1340 Tax Reviewer

NATIONAL INTERNAL REVENUE CODE
REVIEW MANUAL FOR UV TAX CLASS

Sec. 2 - Powers and D!"es o# !$e %rea o# In!erna& Re'ene
The Bureau of Internal Revenue shall be under the supervision and control of the
Department of Finance and its powers and duties shall comprehend the
assessment and collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and fines connected
therewith, including the execution of judgments in all cases decided in its favor
by the ourt of Tax !ppeals and the ordinary courts" The Bureau shall give effect
to and administer the supervisory and police powers conferred to it by this ode
or other laws"
Letters of referral/complaints filed by BIR Commissioner constituted approval of the filing
of the cases in court.
It is not quite correct to claim that the BIR Commissioner referred the matter to
the Department of Justice for preliminary investigation only. The three letters of
referral/complaints she wrote and filed with the Department of Justice and the
ffice of the City !rosecutor all stated "I here#y recommend the prosecution of
the following for violations of the provisions of the $ational Internal Revenue
Code% as amended&. 'ence% the same clearly constituted approval of the filing of
the cases in court. The fact% moreover% is that the cases had #een filed in court
and were already under the court(s control. By merely echoing the findings of the
BIR% the )eTC a#dicated its duty as a court of law% and su#*ugated itself to the
administrative agency. In #a"&"n( !o )a*e an "nde+enden! #"nd"n( o# !$e )er"!s
o# !$e case and )ere&, anc$or"n( !$e d"s)"ssa& on !$e +os"!"on o# !$e %IR-
!$e !r"a& cor! re&"n."s$ed !$e d"scre!"on "! was o/&"(ed !o e0erc"se- "n
'"o&a!"on o# !$e r&"n( "n Cres+o '. Mo(&.
!eople of the !hils. vs. +ucio C. Tan% et al.% ,.R. $o. -../0/% July -1% 200.
Sec. 1 - Power o# Co))"ss"oner !o In!er+re! Ta0 Laws
The power to interpret the provisions of this Code and other tax laws shall
be under the exclusive and original urisdiction of the Commissioner!
subect to review by the "ecretary of #inance.
The power to decide disputed assessments! refunds of internal revenue
taxes! fees or other charges! penalties imposed in relation thereto! or other
matters arising under this Code or other laws or portions thereof
administered by the Bureau of Internal Revenue is vested in the
Commissioner! subect to the exclusive appellate urisdiction of the Court
of Tax $ppeals.
The Commissioner of Internal Revenue is not bound by the ruling of his
predecessors.
That previous Commissioners considered copra as an 3agricultural food product3%
is not reason for holding that the present interpretation is wrong. The
Commissioner of Internal Revenue is not #ound #y the ruling of his
predecessors. To the contrary% the overruling of decisions is inherent in the
interpretation of laws.
)isamis riental 4ssociation of Coco Traders% Inc. vs. Dept. of 5inance
6ecretary% et al.% ,.R. $o. -0782.% $ovem#er -0% -99.
Conclusions and opinions of the Court of Tax $ppeals are extended due
consideration.
It has #een a long standing policy and practice of the 6upreme Court to respect
the conclusions of quasi:*udicial agencies such as the Court of Ta; 4ppeals% a
highly speciali<ed #ody specifically created for the purpose of reviewing ta;
cases. The CT4% #y the nature of its functions% is dedicated e;clusively to the
study and consideration of ta; pro#lems. It has necessarily developed an
e;pertise on the su#*ect. Due consideration is e;tended to its opinion unless
there is an a#use or improvident e;ercise of authority.
Commissioner of Internal Revenue vs. ,eneral 5oods =!hils.>% Inc.% ,.R. $o.
-.1?/2% 4pril 2.% 2001
Sec. 2 - Power o# Co))"ss"oner !o Ma*e Assess)en!s
#!$ %xamination of Returns and Determination of Tax Due" : 4fter a return has
#een filed as required under the provisions of this Code% the Commissioner or his
duly authori<ed representative may authori<e the e;amination of any ta;payer
and the assessment of the correct amount of ta;@ &rovided, however' That failure
to file a return shall not prevent the Commissioner from authori<ing the
e;amination of any ta;payer.
The ta; or any deficiency ta; so assessed shall #e paid upon notice and demand
from the Commissioner or from his duly authori<ed representative.
4ny return% statement of declaration filed in any office authori<ed to receive the
same shall not #e withdrawn@ &rovided, That within three =1> years from the date
of such filing% the same may #e modified% changed% or amended@ &rovided,
further, That no notice for audit or investigation of such return% statement or
declaration has in the meantime #een actually served upon the ta;payer.
=C> !uthority to onduct Inventory(ta)ing, surveillance and to &rescribe
&resumptive *ross +ales and Receipts" : The Commissioner may% at any time
during the ta;a#le year% order inventory:taAing of goods of any ta;payer as a
#asis for determining his internal revenue ta; lia#ilities% or may place the
#usiness operations of any person% natural or *uridical% under o#servation or
surveillance if there is reason to #elieve that such person is not declaring his
correct income% sales or receipts for internal revenue ta; purposes. The findings
&age , of -.
may #e used as the #asis for assessing the ta;es for the other months or
quarters of the same or different ta;a#le years and such assessment shall #e
deemed prima facie correct.
Bhen it is found that a person has failed to issue receipts and invoices in
violation of the requirements of 6ections --1 and 21/ of this Code% or when there
is reason to #elieve that the #ooAs of accounts or other records do not correctly
reflect the declarations made or to #e made in a return required to #e filed under
the provisions of this Code% the Commissioner% after taAing into account the
sales% receipts% income or other ta;a#le #ase of other persons engaged in similar
#usinesses under similar situations or circumstances or after considering other
relevant information may prescri#e a minimum amount of such gross receipts%
sales and ta;a#le #ase% and such amount so prescri#ed shall #e prima facie
correct for purposes of determining the internal revenue ta; lia#ilities of such
person.
=D> !uthority to Terminate Taxable &eriod" : Bhen it shall come to the Anowledge
of the Commissioner that a !a0+a,er "s re!"r"n( #ro) /s"ness s/3ec! !o !a0%
or is "n!end"n( !o &ea'e !$e P$"&"++"nes or !o re)o'e $"s +ro+er!, !$ere#ro)
or to $"de or concea& $"s +ro+er!,% or is +er#or)"n( an, ac! !end"n( !o
o/s!rc! !$e +roceed"n(s #or !$e co&&ec!"on o# !$e !a0 for the past or current
quarter or year or to render the same totally or partly ineffective unless such
proceedings are #egun immediately% the Commissioner shall declare the ta;
period of such ta;payer terminated at any time and shall send the ta;payer a
notice of such decision% together with a request for the immediate payment of the
ta; for the period so declared terminated and the ta; for the preceding year or
quarter% or such portion thereof as may #e unpaid% and said ta;es shall #e due
and paya#le immediately and shall #e su#*ect to all the penalties hereafter
prescri#ed% unless paid within the time fi;ed in the demand made #y the
Commissioner.
=C> !uthority of the ommissioner to &rescribe Real &roperty /alues" : The
Commissioner is here#y authori<ed to divide the !hilippines into different <ones
or areas and shall% upon consultation with competent appraisers #oth from the
private and pu#lic sectors% determine the fair marAet value of real properties
located in each <one or area. 5or purposes of computing any internal revenue
ta;% the value of the property shall #e% whichever is the higher of@
=-> the fair marAet value as determined #y the Commissioner% or
=2> the fair marAet value as shown in the schedule of values of the !rovincial and
City 4ssessors.

=5> !uthority of the ommissioner to in0uire into Ban) Deposit !ccounts" :
$otwithstanding any contrary provision of Repu#lic 4ct $o. -.08 and other
general or special laws% the Commissioner is here#y authori<ed to inquire into
the #anA deposits of@
&age 1 of -.
=-> a decedent to determine his gross estateD and
=2> any ta;payer who has filed an application for compromise of his ta; lia#ility
under 6ec. 20. =4> =2> of this Code #y reason of financial incapacity to pay his
ta; lia#ility.
In case a ta;payer files an application to compromise the payment of his ta;
lia#ilities on his claim that his financial position demonstrates a clear ina#ility to
pay the ta; assessed% his application shall not #e considered unless and until he
wa"'es "n wr"!"n( $"s +r"'"&e(e nder Re+/&"c Ac! No. 4156 or under other
general or special laws% and such waiver shall constitute the a!$or"!, o# !$e
Co))"ss"oner !o "n."re "n!o !$e /an* de+os"!s o# !$e !a0+a,er.
=,> !uthority to !ccredit and Register Tax !gents" : The Commissioner shall
accredit and register% #ased on their professional competence% integrity and
moral fitness% individuals and general professional partnerships and their
representatives who prepare and file ta; returns% statements% reports% protests%
and other papers with or who appear #efore% the Bureau for ta;payers. Bithin
one hundred twenty =-20> days from January -% -997% the Commissioner shall
create national and regional accreditation #oards% the mem#ers of which shall
serve for three =1> years% and shall designate from among the senior officials of
the Bureau% one =-> chairman and two =2> mem#ers for each #oard% su#*ect to
such rules and regulations as the 6ecretary of 5inance shall promulgate upon the
recommendation of the Commissioner.
Individuals and general professional partnerships and their representatives who
are denied accreditation #y the Commissioner and/or the national and regional
accreditation #oards may appeal such denial to the 6ecretary of 5inance% who
shall rule on the appeal within si;ty =?0> days from receipt of such appeal. 5ailure
of the 6ecretary of 5inance to rule on the 4ppeal within the prescri#ed period
shall #e deemed as approval of the application for accreditation of the appellant.
='> !uthority of the ommissioner to &rescribe !dditional &rocedural or
Documentary Re0uirements" : The Commissioner may prescri#e the manner of
compliance with any documentary or procedural requirement in connection with
the su#mission or preparation of financial statements accompanying the ta;
returns.
%andamus may not lie against the Commissioner to compel him to impose a tax
assessment.
6ince the office of the Commissioner of Internal Revenue is charged with the
administration of revenue laws% which is the primary responsi#ility of the
e;ecutive #ranch of the government% )anda)s )a, no! &"e a(a"ns! !$e
Co))"ss"oner !o co)+e& $") !o ")+ose a !a0 assess)en! no! #ond /, $")
!o /e de or +ro+er #or !$a! wo&d /e !an!a)on! !o a sr+a!"on o#
e0ec!"'e #nc!"ons. 6uch discretionary power vested in the proper e;ecutive
official% in the a#sence of ar#itrariness or grave a#use so as to go #eyond the
statutory authority% is not su#*ect to the contrary *udgment or control of others.
&age 2 of -.
)eralco 6ecurities Corp. vs. Eictorino 6avellano% et al.% ,.R. $o. +:1?-7-%
cto#er 21% -972
The power to collect forest charges rests with BIR! not with Bureau of #orestry.
5orest charges are internal revenue ta;es and the sole power and duty to collect
the same is lodged with the Bureau of Internal Revenue and not with the Bureau
of 5orestry. The computation and/or assessment of forest charges made #y the
Bureau of 5orestry may or may not #e adopted #y the Commissioner of Internal
Revenue and such computation made #y the Bureau of 5orestry is not
appeala#le to the Court of Ta; 4ppeals.
)am#ulao +um#er Company vs. Repu#lic of the !hil.% ,.R. $o. +:1/0?-%
6eptem#er 8% -97.
Sec. 2 7%8 - Fa"&re !o S/)"! Re."red Re!rns
=B> Failure to +ubmit Re0uired Returns, +tatements, Reports and other
Documents" : Bhen a report required #y law as a #asis for the assessment of
any national internal revenue ta; shall not #e forthcoming within the time fi;ed #y
laws or rules and regulations or when there is reason to #elieve that any such
report is false% incomplete or erroneous% the Commissioner shall assess the
proper ta; on the #est evidence o#taina#le.
In case a person fails to file a required return or other document at the time
prescri#ed #y law% or willfully or otherwise files a false or fraudulent return or
other document% the Commissioner shall maAe or amend the return from his own
Anowledge and from such information as he can o#tain through testimony or
otherwise% which shall #e prima facie correct and sufficient for all legal purposes.
&hen the rule on 'best evidence obtainable' applies.
The law is specific and clear. The rule on the 3#est evidence o#taina#le3 applies
w$en a !a0 re+or! re."red /, &aw #or !$e +r+ose o# assess)en! "s no!
a'a"&a/&e or w$en !$e !a0 re+or! "s "nco)+&e!e or #rad&en!. Thus% the
persistent failure of the decedent and the ta;payer to present their #ooAs of
accounts for e;amination for the ta;a#le years involved left the Commissioner of
Internal Revenue no other legal option e;cept to report to the power conferred
upon him under 6ection -? of the Ta; Code.
Bonifacia 6y !o vs. Court of Ta; 4ppeals% et al.% ,.R. $o. +:7-..?% 4ugust -7%
-977
Sec. 22 - De#"n"!"ons 7%8 - 9cor+ora!"on:
The term 'corporation' shall include +ar!ners$"+s% no matter how created or
organi<ed% *oint:stocA companies% *oint accounts =cuentas en participacion>%
assoc"a!"on% or "nsrance companies% #ut does not include general professional
partnerships and a *oint venture or consortium formed for the purpose of
undertaAing construction pro*ects or engaging in petroleum% coal% geothermal and
&age 3 of -.
other energy operations pursuant to an operating consortium agreement under a
service contract with the ,overnment .
4*eneral professional partnerships5 are partnerships formed #y persons for the
sole purpose of e;ercising their common profession% no part of the income of
which is derived from engaging in any trade or #usiness.
To #e ta;ed% a *oint venture need not #e constituted in accordance with usual
legal requirements.
&hat constitutes a (partnership) under $merican law.
Fnder 4merican law% the term GpartnershipG includes a syndicate% group% pool%
*oint venture or other unincorporated organi<ation% through or #y means of which
any #usiness% financial operation% or venture is carried on. 5or purposes of the
ta; on corporations% our $ational Internal Revenue Code% includes these
partnerships H with the e;ception only of duly registered general copartnerships
H within the purview of the term 3corporation.3
Cufemia Cvangelista vs. Collector of Internal Revenue% et al.% ,.R. $o. +:999?%
cto#er -8% -98/
Tax on income of insurance pool is different from tax on dividends received by individual
corporate entities.
4n insurance pool is a ta;a#le entity distinct from the individual corporate entities
of the ceding companies. The ta; on its income is o#viously different from the ta;
on the dividends received #y the said companies. Clearly% there is no dou#le
ta;ation here.
4fisco Insurance Corp.% et al. vs. Court of 4ppeals% et al.% ,.R. $o. --2?/8%
January 28% -999
*nregistered partnerships and associations are included in the concept of
(corporations).
The !hilippine legislature included in the concept of corporations those entities
that resem#led them such as unregistered partnerships and associations.
!arenthetically% the $+RCGs inclusion of such entities in the ta; on corporations
was made even clearer #y the Ta; Reform 4ct of -99/.
4fisco Insurance Corp.% et al. vs. Court of 4ppeals% et al.% ,.R. $o. --2?/8%
January 28% -999
+ersonality is not a condition precedent to the existence of partnerships.
The term GcorporationG includes among others% *oint accounts =cuentas en
participacion> and associations% none of which has a legal personality of its own%
independent of that of its mem#ers. The lawmaAers could not have regarded
personality as a condition precedent to the e;istence of partnerships referred to
therein.
&age - of -.
5lorencio Reyes% et al. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:
2.020:2-% July 29% -9?7
Sec. 22 7T8 - 9Secr"!"es:
The term 'securities' means shares of stoc) in a corporation and rights to subscribe for or to receive such shares" The
term includes bonds, debentures, notes or certificates, or other evidence or indebtedness, issued by any corporation,
including those issued by a government or political subdivision thereof, with interest coupons or in registered form"
"hares of stoc, are ordinary assets only to a dealer in securities.
6hares of stocA% liAe the other securities defined in the $IRC% would #e ordinary assets only to a
dealer in securities or a person engaged in the purchase and sale of% or an active trader =for his
own account> in% securities. In the hands% however% of another who holds the shares of stocA #y
way of an investment% the shares to him would #e capital assets. Bhen the shares held #y such
investor #ecome worthless% the loss is deemed to #e a loss from the sale or e;change of capital
assets.
China BanAing Corp. vs. Court of 4ppeals% et al.% ,.R. $o. -28807% July -9% 2000
Sec. 22 7U8 - 9Dea&er "n secr"!"es:
The term 'dealer in securities' means a merchant of stoc)s or securities, whether an individual, partnership or
corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof
to customers' that is, one who, as a merchant, buys securities and re(sells them to customers with a view to the gains and
profits that may be derived therefrom"
-.uity investment is capital! not ordinary! asset.
4n equity investment is a capital% not ordinary% asset of the investor the sale or e;change of which
results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property
sold or e;changed is not a capital asset. Thus% shares of stocA% liAe the other securities defined in
6ection 20=t> . of the $IRC% would #e ordinary assets only to a dealer in securities or a person
engaged in the purchase and sale of% or an active trader =for his own account> in% securities.
Sec. 22 7;8 - 9Ord"nar, &oss:
The term 5ordinary income5 includes any gain from the sale or exchange of property which is not a capital asset or
property described in +ection 16#!$#7$" !ny gain from the sale or exchange of property which is treated or considered,
under other provisions of this Title, as 8ordinary income8 shall be treated as gain from the sale or exchange of property
which is not a capital asset as defined in +ection 16#!$#7$" The term 8ordinary loss8 includes any loss from the sale or
exchange of property which is not a capital asset" !ny loss from the sale or exchange of property which is treated or
considered, under other provisions of this Title, as 8ordinary loss8 shall be treated as loss from the sale or exchange of
property which is not a capital asset"
4n equity investment is a capital% not ordinary% asset of the investor the sale or e;change of which
results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property
sold or e;changed is not a capital asset.
Sec. 2< - =enera& Pr"nc"+&es o# Inco)e Ta0a!"on
%xcept when otherwise provided in this ode9
#!$ ! citi:en of the &hilippines residing therein is taxable on all income derived from sources within and without
the &hilippines'
#B$ ! nonresident citi:en is taxable only on income derived from sources within the &hilippines'
#$ !n individual citi:en of the &hilippines who is wor)ing and deriving income from abroad as an overseas
contract wor)er is taxable only on income derived from sources within the &hilippines9 &rovided, That a seaman
who is a citi:en of the &hilippines 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 wor)er'
&age ; of -.
#D$ !n alien individual, whether a resident or not of the &hilippines, is taxable only on income derived from
sources within the &hilippines'
#%$ ! domestic corporation is taxable on all income derived from sources within and without the &hilippines' and
#F$ ! foreign corporation, whether engaged or not in trade or business in the &hilippines, is taxable only on
income derived from sources within the &hilippines"
!rinciple of estoppel does not operate against the government for neglect or omission of its
officials tasAed to collect ta;es.
Taxes are the lifeblood of the government.
Ta;es are the life#lood of the government and so should #e collected without unnecessary
hindrance. n the other hand% such collection should #e made in accordance with law as any
ar#itrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the ta;payers so that the real
purpose of ta;ation% which is the promotion of the common good% may #e achieved.
Commissioner of Internal Revenue% et al. vs. Court of 4ppeals% et al.% ,.R. $o. --9122% June .%
-99?
"ymbiotic relationship between government and people is the rationale of taxation.
It is said that ta;es are what we pay for civili<ed society. Bithout ta;es% the government would #e
paraly<ed for the lacA of the motive power to activate and operate it. 'ence% despite the natural
reluctance to surrender part of oneGs hard:earned income to ta;ing authorities% every person who
is a#le to must contri#ute his share in the running of the government. The government for its part
is e;pected to respond in the form of tangi#le and intangi#le #enefits intended to improve the
lives of the people and enhance their moral and material values. This sym#iotic relationship is the
rationale of ta;ation and should dispel the erroneous notion that it is an ar#itrary method of
e;action #y those in the seat of power.
Commissioner of Internal Revenue vs. 4lgue% et al.% ,.R. $o. +:2779?% 5e#ruary -/% -977
/bligation to pay taxes rests upon the necessity of money for the support of the state.
The o#ligation to pay ta;es rests not upon the privileges en*oyed #y% or the protection afforded to%
a citi<en #y the government% #ut upon the necessity of money for the support of the state. 5or this
reason% no one is allowed to o#*ect to or resist the payment of ta;es solely #ecause no personal
#enefit to him can #e pointed out. Bhile courts will not enlarge% #y construction% the governmentGs
power of ta;ation% they also will not place upon ta; laws so loose a construction as to permit
evasions on merely fanciful and insu#stantial distinctions. Bhen proper% a ta; statute should #e
construed to avoid the possi#ilities of ta; evasion. Construed this way% the statute% without
resulting in in*ustice to the ta;payer% #ecomes fair to the government.
!a#lo +oren<o vs. Juan !osadas% Jr.% ,.R. $o. .1072% June -7% -91/
The power to tax is an attribute of sovereignty.
The power to ta; is an attri#ute of sovereignty. It is a power emanating from necessity. It is a
necessary #urden to preserve the 6tateGs sovereignty and a means to give the citi<enry an army
to resist an aggression% a navy to defend its shores from invasion% a corps of civil servants to
serve% pu#lic improvements designed for the en*oyment of the citi<enry and those which come
within the 6tateGs territory% and facilities and protection which a government is supposed to
provide.
!hilippine ,uaranty Co.% Inc. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:220/.%
4pril 10% -9?8
-very person who is able to must contribute his share in the running of the government.
&age . of -.
paraly<ed for lacA of the motive power to activate and operate it. 'ence% despite the natural
reluctance to surrender part of oneGs hard:earned income to the ta;ing authorities% every person
who is a#le to must contri#ute his share in the running of the government. The government for its
part% is e;pected to respond in the form of tangi#le and intangi#le #enefits intended to improve
the lives of the people and enhance their moral and material values. This sym#iotic relationship is
the rationale of ta;ation and should dispel the erroneous notion that it is an ar#itrary method of
e;action #y those in the seat of power.
+ower of taxation must be exercised reasonably and in accordance with prescribed
procedure.
a> But even as the inevita#ility and indispensa#ility of ta;ation is conceded% it is a requirement in
all democratic regimes that it #e e;ercised reasona#ly and in accordance with the prescri#ed
procedure. If it is not% then the ta;payer has a right to complain and the courts will then come to
his succor. 5or all the awesome power of the ta; collector% he may still #e stopped in his tracAs if
the ta;payer can demonstrate . . . that the law has not #een o#served. Thus while 3ta;es are the
life#lood of the government%3 the power to ta; has its limits% inspite of all its plenitude.
Commissioner of Internal Revenue% et al. vs. Court of 4ppeals% et al.% ,.R. $o. --9122% June .%
-99?
#> Ta;es are the life#lood of the government and so should #e collected without unnecessary
hindrance. n the other hand% such collection should #e made in accordance with law as any
ar#itrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the ta;payers so that the real
purpose of ta;ation% which is the promotion of the common good% may #e achieved.
The power to tax is not the power to destroy.
Ta;ation is said to #e equita#le when its #urden falls on those #etter a#le to pay. Ta;ation is
progressive when its rate goes up depending on the resources of the person affected. The power
to ta; 3is an attri#ute of sovereignty3. In fact% it is the strongest of all the powers of government.
But for all its plenitude% the power to ta; is not unconfined as there are restrictions. 4dversely
effecting as it does property rights% #oth the due process and equal protection clauses of the
Constitution may properly #e invoAed to invalidate in appropriate cases a revenue measure. If it
were otherwise% there would #e truth to the -901 dictum of Chief Justice )arshall that 3the power
to ta; involves the power to destroy.3 The we# or unreality spun from )arshallGs famous dictum
was #rushed away #y one stroAe of )r. Justice 'olmesG pen% thus@ 3The power to ta; is not the
power to destroy while this Court sits.3 36o it is in the !hilippines.3
4ntero ). 6ison% Jr. vs. Ru#en B. 4ncheta% et al.% ,.R. $o. +:89.1-% July 28% -97.
Tax laws must operate e.ually and uniformly on all persons under similar circumstances.
The ta;ing power has the authority to maAe a reasona#le and natural classification for purposes
of ta;ation #ut the governmentGs act must not #e prompted #y a spirit of hostility% or at the very
least discrimination that finds no support in reason. It suffices then that the laws operate equally
and uniformly on all persons under similar circumstances or that all persons must #e treated in
the same manner% the conditions not #eing different #oth in the privileges conferred and the
lia#ilities imposed.
Jose B.+. Reyes vs. !edro 4lman<or% et al.% ,.R. $os. .9719:.?% 4pril 2?% -99-
Laws granting tax exemption are construed strictissimi uris
&age 6 of -.
a> The settled rule in this *urisdiction is that laws granting e;emption from ta; are construed
strictissimi *uris against the ta;payer and li#erally in favor of the ta;ing power. Ta;ation is the rule
and e;emption is the e;ception. The effect of an e;emption is equivalent to an appropriation.
'ence% a claim for e;emption from ta; payments must #e clearly shown and #ased on language
in the law too plain to #e mistaAen.
+ung Center of the !hil. vs. Iue<on City% et al.% ,.R. $o. -..-0.% June 29% 200.
#> This Court has laid down the rule that 3as the power of ta;ation is a high prerogative of
sovereignty% the relinquishment is never presumed and any reduction or diminution thereof with
respect to its mode or its rate% must #e strictly construed% and the same must #e couched in clear
and unmistaAa#le terms in order that it may #e applied.3 )ore specifically stated% the general rule
is that any claim for e;emption from the ta; statute should #e strictly construed against the
ta;payer
+u<on 6tevedoring Corp. vs. Court of Ta; 4ppeals% et al.% ,.R. $o. +:10212% July 29% -977
Tax amnesty is construed strictly against the taxpayer.
4 ta; amnesty% much liAe a ta; e;emption% is never favored nor presumed in law and if granted #y
statute% the terms of the amnesty liAe that of a ta; e;emption must #e construed strictly against
the ta;payer and li#erally in favor of the ta;ing authority.
Bi#iano E. BaJas% Jr. vs. Court of 4ppeals% et al.% ,.R. $o. -029?/% 5e#ruary -0% 2000
Tax exemptions are not violative of the e.ual protection clause.
4 ta; is uniform when it operates with the same force and effect in every place where the su#*ect
of it is found. Fniformity means that all property #elonging to the same class shall #e ta;ed aliAe.
The +egislature has the inherent power not only to select the su#*ects of ta;ation #ut to grant
e;emptions. Ta; e;emptions have never #een deemed violative of the equal protection clause.
Commissioner of Internal Revenue vs. +ingayen ,ulf Clectric !ower Co.% Inc.% ,.R. $o. +:21//-%
4ugust .% -977
0rant of tax exemption to 1ational +ower Corp. is not a case of tax evasion.
This ta; e;emption is intended not only to insure that the $!C shall continue to generate
electricity for the country #ut more importantly% to assure cheaper rates to #e paid #y the
consumers. The allegation that this is in effect allowing ta; evasion #y oil companies is not quite
correct. There are various arrangements in the payment of crude oil purchased #y $!C from oil
companies. ,enerally% the customs duties paid #y the oil companies are added to the selling
price paid #y $!C. 4s to the specific and ad valorem ta;es% they are added as part of the sellerGs
price% #ut $!C pays the price net of ta;% on condition that $!C would seeA a ta; refund to the oil
companies. $o ta; component on fuel had #een charged or recovered #y $!C from the
consumers through its power rates. Thus% this is not a case of ta; evasion of the oil companies
#ut of ta; relief for the $!C.
Crnesto ). )aceda vs. Catalino )acaraig% Jr.% et al.% ,.R. $o. 7729-% )ay 1-% -99-
Tax exemption provision in a treaty should be construed in favor of the party for whose
benefit the stipulation was inserted.
Bhere two meanings of a stipulation are admissi#le% that which is least to the advantage of the
party for whose #enefit the stipulation was inserted in the treaty should #e preferred. Thus% an
am#iguity in the ta; e;emption provision in the )ilitary Bases 4greement and in the 34ide
)emoire3 in accordance with which a contract was entered into% cannot #e interpreted in favor of
the 4merican ,overnment or for that matter a party claiming under it% liAe a ta;payer% especially
when it is considered that for the !hilippine ,overnment 3the e;ception contained in ta; statutes
must #e strictly construed against the one claiming e;emption and that he who would seeA to #e
&age 7< of -.
thus privileged must *ustify it #y words too plain to #e mistaAen and too categorical to #e
misinterpreted.3
Commissioner of Internal Revenue vs. !. J. Kiener Co.% +td.% et al.% ,.R. $o. +:2./8.% July -7%
-9/8
Re.uisites for availment of tax exemption under R+2*" %ilitary Bases $greement.
In order to avail oneself of the ta; e;emption under the R!:F6 )ilitary Bases 4greement@ he
must #e a national of the Fnited 6tates employed in connection with the construction%
maintenance% operation or defense of the #ases% residing in the !hilippines #y reason of such
employment% and the income derived is from the F.6. ,overnment
Commissioner of Internal Revenue vs. 5ranA Ro#ertson% et al.% ,.R. $os. +:/0--?:-9% 4ugust -2%
-97?
-mployees3 claims prevail over government3s claims only in case of ban,ruptcy or udicial
li.uidation of the employer.
There is no merit in the contention of the $+RC that ta;es are a#solutely preferred claims only
with respect to mova#le or immova#le properties on which they are due and that since the ta;es
sought to #e collected in the case are not due on the #arges in question% the governmentGs claim
cannot prevail over the claims of employees of the )aritime Company of the !hilippines which%
pursuant to 4rt. --0 of the +a#or Code% 3en*oy first preference.3 4rt. --0 of the +a#or Code on
worAer preference in case of #anAruptcy applies only in case of #anAruptcy or *udicial liquidation
of the employer. This is clear from the te;t of the law. This case does not involve the liquidation of
the employerGs #usiness.
Commissioner of Internal Revenue vs. $+RC% et al.% ,.R. $o. /.9?8% $ovem#er 9% -99.
"tate3s underta,ing to guarantee promissory notes does not diminish its taxing power.
4n undertaAing of the Repu#lic of the !hilippines signed #y the 6ecretary of 5inance in each of
the promissory notes merely guaranteed the o#ligations of the $DC #ut without diminution of its
ta;ing power under e;isting laws.
$ational Development Company vs. Commissioner of Internal Revenue% ,.R. $o. +:819?-% June
10% -97/
%ere filing of tax amnesty does not ipso facto shield taxpayer from immunity against
prosecution.
The mere filing of ta; amnesty return under !.D. -/.0 and -7.0 does not ipso facto shield
ta;payer from immunity against prosecution. Ta; amnesty is a general pardon to ta;payers who
want to start a clean ta; slate. It also gives the government a chance to collect uncollected ta;
from ta; evaders without having to go through the tedious process of a ta; case. To avail of a ta;
amnesty granted #y the government% and to #e immune from suit on its delinquencies% the
ta;payer must have voluntarily disclosed his previously unta;ed income and must have paid the
corresponding ta; on such previously unta;ed income.
Bi#iano E. BaJas% Jr. vs. Court of 4ppeals% et al.% ,.R. $o. -029?/% 5e#ruary -0% 2000
+rinciple of estoppel does not operate against the government for neglect or omission of
its officials tas,ed to collect taxes.
Ta;es are the life#lood of the ,overnment and their prompt and certain availa#ility are imperious
need. Fpon ta;ation depends the ,overnmentGs a#ility to serve the people for whose #enefit
ta;es are collected. To safeguard such interest% neglect or omission of government officials
entrusted with the collection of ta;es should not #e allowed to #ring harm or detriment to the
people% in the same manner as private persons may #e made to suffer individually on account of
his own negligence% the presumption #eing that they taAe good care of their personal affair. This
should not hold true to government officials with respect to matters not of their own personal
&age 77 of -.
concern. This is the philosophy #ehind the governmentGs e;ception% as a general rule% from the
operation of the principle of estoppel.
)isael !. Eera% et al. vs. Jose 5. 5ernande<% et al.% ,.R. $o. +:1-1?.% )arch 10% -9/9
4tlas Consolidated )ining L Development Corp. vs. Commissioner of Internal Revenue% ,.R. $o.
+:2?9--% January 2/% -97-
Sec. 21 7%8 728 - Cas$ and>or Pro+er!, D"'"dends
Cas$ and>or Pro+er!, D"'"dends : 4 final ta; at the following rates shall #e imposed upon the cash and/or
property dividends actually or constructively received #y an individual from a domestic corporation or from a
*oint stocA company% insurance or mutual fund companies and regional operating headquarters of multinational
companies% or on the share of an individual in the distri#uta#le net income after ta; of a partnership =e;cept a
general professional partnership> of which he is a partner% or on the share of an individual in the net income
after ta; of an association% a *oint account% or a *oint venture or consortium ta;a#le as a corporation of which he
is a mem#er or co:venturer@

