actual receipt, that determines when to include the
amount in gross income. (Filipinas Fiber Corporation v. Court of Appeals, et al.,
G.R. Nos. 118498 & 124377, October 12, 1999)
The requisites of the accrual method of income recognition:

a. That the right to receive the income must be valid, unconditional and
enforceable, i.e. not contingent upon future time;
b. The amount must be reasonably susceptible of accurate estimate; and
c. There must be a reasonable expectation that the amount will be paid in
due course. (Filipinas Fiber Corporation v. Court of Appeals, et al., G.R. Nos.
118498 & 124377, October 12, 1999)
Under the cash method income is to be construed as income for tax

purposes only upon actual receipt of the cash payment. It is also referred to as
the “cash receipts and disbursements method” because both the receipt and
disbursements are considered. Thus, income is recognized only upon actual
receipt of the cash payment but no deductions are allowed from the cash income
unless actually disbursed through an actual payment in cash.
The other methods of accounting are (a) the completion of contract basis
(not recognized under the NIRC of 1997); (b) the percentage of completion
method; and (c) the installment method.
The installment basis is a method considered when collections extend

over relatively long periods of time and there is a strong possibility that full
collection will not be made. As customers make installment payments, the seller
recognizes the gross profit on sale in proportion to the cash collected. (Chapter
II, Accounting Methods, Handbook on Audit Procedures and Techniques –
Volume I, Revision 2000, pp. 3-4)
BAR: 51. The fringe benefits tax is a final withholding tax imposed on
the grossed-up monetary value of fringe benefits furnished, granted or paid by
the employer to the employee, except rank and file employees. [1 st par., Sec.
2.33 (A), Rev. Regs. No. 3-98] It is the employer that pays the tax.
For purposes of taxation, fringe benefit means any good, service, or other
benefit furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees), such as but not limited to:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the employer for
the employee in social and athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his dependents; and
36
j. Life or health insurance and other non-life insurance premiums or

similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 st
par., Sec. 2.33 (B), Rev. Regs. No. 3-98]
BAR: 52. Fringe benefits that are not subject to the fringe benefits tax:
a. When the fringe benefit is required by the nature of, or necessary to
the trade, business or profession of the employer; or
b. When the fringe benefit is for the convenience or advantage of the
employer. [Sec. 32(A), NIRC of 1997; 1 st par., Sec. 2.33 (A), Rev. Regs. No. 3-
98]
c. Fringe benefits which are authorized and exempted from income tax
under the Tax Code or under any special law;
d. Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
e. Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
f. De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue. [1 st par., Sec. 32 (C), NIRC of 1997; Sec.
2.33 (C), Rev. Regs. No. 3-98]
De minimis benefits are facilities and privileges (such as entertainment,

medical services, or so-called “courtesy discounts” on purchases), furnished or
offered by an employer to his employees. They are not considered as
compensation subject to income tax and consequently to withholding tax, if such
facilities are offered or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of his employees.
[Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
BAR: 53. The following shall be considered as de minimis benefits not

subject to withholding tax on compensation income of both managerial and rank
and file employees:
a. Monetized unused vacation leave credits of employees not exceeding
ten (10) days during the year;
b. Medical cash allowance to dependents of employees not exceeding
P750.00 per employee per semester or P125 per month;
c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month
amounting to not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible persona property other
than cash or gift certificate, with an annual monetary value not exceeding
P10,000.00 received by an employee under an established written plan which
does not discriminate in favor of highly paid employees;
h. Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum;
i. Flowers, fruits, books, or similar items given to employees under
special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.;
and
j. Daily meal allowance for overtime work not exceeding twenty five
percent (25%) of the basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein
prescribed shall not be considered in determining the P30,000 ceiling of “other
benefits” provided under Section 32 (B)(7)(e) of the Code. However, if the
employer pays more than the ceiling prescribed by these regulations, the excess
shall be taxable to the employee receiving the benefits only if such excess is
beyond the P30,000.00 ceiling, provided, further, that any amount given by the
37
employer as benefits to its employees, whether classified as de minimis benefits

or fringe benefits, shall constitute as deductible expense upon such employer.
[Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
51. Income subject to “final tax” refers to an income collected through the
withholding tax system.
The payor of the income withholds the tax and remits it to the government
as a final settlement of the income tax as a final settlement of the income tax due
on said income. The recipient is no longer required to include the income
subjected to a final tax as part of his gross income in his income tax return.
Two examples of income subject to final tax are interest from bank
deposits and royalties.
BAR: 54. Royalties subject to final tax includes technical advice,

assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture,
project or scheme, such as consultancy and technical services rendered
incidental to the distribution, support and use of computer systems.
BAR: 55. Stock dividends are unrealized gains and cannot be subject
to income tax until the gains have been realized. Before realization, stock
dividends are nothing but a representation of an interest in the corporate
properties. As capital, it is not yet subject to income tax. (Commissioner of
Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
An example of realization would be sales of the stock dividends, or where
the issuance results to a proportionate change in ownership.
Exclusions distinguished from deductions:

a. Exclusions from gross income refer to a flow of wealth to the taxpayer
which are not treated as part of gross income for purposes of computing the
taxpayer’s taxable income, due to the following reasons: (1) It is exempted by
the fundamental law; (2) It is exempted by statute; and (3) It does not come
within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE deductions
are the amounts which the law allows to be subtracted from gross income in
order to arrive at net income.
b. Exclusions pertain to the computation of gross income WHILE
deductions pertain to the computation of net income.
c. Exclusions are something received or earned by the taxpayer which do
not form part of gross income WHILE deductions are something spent or paid in
earning gross income.
An example of an exclusion from gross income are life insurance
proceeds, and an example of a deduction are losses.
BAR: 56. The following are excluded from gross income:

a. Proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured whether in a single sum or otherwise.
b. Amounts received by the insured as a return of premiums paid by him
under life insurance, endowment or annuity contracts either during the term, or
at maturity of the term mentioned in the contract, or upon surrender of the
contract.
c. Value of property acquired by gift, bequest, devise, or descent.
d. Amounts received, through accident or health insurance or Workmen’s
Compensation Acts as compensation for personal injuries or sickness, plus the
amounts of any damages received on whether by suit or agreement on account
of such injuries or sickness.
e. Income of any kind to the extent required by any treaty obligation
binding upon the Government of the Philippines.
f. Retirement benefits received under Republic Act No. 7641. Retirement
received from reasonable private benefit plan after compliance with certain
38
conditions. Amounts received for beyond control separation. Foreign social

security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and
GSIS benefits.
BAR: 57. Conditions for excluding retirement benefits from gross

income, hence tax-exempt:
a. Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with the employer’s reasonable private benefit plan
approved by the BIR.
b. Retiring official or employee
1) In the service of the same employer for at least ten (10) years;
2) Not less than fifty (50) years of age at time of retirement;
3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6)
(a), NIRC of 1997] The retiring official or employee should not have
previously availed of the privilege under the retirement plan of the same
or another employer. [1st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]
BAR: 58. Separation (retirement) pay excluded from gross income,

hence tax-exempt:
a. Any amount received by an official, employee or by his heirs,
b. From the employer
c. As a consequence of separation of such official or employee from the
service of the employer because of
1) Death, sickness or other physical disability; or
2) For any cause beyond the control of said official or employee
[Sec. 32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy
and cessation of business. [1 st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No.
2-98]
BAR: 59. Prizes that are excluded from gross income, hence not
taxable:
a. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if
1) The recipient was selected without any action on his part to
enter the contest or proceeding; and
2) The recipient is not required to render substantial future
services as a condition to receiving the prize or award. [Sec. 32 (B) {7}
{c}, NIRC of 1997]
b. All prizes and awards
1) Granted to athletes
2) In local and international sports tournaments and competitions
3) Whether held in the Philippines or abroad, and
4) Sanctioned by their national sports associations [Sec. 32(B) {7}
{d}, NIRC of 1997], which per BIR ruling is accreditation with the
Philippine Olympic Committee. Note that the exemption refers only to
amateur sports. For professional boxing, a special law grants the
exemption not the NIRC.
Only resident citizens and resident alien individuals are allowed to deduct
the optional standard deduction on their gross income other than passive or
compensation income.
Nonresident individuals, estates, trusts or corporations are not allowed to
avail of this deduction.
BAR: 60. Itemized deductions from gross income and who may avail:
a. Ordinary and necessary trade, business or professional expenses.
b. The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer’s profession, trade or business.
39
Resident citizens, resident alien individuals and nonresident alien

individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from within
may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with the
taxpayer’s profession.
d. Ordinary losses, losses from casualty, theft or embezzlement; and net
operating losses.
e. Bad debts due to the taxpayer, actually ascertained to be worthless
and charged off within the taxable year, connected with profession, trade or
business, not sustained between related parties.
f. Depreciation or a reasonable allowance for the exhaustion, wear and
tear (including reasonable allowance for obsolescence) of property used in trade
or business.
g. Depletion or deduction arising from the exhaustion of a non-
replaceable asset, usually a natural resource.
40

h. Charitable and other contributions. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed
to deduct these expenses. Domestic corporations, estates and trusts may also
deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
i. Research and development expenditures treated as deferred
expenses paid or incurred by the taxpayer in connection with his trade, business
or profession, not deducted as expenses and chargeable to capital account but
not chargeable to property of a character which is subject to depreciation or
depletion.
j. Contributions to pension trusts. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation income are allowed
to deduct these expenses. Domestic corporations, estates and trusts may also
deduct this expense. Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
k. Insurance premiums for health and hospitalization. Resident citizens,
resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income
are allowed to deduct these expenses. Nonresident citizens and nonresident
alien individual engaged in trade or business in the Philippine on their gross
incomes from within may also deduct these premiums.
Philippines are not allowed to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and resident
alien on their gross incomes and from compensation income are allowed to
deduct these premiums. Nonresident citizens on their gross incomes from within
may also deduct this expense. Nonresident alien individuals engaged in trade
or business in the Philippines are allowed to deduct these exemptions under
reciprocity.
Extraordinary deductions
a. Those allowed to insurance companies
b. Deductions allowed to estates and trusts availing of itemized
deductions of income currently distributed to beneficiaries.
c. Losses from wash sales of stocks or securities.
d. Certain capital losses but only from capital gains.
Ordinary expenses are those which are common to incur in the trade or
business of the taxpayer WHILE capital expenditures are those incurred to
improve assets and benefits for more than one taxable year. Ordinary expenses
41
are usually incurred during a taxable year and benefits such taxable year.
Necessary expenses are those which are appropriate or helpful to the business.
BAR: 61. The following are the requisites for deductibility of business
expenses:
a. Compliance with the business test:
1) Must be ordinary and necessary;
2) Must be paid or incurred within the taxable year;
3) Must be paid or incurred in carrying on a trade or business.
4) Must not be bribes, kickbacks or other illegal expenditures
b. Compliance with the substantiation test. Proof by evidence or records
of the deductions allowed by law including compliance with the business test.
BAR: 62. Advertising expenses not designed to stimulate the future

sale of merchandise are not deductible These are expenditures in order to
create or maintain some form of goodwill. These expenditures are to be spread
over a reasonable period of time because they are considered that a capital
asset which has a determinable life has been acquired. (General Foods [Phils.],
Inc. v. Commissioner of Internal Revenue, CTA Case No. 4386, February 8,
1994)
Expenses incurred to create a favorable image for the corporation to

generate sales of its shares of stock constitute capital investment because the
particular advertising expense was incurred in relation to the capital asset or
equity of the company (Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, 102 SCRA 246), and are tobe
capitalized or spread over a reasonable period.
Requisites of deductibility of “Entertainment, Amusement and Recreation

