G.R. No. 171251. March 5, 2012.

]
LASCONA LAND CO., INC., vs. COMMISSIONER OF INTERNAL REVENUE

The CIR did not give due course to taxpayer’s request to cancel or set aside the assessment notice issued
for the reason that the case was not elevated to the Court of Tax Appeals as mandated by the provisions
of the last paragraph of Section 228 of the Tax Code. By virtue thereof, the said assessment notice has
become final, executory and demandable.

Lascona alleged that the Regional Director erred in ruling that the failure to appeal to the CTA within
thirty (30) days from the lapse of the 180-day period rendered the assessment final and executory.

The Supreme Court ruled that the taxpayer has two options, either:

(1) file a petition for review with the CTA within 30 days after the expiration of the 180-day period; or

(2) await the final decision of the Commissioner on the disputed assessment and appeal such final
decision to the CTA within 30 days after the receipt of a copy of such decision, these options are
mutually exclusive and resort to one bars the application of the other.

Precisely, when a taxpayer protests an assessment, he naturally expects the CIR to decide either
positively or negatively. A taxpayer cannot be prejudiced if he chooses to wait for the final decision of
the CIR on the protested assessment. More so, because the law and jurisprudence have always
contemplated a scenario where the CIR will decide on the protested assessment.

REVENUE REGULATIONS NO. 18-2013 November 28, 2013

SUBJECT : Amending Certain Sections of Revenue Regulations No. 12-99 Relative to the Due Process
Requirement in the Issuance of a Deficiency Tax Assessment

Due Process Requirement in the Issuance of a Deficiency Tax Assessment. —

1. Preliminary Assessment Notice (PAN). — If after review and evaluation that there exists
sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the
taxpayer a Preliminary Assessment Notice (PAN) for the proposed assessment. It shall show in detail the
facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based

If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall
be considered in default, in which case, a Formal Letter of Demand and Final Assessment Notice
(FLD/FAN) shall be issued calling for payment of the taxpayer's deficiency tax liability, inclusive of the
applicable penalties.
 If the taxpayer, within fifteen (15) days from date of receipt of the PAN, responds that he/it disagrees
with the findings of deficiency tax or taxes, an FLD/FAN shall be issued within fifteen (15) days from
filing/submission of the taxpayer’s response, calling for payment of the taxpayer's deficiency tax liability,
inclusive of the applicable penalties.

2. Formal Letter of Demand and Final Assessment Notice (FLD/FAN)- shall be issued by the
Commissioner or his duly authorized representative. The FLD/FAN calling for payment of the taxpayer's
deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based; otherwise, the assessment shall be void

3. Disputed Assessment. — The taxpayer or its authorized representative or tax agent may protest
administratively against the aforesaid FLD/FAN within thirty (30) days from date of receipt thereof. The
taxpayer protesting an assessment may file a written request for reconsideration or reinvestigation

The taxpayer shall state in his protest (i) the nature of protest whether reconsideration or
reinvestigation, specifying newly discovered or additional evidence he intends to present if it is a
request for reinvestigation, (ii) date of the assessment notice, and (iii) the applicable law, rules and
regulations, or jurisprudence on which his protest is based, otherwise, his protest shall be considered
void and without force and effect.

If the protest is denied, in whole or in part, by the Commissioner’s duly authorized representative, the
taxpayer may either: (i) appeal to the Court of Tax Appeals (CTA) within thirty (30) days from date of
receipt of the said decision; or (ii) elevate his protest through request for reconsideration to the
Commissioner within thirty (30) days from date of receipt of the said decision. No request for
reinvestigation shall be allowed in administrative appeal and only issues raised in the decision of the
Commissioner’s duly authorized representative shall be entertained by the Commissioner.

If the protest is not acted upon by the Commissioner’s duly authorized representative within one
hundred eighty (180) days counted from the date of filing of the protest in case of a request
reconsideration; or from date of submission by the taxpayer of the required documents within sixty (60)
days from the date of filing of the protest in case of a request for reinvestigation, the taxpayer may
either: (i) appeal to the CTA within thirty (30) days after the expiration of the one hundred eighty (180)-
day period; or (ii) await the final decision of the Commissioner’s duly authorized representative on the
disputed assessment.

