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SECTION 1 - 26 NOTES ON TAXATION 1

NIRC being a special law prevails over a general law like Civil Code. Revenue law, is a law passed for the purpose of authorizing the levy and collection of taxes. Revenue derived from taxes are exempt from execution. Revenue refers to all funds or income derived by the government whether from tax or other source. Enforcement and collection of tax is executive in character. La Suerte Cigar vs. CA, 134 SCRA 29 when an administrative agency renders an opinion by means of circular or memo, it merely interprets a preexisting law, and no publication is necessary for its validity. Construction by an executive branch of government of a particular law although not binding upon the courts must be given weight. These agencies are the one called to implement the law. Rulings or interpretation while entitled to great weight, are not judicially binding. BIR RULINGS and DOJ Opinions are less general interpretation of tax laws of the administrative level issued by the BIR and the DOJ. These two will take a character of substantive rules and are generally binding and effective, if not otherwise contrary to law or constitution. It is the BIR who will seek DOJ opinion on tax laws not the taxpayer. Ruling of first impression means rulings, opinions & interpretations without established precedents. Only the CIR can issue this ruling. Those with precedents are called Ruling with established precedents. CIR vs. Hantex, G.R. No. L-136075, March 31, 2005 Mere photocopies not admissible. Exert effort to get the original Hearsay evidence is admissible by the technical rules of evidence. BIR not bound. It depends on trustworthiness for evidence to be admissible.

Assessment, meaning. With special reference to internal revenue taxes, an assessment is merely a notice to the effect that the amount stated therein is due as tax and a demand for the payment thereof. It is not an action or proceeding for the collection of taxes. It is a step preliminary, but essential to warrant of distraint, if still feasible, and also to establish a cause for judicial action as the phrase is used in the Revenue Code.

Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. (Marcos vs. CA, 273
SCRA 47, 1987)

Assessment is not an action or proceeding. It is a preliminary step. Assessment as a general rule is a condition sine quanon for the collection of taxes but not for filing criminal actions. An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumption no matter how reasonable or logical said presumption may be. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption x x x. (Collector vs. Benipayo, 4 SCRA 182) A tax assessment is prima facie valid and correct and the taxpayer has the burden of proof to impugn its validity. (Behn Meyer & Co. vs. Collector of Internal Revenue, 27 Phil. 647) The validity of a tax assessment is a disputable presumption. (Perez vs. CTA, et al., G.R.
No. L-10507, prom. May 30, 1948; Collector vs. Bohol Land Transportation, G.R. Nos. L-13099 and L13462, prom. April 29, 1960)

All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed. The burden of proof is upon the taxpayer to show clearly that the assessment is erroneous, in order to relieve himself from it. Where a taxpayer question the correctness of an assessment against him and is apparently not acting in bad faith or merely attempting to delay payment, but is deprived of the best means of proving his contention because his books of accounts were lost by the BIR agent who examined them, said taxpayer must be given an opportunity to prove by secondary evidence that the assessment is incorrect. (Santos vs.
Nable, et al., 2 SCRA 21)