Expenses:
a. It must be a reasonable allowance for entertainment, amusement and
recreation expenses [Sec. 34 (A) (1) (iv), NIRC of 1997];
b. It must be paid or incurred during the taxable year;
c. It must be
1) directly connected to the development, management and
operation of the trade, business or profession of the taxpayer, or
2) directly related to or in furtherance of the conduct of its trade,
business or exercise of a profession;
d. It must not be contrary to law, morals, good customs, public policy or
public order;
e. It must not have been paid, directly or indirectly, to an official or
employee of the national government, or any local government unit, or of any
government-owned or controlled corporation (GOCC), or of a foreign
government, or to a private individual, or corporation, or general professional
partnership (GPP), or a similar entity, if it constitutes a bribe, kickback or other
similar payment;
f. It must be duly substantiated by adequate proof. The official receipts,
or invoices, or bills or statements of accounts should be in the name of the
taxpayer claiming the deduction; and
g. The appropriate amount of withholding tax, if applicable, should have
withheld therefrom and paid to the Bureau of Internal Revenue. (Sec. 4, Rev.
Regs. No. 10-2002)
i. It must conform to the following ceilings:
1) in an amount equivalent to the actual entertainment,
amusement and recreation expense paid or incurred within the taxable
year by the taxpayer,
2) but in no case shall such deduction exceed 0.50 percent (.5%)
of net sales (i.e. gross sales less sales returns/allowances and sales
discounts) for taxpayers engaged in sale of goods or properties; or
42
3) 1.00 percent (1%) of net revenue (i.e., gross revenue less

discounts) for taxpayers engaged in sale of services, including exercise of
profession and use or lease of properties.
4) However, if the taxpayer is deriving income from both sale of
goods/properties and services, the allowable entertainment, amusement
and recreation expense shall in all cases be determined based on an
apportionment formula taking into consideration the percentage of the net
sales/net revenue to the total net sales/net revenue, but which in no case
shall exceed the maximum percentage ceiling. (Sec. 5, Ibid.)
Who are allowed to deduct entertainment, amusement and recreation

expenses:
a. Individuals engaged in trade or business, including taxable estates
and trusts;
b. Individuals engaged in the practice of profession;
c. Domestic corporations;
d. Resident foreign corporations;
e. General professional partnerships.
Entertainment, Amusement and Recreation Expenses, include

“representation expenses and/or depreciation or rental expense relating to
entertainment facilities.” (1 st par., Sec. 2, Rev. Regs. 110-2002)
Representation expenses, shall “refer to expenses incurred by a

taxpayer in connection with the conduct of his trade, business or exercise of
profession, in entertaining, providing amusement and recreation to, or meeting
with a guest or guests at a dining place, place of amusement, country club,
theater, concert, play, sporting event, and similar events or places.” (2 nd par.,
Sec. 2, Rev. Regs. 10-2002)
Representation expenses “shall not refer to fixed representation
allowances that are subject to withholding tax on wages pursuant to appropriate
revenue regulations.” (Ibid.)
Club dues, when fringe benefits and when representation expenses. “In
the case particularly of a country, golf, sports club, or any other similar club
where the employee or officer of the taxpayer is the registered member and the
expenses incurred in relation thereto are paid for by the taxpayer, there shall be
a presumption that such expenses are fringe benefits subject to fringe benefits
tax unless the taxpayer can prove that these are actually representation
expenses. For purpose of proving that the said expense is a representation
expense and not fringe benefits, the taxpayer should maintain receipts and
adequate records that indicate
a) the amount of expense
b) date and place of expense
c) purpose of expense
d) professional or business relationship of expense
d) professional or business relationship of expense
e) name of person and company entertained with con-tact details.” (2 nd
par., Sec. 2, Rev. Regs. 10-2002)
Dues paid by company officers to any one club deductible by employer as

business expense but not as representation or entertainment:
a. Dues paid to any one social, athletic, or sporting club or organization
per officer may be deductible as a business expense. However, purchase of
proprietary shares and playing rights and expenses in the said club or
organization may be deductible only if said expense complies with the rules on
substantiation. Dues on company membership constitute deductible expense.
(No. 3.4.2, RAMO No. 1-87)
43
b. Dues or fees paid to professional or business organizations and civic

clubs such as Lions, Rotary, Kiwanis shall be deductible to the employer to the
extent of one club. (No. 3.4.3, RAMO No. 1-87)
The above provisions of RAMO No. 1-87 are to be read in relation to the
provisions of Rev. Regs. No. 10-2002. If considered as a fringe benefit subject
to the fringe benefits tax under Sec. 33, NIRC of 1997, may be deductible from
the employer's gross income.
Entertainment facilities shall “refer to (1) a yacht, vacation home or

condominium; and 2) any similar item of real or personal property used by the
taxpayer primarily for the entertainment, amusement, or recreation of guests or
employees. To be considered an entertainment facility, such yacht, vacation
home or condominium, or item of real or personal property must be owned or
form part of the taxpayer’s trade, business or profession, or rented by such
taxpayer, for which the taxpayer claims a depreciation or rental expense. A yacht
shall be considered an entertainment facility if its use is in fact not restricted to
specified officers or employees or positions in such a manner as to make the
same a fringe benefit for purposes of imposing the fringe benefits tax.” (4th par.,
Sec. 2, Rev. Regs. 10-2002)
Guests shall mean “persons or entities with which the taxpayer has direct
business relations, such as but not limited to, clients/customers or prospective
clients/customers. The term shall not include employees, officers, partners,
directors, stockholders, or trustees of the taxpayer.” (last par., Sec. 2, Rev.
Regs. No. 10-2002)
Expenses not considered as entertainment, amusement and recreational

expenses:
a. Expenses which are treated as compensation or fringe benefits for
services rendered under an employer-employee relationship;
b. Expenses for charitable or fund raising events;
c. Expenses for bona fide business meeting of stock-holders, partners or
directors;
d. Expenses for attending or sponsoring an employee to a business
league or professional organizational meeting;
e. Expenses organized for promotion, marketing and advertising
including concerts, conferences, seminars, workshops, conventions, and other
similar events;
f. Other expenses of similar nature.
Notwithstanding the foregoing such items of exclusions may, nonetheless
qualify as items of deduction under Section 34 of the Tax Code of 1997, subject
to conditions for deductibility stated therein. (Sec. 3, Rev. Regs. No. 10-2002)
Reimbursements for expenses relating to entertainment shall be

deductible by the employer if
a. Used primarily for the furtherance of employer’s trade or business
b. Only to the extent allowable, the same is directly related to the active
conduct of the employer’s trade or business and
c. Subject to the rule of substantiation.. (No. 3.4.1, RAMO No. 1-87)
If considered as a fringe benefit subject to the fringe benefits tax under
Sec. 33, NIRC of 1997, may be deductible from the employer's gross income.
Refer to previous discussion for limitations.
Representation expenses fall under the category of business expenses

which are allowable deductions, if they are ordinary and necessary; paid or
incurred in carrying on a trade or business; and they are reasonable. (Zamora
v. Col. of Int. Revenue, 8 SCRA 163 cited in Paramount Insurance Corporation v.
Commissioner of Internal Revenue, CTA Case No. 4844,. June 7, 1996)
44
If treated as a fringe benefit, subject to the fringe benefits tax under Sec.
33, NIRC of 1997, it may be allowed as a deduction from the employer's gross
income.
Representation expenses not supported by official receipts should be

disallowed. Mere receipts when signed by the company officers themselves are
not sufficient, for while they may show that they received the amount from the
company, they do not prove payment of the alleged representation expenses to
the entity in which the same were incurred. Furthermore, the absence of
invoices receipts or vouchers, particularly lack of proof of the items constituting
the expense is fatal to the allowance of the deduction. (Paramount Insurance
Corporation v. Commissioner of Internal Revenue, CTA Case No. 4844, June 7,
1996 citing Collector of Internal Revenue v. Goodrich Int. Rubber Co., 21 SCRA
1336 and Gancayco v. Collector of Internal Revenue, 1 SCRA 980)
BAR: 63. Preferred shares are considered capital regardless of the

conditions under which such shares are issued and dividends or “interests” paid
thereon are not allowed as deductions from the gross income of corporations.
(Revenue Memorandum Circular No. 17-71)
In addition to the expenses allowable as deductions a private educational

institution, may at its option elect either:
a. To deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the expansion of school
facilities, or
b. To deduct allowance for depreciation thereof. [Sec. 34 (A) (2), NIRC of
1997]
Financial statements audited by in dependent external auditors constitute

the normal method of proof of the profit and loss performance of a company. A
comparative statement of revenue and expenses for two years, by itself, is not
conclusive proof of serious business losses. (Bogo-Medellin Sugarcane
Planters Association, Inc. v. NLRC, et al., 296 SCRA 108, 121)
Bad debts are those which result from the worthlessness or

uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising
from money lent or from uncollectible amounts of income from goods sold or
services rendered. (Sec. 2.a, Rev. Regs. 5-99)
The following are related parties:

a. Members of the same family. The family of an individual shall include
only his brothers and sisters (whether by the whole or half-blood), spouse,
ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent (50%) in value
of the outstanding stock of which is owned, directly or indirectly, by or for such
individual;
c. Two corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for the same
individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of
1997]
BAR: 64. Requisites for valid deduction of bad debts from gross
income:
a. There must be an existing indebtedness due to the taxpayer which
must be valid and legally demandable;
45
b. The same must be connected with the taxpayer’s trade, business or

practice of profession;
c. The same must not be sustained in a transaction entered into between
related parties;
d. The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
e. The debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
f. The debts are uncollectible despite diligent effort exerted by the
taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated
in Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court of Appeals,
et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return of the
current or prior years. (Sec. 103, Rev. Regs. No. 2)
:
Reserve for bad debts are not deductible from gross income because the
debts have not yet been ascertained to be bad debts.
The value of worthless securities are not allowed to be deductible from

gross income because they are considered as capital losses and may be
deducted only from capital gains.
BAR: 65. The “tax benefit rule” posits that the recovery of bad debts
previously allowed as deduction in the preceding year or years shall be included
as part of the taxpayer’s gross income in the year of such recovery to the extent
of the income tax benefit of said deduction.
If in the year the taxpayer claimed deduction of bad debts written-off, he