If the protest or administrative appeal, as the case may be, is denied, in whole or in part, by the
Commissioner, the taxpayer may appeal to the CTA within thirty (30) days from date of receipt of the
said decision. Otherwise, the assessment shall become final, executory and demandable. A motion for
reconsideration of the Commissioner’s denial of the protest or administrative appeal, as the case may
be, shall not toll the thirty (30)-day period to appeal to the CTA.
[G.R. No. 218628. September 6, 2017.]

EVERGREEN MANUFACTURING CORPORATION, petitioner, vs. REPUBLIC OF THE PHILIPPINES,

represented by the DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, respondent.

The Facts

Evergreen is the registered owner of a parcel of land situated in Barangay Santolan, Pasig City, which
covers an area of 1,428.68 square meters and is covered by Transfer Certificate of Title No. PT-114857
(Subject Property). Republic-DPWH seeks to expropriate a portion of the Subject Property covering
173.08 square meters (Subject Premises) which will be used for a public purpose — the construction of
Package 3, Marikina Bridge and Access Road, Metro Manila Urban Transport Integration Project.

Based on the zonal, industrial classification and valuation of the Bureau of Internal Revenue (BIR) of the
real properties situated in Barangay Santolan, Evangelista Street, in the vicinity of A. Rodriguez boundary
where the Subject Property is situated, the properties have an appraised value of P6,000.00 per square
meter. While Republic-DPWH offered to acquire the Subject Premises by negotiated sale, Evergreen
declined this offer. Thus, Republic-DPWH filed a complaint for expropriation on 22 March 2004.

Evergreen, in opposing the complaint for expropriation, alleged that the conditions for filing a complaint
for expropriation have not been met, and that there is no necessity for expropriation. It argued that an
expropriation of the Subject Premises would impair the rights of leaseholders in gross violation of the
constitutional proscription against impairment of the obligation of contracts. It prayed for the dismissal
of the complaint for failure to state a cause of action. In the alternative, in the possibility that
expropriation is deemed proper, Evergreen prayed that in addition to the payment of just
compensation, Republic-DPWH be ordered to (a) cause a re-survey of the remaining areas of the Subject
Property and draw a new lot plan and vicinity plan for each area; (b) draw up a new technical
description of the remaining areas for approval of the proper government agencies; (c) cause the
issuance of new titles for the remaining lot; (d) provide new tax declaration for the new title; and (e) pay
incidental expenses relative to the titling of the expropriated areas.

The Issues

In its petition, Evergreen argues that it is entitled to the payment of interest for the Subject Premises
expropriated by Republic-DPWH:

THE HONORABLE COURT OF APPEALS, WITH UTMOST DUE RESPECT, GRAVELY ERRED WHEN IT DENIED
PETITIONER'S CLAIM FOR PAYMENT OF INTEREST FOR THE PROPERTY EXPROPRIATED BY THE
RESPONDENT.

On the other hand Republic-DPWH raises the following arguments in its own petition:

THE QUESTIONED DECISION AND RESOLUTION OF THE COURT OF APPEALS ARE NOT IN ACCORD WITH
LAW AND APPLICABLE JURISPRUDENCE, CONSIDERING THAT:
I. THE JUST COMPENSATION FIXED BY THE COURT OF APPEALS HAS NO BASIS IN FACT AND IN
LAW.

A. THE COMMISSIONERS' REPORTS ARE MANIFESTLY HEARSAY AND BEREFT OF ANY KIND OF
EVIDENCE. THEREFORE, IT SHOULD BE DISREGARDED PURSUANT TO THE PRONOUNCEMENTS OF THE
HONORABLE COURT IN NPC VS. YCLA SUGAR DEVELOPMENT CORPORATION AND NAPOCOR VS. DIATO-
BERNAL.

B. SECTION 4, RULE 67 OF THE RULES OF COURT MANDATES THAT THE VALUE OF JUST
COMPENSATION SHALL BE DETERMINED AS OF THE DATE OF THE TAKING OF THE PROPERTY OR THE
FILING OF THE COMPLAINT, WHICHEVER COMES FIRST. HERE, THE AMOUNT OF JUST COMPENSATION
FOR THE EXPROPRIATED INDUSTRIAL PROPERTY IS BASED ON THE "CURRENT" SELLING PRICE OF
COMMERCIAL PROPERTIES.

