Income Tax Cases

G.R. No.
L-14532 May 26, 1965
JOSE LEON GONZALES, petitioner-appellant,

-versus-
THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERNAL REVENUE,
respondents-appellees.
-----------------------------
G.R. No. L-14533 May 26, 1965
JUANA G. GONZALES and FORTUNATO DE LEON, petitioners-appellants,

-versus-
THE HON. COURT OF TAX APPEALS and THE COLLECTOR OF INTERAL REVENUE, respondents-
appellees.
Statement. — This is an appeal from the decision of the Court of Tax Appeals denying the refund of income taxes
imposed on, and paid by, Jose Leon Gonzales and Juana F. Gonzales.
The Facts. — Jose Leon Gonzales and Juana F. Gonzales are brother and sister [the latter being married to Atty.
Fortunato de Leon 1]. Both petitioners are co-heirs and co-owners, (one-sixth each) of a tract of land of 871, [982.]
square meters which they, along with four other co-heirs, inherited from their mother.
This realty, located at Caloocan, Rizal, was the object of expropriation proceedings, which this Court finally
decided in May 1954, in G.R. No.L-4918. Therein, we fixed the just compensation for the property at P1.50 per
square meter. We also ordered the payment of interest at the legal rate of 6% from January 25, 1947 (when the
Government took possession of the property) to the date of payment, which payment was actually made on
October 31, 1954. Excluded from the payment of interest was the sum of P28,850.00, the amount deposited by the
Government upon taking possession of the estate.
The total compensation paid the six heirs for the expropriated property amounted to P1,307,973.00. Subtracting
therefrom the amount of P28,850.00 just mentioned, there remained a difference of P1,279,123.00, the interest on
which, at the legal rate of 6% per annum, totalled P535,587.70. Divided among the six heirs, this total gave a
share of P89,305.61 as interest to each of them.
Upon the amounts received from the Government, Jose Leon Gonzales and Juana F. Gonzales, were each
ascertained to have made a capital gain of P213,328.82 [P1,279,973.00 2 divided by 6 heirs], and each of them to
have received the amount of P89,309.61 as share in the interests of P535,857.70 (this, sum is divided by 6). A
tentative return for 1954 was thus prepared and filed for each of the two petitioners describing the amounts of
P213,328.82 as capital gain, and in addition, the amount of P89,309.61 as ordinary income. On the basis of such
income, each of the petitioners was assessed P86,166.00.
The Government paid to petitioners the proceeds of the expropriation award and interest through the People's
Homesite and Housing Corporation sometime in October 1954 the last check having been delivered on November
4, 1954. However, the sum of P532,234.70 was retained by the Housing Corporation; and on November 18, 1954,
at the request of respondent Collector, it turned over to the Bureau of Internal Revenue the amount of
P516,007.00 representing income taxes reportedly due and owing from the six co-heirs of the estate. Therefore,
petitioners Jose Leon Gonzales and his sister Juana F. Gonzales were each credited the amount of P86,166.00 as
payment of their income tax. (Official Receipts Nos. 520491 and 520496 dated November 19, 1954)
On February 29, 1956, petitioner Juana F. Gonzales wrote the respondent Collector a letter, seeking the refund of
P24,426.00 allegedly representing excess payment of income taxes for 1954. The letter pertinently stated:
We respectively contend that the assessment was erroneous in that the amount of P89,309.61 representing
interest, was considered as ordinary income and not merely capital gain. If the interest was computed as
capital gain, there shall be due and owing from your office the amount of P24,426.00 assuming for
argument's sake that your assessment was correct. (Exhs. H & 2, also par. 22, "Stifacts")
On November 5, 1956, petitioner Jose Leon Gonzales also wrote a letter to said respondent requesting refund of a
similar amount of P24,426.00 for the same reasons as his co-petitioner. No action appears to have been taken on
this refund claim.
On November 12, 1956, respondent Collector denied the request of Juana F. Gonzales for refund of P24,426.00.
The Suits. — So on November 15, 1956, Jose Leon Gonzales and Juana F. Gonzales submitted to the Court of
Tax Appeals a joint petition seeking a refund, this time of the amount of P86,166.00 for each of the two
petitioners; but the next day, both petitioners amended their petition by filing separate petitions which were
docketed separately as CTA Case No. 328 and CTA Case No. 329.
It appears that on November 24, 1956, Atty. Fortunato de Leon wrote the respondent Collector the following
letter:
Sir:
This is to acknowledge receipt today of your letter of November 12, 1956, denying the
claim of Mrs. Juana F. Gonzales de Leon for refund, to which we take exception.
We are not only claiming the refund of P24,426.00 but the entire amount of P86,166.00
for various reasons more specifically contained in our petition before the Court of Tax
Appeals on November 16, 1956, Case No. 328. We had to file the petition because we
believe our claim is meritorious and that the prescriptive period may run out.
For all legal purposes we shall consider your letter herein referred to as a denial of the
claim for refund of the total amount of P86,166.00. And the difference in amount may be
considered for all purposes as variance only.
Respondent Collector, however, disclaims receipt of this second written claim for refund.
On December 5, 1956, respondent Collector contested the amended petitions. Trial ensued, and in the course
thereof the parties signed a "Partial Stipulation of Facts."
Decision. — On July 16, 1958, a decision was rendered by the Court of Tax Appeals denying petitioners' claim
for refund, with costs against them. Their motion for reconsideration and new trial having been denied, petitioners
perfected this appeal and now pray for reversal.
Issue. — A careful perusal of the debated issues will show that the resolution of this appeal hinges decisively on
two propositions:
(1) Whether or not petitioners' claim for refund of the total of P86,166.00 may be properly entertained;
and
(2) Whether or not the sum of P89,309.61 which each of the petitioners received as interest on the value
of the land expropriated is taxable as ordinary income, and not as capital gain.
Discussion. — The record shows that on November 18, 1954, at the request of respondent Collector, the People's
Homesite and Housing Corporation turned over to the Bureau of Internal Revenue the sum of P516,007.00
representing income taxes due from the six co-owners of the expropriated property. Of this amount, the two
appellants Gonzales were each credited with the amount of P86,166.00 as income taxes for 1954. (The receipts
evidencing such payments are O.R. No. 520491, dated November 19, 1954 for P86,166.00 for Jose Leon
Gonzales and O.R. No. 520496 dated November 19, 1954 for Juana F. Gonzales.)
It likewise appears that appellant Juana F. Gonzales in her letter of February 29, 1956, requested for the refund of
P24,426.00 (only), citing as sole ground therefor that the amount of P89,309.61 which was her share in the
interests paid on the expropriated property was taxed by respondent Collector as ordinary income. She contended
that it should have been taxed as capital gain. Appellant Jose Leon Gonzales on his part, in his letter of November
5, 1958, requested the refund of a similar amount of P24,426.00 only.
Then a joint petition was filed by both parties before the Court of Tax Appeals first on November 15, 1956, but
the next day, November 16, 1956, they filed separate petitions containing similar allegations.
It would appear, therefore, that from November 19, 1954, when the payments for income taxes were received
from the appellants to February 29, 1956, when appellant Juana Gonzales filed her claim for refund and to
November 5, 1956, and appellant Jose Leon Gonzales filed his own refund claim, less than two years had elapsed.
But, since their respective claims for refund were restricted to the amount of P24,426.00 only, it should be clear
that any demand for the return of an amount in excess thereof (P86,166.00) is not included.
Remarkedly, the so-called claim for refund of the amount of P86,166.00 was made only on November 24, 1956,
(after the complaints had been filed) without giving the Collector "an opportunity to consider his mistake, if
mistake has been committed." (Kiener Co. vs. David, 92 Phil. 945) And it refers specifically and exclusively to
appellant Juana F. Gonzales' claim (Exh. "J"). Appellant Jose Leon Gonzales seems not to have filed any refund
claim for a similar amount.
Be that as it may, this later claim for refund for P86,166.00 made on November 24, 1956, by appellant Juana F.
Gonzales has been definitely filed beyond the statutory period of two year, from the date of payment, which was
November 19, 1954.
A stringent requirement of the Tax Code is that before a suit or proceeding for the refund of any internal revenue
tax can be maintained in any court, a written claim for its refund shall be filed with the Collector of Internal
Revenue before filing the action in court and before the expiration of two years from the date of payment of the
taxes to be refunded.3This requirement is mandatory and failure to comply therewith is fatal to the action. 4 What
is more, the claim for refund should set forth in detail the facts and the grounds upon which it is based, so as to
apprise the Collector accordingly. 5
Appellants maintain that it was not they who had paid the tax of P86,166.00 imposed upon each of them, but that
it was respondent Collector himself who paid those taxes and issued receipts therefor without their knowledge and
consent. And that even if the receipts of payment were in fact sent by the respondent Collector to the People's
Homesite and Housing Corporation and were received by the latter on November 23, 1953, said receipts could not
have been received by appellants earlier than November 28, 1954, considering that the Rules of Court treats a
service as complete only upon the expiration of five days from mailing.
We find no merit in these contentions. To begin with, there is no proof positive on record that appellant Juana F.
Gonzales' so-called refund claim for the amount of P86,166.00 had been sent to, let alone received by, respondent
Neither have they protested against this payment by the Collector to the Collector. In the second place, the refund
letter of November 24, 1956, assuming that it was duly filed, referred to Juana F. Gonzales' claim alone, and made
no mention of Jose Leon Gonzales'. ln the third place, the aforesaid refund claim does not set forth in detail the
facts and grounds upon which it was based and failed to apprise the respondent of her grounds for raising her
claim from P24,426.00 to P86,166.00 (see letter). Lastly, appellant Juana F. Gonzales' eleventh-hour modification
upping her refund claim from P24,426.00 to P86,166.00 was made on November 24, 1956 or eight days after the
filing of her amended petition before the respondent court on November 16, 1956, and a few days after the two-
year period.
Obviously then, the requirement of prior timely claim for refund of the sum of P86,166.00 had not been met in
this case. The demand for refund must precede the suit, and this requirement is mandatory; so much so that non-
compliance therewith bars the action. 6
Appellants insist that payment of the tax was not made by them but by the respondent Collector himself, and that,
therefore, the prescriptive period should begin not from the date of such payment but from the date appellants
learned of such payment.
This contention offers no help to appellants' cause. Assuming that appellants indeed learned of their payments
only on November 24, 1953, they should have claimed the refund of P86,166.00 from said date and before they
filled their petitions with the respondent Court on November 15 or 16, 1956. Neither could they blame the
respondent Collector for failing to act on their refund claims sooner for it was incumbent upon appellants to urge
him to act expeditiously on their claims, knowing as they did that the time for bringing an action for a refund of
income tax, fixed by statute, is not extended by the delay of the Collector of Internal Revenue in giving notice of
the rejection of their claim.
Moreover, the provisions of section 306 of the Tax Code are mandatory and not subject to any qualification and,
hence, they apply regardless of the conditions under which the payment has been made. 8
With respect, therefore, to the issue of whether or not appellants' claim for refund of P86,166.00 (each) could now
be entertained, we believe that the same has been barred by prescription.
Anyway, it is mainly based on the proposition that our ruling in Gutierrez vs. Court of Tax Appeals, L-9738 and
L-9771, May 31, 1957, should be abandoned, a proposition we are not disposed to encourage.
Thus, our decision will, therefore, address itself only to appellants' earlier claim for refund in the sum of
P24,426.00. Which brings us to the question of whether or not the sum of P89,309.61 which each of the
appellants had received as share in the interest on the proceeds of the expropriation should be taxed as capital gain
or as ordinary income.
Appellants argue that the accessory follows the principal, that the amount paid in expropriation proceedings (the
principal, i.e., the profit thereon is admittedly capital gain, not ordinary income, and that, therefore, the interest
paid thereon (the accessory) is capital gain, not ordinary income.
This contention may not be sustained. In a previous case, 9 we held that "the acquisition by the Government of
private properties through the exercise of the power of eminent domain, said properties being justly compensated,
is embraced within the meaning of the term 'sale' or 'disposition of property'" and the definition of gross income
laid down by Section 29 of the Tax Code of the Philippines. We also adhered to the view that the transfer of
property through condemnation proceedings is a sale or exchange and that profit from the transaction constitutes
capital gain.
But to say that the proceeds of expropriation which is the return of capital and, therefore, a capital gain, partakes
of the same nature as interests paid thereon is far from correct; because interest is compensation for the delay in
the return of such capital. In fact, the authorities support the conclusion that for income tax purposes, interest does
not form part of the price paid by the Government in condemnation proceedings; and may not be treated as part of
the capital gain. It was so held by the United States Supreme Court in Kieselback v. Commissioner of Internal
Revenue, 317 U.S. 399.
Borrowing the words and phrases of said Court, we could say now:
The sum paid these taxpayers above the award of P1,307,973.00 was paid because of the failure to put the
award in the taxpayer's hands on the day, January 25, 1947, when the property was taken. This additional
payment was necessary to give the owners the full equivalent of the value of the property at the time it
was taken. Whether one calls it interest on the value or payments to meet the constitutional requirement
of just compensation is immaterial. It is income paid to the taxpayers in lieu of what they might have
earned on the sum found to be the value of the property on the day the property was taken. It is not a
capital gain upon an asset sold. The sale price was the P1,307,973.00. 10
The property was turned over in January, 1947. This was the sale. Title then passed. The subsequent earnings of
the property went to the Government. The transaction was as though a purchase money lien at legal interest was
retained upon the property. Such interest when paid would, of course, be ordinary income.
Incidentally, the above Supreme Court's decision disapproved the Seaside Improvement case on which petitioners
rely.
We see, therefore, no reason to impute error to the opinion of the Collector of Internal Revenue and the Court of
Tax Appeals that interest paid was ordinary income, bearing in mind that the Tax Code provides:
SEC. 29. Gross Income. — General Definition. — "Gross income" includes gains, profits, and income
derived from ... interests, rents, dividends, securities, or the transactions of any business carried on for
gain or profit, or gains, profits and income derived from any source whatever. 11
Having arrived at these conclusions, we deem it unnecessary to discuss the other points extensively argued in the
appellants' brief.
Judgment — Consequently, finding no error in the appealed decision, we hereby affirm it, with costs. So ordered.
G.R. No. L-12752 January 30, 1965
THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
BINALBAGAN ESTATE, INC., respondent.
The Government, availing itself of its inherent power of taxation, imposed taxes on the Binalbagan Estate, Inc.,
for income received by the latter corresponding to the years 1951, 1952 and 1953. Binalbagan Estate, Inc. paid
said taxes under protest and filed before the Court of Tax Appeals an action for their refund. The Court of Tax
Appeals found for the taxpayer and the Collector of Internal Revenue brought this case before the Supreme Court.
From 1918 up to December 8, 1941 Binalbagan Estate, Inc. (Binalbagan for short), a domestic corporation.
Operated a sugar central at Binalbagan, Occidental Negros, 99.5% of its capital stock was then owned by the
Philippine National Bank. Its tangible assets, with an acquisition value of P7,797,994.69 included a sugar. It
possessed a sugar quota of 296,525.856 piculs.
During World War II, Banalbagan lost its books, records and papers. 40% to 50% of its machineries, equipment
and plant was rendered useless. After the war or in 1945 it tried to reconstitute its books and records, and its
accountant, Mr. Eugenio, assisted by two employees of the Philippines National Bank, Messrs. Cion and
Domingo, undertook the work. Mr. Ramos evaluated Binalbagan's assets at P824,559.91 and accordingly entered
said amount in its newly reconstituted books. Its sugar quota was not given any value.
In 1946, upon advice of President Manuel A. Roxas and the Council of State, in order to achieve economy in the
rehabilitation of destroyed sugar mills and to lower the operating cost of milling sugar in the area where they were
located, Binalbagan and Isabela Sugar Co., Inc. (Isabela for short) proposed to merge their assets to form a new
corporation to be known as Binalbagan-Isabela Sugar Co., Inc. (BISCOM for short), with a capital stock divided
into 400,000 nonpar value shares.
To ascertain the contribution and participation of Binalbagan and Isabela in BISCOM, a committee composed of
Messrs. E. T. Westly, chairman, Raymundo Robles and Gonzalo Guillen, members, appraised the assets of both
merging corporations. Their qualifications to undertake their work are admitted by both parties. The committee
fixed the fair market value of Binalbagan's tangible assets at P2,541,134.69 and the sugar quota at P5.00 per picul
or P1,482,629.28. It also pegged Isabela's tangible assets at P2,446,062.80.
On the basis of the Westly Committee's appraisal, merger was realized with Binalbagan being allocated 216,000
shares of BISCOM's capital stock in exchange for its tangible assets and sugar quota. In 1948, Binalbagan gave
away 29,055 shares to three small sugar centrals which joined BISCOM in consideration for their voting trust,
thereby reducing its equity to 176,945 shares. In 1951 Binalbagan sold all the 176,945 shares to Philippine
Planters' Investment Co. for P6,192,935.00 payable in installment. Philippines Planters' Investment Co. paid
P1,500,000.00 in 1951; P350,764.47 including interest in the sum of P13,878.26 in 1953. All these receipts
together with sundry profits and credits to surplus were reported in Binalbagan's income tax returns for 1951,
1952 and 1953. Income tax paid thereon is as follows:
1951 P14,327.00
1952 37,446.00
1953 139,617.00
For 1951, Binalbagan deducted the book value of its tangible assets in the sum of P824,559.91 (as appraised by
Mr. Ramos in 1945) from the initial payment of P1,500,000.00, then reported 50% of the remainder as income
(gain from sale of capital assets). It claimed certain deductions which later on were found not allowable. For 1952
and 1953, only 50% of the payments made by Philippine Planters' Investment Co. was returned for income tax
purposes.
On November 27, 1954 the Collector of Internal Revenue assessed against Binalbagan deficiency income tax in
the sums of P267,246.00, P36,030.00 and P127,949.00 for the years 1951, 1952 and 1953, respectively. In said
assessments, he spread over 1951, 1952 and 1953 the gain realized from the sale of Binalbagan's BISCOM shares
in accordance with Section 43 of the National Revenue Code. The Collector further considered taxable 100% of
the gain from the sale of said BISCOM shares pursuant to Section 34 (b) of the Tax Code. Binalbagan reported
only 50% of said gain. For 1953, he assessed in additional income tax on P3,259.60, representing miscellaneous
charges to surplus applicable to previous years.
Binalbagan questioned the deficiency assessments but paid the same on August 18, 1955 under protest. Then it
claimed refund of P444,040.61 as overpaid income tax returns erroneously used as the cost of acquisition of its
BISCOM shares the sum of P824,559.91 1 instead of P4,023,763.97.2
Binalbagan's claim for refund having been denied, it appealed to the Court of Tax Appeals. Said court, after
hearing, found the appraisal of the Westly Committee the correct acquisition value of Binalbagan's 216,000
BISCOM shares, accordingly recomputed the income tax liability of Binalbagan and ordered the refund of the
amount of P443,060.00 as overpaid income tax for the years 1951, 1952 and 1953, with legal interest thereon
from the date of payment. Hence, this appeal of the Collector of Internal Revenue.
The issue is: How much did Binalbagan gain when it sold 176,945 nonpar value BISCOM shares to Philippine
Planters' Investment Co. in 1951?
The law in point is Section 35 of the Tax Code, which states:
SEC. 35 Determination of gain or loss from the sale or other disposition of property. — The gain derived
or loss sustained from the sale or other disposition of property, real, personal or mixed, shall be
determined in accordance with the following schedule:
xxx xxx xxx
(b) In the case of property acquired on or before March first, nineteen hundred and thirteen, the cost
thereof if such property was acquired by purchase or the fair market price or value as of the date of
acquisition if the same was acquired by gratuitous title.
(c) In the case of exchange of one piece of property for another, the property received in exchange shall
be considered the equivalent of money in a sum equal to its fair market value on the date on which the
exchange was made.
Section 35 was implemented by Section 136 of Revenue Regulations No. 2 of the Department of Finance,
otherwise known as Income Tax Regulations. We quote Section 136:
SEC. 136. For the purpose of ascertaining the gain or loss from the sale or exchange of property, the basis
is the cost of such property or in the case of property which should be included in the inventory, latest
inventory value.
... In any case proper adjustment must be made in computing gain or loss from the exchange or sale of
property for any depreciation or depletion sustained and allowable as deduction in computing net income;
the amount of depreciation previously charged off by the taxpayer shall be deemed to be true depreciation
sustained unless shown by clear and convincing evidence to be incorrect. 3
To determine gain or loss from the sale of the 176,945 nonpar value BISCOM shares, the basis is the acquisition
cost of said shares. Binalbagan, however, did not pay for them in cash but with its tangible assets and sugar quota.
This brings us to the question value of Binalbagan's tangible assets and sugar quota as of 1946 when Binalbagan
acquired the 216,000 nonpar value shares of BISCOM in exchange therefor.
The Collector of Internal Revenue holds the view that the acquisition cost of Binalbagan's 216,000 BISCOM
nonpar value shares is equivalent to the acquisition cost of the tangible assets given in exchange therefor. Such
acquisition cost amounts to P824,559.91 as determined by Mr. Ramos in 1945. How said value was arrived at,
considering that Binalbagan's books and records were lost during the war, is not shown. But the Collector
indicated that Mr. Ramos made his calculation at the mill site and obtained his figures from his knowledge of the
assets in question acquired by him as accountant of Binalbagan. This method of calculation suffers from the
unreliability of human memory to record and recall figures with thorough exactness. Such flaw becomes apparent
when we take into account that P824,559.91 is only 10.5% of P7,797,994.69, the acquisition value of the tangible
assets in question. This appears too inadequate an estimate considering that only 40% to 50% of the said assets
were destroyed during the war.
The Collector of Internal Revenue places much emphasis on what he asserts as estoppel in pais and contends that
because the amount of P824,559.91 appears in Binalbagan's books, said amount should be held controlling. We
do not find this contention material herein inasmuch as whether or not P824,559.91 is held the correct acquisition
cost of the tangible assets in question, the same would not determine the profits realized from the sale of
Binalbagan's BISCOM shares to the Philippine Planters' Investment Co. The fact remains that P824,559.91 is not
the fair market value of said assets and, as will presently be explained, the basis in computing the taxable gain
from the sale of Binalbagan's BISCOM shares is the fair market value of the assets and sugar quota in question.
At any rate, Binalbaga's error in carrying the figure P824,559.91 in its books and using the same in its income tax
returns for 1951,1952 and 1953 neither benefited Binalbagan nor prejudiced the Government.
Binalbagan maintain that the true and correct acquisition cost of its 216,000 shares of BISCOM is equivalent to
the fair market value of its tangible assets and sugar quota as appraised by the Westly Committee. 4 This view was
sustained by the Court of Tax Appeals. Considering the evidence, law and jurisprudence applicable to this case,
we find the conclusion of the Court of Tax of Appeals in order.1äwphï1.ñët
There can be no doubt as to the competence of the chairman and members of the Westly Committee, all of whom
were engineers of sugar centrals and were recognized technical experts in sugar centrals and were recognized
technical experts in sugar central equipment and appurtenances by reason of their long experience in the sugar
industry. Precisely, to forestall overvaluation of assets by either of the merging corporations (Binalbagan and
Isabela), each entity appointed one representative to the committee. The chairman, who was connected with the
Del Carmen & Calamba Sugar Estate, had no relationship or privity with either of said merging corporations nor
with their respective representatives.
Assuming, however, that the acquisition cost of Binalbagan's tangible assets is P824,559.91, the value determined
by Mr. Ramos in 1945, said value may not rightly be considered the acquisition cost of the 216,000 BISCOM
shares as insisted by the Collector of Internal Revenue. We are not called upon to decide the income tax due on
the profit which may have been realized by Binalbagan's when it acquired the 216,000 BISCOM shares in
exchange for its tangible assets, in which case the basis would be the acquisition cost of said assets pursuant to
Subsection (b), Section 35 of the Tax Code (Gutierrez vs. Court of Tax Appeals, the controversy rests on
whatever tax is imposable on the gain obtained from the sale of the 216,00 BISCOM shares to the Philippines
Planters' Investment Co. In short, the first transaction was in exchange, and the second was a sale. The basis in
determining the gain in such sale is the cost of said shares. Inasmuch as the shares were acquired in exchange for
Binalbagan's tangible assets and sugar quota, their cost is equivalent to the fair market value of said assets and
sugar quota at the time of the exchange as appraised by the Westly Committee. (Sub-section [c], Section 35 of the
Tax Code, afore-quoted.)
The rule has been aptly stated, thus:
... Where the consideration is property, its amount is determined by its fair market value at the time of the
exchange and not by the original cost of the consideration. It is the same as if the property given in
exchange had first been sold and the purchase price then immediately used to buy the property whose cost
basis is under consideration. The consideration for property surrendered therein. ... The consideration for
property received in an exchange is the value of the property surrendered. (Jacob Mertens, Jr., Law on
Federal Income Taxation, Vol. 3, Sec 21, p. 375.)
The above ruling prevails in the United States. 5 Our income tax law being of American origin, 6 the interpretation
adopted by American courts on corresponding and contemporaneous provisions has peculiar persuative effect on
the interpretation of Philippine laws on the subject.
The fair market value of Binalbagan's tangible assets as appraised by the Westly Committee in the amount of
P2,541,134.69 augmented by the value of its sugar quota amounting to P1,482,629.28 is the correct acquisition
cost of the 216,000 BISCOM shares. It is, however, contended by the Collector that the value of the sugar quota
ought not to be accounted as part of the acquisition cost of the BISCOM shares for the simple reason that
Binalbagan acquired them without cost. Under Subsection (c), Section 35, of the Tax Code, the acquisition cost of
the shares of stock equivalent to the fair market value of the property given in exchange therefor. The sugar quota,
which had a fair market value of P5.00 per picul, was part and parcel of the property turned over by Binalbagan to
BISCOM for the 216,000 shares.
Under the terms of the contract of merger between Binalbagan and Isabela, we doubt if Binalbagan could have
been allocated 216,000 shares without the sugar quota, or even with it, if the tangible assets of Binalbagan were
valued at only P824, 559.91. In plain language, it cost Binalbagan P2,541,134.39 worth of tangible assets and
P1,482,629.28 worth of sugar quota to acquire 216,000 shares of BISCOM.
As to the method of apportioning Binalbagan's taxable gain over 1951, 1952 and 1953, there is no controversy.
Under Section 43 of the Tax Code, the taxable gain or income received during the year which the gross profit
realized or to be realized when payment is completed, bears to the total contract price. The accepted formula is:
Gross Profit
X Installment Received == Profit For The Year
Selling Price
Upon such formula, the Court of Tax Appeals computed Binalbagan's tax liability which, in addition to the tax on
sundry income, is set forth below:
1951 P64,613.00
1952 23,253.00
1953 91,419.00
Total P179,555.00
==========
As Binalbagan paid a total of P622,615.00, it therefore overpaid the amount of P443,060.00 (not P444,040.61 as
claimed), which should justly be refunded to it.
The Collector has called our attention to the prescription of Binalbagan's right to the refund of the tax paid prior to
March 22, 1954 corresponding to the years 1951 and 1952. Indeed, the right to the refund of said tax in the
aggregate amount of P51,773.00 has prescribed under Section 306 of the Tax Code. Binalbagan filed its petition
for review in the Court of Tax Appeals on March 22, 1956, more than two years from the date of payment.
However, prescription has not set in to claim refund of the tax paid after March 22, 1954. The following
tabulation will clearly illustrate:
Tax Paid Prior Tax Paid After Total