realized a reduction of the income tax due from him on account of the said
deduction, his subsequent recovery thereof from his debtor shall be treated as a
receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
If the said taxpayer did not benefit from the deduction of the said bad debt
written-off because it did not result to any reduction of his income tax in the year
of such deduction (i.e. where the result of his business operation was a net loss
even without deduction of the bad debts written-off), then his subsequent
recovery thereof shall be treated as a mere recovery or a return of capital,
hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-
99)
Depreciation is the gradual diminution in the useful value of tangible

property resulting from ordinary wear and tear and from normal obsolescence.
The term is also applied to amortization of the value of intangible assets the use
of which in the trade or business is definitely limited in duration.
The methods of depreciation are the following:

a. Straight line method;
b. Declining balance method;
c. Sum of years digits method; and
d. Any other method prescribed by the Secretary of Finance upon the
recommendation of the Commissioner of Internal Revenue:
1) Apportionment to units of production;
2) Hours of productive use;
3) Revaluation method; and
4) sinking fund method.
The shares of the corporation are considered as capital assets where the
holder is not a dealer in securities. Where the shares are listed and traded in
46
the stock exchange the holder shall be subject to the transaction tax, of ½ of 1%
of the gross selling price, which is in lieu of income tax.
Capital assets shall refer to all real properties held by a taxpayer, whether
or not connected with his trade or business, and which are not included among
the real properties considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-
2003)
BAR: 66. The term “capital assets” means property held by the
taxpayer (whether or not connected with his trade or business), BUT DOES NOT
INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or
c. Property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or
d. Property used in the trade or business, of a character which is subject to the
allowance for depreciation; or real property used in the trade or business of the
taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and
arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
The statutory definition of capital assets is negative in nature. If the asset

is not among the exceptions, it is a capital asset; conversely, assets falling within
the exceptions are ordinary assets. And necessarily, any gain resulting from the
sale or exchange of an asset is a capital gain or an ordinary gain depending on
the kind of asset involved in the transaction. (Calasanz v. Commissioner of
Internal Revenue, et al; 144 SCRA 664, 669-670)
Examples of capital assets:

a. Stock and securities held by taxpayers other than dealers in securities;
b. Jewelry not used for trade and business;
c. Residential houses and lands owned and used as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections, objects of arts which are not
used in trade or business;
f. Inherited large tracts of agricultural land which were subdivided
pursuant to the government mandate under land reform, then sold to tenants.
(Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968)
g. “Real property used by an exempt corporation in its exempt
operations, such as a corporation included in the enumeration of Section 30 of
the Code, shall not be considered used for business purposes, and therefore
considered as capital asset.” (last sentence, 3 rd par., Sec. 3.b, Rev. Regs. No. 7-
2003)
h. “Real property, whether single detached, townhouse, or condominium
unit, not used in trade or business as evidenced by a certification from the
Barangay Chairman or from the head of administration, in case of condominium
unit, townhouse or apartment, and as validated from the existing available
records of the Bureau of Internal Revenue, owned by an individual engaged in
business, shall be treated as capital asset.” (last par., Sec. 3.b., Rev. Regs. No.
7-2003)
Ordinary assets shall refer to all real properties specifically excluded from
the definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which
would properly be included in the inventory of a taxpayer if on hand at the close
of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business; or
47
c. Real property used in trade or business (i.e. buildings and/or

improvements), of a character which is subject to the allowance for depreciation;
or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b,
Rev. Regs. No. 7-2003)
Real properties acquired by banks through foreclosure sales are

considered their ordinary assets. However, banks shall not be considered as
habitually engaged in the real estate business for purposes of determining the
applicable rate of withholding tax. (Sec. 2. b, Rev. Regs. No. 7-2003)
“A property purchased for future use in the business, even though this
purpose is later thwarted by circumstances beyond the taxpayer’s control, does
not lose its character as an ordinary asset. Nor does a mere discontinuance of
the active use of the property change its character previously established as a
business property.” (last sentence, Sec. 3.a.4, Rev. Regs. No. 7-2003)
Examples of ordinary assets hence not capital assets:

a. The machinery and equipment of a manufacturing concern subject to
depreciation;
b. The tractors, trailers and trucks of a hauling company;
c. The condominium building owned by a realty company the units of
which are for rent or for sale;
d. The wood, paint, varnish, nails, glue, etc. which are the raw materials
of a furniture factory;
e. Inherited parcels of land of substantial areas located in the heart of
Metro Manila, which were subdivided into smaller lots then sold on installment
basis after introducing comparatively valuable improvements not for the purpose
of simply liquidating the estate but to make them more saleable ; the
employment of an attorney-in-fact for the purpose of developing, managing,
administering and selling the lots; sales made with frequency and continuity;
annual sales income from the sales was considerable; and the heir was not a
stranger to the real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good roads,
concrete gutters, drainage and lighting systems converts the property to an
ordinary asset. The property forms part of the stock in trade of the owner, hence
an ordinary asset. This is so, as the owner is now engaged in the business of
subdividing real estate. (Calasanz v. Commissioner of Internal Revenue, 144
SCRA at p. 672)
BAR: 67. Capital assets distinguished from ordinary assets:

a. Capital assets are not used in trade or business while ordinary asets
are used in trade or business.
b. Losses from capital assets are allowed to be deducted only from
capital gains while from capital gains derived from disposition of personal
property other than shares of stock may be deducted ordinary losses resulting
from losses incurred in ordinary asset transactions.
c. The concept of capital asset transactions may include the holding
period while this is not so with ordinary asset transactions.
BAR: 68. It is prohibited to deduct capital losses from ordinary gains in

order to prevent tax leakages arising from the shifting of deductions from gains
subject to lower tax rates(such as capital gains), to those subject to higher tax
rates (such as ordinary gains).
Tax treatment of real properties that have been transferred. Real

properties classified as capital or ordinary asset in the hands of the
seller/transferor may change their character in the hands of the buyer/transferee.
The classification of such property in the hands of the buyer/transferee shall be
determined in accordance with the following rules:
48
a. Real property transferred through succession or donation to the heir or

donee who is not engaged in the real estate business with respect to the real
property inherited or donated, and who does not subsequently use such property
in trade or business, shall be considered as a capital asset in the hands of the
heir or donee.
b. Real property received as dividend by stockholders who are not
engaged in the real estate business and who not subsequently use such real
property in trade or business shall be treated as capital assets in the hands of
the recipient even if the corporation which declared the real property dividend is
engaged in real estate business.
c. The real property received in an exchange shall be treated as ordinary
asset in the hands of the transferee in the case of a tax-free exchange by
taxpayer not engaged in real estate business to a taxpayer who is engaged in
real estate business, or to a taxpayer who, even if not engaged in real estate
business, will use in business the property received in the exchange. (Sec. 3.f.,
Factors considered as helpful guides in determining whether asset is

ordinary or capital:
a. The purpose for which the property was initially acquired;
b. The purpose for which the property was subsequently held;
c. The extent to which the improvements, if any, were made by the
taxpayer;
d. The frequency, number and continuity of sales;
e. The extent and nature of the transactions involved;
f. The ordinary business of the taxpayer;
g. The extent of advertising, promotion, or other activities used in
soliciting buyers for the sale of the property;
h. The listing of property, with brokers; and
i. The purpose for which the property was held at the time of sale.
[Elumba, et al. v. The Honorable Commissioner of Internal Revenue, CTA Case
No. 5103, August 16, 1996; Klarkowski, TCM 1965-328, affirmed 385 F. 2d (CA-
7, 1967)]
j. “Real properties acquired by banks through foreclosure sales are
considered as their ordinary assets. However, banks shall not be considered as
application rate of withholding tax imposed” under Revenue Regulations. (last
par., Sec. 2.b, Rev. Regs. No. 7-2003)
“Monetary consideration or the presence or absence of profit in the

operation of the property is not significant in the characterization of the property.
So long as the property is or has been used for business purposes, whether for
the benefit of the owner or nay of its members or stockholders, it shall be
considered as an ordinary asset.” (1 st and 2nd sentences, 3rd par., Sec. 3.b., Rev.
Regs. No. 7-2003)
Taxpayers engaged in the real estate business shall refer collectively to

real estate dealers, real estate developers, and/or real estate lessors. (Sec. 2.g,
The term taxpayers not engaged in the real estate business shall refer to
persons other than real estate dealers, real estate developers and/or real estate
lessors. A taxpayer whose primary purpose of engaging in business, or whose
Articles of Incorporation states that its primary purpose is to engage in the real
estate business shall be deemed to been engaged in the real estate business.
(Sec. 2.g, Rev. Regs. No. 7-2003)
The tax is “imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the
49
Philippines, classified as capital assets.” [Sec. 24 (D) (1`), NIRC of 1997]

Revenue Regulations No. 7-2003 has defined real property as having “the same
meaning attributed to that term under Article 415 of Republic Act No. 386,
otherwise known as the ‘Civil Code of the Philippines.’ (Sec. 2.c, Rev. Regs. No.
7-2003)
Property must be located in the Philippines for purposes of capital gains

taxation. . [Sec. 24 (D) (1), NIRC of 1997]
Tax treatment where property is not located in the Philippines. Gains

realized from the sale, exchange, or other disposition of real property, not
located in the Philippines, regardless of classification by resident citizens or
domestic corporations shall be subject to ordinary income taxation. [1 st
sentence, Sec. 4.f., Rev. Regs. No. 7-2003; Sec. 24 (A) (1), or Sec. 27 (A) or (E),
all of the NIRC of 1997]
Such income may be exempt in the case of non-resident citizens, alien
individuals and foreign corporations. [1 st sentence, Sec. 4.f., Rev. Regs. No. 7-
2003; Sec. 23 (B), (D) and (F) of the NIRC of 1997]
BAR 69. Transactions covered by the presumed capital gains tax on

real property:
a. sale,
b. exchange,
c. or other disposition, including pacto de retro sales and other forms of
conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement
supplied]
“Sale, exchange, or other disposition” includes taking by the government

through condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al.,
101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861)
Transfers that may change the character of the classification of real

properties into ordinary or capital:
a. succession or donation;
b. a dividend declaration; and
c. exchange.
“Real property transferred through succession or donation to the heir or

donor who is not engaged in the real estate business with respect to the real
property inherited or donated, and who does not subsequently use such property
in trade or business, shall be considered as a capital asset in the hands of the
heir or donee.” (Sec. 3.f.1, Rev. Regs. No. 7-2003)
“Real property received as dividends by stockholders who are not

engaged in the real estate business and who do not subsequently use such real
property in trade or business shall be treated as capital assets in the hands of
the recipients even if the corporation which declared the real property dividend
is engaged in real estate business.” (Sec. 3.f.2, Rev. Regs. No. 7-2003,
paraphrasing supplied)
“The real property received in an exchange shall be treated as ordinary

asset in the hands of the transferee in the case of a tax-free exchange by
taxpayer not engaged in real estate business to a taxpayer who is engaged in
real estate business, or to a taxpayer who, even if not engaged in real estate
business, will use in business the property received in the exchange.” (Sec.
3.f.3, Rev. Regs. No. 7-2003, paraphrasing supplied)
In the case of involuntary transfers of real properties, including