As the law provides that any person who is aggrieved by an assessment issued by the Commissioner of Internal Revenue is given only 30 days to appeal therefrom to the Tax Court, the only effect should b e that after that period, the assessment can no longer be questioned by the taxpayer; otherwise, the assessment which has become final, executory and demandable under Section 11 of Republic Act No. 1125 would be an absurdity. (Republic vs. Antonio Albert, G.R. No. L-12996, prom. Dec. 28, 1961) The taxpayers failure to appeal to the Court of Tax Appeals in due time made the assessment in question final, executory and demandable. (Republic vs. Manila Port Service, G.R. No. L-18208, prom. Nov. 27, 1964) And when the present action for collection of the tax was instituted, said taxpayer was already barred from disputing the correctness of the
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assessment or invoking any defense that would reopen the question of its tax liability on the merits. (Republic vs. Albert, 3 SCRA 717) Otherwise, the period of thirty days for appeal to the Court of Tax Appeals would make little sense. (Republic vs. Lopez, 2 SCRA 566) Best evidence obtainable, explained. It refers to the findings gathered by internal revenue examiners and agents from the records of the register of deeds, corporations, employers, clients or patients, tenants, lessees, vendees and the like with whom the taxpayer had previous transactions or from whom he acquired any income. It will be noted that under Section 5 of the said Code, the Commissioner of Internal Revenue may obtain information on potential taxpayers from government offices or agencies. Networth method of investigation. As stated above, the Commissioner of Internal Revenue may make tax assessments on the best evidence obtainable. He can avail of methods in order to arrive at a correct and reasonable assessment of taxes. One method is the networth method of investigation. The power or authority of the Commissioner to choose the method of determining taxable income is quite comprehensive, and the only limitation to the exercise of such power of authority is that the method chosen or adopted must clearly reflect the income. Consequently, Tax Code (Sec. 43) authorizes the Commissioner of Internal Revenue to employ the networth method, where a taxpayer keeps no books or records or where such books or records do not clearly reflect his income. (Commissioner vs. Enrique Avelino, G.R. No. L-14847, prom. Sept. 19, 1961) Acquittal in a criminal case does not exonerate taxpayers civil liability to pay the tax due (Republic vs. Patanao, G.R. No. L-22317, July 21, 1967). It is not required in networth cases that the Government prove with absolute certainty the sources from which petitioner derived his unreported income. It is sufficient if evidence is adduced of the likely source or sources of such income. In this case, there is ample evidence of the probable sources from which petitioner could have derived his undeclared income such as flourishing business in optical goods, office equipments, and haberdashery; horse racing, and real estate transactions. (Reyes
vs. Collector, G.R. Nos. L-11534 & L-11558, prom. Nov. 25, 1968)

Requisites for valid regulations. (a) They must not be contrary to law; (b) They must be published in the Official Gazette; (c) They must be useful, practical and necessary for law enforcement; (d) They must be reasonable in their provisions; and (e) They must be in conformity with the legal provisions. Engaged in trade or business, explained. The phrase engaged in trade or business within the Philippines includes the performance of the functions of a public office or the performance of personal services within the Philippines. (Sec. 8, Rev. Regs. No. 2)
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To engage in business is uniformly construed as signifying to follow the employment or occupation which occupies the time, attention, and labor for the purpose of a livelihood or profit. A nonresident alien who shall come to the Philippines and stay there in an aggregate period of more than one hundred eighty days during any calendar year shall be deemed a nonresident alien doing business in the Philippines. (Sec. 25A) The length of stay is the criterion. Hence, a non-resident alien shall not be considered engaged in trade or business in the Philippines if he stays in the Philippines for less than 180 days notwithstanding the fact that during such stay he actually performs personal services, or engages in a commercial activity therein. And the whole period of more than 180 days must cover a calendar year. The entire gross income of non-resident aliens not engaged in trade or business received from all sources within the Philippines is subject to income tax. He must not be engaged in trade or business in the Philippines. The sources of the income are interests, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income, and capital gains. Sec. 26. Tax Liability of Members of General Professional Partnerships (GPP). Explanatory notes: The GPP as a juridical entity is exempted from income taxes. It would be the individual members who will be liable on their net income share from the GPP. A partner in a general professional partnership shall report in his income tax return, whether distributed or not, his share of the profits of the partnership. If he reports his net share in the profits, he shall be deemed to have elected the itemized deduction and may no longer claim the optional standard deduction. In case he declares his distributive share in the gross income undiminished by his share in the deduction, he may avail the 40% optional standard deduction in lieu of the itemized deduction. Professional partnership. Your professional partnership of Certified Public Accountants is exempt from income tax pursuant to Section 26 of the Tax Code, as amended. Accordingly, payments to said partnership for professional services rendered are exempt from the withholding tax provisions of Revenue Regulations No. 13-78 as amended by Revenue Regulations No. 6-79, both implementing Section 50 (now 43) of the Tax Code, as amended by Presidential Decree No. 1351. (BIR Ruling No. 84-142)
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Professional partnership are not required to file income tax return. Requesting confirmation of your opinion to the effect that professional partnerships are not required to file quarterly returns of their income; and that individual partners of a professional partnership should not be required to file quarterly returns if they received their shares in the net income of the partnership at the end of the calendar year or the fiscal year of the partnership. In reply thereto, I have the honor to inform you that pursuant to Sections 2 & 3, Revenue Regulations No. 7-93 prescribing the procedures for the filing of quarterly returns and payment of the quarterly income tax by individuals receiving selfemployment income, a return of summary declaration or gross income and deductions (BIR Form No. 1701 Q) for each of the first three quarters of the calendar year, and a final or adjustment return (BIR Form No. 1701) shall be filed by all individuals, including estates and trusts. The tax returns shall be filed on or before indicated dates: First quarterly return Second quarterly return Third quarterly return Final return May 15 of the current year; -August 15 of the current year; November 15 of the current year; April 15 of the following year.