March 22, 1954 March 22, 1954 Tax Paid
1951 P14,327.00 P267,246.00 P281,573.00
1952 37,446.00 36,030.00 73,476.00
1953 127,949.00
139,617.00 267,566.00
Tota
P51,773.00 P570,842.00 P622,615.00
l
=========== =========== ===========
Accordingly, refund of P443,060.00, or any amount not exceeding P570,842.00, has not prescribed.
The Court of Tax Appeals awarded Binalbagan legal interest computed from the date the taxes were paid. There is
no statutory provisions awarding interest in these cases. On several occasions, 7 we ruled that in the absence of a
statutory provision clearly directing or authorizing the payment of interest. Later, however, we held that there
where the collection of the tax sought to be refunded was attended with arbitrariness, the Commissioner of
Internal Revenue is liable to pay interest. 8 In the case at bar, collection of the deficiency income tax was not
arbitrary. As a matter of fact, the figures used by the Collector in his deficiency assessment were those reported
by Binalbagan in its own income tax returns. Hence, the consequent error in the assessment was occasioned, not
by the Collector's arbitrary determination, but by the taxpayer's admitted mistake.
WHEREFORE, the Commissioner of Internal Revenue is ordered to refund to the Binalbagan Estate, Inc. the
amount of P443,060.00 as overpaid income tax for the years 1951, 1952 and 1953, without interest. No costs. So
ordered.
G.R. No. 96016 October 17, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,
-versus-
THE COURT OF APPEALS and EFREN P. CASTANEDA, respondents.
The issue to be resolved in this petition for review on certiorari is whether or not terminal leave pay received by a
government official or employee on the occasion of his compulsory retirement from the government service is
subject to withholding (income) tax.
We resolve the issue in the negative.
Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in the Philippine
Embassy in London, England, on 10 December 1982 under the provisions of Section 12 (c) of Commonwealth
Act 186, as amended. Upon retirement, he received, among other benefits, terminal leave pay from which
petitioner Commissioner of Internal Revenue withheld P12,557.13 allegedly representing income tax thereon.
Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that the cash
equivalent of his terminal leave is exempt from income tax. To comply with the two-year prescriptive period
within which claims for refund may be filed, Castaneda filed on 16 July 1984 with the Court of Tax Appeals a
Petition for Review, seeking the refund of income tax withheld from his terminal leave pay.
The Court of Tax Appeals found for private respondent Castaneda and ordered the Commissioner of Internal
Revenue to refund Castaneda the sum of P12,557.13 withheld as income tax. (,Annex "C", petition).
Petitioner appealed the above-mentioned Court of Tax Appeals decision to this Court, which was docketed as
G.R. No. 80320. In turn, we referred the case to the Court of Appeals for resolution. The case was docketed in the
Court of Appeals as CA-G.R. SP No. 20482.
On 26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the decision of the
Court of Tax Appeals. Hence, the present recourse by the Commissioner of Internal Revenue.
The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the terminal leave
pay is income derived from employer-employee relationship, citing in support of his stand Section 28 of the
National Internal Revenue Code; that as part of the compensation for services rendered, terminal leave pay is
actually part of gross income of the recipient. Thus —
. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . .
there can thus be no "commutation of salary" when a government retiree applies for terminal
leave because he is not receiving it as salary. What he applies for is a "commutation of leave
credits." It is an accumulation of credits intended for old age or separation from service. . . .
The Court has already ruled that the terminal leave pay received by a government official or employee is not
subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained the rationale behind the employee's
entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for by an
officer or employee who retires, resigns or is separated from the service through no fault of his
own. (Manual on Leave Administration Course for Effectiveness published by the Civil Service
Commission, pages 16-17). In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government recognizes that for most public
servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest
egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are
given not only at the same time but also for the same policy considerations governing retirement
benefits.
In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit,
terminal leave pay is not subject to income tax.
ACCORDINGLY, the petition for review is hereby DENIED.SO ORDERED.
G.R. Nos. L-28508-9 July 7, 1989

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund
of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251
and 1558 respectively.
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary
and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum
concessions. This claim was disallowed by the respondent Commissioner of Internal Revenue on the
ground that the expenses should be capitalized and might be written off as a loss only when a "dry
hole" should result. ESSO then filed an amended return where it asked for the refund of P323,279.00
by reason of its abandonment as dry holes of several of its oil wells. Also claimed as ordinary and
necessary expenses in the same return was the amount of P340,822.04, representing margin fees it
had paid to the Central Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction
for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the
amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to
April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin
fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head
office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00
representing its overpayment on its income tax for 1959 and paying under protest the additional amount
of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the
interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on
the total deficiency of P367,944.00 but only on the amount of P146,961.00, the difference between the
total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of
the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the
overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central Bank
could not be considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin
fees were deductible from gross income either as a tax or as an ordinary and necessary business
expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were not legally deductible,
there was still an overpayment by P39,787.94 for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for
1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was
appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v. ESSO,
G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision
denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960.
That is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of
the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police
measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to the
Central Bank on its profit remittances to its New York head office should be deductible from ESSO's
gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes paid
or accrued during or within the taxable year and which are related to the taxpayer's trade, business or
profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and legislative history of
the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on
foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by President
Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-1960. It was
enacted by Congress as such and, significantly, properly originated in the House of Representatives.
During its two and a half years of existence, the measure was one of the major sources of revenue
used to finance the ordinary operating expenditures of the government. It was, moreover, payable out
of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out
that —
We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the
legislature, steps taken in the enactment of a law, or the history of the passage of the law through the
legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or of
doubtful meaning. The courts may take into consideration the facts leading up to, coincident with, and
in any way connected with, the passage of the act, in order that they may properly interpret the
legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of Congress become important. As a matter of fact,
there may be no resort to the legislative history of the enactment of a statute, the language of which is
plain and unambiguous, since such legislative history may only be resorted to for the purpose of solving
doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held that a margin fee
is not a tax but an exaction designed to curb the excessive demands upon our international reserve.
2
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, the Court stated through Justice Jose P.
Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction designed

to discourage imports and encourage exports, and ultimately, 'curtail any excessive
demand upon the international reserve' in order to stabilize the currency. Originally
adopted to cope with balance of payment pressures, exchange restrictions have come to
serve various purposes, such as limiting non-essential imports, protecting domestic
industry and when combined with the use of multiple currency rates providing a source
of revenue to the government, and are in many developing countries regarded as a more
or less inevitable concomitant of their economic development programs. The different
measures of exchange control or restriction cover different phases of foreign exchange
transactions, i.e., in quantitative restriction, the control is on the amount of foreign
exchange allowable. In the case of the margin levy, the immediate impact is on the rate
of foreign exchange; in fact, its main function is to control the exchange rate without
changing the par value of the peso as fixed in the Bretton Woods Agreement Act. For a
member nation is not supposed to alter its exchange rate (at par value) to correct a
merely temporary disequilibrium in its balance of payments. By its nature, the margin
levy is part of the rate of exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence
should not form part of the exchange rate, suffice it to state that We have already held the contrary for
the reason that a tax is levied to provide revenue for government operations, while the proceeds of the
margin fee are applied to strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the same
idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's foreign
exchange constitutes an export tax. A tax is a levy for the purpose of providing revenue
for government operations, while the proceeds of the 20% retention, as we have seen,
are applied to strengthen the Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its police power and
not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still deductible from its gross income. The
fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites States.
Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income in computing net income there shall be allowed
as deductions
(a) Expenses:
(1) In general. — All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered; traveling
expenses while away from home in the pursuit of a trade or business; and rentals or
other payments required to be made as a condition to the continued use or possession,
for the purpose of the trade or business, of property to which the taxpayer has not taken
or is not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign corporations. — In

the case of a non-resident alien individual or a foreign corporation, the expenses
deductible are the necessary expenses paid or incurred in carrying on any business or
trade conducted within the Philippines exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, 4 the Court laid down the rules on the deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must point to
some specific provision of the statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the law allows. As previously
adverted to, the law allowing expenses as deduction from gross income for purposes of
the income tax is Section 30(a) (1) of the National Internal Revenue which allows a
deduction of 'all the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business.' An item of expenditure, in order to be
deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be

deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he must substantially prove
by evidence or records the deductions claimed under the law, otherwise, the same will
be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction.
While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no
adequate or satisfactory definition of those terms is possible. Similarly, this Court has
never attempted to define with precision the terms 'ordinary and necessary.' There are
however, certain guiding principles worthy of serious consideration in the proper
adjudication of conflicting claims. Ordinarily, an expense will be considered 'necessary'
where the expenditure is appropriate and helpful in the development of the taxpayer's
business. It is 'ordinary' when it connotes a payment which is normal in relation to the
business of the taxpayer and the surrounding circumstances. The term 'ordinary' does
not require that the payments be habitual or normal in the sense that the same taxpayer
will have to make them often; the payment may be unique or non-recurring to the
particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction depends in
each case on the particular facts and the relation of the payment to the type of business
in which the taxpayer is engaged. The intention of the taxpayer often may be the
controlling fact in making the determination. Assuming that the expenditure is ordinary
and necessary in the operation of the taxpayer's business, the answer to the question as
to whether the expenditure is an allowable deduction as a business expense must be
determined from the nature of the expenditure itself, which in turn depends on the extent
and permanency of the work accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on
this issue as follows:
Considering the foregoing test of what constitutes an ordinary and necessary deductible
expense, it may be asked: Were the margin fees paid by petitioner on its profit
remittance to its Head Office in New York appropriate and helpful in the taxpayer's
business in the Philippines? Were the margin fees incurred for purposes proper to the
conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees
incurred for the purpose of realizing a profit or of minimizing a loss in the Philippines?
Obviously not. As stated in the Lopez case, the margin fees are not expenses in
connection with the production or earning of petitioner's incomes in the Philippines. They
were expenses incurred in the disposition of said incomes; expenses for the remittance
of funds after they have already been earned by petitioner's branch in the Philippines for
the disposal of its Head Office in New York which is already another distinct and
separate income taxpayer.
xxx
Since the margin fees in question were incurred for the remittance of funds to petitioner's
Head Office in New York, which is a separate and distinct income taxpayer from the
branch in the Philippines, for its disposal abroad, it can never be said therefore that the
margin fees were appropriate and helpful in the development of petitioner's business in
the Philippines exclusively or were incurred for purposes proper to the conduct of the
affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing
a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees
were incurred for purposes proper to the conduct of the corporate affairs of Standard
Vacuum Oil Company in New York, but certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance
of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary
and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public
respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations ... . The taxpayer in every
instance has the burden of justifying the allowance of any deduction claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now
claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or
business.
WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of
P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.
G.R. No. L-24248 July 31, 1974

ANTONIO TUASON, JR., petitioner,
-versus-
JOSE B. LINGAD, as Commissioner of Internal Revenue, respondent.
In this petition for review of the decision of the Court of Tax Appeals in CTA Case 1398, the petitioner Antonio
Tuason, Jr. (hereinafter referred to as the petitioner) assails the Tax Court's conclusion that the gains he realized
from the sale of residential lots (inherited from his mother) were ordinary gains and not gains from the sale of
capital assets under section 34(1) of the National Internal Revenue Code.
The essential facts are not in dispute.
In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous parcels
situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters, respectively.
When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twenty-
eight were allocated to their then occupants who had lease contracts with the petitioner's predecessor at various
times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as
Lot 29), with an area of 48,000 square meters, more or less, was not leased to any person. It needed filling
because of its very low elevation, and was planted to kangkong and other crops.
After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-in-fact, J. Antonio
Araneta, to sell them.
There was no difficulty encountered in selling the 28 small lots as their respective occupants bought them on a 10-
year installment basis. Lot 29 could not however be sold immediately due to its low elevation.
Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small lots and paved
with macadam roads. The small lots were then sold over the years on a uniform 10-year annual amortization
basis. J. Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor did he put up
advertisements in the matter of the sale thereof.
In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102,050.79 and P103,468.56,
respectively) as long-term capital gains. On May 17, 1957 the Collector of Internal Revenue upheld the
petitioner's treatment of his gains from the said sale of small lots, against a contrary ruling of a revenue examiner.
In his 1957 tax return the petitioner as before treated his income from the sale of the small lots (P119,072.18) as
capital gains and included only ½ thereof as taxable income. In this return, the petitioner deducted the real estate
dealer's tax he paid for 1957. It was explained, however, that the payment of the dealer's tax was on account of
rentals received from the mentioned 28 lots and other properties of the petitioner. On the basis of the 1957
opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioner's treatment of his
income from the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of
Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion, which was concurred
in by the Commissioner of Internal Revenue.
On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits from the
sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner received a letter from the Bureau
of Internal Revenue advising him to pay deficiency income tax for 1957, as follows:
Net income per orig. investigation ............... P211,095.36

Add:
56% of realized profit on sale
of lots which was deducted in the
income tax return and allowed in
the original report of examination ................. 59,539.09 Net income per final investigation .................
P270,824.70

Less: Personal exemption ..................................... 1,800.00

Amount subject to tax ................................. P269,024.70 Tax due thereon ..........................................
P98,551.00
Less: Amount already assessed .................... 72,199.00 Balance ......... P26,352.00

Add:
½% monthly interest from
6-20-59 to 6-29-62 .................................... 4,742.36
TOTAL AMOUNT DUE AND
COLLECTIBLE ......................................... P31,095.36
The petitioner's motion for reconsideration of the foregoing deficiency assessment was denied, and so he went up
to the Court of Tax Appeals, which however rejected his posture in a decision dated January 16, 1965, and
ordered him, in addition, to pay a 5% Surcharge and 1% monthly interest "pursuant to Sec. 51(e) of the Revenue
Code."
Hence, the present petition.
The petitioner assails the correctness of the opinion below that as he was engaged in the business of leasing the
lots he inherited from his mother as well other real properties, his subsequent sales of the mentioned lots cannot
be recognized as sales of capital assets but of "real property used in trade or business of the taxpayer." The
petitioner argues that (1) he is not the one who leased the lots in question; (2) the lots were residential, not
commercial lots; and (3) the leases on the 28 small lots were to last until 1953, before which date he was
powerless to eject the lessees therefrom.
The basic issue thus raised is whether the properties in question which the petitioner had inherited and
subsequently sold in small lots to other persons should be regarded as capital assets.
1. The National Internal Revenue Code (C.A. 466, as amended) defines the term "capital assets" as follows:
(1) Capital assets. — The term "capital assets" means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stock in trade of the taxpayer or
other property of a kind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or 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
(f) of section thirty; or real property used in the trade or business of the taxpayer.
As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not connected
with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2)
property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the
trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or
business. 1 If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative
thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of
the taxpayer is a capital gain or a capital loss. 2
Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the
sale or exchange of capital assets held for more than twelve months, only 50% of the net capital gain shall be
taken into account in computing the net income.
The Tax Code's provision on so-called long-term capital gains constitutes a statute of partial exemption. In view
of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority, 3 the field of application of the term it "capital assets" is necessarily
narrow, while its exclusions must be interpreted broadly. 4 Consequently, it is the taxpayer's burden to bring
himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts
will be resolved against him. 5 It bears emphasis nonetheless that in the determination of whether a piece of
property is a capital asset or an ordinary asset, a careful examination and weighing of all circumstances revealed
in each case must be made. 6
In the case at bar, after a thoroughgoing study of all the circumstances relevant to the resolution of the issue
raised, this Court is of the view, and so holds, that the petitioner's thesis is bereft of merit.
When the petitioner obtained by inheritance the parcels in question, transferred to him was not merely the duty to
respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of the
business and property which the decedent had established and maintained. 7 Moreover, the record discloses that
the petitioner owned other real properties which he was putting out for rent, from which he periodically derived a
substantial income, and for which he had to pay the real estate dealer's tax (which he used to deduct from his
gross income). 8 In fact, as far back as 1957 the petitioner was receiving rental payments from the mentioned 28
small lots, even if the leases executed by his deceased mother thereon expired in 1953. Under the circumstances,
the petitioner's sales of the several lots forming part of his rental business cannot be characterized as other than
sales of non-capital assets.
The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different
characterization for tax purposes. The following circumstances in combination show unequivocally that the
petitioner was, at the time material to this case, engaged in the real estate business: (1) the parcels of land
involved have in totality a substantially large area, nearly seven (7) hectares, big enough to be transformed into a
subdivision, and in the case at bar, the said properties are located in the heart of Metropolitan Manila; (2) they
were subdivided into small lots and then sold on installment basis (this manner of selling residential lots is one of
the basic earmarks of a real estate business); (3) comparatively valuable improvements were introduced in the
subdivided lots for the unmistakable purpose of not simply liquidating the estate but of making the lots more
saleable to the general public; (4) the employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for the
purpose of developing, managing, administering and selling the lots in question indicates the existence of owner-
realty broker relationship; (5) the sales were made with frequency and continuity, and from these the petitioner
consequently received substantial income periodically; (6) the annual sales volume of the petitioner from the said
lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the
petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a stranger to the real
estate business. Under the circumstances, this Court finds no error in the holding below that the income of the
petitioner from the sales of the lots in question should be considered as ordinary income.
2. This Court notes, however, that in ordering the petitioner to pay the deficiency income tax, the Tax Court also
required him to pay a 5% surcharge plus 1% monthly interest. In our opinion this additional requirement should
be eliminated because the petitioner relied in good faith upon opinions rendered by no less than the highest
officials of the Bureau of Internal Revenue, including the Commissioner himself. The following ruling in Connell
Bros. Co. (Phil.) vs. Collector of Internal Revenue 9 applies with reason to the case at bar:
We do not think Section 183(a) of the National Internal Revenue Code is applicable. The same
imposes the penalty of 25% when the percentage tax is not paid on time, and contemplates a case
where the liability for the tax is undisputed or indisputable. In the present case the taxes were
paid, the delay being with reference to the deficiency, owing to a controversy as to the proper
interpretation if Circulars Nos. 431 and 440 of the office of respondent-appellee. The controversy
was generated in good faith, since that office itself appears to have formerly taken the view that
the inclusion of the words "tax included" on invoices issued by the taxpayer was sufficient
compliance with the requirements of said circulars. 10
ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the portion thereof that imposes
5% surcharge and 1% monthly interest, which is hereby set aside. No costs.
G.R. No. L-26284 October 8, 1986

TOMAS CALASANZ, ET AL., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS, respondents.
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals in
CTA No. 1275 dated June 7, 1966, holding them liable for the payment of P3,561.24 as deficiency
income tax and interest for the calendar year 1957 and P150.00 as real estate dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in
Cainta, Rizal, containing a total area of 1,678,000 square meters. In order to liquidate her inheritance,
Ursula Calasanz had the land surveyed and subdivided into lots. Improvements, such as good roads,
concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after,
the lots were sold to the public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31,
1958, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and
reported fifty per centum thereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged
in business as real estate dealers, as defined in Section 194 [s] 1 of the National Internal Revenue
Code, required them to pay the real estate dealer's tax 2 and assessed a deficiency income tax on
profits derived from the sale of the lots based on the rates for ordinary income.
On September 29, 1962, petitioners received from respondent Commissioner of Internal Revenue:
a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate

dealer's fixed tax of P150.00 and P10.00 compromise penalty for late payment; and
b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on

ordinary gain of P3,018.00 plus interest of P 543.24.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review contesting the
aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the
assessment regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the
same cannot be collected in the absence of a valid and binding compromise agreement.
Hence, the present appeal.
The issues for consideration are:
a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed
tax; and
b. Whether the gains realized from the sale of the lots are taxable in full as ordinary
income or capital gains taxable at capital gain rates.
The issues are closely interrelated and will be taken jointly.
Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the sale of
the lots under Section 34 [b] [2] 3 of the Tax Code.
The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of
Section 34[a] [1] of the Tax Code and that an heir who liquidated his inheritance cannot be said to have
engaged in the real estate business and may not be denied the preferential tax treatment given to gains
from sale of capital assets, merely because he disposed of it in the only possible and advantageous
way.
Petitioners averred that the tract of land subject of the controversy was sold because of their intention
to effect a liquidation. They claimed that it was parcelled out into smaller lots because its size proved
difficult, if not impossible, of disposition in one single transaction. They pointed out that once
subdivided, certainly, the lots cannot be sold in one isolated transaction. Petitioners, however, admitted
that roads and other improvements were introduced to facilitate its sale. 4
On the other hand, respondent Commissioner maintained that the imposition of the taxes in question is
in accordance with law since petitioners are deemed to be in the real estate business for having been
involved in a series of real estate transactions pursued for profit. Respondent argued that property
acquired by inheritance may be converted from an investment property to a business property if, as in
the present case, it was subdivided, improved, and subsequently sold and the number, continuity and
frequency of the sales were such as to constitute "doing business." Respondent likewise contended
that inherited property is by itself neutral and the fact that the ultimate purpose is to liquidate is of no
moment for the important inquiry is what the taxpayer did with the property. Respondent concluded that
since the lots are ordinary assets, the profits realized therefrom are ordinary gains, hence taxable in
full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets.
Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer
[whether or not connected with his trade or business], but does not include, stock in
trade of the taxpayer or other property of a kind which would properly be included, in the
inventory of the taxpayer if on hand at the close of the taxable year, or 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 [f] of section thirty; or real property
used in the trade or business of the taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the asset is not among the
exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets.
And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an
ordinary gain depending on the kind of asset involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be determined with finality whether
property sold by a taxpayer was held primarily for sale to customers in the ordinary course of his trade
or business or whether it was sold as a capital asset. 6 Although several factors or indices 7 have been
recognized as helpful guides in making a determination, none of these is decisive; neither is the
presence nor the absence of these factors conclusive. Each case must in the last analysis rest upon its
own peculiar facts and circumstances. 8
Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tend to show that the activity was in furtherance of or in the
course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital
gain or loss even though the property has to be subdivided or improved or both to make it salable.
However, if the inherited property is substantially improved or very actively sold or both it may be
treated as held primarily for sale to customers in the ordinary course of the heir's business. 9
Upon an examination of the facts on record, We are convinced that the activities of petitioners are
indistinguishable from those invariably employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business element of development which is very
much in evidence. Petitioners did not sell the land in the condition in which they acquired it. While the
land was originally devoted to rice and fruit trees, 10 it was subdivided into small lots and in the process
converted into a residential subdivision and given the name Don Mariano Subdivision. Extensive
improvements like the laying out of streets, construction of concrete gutters and installation of lighting
system and drainage facilities, among others, were undertaken to enhance the value of the lots and
make them more attractive to prospective buyers. The audited financial statements 11 submitted
together with the tax return in question disclosed that a considerable amount was expended to cover
the cost of improvements. As a matter of fact, the estimated improvements of the lots sold reached
P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority that a property ceases
to be a capital asset if the amount expended to improve it is double its original cost, for the extensive
improvement indicates that the seller held the property primarily for sale to customers in the ordinary
course of his business. 12
Another distinctive feature of the real estate business discernible from the records is the existence of
contracts receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The
sizable amount of receivables in comparison with the sales volume of P446,407.00 during the same
period signifies that the lots were sold on installment basis and suggests the number, continuity and
frequency of the sales. Also of significance is the circumstance that the lots were advertised 13 for sale
to the public and that sales and collection commissions were paid out during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.
In Ehrman vs. Commissioner, 14 the American court in clear and categorical terms rejected the
liquidation test in determining whether or not a taxpayer is carrying on a trade or business The court
observed that the fact that property is sold for purposes of liquidation does not foreclose a
determination that a "trade or business" is being conducted by the seller. The court enunciated further:
We fail to see that the reasons behind a person's entering into a business-whether it is to
make money or whether it is to liquidate-should be determinative of the question of
whether or not the gains resulting from the sales are ordinary gains or capital gains. The
sole question is-were the taxpayers in the business of subdividing real estate? If they
were, then it seems indisputable that the property sold falls within the exception in the
definition of capital assets . . . that is, that it constituted 'property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business.
Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter in this wise:
One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale
may be conducted in the most advantageous manner to the seller and he will not lose
the benefits of the capital gain provision of the statute unless he enters the real estate
business and carries on the sale in the manner in which such a business is ordinarily
conducted. In that event, the liquidation constitutes a business and a sale in the ordinary
course of such a business and the preferred tax status is lost.
In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners engaged in
the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable
in full.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.
SO ORDERED.
G.R. No. L-21551 September 30, 1969
FERNANDEZ HERMANOS, INC., petitioner,

-versus-
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
-----------------------------

-versus-
FERNANDEZ HERMANOS, INC., and COURT OF TAX APPEALS, respondents.
-----------------------------

-versus-
FERNANDEZ HERMANOS INC., and the COURT OF TAX APPEALS, respondents.
-----------------------------
FERNANDEZ HERMANOS, INC., petitioner,

-versus-
THE COMMISSIONER OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, COURT OF TAX
APPEALS, respondents.
L-21551:
Rafael Dinglasan for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney Virgilio G.
Saldajeno for respondent.
L-21557:
Office of the Solicitor General for petitioner.

Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24972:
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special
Attorney Virgilio G. Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
L-24978:
Rafael Dinglasan for petitioner.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio G. Ibarra and Special
Attorney Virgilio G. Saldajeno for respondent.
TEEHANKEE, J.:
These four appears involve two decisions of the Court of Tax Appeals determining the taxpayer's income
tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal
Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax Court's decisions,
insofar as their respective contentions on particular tax items were therein resolved against them. Since the issues
raised are interrelated, the Court resolves the four appeals in this joint decision.
Cases L-21551 and L-21557
The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose of
engaging in business as an "investment company" with main office at Manila. Upon verification of the taxpayer's
income tax returns for the period in question, the Commissioner of Internal Revenue assessed against the taxpayer
the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes
for the years 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the result of alleged
discrepancies found upon the examination and verification of the taxpayer's income tax returns for the said years,
summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:
1. Losses —
a. Losses in Mati Lumber Co. (1950) P 8,050.00
b. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951) 353,134.25
c. Losses in Balamban Coal Mines —
1950 8,989.76
1951 27,732.66
d. Losses in Hacienda Dalupiri —
1950 17,418.95
1951 29,125.82
1952 26,744.81
1953 21,932.62
1954 42,938.56
e. Losses in Hacienda Samal —
1951 8,380.25
1952 7,621.73
2. Excessive depreciation of Houses —
1950 P 8,180.40
1951 8,768.11
1952 18,002.16
1953 13,655.25
1954 29,314.98
3. Taxable increase in net worth —
1950 P 30,050.00
1951 1,382.85
4. Gain realized from sale of real property in 1950 P 11,147.2611
The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and (e) and
Item 2 of the above summary, but overruled the Commissioner's disallowances of all the remaining items.
It therefore modified the deficiency assessments accordingly, found the total deficiency income taxes due
from the taxpayer for the years under review to amount to P123,436.00 instead of P166,063.00 as
originally assessed by the Commissioner, and rendered the following judgment:
RESUME
1950 P2,748.00
1951 108,724.00
1952 3,600.00
1953 2,501.00
1954 5,863.00
Total P123,436.00
WHEREFORE, the decision appealed from is hereby modified, and petitioner is ordered to pay the
sum of P123,436.00 within 30 days from the date this decision becomes final. If the said amount, or any
part thereof, is not paid within said period, there shall be added to the unpaid amount as surcharge of 5%,
plus interest as provided in Section 51 of the National Internal Revenue Code, as amended. With costs
against petitioner. (Pp. 75, 76, Taxpayer's Brief as appellant)
Both parties have appealed from the respective adverse rulings against them in the Tax Court's decision.
Two main issues are raised by the parties: first, the correctness of the Tax Court's rulings with respect to the
disputed items of disallowances enumerated in the Tax Court's summary reproduced above, and second, whether
or not the government's right to collect the deficiency income taxes in question has already prescribed.
On the first issue, we will discuss the disputed items of disallowances seriatim.
1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). — The Commissioner of Internal Revenue questions
the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950 return the sum of
P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on January 1,
1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly established. The
Commissioner contends that although the said Company was no longer in operation in 1950, it still had its
sawmill and equipment which must be of considerable value. The Court, however, found that "the company
ceased operations in 1949 when its Manager and owner, a certain Mr. Rocamora, left for Spain ,where he
subsequently died. When the company eased to operate, it had no assets, in other words, completely insolvent.
This information as to the insolvency of the Company — reached (the taxpayer) in 1950," when it properly
claimed the loss as a deduction in its 1950 tax return, pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of the
National Internal Revenue Code. 2
We find no reason to disturb this finding of the Tax Court. There was adequate basis for the writing off of
the stock as worthless securities. Assuming that the Company would later somehow realize some proceeds from
its sawmill and equipment, which were still existing as claimed by the Commissioner, and that such proceeds
would later be distributed to its stockholders such as the taxpayer, the amount so received by the taxpayer would
then properly be reportable as income of the taxpayer in the year it is received.
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). — The taxpayer
appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of P353,134.25,
which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's findings on this item follow:
Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are also
the controlling stockholders of petitioner corporation, requested financial help from petitioner to enable it
to resume it mining operations in Coron, Palawan. The request for financial assistance was readily and
unanimously approved by the Board of Directors of petitioner, and thereafter a memorandum agreement
was executed on August 12, 1945, embodying the terms and conditions under which the financial
assistance was to be extended, the pertinent provisions of which are as follows:
"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10, 1945,
has agreed to extend to the SECOND PARTY the requested financial help by way of
accommodation advances and for this purpose has authorized its President, Mr. Ramon J.
Fernandez to cause the release of funds to the SECOND PARTY.
"WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed to
extend to the SECOND PARTY, the latter has agreed to pay to the former fifteen per centum
(15%) of its net profits.
"NOW THEREFORE, for and in consideration of the above premises, the parties hereto
have agreed and covenanted that in consideration of the financial help to be extended by the
FIRST PARTY to the SECOND PARTY to enable the latter to resume its mining operations in
Coron, Palawan, the SECOND PARTY has agreed and undertaken as it hereby agrees and
undertakes to pay to the FIRST PARTY fifteen per centum (15%) of its net profits." (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly
advances starting from 1945, which advances amounted to P587,308.07 by the end of 1951. Despite these
advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to suffer losses. By
1951, petitioner became convinced that those advances could no longer be recovered. While it continued to give
advances, it decided to write off as worthless the sum of P353,134.25. This amount "was arrived at on the basis of
the total of advances made from 1945 to 1949 in the sum of P438,981.39, from which amount the sum of
P85,647.14 had to be deducted, the latter sum representing its pre-war assets. (t.s.n., pp. 136-139, Id)." (Page 4,
Memorandum for Petitioner.) Petitioner decided to maintain the advances given in 1950 and 1951 in the hope that
it might be able to recover the same, as in fact it continued to give advances up to 1952. From these facts, and as
admitted by petitioner itself, Palawan Manganese Mines, Inc., was still in operation when the advances
corresponding to the years 1945 to 1949 were written off the books of petitioner. Under the circumstances, was
the sum of P353,134.25 properly claimed by petitioner as deduction in its income tax return for 1951, either as
losses or bad debts?
It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to be
repaid. It is true that some testimonial evidence was presented to show that there was some agreement that the
advances would be repaid, but no documentary evidence was presented to this effect. The memorandum
agreement signed by the parties appears to be very clear that the consideration for the advances made by
petitioner was 15% of the net profits of Palawan Manganese Mines, Inc. In other words, if there were no earnings
or profits, there was no obligation to repay those advances. It has been held that the voluntary advances made
without expectation of repayment do not result in deductible losses. 1955 PH Fed. Taxes, Par. 13, 329, citing W.
F. Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR 395; George B. Markle, 17 TC. 1593.
Is the said amount deductible as a bad debt? As already stated, petitioner gave advances to Palawan
Manganese Mines, Inc., without expectation of repayment. Petitioner could not sue for recovery under the
memorandum agreement because the obligation of Palawan Manganese Mines, Inc. was to pay petitioner 15% of
its net profits, not the advances. No bad debt could arise where there is no valid and subsisting debt.
Again, assuming that in this case there was a valid and subsisting debt and that the debtor was incapable of
paying the debt in 1951, when petitioner wrote off the advances and deducted the amount in its return for said
year, yet the debt is not deductible in 1951 as a worthless debt. It appears that the debtor was still in operation in
1951 and 1952, as petitioner continued to give advances in those years. It has been held that if the debtor
corporation, although losing money or insolvent, was still operating at the end of the taxable year, the debt is not
considered worthless and therefore not deductible. 3
The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed out that
the taxpayer has taken an "ambiguous position " and "has not definitely taken a stand on whether the amount
involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt." 4 We sustain the
government's position that the advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines,
Inc. amounting to P587,308,07 as of 1951 were investments and not loans. 5 The evidence on record shows that
the board of directors of the two companies since August, 1945, were identical and that the only capital of
Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayer's balance sheet as its
investment in its subsidiary company. 6 This fact explains the liberality with which the taxpayer made such large
advances to the subsidiary, despite the latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its subsidiary as against the Tax Court's finding
that under their memorandum agreement, the taxpayer did not expect to be repaid, since if the subsidiary had no
earnings, there was no obligation to repay those advances, becomes immaterial, in the light of our resolution of
the question. The Tax Court correctly held that the subsidiary company was still in operation in 1951 and 1952
and the taxpayer continued to give it advances in those years, and, therefore, the alleged debt or investment could
not properly be considered worthless and deductible in 1951, as claimed by the taxpayer. Furthermore, neither
under Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses actually sustained and
charged off during the taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts
actually ascertained to be worthless and charged off within the taxable year, can there be a partial writing off of a
loss or bad debt, as was sought to be done here by the taxpayer. For such losses or bad debts must be ascertained
to be so and written off during the taxable year, are therefore deductible in full or not at all, in the absence of any
express provision in the Tax Code authorizing partial deductions.
The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted for the
year 1951, as the subsidiary was still in operation in 1951 and 1952. The taxpayer, on the other hand, claims that
its advances were irretrievably lost because of the staggering losses suffered by its subsidiary in 1951 and that its
advances after 1949 were "only limited to the purpose of salvaging whatever ore was already available, and for
the purpose of paying the wages of the laborers who needed help." 7 The correctness of the Tax Court's ruling in
sustaining the disallowance of the write-off in 1951 of the taxpayer's claimed losses is borne out by subsequent
events shown in Cases L-24972 and L-24978 involving the taxpayer's 1957 income tax liability. (Infra, paragraph
6.) It will there be seen that by 1956, the obligation of the taxpayer's subsidiary to it had been reduced from
P587,398.97 in 1951 to P442,885.23 in 1956, and that it was only on January 1, 1956 that the subsidiary decided
to cease operations. 8
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). — The Court sustains the Tax
Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the taxpayer for the operation of its
Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the taxpayer's returns for
said years. The Tax Court correctly held that the losses "are deductible in 1952, when the mines were abandoned,
and not in 1950 and 1951, when they were still in operation." 9 The taxpayer's claim that these expeditions should
be allowed as losses for the corresponding years that they were incurred, because it made no sales of coal during
said years, since the promised road or outlet through which the coal could be transported from the mines to the
provincial road was not constructed, cannot be sustained. Some definite event must fix the time when the loss is
sustained, and here it was the event of actual abandonment of the mines in 1952. The Tax Court held that the
losses, totalling P36,722.42 were properly deductible in 1952, but the appealed judgment does not show that the
taxpayer was credited therefor in the determination of its tax liability for said year. This additional deduction of
P36,722.42 from the taxpayer's taxable income in 1952 would result in the elimination of the deficiency tax
liability for said year in the sum of P3,600.00 as determined by the Tax Court in the appealed judgment.
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952). — The
Tax Court overruled the Commissioner's disallowance of these items of losses thus:
Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in 1950,
P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954. These deductions
were disallowed by respondent on the ground that the farm was operated solely for pleasure or as a hobby
and not for profit. This conclusion is based on the fact that the farm was operated continuously at a loss.
From the evidence, we are convinced that the Hacienda Dalupiri was operated by petitioner for
business and not pleasure. It was mainly a cattle farm, although a few race horses were also raised. It does
not appear that the farm was used by petitioner for entertainment, social activities, or other non-business
purposes. Therefore, it is entitled to deduct expenses and losses in connection with the operation of said
farm. (See 1955 PH Fed. Taxes, Par. 13, 63, citing G.C.M. 21103, CB 1939-1, p.164)
Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations,
authorizes farmers to determine their gross income on the basis of inventories. Said regulations provide:
"If gross income is ascertained by inventories, no deduction can be made for livestock or
products lost during the year, whether purchased for resale, produced on the farm, as such losses
will be reflected in the inventory by reducing the amount of livestock or products on hand at the
close of the year."
Evidently, petitioner determined its income or losses in the operation of said farm on the basis of
inventories. We quote from the memorandum of counsel for petitioner:
"The Taxpayer deducted from its income tax returns for the years from 1950 to 1954
inclusive, the corresponding yearly losses sustained in the operation of Hacienda Dalupiri, which
losses represent the excess of its yearly expenditures over the receipts; that is, the losses represent
the difference between the sales of livestock and the actual cash disbursements or expenses."
(Pages 21-22, Memorandum for Petitioner.)
As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its
operation, which losses were determined by means of inventories authorized under Section 100 of
Revenue Regulations No. 2, it was error for respondent to have disallowed the deduction of said losses.
The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951
and 1952. 10
The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory
method of accounting. He concedes, however, "that the regulations referred to does not specify how the
inventories are to be made. The Tax Court, however, felt satisfied with the evidence presented by the taxpayer ...
which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the
years involved." 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding
livestock, reporting on the basis of receipts and disbursements. We find no Compelling reason to disturb its
findings.
2. Disallowance of excessive depreciation of buildings (1950-1954). — During the years 1950 to 1954, the
taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The Commissioner claimed
that the reasonable depreciation rate is only 3% per annum, and, hence, disallowed as excessive the amount
claimed as depreciation allowance in excess of 3% annually. We sustain the Tax Court's finding that the taxpayer
did not submit adequate proof of the correctness of the taxpayer's claim that the depreciable assets or buildings in
question had a useful life only of 10 years so as to justify its 10% depreciation per annum claim, such finding
being supported by the record. The taxpayer's contention that it has many zero or one-peso assets, 12 representing
very old and fully depreciated assets serves but to support the Commissioner's position that a 10% annual
depreciation rate was excessive.
3. Taxable increase in net worth (1950-1951). — The Tax Court set aside the Commissioner's treatment as
taxable income of certain increases in the taxpayer's net worth. It found that:
For the year 1950, respondent determined that petitioner had an increase in net worth in the sum of
P30,050.00, and for the year 1951, the sum of P1,382.85. These amounts were treated by respondent as
taxable income of petitioner for said years.
It appears that petitioner had an account with the Manila Insurance Company, the records bearing
on which were lost. When its records were reconstituted the amount of P349,800.00 was set up as its
liability to the Manila Insurance Company. It was discovered later that the correct liability was only
319,750.00, or a difference of P30,050.00, so that the records were adjusted so as to show the correct
liability. The correction or adjustment was made in 1950. Respondent contends that the reduction of
petitioner's liability to Manila Insurance Company resulted in the increase of petitioner's net worth to the
extent of P30,050.00 which is taxable. This is erroneous. The principle underlying the taxability of an
increase in the net worth of a taxpayer rests on the theory that such an increase in net worth, if unreported
and not explained by the taxpayer, comes from income derived from a taxable source. (See Perez v.
Araneta, G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes, G.R. Nos. L- 11534 & L-11558, Nov. 25,
1958.) In this case, the increase in the net worth of petitioner for 1950 to the extent of P30,050.00 was not
the result of the receipt by it of taxable income. It was merely the outcome of the correction of an error in
the entry in its books relating to its indebtedness to the Manila Insurance Company. The Income Tax Law
imposes a tax on income; it does not tax any or every increase in net worth whether or not derived from
income. Surely, the said sum of P30,050.00 was not income to petitioner, and it was error for respondent
to assess a deficiency income tax on said amount.
The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in the
sum of P1,382.85. It appears that certain items (all amounting to P1,382.85) remained in petitioner's books as
outstanding liabilities of trade creditors. These accounts were discovered in 1951 as having been paid in prior
years, so that the necessary adjustments were made to correct the errors. If there was an increase in net worth of
the petitioner, the increase in net worth was not the result of receipt by petitioner of taxable income." 13 The
Commissioner advances no valid grounds in his brief for contesting the Tax Court's findings. Certainly, these
increases in the taxpayer's net worth were not taxable increases in net worth, as they were not the result of the
receipt by it of unreported or unexplained taxable income, but were shown to be merely the result of the
correction of errors in its entries in its books relating to its indebtednesses to certain creditors, which had been
erroneously overstated or listed as outstanding when they had in fact been duly paid. The Tax Court's action must
be affirmed.
4. Gain realized from sale of real property (1950). — We likewise sustain as being in accordance with the
evidence the Tax Court's reversal of the Commissioner's assessment on all alleged unreported gain in the sum of
P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As found by the Tax Court, the evidence
shows that this property was acquired in 1926 for P11,852.74, and was sold in 1950 for P60,000.00, apparently,
resulting in a gain of P48,147.26. 14 The taxpayer reported in its return a gain of P37,000.00, or a discrepancy of
P11,147.26. 15 It was sufficiently proved from the taxpayer's books that after acquiring the property, the taxpayer
had made improvements totalling P11,147.26, 16 accounting for the apparent discrepancy in the reported gain. In
other words, this figure added to the original acquisition cost of P11,852.74 results in a total cost of P23,000.00,
and the gain derived from the sale of the property for P60,000.00 was correctly reported by the taxpayer at
P37,000.00.
On the second issue of prescription, the taxpayer's contention that the Commissioner's action to recover its
tax liability should be deemed to have prescribed for failure on the part of the Commissioner to file a complaint
for collection against it in an appropriate civil action, as contradistinguished from the answer filed by the
Commissioner to its petition for review of the questioned assessments in the case a quo has long been rejected by
this Court. This Court has consistently held that "a judicial action for the collection of a tax is begun by the filing
of a complaint with the proper court of first instance, or where the assessment is appealed to the Court of Tax
Appeals, by filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed for." 17
This is but logical for where the taxpayer avails of the right to appeal the tax assessment to the Court of Tax
Appeals, the said Court is vested with the authority to pronounce judgment as to the taxpayer's liability to the
exclusion of any other court. In the present case, regardless of whether the assessments were made on February 24
and 27, 1956, as claimed by the Commissioner, or on December 27, 1955 as claimed by the taxpayer, the
government's right to collect the taxes due has clearly not prescribed, as the taxpayer's appeal or petition for
review was filed with the Tax Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his Answer
with a prayer for payment of the taxes due, long before the expiration of the five-year period to effect collection
by judicial action counted from the date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for the year 1957. Upon examination of its
corresponding income tax return, the Commissioner assessed it for deficiency income tax in the amount of
P38,918.76, computed as follows:
Net income per return P29,178.70

Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri 89,547.33
(2) Amortization of Contractual right claimed as an
expense under Mines Operations 48,481.62
Net income per investigation P167,297.65

Tax due thereon 38,818.00
Less: Amount already assessed 5,836.00

Balance P32,982.00
Add: 1/2% monthly interest from 6-20-59 to 6-
20-62 5,936.76
TOTAL AMOUNT DUE AND COLLECTIBLE P38,918.76 18
The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the operation of its
Hacienda Dalupiri in the sum of P89,547.33 but sustained the disallowance of the sum of P48,481.62, which
allegedly represented 1/5 of the cost of the "contractual right" over the mines of its subsidiary, Palawan
Manganese Mines, Inc. which the taxpayer had acquired. It found the taxpayer liable for deficiency income tax
for the year 1957 in the amount of P9,696.00, instead of P32,982.00 as originally assessed, and rendered the
following judgment:
WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby ordered to
pay to respondent the amount of P9,696.00 as deficiency income tax for the year 1957, plus the
corresponding interest provided in Section 51 of the Revenue Code. If the deficiency tax is not paid in full
within thirty (30) days from the date this decision becomes final and executory, petitioner shall pay a
surcharge of five per cent (5%) of the unpaid amount, plus interest at the rate of one per cent (1%) a
month, computed from the date this decision becomes final until paid, provided that the maximum
amount that may be collected as interest shall not exceed the amount corresponding to a period of three
(3) years. Without pronouncement as to costs. 19
Both parties again appealed from the respective adverse rulings against them in the Tax Court's decision.
5. Allowance of losses in Hacienda Dalupiri (1957). — The Tax Court cited its previous decision
overruling the Commissioner's disallowance of losses suffered by the taxpayer in the operation of its Hacienda
Dalupiri, since it was convinced that the hacienda was operated for business and not for pleasure. And in this
appeal, the Commissioner cites his arguments in his appellant's brief in Case No. L-21557. The Tax Court, in
setting aside the Commissioner's principal objections, which were directed to the accounting method used by the
taxpayer found that:
It is true that petitioner followed the cash basis method of reporting income and expenses in the
operation of the Hacienda Dalupiri and used the accrual method with respect to its mine operations. This
method of accounting, otherwise known as the hybrid method, followed by petitioner is not without
justification.
... A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954 Code
provisions permit, however, the use of a hybrid method of accounting, combining a cash and
accrual method, under circumstances and requirements to be set out in Regulations to be issued.
Also, if a taxpayer is engaged in more than one trade or business he may use a different method
of accounting for each trade or business. And a taxpayer may report income from a business on
accrual basis and his personal income on the cash basis.' (See Mertens, Law of Federal Income
Taxation, Zimet & Stanley Revision, Vol. 2, Sec. 12.08, p. 26.) 20
The Tax Court, having satisfied itself with the adequacy of the taxpayer's accounting method and
procedure as properly reflecting the taxpayer's income or losses, and the Commissioner having failed to
show the contrary, we reiterate our ruling [supra, paragraph 1 (d) and (e)] that we find no compelling
reason to disturb its findings.
6. Disallowance of amortization of alleged "contractual rights." — The reasons for sustaining this
disallowance are thus given by the Tax Court:
It appears that the Palawan Manganese Mines, Inc., during a special meeting of its Board of
Directors on January 19, 1956, approved a resolution, the pertinent portions of which read as follows:
"RESOLVED, as it is hereby resolved, that the corporation's current assets composed of

ores, fuel, and oil, materials and supplies, spare parts and canteen supplies appearing in the
inventory and balance sheet of the Corporation as of December 31, 1955, with an aggregate value
of P97,636.98, contractual rights for the operation of various mining claims in Palawan with a
value of P100,000.00, its title on various mining claims in Palawan with a value of P142,408.10
or a total value of P340,045.02 be, as they are hereby ceded and transferred to Fernandez
Hermanos, Inc., as partial settlement of the indebtedness of the corporation to said Fernandez
Hermanos Inc. in the amount of P442,895.23." (Exh. E, p. 17, CTA rec.)
On March 29, 1956, petitioner's corporation accepted the above offer of transfer, thus:
"WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly substantial losses has
decided to cease operation on January 1, 1956 and in order to satisfy at least a part of its
indebtedness to the Corporation, it has proposed to transfer its current assets in the amount of
NINETY SEVEN THOUSAND SIX HUNDRED THIRTY SIX PESOS & 98/100 (P97,636.98)
as per its balance sheet as of December 31, 1955, its contractual rights valued at ONE
HUNDRED THOUSAND PESOS (P100,000.00) and its title over various mining claims valued
at ONE HUNDRED FORTY TWO THOUSAND FOUR HUNDRED EIGHT PESOS & 10/100
(P142,408.10) or a total evaluation of THREE HUNDRED FORTY THOUSAND FORTY FIVE
PESOS & 08/100 (P340,045.08) which shall be applied in partial settlement of its obligation to
the Corporation in the amount of FOUR HUNDRED FORTY TWO THOUSAND EIGHT
HUNDRED EIGHTY FIVE PESOS & 23/100 (P442,885.23)," (Exh. E-1, p. 18, CTA rec.)
Petitioner determined the cost of the mines at P242,408.10 by adding the value of the contractual
rights (P100,000.00) and the value of its mining claims (P142,408.10). Respondent disallowed the
deduction on the following grounds: (1) that the Palawan Manganese Mines, Inc. could not transfer
P242,408.10 worth of assets to petitioner because the balance sheet of the said corporation for 1955
shows that it had only current as worth P97,636.96; and (2) that the alleged amortization of "contractual
rights" is not allowed by the Revenue Code.
The law in point is Section 30(g) (1) (B) of the Revenue Code, before its amendment by Republic
Act No. 2698, which provided in part:
"(g) Depletion of oil and gas wells and mines.:
"(1) In general. — ... (B) in the case of mines, a reasonable allowance for depletion thereof
not to exceed the market value in the mine of the product thereof, which has been mined and sold
during the year for which the return and computation are made. The allowances shall be made
under rules and regulations to be prescribed by the Secretary of Finance: Provided, That when the
allowances shall equal the capital invested, ... no further allowance shall be made."
Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth P242,408.10 which
it actually transferred to the petitioner in 1956, the latter cannot just deduct one-fifth (1/5) of said amount
from its gross income for the year 1957 because such deduction in the form of depletion charge was not
sanctioned by Section 30(g) (1) (B) of the Revenue Code, as above-quoted.
xxx xxx xxx
The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction was the
memorandum of its mining engineer (Exh. 1, pp. 31-32, CTA rec.), who stated that the ore reserves of the
Busuange Mines (Mines transferred by the Palawan Manganese Mines, Inc. to the petitioner) would be
exhausted in five (5) years, hence, the claim for P48,481.62 or one-fifth (1/5) of the alleged cost of the
mines corresponding to the year 1957 and every year thereafter for a period of 5 years. The said
memorandum merely showed the estimated ore reserves of the mines and it probable selling price. No
evidence whatsoever was presented to show the produced mine and for how much they were sold during
the year for which the return and computation were made. This is necessary in order to determine the
amount of depletion that can be legally deducted from petitioner's gross income. The method employed
by petitioner in making an outright deduction of 1/5 of the cost of the mines is not authorized under
Section 30(g) (1) (B) of the Revenue Code. Respondent's disallowance of the alleged "contractual rights"
amounting to P48,481.62 must therefore be sustained. 21
The taxpayer insists in this appeal that it could use as a method for depletion under the pertinent provision
of the Tax Code its "capital investment," representing the alleged value of its contractual rights and titles to
mining claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of this "capital investment"
every year. regardless of whether it had actually mined the product and sold the products. The very authorities
cited in its brief give the correct concept of depletion charges that they "allow for the exhaustion of the capital
value of the deposits by production"; thus, "as the cost of the raw materials must be deducted from the gross
income before the net income can be determined, so the estimated cost of the reserve used up is allowed." 22 The
alleged "capital investment" method invoked by the taxpayer is not a method of depletion, but the Tax Code
provision, prior to its amendment by Section 1, of Republic Act No. 2698, which took effect on June 18, 1960,
expressly provided that "when the allowances shall equal the capital invested ... no further allowances shall be
made;" in other words, the "capital investment" was but the limitation of the amount of depletion that could be
claimed. The outright deduction by the taxpayer of 1/5 of the cost of the mines, as if it were a "straight line" rate
of depreciation, was correctly held by the Tax Court not to be authorized by the Tax Code.
ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L-21551
and L-21557, as modified by the crediting of the losses of P36,722.42 disallowed in 1951 and 1952 to the
taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby affirmed. The judgment of the
Court of Tax Appeals appealed from in Cases Nos. L-24972 and L-24978 is affirmed in toto. No costs. So
ordered.
[G.R. No. 108576. January 20, 1999]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, COURT OF TAX
APPEALS and A. SORIANO CORP., respondents.
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of Appeals
(CA) which affirmed the ruling of the Court of Tax Appeals (CTA) that private respondent A. Soriano
Corporation’s (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign stockholders cannot be
considered as essentially equivalent to a distribution of taxable dividends” under Section 83(b) of the 1939
Internal Revenue Act
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation
“A. Soriano Y Cia”, predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common
shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who
are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued.
On September 12, 1945, ANSCOR’s authorized capital stock was increased to P2,500,000.00 divided into 25,000
common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to
subscribe to the new issues. This increased his subscription to 14,963 common shares. A month later, Don Andres
transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both
sons are foreigners.
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and
December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a
total shareholdings of 185,154 shares - 50,495 of which are original issues and the balance of 134,659 shares as
stock dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to
his wife, Doña Carmen Soriano, as her conjugal share. The other half formed part of his estate.
A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to
P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively
received by the Don Andres estate and Doña Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864 common shares each.
On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenue Service (IRS),
inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme under
Section 367 of the 1954 U.S. Revenue Act. By January 2, 1968, ANSCOR reclassified its existing 300,000
common shares into 150,000 common and 150,000 preferred shares.
In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not
tax avoidance. Consequently, on March 31, 1968 Doña Carmen exchanged her whole 138,864 common shares for
138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its
common shares for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to
127,727.
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don
Andres’ estate. By November 1968, the Board further increased ANSCOR’s capital stock to P75M divided into
150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR again redeemed 80,000
common shares from the Don Andres’ estate, further reducing the latter’s common shareholdings to 19,727. As
stated in the board Resolutions, ANSCOR’s business purpose for both redemptions of stocks is to partially retire
said stocks as treasury shares in order to reduce the company’s foreign exchange remittances in case cash
dividends are declared.
In 1973, after examining ANSCOR’s books of account and records, Revenue examiners issued a report proposing
that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939
Revenue Code, for the year 1968 and the second quarter of 1969 based on the transactions of exchange and
redemption of stocks. The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the
claim of ANSCOR that it availed of the tax amnesty under Presidential Decree (P.D.) 23 which were amended by
P.D.’s 67 and 157. However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in relation
to Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. ANSCOR’s subsequent protest on
the assessments was denied in 1983 by petitioner.
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner’s ruling, after finding
sufficient evidence to overcome the prima facie correctness of the questioned assessments. In a petition for
review, the CA, as mentioned, affirmed the ruling of the CTA. Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which
provides:
“Sec. 83. Distribution of dividends or assets by corporations. –
(b) Stock dividends – A stock dividend representing the transfer of surplus to capital account shall not be subject
to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after
March first, nineteen hundred and thirteen.” (Italics supplied).
Specifically, the issue is whether ANSCOR’s redemption of stocks from its stockholder as well as the exchange
of common with preferred shares can be considered as “essentially equivalent to the distribution of taxable
dividend,” making the proceeds thereof taxable under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction is tantamount to “cancellation” under Section 83(b) making the
proceeds thereof taxable. It also argues that the said Section applies to stock dividends which is the bulk of stocks
that ANSCOR redeemed. Further, petitioner claims that under the “net effect test,” the estate of Don Andres
gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from
the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act.
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from Doña
Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a)
to reduce its foreign exchange remittances in the event the company would declare cash dividends, and to (b)
subsequently “filipinized” ownership of ANSCOR, as allegedly envisioned by Don Andres. It likewise invoked
the amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each case.
The findings of facts of a special court (CTA) exercising particular expertise on the subject of tax, generally binds
this Court, considering that it is substantially similar to the findings of the CA which is the final arbiter of
questions of facts. The issue in this case does not only deal with facts but whether the law applies to a particular
set of facts. Moreover, this Court is not necessarily bound by the lower courts’ conclusions of law drawn from
such facts.
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 provides:
“I. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as earnings,
receipts, gifts, bequests or any other acquisitions from any source whatsoever which are taxable under the
National Internal Revenue Code, as amended, realized here or abroad by any taxpayer, natural or
juridical; the collection of all internal revenue taxes including the increments or penalties or account of
non-payment as well as all civil, criminal or administrative liabilities arising from or incident to such
disclosures under the National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and
Corrupt Practices Act, the Revised Administrative Code, the Civil Service laws and regulations, laws and
regulations on Immigration and Deportation, or any other applicable law or proclamation, are hereby
condoned and, in lieu thereof, a tax of ten (10%) per centum on such previously untaxed income or
wealth is hereby imposed, subject to the following conditions: (conditions omitted) [Emphasis supplied].
The decree condones “the collection of all internal revenue taxes including the increments or penalties or account
of non-payment as well as all civil, criminal or administrative liabilities arising from or incident to” (voluntary)
disclosures under the NIRC of previously untaxed income and/or wealth “realized here or abroad by any taxpayer,
natural or juridical.”
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income
taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency
withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as a
withholding agent and not in its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no
more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the
taxpayer – he is the person subject to tax impose by law; and the payee is the taxing authority. In other words, the
withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-
payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer,
because the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth
flowed into him – he earned no income. The Tax Code only makes the agent personally liable for the tax (c) 1939
Tax Code, as amended by R.A. No. 2343 which provides in part that “xxx Every such person is made personally
liable for such tax xxx.”53 arising from the breach of its legal duty to withhold as distinguish from its duty to pay
tax since:
“the government’s cause of action against the withholding agent is not for the collection of income tax,
but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with
which is imposed on the withholding agent and not upon the taxpayer.”
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction, is not protected by the amnesty
under the decree.
Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. The
taxpayer should not answer for the non-performance by the withholding agent of its legal duty to withhold unless
there is collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent
performed its duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail tax
evasion and give tax evaders a chance to reform, it was deemed administratively feasible to grant tax amnesty in
certain instances. In addition, a “tax amnesty, much like a tax exemption, is never favored nor presumed in law
and if granted by a statute, the terms of the amnesty like that of a tax exemption must be construed strictly against
the taxpayer and liberally in favor of the taxing authority.” The rule on strictissimi juris equally applies. So that,
any doubt in the application of an amnesty law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCOR’s claim of amnesty cannot prosper. The implementing rules of P.D. 370 which expanded
amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:
“Section 4. Cases not covered by amnesty. – The following cases are not covered by the amnesty subject of these
regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53 and 54 of
the National Internal Revenue Code, as amended;
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law, it is
not covered by the amnesty.
TAX ON STOCK DIVIDENDS