expropriation or foreclosure sale, the involuntariness of such sale shall have no
50
effect on the classification of such real property in the hands of the involuntary
seller, either as capital asset or ordinary asset as the case may be. (Sec. 3.g,
In case the mortgagor exercises his right of redemption within one (1)
year from the issuance of the certificate of sale, in a foreclosure of mortgage
sale of real property, 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. 3 (1), Rev. Regs. No. 4-99]
In case of non-redemption of the property sold upon a foreclosure of

mortgage sale, the presumed capital gains tax shall be imposed, based on the
bid price of the highest bidder but only upon the expiration of the one year
period of redemption provided for under Sec. 6 of Act No. 3135, as amended by
Act No. 4118, and shall be paid within thirty (30) days from the expiration of the
said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
Real properties acquired by banks through foreclosure sales are

considered as their ordinary assets. However, banks shall not be considered as
application rate of withholding tax imposed” under Revenue Regulations. (last
par., Sec. 2.b, Rev. Regs. No. 7-2003)
BAR: 70. The basis for the final presumed capital gains tax of six per
cent (6%) is whichever is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or
area as determined by the Commissioner of Internal Revenue after
consultation with competent appraisers both from the private and public
sectors; or
2) the fair market value as shown in the schedule of values of the
Provincial and City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E),
both of the NIRC of 1997]
Holding period not applied to the taxation of the presumed capital gains
derived from the sale of real property considered as capital assets.
The tax liability, of individual taxpayers (not corporate), if any, on gains

from sales or other dispositions of real property, classified as capital assets, to
the government or any of its political subdivisions or agencies or to government
owned or controlled corporations shall be determined, at the option of the
taxpayer, by including the proceeds as part of gross income to be subjected to
the allowable deductions and/or personal and additional exemptions, then to the
schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of
1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D)
(1) in relation to Sec. 6 (E), both of the NIRC of 1997]
The interest at the legal rate on the value of expropriated land should be
taxed as ordinary income, and not as capital gains. (Gonzales v. Court of Tax
Appeals, et al., 121 Phil. 861)
The seller of the real property, classified as a capital asset, pays the
presumed capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
51
3) Nonresident alien engaged in trade or business in the

Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the NIRC
of 1997];
4) Nonresident alien not engaged in trade or business in the
Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of
1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
The proceeds of sale of real property, classified as capital assets, by

foreign corporations shall be subject to ordinary income taxation of whichever is
higher between the reduced rate of 32% and the minimum corporate income tax
[Sec. 28 (A) (1) (2) in relation to Sec. 27 (E), both of the NIRC of 1997]
In the instances where non-resident aliens are qualified to own real

property in the Philippines (like condominium units, or buildings, or other
immovables as defined under Art. 415 of Rep. Act No. 386, the Civil Code of the
Philippines), and these are considered as capital in character, they are to be
subject to tax in the same manner as citizens and resident aliens. [Sec. 25 (A)
(3) and Sec. 25 (B) in relation to Sec. 24 (D), all of the NIRC of 1997]
BAR: 71. Excepted from the payment of the presumed capital gains tax
are those presumed to have been realized from the disposition by natural
persons of their principal place of residence
a. the proceeds of which is fully utilized in acquiring or constructing a
new principal residence;
b. within eighteen (18) calendar months from the date of sale or
disposition
c. the BIR Commissioner shall have been duly notified by the taxpayer
within thirty (30) days from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption; and
d. the said tax exemption can only be availed of once every ten (10)
years. [Sec. 24 (D) (2), NIRC of 1997]
The historical cost or adjusted basis of the real property sold or disposed
shall be carried overto the new principal residence huilt or acquired, provided
that if there is no full utilization of the proceeds of sale or disposition, the portion
of the gain presumed to have been realized from the sale or disposition shall be
subject to capital gains tax. [Sec. 24 (D) (2), NIRC of 1997]
Net loss carry-over means the deduction from net capital gains of a
succeeding year the net capital loss suffered during the prior year. Net
operating loss carry-over is the deduction from gross income for the next three
(3) consecutive taxable years following the year of such loss, the excess of
allowable deduction over the gross income. (Sec. 39 [D], NIRC of 1997)
Distinctions between net loss carry-over and net operating loss carry-
over. Source: The source of net loss carry-over are capital losses only WHILE
the source of net operating loss carry-over are from the ordinary trade and
business of the taxpayer. Who may enjoy the carry-over: Only taxpayers other
than corporations may enjoy net loss carry-over WHILE only corporations may
enjoy the net operating loss carry-over. (Sec. 39 [D], NIRC of 1997)
Any taxpayer, other than a corporation (individuals including trusts and

estates), who sustains in any taxable year a net capital loss from capital
transactions involving capital assets (other than real property or shares of stock
not listed or traded in the stock exchange), is allowed to treat during the
succeeding year such net capital loss as a loss from the sale or exchange of a
capital asset (other than real property or shares of stock not listed and traded in
52
the stock exchange), held for more than twelve months. (Sec. 39 [D], NIRC of
1997)
BAR: 72. The equity investment by a bank in another corporation is

capital in character, the loss of which could be deductible only from capital
gains, and not from any other income of the taxpayer. (China Banking
Corporation v. Court of Appeals, et al., G.R. No. 12508, July 19, 2000)
A capital gain or a capital loss normally requires the concurrence of two

conditions for it to result:
a. There is a sale or exchange; and
b. The thing sold or exchanged is a capital asset.
When securities become worthless there is strictly no sale or exchange
but the law deems the loss anyway to be “a loss from the sale or exchange of
capital assets. (China Banking Corporation v. Court of Appeals, et al., G.R. No.
12508, July 19, 2000)
Securities, defined for deductibility of bad debts are shares of stock in a

corporation and rights to subscribe for or to receive such shares. The term
includes bonds, debentures, notes or certificates, or other evidence of
indebtedness, issued by any corporation, including those issued by a
government or political subdivision thereof, with interest coupons or in registered
form. (Sec. 2.b, Rev. Regs. No. 5-99)
General rule: If securities, held as capital asset, are ascertained to be

worthless and charged off within the taxable year, the loss resulting therefrom
shall be considered as a loss from the sale or exchange of capital asset made
on the last day of such taxable year. The taxpayer, however, has to prove
through clear and convincing evidence that the securities are in fact worthless.
(Sec. 5, Rev. Regs. No. 5-99)
The above rule, however, is not true in the case of banks or trust
companies incorporated under the laws of the Philippines, a substantial part of
whose business is the receipt of deposits. (Sec. 5, Rev. Regs. No. 5-99)
BAR: 73. Non-stock non profit institutions are exempt from income
taxation only on their income from primary sources not on their income from
secondary sources irrespective of utilization.
Thus, religious societies are exempt only from income resulting from their
religious activities such as collection plates, baptismal, marriages and death
fees but not from their income generating rental properties.
The rule is different with respect to non-profit, non-stock educational
institutions which devote their revenues actually, ,directly and exclusively to
educational purposes. The constitutional exemption does not distinguish with
respect to source and not to origin hence the limitation in Sec. 30 of the NIRC of
1997 does not apply.
TRANSFER TAXES
BAR: 74. The gross estate for purposes of estate taxation of Filipino
citizens, whether residents or nonresidents and resident alien includes the value
at the time of his death of all his real property, wherever situated, personal
property, whether tangible, intangible or mixed, wherever situated, to the extent
of the interest existing therein of the decedent at the time of his death.
BAR: 75. The gross estate for purposes of estate taxation of non-
resident aliens includes the value at the time of his death of all the real property
situated in the Philippines, personal property whether tangible, intangible or
53
mixed, situated in the Philippines, to the extent of the interest therein of the
decedent at the time of his death.
BAR: 76. Life insurance proceeds included as part of the gross estate
of a decedent:
a. The insurance was taken by the decedent on his own life and the
beneficiary
1) is himself, his estate, his executor or administrator.
2) irrespective of whether the designation is revocable or
irrevocable.
b. The insurance was taken by the decedent on his own life and the
designated beneficiary is not himself, his estate, his executor or administrator
(such as his wife, child, parent, or other relative, friend, etc.) but the designation
is revocable.
c. The insurance was taken by one who is not the decedent (such as an
employer, a relative, etc.), and the designated beneficiary is the decedent, his
estate, administrator or executor, whether the designation is revocable or
irrevocable.
BAR: 77. Life insurance proceeds not included as part of the gross
estate of a decedent:
a. The insurance was taken by the decedent on his own life and the
designated beneficiary is not himself, his estate, his executor or administrator
(such as his wife, child, parent, or other relative, friend, etc.) but the designation
is irrevocable.
b. The insurance was taken by one who is not the decedent (such as an
employer, a relative, etc.), and the designated beneficiary is not the decedent,
his estate, administrator or executor, whether the designation is revocable or
irrevocable.
Items deductible from the gross estate of a resident or nonresident

Filipino decedent or resident alien decedent:
a. Expenses, losses, claims, indebtedness and taxes;
b. Property previously taxed;
c. Transfers for public use;
d. The Family Home up to a value not exceeding P1 million;
e. Standard deduction of P1 million;
f. Medical expenses not exceeding P500,000.00;
g. Amount of exempt retirement received by the heirs under Rep. Act Mo.
4917;
h. Net share of the surviving spouse in the conjugal partnership.
The notarial fee paid for the extrajudicial settlement is clearly a deductible
expense since such settlement effected a distribution of the estate to his lawful
heirs, Similarly, the attorney’s fees for a guardian of the property during the
decedent’s lifetime should also be considered as a deductible administration
expense. The guardian gives a detailed accounting of decedent’s property and
gives advice as to the proper settlement of the estate, acts which contributed
towards the collection of decedent’s assets and the subsequent settlement of the
case. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No.
123206, March 22, 2000)
Judicial expenses are expenses of administration. Administration

expenses, as an allowable deduction from gross estate of the decedent for
purposes of arriving at the value of the net estate, have been construed to
include all expenses “essential to the collection of the assets, payment of debts
or the distribution of the property to the persons entitled to it.” In other words,
the expenses must be essential to the proper settlement of the estate.
54
Not deductible are expenditures incurred for the individual benefit of the
heirs, devisees or legatees. Thus, in Lorenzo v. Posadas, the Court construed
the phrase “judicial expenses of the testamentary or intestate proceedings” as
not including the compensation paid to a trustee of the decedent’s estate when it
appeared that such trustee was appointed for the purpose of managing the
decedent’s real property for the benefit of the testamentary heir. In another
case, the Court disallowed the premiums paid on the bond filed by the
administrator as an expense of administration since the giving of a bond is in the
nature of a qualification for the office, and not necessary in the settlement of the
estate. Neither may attorney’s fees incident to litigation incurred by the heirs in
asserting their respective rights be claimed as a deduction from the gross estate.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206,
March 22, 2000)
Not every inter-vivos transfer in anticipation of death is considered