The corresponding income tax, as computed, shall be paid at the same time that the returns are filed based on declarations of actual income and deductions for the particular quarter. The filing of the returns and payment of taxes shall be in lieu of the filing of a declaration of estimated income for the current taxable year and the payment of the estimated tax as provided for in Section 67(a) and (b) (now 60) of the NIRC primarily for the reason that the procedure prescribed in Section 67 (now 60) of the NIRC of estimating the amount of income and tax to be paid by the individual. Such being the case, your opinion that professional partnerships are not required to file quarterly returns of their income is hereby confirmed. However, individual partners of a professional partnership are required to file a return of summary declaration of gross income and deduction for each of the first three quarters of the calendar year and a final or adjustment return. The corresponding tax, as computed, shall be paid at the same time that the returns are filed based on declarations of actual income and deductions for the particular quarter. (BIR Ruling No. 94-60) Joint venture. A joint venture was created when two corporations while registered and operating separately were placed under one sole management which operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial economy and profits in the operation. (Collector vs. Bantangas Transportation, et al, 102 Phil. 822; See also BIR Ruling Nos. 020(b)020-80-187-82 dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990)
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Thus, Empire Venture which has been constituted as a single entity whereby Empire and Uniphil agreed to pool their resources for the development of a parcel of land and the construction of condominium units thereon as well as the eventual sale of said units is a joint venture which is subject to the 35% Section 27 of the Tax code, as amended. However, the respective 70% and 30% shares of Uniphil and Empire from the profits of the joint venture are not subject to income tax Section 27 of the Tax Code, as amended. (BIR Ruling No. 91-254) Note: The term corporation mentioned in joint venture refers to a corporation as defined by the corporation law. Unregistered partnerships. They, in order to be subject to corporate income tax, must be engaged in joint venture for profit. To constitute said unregistered partnership, the character of habituality peculiar to business transactions for the purpose of gain must be present. (BIR Ruling No. 89-124) STOCK DIVIDEND - The payment by a corporation of a dividend in the form of shares usually of its own stocks without change in per value. - The stock distributed is a stock dividend. It is not subject to a dividend tax or passive income. However, if the stockholder owns a common stock and the stock dividend is preferred stock or vice versa, then the stock dividend is subject to tax because there is already change of interest. Dividends out of quarterly profits. This refers to your letter requesting opinion as to whether your company can declare cash and/or stock dividends out of quarterly profits and/or surplus. It is represented that your company has been issuing cash and stock dividends for the last five (5) years; that during the early part of this year, you have issued 50% dividend out of accumulated retained earnings; and that since your company has been making profits as early as the first quarter of this year, you intend to declare cash and/or stock dividend out of quarterly profit. Ruling: An ordinary dividend is the most common type of corporate distribution, and is defined as (1) a distribution of property by a corporation to its stockholder (2) made in the ordinary course of its business (3) out of its earnings and profits. (par. 2251, 2d Am. Jur. 33) Thus, a dividend is a corporate profit set aside, declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time. (Fisher vs. Trinidad, 43 Phil. 973) It is distinguished from profits for the profits in thousands of a corporation do not become dividends until they have been set apart, or at lest declared, as dividends and transferred to the separate property of the individual stockholders. Such being the case, your company can declare cash and/or stock dividends out of its quarterly profit. (BIR Ruling No. 87-172)
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