C. THERE IS NO BONA FIDE VALUATION OF THE EXPROPRIATED PROPERTY. THE COMMISSIONERS'

REPORT HINGED COMPLETELY ON THE VALUATION OF THE BOARD OF COMMISSIONERS (BOC) IN THE
LRTA CASE.

1. THE JUST COMPENSATION PRONOUNCED IN LRTA WAS NOT INTENDED TO BECOME A

PRECEDENT, MUCH LESS AN AUTHORITY TO BE APPLIED INVARIABLY IN OTHER EXPROPRIATION CASES.
THE JUST COMPENSATION AWARDED THEREIN WAS A RESULT OF THE DELIBERATION OF THE BOC IN
THAT CASE PURSUANT TO THE EVIDENCE PRESENTED BY THE PARTIES.

The Ruling of the Court

AMOUNT OF JUST COMPENSATION

Just compensation has been defined as the fair and full equivalent of the loss. More specifically, just
compensation has been defined in this wise:

Notably, just compensation in expropriation cases is defined "as the full and fair equivalent of the
property taken from its owner by the expropriator. The Court repeatedly stressed that the true measure
is not the taker's gain but the owner's loss. The word 'just' is used to modify the meaning of the word
'compensation' to convey the idea that the equivalent to be given for the property to be taken shall be
real, substantial, full and ample."

The determination of just compensation in expropriation proceedings is essentially a judicial

prerogative. This determination of just compensation, which remains to be a judicial function performed
by the court, is usually aided by the appointed commissioners. It has been settled that the value and
character of the land at the time it was taken by the government are the criteria for determining just
compensation.

INTEREST ON THE PAYMENT OF JUST COMPENSATION

The delay in the payment of just compensation is a forbearance of money. As such, this is necessarily
entitled to earn interest. The difference in the amount between the final amount as adjudged by the
court and the initial payment made by the government — which is part and parcel of the just
compensation due to the property owner — should earn legal interest as a forbearance of money.

[G.R. No. 216161. August 9, 2017.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE ALUMINUM WHEELS, INC.,

respondent.

The Facts

Respondent is a corporation organized and existing under Philippine laws which engages in the
manufacture, production, sale, and distribution of automotive parts and accessories. On 16 December
2003, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) against
respondent covering deficiency taxes for the taxable year 2001. On 28 March 2004, the BIR issued a
Final Assessment Notice (FAN) against respondent in the amount of P32,100,613.42. On 23 June 2004,
respondent requested for reconsideration of the FAN issued by the BIR. On 8 November 2006, the BIR
issued a Final Decision on Disputed Assessment (FDDA) and demanded full payment of the deficiency tax
assessment from respondent. On 12 April 2007, the FDDA was served through registered mail.

On 19 July 2007, respondent filed with the BIR an application for the abatement of its tax liabilities
under Revenue Regulations No. 13-2001 for the taxable year 2001. In a letter dated 12 September 2007,
the BIR denied respondent's application for tax abatement on the ground that the FDDA was already
issued by the BIR and that the FDDA had become final and executory due to the failure of the
respondent to appeal the FDDA with the CTA. The BIR contended that the FDDA had been sent through
registered mail on 12 April 2007 and that the FDDA had become final, executory, and demandable
because of the failure of the respondent to appeal the FDDA with the CTA within thirty (30) days from
receipt of the FDDA.

In a letter dated 19 September 2007, respondent informed the BIR that it already paid its tax deficiency
on withholding tax amounting to P736,726.89 through the Electronic Filing and Payment System of the
BIR and that it was also in the process of availing of the Tax Amnesty Program under Republic Act No.
9480 (RA 9480) as implemented by Revenue Memorandum Circular No. 55-2007 to settle its deficiency
tax assessment for the taxable year 2001. On 21 September 2007, respondent complied with the
requirements of RA 9480 which include: the filing of a Notice of Availment, Tax Amnesty Return and
Payment Form, and remitting the tax payment. In a letter dated 29 January 2008, the BIR denied
respondent's request and ordered respondent to pay the deficiency tax assessment amounting to
P29,108,767.63.