“transfer in contemplation of death” for purposes of determining the property to
be included in the gross estate of a decedent.
BAR: 78. To be considered a “transfer in contemplation of death” “the

decedent has at any time made a transfer, by trust or otherwise, in contemplation
of or intended to take effect in possession or enjoyment at or after death” [Sec.
85 (B), NIRC of 1997]. It is clear that the properties are not transferred in
contemplation of or intended to take effect in possession or enjoyment at or after
death.
There is no transfer in contemplation of death if there is no showing the

transferor “retained for his life or for any period which does not in fact end
before his death: (1) the possession or enjoyment of, or the right to the income
from the property, or (2) the right, either alone or in conjunction with any person,
to designate the person who shall possess or enjoy the property or the income
therefrom.” [Sec. 85 (B), NIRC of 1997]
The approval of the court sitting in probate, or as a settlement tribunal

over the estate of the deceased is not a mandatory requirement for the collection
of the estate. The probate court is determining issues which are not against the
property of the decedent, or a claim against the estate as such, but is against
the interest or property right which the heir, legatee, devisee, etc. has in the
property formerly held by the decedent.
The notices of levy were regularly issued within the prescriptive period.
The tax assessment having become final, executory and enforceable, the
same can no longer be contested by means of a disguised protest. (Marcos, II
v. Court of Appeals, et al., 273 SCRA 47)
BAR: 80. When the donee or beneficiary is a stranger, the tax payable
by the donor shall be 30% of the net gifts.
BAR: 81. For purposes of the donor’s tax, a stranger is person who is
not a:
“(1) Brother, sister (whether by whole or half-blood), spouse, ancestor
and lineal descendant; or
(2) Relative by consanguinity in the collateral line within the fourth
degree of relationship.” [Sec. 99 (B), NIRC of 1997]
BAR: 82. The amount of P100,000.00 donated during a calendar year

is exempt from donor’s tax. [Sec. 99 (A), NIRC of 1997]
Thus, a P200,000.00 deposit could be splitted in calendar years to avail
of thetax exemption.
55
The donation of a prize to an athlete in an international sports tournament

held abroad and sanctioned by the national sports association is exempt from
donor’s tax. (Sec. 1, Rep. Act No. 7549)
BAR: 83. Any provision of law to the contrary notwithstanding, any

contribution in cash or in kind to any candidate or political party or coalition of
parties for campaign purposes, duly reported to the Commission on Elections,
shall not be subject to the payment of any gift tax. (last par., Sec. 13, R. A. No.
7166)
A non-resident citizen or alien is exempt only from the payment of donor’s

taxes if his gifts are made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for profit, or to any
political subdivision of the said Government.
BAR: 84. A non-resident citizen or alien is subject to donor’s tax where

the gift is not made in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, foundation, trust or
philanthropic organization or research institution or corporation which does not
use more than 30% of the donation for administration purposes.
RETURNS AND WITHHOLDING

Income tax returns being public documents, until controverted by
competent evidence, are competent evidence, are prima facie correct with
respect to the entries therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309,
317)
BAR: 85. “Married individuals, whether citizens, resident or non-

resident aliens, who do not derive income purely from compensation shall file a
return for the taxable year to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each spouse may file a separate
return of income but the returns so filed shall be consolidated by the Bureau for
purposes of verification” Section 51 (D) of the NIRC of 1997 There is no
showing in the problem that it is impracticable for Bill and Hillary to file one
return, hence they should file a single return.
BAR: 86. Individuals required to file an income tax return.

a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines on his income
from sources within the Philippines;
c. Every alien residing in the Philippines on income derived from sources
within the Philippines; and
d. Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC of 1997]
BAR: 87. Individuals who are not required to file an income tax return.
a. An individual whose gross income does not exceed his total personal
and additional exemptions for dependents, Provided, That a citizen of the
Philippines and any alien individual engaged in business or practice of
profession within the Philippines shall file an income tax return regardless of the
amount of gross income;
b. An individual with respect to pure compensation income for services in
whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items, derived from sources within the Philippines, the
income tax on which has been correctly withheld, Provided, That an individual
deriving compensation concurrently from two or more employers at any time
during the taxable year shall file an income tax return: Provided, further, That an
56
individual whose pure compensation income derived from sources within the
Philippines exceeds Sixty thousand pesos (P60,000.00), shall also file an
income tax return;
c. An individual whose sole income has been subject to final withholding
tax;
d. An individual who is exempt from income tax pursuant to the provisions
of the NIRC of 1997, and other laws, general or special. [Sec. 51 (A) (2), NIRC
of 1997]
An individual who is not required to file an income tax return may

nevertheless be required to file an information return. [Sec. 51 (A) (3), NIRC of
1997]
A corporation files its income tax return and pays its income tax four (4)
times during a single taxable year. Quarterly returns are required to be filed for
the first three quarters, then a final adjustment return is filed covering the total
taxable income for the whole taxable year, be it calendar or fiscal.
An individual earning from the practice of his profession or who engages

in trade or business files his income tax return and pays his income tax four (4)
times during a single taxable year. Quarterly returns are required to be filed for
the first three quarters, then an annual income tax return is filed covering the
total taxable income for the whole of the previous calendar year.
The purpose of the above four (4) times a year requirement is to make
available sufficient funds to meet the budgetary requirements, on a quarterly
basis thereby increasing government liquidity. It also eases hardships on the
part of individuals who are required to make this four time return. Thus, the
taxpayer does not have to raise large sums of money in order to pay the tax.
An individual earning purely compensation income files only one annual

income tax return covering the total taxable compensation income for the whole
of the previous calendar year.
Under the withholding tax system, taxes imposed or prescribed by the

NIRC of 1997 are to be deducted and withheld by the payors from payments
made to payees for the former to pay directly to the Bureau of Internal Revenue.
It is also known as collection of the tax at source.
A withholding agent is explicitly made personally liable under the Tax

Code for the payment of the tax required to be withheld, in order to compel the
withholding agent to withhold the tax under any and all circumstances. In effect,
the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction.
(Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos.
118498 & 124377, October 12, 1999) The system facilitates tax collection.
The two (2) types of withholding at source are the 1) final withholding tax;
and 2) creditable withholding tax.
Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as a full and final payment of the income
due from the payee on the said income. [1 st sentence, 1st par., Sec. 2.57 (A),
Rev. Regs. No. 2-98]
The liability for payment of the tax rests primarily on the payor or the
withholding agent.. Thus, in case of his failure to withhold the tax or in case of
under withholding, the deficiency tax shall be collected from the payor
withholding agent. The payee is not required to file an income tax return for the
particular income.
57
Under the creditable withholding tax system, taxes withheld on certain

income payments are intended to equal or at least approximate he tax due from
the payee on the said income. The income recipient is still required to file an
income tax return and/or pay the difference between the tax withheld and the tax
due on the income. [1st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]
The two kinds of creditable withholding taxes are (a) taxes withheld on
income payments covered by the expanded withholding tax; and (b) taxes
withheld on compensation income.
Payments to the following are exempt from the requirement of withholding

or when no withholding taxes required:
a. National Government and its instrumentalities including provincial, city,
or municipal governments;
b. Persons enjoying exemption from payment of income taxes pursuant to
the provisions of any law, general or special, such as but not limited to the
following:
1) Sales of real property by a corporation which is registered with
and certified by the HLURB or HUDCC as engaged in socialized housing
project where the selling price of the house and lot or only the lot does not
exceed P180,000.00 in Metro Manila and other highly urbanized areas
and P150,000.00 in other areas or such adjusted amount of selling price
for socialized housing as may later be determined and adopted by the
HLURB;
2) Corporations registered with the Board of Investments and
enjoying exemptions from income under the Omnibus Investment Code of
1997;
3) Corporations exempt from income tax under Sec. 30, of the Tax
Code, like the SSS, GSIS, the PCSO, etc. However, income payments
arising from any activity which is conducted for profit or income derived
from real or personal property shall be subject to a withholding tax. (Sec.
57.5, Rev. Regs. No. 2-98)
BAR: 88. In applications for refund, the withholding agent is a taxpayer

(Commissioner of Internal Revenue v. Procter & Gamble Philippine
Manufacturing Corporation, 204 SCRA 377, 383-386), but for tax amnesty
purposes, he is not. (Commissioner of Internal Revenue v. Court of Appeals, et
al., G.R. No. 108576, January 20, 1999, the Anscor case)
BAR: 89. Legal requirements for claiming tax rewards for internal
revenue taxes:
a. The informant should voluntarily file a confidential information under
oath with the Law Division of the Bureau of Internal Revenue alleging therein the
specific violations constituting fraud;
b. The information must not yet be in the possession of the Bureau of
Internal Revenue, or refer to a case already pending or previously investigated
by the Bureau of Internal Revenue;
c. The informant must not be a government employee or a relative of a
government employee within the sixth degree of consanguinity; and
d. The information must result to collections of revenue and/orfines.
PENALTIES, INTERESTS AND SURCHARGES

Surtax or surcharge, also known as the civil penalties, are the amounts
imposed in addition to the tax required.
They are in the nature of penalties and shall be collected at the same
time, in the same manner, and as part of the tax. [Sec.248 (A), NIRC of 1997]
58
The two (2) kinds of civil penalties are (a) the 25% surcharge for late
filing or late payment [Sec. 248 (A), NIRC of 1997] (also known as the
delinquency surcharge), and the 50% willful neglect or fraud surcharge. [Sec.
248 (B), Ibid.]
Deficiency income tax is the amount by which the tax imposed under the
NIRC of 1997 exceeds the amount shown as the tax due by the taxpayer upon
his return. [Sec. 56 (B) (1), NIRC of 1997]
Deficiency interest is the interest assessed and collected on any unpaid

amount of tax at the rate of 20% per annum or such higher rate as may be
prescribed by regulations, from the date prescribed for payment until the amount
is fully paid. [Sec. 249 (A) (B), NIRC of 1997]
Delinquency interest is the interest assessed and collected on the unpaid

amount until fulluy paid where there is failure on the part of the taxpayer to pay
the amount die on any return required to be filed; or the amount of the tax due
for which no return is required; or a deficiency tax, or any surcharge or interest
thereon, on the date appearing in the notice and demand by the Commissioner
of Internal Revenue. [Sec.249 (c), NIRC of 1997]
Compromise penalty is the amount agreed upon between the taxpayer

and the Government to be paid as a penalty in cases of a compromise.
The five year prescriptive period for the filing of criminal action for
violation of the Tax Code (assessment cases) starts to run when the assessment
has become final and unappealable.
TARIFF AND CUSTOMS CODE