6i; percent =?M> #eginning January -% -997D
Cight percent =7M> #eginning January -% -999D and
Ten percent =-0M #eginning January -% 2000.
!rovided% however% that the ta; on dividends shall apply only on income earned on or after January -% -997.
Income forming part of retained earnings as of Decem#er 1-% -99/ shall not% even if declared or distri#uted on
or after January -% -997% #e su#*ect to this ta;.
/rdinary dividends distinguished from li.uidated dividends.
The determining element therefore is whether the distri#ution was in the ordinary course of
#usiness and with intent to maintain the corporation as a going concern% or after deciding to quit
with intent to liquidate the #usiness. The distinction #etween a distri#ution in liquidation and an
ordinary dividend is factualD the result in each case depending on the particular circumstances of
the case and the intent of the parties. If the distri#ution is in the nature of a recurring return on
stocA it is an ordinary dividend. 'owever% if the corporation is really winding up its #usiness or
recapitali<ing and narrowing its activities% the distri#ution may properly #e treated as in complete
or partial liquidation and as payment #y the corporation to the stocAholder for his stocA. The
corporation is% in the latter instances% wiping out all or part of the stocAholdersG interest in the
company.
Bise L Co.% Inc. vs. Bi#iano +. )eer% ,.R. $o. .721-% June 10% -9./
Sec. 22 - Ta0 L"a/"&"!, o# Me)/ers o# =enera& Pro#ess"ona& Par!ners$"+s
! general professional partnership as such shall not be subject to the income tax imposed under this hapter" &ersons
engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate
and individual capacities"
For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in
the same manner as a corporation"
%ach partner shall report as gross income his distributive share, actually or constructively received, in the net income of
the partnership"
Income tax is imposed on the partners! not on the professional partnership.
4 general professional partnership% unliAe an ordinary #usiness partnership =which is treated as a
corporation for income ta; purposes and so su#*ect to the corporate income ta;>% is not itself an
income ta;payer. The income ta; is imposed not on the professional partnership% which is ta;
e;empt% #ut on the partners themselves in their individual capacity computed on their distri#utive
shares of partnership profits. The general professional partnership is deemed to #e no more than
a mere mechanism or a flow:through entity in the generation of income #y% and the ultimate
distri#ution of such income to% respectively% each of the individual partners.
Rufino R. Tan vs. Ramon R. del Rosario% Jr.% et al.% ,.R. $o. -09279% cto#er 1% -99.
Sec. 2?7 C8 - =o'ern)en!-owned or -con!ro&&ed cor+ora!"ons
&age 7, of -.
The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the *overnment, except the *overnment +ervice Insurance +ystem #*+I+$, the
+ocial +ecurity +ystem #+++$, the &hilippine =ealth Insurance orporation #&=I$, the &hilippine harity +weepsta)es
>ffice #&+>$ and the &hilippine !musement and *aming orporation #&!*>R$, shall pay such rate of tax upon their
taxable income as are imposed by this +ection upon corporations or associations engaged in similar business, industry,
or activity"
Tax exemptions should be strictly construed against those claiming to be .ualified
thereto.
The !hilippine Casino perators Corporation =!CC> is not e;empt from the payment of duties%
ta;es and other imposts on importations despite its concessionaireGs contract with the !hilippine
4musement and ,aming Corporation =!4,CR>. Fnder B.!. Blg. -0?/:B% as amended% full
e;emption from the payment of importation:related ta;es is granted to !4,CR H and no other
H irrespective of the type of article imported. Bhile it grants e;emption not only to !4,CR #ut
also to 3any corporation having e;isting contractual arrangements with it%3 the e;emption covers
only the importation of vessels and/or accessory ferry #oats. It is settled that ta; e;emptions
should #e strictly construed against those claiming to #e qualified thereto.
Commissioner of Customs vs. Court of Ta; 4ppeal% et al.% ,.R. $o. -12929% )arch 2/% 2000
+$0C/R is exempt from local taxes.
!4,CR has a dual role% to operate and to regulate gam#ling casinos. The latter role is
governmental% which places it in the category of an agency or instrumentality of the ,overnment.
Being an instrumentality of the ,overnment% !4,CR should #e and actually is e;empt from
local ta;es. therwise% its operation might #e #urdened% impeded or su#*ected to control #y a
mere local government.
'um#erto Basco% et al. vs. !4,CR% ,.R. $o. 9-?.9% )ay -.% -99-
Sec. 2@ 7A8 748 - Ta0 on Res"den! Fore"(n Cor+ora!"on
Tax on Resident Foreign orporations" (
#7$ In *eneral" ( %xcept as otherwise provided in this ode, a corporation organi:ed, authori:ed, or existing
under the laws of any foreign country, engaged in trade or business within the &hilippines, shall be subject to
an income tax e0uivalent to thirty(five percent #13?$ of the taxable income derived in the preceding taxable
year from all sources within the &hilippines9 &rovided, That effective @anuary 7, 766., the rate of income tax
shall be thirty(four percent #12?$' effective @anuary 7, 7666, the rate shall be thirty(three percent #11?$, and
effective @anuary 7, ,<<< and thereafter, the rate shall be thirty(two percent #1,?$"
In the case of corporations adopting the fiscal(year accounting period, the taxable income shall be computed
without regard to the specific date when sales, purchases and other transactions occur" Their income and
expenses for the fiscal year shall be deemed to have been earned and spent e0ually for each month of the
period"
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of
months covered by the new rates within the fiscal year by the taxable income of the corporation for the period,
divided by twelve"
&rovided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent
#73?$ on gross income under the same conditions, as provided in +ection ,; #!$"
&hat constitutes 'doing' or 'engaging in' or 'transacting' business.
There is no specific criterion as to what constitutes 3doing3 or 3engaging in3 or 3transacting3
#usiness. Cach case must #e *udged in the light of its peculiar environmental circumstances. The
term implies a continuity of commercial dealings and arrangements% and contemplates% to that
e;tent% the performance of acts or worAs or the e;ercise of some of the functions normally
incident to% and in progressive prosecution of commercial gain or for the purpose and o#*ect of
the #usiness organi<ation. 3In order that a foreign corporation may #e regarded as doing #usiness
within a 6tate% there must #e continuity of conduct and intention to esta#lish a continuous
#usiness% such as the appointment of a local agent% and not one of a temporary character.G
&age 71 of -.
Commissioner of Internal Revenue vs. British verseas 4irways Corp.% et al.% ,.R. $os. +:?8//1:
/.% 4pril 10% -97/
Business transactions of a foreign corporation must be continuous.
In order that a foreign corporation may #e considered engaged in trade or #usiness% its #usiness
transactions must #e continuous. 4 casual #usiness activity in the !hilippines #y a foreign
corporation% as in the present case% does not amount to engaging in trade or #usiness in the
!hilippines for income ta; purposes.
$.E. Reederi* 34msterdam3% et al. vs. Commissioner of Internal Revenue% ,.R. $o. +:.?029% June
21% -977
$ single corporation cannot be both a resident and a non2resident corporation.
4 single corporate entity cannot #e #oth a resident and a non:resident corporation depending on
the nature of the particular transaction involved. 4ccordingly% whether the dividends are paid
directly to the head office or coursed through its local #ranch is of no moment for after all% the
head office and the office #ranch constitute #ut one corporate entity% the )aru#eni Corporation%
which% under #oth !hilippine ta; and corporate laws% is a resident foreign corporation #ecause it
is transacting #usiness in the !hilippines.
)aru#eni Corp. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. /?8/1% 6eptem#er -.%
-979
#oreign airline company selling tic,et in the +hilippines through local agent is considered
a resident foreign corporation doing business in the +hilippines.
There #eing no dispute that J4+ constituted !4+ as local agent to sell its airline ticAets% there can
#e no conclusion other than that J4+ is a resident foreign corporation% doing #usiness in the
!hilippines. Indeed% the sale of ticAets is the very life#lood of the airline #usiness% the generation
of sales #eing the paramount o#*ective.
Commissioner of Internal Revenue vs. Japan 4ir +ines% et al.% ,.R. $o. ?0/-.% cto#er .% -99-
0rant of license to foreign corporation merely gives legitimacy to its doing business here.
It is not really the grant of a license to a foreign corporation to do #usiness in this country that
maAes it a residentD the license merely gives legitimacy to its doing #usiness here. Bhat
effectively maAes such a foreign corporation a resident corporation in the !hilippines is its
actually #eing in the !hilippines and licitly doing #usiness here.
6tate Investment 'ouse% Inc.% et al. vs. Citi#anA% et al.% ,.R. $os. /992?:2/% cto#er -/% -99-
&hat constitutes (residence) of a corporation.
The same principle is recogni<ed in 4merican law@ that the 3residence of a corporation% if it can #e
said to have a residence% is necessarily where it e;ercises corporate functions . . D3 that it is
considered as dwelling 3in the place where its #usiness is done . . %3 as #eing 3located where its
franchises are e;ercised . . %3 and as #eing 3present where it is engaged in the prosecution of the
corporate enterpriseD3 that a 3foreign corporation licensed to do #usiness in a state is a resident of
any country where it maintains an office or agent for transaction of its usual and customary
#usiness for venue purposesD3 and that the 3necessary element in its signification is locality of
e;istence.3 Courts have held that 3a domestic corporation is regarded as having a residence
within the state at any place where it is engaged in the particulars of the corporate enterprise% and
not only at its chief place or home officeD3 that 3a corporation may #e domiciled in one state and
resident in anotherD its legal domicile in the state of its creation presents no impediment to its
residence in a real and practical sense in the state of its #usiness activities.3 The foregoing
propositions are in accord with the dictionary concept of residence as applied to *uridical persons%
a term which appears to comprehend permanent as well as temporary residence.
6tate Investment 'ouse% Inc.% et al. vs. Citi#anA% et al.% ,.R. $os. /992?:2/% cto#er -/% -99-
&age 72 of -.
+lace of activity prevails over place of business of the foreign corporation.
Business implies continuity and progression of transactions while activity may consist of only a
single transaction. 4n activity may occur outside the place of #usiness. 6ection 2. of the Ta;
Code does not require a foreign corporation to engage in #usiness in the !hilippines in su#*ecting
its income to ta;. It suffices that the activity creating the income is performed or done in the
!hilippines. Bhat is controlling% therefore% is not the place of #usiness #ut the place of activity that
created an income.
The !hilippine ,uaranty Co.% Inc. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:
220/.% 4pril 10% -9?8
Sec. 2@ 7A8 7<8 7a8 - In!erna!"ona& A"r Carr"er
International arrier" ( !n international carrier doing business in the &hilippines shall pay a tax of two and one(
half percent #, 7A,?$ on its 5*ross &hilippine Billings5 as defined hereunder9
#a$ International !ir arrier" ( 5*ross &hilippine Billings5 refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the &hilippines in
a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the tic)et or passage document9 &rovided, That tic)ets revalidated, exchanged andAor
indorsed to another international airline form part of the *ross &hilippine Billings if the passenger
boards a plane in a port or point in the &hilippines9 &rovided, further, That for a flight which originates
from the &hilippines, but transshipment of passenger ta)es place at any port outside the &hilippines
on another airline, only the ali0uot portion of the cost of the tic)et corresponding to the leg flown from
the &hilippines to the point of transshipment shall form part of *ross &hilippine Billings"
"ource of an income is the property! activity or service that produced the income 4+$"5
The source of an income is the property% activity or service that produced the income. 5or the
source of income to #e considered as coming from the !hilippines% it is sufficient that the income
is derived from activity within the !hilippines. The sale of ticAets in the !hilippines is the activity
that produces the income. The ticAets e;changed hands here and payments for fares were also
made here in !hilippine currency. The situs of the source of payments is the !hilippines. The flow
of wealth proceeded from% and occurred within% !hilippine territory% en*oying the protection
accorded #y the !hilippine government. In consideration of such protection% the flow of wealth
should share the #urden of supporting the government.
/.% 4pril 10% -97/
Commissioner of Internal Revenue vs. 4ir India% et al.% ,.R. $o. +:/2..1% January 29% -977
Commissioner of Internal Revenue vs. 4merican 4irlines% Inc.% et al.% ,.R. $o. ?/917% Decem#er
-9% -979
The test of taxability is the (source) or that activity which produced the income.
The a#sence of flight operations to and from the !hilippines is not determinative of the source of
income or the situs of income ta;ation. The test of ta;a#ility is the "source&D and the source of an
income is that activity which produced the income. Fnquestiona#ly% the passage documentations
were sold in the !hilippines and the revenue therefrom was derived from a #usiness activity
regularly pursued within the !hilippines. 4nd even if the ticAets sold covered the "transport of
passengers and cargo to and from foreign cities%& it cannot alter the fact that income from the sale
of ticAets was derived from the !hilippines. The word "source& conveys one essential idea% that of
origin% and the origin of the income herein is the !hilippines.
/.% 4pril 10% -97/
&age 73 of -.
Commissioner of Internal Revenue vs. 4merican 4irlines% Inc.% et al.% ,.R. $o. ?/917% Decem#er
-9% -979
Sec. 2@ 7A8 7<8 7/8 - In!erna!"ona& s$"++"n(
5*ross &hilippine Billings5 means gross revenue whether for passenger, cargo or mail originating from the &hilippines up
to final destination, regardless of the place of sale or payments of the passage or freight documents"
Income of foreign corporation engaged in transport of cargo must be sourced from the
+hilippines.
4 resident foreign corporation engaged in the transport of cargo is lia#le for ta;es depending on
the amount of income it derives from sources within the !hilippines. Thus% #efore such a ta;
lia#ility can #e enforced the ta;payer must #e shown to have earned income sourced from the
!hilippines.
Commissioner of Internal Revenue vs. ToAyo 6hipping Co. +td.% et al.% ,.R. $o. ?7282% )ay 2?%
-998
Sec. 2@ 7A8 768 - Ta0 on %ranc$ Pro#"!s Re)"!!ances
!ny profit remitted by a branch to its head office shall be subject to a tax of fifteen #73?$ which shall be based on the total
profits applied or earmar)ed for remittance without any deduction for the tax component thereof #except those activities
which are registered with the &hilippine %conomic Bone !uthority$" The tax shall be collected and paid in the same
manner as provided in +ections 3; and 3. of this ode9 provided, that interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable
year from all sources within the &hilippines shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the &hilippines"
Rationale for imposition of tax on branch profits remittances.
The remittance ta; was conceived in an attempt to equali<e the income ta; #urden on foreign
corporations maintaining% on the one hand% local #ranch offices and organi<ing% on the other
hand% su#sidiary domestic corporations where at least a ma*ority of all the latterGs shares of stocA
are owned #y such foreign corporations.
BanA of 4merica $T L 64 vs. Court of 4ppeals% et al.% ,.R. $o. -01092% July 2-% -99.
Sec. 2A 7A8 - I)+os"!"on o# I)+ro+er&, Acc)&a!ed Earn"n(s Ta0
#!$ In *eneral" ( In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the
improperly accumulated taxable income of each corporation described in +ubsection B hereof, an improperly
accumulated earnings tax e0ual to ten percent #7<?$ of the improperly accumulated taxable income"
Tax on improper accumulation of surplus is essentially a penalty tax.
The provision discouraged ta; avoidance through corporate surplus accumulation. Bhen
corporations do not declare dividends% income ta;es are not paid on the undeclared dividends
received #y the shareholders. The ta; on improper accumulation of surplus is essentially a
penalty ta; designed to compel corporations to distri#ute earnings so that the said earnings #y
shareholders could% in turn% #e ta;ed.
Cyanamid !hilippines% Inc. vs. Court of 4ppeals% et al.% ,.R. $o. -070?/% January 20% 2000
(Immediacy Test) may be used to determine the (reasonable needs) of the business.
To determine the "reasona#le needs& of the #usiness in order to *ustify an accumulation of
earnings% the Courts of the Fnited 6tates have invented the so:called "Immediacy Test& which
construed the words "reasona#le needs of the #usiness& to mean the immediate needs of the
#usiness% 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 reasona#le needs of
the #usiness% and the penalty ta; would apply.
)anila Bine )erchants% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. +:2?-.8% 5e#ruary
20% -97.
&age 7- of -.
Touchstone of liability is the purpose behind the accumulation of the income and not the
conse.uences of the accumulation.
4 prerequisite to the imposition of the ta; has #een that the corporation #e formed or availed of
for the purpose of avoiding the income ta; =or surta;> on its shareholders% or on the shareholders
of any other corporation #y permitting the earnings and profits of the corporation to accumulate
instead of dividing them among or distri#uting them to the shareholders. If the earnings and
profits were distri#uted% the shareholders would #e required to pay an income ta; thereon
whereas% if the distri#ution were not made to them% they would incur no ta; in respect to the
undistri#uted earnings and profits of the corporation. The touchstone of lia#ility is the purpose
#ehind the accumulation of the income and not the consequences of the accumulation. Thus% if
the failure to pay dividends is due to some other cause% such as the use of undistri#uted earnings
and profits for the reasona#le needs of the #usiness% such purpose does not fall within the
interdiction of the statute.
20% -97.
Taxpayer3s intention at the time of accumulation is controlling.
In order to determine whether profits are accumulated for the reasona#le needs of the #usiness
as to avoid the surta; upon shareholders% the controlling intention of the ta;payer is that which is
manifested at the time of accumulation not su#sequently declared intentions% which are merely
the product of afterthought. 4 speculative and indefinite purpose will not suffice. The mere
recognition of a future pro#lem and the discussion of possi#le and alternative solutions is not
sufficient. Definiteness of plan coupled with action taAen towards its consummation are essential.
20% -97.
*ndistributed earnings or profits of prior years are ta,en into consideration in determining
unreasonable accumulation for purposes of surtax.
!revious accumulations should #e considered in determining unreasona#le accumulation for the
year concerned. In determining whether accumulations of earnings or profits in a particular year
are within the reasona#le needs of a corporation% it is necessary to taAe into account prior
accumulations% since accumulations prior to the year involved may have #een sufficient to cover
the #usiness needs and additional accumulations during the year involved would not reasona#ly
#e necessary
Basilan Cstates% Inc. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:22.92% 6eptem#er
8% -9?/
Sec. 2A 7C8 748 - Pr")a Fac"e E'"dence o# Pr+ose !o A'o"d Inco)e Ta0
#$ %vidence of &urpose to !void Income Tax" (
#7$ &rima Facie %vidence" ( the fact that any corporation is a mere holding company or investment company
shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members"
Rationale for imposition of improperly accumulated earnings tax.
The underlying purpose of the additional ta; on a corporationGs improperly accumulated profits or
surplus is to avoid the situation where a corporation unduly retains its surplus earnings instead of
declaring and paying dividends to its shareholders or mem#ers who would then have to pay the
income ta; due on such dividends received #y them.
Commissioner of Internal Revenue vs. 4yala 6ecurities Corp.% et al.% ,.R. $o. +:29.78%
$ovem#er 2-% -970
+resumption of tax avoidance applies where corporation is a mere holding company.
&age 7; of -.
The prima facie evidence and presumption set up #y law is applica#le where the record shows
that respondent corporation is a mere holding company of its shareholders through its mother
company% a registered co:partnership then set up #y the individual shareholders #elonging to the
same family
Commissioner of Internal Revenue vs. 4yala 6ecurities Corp.% et al.% ,.R. $o. +:29.78%
$ovem#er 2-% -970
Sec. <5 - E0e)+!"ons #ro) Ta0 on Cor+ora!"ons
The following organi:ations shall not be taxed under this Title in respect to income received by them as such9
#!$ Cabor, agricultural or horticultural organi:ation not organi:ed principally for profit'
#B$ Dutual savings ban) not having a capital stoc) represented by shares, and cooperative ban) without capital stoc)
organi:ed and operated for mutual purposes and without profit'
#$ ! beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal
organi:ation operating under the lodge system, or mutual aid association or a nonstoc) corporation organi:ed by
employees providing for the payment of life, sic)ness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstoc) corporation or their dependents'
#D$ emetery company owned and operated exclusively for the benefit of its members'
#%$ Eonstoc) corporation or association organi:ed and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the
benefit of any member, organi:er, officer or any specific person'
#F$ Business league chamber of commerce, or board of trade, not organi:ed for profit and no part of the net income of
which inures to the benefit of any private stoc)(holder, or individual'
#*$ ivic league or organi:ation not organi:ed for profit but operated exclusively for the promotion of social welfare'
#=$ ! nonstoc) and nonprofit educational institution'
#I$ *overnment educational institution'
#@$ Farmers8 or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative
telephone company, or li)e organi:ation of a purely local character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of meeting its expenses' and
#F$ Farmers8, fruit growers8, or li)e association organi:ed and operated as a sales agent for the purpose of mar)eting the
products of its members and turning bac) to them the proceeds of sales, less the necessary selling expenses on the
basis of the 0uantity of produce finished by them'
Eotwithstanding the provisions in the preceding paragraphs, the income of whatever )ind and character of the foregoing
organi:ations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax imposed under this ode"
Construction of last paragraph of "ec. 67.
Income derived from its property #y a ta; e;empt organi<ation is not a#solutely ta;a#le. TaAen in
solitude% a word or phrase such as% in this case% 3the income of whatever Aind and character . . .
from any of their properties3 might easily convey a meaning quite different from the one actually
intended and evident when a word or phrase is considered with those with which it is associated.
It is a rule in statutory construction that every part of the statute must #e interpreted with
reference to the conte;t% that every part of the statute must #e considered together with the other
parts and Aept su#servient to the general intent of the whole enactment. 4 close reading of the
last paragraph of 6ec. 2/ of the $ational Internal Revenue Code% in relation to the whole section
on ta; e;emption of the organi<ations enumerated therein% shows that the phrase 3conducted for
profit3 in the last paragraph of 6ec. 2/ qualifies% limits and descri#es 3the income of whatever Aind
and character of the foregoing organi<ations from any of their properties% real or personal% or from
any of their activities3 in order to maAe such income ta;a#le. It is the e;ception to 6ec. 2/ pars.
&age 7. of -.
=g> and =h> providing for the ta; e;emptions of the income of said organi<ations. 'ence% if such
income from property or any other property is not conducted for profit% then it is not ta;a#le.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -2.0.1% cto#er -.%
-997
Income from any property of exempt organi8ations is taxable.
4 reading of the last paragraph ineludi#ly shows that the income from any property of e;empt
organi<ations% as well as that arising from any activity it conducts for profit% is ta;a#le. The phrase
3any of their activities conducted for profit3 does not qualify the word 3properties.3 This maAes
income from the property of a non:profit organi<ation ta;a#le% regardless of how that income is
used H whether for profit or for lofty non:profit purposes. The law does not maAe a distinction.
The rental income is ta;a#le regardless of whence such income is derived and how it is used or
disposed of.
-997
9efinition of (income).
The word 3income3 which is derived from property% real or personal% provided in the last
paragraph of 6ec. 2/ means the amount of money coming to a person or corporation within a
specified time as profit from investmentD the return in money from oneGs #usiness or capital
invested. Income from property also means gains and profits derived from the sale or other
disposition of capital assetsD the money which any person or corporation periodically receives
either as profits from #usiness% or as returns from investments. The word 3income3 as used in ta;
statutes is to #e taAen in its ordinary sense as gain or profit.
-997
:%C$ is exempt from payment of property tax but not income tax on its property rentals.
Bhat is e;empted is not the institution itself . . .D those e;empted from real estate ta;es are lands%
#uildings and improvements actually% directly and e;clusively used for religious% charita#le or
educational purposes N)C4 is e;empt from the payment of property ta;% #ut not income ta; on
the rentals from its property.
-997
Conditions for grant of tax exemption.
+aws allowing ta; e;emption are construed strictissimi *uris. 'ence% for the N)C4 to #e granted
the e;emption it claims under the aforecited provision% it must prove with su#stantial evidence
that =-> it falls under the classification non:stocA% non:profit educational institutionD and =2> the
income it seeAs to #e e;empted from ta;ation is used actually% directly% and e;clusively for
educational purposes.
-997
9efinition of (educational institution).
The term 3educational institution 3 or 3institution of learning3 refers to schools. The school system
is synonymous with formal education% which 3refers to the hierarchically structured and
chronologically graded learnings organi<ed and provided #y the formal school system and for
which certification is required in order for the learner to progress through the grades or move to
the higher levels.3 Cven non:formal education is understood to #e school:#ased and 3private
auspices such as foundations and civic:spirited organi<ations3 are ruled out. It is settled that the
&age 76 of -.
term 3educational institution%3 when used in laws granting ta; e;emptions% refers to a 3. . . school
seminary% college or educational esta#lishment . . .3
-997
Sec. <2 7A87<8 - =ross Inco)eB =a"ns der"'ed #ro) dea&"n(s "n +ro+er!,
4$5 0eneral 9efinition" ( %xcept when otherwise provided in this Title, gross income means all income derived from
whatever source, including #but not limited to$ the following items9
#7$ ompensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items'
#,$ *ross income derived from the conduct of trade or business or the exercise of a profession'
#1$ *ains derived from dealings in property'
#2$ Interests'
#3$ Rents'
#-$ Royalties'
#;$ Dividends'
#.$ !nnuities'
#6$ &ri:es and winnings'
#7<$ &ensions' and
#77$ &artner8s distributive share from the net income of the general professional partnership"
7P%C PRPWPD PARI8
The tax conse.uences arising from gains from a sale of property are not to be determined
solely by the means employed to transfer legal title.
,enerally% a sale or e;change of assets will have an income ta; incidence only when it is
consummated. The incidence of ta;ation depends upon the su#stance of a transaction. The ta;
consequences arising from gains from a sale of property are not finally to #e determined solely #y
the means employed to transfer legal title. Rather% the transaction must #e viewed as a whole%
and each step from the commencement of negotiations to the consummation of the sale is
relevant. 4 sale #y one person cannot #e transformed for ta; purposes into a sale #y another #y
using the latter as a conduit through which to pass title. To permit the true nature of the
transaction to #e disguised #y mere formalisms% which e;ist solely to alter ta; lia#ilities% would
seriously impair the effective administration of the ta; policies of Congress.
Commissioner of Internal Revenue vs. The Cstate of Benigno !. Toda% Jr.% et al.% ,.R. $o.
-./-77% 6eptem#er -.% 200.
Sec. <1 - Dedc!"ons #ro) =ross Inco)e
F"nes and +ena&!"es +a"d #or &a!e +a,)en! o# !a0es are no! dedc!"/&e
Deductions from gross income are matters of legislative graceD what is not e;pressly granted #y
Congress is withheld. )oreover% when acts are condemned #y law and their commission is made
punisha#le #y fines or forfeitures% to allow them to #e deducted from the wrongdoerGs gross
income% reduces% and so in part defeats% the prescri#ed punishment.
+ino ,utierre<% et al. vs. Collector of Internal Revenue% ,.R. $o. +:-981/% )ay 20% -9?8
Sec. <1 7A8 748 - Ord"nar, and Necessar, Trade- %s"ness or Pro#ess"ona& E0+enses
SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising
from personal services rendered under an employer-employee relationship where no deductions shall be
allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to
income tax under Sections ! (")# $ (")# %# & ("), (') and (()# and ) (") (*), there shall be allowed the
following deductions from gross income#
(A) Expenses+ -
(1) Ordinary and ecessary !rade" #usiness or $rofessiona% Expenses+-
&age ,< of -.
(a) ,n -eneral+ - .here shall be allowed as deduction from gross income all the ordinary
and necessary expenses paid or incurred during the taxable year in carrying on or which
are directly attributable to, the development, management, operation and/or conduct of
the trade, business or exercise of a profession, including0
(i) " reasonable allowance for salaries, wages, and other forms of compensation
for personal services actually rendered, including the grossed-up monetary
value of fringe benefit furnished or granted by the employer to the employee0
1rovided, .hat the final tax imposed under Section 22 hereof has been paid#
(ii) " reasonable allowance for travel expenses, here and abroad, while away
from home in the pursuit of trade, business or profession#
(iii) " reasonable allowance for rentals and/or other payments which are
re3uired as a condition for the continued use or possession, for purposes of the
trade, business or profession, of property to which the taxpayer has not ta4en
or is not ta4ing title or in which he has no e3uity other than that of a lessee,
user or possessor#
(iv) " reasonable allowance for entertainment, amusement and recreation
expenses during the taxable year, that are directly connected to the
development, management and operation of the trade, business or profession
of the taxpayer, or that are directly related to or in furtherance of the conduct
of his or its trade, business or exercise of a profession not to exceed such
ceilings as the Secretary of 5inance may, by rules and regulations prescribe,
upon recommendation of the (ommissioner, ta4ing into account the needs as
well as the special circumstances, nature and character of the industry, trade,
business, or profession of the taxpayer0 1rovided, .hat any expense incurred for
entertainment, amusement or recreation that is contrary to law, morals public
policy or public order shall in no case be allowed as a deduction+
(b) Substantiation 6e3uirements+ - 7o deduction from gross income shall be allowed
under Subsection (") hereof unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other ade3uate records0 (i) the amount of the
expense being deducted, and (ii) the direct connection or relation of the expense being
deducted to the development, management, operation and/or conduct of the trade,
business or profession of the taxpayer+
(c) 'ribes, 8ic4bac4s and 9ther Similar 1ayments+ - 7o deduction from gross income
shall be allowed under Subsection (") hereof for any payment made, directly or
indirectly, to an official or employee of the national government, or to an official or
employee of any local government unit, or to an official or employee of a government-
owned or -controlled corporation, or to an official or employee or representative of a
foreign government, or to a private corporation, general professional partnership, or a
similar entity, if the payment constitutes a bribe or 4ic4bac4+
(&) Expenses A%%o'a(%e to $ri)ate Educationa% Institutions+ - ,n addition to the expenses
allowable as deductions under this (hapter, a private educational institution, referred to under
Section & (') of this (ode, may at its option elect either0 (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 under Subsection
(5) hereof+
(#) Interest.*
(1) In Genera%+ - .he amount of interest paid or incurred within a taxable year on indebtedness
in connection with the taxpayer:s profession, trade or business shall be allowed as deduction from
gross income0 1rovided, however, .hat the taxpayer:s otherwise allowable deduction for interest
expense shall be reduced by an amount e3ual to the following percentages of the interest income
subjected to final tax0
5orty-one percent (!*;) beginning <anuary *, *==)#
.hirty-nine percent (2=;) beginning <anuary *, *===# and
.hirty-eight percent (2);) beginning <anuary *, >>>#
(&) Exceptions+ - 7o deduction shall be allowed in respect of interest under the succeeding
subparagraphs0
(a) ,f within the taxable year an individual taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest is paid in advance through discount or
otherwise0 1rovided, .hat such interest shall be allowed a a deduction in the year the
indebtedness is paid0 1rovided, further, .hat if the indebtedness is payable in periodic
amorti?ations, the amount of interest which corresponds to the amount of the principal
amorti?ed or paid during the year shall be allowed as deduction in such taxable year#
&age ,7 of -.
(b) ,f both the taxpayer and the person to whom the payment has been made or is to be
made are persons specified under Section 2% (')# or
(c),f the indebtedness is incurred to finance petroleum exploration+
(3) Optiona% !reatment of Interest Expense+ - "t the option of the taxpayer, interest incurred
to ac3uire property used in trade business or exercise of a profession may be allowed as a
deduction or treated as a capital expenditure+
(C) !axes.*
(1) In Genera%+ - .axes paid or incurred within the taxable year in connection with the taxpayer:s
profession, trade or business, shall be allowed as deduction, except
(a) .he income tax provided for under this .itle#
(b) ,ncome taxes imposed by authority of any foreign country# but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire to have to
any extent the benefits of paragraph (2) of this subsection (relating to credits for taxes
of foreign countries)#
(c) Estate and donor:s taxes# and
(d) .axes assessed against local benefits of a 4ind tending to increase the value of the
property assessed+
1rovided, .hat taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of the income tax
benefit of said deduction+
(&) +imitations on Deductions+ - ,n the case of a nonresident alien individual engaged in trade
or business in the 1hilippines and a resident foreign corporation, the deductions for taxes
provided in paragraph (*) of this Subsection (() shall be allowed only if and to the extent that
they are connected with income from sources within the 1hilippines+
(3) Credit A,ainst !ax for !axes of -orei,n Countries+ - ,f the taxpayer signifies in his
return his desire to have the benefits of this paragraph, the tax imposed by this .itle shall be
credited with0
(a) (iti?en and @omestic (orporation+ - ,n the case of a citi?en of the 1hilippines and of a
domestic corporation, the amount of income taxes paid or incurred during the taxable
year to any foreign country# and
(b) 1artnerships and Estates+ - ,n the case of any such individual who is a member of a
general professional partnership or a beneficiary of an estate or trust, his proportionate
share of such taxes of the general professional partnership or the estate or trust paid or
incurred during the taxable year to a foreign country, if his distributive share of the
income of such partnership or trust is reported for taxation under this .itle+
"n alien individual and a foreign corporation shall not be allowed the credits against the
tax for the taxes of foreign countries allowed under this paragraph+
(4) +imitations on Credit+ - .he amount of the credit ta4en under this Section shall be subject
to each of the following limitations0
(a) .he amount of the credit in respect to the tax paid or incurred to any
country shall not exceed the same proportion of the tax against which such
credit is ta4en, which the taxpayer:s taxable income from sources within such
country under this .itle bears to his entire taxable income for the same taxable
year# and
(b) .he total amount of the credit shall not exceed the same proportion of the
tax against which such credit is ta4en, which the taxpayer:s taxable income
from sources without the 1hilippines taxable under this .itle bears to his entire
taxable income for the same taxable year+
(.) Ad/ustments on $ayment of Incurred !axes+ - ,f accrued taxes when paid differ from the
amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the
taxpayer shall notify the (ommissioner# who shall redetermine the amount of the tax for the year
or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by
the taxpayer upon notice and demand by the (ommissioner, or the amount of tax overpaid, if
any, shall be credited or refunded to the taxpayer+ ,n the case of such a tax incurred but not paid,
the (ommissioner as a condition precedent to the allowance of this credit may re3uire the
taxpayer to give a bond with sureties satisfactory to and to be approved by the (ommissioner in
such sum as he may re3uire, conditioned upon the payment by the taxpayer of any amount of tax
found due upon any such redetermination+ .he bond herein prescribed shall contain such further
conditions as the (ommissioner may re3uire+
(0) 1ear in 23ic3 Credit !a4en+ - .he credits provided for in Subsection (()(2) of this Section
may, at the option of the taxpayer and irrespective of the method of accounting employed in
4eeping his boo4s, be ta4en in the year which the taxes of the foreign country were incurred,
&age ,, of -.
subject, however, to the conditions prescribed in Subsection (()($) of this Section+ ,f the taxpayer
elects to ta4e such credits in the year in which the taxes of the foreign country accrued, the
credits for all subse3uent years shall be ta4en upon the same basis and no portion of any such
taxes shall be allowed as a deduction in the same or any succeeding year+
(5) $roof of Credits+ - .he credits provided in Subsection (()(2) hereof shall be allowed only if
the taxpayer establishes to the satisfaction of the (ommissioner the following0
(a) .he total amount of income derived from sources without the 1hilippines#
(b) .he amount of income derived from each country, the tax paid or incurred to which is
claimed as a credit under said paragraph, such amount to be determined under rules
and regulations prescribed by the Secretary of 5inance# and
(c) "ll other information necessary for the verification and computation of such credits+
(D) +osses. *
(1) In Genera%+- Aosses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity shall be allowed as deductions0
(a) ,f incurred in trade, profession or business#
(b) 9f property connected with the trade, business or profession, if the loss arises from
fires, storms, shipwrec4, or other casualties, or from robbery, theft or embe??lement+
.he Secretary of 5inance, upon recommendation of the (ommissioner, is hereby
authori?ed to promulgate rules and regulations prescribing, among other things, the
time and manner by which the taxpayer shall submit a declaration of loss sustained from
casualty or from robbery, theft or embe??lement during the taxable year0 1rovided,
however, .hat the time limit to be so prescribed in the rules and regulations shall not be
less than thirty (2>) days nor more than ninety (=>) days from the date of discovery of
the casualty or robbery, theft or embe??lement giving rise to the loss+
(c) 7o loss shall be allowed as a deduction under this Subsection if at the time of the
filing of the return, such loss has been claimed as a deduction for estate tax purposes in
the estate tax return+
(&) $roof of +oss+ - ,n the case of a nonresident alien individual or foreign corporation, the
losses deductible shall be those actually sustained during the year incurred in business, trade or
exercise of a profession conducted within the 1hilippines, when such losses are not compensated
for by insurance or other forms of indemnity+ .he Secretary of 5inance, upon recommendation of
the (ommissioner, is hereby authori?ed to promulgate rules and regulations prescribing, among
other things, the time and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or embe??lement during the taxable year0
1rovided, .hat the time to be so prescribed in the rules and regulations shall not be less than
thirty (2>) days nor more than ninety (=>) days from the date of discovery of the casualty or
robbery, theft or embe??lement giving rise to the loss# and
(3) et Operatin, +oss Carry*O)er+ - .he net operating loss of the business or enterprise for
any taxable year immediately preceding the current taxable year, which had not been previously
offset as deduction from gross income shall be carried over as a deduction from gross income for
the next three (2) consecutive taxable years immediately following the year of such loss0
1rovided, however, .hat any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction under this Subsection0 1rovided,
further, .hat a net operating loss carry-over shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise in that -
(i) 7ot less than seventy-five percent (&$;) in nominal value of outstanding issued
shares+, if the business is in the name of a corporation, is held by or on behalf of
the same persons# or
(ii) 7ot less than seventy-five percent (&$;) of the paid up capital of the corporation, if
the business is in the name of a corporation, is held by or on behalf of the same persons+
5or purposes of this subsection, the term Bnot operating lossB shall mean the excess of
allowable deduction over gross income of the business in a taxable year+
1rovided, .hat for mines other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under Executive 9rder 7o+ %, as amended, otherwise
4nown as the 9mnibus ,nvestments (ode of *=)&, incurred in any of the first ten (*>)
years of operation may be carried over as a deduction from taxable income for the next
five ($) years immediately following the year of such loss+ .he entire amount of the loss
shall be carried over to the first of the five ($) taxable years following the loss, and any
portion of such loss which exceeds, the taxable income of such first year shall be
deducted in li4e manner form the taxable income of the next remaining four (!) years+
(4) Capita% +osses. *
(a) Aimitation+ - Aoss from sales or Exchanges of capital assets shall be allowed only to
the extent provided in Section 2=+
&age ,1 of -.
(b) Securities 'ecoming Corthless+ - ,f securities as defined in Section (.) become
worthless during the taxable year and are capital assets, the loss resulting therefrom
shall, for purposes of this .itle, be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets+
(.) +osses -rom 2as3 Sa%es of Stoc4 or Securities+ - Aosses from Bwash salesB of stoc4 or
securities as provided in Section 2)+
(0) 2a,erin, +osses+ - Aosses from wagering transactions shall b allowed only to the extent of
the gains from such transactions+
(5) A(andonment +osses+ -
(a) ,n the event a contract area where petroleum operations are underta4en is partially
or wholly abandoned, all accumulated exploration and development expenditures
pertaining thereto shall be allowed as a deduction0 1rovided, .hat accumulated
expenditures incurred in that area prior to <anuary *, *=&= shall be allowed as a
deduction only from any income derived from the same contract area+ ,n all cases,
notices of abandonment shall be filed with the (ommissioner+
(b) ,n case a producing well is subse3uently abandoned, the unamorti?ed costs thereof,
as well as the undepreciated costs of e3uipment directly used therein, shall be allowed
as a deduction in the year such well, e3uipment or facility is abandoned by the
contractor0 1rovided, .hat if such abandoned well is reentered and production is
resumed, or if such e3uipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration and shall be
amorti?ed or depreciated, as the case may be+