General Rule
Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid
down the general rule known as the ‘proportionate test’ wherein stock dividends once issued form part of the
capital and, thus, subject to income tax. Specifically, the general rule states that:
“A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.”
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US
Revenue Code, this provision originally referred to “stock dividends” only, without any exception. Stock
dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere
issuance thereof is not yet subject to income tax as they are nothing but an “enrichment through increase in value
of capital investment.” As capital, the stock dividends postpone the realization of profits because the “fund
represented by the new stock has been transferred from surplus to capital and no longer available for actual
distribution.” Income in tax law is “an amount of money coming to a person within a specified time, whether as
payment for services, interest, or profit from investment.” It means cash or its equivalent. It is gain derived and
severed from capital, from labor or from both combined - so that to tax a stock dividend would be to tax a capital
increase rather than the income. In a loose sense, stock dividends issued by the corporation, are considered
unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization,
stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet
subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas
income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether
any gain or profit was derived from a transaction.
The Exception
“However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after
March first, nineteen hundred and thirteen.” (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber (that pro rata stock
dividends are not taxable income), the exempting clause above quoted was added because corporations found a
loophole in the original provision. They resorted to devious means to circumvent the law and evade the tax.
Corporate earnings would be distributed under the guise of its initial capitalization by declaring the stock
dividends previously issued and later redeem said dividends by paying cash to the stockholder. This process of
issuance-redemption amounts to a distribution of taxable cash dividends which was just delayed so as to escape
the tax. It becomes a convenient technical strategy to avoid the effects of taxation.
Thus, to plug the loophole – the exempting clause was added. It provides that the redemption or cancellation of
stock dividends, depending on the “time” and “manner” it was made is “essentially equivalent to a distribution of
taxable dividends,” making the proceeds thereof “taxable income” “to the extent it represents profits”. The
exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which
is taxable. Thus,
“the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment
by distributing earnings to its shareholders in two transactions – a pro rata stock dividend followed by a
pro rata redemption – that would have the same economic consequences as a simple dividend.”
Although redemption and cancellation are generally considered capital transactions, as such, they are not subject
to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such
transactions. Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder.
Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice Having realized
gain from that redemption, the income earner cannot escape income tax.
As qualified by the phrase “such time and in such manner,” the exception was not intended to characterize as
taxable dividend every distribution of earnings arising from the redemption of stock dividends. So that, whether
the amount distributed in the redemption should be treated as the equivalent of a “taxable dividend” is a question
of fact, which is determinable on “the basis of the particular facts of the transaction in question.” No decisive test
can be used to determine the application of the exemption under Section 83(b) The use of the words “such
manner” and “essentially equivalent” negative any idea that a weighted formula can resolve a crucial issue –
Should the distribution be treated as taxable dividend. On this aspect, American courts developed certain
recognized criteria, which includes the following:
1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a regular dividend and the
corporation’s past record with respect to the declaration of dividends,
3) the effect of the distribution as compared with the declaration of regular dividend,
4) the lapse of time between issuance and redemption,
5) the presence of a substantial surplus and a generous supply of cash which invites suspicion as does a
meager policy in relation both to current earnings and accumulated surplus.
REDEMPTION AND CANCELLATION
For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation;
(b) the transaction involves stock dividends and (c) the “time and manner” of the transaction makes it “essentially
equivalent to a distribution of taxable dividends.” Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for
property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation
gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues
in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive
distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks
from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed
come from? If its source is the original capital subscriptions upon establishment of the corporation or from initial
capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite
the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the
contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the
proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it
is undisputed that at the time of the last redemption, the original common shares owned by the estate were only
25,247.5. This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the contrary,
the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate
profits, such as stock dividends. The capital cannot be distributed in the form of redemption of stock dividends
without violating the trust fund doctrine – wherein the capital stock, property and other assets of the corporation
are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That
doctrine was intended for the protection of corporate creditors.
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time
alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a
must to consider the factual circumstances as to the manner of both the issuance and the redemption. The “time”
element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a
method usually adopted to accomplish the end sought. Was this transaction used as a “continuing plan,” “device”
or “artifice” to evade payment of tax? It is necessary to determine the “net effect” of the transaction between the
shareholder-income taxpayer and the acquiring (redeeming) corporation. The “net effect” test is not evidence or
testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached. It is also important
to know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of
which might negate a tax evasion plan.
The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the
redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute
corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade
becomes manifest. It has been ruled that:
“[A]n operation with no business or corporate purpose – is a mere devise which put on the form of a corporate
reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which
was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to
transfer a parcel of corporate shares to a stockholder.”
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the
redeemed shares were issued with bona fide business purpose, which is judged after each and every step of the
transaction have been considered and the whole transaction does not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions – (1) the alleged “filipinization” program and (2) the
reduction of foreign exchange remittances in case cash dividends are declared. The Court is not concerned with
the wisdom of these purposes but on their relevance to the whole transaction which can be inferred from the
outcome thereof. Again, it is the “net effect rather than the motives and plans of the taxpayer or his corporation”
that is the fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result. It also applies
even if at the time of the issuance of the stock dividend, there was no intention to redeem it as a means of
distributing profit or avoiding tax on dividends. The existence of legitimate business purposes in support of the
redemption of stock dividends is immaterial in income taxation. It has no relevance in determining “dividend
equivalence”. Such purposes may be material only upon the issuance of the stock dividends. The test of taxability
under the exempting clause, when it provides “such time and manner” as would make the redemption “essentially
equivalent to the distribution of a taxable dividend”, is whether the redemption resulted into a flow of wealth. If
no wealth is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor of
Eisner v. Macomber, income is not deemed “realize” until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit
is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax.
Any business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax
is assessed on income received from any property, activity or service that produces the income because the Tax
Code stands as an indifferent neutral party on the matter of where income comes from.
As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was
realized through the redemption of stock dividends. The redemption converts into money the stock dividends
which become a realized profit or gain and consequently, the stockholder’s separate property. Profits derived from
the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends
can be reached by income taxation regardless of the existence of any business purpose for the redemption.
Otherwise, to rule that the said proceeds are exempt from income tax when the redemption is supported by
legitimate business reasons would defeat the very purpose of imposing tax on income. Such argument would open
the door for income earners not to pay tax so long as the person from whom the income was derived has
legitimate business reasons. In other words, the payment of tax under the exempting clause of Section 83(b)
would be made to depend not on the income of the taxpayer but on the business purposes of a third party (the
corporation herein) from whom the income was earned. This is absurd, illogical and impractical considering that
the Bureau of Internal Revenue (BIR) would be pestered with instances in determining the legitimacy of business
reasons that every income earner may interposed. It is not administratively feasible and cannot therefore be
allowed.
The ruling in the American cases cited and relied upon by ANSCOR that “the redeemed shares are the equivalent
of dividend only if the shares were not issued for genuine business purposes” or the “redeemed shares have been
issued by a corporation bona fide” bears no relevance in determining the non-taxability of the proceeds of
redemption. ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is
supported by valid corporate purposes the proceeds are not subject to tax. The adoption by the courts below of
such argument is misleading if not misplaced. A review of the cited American cases shows that the presence or
absence of “genuine business purposes” may be material with respect to the issuance or declaration of stock
dividends but not on its subsequent redemption. The issuance and the redemption of stocks are two different
transactions. Although the existence of legitimate corporate purposes may justify a corporation’s acquisition of its
own shares under Section 41 of the Corporation Code, such purposes cannot excuse the stockholder from the
effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and
thus, without legitimate business reasons the redemption becomes suspicious which may call for the application
of the exempting clause. The substance of the whole transaction, not its form, usually controls the tax
consequences.
The two purposes invoked by ANSCOR under the facts of this case are no excuse for its tax liability. First, the
alleged “filipinization” plan cannot be considered legitimate as it was not implemented until the BIR started
making assessments on the proceeds of the redemption. Such corporate plan was not stated in nor supported by
any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the
corporation can act only through its Board of Directors. The Board Resolutions authorizing the redemptions state
only one purpose – reduction of foreign exchange remittances in case cash dividends are declared. Not even this
purpose can be given credence. Records show that despite the existence of enormous corporate profits no cash
dividend was ever declared by ANSCOR from 1945 until the BIR started making assessments in the early 1970’s.
Although a corporation under certain exceptions, has the prerogative when to issue dividends, yet when no cash
dividends was issued for about three decades, this circumstance negates the legitimacy of ANSCOR’s alleged
purposes. Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR’s foreign stockholders
contrary to its “filipinization” plan. This would also increase rather than reduce their need for foreign exchange
remittances in case of cash dividend declaration, considering that ANSCOR is a family corporation where the
majority shares at the time of redemptions were held by Don Andres’ foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for
the imposition of tax. Otherwise, the taxpayer’s liability to pay income tax would be made to depend upon a third
person who did not earn the income being taxed. Furthermore, even if the said purposes support the redemption
and justify the issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax
herein assessed because the proceeds of the redemption are deemed taxable dividends since it was shown that
income was generated therefrom.
Thirdly, ANSCOR argued that to treat as ‘taxable dividend’ the proceeds of the redeemed stock dividends would
be to impose on such stock an undisclosed lien and would be extremely unfair to intervening purchasers, i.e. those
who buys the stock dividends after their issuance. Such argument, however, bears no relevance in this case as no
intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the factual
milieu of the case if income was realized from the transaction. Again, we reiterate that the dividend equivalence
test depends on such “time and manner” of the transaction and its net effect. The undisclosed lien may be unfair to
a subsequent stock buyer who has no capital interest in the company. But the unfairness may not be true to an
original subscriber like Don Andres, who holds stock dividends as gains from his investments. The subsequent
buyer who buys stock dividends is investing capital. It just so happen that what he bought is stock dividends. The
effect of its (stock dividends) redemption from that subsequent buyer is merely to return his capital subscription,
which is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock dividends
were made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a
distribution of taxable dividends. As “taxable dividend” under Section 83(b), it is part of the “entire income”
subject to tax under Section 22 in relation to Section 21 of the 1939 Code. Moreover, under Section 29(a) of said
Code, dividends are included in “gross income”. As income, it is subject to income tax which is required to be
withheld at source. The 1997 Tax Code may have altered the situation but it does not change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES
Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally
considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for
common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions
of Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger, transfer to controlled corporation,
corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange of
property, stock or securities related to reorganizations.
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doña Carmen’s shares were
exchanged for the whole 150, 000 preferred shares. Thereafter, both the Don Andres estate and Doña Carmen
remained as corporate subscribers except that their subscriptions now include preferred shares. There was no
change in their proportional interest after the exchange. There was no cash flow. Both stocks had the same par
value. Under the facts herein, any difference in their market value would be immaterial at the time of exchange
because no income is yet realized – it was a mere corporate paper transaction. It would have been different, if the
exchange transaction resulted into a flow of wealth, in which case income tax may be imposed.
Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest.
But the exchange is different – there would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income
for tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class
of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a
pro rata division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends
and asset distribution.
Both shares are part of the corporation’s capital stock. Both stockholders are no different from ordinary investors
who take on the same investment risks. Preferred and common shareholders participate in the same venture,
willing to share in the profits and losses of the enterprise. Moreover, under the doctrine of equality of shares – all
stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences. In this case, the exchange of shares, without more,
produces no realized income to the subscriber. There is only a modification of the subscriber’s rights and
privileges - which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a
subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest.
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR’s
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable
dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all other
respects.
SO ORDERED.
G.R. Nos. 106949-50 December 1, 1995
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP), petitioner,

-versus-
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
G.R. Nos. 106984-85 December 1, 1995
COMMISSIONER INTERNAL REVENUE, petitioner,

-versus-
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES, THE COURT OF APPEALS and THE
COURT OF TAX APPEALS, respondents.
The Paper Industries Corporation of the Philippines ("Picop"), which is petitioner in G.R. Nos. 106949-50 and
private respondent in G.R. Nos. 106984-85, is a Philippine corporation registered with the Board of Investments
("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred
non-pioneer enterprise with respect to its integrated plywood and veneer mills.
On 21 April 1983, Picop received from the Commissioner of Internal Revenue ("CIR") two (2) letters of
assessment and demand both dated 31 March 1983: (a) one for deficiency transaction tax and for documentary
and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate amount of
P88,763,255.00. These assessments were computed as follows:
Transaction Tax
Interest payments on
money market
borrowings P 45,771,849.00
———————
35% Transaction tax due
thereon 16,020,147.00
Add: 25% surcharge 4,005,036.75
——————
T o t a l P 20,025,183.75
Add:
14% int. fr.
1-20-78 to
7-31-80 P 7,093,302.57
20% int, fr.
8-1-80 to
3-31-83 10,675,523.58
——————
17,768,826.15
——————
P 37,794,009.90
Documentary and Science Stamps Tax
Total face value of
debentures P100,000,000.00
Documentary Stamps
Tax Due
(P0.30 x P100,000.000 )
( P200 ) P 150,000.00
Science Stamps Tax Due
(P0.30 x P100,000,000 )
( P200 ) P 150,000.00
——————
T o t a l P 300,000.00
Add: Compromise for
non-affixture 300.00
——————
300,300.00
——————
TOTAL AMOUNT DUE AND COLLECTIBLE P 38,094,309.90
===========
Deficiency Income Tax for 1977
Net income per return P 258,166.00
Add: Unallowable deductions
1) Disallowed deductions
availed of under
R.A. No. 5186 P 44,332,980.00
2) Capitalized interest
expenses on funds
used for acquisition
of machinery & other

equipment 42,840,131.00
3) Unexplained financial
guarantee expense 1,237,421.00
4) Understatement
of sales 2,391,644.00
5) Overstatement of
cost of sales 604,018.00
——————
P91,406,194.00
Net income per investigation P91,664,360.00
Income tax due thereon 34,734,559.00
Less: Tax already assessed per return 80,358.00
——————
Deficiency P34,654,201.00
Add:
14% int. fr.
4-15-78 to
7-31-81 P 11,128,503.56
20% int. fr.
8-1-80 to
4-15-81 4,886,242.34
——————
P16,014,745.90
——————
TOTAL AMOUNT DUE AND COLLECTIBLE P 50,668,946.90 1
===========
On 26 April 1983, Picop protested the assessment of deficiency transaction tax and documentary and science
stamp taxes. Picop also protested on 21 May 1983 the deficiency income tax assessment for 1977. These protests
were not formally acted upon by respondent CIR. On 26 September 1984, the CIR issued a warrant of distraint on
personal property and a warrant of levy on real property against Picop, to enforce collection of the contested
assessments; in effect, the CIR denied Picop's protests.
Thereupon, Picop went before the Court of Tax Appeals ("CTA") appealing the assessments. After trial, the CTA
rendered a decision dated 15 August 1989, modifying the findings of the CIR and holding Picop liable for the
reduced aggregate amount of P20,133,762.33, which was itemized in the dispositive portion of the decision as
follows:
35% Transaction Tax P 16,020,113.20
Documentary & Science
Stamp Tax 300,300.00
Deficiency Income Tax Due 3,813,349.33
——————
TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2
===========
Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the
CTA. In two (2) Resolutions dated 7 February 1990 and 19 February 1990, respectively, the Court referred the
two (2) Petitions to the Court of Appeals. The Court of Appeals consolidated the two (2) cases and rendered a
decision, dated 31 August 1992, which further reduced the liability of Picop to P6,338,354.70. The dispositive
portion of the Court of Appeals decision reads as follows:
WHEREFORE, the appeal of the Commissioner of Internal Revenue is denied for lack of merit.
The judgment against PICOP is modified, as follows:
1. PICOP is declared liable for the 35% transaction tax in the amount of P3,578,543.51;
2. PICOP is absolved from the payment of documentary and science stamp tax of P300,000.00
and the compromise penalty of P300.00;
3. PICOP shall pay 20% interest per annum on the deficiency income tax of P1,481,579.15, for a
period of three (3) years from 21 May 1983, or in the total amount of P888,947.49, and a
surcharge of 10% on the latter amount, or P88,984.75.
No pronouncement as to costs.
SO ORDERED.
Picop and the CIR once more filed separate Petitions for Review before the Supreme Court. These cases were
consolidated and, on 23 August 1993, the Court resolved to give due course to both Petitions in G.R. Nos.
106949-50 and 106984-85 and required the parties to file their Memoranda.
Picop now maintains that it is not liable at all to pay any of the assessments or any part thereof. It assails the
propriety of the thirty-five percent (35%) deficiency transaction tax which the Court of Appeals held due from it
in the amount of P3,578,543.51. Picop also questions the imposition by the Court of Appeals of the deficiency
income tax of P1,481,579.15, resulting from disallowance of certain claimed financial guarantee expenses and
claimed year-end adjustments of sales and cost of sales figures by Picop's external auditors. 3
The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop not liable for surcharge and
interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as
deductible expenses:
(a) the net operating losses of another corporation (i.e., Rustan Pulp and Paper Mills, Inc.); and
(b) interest payments on loans for the purchase of machinery and equipment.
The CIR also claims that Picop should be held liable for interest at fourteen percent (14%) per annum
from 15 April 1978 for three (3) years, and interest at twenty percent (20%) per annum for a maximum of
three (3) years; and for a surcharge of ten percent (10%), on Picop's deficiency income tax. Finally, the
CIR contends that Picop is liable for the corporate development tax equivalent to five percent (5%) of its
correct 1977 net income.
The issues which we must here address may be sorted out and grouped in the following manner:
I. Whether Picop is liable for:
(1) the thirty-five percent (35%) transaction tax;
(2) interest and surcharge on unpaid transaction tax; and
(3) documentary and science stamp taxes;
II. Whether Picop is entitled to deductions against income of:
(1) interest payments on loans for the purchase of machinery and

equipment;
(2) net operating losses incurred by the Rustan Pulp and Paper

Mills, Inc.; and
(3) certain claimed financial guarantee expenses; and
III. (1) Whether Picop had understated its sales and overstated its cost of sales
for 1977; and
(2) Whether Picop is liable for the corporate development tax of

five percent (5%) of its net income for 1977.
We will consider these issues in the foregoing sequence.
I.
(1) Whether Picop is liable

for the thirty-five percent
(35%) transaction tax.
With the authorization of the Securities and Exchange Commission, Picop issued commercial paper consisting of
serially numbered promissory notes with the total face value of P229,864,000.00 and a maturity period of one (1)
year, i.e., from 24 December 1977 to 23 December 1978. These promissory notes were purchased by various
commercial banks and financial institutions. On these promissory notes, Picop paid interest in the aggregate
amount of P45,771,849.00. In respect of these interest payments, the CIR required Picop to pay the thirty-five
percent (35%) transaction tax.
The CIR based this assessment on Presidential Decree No. 1154 dated 3 June 1977, which reads in part as
follows:
Sec. 1. The National Internal Revenue Code, as amended, is hereby further amended by adding a
new section thereto to read as follows:
Sec. 195-C. Tax on certain interest. — There shall be levied, assessed, collected and paid on
every commercial paper issued in the primary market as principal instrument, a transaction tax
equivalent to thirty-five percent (35%) based on the gross amount of interest thereto as defined
hereunder, which shall be paid by the borrower/issuer: Provided, however, that in the case of a
long-term commercial paper whose maturity exceeds more than one year, the borrower shall pay
the tax based on the amount of interest corresponding to one year, and thereafter shall pay the tax
upon accrual or actual payment (whichever is earlier) of the untaxed portion of the interest which
corresponds to a period not exceeding one year.
The transaction tax imposed in this section shall be a final tax to be paid by the borrower and
shall be allowed as a deductible item for purposes of computing the borrower's taxable income.
For purposes of this tax —
(a) "Commercial paper" shall be defined as an instrument evidencing indebtedness of any person