Importation begins when the conveying vessel or aircraft enters the
jurisdiction of the Philippines with intention to unlade therein. (Sec. 1202,
TCCP)
Importation is deemed terminated upon payment of the duties, taxes and

other charges due upon the agencies, or secured to be paid, at the port of entry
and the legal permit for withdrawal shall have been granted.
In case the articles are free of duties, taxes and other charges, until they
have legally left the jurisdiction of the customs. (Sec. 1202, TCCP)
BAR: 90. The flexible tariff clause is a provision in the Tariff and
Customs Code, which implements the constitutionally delegated power of the
President of the Philippines, in the interest of national economy, general welfare
and/or national security upon recommendation of the NEDA (a) to increase,
reduce or remove existing protective rates of import duty, provided that, the
increase should not be higher than 100% ad valorem; (b) to establish import
quota or to ban imports of any commodity, and (c) to impose additional duty on
all imports not exceeding 10% ad valorem, among others.
Customs duties is the name given to taxes on the importation and

exportation of commodities, the tariff or tax assessed upon merchandise
imported from, or exported to, a foreign country. (Nestle Phils. v. Court of
Appeals, et al., G.R. No. 134114, July 6, 2001)
Special customs duties are additional import duties imposed on specific

kinds of imported articles under certain conditions. The special customs duties
are the anti-dumping duty, the countervailing duty, the discriminatory duty and
the marking duty.
59
The special customs duties are imposed for the protection of consumers
and manufacturers, as well as Philippine products.
BAR: 91. Dumping duty is an additional special duty amounting to the

difference between the export price and the normal value of such product,
commodity or article (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752,
“Anti-Dumping Act of 1999.”) imposed on the importation of a product,
commodity or article of commerce into the Philippines at less than its normal
value when destined for domestic consumption in the exporting country which is
causing or is threatening to cause material injury to a domestic industry, or
materially retarding the establishment of a domestic industry producing the like
product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-
Dumping Act of 1999”]
The anti-dumping duty is imposed

a. Where a product, commodity or article of commerce is exported into
the Philippines at a price less than its normal value when destined for domestic
consumption in the exporting country,
b. and such exportation is causing or is threatening to cause material
injury to a domestic industry, or materially retards the establishment of a
domestic industry producing the like product. [Sec. 301 (a), TCC, as amended
by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
Normal value for purposes of imposing the anti-dumping duty is the

comparable price at the date of sale of like product, commodity, or article in the
ordinary course of trade when destined for consumption in the country of export.
[Sec. 301 (s) (3 ), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of
1999”]
A dumped imported product is any product, commodity or article of

commerce introduced into the Philippines at an export price less than its normal
value in the ordinary course of trade, for the like product, commodity or article
destined for consumption in the exporting country, which is causing or is
threatening to cause material injury to a domestic industry, or materially retarding
the establishment of a domestic industry producing the like product. [Sec. 301
(s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
The imposing authority for the anti-dumping duty is the Secretary of Trade
and Industry in the case of non-agricultural product, commodity, or article or the
Secretary of Agriculture, in the case of agricultural product, commodity or article,
after formal investigation and affirmative finding of the Tariff Commission. [Sec.
301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
Even when all the requirements for the imposition have been fulfilled, the
decision on whether or not to impose a definitive anti-dumping duty remains the
prerogative of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep.
Act No. 8752, “Anti-Dumping Act of 1999”]
In the determination of whether to impose the anti-dumping duty, the Tarrif

Commission, may consider among others, the effect of imposing an anti-dumping
duty on the welfare of the consumers and/or the general public, and other
related local industries. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752,
“Anti-Dumping Act of 1999”)
The amount of anti-dumping duty that may be imposed is the difference

between the export price and the normal value of such product, commodity or
article. (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-
Dumping Act of 1999”)
60
The anti-dumping duty shall be equal to the margin of dumping on such

product, commodity or article thereafter imported to the Philippines under similar
circumstances, in addition to ordinary duties, taxes and charges imposed by law
on the imported product, commodity or article,
BAR: 92. Countervailing duties are additional customs duties imposed

on any product, commodity or article of commerce which is granted directly or
indirectly by the government in the country of origin or exportation, any kind or
form of specific subsidy upon the production, manufacture or exportation of such
product commodity or article, and the importation of such subsidized product,
commodity, or article has caused or threatens to cause material injury to a
domestic industry or has materially retarded the growth or prevents the
establishment of a domestic industry. (Sec. 302, TCCP as amended by Section
1, R.A. No. 8751)
The imposing authority for the countervailing duties is the Secretary of

Trade and Industry in the case of non-agricultural product, commodity, or article
or the Secretary of Agriculture, in the case of agricultural product, commodity or
article, after formal investigation and affirmative finding of the Tariff Commission.
Even when all the requirements for the imposition have been fulfilled, the
decision on whether or not to impose a definitive anti-dumping duty remains the
prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as amended by Rep.
Act No. 8752, “Anti-Dumping Act of 1999”)
The countervailing duty is equivalent to the value of the specific subsidy.
BAR: 93. Marking duties are the additional customs duties imposed on
foreign articles (or its containers if the article itself cannot be marked), not
marked in any official language in the Philippines, in a conspicuous place as
legibly, indelibly and permanently in such manner as to indicate to an ultimate
purchaser in the Philippines the name of the country of origin.
The Commissioner of Customs imposes the marking duty.
The marking duty is equivalent to five percent (5%) ad valorem.
BAR: 94. A discriminatory duty is a new and additional customs duty

imposed upon articles wholly or in part the growth or product of, or imported in a
vessel, of any foreign country which imposes, directly or indirectly, upon the
disposition or transportation in transit through or re-exportation from such
country of any article wholly or in part the growth or product of the Philippines,
any unreasonable charge, exaction, regulation or limitation which is not equally
enforced upon like articles of every foreign country, or discriminates against the
commerce of the Philippines, directly or indirectly, by law or administrative
regulation or practice, by or in respect to any customs, tonnage, or port duty, fee,
charge, exaction, classification, regulation, condition, restriction or prohibition, in
such manner as to place the commerce of the Philippines at a disadvantage
compared with the commerce of any foreign country.
The President of the Philippines imposes the discriminatory duties.
BAR: 95. Returning resident s are nationals who have stayed in a

foreign country for a period of at least six (6) months.
BAR: 96. When a ruling or decision of the collector is made whereby

liability for duties, taxes, fees, or other charges are determined, except the fixing
of fines in seizure cases, the party adversely affected may protest such ruling or
decision
61
a. by presenting to the Collector at the time when payment is made, or

within fifteen (15) days thereafter,
b. a written protest setting forth his objection to the ruling or decision in
question, together with his reasons therefor. No protest shall be considered
unless payment of the amount due after final liquidation has first been made and
the corresponding docket fee. (Sec. 2308, TCC numbering and arrangement
supplied)
Protest Exclusive Remedy in Protestable Cases. In all cases subject to

protest, the interested party who desires to have the action of the collector
reviewed, shall make a protest, otherwise the action of the collector shall be final
and conclusive against him. (Sec. 2309, TCC)
BAR: 97. The basis of dutiable value of merchandise that is subject to

ad valorem customs duties is the transaction value, which shall be the price
actually paid or payable for the goods when sold for export to the Philippines,
adjusted by adding certain cost elements to the extent that they are incurred by
the buyer but are not included in the price actually paid or payable for the
imported goods, and may include the following:
a. Cost of containers and packing,
b. Insurance, and
c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No. 9135)
The above transaction value is the primary method of determining

dutiable value. If the transaction value of the imported article could not be
determined using the above, the following alternative methods should be used
one after the other:
a. Transaction value of identical goods
b. Transaction value of similar goods
c. Deductive method
d. Computed method
e. Fallback method
There is a mistaken belief that claims for refund are governed by the rule
on quasi-contract of solutio indebeti which prescribes in six (6) years under
Article 1145 of the Civil Code.
In order for the rule on solutio indebeti to apply it is an essential condition
that the petitioner must first show that its payment of the customs duties was in
excess of what was required by the law at the time the subject 16 importations of
milk and milk products were made. Unless shown otherwise, the disputable
presumption of regularity of performance of duty lies in favor of the Collector of
Customs. (Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)
There is no automatic grant of refund. In determining whether Nestle is

entitled to refund of alleged overpayment of custom duties, it is necessary to
determine exactly how much the Government is entitled to collect as customs
duties. Until there is such a determination by the Collector and affirmed or
rejected by the Commissioner, then the Court of Tax Appeals does not have
jurisdiction. The CTA’s jurisdiction under the Tariff and Customs Code is not
concurrent with that of the Commissioner of Customs due to the absence of any
certification from the Collector of Customs of Manila that such import duties
should be refunded. Consequently, the finding by the CTA in another case of
overpayment of internal revenue taxes is not necessarily a finding that there was
overpayment of customs duties. (Nestle Phil. v. Court of Appeals, et al., G.R.
No. 134114, July 6, 2001)
All claims for refund of duties shall be made in writing and forwarded to
the Collector of Customs to whom such duties are paid, who upon receipt of
such claim, shall verify the same by the records of his Office, and if found to be
62
correct and in accordance with law, shall certify the same to the Commissioner of
Customs with his recommendation together with all necessary papers and
documents. Upon receipt by the Commissioner of such certified claim he shall
cause the same to be paid if found correct. (Sec. 1708, TCC)
BAR: 98. Under the doctrine of primary jurisdiction, the Bureau of

Customs has exclusive administrative jurisdiction to conduct searches, seizures
and forfeitures of contraband without interference from the courts. It could
conduct searches and seizures without need of a judicial warrant except if the
search is to be conducted in a dwelling place.
The doctrine of exclusive customs jurisdiction over customs cases to the

exclusion of the RTCs is anchored upon the policy of placing no unnecessary
hindrance on the government’s drive, not only to prevent smuggling and other
frauds upon Customs, but more importantly, to render effective and efficient the
collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform. (Jao, et
al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43)
The Collector of Customs sitting in seizure and forfeiture proceedings has

exclusive jurisdiction to hear and determine all questions touching on the seizure
and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance
over such matters even through petitions of certiorari, prohibition or mandamus.
(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20,
2000)
Regional Trial Courts have no jurisdiction to replevin a property which is

subject to seizure and forfeiture proceedings for violation of the Tariff and
Customs Code otherwise, actions for forfeiture of property for violation of the
Customs laws could easily be undermined by the simple device of replevin. (De
la Fuente v. De Veyra, et al., 120 SCRA 455)
The customs authorities do not have to prove to the satisfaction of the

court that the articles on board a vessel were imported from abroad or are
intended to be shipped abroad before they may exercise the power to effect
customs searches, seizures, or arrests provided by law and continue with the
administrative hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R.
No. 138081, March 20, 2000)
The Tariff and Customs Code allows the Bureau of Customs to resort to
the administrative remedy of seizure, such as by enforcing the tax lien on the
imported article when the imported articles could be found and be subject to
seizure and forfeiture.
The Tariff and Customs Code allows the Bureau of Customs to resort to
the judicial remedy of filing an action in court when the imported articles could
not anymore be found.
Instances where there is no right of redemption of seized and forfeited

articles:
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law. (Transglobe
International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25,
1999)
In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr.