(E) #ad De(ts. *
(1) In Genera%+ - @ebts due to the taxpayer actually ascertained to be worthless and charged off
within the taxable year except those not connected with profession, trade or business and those
sustained in a transaction entered into between parties mentioned under Section 2% (') of this
(ode0 1rovided, .hat recovery of bad debts previously allowed as deduction in the preceding
years shall be included as part of the gross income in the year of recovery to the extent of the
income tax benefit of said deduction+
(&) Securities #ecomin, 2ort3%ess+ - ,f securities, as defined in Section (.), are
ascertained to be worthless and charged off within the taxable year and are capital assets, the
loss resulting therefrom shall, in the case of a taxpayer other than a ban4 or trust company
incorporated under the laws of the 1hilippines a substantial part of whose business is the receipt
of deposits, for the purpose of this .itle, be considered as a loss from the sale or exchange, on
the last day of such taxable year, of capital assets+
(-) Depreciation. *
(1) Genera% 6u%e+ - .here shall be allowed as a depreciation deduction a reasonable allowance
for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property
used in the trade or business+ ,n the case of property held by one person for life with remainder to
another person, the deduction shall be computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant+ ,n the case of property held in trust, the
allowable deduction shall be apportioned between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the instrument creating the trust, or in the absence of
such provisions, on the basis of the trust income allowable to each+
(&) 7se of Certain 8et3ods and 6ates+ - .he term Breasonable allowanceB as used in the
preceding paragraph shall include, but not limited to, an allowance computed in accordance with
rules and regulations prescribed by the Secretary of 5inance, upon recommendation of the
(ommissioner, under any of the following methods0
(a) .he straight-line method#
(b) @eclining-balance method, using a rate not exceeding twice the rate which would
have been used had the annual allowance been computed under the method described
in Subsection (5) (*)#
(c) .he sum-of-the-years-digit method# and
(d) any other method which may be prescribed by the Secretary of 5inance upon
recommendation of the (ommissioner+
(3) A,reement as to 7sefu% +ife on 23ic3 Depreciation 6ate is #ased+ - Chere under
rules and regulations prescribed by the Secretary of 5inance upon recommendation of the
(ommissioner, the taxpayer and the (ommissioner have entered into an agreement in writing
specifically dealing with the useful life and rate of depreciation of any property, the rate so
agreed upon shall be binding on both the taxpayer and the national -overnment in the absence
of facts and circumstances not ta4en into consideration during the adoption of such agreement+
.he responsibility of establishing the existence of such facts and circumstances shall rest with the
&age ,2 of -.
party initiating the modification+ "ny change in the agreed rate and useful life of the depreciable
property as specified in the agreement shall not be effective for taxable years prior to the taxable
year in which notice in writing by certified mail or registered mail is served by the party initiating
such change to the other party to the agreement0
1rovided, however, that where the taxpayer has adopted such useful life and depreciation rate for
any depreciable and claimed the depreciation expenses as deduction from his gross income,
without any written objection on the part of the (ommissioner or his duly authori?ed
representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the
aforesaid depreciable asset shall be considered binding for purposes of this Subsection+
(4) Depreciation of $roperties 7sed in $etro%eum Operations+ - "n allowance for
depreciation in respect of all properties directly related to production of petroleum initially placed
in service in a taxable year shall be allowed under the straight-line or declining-balance method
of depreciation at the option of the service contractor+
Dowever, if the service contractor initially elects the declining-balance method, it may at any
subse3uent date, shift to the straight-line method+
.he useful life of properties used in or related to production of petroleum shall be ten (*>) years
of such shorter life as may be permitted by the (ommissioner+
1roperties not used directly in the production of petroleum shall be depreciated under the
straight-line method on the basis of an estimated useful life of five ($) years+
(.) Depreciation of $roperties 7sed in 8inin, Operations. - an allowance for depreciation
in respect of all properties used in mining operations other than petroleum operations, shall be
computed as follows0
(a) "t the normal rate of depreciation if the expected life is ten (*>) years or less# or
(b) @epreciated over any number of years between five ($) years and the expected life if
the latter is more than ten (*>) years, and the depreciation thereon allowed as deduction
from taxable income0 1rovided, .hat the contractor notifies the (ommissioner at the
beginning of the depreciation period which depreciation rate allowed by this Section will
be used+
(0) Depreciation Deducti(%e (y onresident A%iens En,a,ed in !rade or #usiness or
6esident -orei,n Corporations+ - ,n the case of a nonresident alien individual engaged in
trade or business or resident foreign corporation, a reasonable allowance for the deterioration of
1roperty arising out of its use or employment or its non-use in the business trade or profession
shall be permitted only when such property is located in the 1hilippines+
(G) Dep%etion of Oi% and Gas 2e%%s and 8ines. *
(1) In Genera%+ - ,n the case of oil and gas wells or mines, a reasonable allowance for depletion
or amorti?ation computed in accordance with the cost-depletion method shall be granted under
rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the
(ommissioner+ 1rovided, .hat when the allowance for depletion shall e3ual the capital invested
no further allowance shall be granted0 1rovided, further, .hat after production in commercial
3uantities has commenced, certain intangible exploration and development drilling costs0 (a)
shall be deductible in the year incurred if such expenditures are incurred for non-producing wells
and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the
taxpayer, may be capitali?ed and amorti?ed if such expenditures incurred are for producing wells
and/or mines in the same contract area+
B,ntangible costs in petroleum operationsB refers to any cost incurred in petroleum operations
which in itself has no salvage value and which is incidental to and necessary for the drilling of
wells and preparation of wells for the production of petroleum0 1rovided, .hat said costs shall not
pertain to the ac3uisition or improvement of property of a character subject to the allowance for
depreciation except that the allowances for depreciation on such property shall be deductible
under this Subsection+
"ny intangible exploration, drilling and development expenses allowed as a deduction in
computing taxable income during the year shall not be ta4en into consideration in computing the
adjusted cost basis for the purpose of computing allowable cost depletion+
(&) E%ection to Deduct Exp%oration and De)e%opment Expenditures+ - ,n computing taxable
income from mining operations, the taxpayer may at his option, deduct exploration and
development expenditures accumulated as cost or adjusted basis for cost depletion as of date of
prospecting, as well as exploration and development expenditures paid or incurred during the
taxable year0 1rovided, .hat the amount deductible for exploration and development
expenditures shall not exceed twenty-five percent ($;) of the net income from mining
operations computed without the benefit of any tax incentives under existing laws+ .he actual
exploration and development expenditures minus twenty-five percent ($;) of the net income
from mining shall be carried forward to the succeeding years until fully deducted+
&age ,3 of -.
.he election by the taxpayer to deduct the exploration and development expenditures is
irrevocable and shall be binding in succeeding taxable years+
B7et income from mining operationsB, as used in this Subsection, shall mean gross income from
operations less Ballowable deductionsB which are necessary or related to mining operations+
B"llowable deductionsB shall include mining, milling and mar4eting expenses, and depreciation of
properties directly used in the mining operations+ .his paragraph shall not apply to expenditures
for the ac3uisition or improvement of property of a character which is subject to the allowance for
depreciation+
,n no case shall this paragraph apply with respect to amounts paid or incurred for the exploration
and development of oil and gas+
.he term Bexploration expendituresB means expenditures paid or incurred for the purpose of
ascertaining the existence, location, extent or 3uality of any deposit of ore or other mineral, and
paid or incurred before the beginning of the development stage of the mine or deposit+
.he term Bdevelopment expendituresB means expenditures paid or incurred during the
development stage of the mine or other natural deposits+ .he development stage of a mine or
other natural deposit shall begin at the time when deposits of ore or other minerals are shown to
exist in sufficient commercial 3uantity and 3uality and shall end upon commencement of actual
commercial extraction+
(3) Dep%etion of Oi% and Gas 2e%%s and 8ines Deducti(%e (y a onresident A%ien
indi)idua% or -orei,n Corporation+ - ,n the case of a nonresident alien individual engaged in
trade or business in the 1hilippines or a resident foreign corporation, allowance for depletion of oil
and gas wells or mines under paragraph (*) of this Subsection shall be authori?ed only in respect
to oil and gas wells or mines located within the 1hilippines+
(9) C3arita(%e and Ot3er Contri(utions.
(1) In Genera%+ - (ontributions or gifts actually paid or made within the taxable year to, or for
the use of the -overnment of the 1hilippines or any of its agencies or any political subdivision
thereof exclusively for public purposes, or to accredited domestic corporation or associations
organi?ed and operated exclusively for religious, charitable, scientific, youth and sports
development, cultural or educational purposes or for the rehabilitation of veterans, or to social
welfare institutions, or to non-government organi?ations, in accordance with rules and regulations
promulgated by the Secretary of finance, upon recommendation of the (ommissioner, no part of
the net income of which inures to the benefit of any private stoc4holder or individual in an
amount not in excess of ten percent (*>;) in the case of an individual, and five percent (;) in the
case of a corporation, of the taxpayer:s taxable income derived from trade, business or profession
as computed without the benefit of this and the following subparagraphs+
(&) Contri(utions Deducti(%e in -u%%. - 7otwithstanding the provisions of the preceding
subparagraph, donations to the following institutions or entities shall be deductible in full#
(a) Donations to t3e Go)ernment. - @onations to the -overnment of the 1hilippines
or to any of its agencies or political subdivisions, including fully-owned government
corporations, exclusively to finance, to provide for, or to be used in underta4ing priority
activities in education, health, youth and sports development, human settlements,
science and culture, and in economic development according to a 7ational 1riority 1lan
determined by the 7ational Economic and @evelopment "uthority (7E@"), ,n
consultation with appropriate government agencies, including its regional development
councils and private philantrophic persons and institutions0 1rovided, .hat any donation
which is made to the -overnment or to any of its agencies or political subdivisions not in
accordance with the said annual priority plan shall be subject to the limitations
prescribed in paragraph (*) of this Subsection#
(b) Donations to Certain -orei,n Institutions or Internationa% Or,ani:ations. -
@onations to foreign institutions or international organi?ations which are fully deductible
in pursuance of or in compliance with agreements, treaties, or commitments entered
into by the -overnment of the 1hilippines and the foreign institutions or international
organi?ations or in pursuance of special laws#
(c) Donations to Accredited on,o)ernment Or,ani:ations. - .he term
Bnongovernment organi?ationB means a non profit domestic corporation0
(*) 9rgani?ed and operated exclusively for scientific, research, educational,
character-building and youth and sports development, health, social welfare,
cultural or charitable purposes, or a combination thereof, no part of the net
income of which inures to the benefit of any private individual#
() Chich, not later than the *$
th
day of the third month after the close of the
accredited nongovernment organi?ations taxable year in which contributions
are received, ma4es utili?ation directly for the active conduct of the activities
constituting the purpose or function for which it is organi?ed and operated,
&age ,- of -.
unless an extended period is granted by the Secretary of 5inance in accordance
with the rules and regulations to be promulgated, upon recommendation of the
(ommissioner#
(2) .he level of administrative expense of which shall, on an annual basis,
conform with the rules and regulations to be prescribed by the Secretary of
5inance, upon recommendation of the (ommissioner, but in no case to exceed
thirty percent (2>;) of the total expenses# and
(!) .he assets of which, in the even of dissolution, would be distributed to
another nonprofit domestic corporation organi?ed for similar purpose or
purposes, or to the state for public purpose, or would be distributed by a court
to another organi?ation to be used in such manner as in the judgment of said
court shall best accomplish the general purpose for which the dissolved
organi?ation was organi?ed+
Subject to such terms and conditions as may be prescribed by the Secretary of
5inance, the term Butili?ationB means0
(i) "ny amount in cash or in 4ind (including administrative expenses)
paid or utili?ed to accomplish one or more purposes for which the
accredited nongovernment organi?ation was created or organi?ed+
(ii) "ny amount paid to ac3uire an asset used (or held for use) directly
in carrying out one or more purposes for which the accredited
nongovernment organi?ation was created or organi?ed+
"n amount set aside for a specific project which comes within one or more
purposes of the accredited nongovernment organi?ation may be treated as a
utili?ation, but only if at the time such amount is set aside, the accredited
nongovernment organi?ation has established to the satisfaction of the
(ommissioner that the amount will be paid for the specific project within a
period to be prescribed in rules and regulations to be promulgated by the
Secretary of 5inance, upon recommendation of the (ommissioner, but not to
exceed five ($) years, and the project is one which can be better accomplished
by setting aside such amount than by immediate payment of funds+
(3) ;a%uation. - .he amount of any charitable contribution of property other than money shall be
based on the ac3uisition cost of said property+
(4) $roof of Deductions. - (ontributions or gifts shall be allowable as deductions only if verified
under the rules and regulations prescribed by the Secretary of 5inance, upon recommendation of
the (ommissioner+
(I) 6esearc3 and De)e%opment.*
(1) In Genera%. - a taxpayer may treat research or development expenditures which are paid or
incurred by him during the taxable year in connection with his trade, business or profession as
ordinary and necessary expenses which are not chargeable to capital account+ .he expenditures
so treated shall be allowed as deduction during the taxable year when paid or incurred+
(&) Amorti:ation of Certain 6esearc3 and De)e%opment Expenditures+ - "t the election of
the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary
of 5inance, upon recommendation of the (ommissioner, the following research and development
expenditures may be treated as deferred expenses0
(a) 1aid or incurred by the taxpayer in connection with his trade, business or profession#
(b) 7ot treated as expenses under paragraph =*) hereof# and
(c) (hargeable to capital account but not chargeable to property of a character which is
subject to depreciation or depletion+
,n computing taxable income, such deferred expenses shall be allowed as deduction
ratably distributed over a period of not less than sixty (%>) months as may be elected by
the taxpayer (beginning with the month in which the taxpayer first reali?es benefits from
such expenditures)+
.he election provided by paragraph () hereof may be made for any taxable year
beginning after the effectivity of this (ode, but only if made not later than the time
prescribed by law for filing the return for such taxable year+ .he method so elected, and
the period selected by the taxpayer, shall be adhered to in computing taxable income for
the taxable year for which the election is made and for all subse3uent taxable years
unless with the approval of the (ommissioner, a change to a different method is
authori?ed with respect to a part or all of such expenditures+ .he election shall not apply
to any expenditure paid or incurred during any taxable year for which the taxpayer
ma4es the election+
(3) +imitations on Deduction. - .his Subsection shall not apply to0
(a) "ny expenditure for the ac3uisition or improvement of land, or for the improvement
of property to be used in connection with research and development of a character
which is subject to depreciation and depletion# and
&age ,; of -.
(b) "ny expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or 3uality of any deposit of ore or other mineral, including oil or gas+
(<) $ension !rusts. - "n employer establishing or maintaining a pension trust to provide for the payment
of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions
to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a
deduction under Subsection (") (*) of this Section ) a reasonable amount transferred or paid into such
trust during the taxable year in excess of such contributions, but only if such amount (*) has not
theretofore been allowed as a deduction, and () is apportioned in e3ual parts over a period of ten (*>)
consecutive years beginning with the year in which the transfer or payment is made+
(=) Additiona% 6e>uirements for Deducti(i%ity of Certain $ayments+ - "ny amount paid or payable
which is otherwise deductible from, or ta4en into account in computing gross income or for which
depreciation or amorti?ation may be allowed under this Section, shall be allowed as a deduction only if it is
shown that the tax re3uired to be deducted and withheld therefrom has been paid to the 'ureau of
,nternal 6evenue in accordance with this Section $) and )* of this (ode+
(+) Optiona% Standard Deduction. - ,n lieu of the deductions allowed under the preceding Subsections,
an individual subject to tax under Section !, other than a nonresident alien, may elect a standard
deduction in an amount not exceeding ten percent (*>;) of his gross income+ Enless the taxpayer
signifies in his return his intention to elect the optional standard deduction, he shall be considered as
having availed himself of the deductions allowed in the preceding Subsections+ Such election when made
in the return shall be irrevocable for the taxable year for which the return is made0 1rovided, .hat an
individual who is entitled to and claimed for the optional standard deduction shall not be re3uired to
submit with his tax return such financial statements otherwise re3uired under this (ode0 1rovided, further,
.hat except when the (ommissioner otherwise permits, the said individual shall 4eep such records
pertaining to his gross income during the taxable year, as may be re3uired by the rules and regulations
promulgated by the Secretary of 5inance, upon recommendation of the (ommissioner+
(8) $remium $ayments on 9ea%t3 and?or 9ospita%i:ation Insurance of an Indi)idua% !axpayer+ -
.he amount of premiums not to exceed .wo thousand four hundred pesos (1,!>>) per family or .wo
hundred pesos (1>>) a month paid during the taxable year for health and/or hospitali?ation insurance
ta4en by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross
income0 1rovided, .hat said family has a gross income of not more than .wo hundred fifty thousand pesos
(1$>,>>>) for the taxable year0 1rovided, finally, .hat in the case of married taxpayers, only the spouse
claiming the additional exemption for dependents shall be entitled to this deduction+
7otwithstanding the provision of the preceding Subsections, .he Secretary of 5inance, upon
recommendation of the (ommissioner, after a public hearing shall have been held for this purpose, may
prescribe by rules and regulations, limitations or ceilings for any of the itemi?ed deductions under
Subsections (") to (<) of this Section0 1rovided, .hat for purposes of determining such ceilings or
limitations, the Secretary of 5inance shall consider the following factors0 (*) ade3uacy of the prescribed
limits on the actual expenditure re3uirements of each particular industry# and () effects of inflation on
expenditure levels0 1rovided, further, .hat no ceilings shall further be imposed on items of expense
already subject to ceilings under present law+
0uiding principles in determining (ordinary and necessary) expenses.
This Court has never attempted to define with precision the terms 3ordinary and necessary.3
There are however% certain guiding principles worthy of serious consideration in the proper
ad*udication of conflicting claims. rdinarily% an e;pense will #e considered 3necessary3 where
the e;penditure is appropriate and helpful in the development of the ta;payers #usiness. It is
3ordinary3 when it connotes a payment which is normal in relation to the #usiness of the ta;payer
and the surrounding circumstances. The term 3ordinary3 does not require that the payments #e
ha#itual or normal in the sense that the same ta;payer will have to maAe them oftenD the payment
may #e unique or non:recurring to the particular ta;payer affected.
4tlas Consolidated )ining L Devt. Corp. vs. Commissioner of Internal Revenue% ,.R. $o. +:
2?9--% January 2/% -97-
Intention of taxpayer may be the controlling factor in determining deductibility of ordinary
and necessary expenditures.
There is no hard and fast rule on the right to a deduction which depends in each case on the
particular facts and the relation of the payment to the type of #usiness in which the ta;payer is
engaged. The intention of the ta;payer often may #e the controlling fact in maAing the
determination. 4ssuming that the e;penditure is ordinary and necessary in the operation of the
ta;payerGs #usiness% the answer to the question as to whether the e;penditure is an allowa#le
&age ,. of -.
deduction as a #usiness e;pense must #e determined from the nature of the e;penditure itself%
which in turn depends on the e;tent and permanency of the worA accomplished #y the
e;penditure.
2?9--% January 2/% -97-
&hat constitutes capital expenditures.
C;penses relating to recapitali<ation and reorgani<ation of the corporation% the cost of o#taining
stocA su#scription% promotions e;penses and commission of fees paid for the sale of stocA
reorgani<ation are capital e;penditures.
2?9--% January 2/% -97-
;uestions in determining deductibility of compensation of corporate officers.
Bhenever a controversy arises on the deducti#ility% for purposes of income ta;% of certain items
for alleged compensation of officers of the ta;payer% two =2> questions #ecome material% namely@
=a> 'ave Gpersonal servicesG #een Gactually renderedG #y said officersO =#> In the affirmative case%
what is the Greasona#le allowanceG thereofO
4lham#ra Cigar L Cigarette )anufacturing Company vs. Commissioner of Internal Revenue%
,.R. $o. +:2122?% $ovem#er 27% -9?/
Compensation to directors without relation to actual services cannot be regarded as
ordinary and necessary expenses.
The e;traordinary and unusual amounts paid #y the ta;payer to its directors in the guise and form
of compensation for their supposed services as such% without any relation to the measure of their
actual services% cannot #e regarded as ordinary and necessary e;penses within the meaning of
the law. This posture is in line with the doctrine in the law of ta;ation that the ta;payer must show
that its claimed deductions clearly come within the language of the law since allowances% liAe
e;emptions% are matters of legislative grace.
2?9--% January 2/% -97-
Improper payments of royalty are not deductible as legitimate business expenses.
4lthough the Ta; Code allows payments of royalty to #e deducted from gross income as #usiness
e;penses% it is CB Circular $o. 191 that defines what royalty payments are proper. Improper
payments of royalty are not deducti#le as legitimate #usiness e;penses.
1) !hilippines% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. 72711% 6eptem#er 2?% -977
Conditions for deductibility of business expense.
The statutory test of deducti#ility requires that to #e deducti#le as a #usiness e;pense% three
conditions are imposed% namely@ =-> the e;pense must #e ordinary and necessary% =2> it must #e
paid or incurred within the ta;a#le year% and =1> it must #e paid or incurred in carrying on a trade
or #usiness. In addition% not only must the ta;payer meet the #usiness test% he must su#stantially
prove #y evidence or records the deductions claimed under the law% otherwise% the same will #e
disallowed. The mere allegation of the ta;payer that an item of e;pense is ordinary and
necessary does not *ustify its deduction.
Csso 6tandard Castern% Inc. vs. Commissioner of Internal Revenue% ,.R. $os. 27807:9% July /%
-979
Re.uisites for deductibility of advertising expense.
&age ,6 of -.
To #e deducti#le from gross income% advertising e;pense must comply with the following
requisites@ =a> the e;pense must #e ordinary and necessaryD =#> it must have #een paid or
incurred during the ta;a#le yearD =c> it must have #een paid or incurred in carrying on the trade or
#usiness of the ta;payerD and =d> it must #e supported #y receipts% records or other pertinent
papers.
Commissioner of Internal Revenue vs. ,eneral 5oods =!hils.>% Inc.% ,.R. $o. -.1?/2% 4pril 2.%
2001
#actors to consider in determining the reasonableness of an advertising expense.
There is yet to #e a clear:cut criteria or fi;ed test for determining the reasona#leness of an
advertising e;pense. There #eing no hard and fast rule on the matter% the right to a deduction
depends on a num#er of factors such as #ut not limited to@ the type and si<e of #usiness in which
the ta;payer is engagedD the volume and amount of its net earningsD the nature of the e;penditure
itselfD the intention of the ta;payer and the general economic conditions. It is the interplay of
these% among other factors and properly weighed% that will yield a proper evaluation.
2001
Two ,inds of advertising.
4dvertising is generally of two Ainds@ =-> advertising to stimulate the current sale of merchandise
or use of services and =2> advertising designed to stimulate the future sale of merchandise or use
of services. The second type involves e;penditures incurred% in whole or in part% to create or
maintain some form of goodwill for the ta;payerGs trade or #usiness or for the industry or
profession of which the ta;payer is a mem#er. If the e;penditures are for the advertising of the
first Aind% then% e;cept as to the question of the reasona#leness of amount% there is no dou#t such
e;penditures are deducti#le as #usiness e;penses. If% however% the e;penditures are for
advertising of the second Aind% then normally they should #e spread out over a reasona#le period
of time.
2001
+rotection of brand franchise is a,in to ac.uisition of capital assets and therefore not
business expense.
The protection of #rand franchise is analogous to the maintenance of goodwill or title to oneGs
property. This is a capital e;penditure which should #e spread out over a reasona#le period of
time. Respondent corporationGs venture to protect its #rand franchise was tantamount to efforts to
esta#lish a reputation. This was aAin to the acquisition of capital assets and therefore e;penses
related thereto were not to #e considered as #usiness e;penses #ut as capital e;penditures.
2001
To be considered ordinary! an expense must be reasonable in amount.
True% it is the ta;payerGs prerogative to determine the amount of advertising e;penses it will incur
and where to apply them. 6aid prerogative% however% is su#*ect to certain considerations. The first
relates to the e;tent to which the e;penditures are actually capital outlaysD this necessitates an
inquiry into the nature or purpose of such e;penditures. The second% which must #e applied in
harmony with the first% relates to whether the e;penditures are ordinary and necessary.
Concomitantly% for an e;pense to #e considered ordinary% it must #e reasona#le in amount.
2001
Conditions for deductibility of employee bonuses.
&age 1< of -.
It is a general rule that #onuses to employees made in good faith and as additional compensation
for the services actually rendered #y the employees are deducti#le% provided such payments%
when added to the stipulated salaries% do not e;ceed a reasona#le compensation for the services
rendered. The conditions precedent to the deduction of #onuses to employees are@ =-> the
payment of the #onuses is in fact compensationD =2> it must #e for personal services actually
renderedD and =1> the #onuses% when added to the salaries% are Greasona#le . . . when measured
#y the amount and quality of the services performed with relation to the #usiness of the particular
ta;payerG
C. ). 'osAins L Co.% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. +:2.089% $ovem#er
27% -9?9
#actors in determining reasonableness of bonus as compensation.
There is no fi;ed test for determining the reasona#leness of a given #onus as compensation. This
depends upon many factors% one of them #eing Gthe amount and quality of the services performed
with relation to the #usiness.G ther tests suggested are@ payment must #e Gmade in good faithGD
Gthe character of the ta;payerGs #usiness% the volume and amount of its net earnings% its locality%
the type and e;tent of the services rendered% the salary policy of the corporationGD Gthe si<e of the
particular #usinessGD Gthe employeesG qualifications and contri#utions to the #usiness ventureGD and
Ggeneral economic conditionsG. 'owever% Gin determining whether the particular salary or
compensation payment is reasona#le% the situation must #e considered as a whole. rdinarily% no
single factor is decisive. . . . it is important to Aeep in mind that it seldom happens that the
application of one test can give satisfactory answer% and that ordinarily it is the interplay of several
factors% properly weighted for the particular case% which must furnish the final answer.3
C. ). 'osAins L Co.% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. +:2.089% $ovem#er
27% -9?9
Tax deductions must also be strictly construed.
It is a governing principle in ta;ation that ta; e;emptions must #e construed in strictissimi *uris
against the ta;payer and li#erally in favor of the ta;ing authorityD and he who claims an e;emption
must #e a#le to *ustify his claim #y the clearest grant of organic or statute law. 4n e;emption from
the common #urden cannot #e permitted to e;ist upon vague implications. Deductions for income
ta; purposes partaAe of the nature of ta; e;emptionsD hence% if ta; e;emptions are strictly
construed% then deductions must also #e strictly construed.
2001
-xpenses to establish reputation are capital expenditures.
4n e;pense incurred to create a favora#le image of the corporation in order to gain or maintain
the pu#lic(s and its stocAholder(s patronage% does not maAe it deducti#le as #usiness e;pense.
Cfforts to esta#lish reputation are aAin to acquisition of capital assets and% therefore% e;penses
related thereto are not #usiness e;pense #ut capital e;penditures.
2?9--% January 2/% -97-
Listing fee is an ordinary and necessary business expense.
4 listing fee is an ordinary and necessary #usiness e;pense for the privilege of having its stocA
listed.
2?9--% January 2/% -97-
Litigation expenses incurred in defense or protection of title are capital in nature and not
deductible.
&age 17 of -.
It is well settled that litigation e;penses incurred in defense or protection of title are capital in
nature and not deducti#le% liAewise% it was ruled #y the F.6. Ta; Court that e;penditures in
defense of title property constitute a part of the cost of the property% are not deducti#le as
e;pense.
2?9--% January 2/% -97-
-xpenses incurred by charitable institution for handling its dividends and interests are not
deductible as business expenses.
4s the principle of allocating e;penses is grounded on the premise that the ta;a#le income was
derived from carrying on a trade or #usiness% as distinguished from mere receipt of interests and
dividends from one(s investments% said income should not share in the allocation of administrative
e;penses. Thus% e;penses incurred #y a charita#le institution for handling its funds or income
consisting solely of dividends and interests% are not e;penses incurred in 3carrying on any trade
or #usiness%3 hence% not deducti#le as #usiness or administrative e;penses.
'ospital de 6an Juan de Dios% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. 1-108% )ay
-0% -990
Sec. <1 7%8 - In!eres!
Interest paid for late payment of tax is deductible from gross income.
The term 3inde#tedness3 as used in the Ta; Code of the Fnited 6tates has #een defined as an
unconditional and legally enforcea#le o#ligation for the payment of money. Bithin the meaning of
that definition% it is apparent that a ta; may #e considered an inde#tedness. It follows that the
interest paid for the late payment of donorGs ta; is deducti#le from ta;payer(s gross income.
Commissioner of Internal Revenue vs. Consuelo +. vda. de !rieto% ,.R. $o. +:-19-2% 6eptem#er
10% -9?0
&hen distinction between (taxes) and (debts) are inconse.uential"
Bhile "ta;es& and "de#t& are distinguisha#le legal concepts% in certain cases% on account of their
nature% the distinction #ecomes inconsequential. This qualification is recogni<ed even in the
Fnited 6tates. Thus% the term "de#t& is properly used in a comprehensive sense as em#racing not
merely money due #y contract% #ut whatever one is #ound to render to another% either for contract
or the requirements of the law. 4lthough what is involved in the !rieto case was donorGs ta; while
the present suit pertains to interest paid on the estate and inheritance ta;% interpretation placed
upon the law was predicated on the congressional intent% not on the nature of the ta; for which
the interest was paid.
Commissioner of Internal Revenue vs. Carlos !alanca% Jr.% ,.R. $o. +:-??2?% cto#er 29% -9??
9efinition of (theoretical interest).
3Theoretical interest3 refers to interest 3calculated3 or computed =and not incurred or paid> for the
purpose of determining the 3opportunity cost3 of investing funds in a given #usiness. 6uch
3theoretical3 or imputed interest does not arise from a legally demanda#le interest:#earing
o#ligation incurred #y the ta;payer who however wishes to find out% e.g.% whether he would have
#een #etter off #y lending out his funds and earning interest rather than investing such funds in
his #usiness.
!aper Industries Corp. of the !hil. =!IC!> vs. Court of 4ppeals% et al.% ,.R. $os. -0?9.9:80%
Decem#er -% -998
(Carrying charges) may be capitali8ed or deducted from gross income at the option of
taxpayer.
&age 1, of -.
The 3carrying charges3 which may #e capitali<ed under the F.6. Internal Revenue Code include%
interest on a loan 3=#ut not theoretical funds>.3 6uch 3carrying charges3 may% at the election of the
ta;payer% either #e =a> capitali<ed in which case the cost #asis of the capital assets% e.g.%
machinery and equipment% will #e ad*usted #y adding the amount of such interest payments or%
alternatively% #e =#> deducted from gross income of the ta;payer. 6hould the ta;payer elect to
deduct the interest payments against its gross income% the ta;payer cannot at the same time
capitali<e the interest payments. In other words% the ta;payer is not entitled to #oth the deduction
from gross income and the ad*usted =increased> #asis for determining gain or loss and the
allowa#le depreciation charge. The F.6. Internal Revenue Code does not prohi#it the deduction
of interest on a loan o#tained for purchasing machinery and equipment against gross income%
unless the ta;payer has also or previously capitali<ed the same interest payments and there#y
ad*usted the cost #asis of such assets.
!aper Industries Corp. of the !hil. =!IC!> vs. Court of 4ppeals% et al.% ,.R. $os. -0?9.9:80%
Decem#er -% -998
Sec. <17D8 718 7a8 - Ca+"!a& Losses
(4) Capita% +osses. *
(a) Aimitation+ - Aoss from sales or Exchanges of capital assets shall be allowed only to
the extent provided in Section 2=+
Capital losses are deductible only to the extent of capital gains.
Capital losses are allowed to #e deducted only to the e;tent of capital gains% i.e.% gains derived
from the sale or e;change of capital assets% and not from any other income of the ta;payer.
Sec. <17D8 718 7/8 - Secr"!"es /eco)"n( wor!$&ess