The Issue

Whether respondent is entitled to the benefits of the Tax Amnesty Program under RA 9480.
The Decision of this Court

This Court denies the petition in view of the taxpayert's availment of the Tax Amnesty Program under RA
9480.

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax
evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax
exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority

In National Tobacco Administration v. Commission on Audit, 26 this Court held that in case there is a
discrepancy between the law and a regulation issued to implement the law, the law prevails because the
rule or regulation cannot go beyond the terms and provisions of the law, to wit: "[t]he Circular cannot
extend the law or expand its coverage as the power to amend or repeal a statute is vested with the
legislature." To give effect to the exception under RMC No. 19-2008 of delinquent accounts or accounts
receivable by the BIR, as interpreted by the BIR, would unlawfully create a new exception for availing of
the Tax Amnesty Program under RA 9480.

[G.R. No. 198146. August 8, 2017.]

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, respondent.

The Facts

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-
owned and controlled corporation created under Republic Act No. 9136 (RA 9136), also known as the
Electric Power Industry Reform Act of 2001 (EPIRA). Section 50 of RA 9136 states that the principal
purpose of PSALM is to manage the orderly sale, disposition, and privatization of the National Power
Corporation (NPC) generation assets, real estate and other disposable assets, and Independent Power
Producer (IPP) contracts with the objective of liquidating all NPC financial obligations and stranded
contract costs in an optimal manner.

On 28 August 2007, the NPC received a letter dated 14 August 2007 from the Bureau of Internal
Revenue (BIR) demanding immediate payment of P3,813,080,472 6 deficiency value-added tax (VAT) for
the sale of the Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand letter to
PSALM.

On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the adjudication
of the dispute with the BIR to resolve the issue of whether the sale of the power plants should be
subject to VAT. The case was docketed as OSJ Case No. 2007-3. The BIR moved for reconsideration,
alleging that the DOJ had no jurisdiction since the dispute involved tax laws administered by the BIR and
therefore within the jurisdiction of the Court of Tax Appeals (CTA). Furthermore, the BIR stated that the
sale of the subject power plants by PSALM to private entities is in the course of trade or business, as
contemplated under Section 105 of the National Internal Revenue Code (NIRC) of 1997, which covers
incidental transactions. Thus, the sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's
Motion for Reconsideration.

The Issues

Petitioner PSALM raises the following issues:

I. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW IN ASSUMING
JURISDICTION AND SETTLING THE DISPUTE BY AND BETWEEN THE BIR AND PSALM?

II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW AND JURISPRUDENCE IN
RENDERING JUDGMENT THAT THERE SHOULD BE NO VAT ON THE PRIVATIZATION, SALE OR DISPOSAL
OF GENERATION ASSETS?

The Ruling of the Court

I. Whether the Secretary of Justice has jurisdiction over the case.

The primary issue in this case is whether the DOJ Secretary has jurisdiction over OSJ Case No. 2007-3
which involves the resolution of whether the sale of the Pantabangan-Masiway Plant and Magat Plant is
subject to VAT.

We agree with the Court of Appeals that jurisdiction over the subject matter is vested by the
Constitution or by law, and not by the parties to an action. Jurisdiction cannot be conferred by consent
or acquiescence of the parties or by erroneous belief of the court, quasi-judicial office or government
agency that it exists.

However, contrary to the ruling of the Court of Appeals, we find that the DOJ is vested by law with
jurisdiction over this case. This case involves a dispute between PSALM and NPC, which are both wholly
government-owned corporations, and the BIR, a government office, over the imposition of VAT on the
sale of the two power plants. There is no question that original jurisdiction is with the CIR, who issues
the preliminary and the final tax assessments. However, if the government entity disputes the tax
assessment, the dispute is already between the BIR (represented by the CIR) and another government
entity, in this case, the petitioner PSALM. Under Presidential Decree No. 242 (PD 242), all disputes and
claims solely between government agencies and offices, including government-owned or controlled
corporations, shall be administratively settled or adjudicated by the Secretary of Justice, the Solicitor
General, or the Government Corporate Counsel, depending on the issues and government agencies
involved. As regards cases involving only questions of law, it is the Secretary of Justice who has
jurisdiction.