or entity, including banks and non-banks performing quasi-banking functions, which is issued,
endorsed, sold, transferred or in any manner conveyed to another person or entity, either with or
without recourse and irrespective of maturity. Principally, commercial papers are promissory
notes and/or similar instruments issued in the primary market and shall not include repurchase
agreements, certificates of assignments, certificates of participations, and such other debt
instruments issued in the secondary market.
(b) The term "interest" shall mean the difference between what the principal borrower received
and the amount it paid upon maturity of the commercial paper which shall, in no case, be lower
than the interest rate prevailing at the time of the issuance or renewal of the commercial paper.
Interest shall be deemed synonymous with discount and shall include all fees, commissions,
premiums and other payments which form integral parts of the charges imposed as a consequence
of the use of money.
In all cases, where no interest rate is stated or if the rate stated is lower than the prevailing interest
rate at the time of the issuance or renewal of commercial paper, the Commissioner of Internal
Revenue, upon consultation with the Monetary Board of the Central Bank of the Philippines,
shall adjust the interest rate in accordance herewith, and assess the tax on the basis thereof.
The tax herein imposed shall be remitted by the borrower to the Commissioner of Internal
Revenue or his Collection Agent in the municipality where such borrower has its principal place
of business within five (5) working days from the issuance of the commercial paper. In the case
of long term commercial paper, the tax upon the untaxed portion of the interest which
corresponds to a period not exceeding one year shall be paid upon accrual payment, whichever is
earlier. (Emphasis supplied)
Both the CTA and the Court of Appeals sustained the assessment of transaction tax.
In the instant Petition, Picop reiterates its claim that it is exempt from the payment of the transaction tax by virtue
of its tax exemption under R.A. No. 5186, as amended, known as the Investment Incentives Act, which in the
form it existed in 1977-1978, read in relevant part as follows:
Sec. 8. Incentives to a Pioneer Enterprise. In addition to the incentives provided in the preceding
section, pioneer enterprises shall be granted the following incentive benefits:
(a) Tax Exemption. Exemption from all taxes under the National Internal Revenue Code, except
income tax, from the date the area of investment is included in the Investment Priorities Plan to
the following extent:
(1) One hundred per cent (100%) for the first five years;
(2) Seventy-five per cent (75%) for the sixth through the eighth years;
(3) Fifty per cent (50%) for the ninth and tenth years;
(4) Twenty per cent (20%) for the eleventh and twelfth years; and
(5) Ten per cent (10%) for the thirteenth through the fifteenth year.
xxx xxx xxx 4
We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as amended,
does not include exemption from the thirty-five percent (35%) transaction tax. In the first place, the thirty-five
percent (35%) transaction tax 5 is an income tax, that is, it is a tax on the interest income of the lenders or
creditors. In Western Minolco Corporation v. Commissioner of Internal Revenue, 6 the petitioner corporation
borrowed funds from several financial institutions from June 1977 to October 1977 and paid the corresponding
thirty-five (35%) transaction tax thereon in the amount of P1,317,801.03, pursuant to Section 210 (b) of the 1977
Tax Code. Western Minolco applied for refund of that amount alleging it was exempt from the thirty-five (35%)
transaction tax by reason of Section 79-A of C.A. No. 137, as amended, which granted new mines and old mines
resuming operation "five (5) years complete tax exemptions, except income tax, from the time of its actual
bonafide orders for equipment for commercial production." In denying the claim for refund, this Court held:
The petitioner's contentions deserve scant consideration. The 35% transaction tax is imposed on
interest income from commercial papers issued in the primary money market. Being a tax on
interest, it is a tax on income.
As correctly ruled by the respondent Court of Tax Appeals:
Accordingly, we need not and do not think it necessary to discuss further the
nature of the transaction tax more than to say that the incipient scheme in the
issuance of Letter of Instructions No. 340 on November 24, 1975 (O.G. Dec. 15,
1975), i.e., to achieve operational simplicity and effective administration in
capturing the interest-income "windfall" from money market operations as a new
source of revenue, has lost none of its animating principle in parturition of
amendatory Presidential Decree No. 1154, now Section 210 (b) of the Tax Code.
The tax thus imposed is actually a tax on interest earnings of the lenders or
placers who are actually the taxpayers in whose income is imposed. Thus "the
borrower withholds the tax of 35% from the interest he would have to pay the
lender so that he (borrower) can pay the 35% of the interest to the Government."
(Citation omitted) . . . . Suffice it to state that the broad consensus of fiscal and
monetary authorities is that "even if nominally, the borrower is made to pay the
tax, actually, the tax is on the interest earning of the immediate and all prior
lenders/placers of the money. . . ." (Rollo, pp. 36-37)
The 35% transaction tax is an income tax on interest earnings to the lenders or placers. The
latter are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the petitioner.
In other words, the petitioner who borrowed funds from several financial institutions by issuing
commercial papers merely withheld the 35% transaction tax before paying to the financial
institutions the interests earned by them and later remitted the same to the respondent
Commissioner of Internal Revenue. The tax could have been collected by a different procedure
but the statute chose this method. Whatever collecting procedure is adopted does not change the
nature of the tax.
xxx xxx xxx 7
(Emphasis supplied)
Much the same issue was passed upon in Marinduque Mining Industrial Corporation v. Commissioner of
Internal Revenue 8 and resolved in the same way:
It is very obvious that the transaction tax, which is a tax on interest derived from commercial
paper issued in the money market, is not a tax contemplated in the above-quoted legal provisions.
The petitioner admits that it is subject to income tax. Its tax exemption should be strictly
construed.
We hold that petitioner's claim for refund was justifiably denied. The transaction tax, although
nominally categorized as a business tax, is in reality a withholding tax as positively stated in LOI
No. 340. The petitioner could have shifted the tax to the lenders or recipients of the interest. It did
not choose to do so. It cannot be heard now to complain about the tax. LOI No. 340 is an
extraneous or extrinsic aid to the construction of section 210 (b).
xxx xxx xxx 9
(Emphasis supplied)
It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope of the tax
exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. Picop was the
withholding agent, obliged to withhold thirty-five percent (35%) of the interest payable to its lenders and to remit
the amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a withholding agent, Picop is made
personally liable for the thirty-five percent (35%) transaction tax 10 and if it did not actually withhold thirty-five
percent (35%) of the interest monies it had paid to its lenders, Picop had only itself to blame.
Picop claims that it had relied on a ruling, dated 6 October 1977, issued by the CIR, which held that Picop was not
liable for the thirty-five (35%) transaction tax in respect of debenture bonds issued by Picop. Prior to the issuance
of the promissory notes involved in the instant case, Picop had also issued debenture bonds P100,000,000.00 in
aggregate face value. The managing underwriter of this debenture bond issue, Bancom Development Corporation,
requested a formal ruling from the Bureau of Internal Revenue on the liability of Picop for the thirty-five percent
(35%) transaction tax in respect of such bonds. The ruling rendered by the then Acting Commissioner of Internal
Revenue, Efren I. Plana, stated in relevant part:
It is represented that PICOP will be offering to the public primary bonds in the aggregate
principal sum of one hundred million pesos (P100,000,000.00); that the bonds will be issued as
debentures in denominations of one thousand pesos (P1,000.00) or multiples, to mature in ten
(10) years at 14% interest per annum payable semi-annually; that the bonds are convertible into
common stock of the issuer at the option of the bond holder at an agreed conversion price; that the
issue will be covered by a "Trust Indenture" with a duly authorized trust corporation as required
by the Securities and Exchange Commission, which trustee will act for and in behalf of the
debenture bond holders as beneficiaries; that once issued, the bonds cannot be preterminated by
the holder and cannot be redeemed by the issuer until after eight (8) years from date of issue; that
the debenture bonds will be subordinated to present and future debts of PICOP; and that said
bonds are intended to be listed in the stock exchanges, which will place them alongside listed
equity issues.
In reply, I have the honor to inform you that although the bonds hereinabove described are
commercial papers which will be issued in the primary market, however, it is clear from the
abovestated facts that said bonds will not be issued as money market instruments. Such being the
case, and considering that the purposes of Presidential Decree No. 1154, as can be gleaned from
Letter of Instruction No. 340, dated November 21, 1975, are (a) to regulate money market
transactions and (b) to ensure the collection of the tax on interest derived from money market
transactions by imposing a withholding tax thereon, said bonds do not come within the purview of
the "commercial papers" intended to be subjected to the 35% transaction tax prescribed in
Presidential Decree No. 1154, as implemented by Revenue Regulations No. 7-77. (See Section 2
of said Regulation) Accordingly, PICOP is not subject to 35% transaction tax on its issues of the
aforesaid bonds. However, those investing in said bonds should be made aware of the fact that
the transaction tax is not being imposed on the issuer of said bonds by printing or stamping
thereon, in bold letters, the following statement: "ISSUER NOT SUBJECT TO TRANSACTION
TAX UNDER P.D. 1154. BONDHOLDER SHOULD DECLARE INTEREST EARNING FOR
INCOME TAX." 11 (Emphases supplied)
In the above quoted ruling, the CIR basically held that Picop's debenture bonds did not constitute "commercial
papers" within the meaning of P.D. No. 1154, and that, as such, those bonds were not subject to the thirty-five
percent (35%) transaction tax imposed by P.D. No. 1154.
The above ruling, however, is not applicable in respect of the promissory notes which are the subject matter of the
instant case. It must be noted that the debenture bonds which were the subject matter of Commissioner Plana's
ruling were long-term bonds maturing in ten (10) years and which could not be pre-terminated and could not be
redeemed by Picop until after eight (8) years from date of issue; the bonds were moreover subordinated to present
and future debts of Picop and convertible into common stock of Picop at the option of the bondholder. In contrast,
the promissory notes involved in the instant case are short-term instruments bearing a one-year maturity period.
These promissory notes constitute the very archtype of money market instruments. For money market instruments
are precisely, by custom and usage of the financial markets, short-term instruments with a tenor of one (1) year or
less. 12 Assuming, therefore, (without passing upon) the correctness of the 6 October 1977 BIR ruling, Picop's
short-term promissory notes must be distinguished, and treated differently, from Picop's long-term debenture
bonds.
We conclude that Picop was properly held liable for the thirty-five percent (35%) transaction tax due in respect of
interest payments on its money market borrowings.
At the same time, we agree with the Court of Appeals that the transaction tax may be levied only in respect of the
interest earnings of Picop's money market lenders accruing after P.D. No. 1154 went into effect, and not in respect
of all the 1977 interest earnings of such lenders. The Court of Appeals pointed out that:
PICOP, however contends that even if the tax has to be paid, it should be imposed only for the
interests earned after 20 September 1977 when PD 1154 creating the tax became effective. We
find merit in this contention. It appears that the tax was levied on interest earnings from January
to October, 1977. However, as found by the lower court, PD 1154 was published in the Official
Gazette only on 5 September 1977, and became effective only fifteen (15) days after the
publication, or on 20 September 1977, no other effectivity date having been provided by the PD.
Based on the Worksheet prepared by the Commissioner's office, the interests earned from 20
September to October 1977 was P10,224,410.03. Thirty-five (35%) per cent of this is
P3,578,543.51 which is all PICOP should pay as transaction tax. 13 (Emphasis supplied)
P.D. No. 1154 is not, in other words, to be given retroactive effect by imposing the thirty-five percent (35%)
transaction tax in respect of interest earnings which accrued before the effectivity date of P.D. No. 1154, there
being nothing in the statute to suggest that the legislative authority intended to bring about such retroactive
imposition of the tax.
(2) Whether Picop is liable

for interest and surcharge
on unpaid transaction tax.
With respect to the transaction tax due, the CIR prays that Picop be held liable for a twenty-five percent (25%)
surcharge and for interest at the rate of fourteen percent (14%) per annum from the date prescribed for its
payment. In so praying, the CIR relies upon Section 10 of Revenue Regulation 7-77 dated 3 June 1977, 14 issued
by the Secretary of Finance. This Section reads:
Sec. 10. Penalties. — Where the amount shown by the taxpayer to be due on its return or part of
such payment is not paid on or before the date prescribed for its payment, the amount of the tax
shall be increased by twenty-five (25%) per centum, the increment to be a part of the tax and the
entire amount shall be subject to interest at the rate of fourteen (14%) per centum per annum
from the date prescribed for its payment.
In the case of willful neglect to file the return within the period prescribed herein or in case a
false or fraudulent return is willfully made, there shall be added to the tax or to the deficiency tax
in case any payment has been made on the basis of such return before the discovery of the falsity
or fraud, a surcharge of fifty (50%) per centum of its amount. The amount so added to any tax
shall be collected at the same time and in the same manner and as part of the tax unless the tax
has been paid before the discovery of the falsity or fraud, in which case the amount so added shall
be collected in the same manner as the tax.
In addition to the above administrative penalties, the criminal and civil penalties as provided for
under Section 337 of the Tax Code of 1977 shall be imposed for violation of any provision of
Presidential Decree No. 1154. 15 (Emphases supplied)
The 1977 Tax Code itself, in Section 326 in relation to Section 4 of the same Code, invoked by the
Secretary of Finance in issuing Revenue Regulation 7-77, set out, in comprehensive terms, the rule-
making authority of the Secretary of Finance:
Sec. 326. Authority of Secretary of Finance to Promulgate Rules and Regulations. — The

Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, shall
promulgate all needful rules and regulations for the effective enforcement of the provisions of
this Code. (Emphasis supplied)
Section 4 of the same Code contains a list of subjects or areas to be dealt with by the Secretary of Finance
through the medium of an exercise of his quasi-legislative or rule-making authority. This list, however,
while it purports to be open-ended, does not include the imposition of administrative or civil penalties
such as the payment of amounts additional to the tax due. Thus, in order that it may be held to be legally
effective in respect of Picop in the present case, Section 10 of Revenue Regulation 7-77 must embody or
rest upon some provision in the Tax Code itself which imposes surcharge and penalty interest for failure
to make a transaction tax payment when due.
P.D. No. 1154 did not itself impose, nor did it expressly authorize the imposition of, a surcharge and penalty
interest in case of failure to pay the thirty-five percent (35%) transaction tax when due. Neither did Section 210
(b) of the 1977 Tax Code which re-enacted Section 195-C inserted into the Tax Code by P.D. No. 1154.
The CIR, both in its petition before the Court of Appeals and its Petition in the instant case, points to Section 51
(e) of the 1977 Tax Code as its source of authority for assessing a surcharge and penalty interest in respect of the
thirty-five percent (35%) transaction tax due from Picop. This Section needs to be quoted in extenso:
Sec. 51. Payment and Assessment of Income Tax. —
(c) Definition of deficiency. — As used in this Chapter in respect of a tax imposed by this Title,
the term "deficiency" means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by
the taxpayer upon his return; but the amount so shown on the return shall first be increased by the
amounts previously assessed (or collected without assessment) as a deficiency, and decreased by
the amount previously abated, credited, returned, or otherwise in respect of such tax; . . .
xxx xxx xxx
(e) Additions to the tax in case of non-payment. —
(1) Tax shown on the return. — Where the amount determined by the taxpayer as the tax imposed
by this Title or any installment thereof, or any part of such amount or installment is not paid on or
before the date prescribed for its payment, there shall be collected as a part of the tax, interest
upon such unpaid amount at the rate of fourteen per centum per annum from the date prescribed
for its payment until it is paid: Provided, That the maximum amount that may be collected as
interest on deficiency shall in no case exceed the amount corresponding to a period of three years,
the present provisions regarding prescription to the contrary notwithstanding.
(2) Deficiency. — Where a deficiency, or any interest assessed in connection therewith under

paragraph (d) of this section, or any addition to the taxes provided for in Section seventy-two of
this Code is not paid in full within thirty days from the date of notice and demand from the
Commissioner of Internal Revenue, there shall be collected upon the unpaid amount as part of the
tax, interest at the rate of fourteen per centum per annum from the date of such notice and
demand until it is paid: Provided, That the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount corresponding to a period of three years, the
present provisions regarding prescription to the contrary notwithstanding.
(3) Surcharge. — If any amount of tax included in the notice and demand from the Commissioner
of Internal Revenue is not paid in full within thirty days after such notice and demand, there shall
be collected in addition to the interest prescribed herein and in paragraph (d) above and as part of
the tax a surcharge of five per centum of the amount of tax unpaid. (Emphases supplied)
Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2) above, provides:
Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns.
— In case of willful neglect to file the return or list required by this Title within the time
prescribed by law, or in case a false or fraudulent return or list is wilfully made, the
Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case any
payment has been made on the basis of such return before the discovery of the falsity or fraud, as
surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to
make and file a return or list within the time prescribed by law or by the Commissioner or other
Internal Revenue Officer, not due to willful neglect, the Commissioner of Internal Revenue shall
add to the tax twenty-five per centum of its amount, except that, when a return is voluntarily and
without notice from the Commissioner or other officer filed after such time, and it is shown that
the failure to file it was due to a reasonable cause, no such addition shall be made to the tax. The
amount so added to any tax shall be collected at the same time, in the same manner and as part of
the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which
case the amount so added shall be collected in the same manner as the tax. (Emphases supplied)
It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977 Tax Code, authorize the imposition of
surcharge and interest only in respect of a "tax imposed by this Title," that is to say, Title II on "Income Tax." It
will also be seen that Section 72 of the 1977 Tax Code imposes a surcharge only in case of failure to file a return
or list "required by this Title," that is, Title II on "Income Tax." The thirty-five percent (35%) transaction tax is,
however, imposed in the 1977 Tax Code by Section 210 (b) thereof which Section is embraced in Title V on
"Taxes on Business" of that Code. Thus, while the thirty-five percent (35%) transaction tax is in truth a tax
imposed on interest income earned by lenders or creditors purchasing commercial paper on the money market, the
relevant provisions, i.e., Section 210 (b), were not inserted in Title II of the 1977 Tax Code. The end result is that
the thirty-five percent (35%) transaction tax is not one of the taxes in respect of which Section 51 (e) authorized
the imposition of surcharge and interest and Section 72 the imposition of a fraud surcharge.
It is not without reluctance that we reach the above conclusion on the basis of what may well have been an
inadvertent error in legislative draftsmanship, a type of error common enough during the period of Martial Law in
our country. Nevertheless, we are compelled to adopt this conclusion. We consider that the authority to impose
what the present Tax Code calls (in Section 248) civil penalties consisting of additions to the tax due, must be
expressly given in the enabling statute, in language too clear to be mistaken. The grant of that authority is not
lightly to be assumed to have been made to administrative officials, even to one as highly placed as the Secretary
of Finance.
The state of the present law tends to reinforce our conclusion that Section 51 (c) and (e) of the 1977 Tax Code did
not authorize the imposition of a surcharge and penalty interest for failure to pay the thirty-five percent (35%)
transaction tax imposed under Section 210 (b) of the same Code. The corresponding provision in the current Tax
Code very clearly embraces failure to pay all taxes imposed in the Tax Code, without any regard to the Title of the
Code where provisions imposing particular taxes are textually located. Section 247 (a) of the NIRC, as amended,
reads:
Title X
Statutory Offenses and Penalties
Chapter I
Additions to the Tax
Sec. 247. General Provisions. — (a) The additions to the tax or deficiency tax prescribed in this
Chapter shall apply to all taxes, fees and charges imposed in this Code. The amount so added to
the tax shall be collected at the same time, in the same manner and as part of the tax. . . .
Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the tax required to be
paid, penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:
xxx xxx xxx
(3) failure to pay the tax within the time prescribed for its payment; or
xxx xxx xxx
(c) the penalties imposed hereunder shall form part of the tax and the entire amount shall be
subject to the interest prescribed in Section 249.
Sec. 249. Interest. — (a) In General. — There shall be assessed and collected on any unpaid
amount of tax, interest at the rate of twenty percent (20%) per annum or such higher rate as may
be prescribed by regulations, from the date prescribed for payment until the amount is fully
paid. . . . (Emphases supplied)
In other words, Section 247 (a) of the current NIRC supplies what did not exist back in 1977 when
Picop's liability for the thirty-five percent (35%) transaction tax became fixed. We do not believe we can
fill that legislative lacuna by judicial fiat. There is nothing to suggest that Section 247 (a) of the present
Tax Code, which was inserted in 1985, was intended to be given retroactive application by the legislative
authority. 16
(3) Whether Picop is Liable

for Documentary and
Science Stamp Taxes.
As noted earlier, Picop issued sometime in 1977 long-term subordinated convertible debenture bonds with an
aggregate face value of P100,000,000.00. Picop stated, and this was not disputed by the CIR, that the proceeds of
the debenture bonds were in fact utilized to finance the BOI-registered operations of Picop. The CIR assessed
documentary and science stamp taxes, amounting to P300,000.00, on the issuance of Picop's debenture bonds. It is
claimed by Picop that its tax exemption — "exemption from all taxes under the National Internal Revenue Code,
except income tax" on a declining basis over a certain period of time — includes exemption from the
documentary and science stamp taxes imposed under the NIRC.
The CIR, upon the other hand, stresses that the tax exemption under the Investment Incentives Act may be
granted or recognized only to the extent that the claimant Picop was engaged in registered operations, i.e.,
operations forming part of its integrated pulp and paper project. 17 The borrowing of funds from the public, in the
submission of the CIR, was not an activity included in Picop's registered operations. The CTA adopted the view
of the CIR and held that "the issuance of convertible debenture bonds [was] not synonymous [with] the
manufactur[ing] operations of an integrated pulp and paper mill." 18
The Court of Appeals took a less rigid view of the ambit of the tax exemption granted to registered pioneer
enterprises. Said the Court of Appeals:
. . . PICOP's explanation that the debenture bonds were issued to finance its registered operation
is logical and is unrebutted. We are aware that tax exemptions must be applied strictly against the
beneficiary in order to deter their abuse. It would indeed be altogether a different matter if there
is a showing that the issuance of the debenture bonds had no bearing whatsoever on the
registered operations PICOP and that they were issued in connection with a totally different
business undertaking of PICOP other than its registered operation. There is, however, a dearth of
evidence in this regard. It cannot be denied that PICOP needed funds for its operations. One of
the means it used to raise said funds was to issue debenture bonds. Since the money raised
thereby was to be used in its registered operation, PICOP should enjoy the incentives granted to
it by R.A. 5186, one of which is the exemption from payment of all taxes under the National
Internal Revenue Code, except income taxes, otherwise the purpose of the incentives would be
defeated. Documentary and science stamp taxes on debenture bonds are certainly not income
taxes. 19 (Emphasis supplied)
Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended beyond the ordinary
and reasonable intendment of the language actually used by the legislative authority in granting the exemption.
The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing
operations. But no one contends that issuance of bonds was a principal or regular business activity of Picop; only
banks or other financial institutions are in the regular business of raising money by issuing bonds or other
instruments to the general public. We consider that the actual dedication of the proceeds of the bonds to the
carrying out of Picop's registered operations constituted a sufficient nexus with such registered operations so as to
exempt Picop from stamp taxes ordinarily imposed upon or in connection with issuance of such bonds. We agree,
therefore, with the Court of Appeals on this matter that the CTA and the CIR had erred in rejecting Picop's claim
for exemption from stamp taxes.
It remains only to note that after commencement of the present litigation before the CTA, the BIR took the
position that the tax exemption granted by R.A. No. 5186, as amended, does include exemption from
documentary stamp taxes on transactions entered into by BOI-registered enterprises. BIR Ruling No. 088, dated
28 April 1989, for instance, held that a registered preferred pioneer enterprise engaged in the manufacture of
integrated circuits, magnetic heads, printed circuit boards, etc., is exempt from the payment of documentary stamp
taxes. The Commissioner said:
You now request a ruling that as a preferred pioneer enterprise, you are exempt from the payment
of Documentary Stamp Tax (DST).
In reply, please be informed that your request is hereby granted. Pursuant to Section 46 (a) of
Presidential Decree No. 1789, pioneer enterprises registered with the BOI are exempt from all
taxes under the National Internal Revenue Code, except from all taxes under the National Internal
Revenue Code, except income tax, from the date the area of investment is included in the
Investment Priorities Plan to the following extent:
xxx xxx xxx
Accordingly, your company is exempt from the payment of documentary stamp tax to the extent
of the percentage aforestated on transactions connected with the registered business activity.
(BIR Ruling No. 111-81) However, if said transactions conducted by you require the execution of
a taxable document with other parties, said parties who are not exempt shall be the one directly
liable for the tax. (Sec. 173, Tax Code, as amended; BIR Ruling No. 236-87) In other words, said
parties shall be liable to the same percentage corresponding to your tax exemption. (Emphasis
supplied)
Similarly, in BIR Ruling No. 013, dated 6 February 1989, the Commissioner held that a registered
pioneer enterprise producing polyester filament yarn was entitled to exemption "from the documentary
stamp tax on [its] sale of real property in Makati up to December 31, 1989." It appears clear to the Court
that the CIR, administratively at least, no longer insists on the position it originally took in the instant
case before the CTA.
II
(1) Whether Picop is entitled

to deduct against current
income interest payments
on loans for the purchase
of machinery and equipment.
In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the purchase of
machinery and equipment needed for its operations. In its 1977 Income Tax Return, Picop claimed interest
payments made in 1977, amounting to P42,840,131.00, on these loans as a deduction from its 1977 gross income.
The CIR disallowed this deduction upon the ground that, because the loans had been incurred for the purchase of
machinery and equipment, the interest payments on those loans should have been capitalized instead and claimed
as a depreciation deduction taking into account the adjusted basis of the machinery and equipment (original
acquisition cost plus interest charges) over the useful life of such assets.
Both the CTA and the Court of Appeals sustained the position of Picop and held that the interest deduction
claimed by Picop was proper and allowable. In the instant Petition, the CIR insists on its original position.
We begin by noting that interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are
allowed by the NIRC as deductions against the taxpayer's gross income. Section 30 of the 1977 Tax Code
provided as follows:
Sec. 30. Deduction from Gross Income. — The following may be deducted from gross income:
(a) Expenses:
xxx xxx xxx
(b) Interest:
(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase or carry
obligations the interest upon which is exempt from taxation as income under this
Title: . . . (Emphasis supplied)
Thus, the general rule is that interest expenses are deductible against gross income and this certainly
includes interest paid under loans incurred in connection with the carrying on of the business of the
taxpayer. 20 In the instant case, the CIR does not dispute that the interest payments were made by Picop on
loans incurred in connection with the carrying on of the registered operations of Picop, i.e., the financing
of the purchase of machinery and equipment actually used in the registered operations of Picop. Neither
does the CIR deny that such interest payments were legally due and demandable under the terms of such
loans, and in fact paid by Picop during the tax year 1977.
The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires the
disallowance of the interest payments made by Picop. The CIR invokes Section 79 of Revenue Regulations No. 2
as amended which reads as follows:
Sec. 79. Interest on Capital. — Interest calculated for cost-keeping or other purposes on account
of capital or surplus invested in the business, which does not represent a charge arising under an
interest-bearing obligation, is not allowable deduction from gross income. (Emphases supplied)
We read the above provision of Revenue Regulations No. 2 as referring to so called "theoretical interest,"
that is to say, interest "calculated" or computed (and not incurred or paid) for the purpose of determining
the "opportunity cost" of investing funds in a given business. Such "theoretical" or imputed interest does
not arise from a legally demandable interest-bearing obligation incurred by the taxpayer who however
wishes to find out, e.g., whether he would have been better off by lending out his funds and earning
interest rather than investing such funds in his business. One thing that Section 79 quoted above makes
clear is that interest which does constitute a charge arising under an interest-bearing obligation is an
allowable deduction from gross income.
It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned after" paragraph 1.266-1
(b), entitled "Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital Items" of the
U.S. Income Tax Regulations, which paragraph reads as follows:
(B) Taxes and Carrying Charges. — The items thus chargeable to capital accounts are —
(11) In the case of real property, whether improved or unimproved and whether productive or
nonproductive.
21
(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds).
The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be related to the relevant
provisions of the U.S. Internal Revenue Code, which provisions deal with the general topic of adjusted basis for
determining allowable gain or loss on sales or exchanges of property and allowable depreciation and depletion of
capital assets of the taxpayer:
Present Rule. The Internal Revenue Code, and the Regulations promulgated thereunder provide
that "No deduction shall be allowed for amounts paid or accrued for such taxes and carrying
charges as, under regulations prescribed by the Secretary or his delegate, are chargeable to capital
account with respect to property, if the taxpayer elects, in accordance with such regulations, to
treat such taxes or charges as so chargeable."
At the same time, under the adjustment of basis provisions which have just been discussed, it is
provided that adjustment shall be made for all "expenditures, receipts, losses, or other items"
properly chargeable to a capital account, thus including taxes and carrying charges; however, an
exception exists, in which event such adjustment to the capital account is not made, with respect
to taxes and carrying charges which the taxpayer has not elected to capitalize but for which a
deduction instead has been taken. 22 (Emphasis supplied)
The "carrying charges" which may be capitalized under the above quoted provisions of the U.S. Internal
Revenue Code include, as the CIR has pointed out, interest on a loan "(but not theoretical interest of a
taxpayer using his own funds)." What the CIR failed to point out is that such "carrying charges" may, at
the election of the taxpayer, either be (a) capitalized in which case the cost basis of the capital assets, e.g.,
machinery and equipment, will be adjusted by adding the amount of such interest payments or
alternatively, be (b) deducted from gross income of the taxpayer. Should the taxpayer elect to deduct the
interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest
payments. In other words, the taxpayer is not entitled to both the deduction from gross income and the
adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. The U.S.
Internal Revenue Code does not prohibit the deduction of interest on a loan obtained for purchasing
machinery and equipment against gross income, unless the taxpayer has also or previously capitalized the
same interest payments and thereby adjusted the cost basis of such assets.
We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for
acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest payments
on such a loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of
such interest payments. Accordingly, the general rule that interest payments on a legally demandable loan are
deductible from gross income must be applied.
The CIR argues finally that to allow Picop to deduct its interest payments against its gross income would be to
encourage fraudulent claims to double deductions from gross income:
[t]o allow a deduction of incidental expense/cost incurred in the purchase of fixed asset in the
year it was incurred would invite tax evasion through fraudulent application of double deductions
from gross income. 23 (Emphases supplied)
The Court is not persuaded. So far as the records of the instant cases show, Picop has not claimed to be
entitled to double deduction of its 1977 interest payments. The CIR has neither alleged nor proved that
Picop had previously adjusted its cost basis for the machinery and equipment purchased with the loan
proceeds by capitalizing the interest payments here involved. The Court will not assume that the CIR
would be unable or unwilling to disallow "a double deduction" should Picop, having deducted its interest
cost from its gross income, also attempt subsequently to adjust upward the cost basis of the machinery
and equipment purchased and claim, e.g., increased deductions for depreciation.
We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977
interest payments on its loans for capital equipment against its gross income for 1977.