Re.uisites for capital gain or capital loss.
The loss sustained #y the holder of the securities% which are capital assets =to him>% is to #e
treated as a capital loss as if incurred from a sale or e;change transaction. 4 capital gain or a
capital loss normally requires the concurrence of two conditions for it to result@ =-> There is a sale
or e;changeD and =2> the thing sold or e;changed is a capital asset.
&hen securities become worthless! the law deems the loss as 'a loss from the sale or
exchange of capital assets'.
Bhen securities #ecome worthless% there is strictly no sale or e;change #ut the law deems the
loss anyway to #e 3a loss from the sale or e;change of capital assets.3 4 similar Aind of treatment
is given #y the $IRC on the retirement of certificates of inde#tedness with interest coupons or in
registered form% short sales and options to #uy or sell property where no sale or e;change strictly
e;ists. In these cases% the $IRC dispenses% in effect% with the standard requirement of a sale or
e;change for the application of the capital gain and loss provisions of the code.
Sec. <1 7E8 - %ad De/!s
Re.uisites for deductibility of (bad debts).
5or de#ts to #e considered as 3worthless%3 and there#y qualify as 3#ad de#ts3 maAing them
deducti#le% the ta;payer should show that =-> there is a valid and su#sisting de#tD =2> the de#t
must #e actually ascertained to #e worthless and uncollecti#le during the ta;a#le yearD =1> the
de#t must #e charged off during the ta;a#le yearD and =.> the de#t must arise from the #usiness
&age 11 of -.
or trade of the ta;payer. 4dditionally% #efore a de#t can #e considered worthless% the ta;payer
must also show that it is indeed uncollecti#le even in the future.
!hilippine Refining Company vs. Court of 4ppeals% et al.% ,.R. $o. --7/9.% )ay 7% -99?
Criteria for ascertaining worthlessness of debts.
The requirement of ascertainment of worthlessness requires proof of two facts@ =-> that the
ta;payer did in fact ascertain the de#t to #e worthless% in the year for which the deduction is
soughtD and =2> that% in so doing% he acted in good faith.
Collector of Internal Revenue vs. ,oodrich International Ru##er Co.% ,.R. $o. +:222?8%
Decem#er 22% -9?/
Sec. <1 7F8 - De+rec"a!"on
9efinition of (depreciation).
Depreciation is the gradual diminution in the useful value of tangi#le property resulting from wear
and tear and normal o#solescence. The term is also applied to amorti<ation of the value of
intangi#le assets% the use of which in the trade or #usiness is definitely limited in duration.
8% -9?/
9epreciation commences with the ac.uisition of the property.
Depreciation commences with the acquisition of the property and its owner is not #ound to see
his property gradually waste% without maAing provision out of earnings for its replacement. It is
entitled to see that from earnings the value of the property invested is Aept unimpaired% so that at
the end of any given term of years% the original investment remains as it was in the #eginning. It is
not only the right of a company to maAe such a provision% #ut it is its duty to its #ond and
stocAholders% and% in the case of a pu#lic service corporation% at least% its plain duty to the pu#lic.
4ccordingly% the law permits the ta;payer to recover gradually his capital investment in wasting
assets free from income ta;.
8% -9?/
The law does not authori8e depreciation of an asset beyond its ac.uisition cost.
The income ta; law does not authori<e the depreciation of an asset #eyond its acquisition cost.
'ence% a deduction over and a#ove such cost cannot #e claimed and allowed. The reason is that
deductions from gross income are privileges% not matters of right. They are not created #y
implication #ut upon clear e;pression in the law. )oreover% the recovery% free of income ta;% of an
amount more than the invested capital in an asset will transgress the underlying purpose of a
depreciation allowance. 5or then what the ta;payer would recover will #e% not only the acquisition
cost% #ut also some profit. Recovery in due time thru depreciation of investment made is the
philosophy #ehind depreciation allowanceD the idea of profit on the investment made has never
#een the underlying reason for the allowance of a deduction for depreciation.
8% -9?/
9epreciation of building is based on construction cost! not on its assessed value.
Bhere a #uilding acquired #y a corporation from the vendors in e;change for shares of its stocAs
is revalued on the #asis of its construction cost% which revaluation imports an o#ligation of the
corporation to pay the vendors the difference #etween the assessed value and the revalued
construction cost% it is held that the depreciation logically has to #e on the #asis of the
construction cost and not on the assessed value of the #uilding% since the corporate investment
would ultimately #e the construction cost.
&age 12 of -.
Commissioner of Internal Revenue vs. !riscila Cstate% Inc.% et al% ,.R. $o. +:-7272% )ay 29% -9?.
#indings of tax court on depreciation of assets should not be disturbed.
Depreciation is a question of fact% and where the appellant does not claim that the ta; court% in
applying certain rates and #asis to arrive at the allowed amounts of depreciation% was ar#itrary or
had a#used its discretion% the findings of the ta; court on the depreciation of assets should not #e
distur#ed.
Commissioner of Internal Revenue vs. !riscila Cstate% Inc.% et al.% ,.R. $o. +:-7272% )ay 29%
-9?.
9epreciation of residence not used in trade or business is not deductible.
The claim for depreciation of ta;payerGs residence is not deducti#le where such residence was
not used in his trade or #usiness. 4 ta;payer may deduct from gross income reasona#le
allowance for deterioration of property arising out of its use or employment in #usiness or trade.
+ino ,utierre<% et al. vs. Collector of Internal Revenue% ,.R. $o. +:-981/% )ay 20% -9?8
Sec. <1 7=8 - De+&e!"on o# O"& and =as We&&s and M"nes
Burden of ustifying the allowance of deduction based on depletion rests on taxpayer.
4s an income ta; concept% depletion is wholly a creation of the statute H 3solely a matter of
legislative grace.3 'ence% the ta;payer has the #urden of *ustifying the allowance of any
deduction claimed. 4s in connection with all other ta; controversies% the #urden of proof to show
that a disallowance of depletion #y the Commissioner is incorrect or that an allowance made is
inadequate is upon the ta;payer% and this is true with respect to the value of the property
constituting the #asis of the deduction. This #urden:of:proof rule has #een frequently applied and
a value claimed has #een disallowed for lacA of evidence.
Consolidated )ines% Inc. vs. Court of Ta; 4ppeals% et al.% ,.R. $os. +:-77.1 L -77..% 4ugust 29%
-9/.
9ifferences between (depletion) and (depreciation).
Both depletion and depreciation are predicated on the same #asic premise of avoiding a ta; on
capital. The allowance for depletion is #ased on the theory that the e;traction of minerals
gradually e;hausts the capital investment in the mineral deposit. The purpose of the depletion
deduction is to permit the owner of a capital interest in mineral in place to maAe a ta;:free
recovery of that depleting capital asset. 4 depletion is #ased upon the concept of the e;haustion
of a natural resource whereas depreciation is #ased upon the concept of the e;haustion of the
property% not otherwise a natural resource% used in a trade or #usiness or held for the production
of income. Thus% depletion and depreciation are made applica#le to different types of assets. 4nd
a ta;payer may not deduct that which the Code allows as a deduction of another. =cited in
5ootnote 1?>
-9/.
Sec. <1 7C8 - C$ar"!a/&e and O!$er Con!r"/!"ons
Charitable institution remains tax2exempt although it derives income from paying patients.
4s a general principle% a charita#le institution does not lose its character as such and its
e;emption from ta;es simply #ecause it derives income from paying patients% whether out:patient%
or confined in the hospital% or receives su#sidies from the government% so long as the money
&age 13 of -.
received is devoted or used altogether to the charita#le o#*ect which it is intended to achieveD and
no money inures to the private #enefit of the persons managing or operating the institution.
Rationale for tax exemption of charitable institutions.
4n institution does not lose its charita#le character% and consequent e;emption from ta;ation% #y
reason of the fact that those recipients of its #enefits who are a#le to pay are required to do so%
where no profit is made #y the institution and the amounts so received are applied in furthering its
charita#le purposes% and those #enefits are refused to none on account of ina#ility to pay
therefor. The fundamental ground upon which all e;emptions in favor of charita#le institutions are
#ased is the #enefit conferred upon the pu#lic #y them% and a consequent relief% to some e;tent%
of the #urden upon the state to care for and advance the interests of its citi<ens.
+ung Center of the !hil. vs. Iue<on City% et al% ,.R. $o. -..-0.% June 29% 200.
Sec. <1 7D8 - Pens"on Trs!s
Income of pension trust is li,ewise tax2exempt.
It is evident that ta; e;emption is liAewise to #e en*oyed #y the income of the pension trust.
therwise% ta;ation of those earnings would result in a diminution of accumulated income and
reduce whatever the trust #eneficiaries would receive out of the trust fund. This would run afoul of
the very intendment of the law. The ta; advantage in Rep. 4ct $o. -971% 6ection 8?=#>% was
conceived in order to encourage the formation and esta#lishment of such private !lans for the
#enefit of la#orers and employees outside of the 6ocial 6ecurity 4ct.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. 98022% )arch 21% -992
Sec. <2 - Losses #ro) Sa&es or E0c$an(es o# Pro+er!,
&hen loss is deemed to be a loss from the sale or exchange of capital assets.
In the hands of another who holds the shares of stocA #y way of an investment% the shares to him
would #e capital assets. Bhen the shares held #y such investor #ecome worthless% the loss is
deemed to #e a loss from the sale or e;change of capital assets.
Sec. <A - Ca+"!a& =a"ns and Losses
(A) Definitions. - "s used in this .itle -
(1) Capita% Assets+ - .he term Bcapital assetsB means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stoc4 in trade of the taxpayer or
other property of a 4ind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation provided in Subsection
(5) of Section 2!# or real property used in trade or business of the taxpayer+
(&) et Capita% Gain+ - .he term Bnet capital gainB means the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or exchanges+
(3) et Capita% +oss+ - .he term Bnet capital lossB means the excess of the losses from sales or
exchanges of capital assets over the gains from such sales or exchanges+
Two conditions for a capital gain or a capital loss to result.
&age 1- of -.
6ection 29=d>=.>=B> of the $IRC conveys that the loss sustained #y the holder of the securities%
which are capital assets =to him>% is to #e treated as a capital loss as if incurred from a sale or
e;change transaction. 4 capital gain or a capital loss normally requires the concurrence of two
conditions for it to result@ =-> There is a sale or e;changeD and =2> the thing sold or e;changed is a
capital asset. Bhen securities #ecome worthless% there is strictly no sale or e;change #ut the law
deems the loss anyway to #e 3a loss from the sale or e;change of capital assets3. 4 similar Aind
of treatment is given #y the $IRC on the retirement of certificates of inde#tedness with interest
coupons or in registered form% short sales and options to #uy or sell property where no sale or
e;change strictly e;ists. In these cases% the $IRC dispenses% in effect% with the standard
requirement of a sale or e;change for the application of the capital gain and loss provisions of the
code.
Sec. <A7A8 748 - Ca+"!a& Asse!s
Li.uidation test is not acceptable in determining whether or not a taxpayer is carrying on
a trade or business.
The fact that property is sold for purposes of liquidation does not foreclose a determination that a
3trade or #usiness3 is #eing conducted #y the seller. The sole question is H were the ta;payers in
the #usiness of su#dividing real estateO If they were% then it seems indisputa#le that the property
sold falls within the e;ception in the definition of capital assetsD that is% that it constituted Pproperty
held #y the ta;payer primarily for sale to customers in the ordinary course of his trade or
#usiness.G3
Tomas Calasan<% et al. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:2?27.% cto#er
9% -97?
0ains from sale of subdivided lots are ordinary income.
ne may% of course% liquidate a capital asset. To do so% it is necessary to sell. The sale may #e
conducted in the most advantageous manner to the seller and he will not lose the #enefits of the
capital gain provision of the statute unless he enters the real estate #usiness and carries on the
sale in the manner in which such a #usiness is ordinarily conducted. In that event% the liquidation
constitutes a #usiness and a sale in the ordinary course of such a #usiness and the preferred ta;
status is lost.
9% -97?
If the asset is not among the exceptions provided by the 1IRC! it is a capital asset.
The statutory definition of capital assets is negative in nature. If the asset is not among the
e;ceptions% it is a capital assetD conversely% assets falling within the e;ceptions are ordinary
assets. 4nd necessarily% any gain resulting from the sale or e;change of an asset is a capital gain
or an ordinary gain depending on the Aind of asset involved in the transaction.
9% -97?
There is no rigid rule in determining with finality whether property sold by a taxpayer is
held primarily for sale to customers in the ordinary course of his trade or business or as
capital asset.
There is no rigid rule or fi;ed formula #y which it can #e determined with finality whether property
sold #y a ta;payer was held primarily for sale to customers in the ordinary course of his trade or
#usiness or whether it was sold as a capital asset. 4lthough several factors or indices have #een
recogni<ed as helpful guides in maAing a determination% none of these is decisiveD neither is the
&age 1; of -.
presence nor the a#sence of these factors conclusive. Cach case must in the last analysis rest
upon its own peculiar facts and circumstances.
9% -97?
Inherited property is deemed primarily for sale in the ordinary course of business if it is
substantially improved or/and very actively sold.
4lso a property initially classified as a capital asset may thereafter #e treated as an ordinary asset
if a com#ination of the factors indu#ita#ly tend to show that the activity was in furtherance of or in
the course of the ta;payerGs trade or #usiness. Thus% a sale of inherited real property usually
gives capital gain or loss even though the property has to #e su#divided or improved or #oth to
maAe it sala#le. 'owever% if the inherited property is su#stantially improved or very actively sold
or #oth it may #e treated as held primarily for sale to customers in the ordinary course of the
heirGs #usiness.
9% -97?
+roperty ceases to be a capital asset if the amount expended to improve it is double its
original cost.
4 property ceases to #e a capital asset if the amount e;pended to improve it is dou#le its original
cost% for the e;tensive improvement indicates that the seller held the property primarily for sale to
customers in the ordinary course of his #usiness.
9% -97?