It is only proper that intra-governmental disputes be settled administratively since the opposing
government offices, agencies and instrumentalities are all under the President's executive control and
supervision. Section 17, Article VII of the Constitution states unequivocally that: "The President shall
have control of all the executive departments, bureaus and offices. He shall ensure that the laws be
faithfully executed." Furthermore, under the doctrine of exhaustion of administrative remedies, it is
mandated that where a remedy before an administrative body is provided by statute, relief must be
sought by exhausting this remedy prior to bringing an action in court in order to give the administrative
body every opportunity to decide a matter that comes within its jurisdiction.

II. Whether the sale of the power plants is subject to VAT.

To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants by
petitioner PSALM to private entities is subject to VAT, the Court must determine whether the sale is "in
the course of trade or business" as contemplated under Section 105 of the NIRC

Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale, disposition,
and privatization of the NPC generation assets, real estate and other disposable assets, and IPP
contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in an
optimal manner.

PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-Masiway and
Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law and is not conducted in the
course of trade or business. PSALM cited the 13 May 2002 BIR Ruling No. 020-02, that PSALM's sale of
assets is not conducted in pursuit of any commercial or profitable activity as to fall within the ambit of a
VAT-able transaction under Sections 105 and 106 of the NIRC.

The sale of the power plants is not "in the course of trade or business" as contemplated under Section
105 of the NIRC, and thus, not subject to VAT. The sale of the power plants is not in pursuit of a
commercial or economic activity but a governmental function mandated by law to privatize NPC
generation assets. PSALM was created primarily to liquidate all NPC financial obligations and stranded
contract costs in an optimal manner

[G.R. No. 197526. July 26, 2017.]

CE LUZON GEOTHERMAL POWER COMPANY, INC., petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, respondent.

[G.R. Nos. 199676-77. July 26, 2017.]

REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF INTERNAL REVENUE, petitioner, vs. CE
LUZON GEOTHERMAL POWER COMPANY, INC., respondent.

The Facts:

The 120-day and 30-day reglementary periods under Section 112 (C) of the National Internal Revenue
Code are both mandatory and jurisdictional. Non-compliance with these periods renders a judicial claim
for refund of creditable input tax premature.
In the course of its operations, CE Luzon incurred unutilized creditable input tax amounting to
P26,574,388.99 for taxable year 2003. This amount was duly reflected in its amended quarterly VAT
returns. CE Luzon then filed before the Bureau of Internal Revenue an administrative claim for refund of
its unutilized creditable input tax.

CE Luzon argues that the Commissioner of Internal Revenue is estopped from assailing the timeliness of
its judicial claims. The Commissioner of Internal Revenue categorically stated in several of its rulings
that taxpayers need not wait for the expiration of 120 days before instituting a judicial claim for refund
of creditable input tax. CE Luzon relies on the following Bureau of Internal Revenue issuances: (1)
Section 4.104-2, Revenue Regulations No. 7-95; (2) Revenue Memorandum Circular No. 42-99; (3)
Revenue Memorandum Circular No. 42-2003, as amended by Revenue Memorandum Circular No. 49-
2003; (4) Revenue Memorandum Circular No. 29-2009; and (5) Bureau of Internal Revenue Ruling DA-
489-03.

On the other hand, the Commissioner of Internal Revenue argues that Sections 112 (C) and 229 of the
National Internal Revenue Code need not be harmonized because they are clear and explicit. Laws
should only be construed if they are "ambiguous or doubtful in meaning." Section 112 (C) clearly
provides that in claims for refund of creditable input tax, taxpayers can only elevate their judicial claim
upon receipt of the decision denying their administrative claim or upon the lapse of 120 days.
Moreover, the tax covered in Section 112 is different from the tax in Section 229. Section 112 (C) covers
unutilized input tax. In contrast, Section 229 pertains to national internal revenue tax that is erroneously
or illegally collected.

This case presents two (2) issues for resolution:

First, whether CE Luzon Geothermal Power, Inc.'s judicial claims for refund of input Value Added Tax for
taxable year 2003 were filed within the prescriptive period; and

Finally, whether CE Luzon Geothermal Power, Inc. is entitled to the refund of input Value Added Tax for
the second quarter of taxable year 2003. Subsumed in this issue is whether it has substantiated this
claim.