income net operating losses
incurred by Rustan Pulp
and Paper Mills, Inc.
On 18 January 1977, Picop entered into a merger agreement with the Rustan Pulp and Paper Mills, Inc. ("RPPM")
and Rustan Manufacturing Corporation ("RMC"). Under this agreement, the rights, properties, privileges, powers
and franchises of RPPM and RMC were to be transferred, assigned and conveyed to Picop as the surviving
corporation. The entire subscribed and outstanding capital stock of RPPM and RMC would be exchanged for
2,891,476 fully paid up Class "A" common stock of Picop (with a par value of P10.00) and 149,848 shares of
preferred stock of Picop (with a par value of P10.00), to be issued by Picop, the result being that Picop would
wholly own both RPPM and RMC while the stockholders of RPPM and RMC would join the ranks of Picop's
shareholders. In addition, Picop paid off the obligations of RPPM to the Development Bank of the Philippines
("DBP") in the amount of P68,240,340.00, by issuing 6,824,034 shares of preferred stock (with a par value of
P10.00) to the DBP. The merger agreement was approved in 1977 by the creditors and stockholders of Picop,
RPPM and RMC and by the Securities and Exchange Commission. Thereupon, on 30 November 1977, apparently
the effective date of merger, RPPM and RMC were dissolved. The Board of Investments approved the merger
agreement on 12 January 1978.
It appears that RPPM and RMC were, like Picop, BOI-registered companies. Immediately before merger effective
date, RPPM had over preceding years accumulated losses in the total amount of P81,159,904.00. In its 1977
Income Tax Return, Picop claimed P44,196,106.00 of RPPM's accumulated losses as a deduction against Picop's
1977 gross income. 24
Upon the other hand, even before the effective date of merger, on 30 August 1977, Picop sold all the outstanding
shares of RMC stock to San Miguel Corporation for the sum of P38,900,000.00, and reported a gain of
P9,294,849.00 from this transaction. 25
In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186 which provides as follows:
Sec. 7. Incentives to Registered Enterprise. — A registered enterprise, to the extent engaged in a

preferred area of investment, shall be granted the following incentive benefits:
xxx xxx xxx
(c) Net Operating Loss Carry-over. — A net operating loss incurred in any of the first ten years
of operations may be carried over as a deduction from taxable income for the six years
immediately following the year of such loss. The entire amount of the loss shall be carried over to
the first of the six taxable years following the loss, and any portion of such loss which exceeds
the taxable income of such first year shall be deducted in like manner from the taxable income of
the next remaining five years. The net operating loss shall be computed in accordance with the
provisions of the National Internal Revenue Code, any provision of this Act to the contrary
notwithstanding, except that income not taxable either in whole or in part under this or other laws
shall be included in gross income. (Emphasis supplied)
Picop had secured a letter-opinion from the BOI dated 21 February 1977 — that is, after the date of the
agreement of merger but before the merger became effective — relating to the deductibility of the
previous losses of RPPM under Section 7 (c) of R.A. No. 5186 as amended. The pertinent portions of this
BOI opinion, signed by BOI Governor Cesar Lanuza, read as follows:
2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal dissolution of
the latter because at that time the two (2) companies still had separate legal personalities;
3) After BOI approval of the merger, PICOP can no longer apply for the registration of the
registered capacity of Rustan because with the approved merger, such registered capacity of
Rustan transferred to PICOP will have the same registration date as that of Rustan. In this case,
the previous losses of Rustan may be carried over by PICOP, because with the merger, PICOP
assumes all the rights and obligations of Rustan subject, however, to the period prescribed for
carrying over of such
losses. 26 (Emphasis supplied)
Curiously enough, Picop did not also seek a ruling on this matter, clearly a matter of tax law, from the
Bureau of Internal Revenue. Picop chose to rely solely on the BOI letter-opinion.
The CIR disallowed all the deductions claimed on the basis of RPPM's losses, apparently on two (2) grounds.
Firstly, the previous losses were incurred by "another taxpayer," RPPM, and not by Picop in connection with
Picop's own registered operations. The CIR took the view that Picop, RPPM and RMC were merged into one (1)
corporate personality only on 12 January 1978, upon approval of the merger agreement by the BOI. Thus, during
the taxable year 1977, Picop on the one hand and RPPM and RMC on the other, still had their separate juridical
personalities. Secondly, the CIR alleged that these losses had been incurred by RPPM "from the borrowing of
funds" and not from carrying out of RPPM's registered operations. We focus on the first ground. 27
The CTA upheld the deduction claimed by Picop; its reasoning, however, is less than crystal clear, especially in
respect of its view of what the U.S. tax law was on this matter. In any event, the CTA apparently fell back on the
BOI opinion of 21 February 1977 referred to above. The CTA said:
Respondent further averred that the incentives granted under Section 7 of R.A. No. 5186 shall be
available only to the extent in which they are engaged in registered operations, citing Section 1 of
Rule IX of the Basic Rules and Regulations to Implement the Intent and Provisions of the
Investment Incentives Act, R.A. No. 5186.
We disagree with respondent. The purpose of the merger was to rationalize the container board
industry and not to take advantage of the net losses incurred by RPPMI prior to the stock swap.
Thus, when stock of a corporation is purchased in order to take advantage of the corporation's net
operating loss incurred in years prior to the purchase, the corporation thereafter entering into a
trade or business different from that in which it was previously engaged, the net operating loss
carry-over may be entirely lost. [IRC (1954), Sec. 382(a), Vol. 5, Mertens, Law of Federal
Income Taxation, Chap. 29.11a, p. 103]. 28 Furthermore, once the BOI approved the merger
agreement, the registered capacity of Rustan shall be transferred to PICOP, and the previous
losses of Rustan may be carried over by PICOP by operation of law. [BOI ruling dated February
21, 1977 (Exh. J-1)] It is clear therefrom, that the deduction availed of under Section 7(c) of R.A.
No. 5186 was only proper." (pp. 38-43, Rollo of SP No. 20070) 29 (Emphasis supplied)
In respect of the above underscored portion of the CTA decision, we must note that the CTA in fact
overlooked the statement made by petitioner's counsel before the CTA that:
Among the attractions of the merger to Picop was the accumulated net operating loss carry-over
of RMC that it might possibly use to relieve it (Picop) from its income taxes, under Section 7 (c)
of R.A. 5186. Said section provides:
xxx xxx xxx
With this benefit in mind, Picop addressed three (3) questions to the BOI in a letter dated
November 25, 1976. The BOI replied on February 21, 1977 directly answering the three (3)
queries. 30 (Emphasis supplied)
The size of RPPM's accumulated losses as of the date of the merger — more than P81,000,000.00 —
must have constituted a powerful attraction indeed for Picop.
The Court of Appeals followed the result reached by the CTA. The Court of Appeals, much like the CTA,
concluded that since RPPM was dissolved on 30 November 1977, its accumulated losses were appropriately
carried over by Picop in the latter's 1977 Income Tax Return "because by that time RPPMI and Picop were no
longer separate and different taxpayers." 31
After prolonged consideration and analysis of this matter, the Court is unable to agree with the CTA and Court of
Appeals on the deductibility of RPPM's accumulated losses against Picop's 1977 gross income.
It is important to note at the outset that in our jurisdiction, the ordinary rule — that is, the rule applicable in
respect of corporations not registered with the BOI as a preferred pioneer enterprise — is that net operating losses
cannot be carried over. Under our Tax Code, both in 1977 and at present, losses may be deducted from gross
income only if such losses were actually sustained in the same year that they are deducted or charged off. Section
30 of the 1977 Tax Code provides:
Sec. 30. Deductions from Gross Income. — In computing net income, there shall be allowed as
deduction —
xxx xxx xxx
(d) Losses:
(1) By Individuals. — In the case of an individual, losses actually sustained during the taxable
year and not compensated for by an insurance or otherwise —
(A) If incurred in trade or business;
xxx xxx xxx
(2) By Corporations. — In a case of a corporation, all losses actually sustained and charged off
within the taxable year and not compensated for by insurance or otherwise.
(3) By Non-resident Aliens or Foreign Corporations. — In the case of a non-resident alien

individual or a foreign corporation, the losses deductible are those actually sustained during the
year incurred in business or trade conducted within the Philippines, . . . 32 (Emphasis supplied)
Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. 2, as amended) is even
more explicit and detailed:
Sec. 76. When charges are deductible. — Each year's return, so far as practicable, both as to
gross income and deductions therefrom should be complete in itself, and taxpayers are expected
to make every reasonable effort to ascertain the facts necessary to make a correct return. The
expenses, liabilities, or deficit of one year cannot be used to reduce the income of a subsequent
year. A taxpayer has the right to deduct all authorized allowances and it follows that if he does
not within any year deduct certain of his expenses, losses, interests, taxes, or other charges,
he can not deduct them from the income of the next or any succeeding year. . . .
xxx xxx xxx
. . . . If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss
sustained during a prior taxable year which has not been deducted from gross income, he may
render an amended return for such preceding taxable year including such amount of loss in the
deduction from gross income and may in proper cases file a claim for refund of the excess paid by
reason of the failure to deduct such loss in the original return. A loss from theft or embezzlement
occurring in one year and discovered in another is ordinarily deductible for the year in which
sustained. (Emphases supplied)
It is thus clear that under our law, and outside the special realm of BOI-registered enterprises, there is no
such thing as a carry-over of net operating loss. To the contrary, losses must be deducted against current
income in the taxable year when such losses were incurred. Moreover, such losses may be charged off
only against income earned in the same taxable year when the losses were incurred.
Thus it is that R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be
granted only to registered pioneer enterprises and only with respect to their registered operations. The statutory
purpose here may be seen to be the encouragement of the establishment and continued operation of pioneer
industries by allowing the registered enterprise to accumulate its operating losses which may be expected during
the early years of the enterprise and to permit the enterprise to offset such losses against income earned by it in
later years after successful establishment and regular operations. To promote its economic development goals, the
Republic foregoes or defers taxing the income of the pioneer enterprise until after that enterprise has recovered or
offset its earlier losses. We consider that the statutory purpose can be served only if the accumulated operating
losses are carried over and charged off against income subsequently earned and accumulated by the same
enterprise engaged in the same registered operations.
In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise,
Picop, to benefit from the operating losses accumulated by another corporation or enterprise, RPPM. RPPM far
from benefiting from the tax incentive granted by the BOI statute, in fact gave up the struggle and went out of
existence and its former stockholders joined the much larger group of Picop's stockholders. To grant Picop's
claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective which Picop had
from the very beginning) which had not been earned by the registered enterprise which had suffered the
accumulated losses. In effect, to grant Picop's claimed deduction would be to permit Picop to purchase a tax
deduction and RPPM to peddle its accumulated operating losses. Under the CTA and Court of Appeals decisions,
Picop would benefit by immunizing P44,196,106.00 of its income from taxation thereof although Picop had not
run the risks and incurred the losses which had been encountered and suffered by RPPM. Conversely, the income
that would be shielded from taxation is not income that was, after much effort, eventually generated by the same
registered operations which earlier had sustained losses. We consider and so hold that there is nothing in Section 7
(c) of R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes non-sense of the
legislative purpose which may be seen clearly to be projected by Section 7 (c), R.A. No. 5186.
The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated operating losses against Picop's
1977 gross income, basically because towards the end of the taxable year 1977, upon the arrival of the effective
date of merger, only one (1) corporation, Picop, remained. The losses suffered by RPPM's registered operations
and the gross income generated by Picop's own registered operations now came under one and the same corporate
roof. We consider that this circumstance relates much more to form than to substance. We do not believe that that
single purely technical factor is enough to authorize and justify the deduction claimed by Picop. Picop's claim for
deduction is not only bereft of statutory basis; it does violence to the legislative intent which animates the tax
incentive granted by Section 7 (c) of R.A. No. 5186. In granting the extraordinary privilege and incentive of a net
operating loss carry-over to BOI-registered pioneer enterprises, the legislature could not have intended to require
the Republic to forego tax revenues in order to benefit a corporation which had run no risks and suffered no
losses, but had merely purchased another's losses.
Both the CTA and the Court of Appeals appeared much impressed not only with corporate technicalities but also
with the U.S. tax law on this matter. It should suffice, however, simply to note that in U.S. tax law, the availability
to companies generally of operating loss carry-overs and of operating loss carry-backs is expressly provided and
regulated in great detail by statute. 33 In our jurisdiction, save for Section 7 (c) of R.A. No. 5186, no statute
recognizes or permits loss carry-overs and loss carry-backs. Indeed, as already noted, our tax law expressly rejects
the very notion of loss carry-overs and carry-backs.
We conclude that the deduction claimed by Picop in the amount of P44,196,106.00 in its 1977 Income Tax Return
must be disallowed.

income certain claimed
financial guarantee expenses.
In its Income Tax Return for 1977, Picop also claimed a deduction in the amount of P1,237,421.00 as financial
guarantee expenses.
This deduction is said to relate to chattel and real estate mortgages required from Picop by the Philippine National
Bank ("PNB") and DBP as guarantors of loans incurred by Picop from foreign creditors. According to Picop, the
claimed deduction represents registration fees and other expenses incidental to registration of mortgages in favor
of DBP and PNB.
In support of this claimed deduction, Picop allegedly showed its own vouchers to BIR Examiners to prove
disbursements to the Register of Deeds of Tandag, Surigao del Sur, of particular amounts. In the proceedings
before the CTA, however, Picop did not submit in evidence such vouchers and instead presented one of its
employees to testify that the amount claimed had been disbursed for the registration of chattel and real estate
mortgages.
The CIR disallowed this claimed deduction upon the ground of insufficiency of evidence. This disallowance was
sustained by the CTA and the Court of Appeals. The CTA said:
No records are available to support the abovementioned expenses. The vouchers merely showed
that the amounts were paid to the Register of Deeds and simply cash account. Without the
supporting papers such as the invoices or official receipts of the Register of Deeds, these
vouchers standing alone cannot prove that the payments made were for the accrued expenses in
question. The best evidence of payment is the official receipts issued by the Register of Deeds .
The testimony of petitioner's witness that the official receipts and cash vouchers were shown to
the Bureau of Internal Revenue will not suffice if no records could be presented in court for
proper marking and identification. 34 Emphasis supplied)
The Court of Appeals added:
The mere testimony of a witness for PICOP and the cash vouchers do not suffice to establish its
claim that registration fees were paid to the Register of Deeds for the registration of real estate
and chattel mortgages in favor of Development Bank of the Philippines and the Philippine
National Bank as guarantors of PICOP's loans. The witness could very well have been merely
repeating what he was instructed to say regardless of the truth, while the cash vouchers, which we
do not find on file, are not said to provide the necessary details regarding the nature and purpose
of the expenses reflected therein. PICOP should have presented, through the guarantors, its
owner's copy of the registered titles with the lien inscribed thereon as well as an official receipt
from the Register of Deeds evidencing payment of the registration fee. 35 (Emphasis supplied)
We must support the CTA and the Court of Appeals in their foregoing rulings. A taxpayer has the burden of
proving entitlement to a claimed deduction. 36 In the instant case, even Picop's own vouchers were not submitted
in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them.
Moreover, cash vouchers can only confirm the fact of disbursement but not necessarily the purpose thereof. 37 The
best evidence that Picop should have presented to support its claimed deduction were the invoices and official
receipts issued by the Register of Deeds. Picop not only failed to present such documents; it also failed to explain
the loss thereof, assuming they had existed before. 38 Under the best evidence rule, 39 therefore, the testimony of
Picop's employee was inadmissible and was in any case entitled to very little, if any, credence.
We consider that entitlement to Picop's claimed deduction of P1,237,421.00 was not adequately shown and that
such deduction must be disallowed.
III
(1) Whether Picop had understated

its sales and overstated its
cost of sales for 1977.
In its assessment for deficiency income tax for 1977, the CIR claimed that Picop had understated its sales by
P2,391,644.00 and, upon the other hand, overstated its cost of sales by P604,018.00. Thereupon, the CIR added
back both sums to Picop's net income figure per its own return.
The 1977 Income Tax Return of Picop set forth the following figures:
Sales (per Picop's Income Tax Return):
Paper P 537,656,719.00
Timber P 263,158,132.00
———————
Total Sales P 800,814,851.00
============
Upon the other hand, Picop's Books of Accounts reflected higher sales figures:
Sales (per Picop's Books of Accounts):
Paper P 537,656,719.00
Timber P 265,549,776.00
———————
Total Sales P 803,206,495.00
============
The above figures thus show a discrepancy between the sales figures reflected in Picop's Books of
Accounts and the sales figures reported in its 1977 Income Tax Return, amounting to: P2,391,644.00.
The CIR also contended that Picop's cost of sales set out in its 1977 Income Tax Return, when compared with the
cost figures in its Books of Accounts, was overstated:
Cost of Sales
(per Income Tax Return) P607,246,084.00
Cost of Sales
(per Books of Accounts) P606,642,066.00
———————
Discrepancy P 604,018.00
============
Picop did not deny the existence of the above noted discrepancies. In the proceedings before the CTA, Picop
presented one of its officials to explain the foregoing discrepancies. That explanation is perhaps best presented in
Picop's own words as set forth in its Memorandum before this Court:
. . . that the adjustment discussed in the testimony of the witness, represent the best and most
objective method of determining in pesos the amount of the correct and actual export sales during
the year. It was this correct and actual export sales and costs of sales that were reflected in the
income tax return and in the audited financial statements. These corrections did not result in
realization of income and should not give rise to any deficiency tax.
xxx xxx xxx
What are the facts of this case on this matter? Why were adjustments necessary at the year-end?
Because of PICOP's procedure of recording its export sales (reckoned in U.S. dollars) on the basis
of a fixed rate, day to day and month to month, regardless of the actual exchange rate and without
waiting when the actual proceeds are received. In other words, PICOP recorded its export sales at
a pre-determined fixed exchange rate. That pre-determined rate was decided upon at the
beginning of the year and continued to be used throughout the year.
At the end of the year, the external auditors made an examination. In that examination, the
auditors determined with accuracy the actual dollar proceeds of the export sales received. What
exchange rate was used by the auditors to convert these actual dollar proceeds into Philippine
pesos? They used the average of the differences between (a) the recorded fixed exchange rate and
(b) the exchange rate at the time the proceeds were actually received. It was this rate at time of
receipt of the proceeds that determined the amount of pesos credited by the Central Bank
(through the agent banks) in favor of PICOP. These accumulated differences were averaged by
the external auditors and this was what was used at the year-end for income tax and other
government-report purposes. (T.s.n., Oct. 17/85, pp. 20-25) 40
The above explanation, unfortunately, at least to the mind of the Court, raises more questions than it resolves.
Firstly, the explanation assumes that all of Picop's sales were export sales for which U.S. dollars (or other foreign
exchange) were received. It also assumes that the expenses summed up as "cost of sales" were all dollar expenses
and that no peso expenses had been incurred. Picop's explanation further assumes that a substantial part of Picop's
dollar proceeds for its export sales were not actually surrendered to the domestic banking system and seasonably
converted into pesos; had all such dollar proceeds been converted into pesos, then the peso figures could have
been simply added up to reflect the actual peso value of Picop's export sales. Picop offered no evidence in respect
of these assumptions, no explanation why and how a "pre-determined fixed exchange rate" was chosen at the
beginning of the year and maintained throughout. Perhaps more importantly, Picop was unable to explain why its
Books of Accounts did not pick up the same adjustments that Picop's External Auditors were alleged to have
made for purposes of Picop's Income Tax Return. Picop attempted to explain away the failure of its Books of
Accounts to reflect the same adjustments (no correcting entries, apparently) simply by quoting a passage from a
case where this Court refused to ascribe much probative value to the Books of Accounts of a corporate taxpayer in
a tax case. 41 What appears to have eluded Picop, however, is that its Books of Accounts, which are kept by its
own employees and are prepared under its control and supervision, reflect what may be deemed to be admissions
against interest in the instant case. For Picop's Books of Accounts precisely show higher sales figures and lower
cost of sales figures than Picop's Income Tax Return.
It is insisted by Picop that its Auditors' adjustments simply present the "best and most objective" method of
reflecting in pesos the "correct and ACTUAL export sales" 42 and that the adjustments or "corrections" "did not
result in realization of [additional] income and should not give rise to any deficiency tax." The correctness of this
contention is not self-evident. So far as the record of this case shows, Picop did not submit in evidence the
aggregate amount of its U.S. dollar proceeds of its export sales; neither did it show the Philippine pesos it had
actually received or been credited for such U.S. dollar proceeds. It is clear to this Court that the testimonial
evidence submitted by Picop fell far short of demonstrating the correctness of its explanation.
Upon the other hand, the CIR has made out at least a prima facie case that Picop had understated its sales and
overstated its cost of sales as set out in its Income Tax Return. For the CIR has a right to assume that Picop's
Books of Accounts speak the truth in this case since, as already noted, they embody what must appear to be
admissions against Picop's own interest.
Accordingly, we must affirm the findings of the Court of Appeals and the CTA.
(2) Whether Picop is liable for

the corporate development
tax of five percent (5%)
of its income for 1977.
The five percent (5%) corporate development tax is an additional corporate income tax imposed in Section 24 (e)
of the 1977 Tax Code which reads in relevant part as follows:
(e) Corporate development tax. — In addition to the tax imposed in subsection (a) of this section,
an additional tax in an amount equivalent to 5 per cent of the same taxable net income shall be
paid by a domestic or a resident foreign corporation; Provided, That this additional tax shall be
imposed only if the net income exceeds 10 per cent of the net worth, in case of a domestic
corporation, or net assets in the Philippines in case of a resident foreign corporation: . . . .
The additional corporate income tax imposed in this subsection shall be collected and paid at the
same time and in the same manner as the tax imposed in subsection (a) of this section.
Since this five percent (5%) corporate development tax is an income tax, Picop is not exempted from it
under the provisions of Section 8 (a) of R.A. No. 5186.
For purposes of determining whether the net income of a corporation exceeds ten percent (10%) of its net worth,
the term "net worth" means the stockholders' equity represented by the excess of the total assets over liabilities as
reflected in the corporation's balance sheet provided such balance sheet has been prepared in accordance with
generally accepted accounting principles employed in keeping the books of the corporation. 43
The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its net worth figure or total
stockholders' equity as reflected in its Audited Financial Statements for 1977 is P464,749,528.00. Since its
adjusted net income for 1977 thus exceeded ten percent (10%) of its net worth, Picop must be held liable for the
five percent (5%) corporate development tax in the amount of P2,434,367.75.
Recapitulating, we hold:
(1) Picop is liable for the thirty-five percent (35%) transaction tax in the amount of P3,578,543.51.
(2) Picop is not liable for interest and surcharge on unpaid transaction tax.
(3) Picop is exempt from payment of documentary and science stamp taxes in the amount of P300,000.00 and the
compromise penalty of P300.00.
(4) Picop is entitled to its claimed deduction of P42,840,131.00 for interest payments on loans for, among other
things, the purchase of machinery and equipment.
(5) Picop's claimed deduction in the amount of P44,196,106.00 for the operating losses previously incurred by
RPPM, is disallowed for lack of merit.
(6) Picop's claimed deduction for certain financial guarantee expenses in the amount P1,237,421.00 is disallowed
for failure adequately to prove such expenses.
(7) Picop has understated its sales by P2,391,644.00 and overstated its cost of sales by P604,018.00, for 1977.
(8) Picop is liable for the corporate development tax of five percent (5%) of its adjusted net income for 1977 in
the amount of P2,434,367.75.
Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to hold Picop liable for deficiency income
tax for the year 1977 computed as follows:
Deficiency Income Tax
Net Income Per Return P 258,166.00
Add:
Unallowable Deductions
(1) Deduction of net
operating losses
incurred by RPPM P 44,196,106.00
(2) Unexplained financial
guarantee expenses P 1,237,421.00
(3) Understatement of
Sales P 2,391,644.00
(4) Overstatement of
Cost of Sales P 604,018.00
——————
Total P 48,429,189.00
——————
Net Income as Adjusted P 48,687,355.00
===========
Income Tax Due Thereon 44 P 17,030,574.00
Less:
Tax Already Assessed per

Return 80,358.00
——————
Deficiency Income Tax P 16,560,216.00
Add:
Five percent (5%) Corporate