Sec. <A 7C8 - 9L")"!a!"on on Ca+"!a& Losses:
Losses on e.uity investments are not deductible as bad debts.
The e;clusionary clause found in the law does not include all forms of securities #ut specifically
covers only #onds% de#entures% notes% certificates or other evidence of inde#tedness% with interest
coupons or in registered form% which are the instruments of credit normally dealt with in the usual
lending operations of a financial institution. Cquity holdings cannot come close to #eing within the
purview of 3evidence of inde#tedness3.Eerily% it is for a liAe thesis that the loss of petitioner #anA
in its equity investment in the 'ongAong su#sidiary cannot also #e deducti#le as a #ad de#t. The
shares of stocA in question do not constitute a loan e;tended #y it to its su#sidiary =5irst CBC
Capital> or a de#t su#*ect to o#ligatory repayment #y the latter% essential elements to constitute a
#ad de#t% #ut a long term investment made #y CBC.
Sec. 15 - De!er)"na!"on o# A)on! and Reco(n"!"on o# =a"n or Loss

Instances when no recognition of gain or loss is made in sale or exchange of property.
The law should #e taAen within the conte;t on the general su#*ect of the determination and
recognition of gain or loss. It is not preclusive of% let alone renders completely inconsequential%
the more specific provisions of the code. Thus% no such recognition shall #e made if the sale or
e;change is made in pursuance of a plan of corporate merger or consolidation or% if as a result of
an e;change of property for stocAs% the e;changer% alone or together with others not e;ceeding
four% gains control of the corporation.
&age 1. of -.
Sec. 12 7A8 - =ross Inco)e Fro) Sorces W"!$"n !$e P$"&"++"nes
Residence of obligor who pays the interest determines the source of interest income.
The law does not speaA of activity #ut of 3source3. Cven if all the related activities H the signing
of the contract% the construction of the vessels% the payment of the stipulated price% and their
delivery to the $DC H were done in ToAyo% it is the residence of the o#ligor who pays the interest
which is the determining factor of the source of interest income.
10% -97/
Sec. 1< - Accon!"n( Per"ods and Me!$ods o# Accon!"n(
$ccounting methods for tax purposes differentiated from methods for accounting
purposes.
Bhile ta;a#le income is #ased on the method of accounting used #y the ta;payer% it will almost
always differ from accounting income. This is so #ecause of a fundamental difference in the ends
the two concepts serve. 4ccounting attempts to match cost against revenue. Ta; law is aimed at
collecting revenue. It is quicA to treat an item as income% slow to recogni<e deductions or losses.
Thus% the ta; law will not recogni<e deductions for contingent future losses e;cept in very limited
situations. ,ood accounting% on the other hand% requires their recognition. nce this fundamental
difference in approach is accepted% income ta; accounting methods can #e understood more
easily. =cited in 5ootnote $o. ->
-9/.
Income reali8ed within taxpayer<s annual accounting period becomes the basis for
computation of the gross income and the tax liability.
Fnder the withholding ta; system% income is viewed as a flow and is measured over a period of
time Anown as an 3accounting period.3 4n accounting period covers twelve months% su#divided
into four equal segments Anown as 3quarters.3 Income reali<ed within the ta;payerGs annual
accounting period =fiscal or calendar year> #ecomes the #asis for the computation of the gross
income and the ta; lia#ility.
Citi#anA% $.4. vs. Court of 4ppeals% et al.% ,.R. $o. -0/.1.% cto#er -0% -99/
Sec. 6? - W"!$$o&d"n( o# Ta0 a! Sorce
Reasons for devising the withholding tax system.
The withholding ta; system was devised for two main reasons@ first% to provide the ta;payer a
convenient manner to meet his pro#a#le income ta; lia#ilityD and second% to ensure the collection
of the income ta; which could otherwise #e lost or su#stantially reduced through failure to file the
corresponding returns. To these% a third reason may #e added@ to improve the governmentGs cash
flow.
Citi#anA% $.4. vs. Court of 4ppeals% et al.% ,.R. $o. -0/.1.% cto#er -0% -99/
Taxes withheld are in the nature of payment by a taxpayer in order to extinguish his
possible tax obligation.
4 ta;payer% resident or non:resident who contri#utes to the withholding ta; system% does not
really deposit an amount to the Commissioner of Internal Revenue% #ut% in truth% to perform and
e;tinguish his ta; o#ligation for the year concerned. In other words% he is paying his ta; lia#ilities
&age 16 of -.
for that year. Consequently% a ta;payer whose income is withheld at the source will #e deemed to
have paid his ta; lia#ility when the same falls due at the end of the ta; year.
5inley J. ,i##s% et al. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:-/.0?% $ovem#er
29% -9?8
The withholding agent is the agent of both the 0overnment and the taxpayer.
The law sets no condition for the personal lia#ility of the withholding agent to attach. The reason
is to compel the withholding agent to withhold the ta; under all circumstances. In effect% the
responsi#ility for the collection of the ta; as well as the payment thereof is concentrated upon the
person over whom the ,overnment has *urisdiction. Thus% the withholding agent is constituted the
agent of #oth the ,overnment and the ta;payer. Bith respect to the collection and/or withholding
of the ta;% he is the ,overnmentGs agent. In regard to the filing of the necessary income ta; return
and the payment of the ta; to the ,overnment% he is the agent of the ta;payer. The withholding
agent% therefore% is no ordinary government agent especially #ecause under 6ection 81=c> he is
held personally lia#le for the ta; he is duty #ound to withholdD whereas% the Commissioner of
Internal Revenue and his deputies are not made lia#le #y law.
!hilippine ,uaranty Co.% Inc. vs. Commissioner of Internal Revenue% et al.% ,.R. $o. +:220/.%
6eptem#er ?% -9?8
&ithholding agent has implied authority to file claim for refund.
If the withholding agent is also an agent of the #eneficial owner of the dividends with respect to
the filing of the necessary income ta; return and with respect to actual payment of the ta; to the
government% such authority may reasona#ly #e held to include the authority to file a claim for
refund and to #ring an action for recovery of such claim. This implied authority is especially
warranted where the withholding agent is the wholly owned su#sidiary of the parent:stocAholder
and therefore% at all times% under the effective control of such parent:stocAholder.
Commissioner of Internal Revenue vs. !rocter L ,am#le !hilippine )fg. Corp.% ,.R. $o. ??717%
Decem#er 2% -99-
Sec. 6@ - Re!rns and Pa,)en! o# Ta0es W"!$$e&d a! Sorce
Commissioner may re.uire withholding agents to regularly pay or deposit the taxes
withheld.
paraly<ed for lacA of the motive power to activate and operate it . . . It is the life#lood of the
government and so should #e collected without unnecessary hindrance . . . In line with this
principle% the Ta; Code% provides that 3the Commissioner of Internal Revenue may% with the
approval of the 6ecretary of 5inance% require the withholding agents to pay or deposit the ta;es
deducted and withheld at more frequent intervals when necessary to protect the interest of the
government. The return shall #e filed and the payment made within 28 days from the close of
each calendar quarter3.
Commissioner of Internal Revenue vs. Byeth 6uaco +a#oratories% Inc.% et al.% ,.R. $o. /?27-%
6eptem#er 10% -99-
Sec. 257%8 - E0ce+!"on #ro) Inco)e Ta0 - Es!a!es and Trs!s
$ 0ratuity +lan will lose its tax2exempt status if the retirement benefits are released prior
to the retirement of the employees.
Fnder the law% the trust funds of employees other than those of private employers are qualified
for certain ta; e;emptions pursuant to 6ection ?0=B> of the $ational Internal Revenue Code. The
,ratuity !lan provides that the gratuity #enefits of a qualified DB! employee shall #e released
only 3upon retirement under the !lan.3 If the earnings and principal of the 5und are distri#uted to
DB! employees prior to their retirement% the ,ratuity !lan will no longer qualify for e;emption
&age 2< of -.
under 6ection ?0=B>. If DB! insists that its employees may receive the dividends% the necessary
consequence will #e the non:qualification of the ,ratuity !lan as a ta;:e;empt plan.
DevGt. BanA of the !hil. vs. Commission on 4udit% ,.R. $o. -..8-?% 5e#ruary --% 200.
Sec. ?2 - F"na& Ad3s!)en! Re!rn
&ithout the tax return! it is error to grant a refund.
The grant of a refund is founded on the assumption that the ta; return is valid% i.e.% that the facts
stated therein are true and correct. Bithout the ta; return% it is error to grant a refund since it
would #e virtually impossi#le to determine whether the proper ta;es have #een assessed and
paid. In this case% petitionerGs failure to present sufficient evidence to prove its claim for refund is
fatal to its cause. 4fter all% it is a;iomatic that a claimant has the #urden of proof to esta#lish the
factual #asis of his or her claim for ta; credit or refund. Ta; refunds% liAe ta; e;emptions% are
construed strictly against the ta;payer.
!aseo Realty L Development Corp. vs. Court of 4ppeals% et al.% ,.R. $o. --927?% cto#er -1%
200.
The carrying forward of any excess or overpaid income tax for a given taxable year is
limited to the succeeding taxable year only.
In case the corporation is entitled to a refund of the e;cess estimated quarterly income ta;es
paid% the refunda#le amount shown on its final ad*ustment return may #e credited against the
estimated quarterly income ta; lia#ilities for the ta;a#le quarters of the succeeding year. The
carrying forward of any e;cess or overpaid income ta; for a given ta;a#le year is limited to the
succeeding ta;a#le year only.
!aseo Realty L Development Corp. vs. Court of 4ppeals% et al.% ,.R. $o. --927?% cto#er -1%
200.
Sec. @6 - =ross Es!a!e
-xpenditures incurred for the individual benefit of the heirs! devisees or legatees are not
deductible
Judicial e;penses are e;penses of administration. 4dministration e;penses% as an allowa#le
deduction from the gross estate of the decedent for purposes of arriving at the value of the net
estate% have #een construed #y the federal and state courts of the Fnited 6tates to include all
e;penses 3essential to the collection of the assets% payment of de#ts or the distri#ution of the
property to the persons entitled to it.3 In other words% the e;penses must #e essential to the
proper settlement of the estate. C;penditures incurred for the individual #enefit of the heirs%
devisees or legatees are not deducti#le.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -2120?% )arch 22% 2000
Tax should be measured by the value of the estate at the time of decedent<s death.
If death is the generating source from which the power of the state to impose inheritance ta;es
taAes its #eing and if% upon the death of the decedent% succession taAes place and the right of the
state to ta; vests instantly% the ta; should #e measured #y the value of the estate as it stood at
the time of the decedentGs death% regardless of any su#sequent contingency affecting value of any
su#sequent increase or decrease in value.
Right of the state to inheritance tax accrues at the moment of death.
&age 27 of -.
The right of the state to inheritance ta; accrues at the moment of death% and hence is ordinarily
measured as to any #eneficiary #y the value at that time of such property as passes to him.
6u#sequent appreciation or depreciation is immaterial.
+ayment of inheritance tax cannot be postponed or delayed by the creation of a trust.
The payment of inheritance ta; cannot #e postponed or delayed #y the creation of a trust.
Testators may provide that their estates #e not delivered to their #eneficiaries until after the lapse
of a certain period of time. The collection of the ta; would then #e left to the will of a private
individual. Ta;es are essential to the very e;istence of government.
Tax is based on the value of property transmitted at the time of predecessor3s death.
4 transmission #y inheritance is ta;a#le at the time of the predecessorGs death% notwithstanding
the postponement of the actual possession or en*oyment of the estate #y the #eneficiary% and the
ta; measured #y the value of the property transmitted at that time regardless of its appreciation or
depreciation.
Compensation of trustee is not deductible expense.
The compensation of a trustee% earned% not in the administration of the estate% #ut in the
management thereof for the #enefit of the legatees or devisees% does not come properly within
the class or reason for e;empting administration e;penses. 6ervices rendered in that #ehalf have
no reference to closing the estate for the purpose of a distri#ution thereof to those entitled to it
and are not required or essential to the perfection of the rights of the heirs or legatees.
$ccrual of inheritance tax is distinct from the obligation to pay the same.
The accrual of the inheritance ta; is distinct from the o#ligation to pay the same. It is in reality an
e;cise or privilege ta; imposed on the right to succeed to% receive% or taAe property #y or under a
will or the intestacy law% or deed% grant% or gift% to #ecome operative at or after death.
+remiums paid on the bond filed by administrator is not deductible as administration
expense.
The premiums paid on the #ond filed #y the administrator is not deducti#le as an e;pense of
administration since the giving of a #ond is in the nature of a qualification for the office% and not
necessary in the settlement of the estate. 4 person may accept the position of e;ecutor or
administrator with all the incidents appertaining thereto having in mind the compensation which
the law allows for the purpose% #ut he may waive this compensation in the same manner as he
may refuse to serve without it.
Carlos )oran 6ison vs. $arcisa 5. Teodoro% ,.R. $o. +:92/-% )arch 29% -98/
1otarial fee paid for extraudicial settlement is a deductible expense.
The notarial fee paid for the e;tra*udicial settlement is clearly a deducti#le e;pense since such
settlement effected a distri#ution of the decedent(s estate to his lawful heirs. 6imilarly% the
attorneyGs fees paid to !$B for acting as the guardian of the decedent(s property during his
lifetime should also #e considered as a deducti#le administration e;pense. !$B provided a
detailed accounting of decedentGs property and gave advice as to the proper settlement of the
latterGs estate% acts which contri#uted towards the collection of decedentGs assets and the
su#sequent settlement of the estate.
&age 2, of -.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -2120?% )arch 22% 2000
Sec. @A - F"&"n( o# No!"ce o# Dea!$
/bligation to inform Commissioner of Internal Revenue of taxpayer3s death does not apply
to cases involving deficiency income tax.
6ection -0. of the $ational Internal Revenue Code of -9// =now 6ec. 79 of $IRC of -99/>
pertains to 3all cases of transfers su#*ect to ta;3 or where the 3gross value of the estate e;ceeds
three thousand pesos3. It has a#solutely no applica#ility to a case for deficiency income ta;. It
further lacAs applica#ility since !hiltrust =which managed the #usiness affairs of the deceased>
was never the e;ecutor% administrator of the decedentGs estate% and% as such% never had the legal
o#ligation% #ased on the a#ove provision% to inform the Commissioner of Internal Revenue of her
death.
Cstate of the +ate Juliana Die< vda. de ,a#riel vs. Commissioner of Internal Revenue% ,.R. $o.
-888.-% January 2/% 200.
Sec. A5 - Es!a!e Ta0 Re!rns
/mission to file estate tax return and to contest tax assessment is fatal.
The omission to file an estate ta; return% and the su#sequent failure to contest or appeal the
assessment made #y the BIR is fatal% as under the $IRC% in case of failure to file a return% the ta;
may #e assessed at any time within ten years after the omission% and any ta; so assessed may
#e collected #y levy upon real property within three years following the assessment of the ta;.
6ince the estate ta; assessment had #ecome final and unappeala#le #y the petitionerGs default as
regards protesting the validity of the said assessment% there is now no reason why the BIR cannot
continue with the collection of the said ta;. 4ny o#*ection against the assessment should have
#een pursued following the avenue paved in 6ection 229 of the $IRC on protests or assessments
of internal revenue ta;es.
5erdinand R. )arcos II vs. Court of 4ppeals% et al.% ,.R. $o. -20770% June 8% -99/
Sec. A1 - Pa,)en! %e#ore De&"'er, /, E0ec!or or Ad)"n"s!ra!or
$pproval of probate court is not a mandatory re.uirement in collection of estate taxes.
The approval of the court% sitting in pro#ate% or as a settlement tri#unal over the deceased is not a
mandatory requirement in the collection of estate ta;es. There is nothing in the Ta; Code% and in
the pertinent remedial laws that implies the necessity of the pro#ate or estate settlement courtGs
approval of the stateGs claim for estate ta;es% #efore the same can #e enforced and collected.
Fnder the $IRC% it is the pro#ate or settlement court which is #idden not to authori<e the e;ecutor
or *udicial administrator of the decedentGs estate to deliver any distri#utive share to any party
interested in the estate% unless it is shown a Certification #y the Commissioner of Internal
Revenue that the estate ta;es have #een paid. This provision disproves the contention that it is
the pro#ate court which approves the assessment and collection of the estate ta;.
The delin.uent taxpayer is the -state of decedent and not the heirs of the deceased.
In the case of notices of levy issued to satisfy the delinquent estate ta;% the delinquent ta;payer is
the Cstate of the decedent% and not necessarily and e;clusively% the petitioner as heir of the
deceased. In the same vein% in the matter of income ta; delinquency of the late president and his
spouse% petitioner is not the ta;payer lia#le. Thus% it follows that service of notices of levy in
satisfaction of these ta; delinquencies upon the petitioner is not required #y law% as under 6ection
2-1 of the $IRC%
&age 21 of -.
Sec. 4547A87<8 - E0e)+!"on o# Cer!a"n ="#!sB C$ar"!a/&e Cor+ora!"ons