The Ruling of the Court:

Excess input tax or creditable input tax is not an erroneously, excessively, or illegally collected tax.
Hence, it is Section 112 (C) and not Section 229 of the National Internal Revenue Code that governs
claims for refund of creditable input tax. Ordinarily, VAT-registered entities are liable to pay excess
output tax if their input tax is less than their output tax at any given taxable quarter. However, if the
input tax is greater than the output tax, VAT-registered persons can carry over the excess input tax to
the succeeding taxable quarter or quarters. Nevertheless, if the excess input tax is attributable to zero-
rated or effectively zero-rated transactions, the excess input tax can only be refunded to the taxpayer or
credited against the taxpayer's other national internal revenue tax. Availing any of the two (2) options
entail compliance with the procedure outlined in Section 112 not under Section 229, of the National
Internal Revenue Code
It is unnecessary to construe and harmonize Sections 112 (C) and 229 of the National Internal Revenue
Code. Excess input tax or creditable input tax is not an excessively, erroneously, or illegally collected tax
because the taxpayer pays the proper amount of input tax at the time it is collected. That a VAT-
registered taxpayer incurs excess input tax does not mean that it was wrongfully or erroneously paid. It
simply means that the input tax is greater than the output tax, entitling the taxpayer to carry over the
excess input tax to the succeeding taxable quarters. If the excess input tax is derived from zero-rated or
effectively zero-rated transactions, the taxpayer may either seek a refund of the excess or apply the
excess against its other internal revenue tax.

Section 112 (C) of the National Internal Revenue Code provides two (2) possible scenarios. The first is
when the Commissioner of Internal Revenue denies the administrative claim for refund within 120 days.
The second is when the Commissioner of Internal Revenue fails to act within 120 days. Taxpayers must
await either for the decision of the Commissioner of Internal Revenue or for the lapse of 120 days
before filing their judicial claims with the Court of Tax Appeals. Failure to observe the 120-day period
renders the judicial claim premature.

This is very important. Potential bar question from this case

G.R. No. 193301. March 11, 2013.]

MINDANAO II GEOTHERMAL PARTNERSHIP, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,

respondent.

[G.R. No. 194637. March 11, 2013.]

MINDANAO I GEOTHERMAL PARTNERSHIP, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,

respondent.

In the course of its operation, Mindanao II makes domestic purchases of goods and services and
accumulates therefrom creditable input taxes. [Mindanao II] alleges that it can use its accumulated
input tax credits to offset its output tax liability. Considering, however that its only revenue-generating
activity is VAT zero-rated under RA No. 9136, [Mindanao II's] input tax credits remain unutilized.

Considering that it has accumulated its unutilized creditable input taxes, [Mindanao II] filed an
application for refund and/or issuance of tax credit certificate with the BIR's Revenue District Office at
Kidapawan City on April 13, 2005 for the four quarters of 2003.

The CIR argued that the judicial claims for the first and second quarters of 2003 were filed beyond the
period allowed by law, as stated in Section 112 (A) of the 1997 Tax Code. The CIR further stated that
Section 229 is a general provision, and governs cases not covered by Section 112 (A).

The CIR cited the CTA ruling in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant), which stated that unutilized input VAT payments must be claimed within two years reckoned
from the close of the taxable quarter when the relevant sales were made regardless of whether said tax
was paid.
Mindanao II raised the following grounds in its Petition for Review:

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant
to the case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of
Internal Revenue, which was then the controlling ruling at the time of filing.
II. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao
Corporation, which uses the end of the taxable quarter when the sales were made as the
reckoning date in counting the two-year prescriptive period, cannot be applied retroactively
in the case of [Mindanao II].

The Supreme Court summarize the rules on the determination of the prescriptive period for filing a tax
refund or credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An ADMINISTRATIVE claim must be filed with the CIR within two years after the close of
the taxable quarter when the zero-rated or effectively zero-rated sales were made. The CIR
has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit
certificate. If the 120-day period expires without any decision from the CIR, then the
administrative claim may be considered to be denied by inaction.