v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme court clarified that
the fraud contemplated by law must be actual and not constructive. It must be
63
intentional, consisting of deception, willfully and deliberately done or resorted to

in order to induce another to give up some right.
Fraud must be proved to justify forfeiture. It must be actual, amounting to

intentional wrong-doing with the clear purpose of avoiding the tax. Forfeiture is
not favored in law nor in equity. Mere negligence is not equivalent to the fraud
contemplated by law. An honest mistake, will not deprive the government of its
right to collect the proper tax. (Republic, etc., v. The Court of Appeals, et al.,
G.R. No. 139050, October 2, 2001)
Requisites for forfeiture of imported goods:

a. Wrongful making by the owner, importer, exporter or consignee of any
declaration or affidavit, or the wrongful making or delivery by the same person of
any invoice, letter or paper – all touching on the importation or exportation of
merchandise.
b. the falsity of such declaration, affidavit, invoice, letter or paper; and
c. an intention on the part of the importer/consignee to evade the
payment of the duties due. (Republic, etc., v. The Court of Appeals, et al., G.R.
No. 139050, October 2, 2001)
Forfeiture of seized goods in the Bureau of Customs is in the nature of a

proceeding in rem, i.e. directed against the res or imported goods and entails a
determination of the legality of their importation. In this proceeding, it is in legal
contemplation the property itself which commits the violation and is treated as
the offender, without reference whatsoever to the character or conduct of the
owner.
The issue is limited to whether the imported goods should be forfeited and
disposed of in accordance with law for violation of the Tariff and Customs Code.
.(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634,
January 25, 1999)
The one-year prescriptive period for forfeiture proceedings applies only in

the absence of fraud. (Commissioner of Customs v. Court of Tax Appeals, et al.,
G.R. No. 132929, March 27, 2000)
BAR: 99. The Collector of Customs upon probable cause that the
articles are imported or exported, or are attempted to be imported or exported, in
violation of the tariff and customs laws shall issue a warrant of seizure. (Sec. 6,
Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then a
search warrant should be issued by the regular courts not the Bureau of
Customs.
There may be instances where no warrants issued by the Bureau of
Customs or the regular courts is required, as in search and seizures of motor
vehicles and vessels.
LOCAL TAXATION
BAR: 100. The fundamental principles of local taxation are:

a. Uniformity;
b. Taxes, fees, charges and other impositions shall be equitable and
based on ability to pay, for public purposes, not unjust, excessive, oppressive or
confiscatory, not contrary to law, public policy, national economic policy or in
restraint of trade;
c. The levy and collection shall not be let to any private person;
64
d. Inures solely to the local government unit levying the tax;

e. The progressivity principle must be observed.
Under the now prevailing Constitution, where there is neither a grant nor
prohibition by statute, the taxing power of local governments must be deemed to
exist although Congress may provide statutory limitations and guidelines in order
to safeguard the viability and self-sufficiency of local government units by
directly granting them general and broad tax powers. (City Government of San
Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
BAR: 101. The paradigm shift to the grant of the power of taxation to
local government units results from the realization that genuine development can
be achieved only by strengthening local autonomy and promoting
decentralization of governance.
For along time, the country’s highly centralized government structure has
bred a culture of dependence among local government leaders upon the
national leadership. It has also dampened the spirit of initiative, innovation and
imaginative resilience in matters of local development on the part of local
government leaders.
The only way to shatter this culture of dependence is to give the LGUs a
wider role in the delivery of basic services and confer them sufficient powers to
generate their own sources of revenue for the purpose. (National Power
Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
BAR: 102. The Local Government Code explicitly authorizes provinces

and cities, notwithstanding “any exemption granted by any law or other special
law” to impose a tax on businesses enjoying a franchise. Indicative of the
legislative intent to carry out the constitutional mandate of vesting broad tax
powers to local government units, the Local Government Code has withdrawn
tax exemptions or incentives theretofore enjoyed by certain entities. (City
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708,
March 25, 1999)
LGUs such as the province or the city can impose franchise tax
“notwithstanding any exemption granted by law or other special law”. The
legislative purpose to withdraw tax exemption privileges under existing law or
charter is clearly manifested by the language used categorically withdrawing
such exemption subject only to the exceptions enumerated.
Since it would be not only tedious and impractical to attempt to enumerate
all the existing statutes providing for special tax exemptions or privileges the
Local Government Code provided for an express, albeit general, withdrawal of
such exemptions or privileges. No more unequivocal language could have been
used. (National Power Corporation v. City of Cabanatuan, G. R. No. 149110,
April 9, 2003)
Rationale for blanket withdrawal of local government tax exemptions:

Doubtless the power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of the LGUs for the delivery of
basic services essential to the promotion of the general welfare and the
enhancement of peace, progress and prosperity of the people.
The original reasons for the withdrawal of local government tax
exemptions to government owned or controlled corporations and all other units
of government were that such privilege resulted in serious tax base erosion and
distortion in the tax treatment of similarly situated enterprises.
With the added burden of devolution, it is even more imperative for
government entities to share in the requirements of development, fiscal or
otherwise, by paying taxes or other charges due from them. (National Power
Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
65
Philippine Long Distance Telephone Company, Inc., v. City of Davao, et

al., etc.,G.R.No. 143867, August 22, 2001, upheld the authority of the City of
Davao, a local government unit, to impose and collect a local franchise tax
because the Local Government has withdrawn all tax exemptions previously
enjoyed by all persons and authorized local government units to impose a tax on
business enjoying a franchise tax notwithstanding the grant of tax exemption to
them.
Power of local governments to tax is only a delegated power. Local

governments do not have the inherent power to tax except to the extent that
such power might be delegated to them either by the basic law or statute.
Presently, under Article X of the 1987 Constitution a general delegation of that
power has been given in favor of local government units. (Manila Electric
Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
The fundamental law did not intend the delegation to local government
units to be absolute and unconditional, the constitutional objective obviously is
to ensure that, while local government units are being strengthened and made
more autonomous, the legislature must still see to it that:
a. the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions;
b. each local government unit will have its fair share of available
resources;
c. the resources of the national government will be unduly disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric Company v.
Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
The withdrawal of a tax exemption should not be construed as prohibiting

future grants of exemption from all taxes. Indeed, the grant of taxing powers to
local government units under the Local Government Code does not affect the
power of Congress to grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions on municipal
taxing powers, doubts must be resolved in favor of municipal corporations.
(Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al.,
etc.,G.R. No. 143867, August 22, 2001)
Smart and Globe are exempt from local taxes (including the franchise tax)
because their franchises which were granted after the effectivity of the LGC
exempted them from the payment of local franchise and business taxes.
(Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al.,
etc.,G.R. No. 143867, August 22, 2001)
When Congress approved a provision that, “Any advantage, favor,

privilege, exemption, or immunity granted under existing franchises, or may
hereafter be granted, shall ipso facto become part of previously granted
telecommunications franchises and shall be accorded immediately and
unconditionally to the grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of telecommunications
franchises concerning territory covered by the franchise, the life span of the
franchise, or the type of service authorized by the franchise.” (Underscoring
supplied) there was no intention for it to operate as a blanket tax exemption to all
telecommunications entities. Applying the rule of strict construction of laws
granting tax exemptions and the rule that doubts should be resolved in favor of
municipal corporations in interpreting statutory provisions on municipal taxation,
it was held that said provisions cannot be considered as extending its
application to franchises such as that of PLDT. (Philippine Long Distance
Telephone Company, Inc., v. City of Davao, et al., etc.,G.R.No. 143867, August
22, 2001)
66
BAR: 103. A law which deprives local government units of their power
to tax would be unconstitutional. The constitution has delegated to local
governments the power to levy taxes, fees and other charges. This
constitutional delegation may only be removed by a constitutional amendment.
BAR: 104. The power of local governments to tax and raise their own
sources of revenue is exercised through tax ordinances passed by the local
Sangguniangs and approved by the LGU Chief Executive.
The authority under the Local Government Code to collect taxes on

quarry resources applies only to those extracted from public lands. (Sec. 134 in
relation to Sec. 138, Local Government Code)
The Local Government Code prohibits local government units from

collecting excise taxes on articles enumerated under the NIRC, and taxes, fees
or charges on petroleum products. (Sec. 133 [h], Local Government Code in
relation to the Tax Code] While the Tax Code levies a tax on all quarry
resources, regardless of origin, whether extracted from public or private lands,
the Local Government Code authorizes the local government unit to impose
such taxes on those taken from public lands. Thus, quarry resources extracted
from private lands are taxable under the NIRC and not by local government
units. (The Province of Bulacan, et al., v. The Court of Appeals, etc., et al., 299
SCRA 442)
BAR: 105. Professional basketball games should pay the amusement

taxes collected by the BIR and not the amusement taxes collected by the local
governments. The amusement tax which provinces and cities are allowed to
collect under Sec. 140 of the Local Government Code, refers to “an amusement
tax to be collected from proprietors, lessees, or operators of theaters, cinemas,
concert halls, circuses, boxing stadia, and other places of amusement.” The
authority to tax professional basketball games is not included therein because it
is a national tax provided for under Sec. 125 of the 1997 Tax Code which
provides that, “There shall be collected from the proprietor, lessee or operator of
cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball
games, Jai-Alai and racetracks, a tax equivalent to: xxxx (d) Fifteen percent
(15%) in the case of professional basketball games envisioned in Presidential
Decree No. 971: Provided, however, That the tax herein shall be in lieu of all
other percentage taxes of whatever nature and description; xxx” (Philippine
Basketball Association v. Court of Appeals, et al., G.R. No. 119122, August 8,
2000)
BAR: 106. The remedy to impugn the constitutionality of a local tax

ordinance is an appeal to the Secretary of Justice within a period of thirty (30)
days from effectivity. The Secretary has a period of 60 days within which to
decide. Should the SOJ fail to decide within that period, or if the decision is
adverse to the taxpayer or to the government, the party may appeal to the RTC
within a period of 30 days from the expiration of the 60 day period within which
to decide or within 30 days from receipt of the adverse judgment.
REAL PROPERTY TAXATION