E&e)en!s o# a c$ar"!a/&e "ns!"!!"on>en!"!,.
In the legal sense% a charity may #e fully defined as a gift% to #e applied consistently with e;isting
laws% for the #enefit of an indefinite num#er of persons% either #y #ringing their minds and hearts
under the influence of education or religion% #y assisting them to esta#lish themselves in life or
otherwise lessening the #urden of government. It may #e applied to almost anything that tend to
promote the well:doing and well:#eing of social man. It em#races the improvement and promotion
of the happiness of man. To determine whether an enterprise is a charita#le institution/entity or
not% the elements which should #e considered include the statute creating the enterprise% its
corporate purposes% its constitution and #y:laws% the methods of administration% the nature of the
actual worA performed% the character of the services rendered% the indefiniteness of the
#eneficiaries% and the use and occupation of the properties. The word 3charita#le3 is not restricted
to relief of the poor or sicA. The test of a charity and a charita#le organi<ation are in law the same.
The test whether an enterprise is charita#le or not is whether it e;ists to carry out a purpose
reorgani<ed in law as charita#le or whether it is maintained for gain% profit% or private advantage.
$ charitable institution does not lose its character as such and its exemption from taxes
simply because it derives income from paying patients.
4s a general principle% a charita#le institution does not lose its character as such and its
e;emption from ta;es simply #ecause it derives income from paying patients% whether out:patient%
or confined in the hospital% or receives su#sidies from the government% so long as the money
received is devoted or used altogether to the charita#le o#*ect which it is intended to achieveD and
no money inures to the private #enefit of the persons managing or operating the institution.
Sec. 45< 7%8 - T")e and P&ace o# F"&"n( and Pa,)en! o# DonorEs Ta0

The filing of the return and payment of donor3s taxes are mandatory.
Fnder the $ational Internal Revenue Code of -9//% the ta; code in force at the time of the
e;ecution of the deed% an individual who maAes any transfer #y gift shall maAe a return and file
the same within 10 days after the date the gift is made with the Revenue District fficer%
Collection 4gent or duly authori<ed Treasurer of the municipality in which the donor was
domiciled at the time of the transfer. The filing of the return and payment of donor(s ta;es are
mandatory. In fact% the registrar of deeds is mandated not to register in the registry of property
any document transferring real property #y way of gifts inter vivos unless a certification that the
ta;es fi;ed and actually due on the transfer had #een paid or that the transaction is ta; e;empt
from the Commissioner of Internal Revenue% in either case% is presented.
+ydia 6umipat% et al. vs. Brigido Banga% et al.% ,.R. $o. -887-0% 4ugust -1% 200.
Sec. 456 - Va&e-added Ta0

=alue2added tax is an indirect tax.
The E4T is an indirect ta;. 4s such% the amount of ta; paid on the goods% properties or services
#ought% transferred% or leased may #e shifted or passed on #y the seller% transferor% or lessor to
the #uyer% transferee or lessee. FnliAe a direct ta;% such as the income ta;% which primarily ta;es
an individualGs a#ility to pay #ased on his income or net wealth% an indirect ta;% such as the E4T%
&age 22 of -.
is a ta; on consumption of goods% services% or certain transactions involving the same. The E4T%
thus% forms a su#stantial portion of consumer e;penditures.
Conte; Corp. vs. Commissioner of Internal Revenue% ,.R. $o. -8--18% July 2% 200.
1on2stoc,! non2profit organi8ations or government entities are liable to pay =$T on the
sale of goods or services.
6ec. -08 of R.4. $o. 7.2.% the $ational Internal Revenue Code of -99/% clarifies that even a non:
stocA% non:profit organi<ation or government entity% is lia#le to pay E4T on the sale of goods or
services. E4T is a ta; on transactions% imposed at every stage of the distri#ution process on the
sale% #arter% e;change of goods or property% and on the performance of services% even in the
a#sence of profit attri#uta#le thereto. The term 3in the course of trade or #usiness3 requires the
regular conduct or pursuit of a commercial or an economic activity% regardless of whether or not
the entity is profit:oriented.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -28188% )arch 10% 2000
9ifferent tax treatment of talents and broadcasters.
The $ational Internal Revenue Code in relation to R.4. $o. //-?% as amended #y R.4. $o. 72.-%
treats talents% television and radio #roadcasters differently. Fnder the $IRC% these professionals
are su#*ect to the -0M value:added ta; =E4T> on services they render. C;empted from the E4T
are those under an employer:employee relationship. This different ta; treatment accorded to
talents and #roadcasters #olsters the conclusion that they are independent contractors% provided
all the #asic elements of a contractual relationship are present.
Jose N. 6on<a vs. 4B6:CB$ Broadcasting Corp.% ,.R. $o. -1708-% June -0% 200.
The performance of all ,inds of services for others for a fee! remuneration or
consideration is considered as sale of services subect to =$T.
Cven if a corporation was organi<ed without any intention of reali<ing profit% any income or profit
generated #y the entity in the conduct of its activities is su#*ect to income ta;. 'ence% it is
immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reim#ursement:on:cost #asis only% without reali<ing profit%
for purposes of determining lia#ility for E4T on services rendered. 4s long as the entity provides
service for a fee% remuneration or consideration% then the service rendered is su#*ect to E4T.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -28188% )arch 10% 2000
9istinctions between 'liability for the tax' and 'burden of the tax' in indirect taxation.
In indirect ta;ation% there is a need to distinguish #etween the lia#ility for the ta; and the #urden
of the ta;. The amount of ta; paid may #e shifted or passed on #y the seller to the #uyer. Bhat is
transferred in such instances is not the lia#ility for the ta;% #ut the ta; #urden. In adding or
including the E4T due to the selling price% the seller remains the person primarily and legally
lia#le for the payment of the ta;. Bhat is shifted only to the intermediate #uyer and ultimately to
the final purchaser is the #urden of the ta;. 6tated differently% a seller who is directly and legally
lia#le for payment of an indirect ta;% such as the E4T on goods or services is not necessarily the
person who ultimately #ears the #urden of the same ta;. It is the final purchaser or consumer of
such goods or services who% although not directly and legally lia#le for the payment thereof%
ultimately #ears the #urden of the ta;.
>ero2rating distinguished from exemption.
Fnder Qero:rating% all E4T is removed from the <ero:rated goods% activity or firm. In contrast%
e;emption only removes the E4T at the e;empt stage% and it will actually increase% rather than
reduce the total ta;es paid #y the e;empt firmGs #usiness or non:retail customers. It is for this
&age 23 of -.
reason that a sharp distinction must #e made #etween <ero:rating and e;emption in designating a
value:added ta;.
1on2=$T taxpayer is not allowed any tax credit on =$T 4input tax5 previously paid.
!etitioner is registered as a $on:E4T ta;payer and thus% is e;empt from E4T. 4s an e;empt E4T
ta;payer% it is not allowed any ta; credit on E4T =input ta;> previously paid. In fine% even if it is
assumed that e;emption from the #urden of E4T on petitionerGs purchases did e;ist% petitioner is
still not entitled to any ta; credit or refund on the input ta; previously paid as petitioner is an
e;empt E4T ta;payer. Rather% it is the petitionerGs suppliers who are the proper parties to claim
the ta; credit and accordingly refund the petitioner of the E4T erroneously passed on to the latter.
Sec. 452 - VAT on Sa&e o# =oods or Ser'"ces

Tax Code excludes =$T from the 'gross selling price' to avoid a 'tax on the tax'.
5or purposes of the value:added ta;% 6ection -0? of the Ta; Code e;pressly e;cludes the value:
added ta; from the 3gross selling price3 to avoid a 3ta; on the ta;.3 To clarify that only the value:
added ta; does not form part of the gross selling price% 6ection -0? e;pressly states that the
gross selling price shall include any e;cise ta;% effectively resulting in a 3ta; on a ta;.3 f course%
the 3ta; on a ta;3 is in reality a ta; on the portion of the income or receipt that is equivalent to the
ta;% usually withheld and remitted to the government.
China BanAing Corp. vs. Court of 4ppeals% ,.R. $o. -.?/.9% June -0% 2001
Sec. 45@ - VAT on Sa&e o# Ser'"ces and Use or Lease o# Pro+er!"es
0ross receipts tax distinguished from final withholding tax.
There is no dou#le ta;ation when 6ection -2- of the Ta; Code imposes a gross receipts ta; on
interest income that is already su#*ected to the 20M final withholding ta; under 6ection 2/ of the
Ta; Code. The gross receipts ta; is a #usiness ta; under Title E of the Ta; Code% while the final
withholding ta; is an income ta; under Title II of the Code. There is no dou#le ta;ation if the law
imposes two different ta;es on the same income% #usiness or property.
China BanAing Corp. vs. Court of 4ppeals% ,.R. $o. -.?/.9% June -0% 2001
Sec. 445 - Ta0 Cred"!s

=$T invoice can be used only for sale of goods and services subect to =$T.
4 E4T invoice can #e used only for the sale of goods and services that are su#*ect to E4T. The
corresponding ta;es thereon shall #e allowed as input ta; credits for those su#*ect to E4T.
4tlas Consolidated )ining L Development Corp. vs. Commissioner of Internal Revenue% ,.R. $o.
-1..?/% $ovem#er -/% -999
Sec. 44? - Percen!a(e Ta0 on Do)es!"c Carr"ers
The common carriers< tax is based on 'gross receipts'.
The Ta; Code does not also define the term 3gross receipts3 for purposes of the common
carriersG ta;% the international carriersG ta;% the ta; on radio and television franchises% and the ta;
on finance companies. 4ll these #usiness ta;es under Title E of the Ta; Code are #ased on gross
receipts. Despite the a#sence of a statutory definition% these ta;es have #een collected in this
country for over half a century on the general and common understanding that they are #ased on
all receipts without any deduction.
&age 2- of -.
China BanAing Corp. vs. Court of 4ppeals% ,.R. $os. -.?/.9 L -./917% June -0% 2001
Sec. 44@ - Percen!a(e Ta0 on In!erna!"ona& Carr"ers
The international carriers< tax is based on 'gross receipts'.
Sec. 44A - Franc$"se Ta0

The tax on radio and television franchises is based on 'gross receipts'.
Sec. 424 - Ta0 on %an*s and Non-/an* F"nanc"a& In!er)ed"ar"es
Interest income is taxable for gross receipts tax purposes only upon actual receipt.
Income may #e ta;a#le either at the time of its actual receipt or its accrual% depending on the
accounting method of the ta;payer. 6ection .=e> of Revenue Regulations $o. -2:70 merely
provides for an e;ception to the rule% maAing interest income ta;a#le for gross receipts ta;
purposes only upon actual receipt. Interest is accrued% and not actually received% when the
interest is due and demanda#le #ut the #orrower has not actually paid and remitted the interest%
whether physically or constructively. 6ection .=e> does not e;clude accrued interest income from
gross receipts #ut merely postpones its inclusion until actual payment of the interest to the
lending #anA
The Tax Code does not define the term 'gross receipts' for purposes of the gross receipts
tax on ban,s.
6ection -2- of the Ta; Code e;pressly su#*ects interest income to the gross receipts ta; on
#anAs. 6uch e;press inclusion of interest income in ta;a#le gross receipts creates a presumption
that the entire amount of the interest income% without any deduction% is su#*ect to the gross
receipts ta;. The Ta; Code does not define the term 3gross receipts3 for purposes of the gross
receipts ta; on #anAs. 6ince - cto#er -9.? when R4 $o. 19 first imposed the gross receipts ta;
on #anAs until the present% there has #een no statutory definition of the term 3gross receipts.3
4#sent a statutory definition% the BIR has applied the term in its plain and ordinary meaning. 4s
commonly understood% the term 3gross receipts3 means the entire receipts without any deduction.
Deducting any amount from the gross receipts changes the result% and the meaning% to net
receipts. 4ny deduction from gross receipts is inconsistent with a law that mandates a ta; on
gross receipts% unless the law itself maAes an e;ception. 4#sent a statutory definition% the term
3gross receipts3 is understood in its plain and ordinary meaning. Bords in a statute are taAen in
their usual and familiar signification% with due regard to their general and popular use.
&age 2; of -.
The term 'gross receipts' does not admit of any deduction.
Fnder Revenue Regulations $os. -2:70 and -/:7.% as well as in several num#ered rulings% the
BIR has consistently ruled that the term 3gross receipts3 does not admit of any deduction. This
interpretation has remained unchanged throughout the various re:enactments of the present
6ection -2- of the Ta; Code. The only conclusion that can #e drawn is that the legislature has
adopted the BIRGs interpretation% following the principle of legislative approval #y re:enactment.
Mean"n( o# F"n!eres!F.
Bhen 6ection -2- of the Ta; Code includes 3interest3 as part of gross receipts% it refers to the
entire interest earned and owned #y the #anA without any deduction. 3Interest3 means the gross
amount paid #y the #orrower to the lender as consideration for the use of the lenderGs money.
6ection 2=h> of Revenue Regulations $o. -2:70% now 6ection 2=i> of Revenue Regulations $o.
-/:7.% defines the term 3interest3 as 3the amount which a depository #anA =#orrower> may pay on
savings and time deposit in accordance with rates authori<ed #y the Central BanA of the
!hilippines.3 This definition does not allow any deduction. The entire interest paid #y the
depository #anA% without any deduction% is what forms part of the lending #anAGs gross receipts.
Ban,s are covered by percentage tax and income tax.
BanAs are covered #y two types of ta;es@ =-> the ,ross Receipts Ta; =,RT>% which is a
percentage ta;D and =2> the 5inal Bithholding Ta; =5BT>% which is an income ta;. 4 percentage
ta; is a national ta; measured #y a certain percentage of the gross selling price or gross value in
money of goods sold% #artered or importedD or of the gross receipts or earnings derived #y any
person engaged in the sale of services. It is not su#*ect to withholding. 4n income ta;% on the
other hand% is a national ta; imposed on the net or the gross income reali<ed in a ta;a#le year. It
is su#*ect to withholding.
Commissioner of Internal Revenue vs. 6olid#anA Corp.% ,.R. $o. -.7-9-% $ovem#er 28% 2001
Income constructively received is included as part of the tax base upon which the 0RT is
imposed.
In our withholding ta; system% possession is acquired #y the payor as the withholding agent of the
government% #ecause the ta;payer ratifies the very act of possession for the government. There
is thus constructive receipt. The processes of #ooAAeeping and accounting for interest on
deposits and yield on deposit su#stitutes that are su#*ected to 5BT are indeed : for legal
purposes : tantamount to delivery% receipt or remittance. Besides% respondent itself admits that its
income is su#*ected to a ta; #urden immediately upon 3receipt%3 although it claims that it derives
no pecuniary #enefit or advantage through the withholding process. There #eing constructive
receipt of such income : part of which is withheld : RR -/:7. applies% and that income is included
as part of the ta; #ase upon which the ,RT is imposed.
$mounts earmar,ed do not form part of gross receipts.
CarmarAing is not the same as withholding. 4mounts earmarAed do not form part of gross
receipts% #ecause% although delivered or received% these are #y law or regulation reserved for
some person other than the ta;payer. n the contrary% amounts withheld form part of gross
receipts% #ecause these are in constructive possession and not su#*ect to any reservation% the
withholding agent #eing merely a conduit in the collection process.
&age 2. of -.
RR ?@2A7 is superseded by RR ?B2AC.
RR -2:70 imposes the ,RT only on all items of income actually received% as opposed to their
mere accrual% while RR -/:7. includes all interest income in computing the ,RT. RR -2:70 is
superseded #y the later rule% #ecause 6ection .=e> thereof is not restated in RR -/:7.. Clearly
therefore% this particular provision was impliedly repealed when the later regulations tooA effect.
0ross receipts do not include monies or receipts entrusted to the taxpayer.
,ross receipts su#*ect to ta; under the Ta; Code do not include monies or receipts entrusted to
the ta;payer which do not #elong to them and do not redound to the ta;payerGs #enefitD and it is
not necessary that there must #e a law or regulation which would e;empt such monies and
receipts within the meaning of gross receipts under the Ta; Code.
Commissioner of Internal Revenue vs. Tours 6pecialists% Inc.% et al.% ,.R. $o. ??.-?% )arch 2-%
-990
The @7D portion of ban,s< passive income constitutes part of their actual earnings.
The fact is that if there were no withholding ta; system in place in this country% this 20 percent
portion of the 3passive3 income of #anAs would actually #e paid to the #anAs and then remitted #y
them to the government in payment of their income ta;. The institution of the withholding ta;
system does not alter the fact that the 20 percent portion of their 3passive3 income constitutes
part of their actual earnings% e;cept that it is paid directly to the government on their #ehalf in
satisfaction of the 20 percent final income ta; due on their 3passive3 incomes.
Sec. 422 - Ta0 on F"nance Co)+an"es
The tax on finance companies is based on 'gross receipts'.
Sec. 426 - A)se)en! Ta0es

The Tax Code ma,es a special definition of the term 'gross receipts'.
5or the amusement ta;% which is also a #usiness ta; under the same Title E% the Ta; Code
maAes a special definition of the term 3gross receipts.3 The term 3gross receipts3 for amusement
ta; purposes 3em#races all receipts of the proprietor% lessee or operator of the amusement
place.3 The Ta; Code further adds that 3RsSaid gross receipts also include income from television%
radio and motion picture rights% if any.3 This definition merely confirms that the term 3gross
receipts3 em#races the entire receipts without any deduction or e;clusion% as the term is generally
and commonly understood.
Sec. 415 - Re)o'a& o# To/acco Prodc!s W"!$o! Pre+a,)en! o# Ta0

Conditions for transfer without prepayment of specific tax on stemmed leaf tobacco.
&age 26 of -.
The following conditions must #e met for stemmed leaf to#acco to #e transferred without
prepayment of specific ta;% to wit@
=a> The transfer shall #e made pursuant to an official +:/ invoice on which shall #e entered
the e;act weight of the to#acco at the time of its removalD
=#> Cntry shall #e made in the +:/ register in the place provided on the page removalsD and
=c> Corresponding de#it entry shall #e made in the +:/ register #ooA of the factory receiving
the to#acco under the heading 3Refuse% etc.% received from the other factory%3 showing the date of
receipt% assessment and invoice num#ers% name and address of the consignor% form in which
received% and the weight of the to#acco.
Commissioner of Internal Revenue vs. +a Campana 5a#rica de Ta#acos% Inc.% ,.R. $o. -.82/8%
$ovem#er -8% 200-
Tax Code provisions on sale of stemmed leaf tobacco must be read and interpreted in
accordance with pertinent Revenue Regulations.
Both 6ections -1/ and -.- of the former Ta; Code =now 6ections -.0 and -.. of R.4. $o. 7.2.>
allowed the sale of stemmed leaf to#acco without any pre:payment of ta;. 'owever% a careful
reading of the provisions show that such sale is qualified #y and is su#*ect to 3such conditions as
may #e prescri#ed in the regulations of the Department of 5inance.3 6aid conditions were
provided for in Revenue Regulations $os. E:19 and -/:?/% which were issued to clarify and
implement the foregoing provisions of the Ta; Code. 'ence% said provisions of the Ta; Code
must #e read and interpreted in accordance with said regulations.
Compania ,eneral de Ta#acos de 5ilipinas vs. Court of 4ppeals% et al.% ,.R. $o. -./1?-% )arch
21% 200.
To claim exemption from specific tax! both the entity and the transferee must be
categori8ed as L2B manufacturers.
It is clear that an entity claiming e;emption from specific ta; under 6ection -1/% must prove that
#oth the entity and the transferee are categori<ed as +:/ manufacturers since only an +:/ to#acco
manufacturer has an +:/ invoice and an +:/ registry #ooA. The ta;payer is engaged in the e;port%
domestic sale and re:drying of to#acco leaves% activities which are designated as falling either
under +:1R or +:? under Revenue Regulations $o. -/:?/. Thus% not #eing designated as an +:/
to#acco manufacturer% it cannot claim any e;emption from payment of the specific ta; on its
stemmed leaf to#acco. Therefore% it is lia#le to pay the specific ta; thereon and is not lia#le to any
refund of the specific ta;es paid.
21% 200.
Sec. 412 - Ins+ec!"on Fee

BIR Commissioner is empowered to collect tobacco inspection fees even without
inspection.
To#acco Inspection fees are undou#tedly $ational Internal Revenue ta;es% they #eing one of the
miscellaneous ta;es provided for under the Ta; Code. 6ection 227 =formerly 6ection 102> of
Chapter EII of the Code specifically provides for the collection and manner of payment of the said
inspection fees. It is within the power and duty of the Commissioner to collect the same% even
without inspection% should to#acco products #e removed clandestinely or surreptitiously from the
esta#lishment of the wholesaler% manufacturer or redrying plant and from the customs custody in
case of imported leaf to#acco. Crrors% omissions or flaws committed #y BIR inspectors and
representatives while in the performance of their duties cannot #e set up as estoppel nor estop
the ,overnment from collecting a ta; legally due. To#acco inspection fees are levied and
&age 3< of -.
collected for purposes of regulation and control and also as a source of revenue since fifty
percentum =80M> of said fees shall accrue to the To#acco Inspection 5ee 5und created #y 6ec.
-2 of 4ct $o. 2?-1% as amended and the other fifty percentum% to the Cultural Center of the
!hilippines.
+a 6uerte Cigar and Cigarette 5actory% et al. vs. Court of Ta; 4ppeals% et al.% ,.R. $o. +:1?-10%
January -/% -978
Sec. 4?< - S!a)+ Ta0es U+on Doc)en!s- Loan A(ree)en!s- Ins!r)en!s- and Pa+ers
Tax base for computation of documentary stamp taxes on life insurance policies is the
amount fixed in the policy.
The amount fi;ed in the policy is the figure written on its face and whatever increases will taAe
effect in the future #y reason of the 3automatic increase clause3 em#odied in the policy without
the need of another contract. 'ere% although the automatic increase in the amount of life
insurance coverage was to taAe effect later on% the date of its effectivity% as well as the amount of
the increase% was already definite at the time of the issuance of the policy. Thus% the amount
insured #y the policy at the time of its issuance necessarily included the additional sum covered
#y the automatic increase clause #ecause it was already determina#le at the time the transaction
was entered into and formed part of the policy.
Commissioner of Internal Revenue vs. +incoln !hilippine +ife Insurance Company% Inc.% et al.%
,.R. $o. --9-/?% )arch -9% 2002
Increase in insurance due to 'automatic increase clause' in policy is subect to
documentary stamp tax.
The 3automatic increase clause3 in the policy is in the nature of a conditional o#ligation under
4rticle --7-% #y which the increase of the insurance coverage shall depend upon the happening
of the event which constitutes the o#ligation. Thus% the additional insurance that had taAen effect
was an o#ligation su#*ect to a suspensive o#ligation% #ut still a part of the insurance sold to which
the life insurance company was lia#le for the payment of the documentary stamp ta;.
,.R. $o. --9-/?% )arch -9% 2002
9eficiency of documentary stamp tax is imposed on the increase of amount insured upon
the effectivity of the 'Eunior -state Builder +olicy.'
The deficiency of documentary stamp ta; imposed on life insurance company is definitely not on
the amount of the original insurance coverage% #ut on the increase of the amount insured upon
the effectivity of the 3Junior Cstate Builder !olicy.3
,.R. $o. --9-/?% )arch -9% 2002
Sec. 25< - Per"od o# L")"!a!"on U+on Assess)en! and Co&&ec!"on