Development Tax P 2,434,367.00
Total Deficiency Income Tax P 18,994,583.00
===========
Add:
Five percent (5%) surcharge 45 P 949,729.15
——————
Total Deficiency Income Tax
with surcharge P 19,944,312.15
Add:
Fourteen percent (14%)
interest from 15 April
1978 to 14 April 1981 46 P 8,376,610.80
Fourteen percent (14%)
interest from 21 April
1983 to 20 April 1986 47 P 11,894,787.00
——————
Total Deficiency Income Tax
Due and Payable P 40,215,709.00
===========
WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is hereby MODIFIED and Picop is
hereby ORDERED to pay the CIR the aggregate amount of P43,794,252.51 itemized as follows:
(1) Thirty-five percent (35%)
transaction tax P 3,578,543.51
(2) Total Deficiency Income

Tax Due 40,215,709.00
———————
Aggregate Amount Due and Payable P 43,794,252.51
============
No pronouncement as to costs.
G.R. No. 96322 December 20, 1991
ACCRA INVESTMENTS CORPORATION, petitioner,

-versus-
THE HONORABLE COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, respondents.
This petition for review on certiorari presents the issue of whether or not the petitioner corporation is barred from
recovering the amount of P82,751.91 representing overpaid taxes for the taxable year 1981.
The petitioner corporation is a domestic corporation engaged in the business of real estate investment and
management consultancy.
On April 15, 1982, the petitioner corporation filed with the Bureau of Internal Revenue its annual corporate
income tax return for the calendar year ending December 31, 1981 reporting a net loss of P2,957,142.00 (Exhibits
"B", "B-1" to "B-10"). In the said return, the petitioner corporation declared as creditable all taxes withheld at
source by various withholding agents, as follows:
Withholding Agent Amount Withheld
a) Malayan Insurance Co., Inc. P1,429.97
(Exh. "C")
b) Angara Concepcion Regala
& Cruz Law Offices P73,588.00
(Exh. "D")
c) MJ Development Corp. P 1,155.00 (Exh. "E")
d) Philippine Global Communications,
Inc. (Exh. "F") 6,578.94
TOTAL P82,751.91
(CTA Decision, p. 4; Records, p. 10)
The withholding agents aforestated paid and remitted the above amounts representing taxes on rental, commission
and consultancy income of the petitioner corporation to the Bureau of Internal Revenue from February to
December 1981.
In a letter dated December 29, 1983 addressed to the respondent Commissioner of Internal Revenue (Exh. "G"),
the petitioner corporation filed a claim for refund inasmuch as it had no tax liability against which to credit the
amounts withheld.
Pending action of the respondent Commissioner on its claim for refund, the petitioner corporation, on April 13,
1984, filed a petition for review with the respondent Court of Tax Appeals (CTA) asking for the refund of the
amounts withheld as overpaid income taxes.
On January 27, 1988, the respondent CTA dismissed the petition for review after a finding that the two-year
period within which the petitioner corporation's claim for refund should have been filed had already prescribed
pursuant to Section 292 of the National Internal Revenue Code of 1977, as amended.
Acting on the petitioner corporation's motion for reconsideration, the respondent CTA in its resolution dated
September 27, 1988 denied the same for having been filed out of time. It ruled that the reckoning date for
purposes of counting the two-year prescriptive period within which the petitioner corporation could file a claim
for refund was December 31, 1981 when the taxes withheld at source were paid and remitted to the Bureau of
Internal Revenue by its withholding agents, not April 15, 1982, the date when the petitioner corporation filed its
final adjustment return.
On January 14, 1989, the petitioner corporation filed with us its petition for review which we referred to the
respondent appellate court in our resolution dated February 15, 1990 for proper determination and disposition.
On May 28, 1990, the respondent appellate court affirmed the decision of the respondent CTA opining that the
two-year prescriptive period in question commences "from the date of payment of the tax" as provided under
Section 292 of the Tax Code of 1977 (now Sec. 230 of the National Internal Revenue Code of 1986), i.e., "from
the end of the tax year when a taxpayer is deemed to have paid all taxes withheld at source", and not "from the
date of the filing of the income tax return" as posited by the petitioner corporation (CA Decision, pp. 3-5; Rollo,
pp. 27-29).
Its motion for reconsideration with the respondent appellate court having been denied in a resolution dated
November 20, 1990, the petitioner corporation (ACCRAIN) elevated this case to us presenting as main
arguments, to wit:
ACCRAIN'S JUDICIAL ACTION FOR RECOVERY OF CREDITABLE TAXES

ERRONEOUSLY WITHHELD AT SOURCE WAS FILED ON TIME.
II
THE RECKONING DATE FOR THE COMMENCEMENT OF THE TWO-YEAR

PRESCRIPTIVE PERIOD IS 15 APRIL 1982. ACCORDINGLY, THE 13 APRIL 1984
ACTION OFACCRAIN FOR THE RECOVERY OF TAXES ERRONEOUSLY WITHHELD
AT SOURCE IN 1981 IS NOT BARRED AND ACCRAIN IS ENTITLED TO THE REFUND
OF P82,751.91 OF SUCH TAXES. (Rollo, p. 116)
We find merit in the petitioner corporation's postures.
Crucial in our resolution of the instant case is the interpretation of the phraseology "from the date of payment of
the tax" in the context of Section 230 (formerly sec. 292) of the National Internal Revenue Code of 1986, as
amended, which provides that:
Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty
or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall begin after the expiration of two years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, that the Commissioner may, even without a written claim therefor, refund or
credit any tax, where on the face of the return upon which payment was made, such payment
appears to have been erroneously paid. (Emphasis supplied)
The respondent appellate court citing the case of Gibbs v. Commissioner of Internal Revenue (155 SCRA 318
[1965]), construed the phrase "from the date of payment" as to be reckoned from "the end of the tax year" when
the petitioner corporation was deemed to have paid its tax liabilities in question under the withholding tax system.
(CA Decision, pp. 4-5; Rollo, pp. 28-29)
The respondent appellate court in this case has misapplied jurisprudential law. In the Gibbs case, supra, cited by
the Court of Appeals, we have clearly stated that:
Payment is a mode of extinguishing obligations (Art. 1231, Civil Code) and it means not only the
delivery of money but also the performance, in any other manner, of an obligation (id., Art.
1231). A taxpayer, resident or non-resident, does so not really to deposit an amount to the
Commissioner of Internal Revenue, but, in truth, to perform and extinguish his tax obligation for
the year concerned. In other words, he is paying his tax liabilities for that year. Consequently, a
taxpayer whose income is withheld at source will be deemed to have paid his tax liability end of
the tax year. It is from twhen the same falls due at the his latter date then, or when thtwo-year
prescriptive period under Section 306 (now pae tax liability falls due, that the rt of Section 230)
of the Revenue Code starts to run with respect to payments effected through the withholding tax
system. ... (At p. 325; Emphasis supplied)
The aforequoted ruling presents two alternative reckoning dates, i.e., (1) the end of the tax year; and (2) when the
tax liability falls due. In the instant case, it is undisputed that the petitioner corporation's withholding agents had
paid the corresponding taxes withheld at source to the Bureau of Internal Revenue from February to December
1981. In having applied the first alternative date - "the end of the tax year" in order to determine whether or not
the petitioner corporation's claim for refund had been seasonably filed, the respondent appellate court failed to
appreciate properly the attending circumstances of this case.
The petitioner corporation is not claiming a refund of overpaid withholding taxes, per se. It is asking for the
recovery of the sum of P82,751.91.00, the refundable or creditable amount determined upon the petitioner
corporation's filing of the its final adjustment tax return on or before 15 April 1982 when its tax liability for the
year 1981 fell due. The distinction is essential in the resolution of this case for it spells the difference between
being barred by prescription and entitlement to a refund.
Under Section 49 of the National Internal Revenue Code of 1986, as amended, it is explicitly provided that:
Sec. 49. Payment and assessment of income tax for individuals and corporations.
(a) Payment of tax — (1) In general. —- The total amount of tax imposed by this Title shall be
paid by the person subject thereto at the time the return is filed. ...
Section 70, subparagraph (b) of the same Code states when the income tax return with respect to taxpayers like
the petitioner corporation must be filed. Thus:
Sec. 70 (b) Time of filing the income return - The corporate quarterly declaration shall be filed
within sixty (60) days following the close of each of the first three quarters of the taxable year.
The final adjustment return shall be filed on or before the 15th day of the 4th month following the
close of the fiscal year, as the case may be. The petitioner corporation's taxable year is on a
calendar year basis, hence, with respect to the 1981 taxable year, ACCRAIN had until 15 April
1982 within which to file its final adjustment return. The petitioner corporation duly complied
with this requirement. On the basis of the corporate income tax return which ACCRAIN filed on
15 April 1982, it reported a net loss of P2,957,142.00. Consequently, as reflected thereon, the
petitioner corporation, after due computation, had no tax liability for the year 1981. Had there
been any, payment thereof would have been due at the time the return was filed pursuant to
subparagraph (c) of the aforementioned codal provision which reads:
Sec. 70 (c) - Time payment of the income tax - The income tax due on the corporate quarterly
returns and the final income tax returns computed in accordance with Sections 68 and 69 shall be
paid at the time the declaration or return is filed asprescribed by the Commissioner of Internal
Revenue. If we were to uphold the respondent appellate court in making the "date of payment"
coincide with the "end of the taxable year," the petitioner corporation at the end of the 1981
taxable year was in no position then to determine whether it was liable or not for the payment of
its 1981 income tax.
Anent claims for refund, section 8 of Revenue Regulation No. 13-78 issued by the Bureau of Internal Revenue
requires that:
Section 8. Claims for tax credit or refund — Claims for tax credit or refund of income tax
deducted and withheld on income payments shall be given due course only when it is shown on
the return that the income payment received was declared as part of the gross income and the fact
of withholding is established by a copy of the statement, duly issued by the payor to the payee
(BIR Form No. 1743-A) showing the amount paid and the amount of tax withheld therefrom.
The term "return" in the case of domestic corporations like ACCRAIN refers to the final adjustment return as
mentioned in Section 69 of the Tax Code of 1986, as amended, which partly reads:
Sec. 69. Final Adjustment Return - Every corporation liable to tax under Section 24 shall file a
final adjustment return covering the total taxable income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the total
tax due on the entire taxable income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the respondent
Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask for a refund
must show in its final adjustment return the income it received from all sources and the amount of withholding
taxes remitted by its withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its
final adjustment return for its 1981 taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in the
case of Commissioner of Internal Revenue v. Asia Australia Express, Ltd. (G. R. No. 85956), we ruled that 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 adjusted final tax return. Hence, the petitioner corporation had until April 15, 1984 within which to
file its claim for refund. Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with
the respondent Commissioner who failed to take any action thereon and considering further that the non-
resolution of its claim for refund with the said Commissioner prompted ACCRAIN to reiterate its claim before the
Court of Tax Appeals through a petition for review on April 13, 1984, the respondent appellate court manifestly
committed a reversible error in affirming the holding of the tax court that ACCRAIN's claim for refund was
barred by prescription.
It bears emphasis at this point that the rationale in computing the two-year prescriptive period with respect to the
petitioner corporation's claim for refund from the time it filed its final adjustment return is the fact that it was only
then that ACCRAIN could ascertain whether it made profits or incurred losses in its business operations. The
"date of payment", therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its
final adjustment return on April 15, 1982.
WHEREFORE, in view of the foregoing, the petition is GRANTED. The decision of the Court of Appeals dated
May 28, 1990 and its resolution of November 20, 1990 are hereby REVERSED and SET ASIDE. The respondent
Commissioner of Internal Revenue is directed to refund to the petitioner corporation the amount of P82,751.91.
SO ORDERED.
G.R. No. 78953 July 31, 1991

-versus-
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his
income tax return that a sum of money that he erroneously received and already spent is the subject of a pending
litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated July
27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben
B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion of the 50%
surcharge from Javier's deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and
incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent
herein), received from the Prudential Bank and Trust Company in Pasay City the amount of
US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in the United
States, among which is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First
Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the
petitioner (private respondent herein), his wife and other defendants, claiming that its remittance
of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only, and praying
that the excess amount of US$999,000.00 be returned on the ground that the defendants are
trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate, and
continuing duty to return the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the
then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private
respondent herein) and his wife with the crime of estafa, alleging that they misappropriated,
misapplied, and converted to their own personal use and benefit the amount of US$999,000.00
which they received under an implied trust for the benefit of Mellon Bank and as a result of the
mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return
for the taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88
and stating in the footnote of the return that "Taxpayer was recipient of some money received
from abroad which he presumed to be a gift but turned out to be an error and is now subject of
litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a
letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together with
income assessment notices for the years 1976 and 1977, demanding that petitioner (private
respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of
Internal Revenue that he was paying the deficiency income assessment for the year 1976 but
denying that he had any undeclared income for the year 1977 and requested that the assessment
for 1977 be made to await final court decision on the case filed against him for filing an allegedly
fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to
his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance
which you were able to dispose, is definitely taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding
portion:
We note that in the deficiency income tax assessment under consideration, respondent (petitioner
here) further requested petitioner (private respondent here) to pay 50% surcharge as provided for
in Section 72 of the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and
interest due thereon. Since petitioner (private respondent) filed his income tax return for taxable
year 1977, the 50% surcharge was imposed, in all probability, by respondent (petitioner) because
he considered the return filed false or fraudulent. This additional requirement, to our mind, is
much less called for because petitioner (private respondent), as stated earlier, reflected in as 1977
return as footnote that "Taxpayer was recipient of some money received from abroad which he
presumed to be gift but turned out to be an error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of deception
willfully and deliberately done or resorted to by petitioner (private respondent) in order to induce
the Government to give up some legal right, or the latter, due to a false return, was placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities. (Aznar
vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519), because petitioner
literally "laid his cards on the table" for respondent to examine. Error or mistake of fact or law is
not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too
plain and simple to understand. Since the question involved in this case is of first impression in
this jurisdiction, under the circumstances, the 50% surcharge imposed in the deficiency
assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to us,
by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which held
him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he submitted
in the same memorandum "that the issue may be raised in the case not for the purpose of correcting or setting
aside the decision which held him liable for deficiency income tax, but only to show that there is no basis for the
imposition of the surcharge." This subsequent disavowal therefore renders moot and academic the posturings
articulated in as Comment 10 on the non-taxability of the amount he erroneously received and the bulk of which he
had already disbursed. In any event, an appeal at that time (of the filing of the Comments) would have been
already too late to be seasonable. The petitioner, through the office of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is self-
convinced, and so acted, that he is the beneficial owner, and of which reason is liable to tax. Put
another way, the studied insinuation that private respondent may not be the beneficial owner of
the money or income flowing to him as enhanced by the studied claim that the amount is "subject
of litigation" is belied by the record and clearly exposed as a fraudulent ploy, as witness what
transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for
the amount of private respondent's wife was $999,000.00 after opening a dollar account with
Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste and
dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14, 1977,
effected a total massive withdrawal from the said dollar account in the sum of $975,000.00 or
P7,020,000.00. . . . 11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not declaring the
"mistaken remittance" in his income tax return and by merely making a footnote thereon which
read: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation." It is respectfully submitted that the said
return was not fraudulent. The footnote was practically an invitation to the petitioner to make an
investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F
[2d] 782), that is, it must be stronger than the "mere preponderance of evidence" which would be
sufficient to sustain a judgment on the issue of correctness of the deficiency itself apart from the
fraud penalty. (Frank A. Neddas, 40 BTA 672). The following circumstances attendant to the case
at bar show that in filing the questioned return, the private respondent was guided, not by that
"willful and deliberate intent to prevent the Government from making a proper assessment"
which constitute fraud, but by an honest doubt as to whether or not the "mistaken remittance" was
subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case"
was given very, very wide publicity by media; and only one who is not in his right mind would
have entertained the idea that the BIR would not make an assessment if the amount in question
was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression in
this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the
authorities are not unanimous in holding that similar receipts are subject to the income tax. It
should be noted that the decision in the Rutkin case is a five-to-four decision; and in the very case
before this Honorable Court, one out of three Judges of the respondent Court was of the opinion
that the amount in question is not taxable. Thus, even without the footnote, the failure to declare
the "mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being
sued by the Mellon Bank for the return of the money, and was being prosecuted by the
Government for estafa committed allegedly by his failure to return the money and by converting
it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and
could not have been paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his income tax return that the amount
received was still under litigation. If he had paid the tax, would that not constitute estafa for using
the funds for his own personal benefit? and would the Government refund it to him if the courts
ordered him to refund the money to the Mellon Bank? 12
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a
taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the
deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity or
fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the
return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return
filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be
a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law"
not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally
"laid his cards on the table." 13
14
In Aznar v. Court of Tax Appeals, fraud in relation to the filing of income tax return was discussed in this
manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce another to
give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with
intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the
sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as
fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the assessment, respectively, under the
inventory method of determining tax liability, it would be unfair to treat the mistakes of the
petitioner as tainted with fraud and those of the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create
only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be,
Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government
was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents
from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not
fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable.
Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be
guilty of swindling charges, perhaps even for greed by spending most of the money he received, but the records
lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of
money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be
deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED.
No costs.
SO ORDERED.
G.R. No. L-17509 January 30, 1970
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

-versus-
CARLOS LEDESMA, JULIETA LEDESMA, VICENTE GUSTILO. JR. and AMPARO LEDESMA DE
GUSTILO, respondents.
Appeal by petitioner Commissioner of Internal Revenue — hereinafter referred to as Commissioner — from the
decision of the Court of Tax Appeals, in its CTA Case No. 226, declaring as not in accordance with law the
assessment of corporate income tax made by said Commissioner in the sum of P15,777.26 on the income of the
co-partnership named "Hacienda Fortuna" during the period from January 1 to July 13, 1949, of which co-
partnership herein respondents Carlos Ledesma, Julieta Ledesma, Amparo Ledesma de Gustilo and Vicente
Gustilo, Jr. are its members.1 The undisputed facts, as shown in the record, are as follows:
On July 9, 1949 herein respondents, Carlos Ledesma, Julieta Ledesma and the spouses Amparo Ledesma and
Vicente Gustilo, Jr., purchased from their parents, Julio Ledesma and Florentina de Ledesma, the sugar plantation
known as "Hacienda Fortuna," consisting of 36 parcels of land, situated in the municipality of San Carlos,
province of Negros Occidental, with an area of approximately 1,202 hectares and with a sugar quota of 79,211.17
piculs, which sugar quota was included in the sale. By virtue of the purchase, Carlos Ledesma acquired the one-
third undivided portion of the plantation for the price of P144,043.00; Julieta Ledesma acquired another one-third
undivided portion of the plantation for the same price; and respondents Amparo Ledesma de Gustilo and Vicente
Gustilo, Jr. acquired the remaining one-third undivided portion also for the same price. Prior to the purchase, the
sugar quota of 79,211.17 piculs was registered in the names of the vendors, Julio Ledesma and Florentina de
Ledesma, under Plantation Audit No. 38-101 of the milling district of San Carlos Milling Co., Ltd. By virtue of
the purchase Plantation Audit No. 58-101 was cancelled, and during the sugar crop year 1948-1949 the said sugar
quota of 79,211.17 piculs was transferred to, apportioned among, and separately registered in the names of, the
respondents, as follows: one-third to Vicente Gustilo, Jr. and Amparo Ledesma de Gustilo, under Plantation Audit
No. 38-246; one-third to Carlos Ledesma, under Plantation Audit No. 38-247; and one-third to Julieta Ledesma
under Plantation Audit No. 38248.
After their purchase of the plantation, herein respondents took over the sugar cane farming on the plantation
beginning with the crop year 1948-1949. For the crop year 1948- 1949 the San Carlos Milling Co., Ltd. credited
the respondents with their shares in the gross sugar production, as follows:
Gross Production:
Amparo Ledesma and

Vicente Gustilo, Jr. 21,308.30 piculs
Carlos Ledesma 21,308.30 "
Julieta Ledesma 21,308.30 "

TOTAL 63,924.90 piculs
Planters' Share:
Amparo Ledesma and

Vicente Gustilo, Jr. 13,317.70 piculs
Carlos Ledesma 13,317.70 "
Julieta Ledesma 13,317.70 "