BAR: 107. The fundamental principles of real property taxation are:
a. Appraisal at current and fair market value;
b. Classification for assessment on the basis of actual use;
c. Assessment on the basis of uniform classification;
d. Appraisal, assessment, levy and collection shall not be let to a private
person;
67
e. Appraisal and assessment shall be equitable.
The reasonable market value is determined by the assessor in the form of

a schedule of fair market values. The schedule is then enacted by the local
sanggunian.
The assessment level is fixed by ordinances of the appropriate

sanggunian.
The tax rate is also fixed by ordinances of the appropriate sanggunian.
BAR: 108. Personal property under the civil law may be considered as
real property for purposes of taxes where the property is essential to the conduct
of the business. Underground tanks are essential to the conduct of the business
of a gasoline station without which it would not be operational. (Caltex Phils.,
Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296)
Light Rail Transit (LRT) improvements such as buildings, carriageways,

passenger terminals stations, and similar structures do not form part of the
public roads since the former are constructed over the latter in such a way that
the flow of vehicular traffic would not be impaired. The carriageways and
terminals serve a function different from the public roads. Furthermore, they are
not open to use by the general public hence npt exempt from real propery taxes.
(Light Rail Transit Authority v. Central Board of Assessment Appeals, et al., G. R.
No. 127316, October 12, 2000)
Even granting that the national government owns the carriageways and
terminal stations, the property is not exempt because their beneficial use has
been granted to LRTA a taxable entity. (Light Rail Transit Authority v. Central
Board of Assessment Appeals, et al., G. R. No. 127316, October 12, 2000)
BAR: 109. Property exempt from the payment of real property tax:
a. Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been granted to
a taxable person for a consideration or otherwise;
b. Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and
improvements actually, directly and exclusively used for religious, charitable and
educational purposes;
c. Machineries and equipment, actually, directly and exclusively used by
local water districts; and government owned and controlled corporations
engaged in the supply and distribution of water and generation and transmission
of electric power;
d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and environmental
protection.
The restriction upon the power of courts to impeach tax assessment

without a prior payment, under protest, of the taxes assessed is consistent with
the doctrine that taxes are the lifeblood of the nation, and as such their collection
cannot be curtailed by injunction or any like action; otherwise, the state or, in this
case, the local government unit, shall be crippled in dispensing the needed
services to the people, and its machinery gravely disabled. (Manila Electric
Company v. Barlis, G.R. No. 114231, May 18, 2001)
Thus, the trial court has no jurisdiction to entertain a petition for
prohibition absent payment under protest of the tax assessed. (Ibid.)
BAR: 110. Unpaid realty taxes attach to the property and is chargeable
against the person who had actual or beneficial use and possession of it
68
regardless of whether or not he is the owner. To impose the real property tax on
the subsequent owner which was neither the owner not the beneficial user of the
property during the designated periods would not only be contrary to law but
also unjust.
Consequently, MERALCO the former owner/user of the property was
required to pay the tax instead of the new owner NAPOCOR. (Manila Electric
Company v. Barlis, G.R. No. 114231, May 18, 2001)
BAR: 111. The administrative remedies that are provided for under the
provisions of Rep. Act No. 7160, the Local Government Code, before resort to
courts is made relative to real property taxes.
a. A taxpayer may question the constitutionality or legality of a tax
ordinance on appeal within thirty (30) days from effectivity thereof, to the
Secretary of Justice. The taxpayer after finding that his assessment is unjust,
confiscatory, or excessive, must bring the case before the Secretary of Justice
for questions of legality or constitutionality of a city ordinance.
b. An owner of real property who is not satisfied with the assessment of
his property may, within sixty (60) days from notice of assessment, appeal to the
Local Board of Assessment Appeals.
c. Should the taxpayer question the excessiveness of the amount of tax,
he must first pay the amount due. Then, he must request the annotation of the
phrase “paid under protest” and accordingly appeal to the Local Board of
Assessment Appeals by filing a petition under oath together with copies of the
tax declarations and affidavits or documents to support his appeal . (Lopez v.
City of Manila, et al., G.R. No. 127139, February 19, 1999)
Secretary of Justice can take cognizance of a case involving the

constitutionality or legality of tax ordinances where there are factual issues
involved. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25,
1999)
Taxpayer files appeal to the Secretary of Justice, within 30 days from

effectivity thereof. In case the Secretary decides the appeal, a period also of 30
days is allowed for an aggrieved party to go to court. But if the Secretary does
not act thereon, after the lapse of 60 days, a party could already seek relief in
court.
These three separate periods are clearly given for compliance as a
prerequisite before seeking redress in a competent court. Such statutory
periods are set to prevent delays as well as enhance the orderly and speedy
discharge of judicial functions. For this reason the courts construe these
provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al.,
G.R. No. 118233, December 10, 1999)
A City Assessor cannot be commanded by mandamus to classify a

particular property as exempt from real property taxation because this is an
exercise of his function of assessing properties for taxation purposes. While it is
his duty to conduct assessments is a ministerial function, the actual exercise
thereof is necessarily discretionary.
Furthermore, recourse to courts will violate the doctrine of exhaustion of
administrative remedies because the action of the City Assessor is appealable to
the Local Board of Assessment Appeals, thence to the Central Board of
Assessment Appeals (Systems Plus Computer College of Caloocan City v. Local
Government of Caloocan City, et al., G. R. No. 146382, August 7, 2003)
Public hearings are mandatory prior to approval of tax ordinance, but this
still requires the taxpayer to adduce evidence to show that no public hearings
ever took place. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233,
December 10, 1999)
69
Solutio indebeti and issues relative to validity do not require payment

under protest.
The concurrent and simultaneous remedies afforded local government

units in enforcing collection of real property taxes:
a. Distraint of personal property;
b. Sale of delinquent real property, and
c. Collection of real property tax through ordinary court action.
The remedy of levy can be pursued by putting up for sale the real
property subject of tax, i.e., the delinquent property upon which the tax lien
attaches, regardless of the present owner or possessor thereof. However this
remedy is only one of the other remedies. (Manila Electric Company v. Barlis,
G.R. No. 114231, May 18, 2001)
The LGU could also avail of the remedy of distraint and levy of personal
property subjecting any personal property of the taxpayer to execution. thus, the
issuance of the warrants of garnishment over MERALCO’s bank deposits was
not improper or irregular. (Manila Electric Company v. Barlis, et al., G.R. No.
114231, May 18, 2001)
BAR: 112. It is true that the unpaid tax attaches to the property and is
chargeable against the person who has actual or beneficial use and possession
of it regardless of whether or not he is the owner. However, to impose the real
property tax on the subsequent owner which was neither the owner nor the
beneficial user of the property during the designated periods would not only be
contrary to law but also unjust. ((Manila Electric Company v. Barlis, et al., G.R.
No. 114231, May 18, 2001 citing Testate Estate of Concordia T. Lim v. City of
Manila, 182 SCRA 482) Thus MERALCO the former owner, not NAPOCOR, the
present owner, is liable for the payment of the back taxes on the above
properties.
Notice and publication, as well as the legal requirements for a tax

delinquency sale, are mandatory, and the failure to comply therewith can
invalidate the sale. The prescribed notices must be sent to comply with the
requirements of due process. (De Knecht, et al,. v. Court of Appeals; De Knecht,
et al., v. Honorable Sayo, 290 SCRA 223,236)
The reason behind the notice requirement is that tax sales are
administrative proceedings which are in personam in nature. (Puzon v. Abellera,
169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314)
Steps to be followed for the mandatory conduct of General Revision of

Real Property Assessments:
a. Preparation of Schedule of Fair Market Values;
b . Enactment of Ordinances:
1) Levying an annual “ad valorem” tax on real property and an
additional tax accruing to the Special Education Fund;
2) Fixing the assessment levels to be applied to the market values
of real properties;
3) Providing the necessary appropriations to defray expenses
incident to general revision of real property assessments,; and
4) Adopting the Schedule of Fair Market Values prepared by the
assessors. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19,
1999)
Preparation of fair market values:

a. The city or municipal assessor shall prepare a schedule of fair market
values for the different classes of real property situated in their respective Local
70
Government Units for the enactment of an ordinance by the sanggunian

concerned; and
b. The schedule of fair market values shall be published in a newspaper
of general circulation in the province, city or municipality concerned or the
posting in the provincial capitol or other places as required by law. (Lopez v. City
of Manila, et al., G.R. No. 127139, February 19, 1999)
Proposed fair market values of real property in a local government unit as

well as the ordinance containing the schedule must be published in full for three
(3) consecutive days in a newspaper of local circulation, where available, within
ten (10) days of its approval, and posted in at lease two (2) prominent places in
the provincial capitol, city, municipal or barangay hall for a minimum of three (3)
consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172,
March 25, 1999)
A special levy or special assessment is an imposition by a province, a city

or a municipality within the Metropolitan Manila Area upon real property specially
benefited by a public works expenditure of the LGU to recover not more than
60% of such expenditure.
The real property taxes that may be collected by provinces, cities and
municipalities within the Metro Manila area are the basic real property tax, the
special education fund, and the ad valorem tax on idle lands.
GOOD LUCK AND PRAYERS

FOR YOUR PASSING THE BAR.

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DOMONDON’s “CUT AND PASTE” 1

Analysis of previous Bar Questions shows that there are fundamental

GENERAL PRINCIPLES OF TAXATION

The exercise of the power to tax is not destructive of a taxpayer’s property

A reversal of a BIR ruling favorable to a taxpayer would not necessarily

BAR: 2. As a general rule, the right of the government to collect taxes

BAR: 4. The power to tax is an inherent power of the state exercised

One of the purposes of taxation is to raise revenues to meet the

The sumptuary purpose of taxation is to protect the health, safety or

The compensatory purpose of taxation is to implement the social justice

BAR: 5. In recent years, the increasing social challenges of the times

The Philsugin fund, an imposition on sugar, to raise funds to conduct

Motor vehicle registration fees are now considered revenue or tax

The tax impost on videogram establishments is not only regulatory but a

The OPSF designed to reimburse gasoline companies for increases in the

The inherent and constitutional limitations to the power of taxation are

BAR: 6. The inherent limitations are (a) public purpose; (b) no

The power of taxation is exercised by the legislature whose members are

Delegata potestas non potest delegari. A delegated power cannot be

In par parem, non habet imperium. As between equals there is no

Comity is the respect accorded to other sovereign nations. Thus,

Government exemption should be recognized in order to reduce the

Intangible personal property may have obtained a business situs in a

domestic corporations are considered as income from within, irrespective where

The situs of income taxation is determined by the nationality, residence of

The situs of transfer taxes, such as estate and donor’s taxes, is

The situs of taxation of a contract for a project which included the

The general or indirect constitutional limitations as well as the

BAR: 8. The general or indirect constitutional limitations are the

BAR: 9. The specific or direct constitutional limitations are the following:

BAR: 10. Equal protection of the law clause is subject to reasonable

BAR: 11. Classification, to be valid, must (a) rest on substantial

A legislative rule which is in the nature of subordinate legislation,

In case of an interpretative rule no hearing or publication is required since

Uniformity may have a restrictive meaning different from equality and

The P1,000.00 VAT registration fee imposed on non-VAT enterprises

Article XII, Sec. 11 of the Constitution provides that the grant of a

BAR: 14. A lawful tax on a new subject, or an increased tax on an old

BAR: 16. The elements of direct duplicate taxation are:

Double taxation usually takes place when a person is a resident of a

Purpose of tax treaties. To reconcile the national fiscal legislation of the

Rationale for avoiding international juridical double taxation. To

The mandate to Congress is not to prescribe but to evolve a progressive

An “item” in a revenue bill does not refer to an entire section imposing a

BAR: 20. Charitable institutions, churches and parsonages or convents

BAR: 21. All revenues and assets of non-stock, non-profit educational

Revenues and assets of proprietary educational institutions, including

The tax exemption so recognized does not flow to income of whatever

Tax amnesty distinguished from tax exemption:

A tax amnesty is a general pardon or intentional overlooking by the State

BAR: 22. Tax avoidance is the use of legally permissible means to

BAR: 24. Reasons why national taxes cannot be the subject of

Compensation takes place by operation of law, where the local

In case of a tax overpayment, where the BIR’s obligation to refund or set-

THE COURT OF TAX APPEALS AND TAX

The Court of Tax Appeals was created:

The factual determination of the Court of Tax Appeals, when supported by

Generally speaking it is the Final Adjustment Return, in which amounts of

Outline of tax remedies of a taxpayer and the government relative to