Limitation of actions for collection of income tax benefits both the 0overnment and its
citi8ens.
The law prescri#ing a limitation of actions for the collection of the income ta; is #eneficial #oth to
the ,overnment and to its citi<ensD to the ,overnment #ecause ta; officers would #e o#liged to
act promptly in the maAing of assessment% and to citi<ens #ecause after the lapse of the period of
prescription citi<ens would have a feeling of security against unscrupulous ta; agents who will
always find an e;cuse to inspect the #ooAs of ta;payers% not to determine the latterGs real lia#ility%
#ut to taAe advantage of every opportunity to molest peaceful% law:a#iding citi<ens. Bithout such
&age 37 of -.
a legal defense ta;payers would furthermore #e under o#ligation to always Aeep their #ooAs and
Aeep them open for inspection su#*ect to harassment #y unscrupulous ta; agents.
Repu#lic of the !hils. vs. +uis ,. 4#la<a% ,.R. $o. +:-.8-9% July 2?% -9?0
Tax assessments by tax examiners are presumed correct and made in good faith
Ta; assessments #y ta; e;aminers are presumed correct and made in good faith. The ta;payer
has the duty to prove otherwise. In the a#sence of proof of any irregularities in the performance of
duties% an assessment duly made #y a Bureau of Internal Revenue e;aminer and approved #y his
superior officers will not #e distur#ed. 4ll presumptions are in favor of the correctness of ta;
assessments.
6eptem#er 10% -99-
&aiver of statute of limitations does not mean that taxpayer relin.uishes its right to
invo,e prescription.
4 waiver of the statute of limitations under the $IRC% to a certain e;tent% is a derogation of the
ta;payers( right to security against prolonged and unscrupulous investigations and must therefore
#e carefully and strictly construed. The waiver of the statute of limitations is not a waiver of the
right to invoAe the defense of prescription as erroneously held #y the Court of 4ppeals. It is an
agreement #etween the ta;payer and the BIR that the period to issue an assessment and collect
the ta;es due is e;tended to a date certain. The waiver does not mean that the ta;payer
relinquishes the right to invoAe prescription unequivocally particularly where the language of the
document is equivocal. 5or the purpose of safeguarding ta;payers from any unreasona#le
e;amination% investigation or assessment% our ta; law provides a statute of limitations in the
collection of ta;es. Thus% the law on prescription% #eing a remedial measure% should #e li#erally
construed in order to afford such protection. 4s a corollary% the e;ceptions to the law on
prescription should perforce #e strictly construed.
!hilippine Journalists% Inc. vs. Commissioner of Internal Revenue% ,.R. $o. -?2782% Decem#er
-?% 200.
&aiver of statute of limitations is a bilateral agreement between taxpayer and BIR.
The waiver is not a unilateral act #y the ta;payer or the BIR% #ut is a #ilateral agreement #etween
two parties to e;tend the period to a date certain. The conformity of the BIR must #e made #y
either the Commissioner or the Revenue District fficer.
-?% 200.
Re.uirement to furnish taxpayer with copy of the waiver is to give notice of acceptance by
the BIR and perfection of the agreement.
Fnder R) $o. 20:90% the waiver must #e e;ecuted in three copies with the second copy for the
ta;payer. The ta;payer must #e furnished with a copy of the waiver #ecause even if Anowingly
e;ecuted% it is not considered a unilateral act of the ta;payer #ut is in fact and in law an
agreement #etween the ta;payer and the BIR. Bhen the ta;payer(s comptroller signed the
waiver% it was not yet complete and final #ecause the BIR had not assented. There is compliance
with the provision of R) $o. 20:90 only after the ta;payer received a copy of the waiver
accepted #y the BIR. The requirement to furnish the ta;payer with a copy of the waiver is not only
to give notice of the e;istence of the document #ut of the acceptance #y the BIR and the
perfection of the agreement.
-?% 200.
&age 3, of -.
To be binding! waivers re.uire the concurrence of the Commissioner of Internal Revenue.
The waivers in question reveal that they are in no wise unequivocal% and therefore necessitates
for its #inding effect the concurrence of the Commissioner of Internal Revenue. n this #asis
neither implied consent can #e presumed nor can it #e contended that the waiver required under
6ec. 1-9 of the Ta; Code is one which is unilateral nor can it #e said that concurrence to such an
agreement is a mere formality #ecause it is the very signatures of #oth the Commissioner of
Internal Revenue and the ta;payer which give #irth to such a valid agreement.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. --8/-2% 5e#ruary 28%
-999
-xceptions to the law on prescription should be strictly construed.
a> 5or the purpose of safeguarding ta;payers from any unreasona#le e;amination%
investigation or assessment% our ta; law provides a statute of limitations in the collection
of ta;es. Thus% the law on prescription% #eing a remedial measure% should #e li#erally
construed in order to afford such protection. 4s a corollary% the e;ceptions to the law on
prescription should perforce #e strictly construed.
Commissioner of Internal Revenue vs. B.5. ,oodrich !hils.% Inc.% et al.% ,.R. $o. -0.-/-%
5e#ruary 2.% -999
#> The law of prescription #eing a remedial measure should #e interpreted in a way
conducive to #ringing a#out the #eneficient purpose of affording protection to the
ta;payer within the contemplation of the Commission which recommend the approval of
the law.
1otice of assessment should be sent to the taxpayer and not merely to a disinterested
party.
The law requires that the notice #e sent to the ta;payer% and not merely to a disinterested party.
4lthough there is no specific requirement that the ta;payer should receive the notice within the
said period% due process requires at the very least that such notice actually #e received. !hiltrust
had a#solutely no legal relationship to the deceased% or to her Cstate. There was therefore no
assessment served on the Cstate as to the alleged underpayment of ta;. 4#sent this assessment%
no proceedings could #e initiated in court for the collection of said ta;.
Cstate of the +ate Juliana Die< vda. de ,a#riel vs. Commissioner of Internal Revenue% ,.R. $o.
-888.-% January 2/% 200.
$ssessments based on illegally2sei8ed documents cannot be enforced against taxpayer.
Ta; assessments #ased on documents sei<ed #y virtue of an illegal search% and the deprivation
of the right to due process tainted the entire proceedings with illegality.
Bache L Co. =!hil.>% Inc.% et al. vs. Eivencio ). Rui<% et al.% ,.R. $o. +:12.09% 5e#ruary 2/% -9/-
$n assessment letter may be presumed to have been received by the taxpayer.
Bhen sent #y registered mail% an assessment letter is presuma#ly received in the regular course
of the mail if it is proved =a> that the letter was properly addressed with postage prepaidD and =#>
that it was mailed. nce these facts are proved% the presumption is that the letter was received #y
the addressee as soon as it could have #een transmitted to him in the ordinary course of the
mails.
!rotectorGs 6ervices% Inc. vs. Court of 4ppeals% et al.% ,.R. $o. --7-/?% 4pril -2% 2000
$ssessment based on estimates is prima facie valid and lawful.
&age 31 of -.
It is not the Department of Justice which is the government agency tasAed to determine the
amount of ta;es due upon the su#*ect estate% #ut the Bureau of Internal Revenue% whose
determinations and assessments are presumed correct and made in good faith. The ta;payer has
the duty of proving otherwise. In the a#sence of proof of any irregularities in the performance of
official duties% an assessment will not #e distur#ed. Cven an assessment #ased on estimates is
prima facie valid and lawful where it does not appear to have #een arrived at ar#itrarily or
capriciously. The #urden of proof is upon the complaining party to show clearly that the
assessment is erroneous. 5ailure to present proof of error in the assessment will *ustify the
*udicial affirmance of said assessment.
"uit for collection of internal revenue taxes is a,in to an action to enforce udgment.
In a suit for collection of internal revenue ta;es% where the assessment has already #ecome final
and e;ecutory% the action to collect is aAin to an action to enforce a *udgment. $o inquiry can #e
made therein as to the merits of the original case or the *ustness of the *udgment relied upon. The
defense of prescription can no longer #e raised.
)am#ulao +um#er Co. vs. Repu#lic of the !hils.% ,.R. $o. +:1/0?-% 6eptem#er 8% -97.
$ll presumptions are in favor of tax assessments
4ssessments are prima facie presumed correct and made in good faith. Contrary to the theory of
4C)DC% it is the ta;payer and not the Bureau of Internal Revenue who has the duty of proving
otherwise. It is an elementary rule that in the a#sence of proof of any irregularities in the
performance of official duties% an assessment will not #e distur#ed. 4ll presumptions are in favor
of ta; assessments. Eerily% failure to present proof of error in the assessment will *ustify *udicial
affirmance of said assessment.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. -0.-8-% )arch -0% -998
Contents of a valid tax assessment.
4n assessment contains not only a computation of ta; lia#ilities% #ut also a demand for payment
within a prescri#ed period. It also signals the time when penalties and interests #egin to accrue
against the ta;payer. To ena#le the ta;payer to determine his remedies thereon% due process
requires that it must #e served on and received #y the ta;payer.
Commissioner of Internal Revenue vs. !ascor Realty and Devt. Corp.% et al.% ,.R. $o. -271-8%
June 29% -999
&hen tax assessment is deemed made.
The assessment is deemed made when the notice to this effect is released% mailed or sent to the
ta;payer for the purpose of giving effect to said assessment. It appearing that the person lia#le
for the payment of the ta; did not receive the assessment% the assessment could not #ecome
final and e;ecutory.
Repu#lic of the !hils. vs. +eonor de la Rama% et al.% ,.R. $o. +:2--07% $ovem#er 29% -9??
1otice of assessment sent to taxpayer3s old office is not a valid assessment.
4ssuming arguendo that there was a deficiency ta; for which the ta;payer was lia#le% the
commissioner failed to maAe a valid assessment on it since the notice of assessment was sent to
the !4CGs old =and therefore improper> office address. !4C already indicated its new address in
its -97? ta; return filed with the BIRGs )aAati office. This notwithstanding% the commissioner sent
the notice of assessment to the ta;payer(s old #usiness address instead of its new address%
which was also B!IGs =!4CGs liquidator> office address. 6ince there was a failure to effect a timely
valid assessment% the period for filing a criminal case for !4CGs ta; lia#ilities had prescri#ed #y
the time petitioner instituted the criminal cases against its former officers.
&age 32 of -.
Commissioner of Internal Revenue vs. B!I% as liquidator of !aramount 4cceptance Corp.% ,.R.
$o. -18..?% 6eptem#er 21% 2001
1ot all BIR documents containing a computation of tax liability can be deemed
assessments.
$either the $IRC nor the revenue regulations governing the protest of assessments provide a
specific definition or form of an assessment. 'owever% the $IRC defines the specific functions
and effects of an assessment. To consider the affidavit attached to the Complaint as a proper
assessment is to su#vert the nature of an assessment and to set a #ad precedent that will
pre*udice innocent ta;payers. 4n assessment informs the ta;payer that he or she has ta;
lia#ilities. But not all documents coming from the BIR containing a computation of the ta; lia#ility
can #e deemed assessments.
June 29% -999
$ssessment must be sent to and received by a taxpayer and must demand payment of
taxes.
4n assessment must #e sent to and received #y a ta;payer% and must demand payment of the
ta;es descri#ed therein within a specific period. Thus% the $IRC imposes a 28 percent penalty% in
addition to the ta; due% in case the ta;payer fails to pay the deficiency ta; within the time
prescri#ed for its payment in the notice of assessment. +iAewise% an interest of 20 percent per
annum% or such higher rate as may #e prescri#ed #y rules and regulations% is to #e collected from
the date prescri#ed for its payment until the full payment.
June 29% -999
Issuance of an assessment is vital in determining period of limitation.
The issuance of an assessment is vital in determining the period of limitation regarding its proper
issuance and the period within which to protest it. 6ection 201 of the $IRC provides that internal
revenue ta;es must #e assessed within three years from the last day within which to file the
return. 6ection 222% on the other hand% specifies a period of ten years in case a fraudulent return
with intent to evade was su#mitted or in case of failure to file a return. 4lso% 6ection 227 of the
same law states that said assessment may #e protested only within thirty days from receipt
thereof. $ecessarily% the ta;payer must #e certain that a specific document constitutes an
assessment. therwise% confusion would arise regarding the period within which to maAe an
assessment or to protest the same% or whether interest and penalty may accrue thereon. It should
also #e stressed that the said document is a notice duly sent to the ta;payer. Indeed% an
assessment is deemed made only when the collector of internal revenue releases% mails or sends
such notice to the ta;payer.
June 29% -999
$ffidavit containing a computation of tax liability is not a valid assessment.
The purpose of the Joint 4ffidavit containing a computation of ta; lia#ility was merely to support
and su#stantiate the criminal complaint for ta; evasion. Clearly% it was not meant to #e a notice of
the ta; due and a demand for payment thereof.
June 29% -999
*nreasonable investigation refers to cases where period for assessment extends
indefinitely.
The $IRC% under 6ections 201 and 222% provides for a statute of limitations on the assessment
and collection of internal revenue ta;es in order to safeguard the interest of the ta;payer against
&age 33 of -.
unreasona#le investigation. Fnreasona#le investigation contemplates cases where the period for
assessment e;tends indefinitely #ecause this deprives the ta;payer of the assurance that it will
no longer #e su#*ected to further investigation for ta;es after the e;piration of a reasona#le period
of time.
-?% 200.
Rationale for prescribing a limitation of actions for income tax collection.
The law prescri#ing a limitation of actions for the collection of the income ta; is #eneficial #oth to
the ,overnment and to its citi<ensD to the ,overnment #ecause ta; officers would #e o#liged to
act promptly in the maAing of assessment% and to citi<ens #ecause after the lapse of the period of
prescription citi<ens would have a feeling of security against unscrupulous ta; agents who will
always find an e;cuse to inspect the #ooAs of ta;payers% not to determine the latterGs real lia#ility%
#ut to taAe advantage of every opportunity to molest peaceful% law:a#iding citi<ens. Bithout such
a legal defense ta;payers would furthermore #e under o#ligation to always Aeep their #ooAs and
Aeep them open for inspection su#*ect to harassment #y unscrupulous ta; agents. The law on
prescription #eing a remedial measure should #e interpreted in a way conducive to #ringing a#out
the #eneficent purpose of affording protection to the ta;payer within the contemplation of the
Commission which recommend the approval of the law.
Sec. 251 - A!$or"!, o# !$e Co))"ss"oner !o Co)+ro)"se- A/a!e- and Re#nd or Cred"!
Ta0es

Re.uisites for the exercise of commissioner3s power to abate or cancel tax liability.
The power of the commissioner to a#ate or cancel a ta; lia#ility can #e e;ercised only when =->
the ta; appears to #e un*ustly or e;cessively assessed% or =2> the administration and collection
costs involved do not *ustify the collection of the ta; due. In this instance% the cancellation of ta;
lia#ility is done even #efore the determination of the amount due. In any event% criminal violations
of the Ta; Code% for which legal actions have #een filed in court or in which fraud is involved%
cannot #e compromised.
5rancisco I. Chave< vs. !C,,% et al.% ,.R. $o. -10/-?% Decem#er 9% -997
/mbudsman can investigate where there is a suspicion of impropriety in the grant of tax
refund by BIR.
The determination of whether to grant a ta; refund falls within the e;clusive e;pertise of the BIR.
$onetheless% when there is a suspicion of even *ust a tinge of impropriety in the grant of the
same% the m#udsman could rightfully ascertain whether the determination was done in
accordance with law and identify the persons who may #e held responsi#le thereto. In that sense%
the m#udsman could not #e accused of unlawfully intruding into and intervening with the BIR(s
e;ercise of discretion.
Commissioner of Internal Revenue vs. ffice of the m#udsman% ,.R. $o. --8-01% 4pril --%
2002
Sec. 256 - Re)ed"es #or !$e Co&&ec!"on o# De&"n.en! Ta0es
$ssessment of a deficiency is not necessary to a criminal prosecution for tax evasion.
Bhile there can #e no civil action to enforce collection #efore the assessment procedures
provided in the Code have #een followed% there is no requirement for the precise computation
and assessment of the ta; #efore there can #e a criminal prosecution under the Code. 4n
assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat
&age 3- of -.
and evade the income ta;. 4 crime is complete when the violator has Anowingly and willfully filed
a fraudulent return with intent to evade and defeat the ta;. The perpetration of the crime is
grounded upon Anowledge on the part of the ta;payer that he has made an inaccurate return% and
the government(s failure to discover the error and promptly to assess has no connections with the
commission of the crime.
Iuirico !. Fnga# vs. Eicente $. Cusi% Jr.% et al.% ,.R. $os. +:.-9-9:2.% )ay 10% -970

Sec. 252 - Cons!rc!"'e D"s!ra"n! o# Ta0+a,erEs Pro+er!,
BIR cannot appoint a depositary as a public officer.
The constructive distraint of personal property shall #e effected #y requiring the ta;payer or any
person having possession or control of such property to sign a receipt covering the property
distrained and o#ligate himself to preserve the same intact and unaltered and not to dispose of
the same in any manner whatever without the e;press authority of the Commissioner. 'owever%
there is no provision in the $IRC constituting such person a pu#lic officer #y reason of such
requirement. The BIRGs power authori<ing a private individual to act as a DC!6IT4RN cannot
#e stretched to include the power to appoint him as a pu#lic officer.
4lfredo +. 4<arcon vs. 6andigan#ayan% ,.R. $o. --?011% 5e#ruary 2?% -99/

Sec. 25?7A87%8 - D"s!ra"n! and Le',
Inability to pay taxes which may result in suspension of business is not a defense in
enforcement of tax laws.
Iuoting from the case of Noung#lood vs. 6e;ton =12 )ich.% .0?>% Judge Cooley% speaAing for the
court% said@ 3But if this consideration is sufficient to *ustify the transfer of a controversy from a
court of law to a court of equity% then every controversy where money is demanded may #e made
the su#*ect of equita#le cogni<ance. To enforce against a dealer a promissory note may in some
cases as effectually #reaA up his #usiness as to collect from him a ta; of equal amount. This is
not what is Anown to the law as irrepara#le in*ury. The courts have never recogni<ed the
consequences of the mere enforcement of a money demand as falling within that category.3
5rancis 4. Churchill% et al.% vs. James J. Rafferty% ,.R. $o. -08/2% Decem#er 2-% -9-8
6aturnino David vs. 6imeon Ramos% et al.% ,.R. $o. +:.100% cto#er 1-% -98-
Sec. 25A - Sa&e o# Pro+er!, D"s!ra"ned and D"s+os"!"on o# Proceeds
BIR3s power to appoint a depositary cannot include the power to appoint him as public
officer.
It is true that 6ec. 20? of the $IRC authori<es the BIR to effect a constructive distraint #y
requiring 3any person3 to preserve a distrained property% thus@ 3. . . The constructive distraint of
personal property shall #e effected #y requiring the ta;payer or any person having possession or
control of such property to sign a receipt covering the property distrained and o#ligate himself to
preserve the same intact and unaltered and not to dispose of the same in any manner whatever
without the e;press authority of the Commissioner. . . 'owever% there is no provision in the $IRC
constituting such person a pu#lic officer #y reason of such requirement. The BIRGs power
authori<ing a private individual to act as a DC!6IT4RN cannot #e stretched to include the
power to appoint him as a pu#lic officer.
4lfredo +. 4<arcon vs. 6andigan#ayan% et al.% ,.R. $o. --?011% 5e#ruary 2?% -99/
Sec. 24@ - In3nc!"on no! a'a"&a/&e !o res!ra"n co&&ec!"on o# !a0.

&age 3; of -.
Imposition of safeguard measures should not be enoined despite availability of udicial
review.
6ection 2-7 of the Ta; Reform 4ct of -99/ prohi#its any court from granting an in*unction to
restrain the collection of any national internal revenue ta;% fee or charge imposed #y the internal
revenue code. 4 similar philosophy is e;pressed #y 6ection 29 of the 6afeguard )easures 4ct
=R.4. $o. 7700>% which states that the filing of a petition for review #efore the CT4 does not stop%
suspend% or otherwise toll the imposition or collection of the appropriate tariff duties or the
adoption of other appropriate safeguard measures. This evinces a clear legislative intent that the
imposition of safeguard measures% despite the availa#ility of *udicial review% should not #e
en*oined notwithstanding any timely appeal of the imposition.
6outhern Cross Cement Corp. vs. !hil. Cement )anufacturers Corp.% et al.% ,.R. $o. -878.0%
July 7% 200.
By ta,ing away inunction! the "tate leaves the taxpayer to the same ordinary remedial
actions prevailing between citi8en and citi8en.
!reventive remedies of the courts are e;traordinary and are not the usual remedies. The origin
and history of the writ of in*unction show that it has always #een regarded as an e;traordinary%
preventive remedy% as distinguished from the common course of the law to redress evils after
they have #een consummated. $o in*unction issues as of course% #ut is granted only upon the
oath of a party and when there is no adequate remedy at law. The ,overnment does taAe away
the preventive remedy of in*unction% if it ever e;isted% and leaves the ta;payer% in a contest with it%
to the same ordinary remedial actions which prevail #etween citi<en and citi<en.
5rancis 4. Churchill% et al. vs. James J. Rafferty% ,.R. $o. -08/2% Decem#er 2-% -9-8
Illegality or unconstitutionality of a tax does not authori8e courts to restrain its collection
by inunction.
The mere fact that a ta; is illegal% or that the law% #y virtue of which it is imposed% is
unconstitutional% does not authori<e a court of equity to restrain its collection #y in*unction. There
must #e a further showing that there are special circumstances which #ring the case under some
well recogni<ed head of equity *urisprudence% such as that irrepara#le in*ury% multiplicity of suits%
or a cloud upon title to real estate will result% and also that there is no adequate remedy at law.
Tax collectors are authori8ed to sei8e and sell property of delin.uent taxpayers without
court assistance.
4 citi<enGs property% #oth real and personal% may #e taAen% and usually is taAen% #y the
government in payment of its ta;es without any *udicial proceedings whatever. In this country% the
officer charged with the collection of ta;es is authori<ed to sei<e and sell the property of
delinquent ta;payers without applying to the courts for assistance% and the constitutionality of the
law authori<ing this procedure never has #een seriously questioned.
1o government could exist if every litigious man were permitted to delay the collection of
its taxes.
This must necessarily #e the course% #ecause it is upon ta;ation that the ,overnment chiefly
relies to o#tain the means to carry on its operations% and it is of the utmost importance that the
modes adopted to enforce the collection of the ta;es levied should #e summary and interfered
with as little as possi#le. $o government could e;ist if every litigious man were permitted to delay
the collection of its ta;es. This principle of pu#lic policy must #e constantly #orne in mind in
determining cases such as the one under consideration. 4nd though this was intended to apply
alone to ta;es levied #y the Fnited 6tates% it shows the sense of Congress of the evils to #e
feared if courts of *ustice could% in any case% interfere with the process of collecting ta;es on
which the government depends for its continued e;istence. It is a wise policy. It is founded in the
&age 3. of -.
simple philosophy derived from the e;perience of ages% that the payment of ta;es has to #e
enforced #y summary and stringent means against a reluctant and often adverse sentimentD and
to do this successfully% other instrumentalities and other modes of procedure are necessary% than
those which #elong to courts of *ustice.
Inunction is not available to restrain the collection of taxes even if disputed.
It is clear that the word 3ta;%3 as used in the provision prohi#iting in*unctions% means a ta; even if
it is disputed #y the ta;payer% for otherwise it would #e sufficient to dispute a ta; in order to taAe it
out from the provisions of said section% rendering them practically nugatory.
6aturnino David vs. 6imeon Ramos% et al.% ,.R. $o. +:.100% cto#er 1-% -98-
Rationale for prohibiting inunctions from restraining tax collection.
The argument that the assessment cannot as yet #e enforced #ecause it is still #eing contested
loses sight of the urgency of the need to collect ta;es as "the life#lood of the government&. If the
payment of ta;es could #e postponed #y simply questioning their validity% the machinery of the
state would grind to a halt and all government functions would #e paraly<ed. That is the reason
why% save for the e;ception already noted% the Ta; Code prohi#its an in*unction from restraining
collection of ta;..
Commissioner of Internal Revenue vs. Ce#u !ortland Cement Co.% et al.% ,.R. $o. +:29089%
Decem#er -8% -97/
Sec. 24A - Na!re and E0!en! o# Ta0 L"en
Tax lien is more superior than a private litigant3s claim predicated on a udgment.
It is settled that the claim of the government predicated on a ta; lien is superior to the claim of a
private litigant predicated on a *udgment. The ta; lien attaches not only from the service of the
warrant of distraint of personal property #ut from the time the ta; #ecame due and paya#le.
Repu#lic of the !hil. vs. Ramon ,. Cnrique<% ,.R. $o. +:/719-% cto#er 2-% -977

Sec. 225 - For) and Mode o# Proceed"n( "n Ac!"ons Ar"s"n( Under NIRC
The "olicitor 0eneral! not BIR legal officers! has primary responsibility to appear for the
government in appellate proceedings.
The 6olicitor ,eneral% #eing the principal law officer and legal defender of the state% its agencies
and instrumentalities% is aptly the office that can #ring a case on appeal to the Court of 4ppeals or
the 6upreme Court. The institution or commencement #efore a proper court of civil and criminal
actions and proceedings arising under the Ta; Reform 4ct which 3shall #e conducted #y legal
officers of the Bureau of Internal Revenue3 is not in dispute. 4n appeal from such court% however%
is not a matter of right. 6ection 220 of the Ta; Reform 4ct must not #e understood as overturning
the long esta#lished procedure #efore this Court in requiring the 6olicitor ,eneral to represent the
interest of the Repu#lic. This pronouncement finds *ustification in the various laws defining the
ffice of the 6olicitor ,eneral% #eginning with 4ct $o. -18% which tooA effect on -? June -90-% up
to the present 4dministrative Code of -97/.
Commissioner of Internal Revenue vs. +a 6uerte Cigar and Cigarette 5actory% ,.R. $o. -..9.2%
June 27% 200-
Sec. 222 - E0ce+!"ons as !o Per"od o# L")"!a!"on o# Assess)en! and Co&&ec!"on o# Ta0es
&age 36 of -.
+eriod within which to assess tax in cases of fraudulent and false returns and failure to
file a return.
In cases of =-> fraudulent returnsD =2> false returns with intent to evade ta;D and =1> failure to file a
return% the period within which to assess ta; is ten years from discovery of the fraud% falsification
or omission% as the case may #e.
-./-77% 6eptem#er -.% 200.
+rescriptive period is interrupted once taxpayer re.uests for reinvestigation or
reconsideration of assessment.
6ettled is the rule that the prescriptive period provided #y law to maAe a collection #y distraint or
levy or #y a proceeding in court is interrupted once a ta;payer requests for reinvestigation or
reconsideration of the assessment.
6eptem#er 10% -99-
Taxpayer<s re.uest for review or reconsideration of assessment interrupts period of
prescription.
The period of prescription of action to collect a ta;payerGs deficiency income ta; assessment is
interrupted when the ta;payer requests for a review or reconsideration of said assessment% and
starts to run again when said request is denied. Deducting all the periods of suspension from the
five:year prescriptive period% the action for collection was timely presented.
Commissioner of Internal Revenue vs. Capitol 6u#division% Inc.% ,.R. $o. +:-7991% 4pril 10% -9?.
%ere re.uest for reexamination or reinvestigation of assessment may not suspend the
running of the period of limitation.
4 mere request for ree;amination or reinvestigation of assessment may not suspend the running
of the period of limitation for in such a case there is need of a written agreement to e;tend the
period #etween the Collector and the ta;payer. There are cases% however% where a ta;payer may
#e prevented from setting up the defense of prescription even if he has not previously waived it in
writing as when #y his repeated requests or positive acts the ,overnment has #een% for good
reasons% persuaded to postpone collection to maAe himself feel that the demand was not
unreasona#le or that no harassment or in*ustice is meant #y the ,overnment. 4nd when such
situation comes to pass there are authorities that hold% #ased on weighty reasons% that such an
attitude or #ehavior should not #e countenanced if only to protect the interest of the ,overnment.
Commissioner of Internal Revenue vs. 6uyoc Consolidated )ining Co.% et al.% ,.R. $o. +:--82/%
$ovem#er 28% -987
Criminal complaint is instituted not to demand payment but to penali8e the taxpayer for
violation of the Tax Code.
The issuance of an assessment must #e distinguished from the filing of a complaint. Before an
assessment is issued% there is% #y practice% a pre:assessment notice sent to the ta;payer. The
ta;payer is then given a chance to su#mit position papers and documents to prove that the
assessment is unwarranted. If the commissioner is unsatisfied% an assessment signed #y him or
her is then sent to the ta;payer informing the latter specifically and clearly that an assessment
has #een made against him or her. In contrast% the criminal charge need not go through all these.
The criminal charge is filed directly with the DJ. Thereafter% the ta;payer is notified that a
criminal case had #een filed against him% not that the commissioner has issued an assessment. It
must #e stressed that a criminal complaint is instituted not to demand payment% #ut to penali<e
the ta;payer for violation of the Ta; Code.
June 29% -999
&age -< of -.
Sec. 22< - Ss+ens"on o# Rnn"n( o# S!a!!e o# L")"!a!"ons
The pendency of taxpayer3s appeal temporarily stayed the hands of the Commissioner.
Fnder the Ta; Code the running of the prescriptive period to collect deficiency ta;es shall #e
suspended for the period during which the Commissioner of Internal Revenue is prohi#ited from
#eginning a distraint and levy or instituting a proceeding in court% and for si;ty days thereafter.
The pendency of the ta;payerGs appeal in the Court of Ta; 4ppeals and in the 6upreme Court
had the effect of temporarily staying the hands of the said Commissioner. If the ta;payerGs stand
that the pendency of the appeal did not stop the running of the period #ecause the Court of Ta;
4ppeals did not have *urisdiction over the case of ta;es is upheld% ta;payers would #e
encouraged to delay the payment of ta;es in the hope of ultimately avoiding the same. Fnder the
circumstances% the running of the prescriptive period was suspended.3
Repu#lic of the !hils. vs. Ker L Co.% +td.% ,.R. $o. +:2-?09% 6eptem#er 29% -9??