TOTAL 39,953.10 piculs
The respondents shared equally the expenses of production, on the basis of their respective one-third undivided
portions of the plantation. The San Carlos Milling Co., Ltd. issued to respondents separate quedans for the sugar
produced, based on the quota under the plantation audits respectively issued to them. In their individual income
tax returns for the year 1949 the respondents included as part of their income their respective net profits derived
from their individual sugar production from the "Hacienda Fortuna," as herein-above stated.
On July 11, 1949, the respondents organized themselves into a general co-partnership under the firm name
"Hacienda Fortuna", for the "production of sugar cane for conversion into sugar, palay and corn and such other
products as may profitably be produced on said hacienda, which products shall be sold or otherwise disposed of
for the purpose of realizing profit for the partnership." 2 The articles of general co-partnership were registered in
the commercial register of the office of the Register of Deeds in Bacolod City, Negros Occidental, on July 14,
1949. Paragraph 14 of the articles of general partnership provides that the agreement shall have retroactive effect
as of January 1, 1949.
On March 22, 1959 the Commissioner assessed against the partnership "Hacienda Fortuna" corporate income tax
for the calendar year 1949, under Section 24 of the National Internal Revenue Code, in the sum of P23,704.22.
The respondents contested the assessment upon the ground that the "Hacienda Fortuna" was a registered general
co-partnership and requested for the cancellation of the assessment. In a letter, dated March 12, 1955, the
Commissioner advised respondents that inasmuch as the articles of general co-partnership of the "Hacienda
Fortuna" were registered on July 14, 1949, the income realized by the partnership prior to the registration cannot
be, exempt from the payment of corporate income tax. In a letter, also dated March 12, 1955, the Commissioner
instructed the provincial revenue agent of Negros Occidental to investigate the income of "Hacienda Fortuna" for
the period from January 1, 1959 to July 13, 1949, being the portion of the year 1949 which was prior to July 14,
1949, the date of the registration of the articles of general co-partnership of "Hacienda Fortuna." The provincial
revenue agent reported that during the period from January 1, 1959 to July 13, 1949 the "Hacienda Fortuna" had a
net profit amounting to P131,477.20, and that the income tax due on said net profit, at the rate of 12%, was
P15,777.26. It thus resulted that the original assessment of P23,704.22, as corporate income tax on the income for
the entire calendar year 1949, was reduced to P15,777.26 after deducting the corporate income tax due on the net
profits derived by the "Hacienda Fortuna" for the period from July 14 to December 31, 1949, based on the theory
that the co-partnership "Hacienda Fortuna" was exempt from the payment of corporate income tax on its income
from the day its articles of general co-partnership were registered in the mercantile registry. Herein respondents
accepted the correctness of the figures contained in the report of the provincial revenue agent, but denied their
liability to pay the corporate income tax of P15,777.26 assessed against the "Hacienda Fortuna" as a general co-
partnership.
On April 2, 1955 the respondents, through counsel, wrote a letter to the Commissioner asking for the
reconsideration of his ruling of March 12, 1955, upon the ground that during the period from January 1 to July 13,
1949 the respondents were operating merely as co-owners of the plantation known as "Hacienda Fortuna", so that
the case of the "Hacienda Fortuna" was really one of co-ownership and not that of an unregistered co-partnership
which was subject to corporate tax. That request for reconsideration was denied by the Commissioner on October
25, 1955. The respondents filed a second request for reconsideration, dated November 4, 1955, but the
Commissioner in a letter dated December 6, 1955, which was received by respondents on December 20, 1955,
denied said second request for reconsideration. Thereupon, respondents, on January 3, 1956, filed a petition for
review with the Court of Tax Appeals, by way of an appeal from the ruling of the Commissioner of March 12,
1955 and from the denial of the requests for reconsideration of said ruling. The case was docketed in the Court of
Tax Appeals as CTA Case No. 226.
In the meantime, on March 22, 1955, exactly 5 years from and after the date of the assessment on March 22,
1950, and before the expiration of the thirty-day period within which the respondents could ask for a
reconsideration of the ruling of the Commissioner of March 12, 1955, or appeal to the Court of Tax Appeals, the
Provincial Fiscal of Negros Occidental, upon the request of the Commissioner, filed a complaint against herein
respondents for the collection of the alleged income tax assessed against the "Hacienda Fortuna." The said action,
entitled "The Collector of Internal Revenue vs. Carlos Ledesma, Julieta Ledesma, Vicente Gustilo, Jr. and
Amparo Ledesma de Gustilo" was docketed in the Court of First Instance of Negros Occidental as Civil Case No.
3373.
It happened, therefore, that before respondents could bring the case on appeal to the Court of Tax Appeals a
complaint for the Collection of the alleged income tax due on the "Hacienda Fortuna" was filed against them in
the Court of First Instance of Negros Occidental. Upon motion of the Commissioner, in CTA Case No. 226, the
Court of Tax Appeals, on July 31, 1956, dismissed the petition for review upon the ground that the Court of First
Instance of Negros Occidental had already acquired jurisdiction over the controverted assessment prior to the
institution of the appeal, and the judgment in Civil Case No. 3373 of the Court of First Instance of Negros
Occidental would constitute res adjudicata between the same parties. Herein respondents filed in the Supreme
Court a petition for mandamus to compel the Court of Tax Appeals to annul the resolution of July 31, 1956
dismissing the petition in CTA Case No. 226 and to proceed with the case. The Supreme Court set aside the
resolution of the Court of Tax Appeals of July 31, 1956 and directed said court to proceed with the determination
of the appeal of herein respondents in CTA Case No. 226. 3 This Court held that the Court of Tax Appeals had
exclusive jurisdiction over the disputed assessment, to the exclusion of the Court of First Instance of Negros
Occidental. Subsequently, the Court of First Instance of Negros Occidental dismissed Civil Case No. 3373.
After the dismissal of Civil Case No. 3373 of the Court of First Instance of Negros Occidental, and before the
hearing of CTA Case No. 226 in the Court of Tax Appeals, herein respondents filed a supplement petition for
review alleging, as an additional ground for appeal, that the action of the Government to collect the tax assessed
against the "Hacienda Fortuna" had prescribed. During the hearing before the Court of Tax Appeals, the parties
submitted a stipulation of facts and their respective documentary evidence.
Two issues were raised before the Court of Tax Appeals, to wit: (1) whether or not the right of the Government to
collect the income tax against the "Hacienda Fortune" as an unregistered general co-partnership for the year 1949,
had prescribed; and (2) whether or not the income tax in question was validly assessed against the "Hacienda
Fortuna."
The Court of Tax Appeals, on August 15, 1960, rendered a decision, declaring that the right of the Government to
collect the income tax in question had not prescribed, but holding that the assessment of the corporate income tax
against the "Hacienda Fortuna" is not in accordance with law. The Court of Tax Appeals, therefore, reversed the
rulings of the Commissioner of Internal Revenue, appealed from.
Herein respondents did not appeal from the decision of the Court of Tax Appeals, but in the brief that they filed
before this Court, as appellees, they claim that the Court of Tax Appeals erred in holding that prior to the
execution of the articles of general co-partnership on July 11, 1949 the respondents had operated the "Hacienda
Fortuna" as a general partnership; and that the Court of Tax Appeals erred in not holding that the right of the
Government to collect the income tax in question had prescribed. In this connection, suffice it to say that the
conclusion of the Court of Tax Appeals that the respondents operated the "Hacienda Fortuna" as a partnership
prior to the execution of the articles of general co-partnership is based on findings of fact, and We find no reason
in the record to disturb the findings of the tax court on this matter. On the contrary, the intention of the
respondents to operate the "Hacienda Fortuna" as a partnership, before July 11, 1949, is clearly shown in
paragraph 14 of the articles of general co-partnership which provides that the partnership agreement "shall be
retroactive as of January 1, 1949." We also find no merit in the contention of the respondents that the Court of
Tax Appeals erred in not holding that the right of the Government to collect the income tax in question had
prescribed.
We shall now occupy ourselves with the errors assigned by the Commissioner, as follows:
(1) The Court of Tax Appeals erred in holding that herein respondents, as partners of the general
co-partnership "Hacienda Fortuna", are not subject to corporate income tax prior to its registration
or for the period from January 1 to July 13, 1949.
(2) The Court of Tax Appeals erred in holding that the registration of the articles or general co-
partnership of the "Hacienda Fortuna" on July 14, 1949 operated to exempt said partnership from
the corporate income tax for the year 1949 and not only for the period from July 14, 1949 to
December 31, 1949.
The Solicitor General, as counsel for the Commissioner, considers these two assigned errors as interrelated and
discusses them together.
The sole question to be decided in this appeal is whether or not the partnership known as "Hacienda Fortuna"
which was organized by respondents on July 11, 1949, whose articles of general partnership provided that the
partnership agreement should retroact as of January 1, 1949, and which articles of general co-partnership were
registered on July 14, 1949, should pay corporate income tax as an unregistered partnership on its net income
received during the period from January 1, 1949 to July 13, 1949, the period in the year 1949 prior to the date of
said registration.
The provision of law that is relevant to this question is, that portion of Section 24 of the National Internal
Revenue Code which reads as follows:
Sec. 24. Rate of tax on corporation. — (a) Tax on domestic corporations. — In general, there
shall be levied, collected, and paid annually upon the total net income received in the preceding
taxable year from all sources by every corporation organized in, or existing under the laws of, the
Philippines, no matter how created or organized, but not including duly registered general co-
partnerships (compañias colectivas), domestic life insurance companies and foreign life
insurance companies doing business in the Philippines, a tax upon such income equal to the sum
of the following: (Italics supplied.).
xxx xxx xxx
It is the contention of the Commissioner that it is only from the date of the registration of the articles of general
co- partnership in the mercantile register when a co-partnership is exempt from the payment of corporate income
tax under Section 24 of the Tax Code. It is the position of the Commissioner, in the present case, that the
partnership known as "Hacienda Fortuna" is exempt from the payment of corporate income tax due only on
income received from July 14, 1949, the date of the registration of its articles of general co-partnership. In other
words, from January 1 to July 13, 1949 the partnership "Hacienda Fortune" should be considered still an
unregistered co-partnership for the purposes of the assessment of the corporate income tax, notwithstanding the
fact that paragraph 14 of its articles of co-partnership provides that the partnership agreement should retroact to
January 1, 1949. Thus, as stated at the earlier part of this decision, the Commissioner instructed the provincial
revenue agent in Negros Occidental to determine the net income of the "Hacienda Fortuna" for the period from
January 1 to July 13, 1949, said agent having reported that the net income of the partnership during that period
amounted to P131,477.20, and that the corporate income tax due on that net income was P15,777.26. It is this
amount of P15,777.26 which the Commissioner insists in collecting from the respondents.
On the other hand, the respondents contend that prior to July 14, 1949 they were operating the sugar plantation
that they bought from their parents under a system of co-ownership, and not as a partnership, so that they were not
under obligation to pay the corporate income tax assessed by the Commissioner on the alleged income of the
partnership "Hacienda Fortuna" from January 1 to July 13, 1949. The respondents further contend that even
assuming that they were operating the sugar plantation as a partnership the registration of the articles of general
co-partnership on July 14, 1949 had operated to exempt said partnership from corporate income tax on its net
income during the entire taxable year, from January 1 to December 31, 1949.
The Court of Tax Appeals made a finding that the respondents had actually operated the "Hacienda Fortuna" as a
general partnership from January 1, 1949, and that when its articles of general partnership were registered on July
14, 1949 that registration had the effect of giving the partnership the status of a registered co-partnership which
places it under the purview of Section 24 of the Tax Code as exempt from the payment of corporate income tax
during the entire taxable year of 1949. The pertinent portion of the decision of the Court of Tax Appeals reads as
follows:
Although petitioners acquired undivided shares in the Hacienda Fortuna, from the evidence of
record it appears to us that the intention of the parties was to form, and that they did operate the
hacienda as, a general partnership. That this was their intention is confirmed by the fact that they
actually organized a general co-partnership on July 11, 1949. And the Articles of General Co-
partnership which was registered on July 14, 1949 provides that the agreement shall be
retroactive as of January 1, 1949. The sole question to be decided is, therefore, whether the
partnership is entitled to exemption for the entire year of 1949, or whether it is taxable as an
unregistered partnership before its articles of partnership was actually registered.
Section 24 of the Revenue Code imposes an income tax on corporations. The term "corporation"
includes unregistered general co-partnerships. (See. 84 [b]). Section 26 provides that persons
carrying on business in general co-partnership duly registered in the mercantile registry shall be
liable for income tax only in their individual capacity. There is no specific provision of law or
regulations as to the date of commencement of the exemption of a registered general co-
partnership. We find, however, that the Bureau of Internal Revenue as far back as 1924, issued a
ruling which was published in the Official Gazette to the effect that 'the status or form of
organization of a partnership at the end of the taxable year will determine its income tax liability
for that year.' We quote:
A & S Co. had been paying income tax for years as non-registered partnership.
On July, 1922, it registered its partnership agreement. Should it file a return for
the period from January to July of the year of its registration ?
HELD: That it need not do so. For purposes of the Income Tax Law, the status or
form of organization of a partnership at the end of the taxable year will determine
its income tax liability for that year. (September 4, 1924.)' (Ruling No. 30, 22
O.G. 3451.) 4
Ruling No. 30 of the Bureau of Internal Revenue, dated September 4, 1924, does not appear to
have been revoked or even revised or amended. In fact, the same opinion was reiterated in a
ruling dated November 4, 1948. Again, we quote:
In answer to your letter dated October 15, 1948, requesting opinion whether or
not a commercial partnership, intended to be registered as evidenced by the
partnership agreement formally executed by the parties at the time it commenced
to do business, but which was not registered until after the lapse of several
months, should be required to file two (2) separate returns — one corresponding
to the unregistered period and another for the period after its registration, you are
informed that, if a general partnership registers its articles of partnership within
the same taxable year, which may either be calendar or fiscal year, in which it
commenced business, it is required to file only one income tax return covering its
income for the period from the date of its business operation to the end of the
taxable year. However, where the registration takes place after the end of the
taxable year in which the partnership commenced business, separate returns
should be filed, one corresponding to the taxable year in which the partnership
did business as an unregistered partnership, and another covering the taxable year
in which it operated as a registered partnership. (B. I. R. ruling, dated November
5, 1948, contained in a letter addressed to Provincial Examiner Amante
Astudillo, Surigao, Surigao.)
The rule enunciated above that the status of a general partnership as a registered or unregistered
general co-partnership at the end of the taxable year determines its liability or exemption from
income tax for the entire taxable year is a sound rule. It does not run counter to any specific
provision of law or regulation. On the other hand, it appears to us to be in harmony with the intent
and purpose of the law to grant exemption to registered general co-partnership and to tax the
partners only in their individual capacity. We note that when the attention of respondent was
called to the existence of the Bureau's ruling of November 5, 1948, he merely stated that he was
not inclined to reconsider his decision and would prefer 'to have a judicial pronouncement on the
matter.' (See p. 222, B.I.R. records.)
Moreover, the old Income Tax Law (Act No. 2833, as amended) contained the same provisions
regarding the exemption from income tax of registered general co-partnerships as the present law.
The practice of the Bureau of Internal Revenue exempting general co-partnerships from income
tax for the entire year so long as it was registered within that year continued to be the prevailing
rule in 1939, when the National Internal Revenue Code, Commonwealth Act No. 466, was
enacted. The law governing general co-partnership contained in the old law was merely reenacted
in the new Code. It is reasonable to suppose that a long standing administrative practice, if
contrary to the intention of the legislature, would be specifically corrected by it. (1 USTC, Par.
259; see also 1 USTC, Par. 293). That Congress merely reenacted the old law in the face of the
long continued practice of the Bureau of Internal Revenue which it published in the Official
Gazette is a strong indication that such practice has received congressional approval. We find no
justification to deviate from the rule.
We are in accord with the views expressed by the Court of Tax Appeals in the afore-quoted portion of its
decision. The Bureau of Internal Revenue, in the exercise of its powers relative to the collection of internal
revenue taxes, fees and charges, may make, and has in fact issued, administrative rules and rulings in connection
with the enforcement of the provisions of the National Internal Revenue Code. There are rulings of the Bureau of
Internal Revenue where the "status-at-the-end-of-the-taxable-year" rule has been applied in determining the
taxpayer's income tax liability during the taxable year. In the book, "Rules and Rulings on the Philippine Income
Tax", a compilation by Francisco Tantuico, Sr. and Francisco Tantuico Jr. of the rulings of the Bureau of Internal
Revenue, We read:5
A child born or adopted during the first fifteen days of October, if wholly dependent upon the
head of the family for support on December 31 of the year, entitles the latter to an additional
exemption of P600.00 (amount amended) in accordance with subsections (c) and (d) of section 23
of the National Internal Revenue Code (Ruling of February 8, 1952). [p. 65]
A child who becomes 21 years of age during the last 15 days of June, unless incapable of support
for being mentally or physically defective, does not entitle his parents to any additional
exemption (Rule of February 8, 1952). [pages 65-66]
A father is entitled to P600.00 (amount amended) additional exemption for his child born on
December 31 of the taxable year, but not for a child who became of age on September 15, unless
the latter is incapable of self-support because he is physically or mentally defective. (Ruling of
July 29, 1948). [page 66]
A person who married during the first fifteen days of July, if not legally separated from his
spouse on December 31 of that year is granted the full exemption of P3,000 for said year. (Ruling
of February 8, 1952). [page 58]
Under Section 23 of the National Internal Revenue Code, as amended by Republic Act 590, a
person who marries on December 31 is entitled to the full exemption of P3,000.00 for said
calendar year; and a child born or Legally adopted on December 31, wholly dependent upon the
taxpayer can be claimed as an additional exemption of P600 (amount amended) for the said year.
(BIR Ruling of June 19, 1952, p. 58). [page 58]
The Court of Tax Appeals, in its decision, has pointed out that as early as 1924 the Bureau of Internal Revenue
had applied the "status-at-the-end-of-the-taxable-year" rule in determining the income tax liability of a
partnership, such that a partnership is considered a registered partnership for the entire taxable year even if its
articles of co-partnership are registered only at the middle of the taxable year, or in the last month of the taxable
year. We agree with the Court of Tax Appeals that the ruling is a sound one, and it is in consonance with the
purpose of the law in requiring the registration of partnerships. The policy of the law is to encourage persons
doing business under a partnership agreement to have the partnership agreement, or the articles of partnership,
registered in the mercantile registry, so that the public may know who the real partners of the partnership are, the
capital stock of the partnership, the interest or contribution of each partner in the capital stock, the proportionate
share of each partner in the profits, and the earnings or salaries of the partner or partners who render service for
the partnership.6 It is precisely in the share of the profits and the salaries or wages that the partners would receive
that the government is interested in, because it is on these incomes that the assessment of the income tax is based.
It can happen that the profits realized by an unregistered partnership may be distributed to other persons in
addition to those who appear to the public as the partners. The government may not be able to trace exactly to
whom the profits of an unregistered partnership go, nor can the government determine the precise participation of
the apparent partners in the profits of the partnership. It is for this reason that the government imposes a corporate
income tax against an unregistered partnership as an entity, and an individual income tax against the apparent
members thereof. But once the partnership is duly registered, the names of all the partners are known, the
proportional interest of the partners in the business of the partnership is known, and the government can very well
assess the income tax on the respective income of the partners whose names appear in the articles of co-
partnership. Once the partnership is registered its operation during the taxable year may be ascertained in all
matters regarding its management, its expenditures, its earnings, and the participation of the partners in the net
profits. If it can be ascertained that the profits of the partnership have actually been given, or credited, to the
partners, then there is no reason why the partnership should be made to pay a corporate income tax on the profits
realized by the partnership, and at the same time assess an income tax on the income that the partners had
received from the partnership. And so, We believe that it is a fair and sound application of Section 24 of the tax
code that once a partnership is registered during a taxable year that partnership should be considered as registered
"partnership exempt from the payment of corporate income tax during that taxable year, and only the partners
thereof should be made to pay income tax on the profits of the partnership that were divided among them. Section
26 of the tax code provides as follows:
SEC. 26 — Tax liability of members of duly registered co-partnership.—Persons carrying on

business in general co-partnership (compañia colectiva) duly registered in the mercantile registry,
or those exercising a common profession in general partnership, shall be liable for income tax
only in their individual capacity, and the share in the profits of the registered general co-
partnership (compañia colectiva) or in the general professional partnership to which any taxable
partner should be entitled, whether distributed or otherwise shall be returned for taxation and the
tax paid in accordance with the provisions of this title.
It may thus be said that a premium is given to a partnership that is registered by exempting it from the payment of
corporate income tax, and making only the individual partners pay income tax on the basis of their respective
shares in the partnership profits. On the other hand, the partnership that is not registered is being penalized by
making it pay corporate income tax on the profits it realizes during a taxable year and at the same time making the
partners thereof pay their individual income tax based on their respective shares in the profits of the partnership.
In other words, there is double assessment of income tax against the partners of the unregistered partnership, but
only one assessment against the partners of registered partnership.
The exclusion of a registered partnership from the entities subject to the payment of corporate income tax under
Section 24 of the tax code should be made to cover the entire taxable year, regardless of whether the registration
takes place at the middle, or towards the last days, of the taxable year. This is so because, after all, the taxable
status of the taxpayer, for the purposes of the payment of income tax, is determined as of the end of the taxable
year, and the income tax is collected after the end of the taxable year. Since it is the policy of the government to
encourage a partnership to register its articles of co-partnership in order that the government can better ascertain
the profits of the partnership and the distribution of said profits among the partner, this benefit of exclusion from
paying corporate income tax arising from registration should be liberally extended to registered, or registering,
partnerships in order that the purpose of the government may be attained. The provision of Section 24 of the tax
code excluding "registered general co-partnership" from the payment of corporate income tax is not an exemption
clause but a classification clause which must be construed liberally in favor of the taxpayer.
A classification statute, or one which specifies the persons or property subject and not subject to a
tax, is not an exemption statute and the general rule ... that a tax statute will be construed in favor
of the taxpayer applies. (84 C.J.S., Section 277, page 443)
Any doubt as to the person or property intended to be included in a tax statute will be resolved in
favor of the taxpayer. (51 Am. Jur., Section 409, page 433).
Once the articles of partnership are registered, the collecting agents of the government can very well trace the
operations of the partnership during the period of the taxable year prior to the date of registration — that is, if the
partnership had operated as an unregistered partnership prior to the date of its registration, and require the partners
to declare the true income that they derived from the operations of the partnership during the period prior to the
date of registration and after the date of registration.
We hold that the administrative construction of Section 24 of the tax code made by the Bureau of Internal
Revenue as early as 1924, reiterated in 1948, as pointed out by the Court of Tax Appeals, being of long standing,
not shown to be contrary to law, and not having been modified up to the time when the case at bar came up,
should be upheld. Considering that most of our tax laws are patterned after the tax laws of the United States of
America, the following authority is pertinent:
Considerable weight is given to the Treasury Department's administrative construction of a tax

provision and to its regulations. The Supreme Court at one time said: 'Treasury regulations and
interpretations long continued without substantial change, applied to unamended or substantially
re-enacted statutes are deemed to have received congressional approval and have the effect of law
...
Treasury Department rules and regulations will not be disturbed except for cogent reasons or
unless contrary to the statute or exceeding departmental authority, and they are binding on the
Commissioner and taxpayer alike. When a particular construction has been operative over a long
period and has acquired the sanction of usage it is entitled to "respectful consideration" specially
if rights have been adjusted and determined by it for many years, as a change may result in
inequitable treatment of similarly situated taxpayers and may occur after many persons have
acted upon the faith of the regulation. The rule is also, perhaps, particularly applicable where a
change in the administrative construction would produce great administrative inconvenience or
irregularity. Particular weight will be given to an administrative construction where much latitude
for discretion has been given to the Treasury. Where the basic provision of the Code is couched
in general language an interpretative regulation is appropriate. Where the statutory provision is
ambiguous the Supreme Court has sustained the administrative construction particularly where
the Congress did not interfere with the interpretation claimed by the administrative agency. ("The
Law of Federal Income Taxation" by Jacob Mertens, Jr., Volume 1, 1962 Revision, Section 320,
pages 32-35).
WHEREFORE, the decision of the Court of Tax Appeals appealed from is affirmed. No pronouncement as to
costs. It is so ordered.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters, petitioners
-versus-
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had
acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and
963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for
P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show
that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the
sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an
income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud
surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full
(not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating
P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their
profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs.
Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil
Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the
profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation
and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider
them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were
not engaged in any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build
their residences on the lots because of the high cost of construction, then they had no choice but to resell the same
to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-
ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Castan
Tobeñas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la
sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y
existe ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es
obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun y
favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en

nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica
señala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la
sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol,
Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any property from
which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide
the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an
unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in
Oña vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.—We find that the case at bar is fundamentally
similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda'
in question pro-indiviso from their deceased parents; they did not contribute or invest additional '
capital to increase or expand the inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears; they individually reported in their
tax returns their corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as conceded by respondent, 'to
preserve its (the 'hacienda') value and to continue the existing contractual relations with the
Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31,
1963).
All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties
which produce income should not automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would
be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does
not produce an income at all, it is not subject to any kind of income tax, whether the income tax
on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738,
September 11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement
the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for
themselves, it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of the building to an administrator and divided equally
the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three
Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals
therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots
to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this
matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.
SO ORDERED.
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B.
OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
-versus-
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,
holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of
the deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for
the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from
December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said court denying
petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and
her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949,
the administrator submitted the project of partition, which was approved by the Court on May 16,
1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was approved, Lorenzo T. Oña,
their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of
First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the
Court appointed him guardian of the persons and property of the aforenamed minors (See p. 3,
BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00,
six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected
from the War Damage Commission. Later, they received from said Commission the amount of
P50,000.00, more or less. This amount was not divided among them but was used in the
rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land
aforementioned, two were acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR
rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter
with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and investments gradually increased
from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:
Y Invest Lan Bui

e ment d ldin
a g
r
Acco Ac Acc
unt cou oun
nt t
1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from installment
sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of
Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of
account kept by Lorenzo T. Oña where the corresponding shares of the petitioners in the net
income for the year are also known. Every year, petitioners returned for income tax purposes their
shares in the net income derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive
their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in
the hands of Lorenzo T. Oña who, as heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for
1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership. Finding no merit in petitioners'
request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling
of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6,
1958, so that the questioned assessment refers solely to the income tax proper for the years 1955
and 1956 and the "Compromise for non-filing," the latter item obviously referring to the
compromise in lieu of the criminal liability for failure of petitioners to file the corporate income
tax returns for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED

PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY
THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON
AND THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS
COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE

COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS
PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON,
FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court
of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the
deceased Julia Buñales and the profits derived from transactions involving the same, or, must they be deemed to
have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal
Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in the sense
that they invested as a common fund the profits earned by the properties owned by them in common and the loans
granted to them upon the security of the said properties, with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should be considered as that of co-owners and not of the
unregistered partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not
the various amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their
respective shares of the profits accruing from the properties they owned in common be deducted from the
deficiency corporate taxes, herein involved, assessed against such unregistered partnership by the respondent
Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in
interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance
since those dates admittedly under the administration or management of the head of the family, the widower and
father Lorenzo T. Oña, the assessment in question refers to the later years 1955 and 1956. We believe this point to
be important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least, there is nothing in the record indicating
that an earlier assessment had already been made. Such being the case, and We see no reason how it could be
otherwise, it is easily understandable why petitioners' position that they are co-owners and not unregistered co-
partners, for the purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should find
comfort in the fact that they were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to
the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who
used said properties in business by leasing or selling them and investing the income derived therefrom and the
proceed from the sales thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in
1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956. And all these became possible because, admittedly, petitioners never actually received any
share of the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said shares as
part of the common fund for their ventures, even as they paid the corresponding income taxes on the basis of their
respective shares of the profits of their common business as reported by the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding
the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the
said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T.
Oña, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures
were divided among petitioners proportionately in accordance with their respective shares in the inheritance. In
these circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes
from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo
T. Oña as a common fund in undertaking several transactions or in business, with the intention of deriving profit
to be shared by them proportionally, such act was tantamonut to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-mentioned
provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-
owners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned.
Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to
all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily
follow that such status as co-owners continues until the inheritance is actually and physically distributed among
the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide
to continue holding said shares under the common management of the administrator or executor or of anyone
chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest
thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National
Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not something
they found already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly
far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not
actually divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-
ownership of inherited properties is automatically converted into an unregistered partnership the moment the said
common properties and/or the incomes derived therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled
already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common
with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The
sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are derived," and, for that matter, on any
other provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated
the concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as
"corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto
Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking,
are distinct and different from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the technical sense of the
term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in confirmity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said
section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general co-partnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections 24 and 84[b]) from the connotation
of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is not,
within the meaning of the Code, a trust, estate, or a corporation. ... . (7A Merten's
Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on. ... . (8 Merten's Law of Federal
Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-
24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes
in question, of their inherited properties from those acquired by them subsequently, We consider as justified the
following ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership,
the holding should be limited to the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership should be limited to the income
derived from the acquisition and sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is admitted that the inherited
properties and the income derived therefrom were used in the business of buying and selling other
real properties and corporate securities. Accordingly, the partnership income must include not
only the income derived from the purchase and sale of other properties but also the income of the
inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as
individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part of the common assets of the heirs to be
used in making profits, it is but proper that the income of such shares should be considered as the part of the
taxable income of an unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be
taxed as such, it might be recalled that the petitioners in their individual income
tax returns reported their shares of the profits of the unregistered partnership. We
think it only fair and equitable that the various amounts paid by the individual
petitioners as income tax on their respective shares of the unregistered
partnership should be deducted from the deficiency income tax found by this
Honorable Court against the unregistered partnership. (page 7, Memorandum for
the Petitioner in Support of Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits.
This is not correct; rather, it should be the other way around. The partnership profits distributable
to the partners (petitioners herein) should be reduced by the amounts of income tax assessed
against the partnership. Consequently, each of the petitioners in his individual capacity overpaid
his income tax for the years in question, but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as
individual income tax cannot be credited as part payment of the taxes herein in question. It is argued that to
sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and,
worse, considering the time that has lapsed since they paid their individual income taxes, they may already be
barred by prescription from recovering their overpayments in a separate action. We do not agree. As We see it,
the case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong
tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer
has the right to be reimbursed what he has erroneously paid, but the law is very clear that the claim and action for
such reimbursement are subject to the bar of prescription. And since the period for the recovery of the excess
income taxes in the case of herein petitioners has already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make
the proper return and payment of the corporate taxes legally due from them. In principle, it is but proper not to
allow any relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-
a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with
costs against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.

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G.R. No.

L-14532 May 26, 1965

JOSE LEON GONZALES, petitioner-appellant,

G.R. No. L-14533 May 26, 1965

JUANA G. GONZALES and FORTUNATO DE LEON, petitioners-appellants,

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

The law in point is Section 35 of the Tax Code, which states:

The rule has been aptly stated, thus:

Tax Paid Prior Tax Paid After Total

G.R. No. 96016 October 17, 1991

We resolve the issue in the negative.

ACCORDINGLY, the petition for review is hereby DENIED.SO ORDERED.

G.R. Nos. L-28508-9 July 7, 1989

A margin levy on foreign exchange is a form of exchange control or restriction designed

(2) Expenses allowable to non-resident alien individuals and foreign corporations. — In

We come, then, to the statutory test of deductibility where it is axiomatic that to be

G.R. No. L-24248 July 31, 1974

The essential facts are not in dispute.

Net income per orig. investigation ............... P211,095.36

Less: Personal exemption ..................................... 1,800.00

Hence, the present petition.

G.R. No. L-26284 October 8, 1986

a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate

b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on

Hence, the present appeal.

The issues for consideration are:

The issues are closely interrelated and will be taken jointly.

We agree with the respondent.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.

FERNANDEZ HERMANOS, INC., petitioner,

G.R. No. L-21557 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

G.R. No. L-24972 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

G.R. No. L-24978 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

Rafael Dinglasan for petitioner.

Office of the Solicitor General for petitioner.

Rafael Dinglasan for petitioner.

Cases L-21551 and L-21557

a. Losses in Mati Lumber Co. (1950) P 8,050.00

b. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951) 353,134.25

c. Losses in Balamban Coal Mines —

d. Losses in Hacienda Dalupiri —

e. Losses in Hacienda Samal —

2. Excessive depreciation of Houses —

3. Taxable increase in net worth —

4. Gain realized from sale of real property in 1950 P 11,147.2611

Cases L-24972 and L-24978

Net income per return P29,178.70

Net income per investigation P167,297.65

Less: Amount already assessed 5,836.00

TOTAL AMOUNT DUE AND COLLECTIBLE P38,918.76 18

"RESOLVED, as it is hereby resolved, that the corporation's current assets composed of

[G.R. No. 108576. January 20, 1999]

The undisputed facts are as follows:

“Sec. 83. Distribution of dividends or assets by corporations. –

xxx xxx xxx

TAX ON STOCK DIVIDENDS

1) the presence or absence of real business purpose,

REDEMPTION AND CANCELLATION

EXCHANGE OF COMMON WITH PREFERRED SHARES

G.R. Nos. 106949-50 December 1, 1995