Sec. 22@ - Pro!es!"n( o# Assess)en!
#inal 1otice Before "ei8ure is deemed as commissioner<s final decision.
The 5inal $otice Before 6ei<ure should #e considered as a denial of request for reconsideration
of the disputed assessment. The $otice should #e deemed as the ta;payerGs last act% since failure
to comply with it would lead to the distraint and levy of the ta;payerGs properties. $ot only was the
$otice the only response receivedD its content and tenor supported the theory that it was the
CIRGs final act regarding the request for reconsideration. The very title e;pressly indicated that it
was a final notice prior to sei<ure of property. The letter itself clearly stated that respondent was
#eing given 3this +46T !!RTF$ITN3 to payD otherwise% its properties would #e su#*ected to
distraint and levy.
Commissioner of Internal Revenue vs. Isa#ela Cultural Corp.% ,.R. $o. -182-0% July --% 200-
$ final demand letter for payment of delin.uent taxes may be considered a decision on a
disputed or protested assessment.
4 letter reiterating the demand of the BIR for the settlement of the assessment already made and
for the immediate payment of a certain sum in spite of the vehement protest of the ta;payer is
tantamount to a denial of the reconsideration or protest of the assessment. This certainly is a
clear indication of the firm stand of the commissioner against the reconsideration of the disputed
assessment% in view of the continued refusal of the ta;payer to e;ecute the waiver of the period of
limitation upon the assessment in question. This #eing so% the said letter amounted to a decision
on a disputed or protested assessment.
Commissioner of Internal Revenue vs. 4yala 6ecurities Corp.% et al.% ,.R. $o. +:29.78% )arch
1-% -9/?
Tenor of commissioner<s letter indicates final nature of determination on taxpayer<s tax
liability.
4 letter of demand from the commissioner demanding not only the payment of a certain amount
#ut also giving a warning that in the event the ta;payer fails to pay he would #e constrained to
enforce the collection thereof #y means of legal remedies% unquestiona#le constitutes the final
action taAen #y the commissioner on the ta;payerGs several requests for reconsideration and
recomputation. The tenor of the letter% specifically the statement regarding the resort to legal
remedies% unmistaAa#ly indicated the final nature of the determination made #y the commissioner
of the ta;payerGs deficiency franchise ta; lia#ility.3
6urigao Clectric Co.% Inc. vs. Court of Ta; 4ppeals% et al.% ,.R. $o. +:28279% June 27% -9/.
BIR should clearly indicate to taxpayer its final action on a disputed assessment.
&age -7 of -.
The BIR should always indicate to the ta;payer in clear and unequivocal language what
constitutes final action on a disputed assessment. The o#*ect of this policy is to avoid repeated
requests for reconsideration #y the ta;payer% there#y delaying the finality of the assessment and%
consequently% the collection of the ta;es due. 5urthermore% the ta;payer would not #e groping in
the darA% speculating as to which communication or action of the BIR may #e the decision
appeala#le to the ta; court.
Commissioner of Internal Revenue vs. Fnion 6hipping Corp.% et al.% ,.R. $o. ??-?0% )ay 2-%
-990
&arrant is deemed premature where no categorical ruling on taxpayer<s re.uest for
reconsideration was issued.
The Barrant of Distraint and +evy issued to the ta;payer is premature. The a#sence of a
categorical ruling on ta;payerGs request for reconsideration is not deemed equivalent to a denial
of the request. 6uch request could not in fact #e found in its records% since the BIR cannot #e
presumed to have taAen it into consideration. The request was considered only when the
ta;payer gave a copy of it% duly stamp:received #y the BIR. 'ence% the warrant is deemed
premature.
Commissioner of Internal Revenue vs. 4lgue% Inc.% et al.% ,.R. $o. +:2779?% 5e#ruary -/% -977
Timely service of warrant of distraint or levy suspends the running of the period to collect
the tax deficiency.
The timely service of a warrant of distraint or levy suspends the running of the period to collect
the ta; deficiency in the sense that the disposition of the attached properties might well taAe time
to accomplish% e;tending even after the lapse of the statutory period for collection. The
Commissioner did not institute any *udicial proceeding to collect the ta;. 'e relied on the warrants
of distraint to interrupt the running of the statute of limitations. 'e gave the ta;payer ample
opportunity to contest the assessments #ut at the same time safeguarded the ,overnmentGs
interest #y means of the warrants of distraint.
4dvertising 4ssociates% Inc. vs. Court of 4ppeals% et al.% ,.R. $o. 89/87% Decem#er 2?% -97.

Sec. 22A - Reco'er, o# Ta0 Erroneos&, or I&&e(a&&, Co&&ec!ed
Tax refunds are strictly construed against the person claiming the exemption.
Ta; refunds are in the nature of ta; e;emptions. 4s such% these are regarded as in derogation of
sovereign authority and are to #e strictly construed against the person or entity claiming the
e;emption. The #urden of proof is upon him who claims the e;emption and he must #e a#le to
*ustify his claim #y the clearest grant under Constitutional or statutory law% and he cannot #e
permitted to rely upon vague implications.
B!I +easing Corp. vs. Court of 4ppeals% et al.% ,.R. $o. -2/?2.% $ovem#er -7% 2001
The "tate must observe fairness and honesty in refunding excess tax payments.
Technicalities and legalisms% however e;alted% should not #e misused #y the 6tate to Aeep
money not #elonging to it. If it e;pects its ta;payers to o#serve fairness and honesty in paying
their ta;es% it must apply the same standard against itself in refunding e;cess payments of such
ta;es. It should not enrich oneself at the e;pense of another.
4B +easing and 5inance Corp. vs. Commissioner of Internal Revenue% ,.R. $o. -171.2% July 7%
2001
The government must follow the same rules of procedure which bind private parties
The BIR should not #e allowed to defeat an otherwise valid claim for refund #y raising the
question of alleged incapacity of the ta;payer to file an action for refund or ta; credit% for the first
&age -, of -.
time on appeal #efore the 6upreme Court. This is clearly a matter of procedure. !etitioner does
not pretend that !L,:!hil.% should it succeed in the claim for refund% is liAely to run away% as it
were% with the refund instead of transmitting such refund or ta; credit to its parent and sole
stocAholder. It is commonplace that in the a#sence of e;plicit statutory provisions to the contrary%
the government must follow the same rules of procedure which #ind private parties.
Commissioner of Internal Revenue vs. !rocter L ,am#le !hil.% ,.R. $o. ??717% Decem#er 2%
-99-
Re.uirements for the recovery of any national internal revenue tax assessed or collected.
6ection 210 of the $ational Internal Revenue Code precludes any suit or proceeding from #eing
maintained in any court for the recovery of any national internal revenue ta; alleged to have #een
erroneously or illegally assessed or collected% or of any penalty claimed to have #een collected
without authority% or of any sum said to have #een e;cessive or in any manner wrongfully
collected unless =a> a written claim for the refund or credit thereof has #een duly filed with the
Commissioner and =#> the suit or proceeding shall have #een instituted within two years from the
date of payment of the ta; or penalty regardless of any supervening cause that might arise after
such payment =revoAing the rule announced in Commissioner vs. $ational !ower Corporation%
and Commissioner vs. Eictorias )illing Company>.
Commissioner of Internal Revenue vs. !hilippine 4merican +ife Insurance Co.% et al.% ,.R. $o.
-08207% )ay 29% -998
The two2year period is not urisdictional and may be suspended under exceptional
circumstances.
The two:year period is a limitation of action not only in su#mitting the written claim for the refund
of the ta; to the Commissioner #ut liAewise in filing the case =appeal> with the Court of Ta;
4ppeals =which has *urisdiction thereover e;clusive of the regular courts>. This two:year period%
unliAe the thirty:day period of appeal from the decision of the Commissioner% is not *urisdictional
and it may there#y #e suspended under e;ceptional circumstances. This two:year prescriptive
period is intended to apply to suits or proceedings for the recovery of ta;es% penalties or sums
erroneously% e;cessively% illegally or wrongfully collectedD accordingly% an availment of a ta; credit
granted #y law may have a different prescriptive period. 4#sent any specific provision in the Ta;
Code or special laws that period would #e ten years under 4rticle --.. of the Civil Code.
Commissioner of Internal Revenue vs. !hilippine 4merican +ife Insurance Co.% et al.% ,.R. $o.
-08207% )ay 29% -998
The /mbudsman has power to investigate when there is a tinge of impropriety in the grant
of tax refunds.
The power to investigate and to prosecute which was granted #y law to the m#udsman is
plenary and unqualified. The m#udsman 4ct maAes it perfectly clear that the *urisdiction of the
m#udsman encompasses 3all Ainds of malfeasance% misfeasance and nonfeasance that have
#een committed #y any officer or employee . . . during his tenure of office. Concededly% the
determination of whether to grant a ta; refund falls within the e;clusive e;pertise of the BIR.
$onetheless% when there is a suspicion of even *ust a tinge of impropriety in the grant of the
same% the m#udsman could rightfully ascertain whether the determination was done in
accordance with law and identify the persons who may #e held responsi#le thereto. In that sense%
the m#udsman could not #e accused of unlawfully intruding into and intervening with the BIRGs
e;ercise of discretion. Indeed% the clause 3any RillegalS act or omission of any pu#lic official3 is
#road enough to em#race any crime committed #y a pu#lic official. The law does not qualify the
nature of the illegal act or omission of the pu#lic official or employee that the m#udsman may
investigate. It does not require that the act or omission #e related to or #e connected with or arise
from the performance of official duty.
Bureau of Internal Revenue vs. ffice of the m#udsman% ,.R. $o. --8-01% 4pril --% 2002
&age -1 of -.
Rationale for re.uiring taxpayer to submit a claim for refund before resorting to courts.
The law clearly stipulates that after paying the ta;% the citi<en must su#mit a claim for refund
#efore resorting to the courts. The idea pro#a#ly is% first% to afford the collector an opportunity to
correct the action of su#ordinate officersD and second% to notify the ,overnment that such ta;es
have #een questioned% and the notice should then #e #orne in mind in estimating the revenue
availa#le for e;penditure. !revious o#*ections to the ta; may not taAe the place of that claim for
refund% #ecause there may #e some reason to #elieve that% in paying% the ta;payer has finally
come to reali<e the validity of the assessment. 4nyway% strict compliance with the conditions
imposed for the return of revenue corrected is a doctrine consistently applied here and in the
Fnited 6tates.
6antiago ). Berme*o vs. Collector of Internal Revenue% ,.R. $o. +:1029% July 28% -980
#ailure to institute action within @ years after payment of tax bars taxpayer from recovery
of the same.
The ta;payerGs failure to comply with the requirement regarding the institution of the action or
proceeding in court within 2 years after the payment of the ta;es #ars him from the recovery of
the same% irrespective of whether a claim for the refund of such ta;es filed with the Collector of
Internal Revenue is still pending action of the latter.
College of ral L Dental 6urgery vs. Court of Ta; 4ppeals% et al.% ,.R. $o. +:-0..?% January 27%
-987
&hen period of prescription starts.
Bhen the ta; sought to #e refunded is illegally or erroneously collected% the period of prescription
starts from the date the ta; was paidD #ut when the ta; is legally collected% the prescriptive period
commences to run from the date of occurrence of the supervening cause which gave rise to the
right of refund.
Commissioner of Internal Revenue vs. Eictorias )illing Co.% Inc.% et al.% ,.R. $o. +:2.-07%
January 1% -9?7
&hen two2year prescriptive period commences to run.
The two:year prescriptive period within which to claim a refund commences to run% at the earliest%
on the date of the filing of the ad*usted final ta; return.
4CCR4 Investments Corp. vs. Court of 4ppeals% ,.R. $o. 9?122% Decem#er 20% -99-
Rationale in computing the two2year prescriptive period.
It #ears emphasis that the rationale in computing the two:year prescriptive period with respect to
the ta;payer(s claim for refund from the time it filed its final ad*ustment return is the fact that it was
only then that 4CCR4I$ could ascertain whether it made profits or incurred losses in its #usiness
operations. The 3date of payment3% therefore% in 4CCR4I$Gs case was when its ta; lia#ility% if any%
fell due upon its filing of its final ad*ustment return on 4pril -8% -972.
4CCR4 Investments Corp. vs. Court of 4ppeals% ,.R. $o. 9?122% Decem#er 20% -99-
Sec. 211 - A!$or"!, o# !$e Secre!ar, o# F"nance !o Pro)&(a!e R&es and Re(&a!"ons
$n administrative rule should be published if it substantially adds to or increases the
burden of those governed.
Bhen an administrative rule is merely interpretative in nature% its applica#ility needs nothing
further than its #are issuance for it gives no real consequence more than what the law itself has
already prescri#ed. Bhen% upon the other hand% the administrative rule goes #eyond merely
providing for the means that can facilitate or render least cum#ersome the implementation of the
law #ut su#stantially adds to or increases the #urden of those governed% it #ehooves the agency
&age -2 of -.
to accord at least to those directly affected a chance to #e heard% and thereafter to #e duly
informed% #efore that new issuance is given the force and effect of law.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. --9/?-% 4ugust 29%
-99?
Commissioner of Internal Revenue vs. )ichel J. +huillier !awnshop% Inc.% ,.R. $o. -809./% July
-8% 2001
Rules and regulations promulgated by the "ecretary of #inance deserve weight and
respect.
The authority of the 6ecretary of 5inance% in con*unction with the Commissioner of Internal
Revenue% to promulgate needful rules and regulations for the effective enforcement of internal
revenue laws cannot #e controverted. 6uch rules and regulations% as well as administrative
opinions and rulings% ordinarily deserve to #e given weight and respect #y the courts.
21% 200.
$dministrative issuances must remain consistent with the law they intend to carry out.
The power of the CIR to maAe rulings and opinions in connection with the implementation of
internal revenue laws cannot #e controverted. 'owever% the CIR cannot% in the e;ercise of such
power% issue administrative rulings or circulars not consistent with the law sought to #e applied.
Indeed% administrative issuances must not override% supplant or modify the law% #ut must remain
consistent with the law they intend to carry out. nly Congress can repeal or amend the law.
Bhile the rule:maAing authority of the CIR is not dou#ted% liAe any other government agency% the
CIR may not disregard legal requirements or applica#le principles in the e;ercise of quasi:
legislative powers.
-8% 2001
Legislative rule distinguished from interpretative rule.
There are two Ainds of administrative issuances@ the legislative rule and the interpretative rule. 4
legislative rule is in the nature of su#ordinate legislation% designed to implement a primary
legislation #y providing the details thereof. 4n interpretative rule% on the other hand% is designed
to provide guidelines to the law which the administrative agency is in charge of enforcing.
-8% 2001
Sec. 21@ 7%8 - W"&&#& Ne(&ec! !o F"&e Re!rns or F"&"n( o# Fa&se or Frad&en! Re!rns
#raud cannot be presumed.
5raudulent intent could not #e deduced from mistaAes however frequent they may #e% especially
if such mistaAes emanate from erroneous entries or erroneous classification of items in
accounting methods utili<ed for determination of ta; lia#ilities. The fraud contemplated #y law is
actual and not constructive. It must #e intentional fraud% consisting of deception willfully and
deli#erately done or resorted to in order to induce another to give up some legal right.
$egligence% whether slight or gross% is not equivalent to the fraud with intent to evade the ta;
contemplated #y the law. It must amount to intentional wrongdoing with the sole o#*ect of
avoiding the ta;.
Jose B. 4<nar vs. Court of Ta; 4ppeals% et al.% ,.R. $o. +:208?9% 4ugust 21% -9/.
&age -3 of -.

Sec. 21A G In!eres!
Interest and surcharges on deficiency taxes are imposable upon failure of the taxpayer to
pay the tax on the date fixed by law.
The rule as to when interest and surcharges on delinquency ta; payments #ecomes chargea#le
is well settled. The interest and surcharges on deficiency ta;es are imposa#le upon failure of the
ta;payer to pay the ta; on the date fi;ed in the law for the payment thereof. The rule has to #e so
#ecause a deficiency ta; indicates non:payment of the correct ta;% and such deficiency e;ists not
only from the assessment thereof #ut from the time the ta;payer failed to pay the correct amount
of ta; when it should have #een paidD and the imposition thereof is mandatory even in the
a#sence of fraud or willful failure to pay the ta; in full.
4guinaldo Industries Corp. =5ishing $ets Division> vs. Commissioner of Internal Revenue% et al.%
,.R. $o. +:29/90% 5e#ruary 28% -972
Imposition of interest is not penal but compensatory in nature.
The imposition of interest is #ut a *ust compensation to the 6tate for the delay in paying the ta;
and for the concomitant use #y the ta;payer of funds that rightfully should #e in the governmentGs
hands. The fact that the interest charged is made% proportionate to the period of delay constitutes
the #est evidence that such interest is not penal #ut compensatory.
4guinaldo Industries Corp. =5ishing $ets Division> vs. Commissioner of Internal Revenue% et al.%
,.R. $o. +:29/90% 5e#ruary 28% -972
Collection of penalty and interest in case of delin.uency is mandatory.
It is mandatory to collect penalty and interest at the stated rate in case of delinquency. The
intention of the law is to discourage delay in the payment of ta;es due the ,overnment and% in
this sense% the penalty and interest are not penal #ut compensatory for the concomitant use of
the funds #y the ta;payer #eyond the date when he is supposed to have paid them to the
,overnment.
!hilippine Refining Company% et al. vs. Court of 4ppeals% et al.% ,.R. $o. --7/9.% )ay 7% -99?
"urcharges are not penalties but civil administrative sanctions.
a> 4dditions liAe the 80M surcharge to the main ta; are not penalties #ut civil administrative
sanctions% provided primarily as a safeguard for the protection of the state revenue and to
reim#urse the government for the heavy e;pense of investigation and the loss resulting
from the ta;payerGs fraud.
)aria B. Castro vs. Collector of Internal Revenue% ,.R. $o. +:-2-/.% 4pril 2?% -9?2
#> 6trong reasons of policy support a strict o#servance of the rule on imposition of
surcharge. Ta; laws imposing penalties for delinquencies are clearly intended to hasten
ta; payments or to punish evasion or neglect of duty in respect thereof. If delays in ta;
payments are to #e condoned for light reasons% the law imposing penalties for
delinquencies would #e rendered nugatory% and the maintenance of the government and
its multifarious activities would #e as precarious as ta;payers are willing or unwilling to
pay their o#ligations to the state in time. Imperatives of pu#lic welfare will not approve of
this result
Celso B. Jamora% et al. vs. Bi#iano +. )eer% ,.R. $o. .7-29% $ovem#er --% -9.2
4guinaldo Industries Corp. =5ishing $ets Division> vs. Commissioner of Internal Revenue%
et al.% ,.R. $o. +:29/90% 5e#ruary 28% -972
&age -- of -.
Sec. 264 - Fa"&re o# a W"!$$o&d"n( A(en! !o Co&&ec! and Re)"! Ta0
9eficiency taxes are imposed for failure of a withholding agent to collect tax.
It is not the $DC that is #eing ta;ed. The ta; was due on the interests earned #y the Japanese
ship#uilders. It was the income of these companies and not the Repu#lic of the !hilippines that
was su#*ect to the ta; the $DC did not withhold. In effect% therefore% the imposition of the
deficiency ta;es on the $DC is a penalty for its failure to withhold the same from the Japanese
ship#uilders.
10% -97/
Sec. 26< - Cr")es- O!$er O##enses and For#e"!resB =enera& Pro'"s"ons
+recise computation and assessment of tax is not re.uired before criminal prosecution.
Bhile there can #e no civil action to enforce collection #efore the assessment procedures
provided in the Code have #een followed% there is no requirement for the precise computation
and assessment of the ta; #efore there can #e a criminal prosecution under the Code. Bhat is
involved here is not the collection of ta;es where the assessment of the Commissioner of Internal
Revenue may #e reviewed #y the Court of Ta; 4ppeals% #ut a criminal prosecution for violations
of the $ational Internal Revenue Code which is within the cogni<ance of courts of first instance.
$ssessment of deficiency tax is not necessary before taxpayer can be prosecuted.
4n assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to
defeat and evade the income ta;. 4 crime is complete when the violator has Anowingly and
willfully filed a fraudulent return with intent to evade and defeat the ta;. The perpetration of the
crime is grounded upon Anowledge on the part of the ta;payer that he has made an inaccurate
return% and the governmentGs failure to discover the error and promptly to assess has no
connections with the commission of the crime.

Sec. 261 - Ta0 E'as"on
-lements of tax evasion.
Ta; evasion connotes the integration of three factors@ =-> the end to #e achieved% i.e.% the
payment of less than that Anown #y the ta;payer to #e legally due% or the non:payment of ta;
when it is shown that a ta; is dueD =2> an accompanying state of mind which is descri#ed as #eing
3evil%3 in 3#ad faith%3 3willfull%3 or 3deli#erate and not accidental3D and =1> a course of action or
failure of action which is unlawful.
-./-77% 6eptem#er -.% 200.
Before one is prosecuted for willful attempt to evade or defeat any tax under the Tax Code!
the fact that a tax is due must first be proved.
Before a ta;payer could #e prosecuted for ta; evasion under the Ta; Code% the fact that the
deficiency income% ad valorem and value:added ta;es were due should first #e esta#lished.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. --9122% June .% -99?
#or criminal prosecution to proceed before assessment! there must be a prima facie
showing of a willful attempt to evade taxes.
&age -; of -.
5or criminal prosecution to proceed #efore assessment% there must #e a prima facie showing of a
willful attempt to evade ta;es. 6ince the registered wholesale price of the goods% approved #y the
BIR% is presumed to #e the actual wholesale price% therefore% not fraudulent and unless and until
the BIR had made a final determination of what is supposed to #e the correct ta;es% the ta;payer
should not #e placed in the cruci#le of criminal prosecution.
Commissioner of Internal Revenue vs. Court of 4ppeals% et al.% ,.R. $o. --9122% June .% -99?

Sec. 2?2 - V"o&a!"on o# W"!$$o&d"n( Ta0 Pro'"s"on
Revenue Regulation C2F6 re.uires payment of withholding taxes through ban,s to avoid
employees< direct receipt of tax payments.
By accommodating and accepting withholding ta; returns and checA payments from a ta;payer% a
revenue collection officer disregarded an esta#lished BIR rule. Revenue Regulation $o. .:91
requires payment through the #anAs precisely to avoid% whenever possi#le% BIR employeesG direct
receipt of ta; payments. In the face of her silence% the fact that the checAs ended up in an
unauthori<ed BIR account eloquently speaAs% at the very least% of her gross negligence in taAing
care of collections that should not have passed through her hands in the first place. Because of
her complicity in the transgression of the cited BIR regulation as well as her gross negligence%
respondent is administratively lia#le for misconduct.
Bureau of Internal Revenue% et al.% vs. +ilia B. rgano% ,.R. $o. -.98.9% 5e#ruary 2?% 200.

Sec. 2@2 - In#or)erEs Reward
0rant of informer3s reward is not dependent on classification of delin.uent taxpayer.
That the informerGs reward was sought and given in relation to ta; delinquencies of government
agencies provides no reason for disallowance. The law on the matter maAes no distinction
whatsoever #etween delinquent ta;payers in his regard% whether private person or corporations%
or pu#lic or quasi:pu#lic agencies% it #eing sufficient for its operation that the person or entity
concerned is su#*ect to% and violated% revenue laws% and the informerGs report thereof resulted in
the recovery of revenues. It is elementary that where the law does not distinguish% none must #e
made. Gbi lex non distinguit nec nos distinguere debemos.
Commissioner of Internal Revenue vs. Commission on 4udit% ,.R. $o. -0-9/?% January 29% -991
Informer<s reward is contingent upon the payment and collection of unpaid or deficiency
taxes.
6ince no ta;es are to #e collected% no informerGs reward is due .to the informerGs heirs. InformerGs
reward is contingent upon the payment and collection of unpaid or deficiency ta;es. 4n informer
is entitled #y way of reward only to a percentage of the ta;es actually assessed and collected.
)eralco 6ecurities Corp. vs. Eictorino 6avellano% et al.% ,.R. $o. +:1?-7-% cto#er 21% -972
&age -. of -.

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NATIONAL INTERNAL REVENUE CODE

REVIEW MANUAL FOR UV TAX CLASS

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