(2.) A JUDICIAL claim must be filed with the CTA within 30 days from the receipt of the CIR's
decision denying the administrative claim or from the expiration of the 120-day period
without any action from the CIR.

The 120+30 day period is mandatory and jurisdictional, therefore, if no appeal is filed with
the CTA, the claim for refund has been barred by prescription.

Potential bar question from this case

[G.R. No. 187485. February 12, 2013.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SAN ROQUE POWER CORPORATION,

respondent.

[G.R. No. 196113. February 12, 2013.]

TAGANITO MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

[G.R. No. 197156. February 12, 2013.]

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

1. A VAT-registered person whose sales are zero-rated, or effectively zero-rated, may apply for a refund
or credit of creditable input tax within 2 years after the close of the taxable quarter when the zero-rated
or effectively zero-rated sales were made. An administrative claim that is filed beyond the 2-year period
is barred by prescription.

2. CIR has 120 days from the date of submission of complete documents in support of an application,
within which to act on the claim. The taxpayer affected by the CIR's decision or inaction may appeal to
the CTA within 30 days from the receipt of the decision or after the expiration of the 120-day period
within which the claim has not been acted upon.

3. The 120 + 30-day period is mandatory and jurisdictional and the CTA does not acquire jurisdiction
over a judicial claim that is filed before the expiration of the 120-day period. On the other hand, failure
of the taxpayer to elevate its claim within 30 days from the lapse of the 120-day period, counted from
the filing of its administrative claim for refund, or from the date of receipt of the decision of the CIR, will
bar any subsequent judicial claim for refund.

[G.R. No. 183408. July 12, 2017.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LANCASTER PHILIPPINES, INC., respondent.

THE FACTS

Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others, to investigate or
examine and, if necessary, issue assessments for deficiency taxes.

On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a domestic corporation
established in 1963 and is engaged in the production, processing, and marketing of tobacco.

In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No. 00012289 authorizing
its revenue officers to examine Lancaster's books of accounts and other accounting records for all
internal revenue taxes due from taxable year 1998 to an unspecified date. After the conduct of an
examination pursuant to the LOA, the BIR issued a Preliminary Assessment Notice (PAN) which cited
Lancaster for: 1) overstatement of its purchases for the fiscal year April 1998 to March 1999; and 2)
noncompliance with the generally accepted accounting principle of proper matching of cost and
revenue. More concretely, the BIR disallowed the purchases of tobacco from farmers covered by
Purchase Invoice Vouchers (PIVs) for the months of February and March 1998 as deductions against
income for the fiscal year April 1998 to March 1999.

The issue raised by the parties for the resolution:

WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLE OF
PROPER MATCHING OF COST AND REVENUE;

The Decision

The matching principle

While there may be differences between tax and accounting, it cannot be said that the two mutually
exclude each other. As already made clear, tax laws borrowed concepts that had origins from
accounting. In truth, tax cannot do away with accounting. It relies upon approved accounting methods
and practices to effectively carry out its objective of collecting the proper amount of taxes from the
taxpayers. Thus, an important mechanism established in many tax systems is the requirement for
taxpayers to make a return of their true income. Maintaining accounting books and records, among
other important considerations, would in turn assist the taxpayers in complying with their obligation to
file their income tax returns. At the same time, such books and records provide vital information and
possible bases for the government, after appropriate audit, to make an assessment for deficiency tax
whenever so warranted under the circumstances

We are tasked to determine which view is legally sound.

In essence, the matching concept, which is one of the generally accepted accounting principles, directs
that the expenses are to be reported in the same period that related revenues are earned. It attempts to
match revenue with expenses that helped earn it.

SECTION 45. Period for which Deductions and Credits Taken. — The deductions provided for in this Title
shall be taken for the taxable year in which 'paid or accrued' of 'paid or incurred', dependent upon the
method of accounting upon the basis of which the net income is computed, unless in order to clearly
reflect the income, the deductions should be taken as of a different period.

If a farmer is engaged in producing crops which takes more than a year from the time of planting to the
time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in
any such cases the entire cost of producing the crop must be taken as a deduction in the year in which
the gross income from the crop is realized. (underscoring supplied)

Where there is conflict between the provisions of the Tax Code (NIRC), including its implementing rules
and regulations, on accounting methods and the generally accepted accounting principles, the former
shall prevail.

Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, in the amount of P6,466,065.50 for
deficiency income tax is cancelled and set aside. The assessment is void for being issued without valid
authority. Furthermore, there is no legal justification for the disallowance of Lancaster's expenses for
the purchase of tobacco in February and March 1998.

[G.R. No. 195876. June 19, 2017.]

PILIPINAS SHELL PETROLEUM CORPORATION, petitioner, vs. COMMISSIONER OF CUSTOMS, respondent.

An Omnibus Motion (For Reconsideration and Referral to the Court En Banc) dated January 20, 2017
filed by public respondent Commissioner of Customs.

The Omnibus Motion is anchored primarily on the alleged applicability of Chevron Philippines, Inc. v.
Commissioner of the Bureau of Customs 1 (Chevron) to the case at bar. However, the Court desisted
from applying the doctrine laid down in Chevron considering that the facts and circumstances therein
are not in all fours with those obtaining in the instant case. Thus, Chevron is not a precedent to the case
at bar.

A "precedent" is defined as a judicial decision that serves as a rule for future determination in similar or
substantially similar cases. Thus, the facts and circumstances between the jurisprudence relied upon and
the pending controversy should not diverge on material points. But as clearly explained in the assailed
December 5, 2016 Decision, the main difference between Chevron and the case at bar lies in the
attendance of fraud.

In Chevron, evidence on record established that Chevron committed fraud in its dealings. On the other
hand, proof that petitioner Pilipinas Shell Petroleum Corporation (Pilipinas Shell) was just as guilty was
clearly wanting. Simply, there was no finding of fraud on the part of petitioner in the case at bar. Such
circumstance is too significant that it renders Chevron indubitably different from and cannot, therefore,
serve as the jurisprudential foundation of the case at bar.

In his dissent, Associate Justice Diosdado M. Peralta (Justice Peralta) claims that fraud was committed by
Pilipinas Shell when it allegedly deliberately incurred delay in filing its Import Entry and Internal Revenue
Declaration in order to avail of the reduced tariff duty on oil importations, from ten percent (10%) to
three percent (3%), upon the effectivity of Republic Act No. 8180 (RA 8180), otherwise known as the Oil
Deregulation Law. Justice Peralta cites the February 2, 2011 Memorandum to support the allegation of
fraud, but as exhaustively discussed in Our December 5, 2016 Decision, the document was never
formally offered as evidence before the Court of Tax Appeals, and is, therefore, bereft of evidentiary
value. Worse, it was not even presented during trial and no witness identified the same.

Resultantly, no scintilla of proof was ever offered in evidence by respondent Commissioner of Customs
to substantiate the claim that Pilipinas Shell acted in a fraudulent manner. At best, the allegation of
fraud on the part of Pilipinas Shell is mere conjecture and purely speculative. Settled is the rule that a
court cannot rely on speculations, conjectures or guesswork, but must depend upon competent proof
and on the basis of the best evidence obtainable under the circumstances. We emphasize that litigations
cannot be properly resolved by suppositions, deductions, or even presumptions, with no basis in
evidence, for the truth must have to be determined by the hard rules of admissibility and proof.

Coupled with the earlier quotation from Chevron, it becomes abundantly clear that the notice
requirement as mandated in CMO 15-94 cannot be excused unless fraud is established. Resultantly,
fraud being absent on the part of petitioner Pilipinas Shell, the ipso facto abandonment doctrine cannot
operate within the factual milieu of the instant case. Be that as it may, in view of the substantial
differences between the facts of Chevron and the peculiarities of the instant case, and just as Chevron
was justified "under the peculiar facts and circumstances" obtaining therein, the Decision dated
December 5, 2016 in the case at bar ought to be considered as a judgment pro hac vice.

WHEREFORE, premises considered, the Court DENIES WITH FINALITY the Omnibus Motion (For
Reconsideration and Referral to the Court En Banc) dated January 20, 2017 filed by public respondent
Commissioner of Customs for lack of merit.
[G.R. No. 205428. June 7, 2017.]

REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS
(DPWH), petitioner, vs. SPOUSES SENANDO F. SALVADOR and JOSEFINA R. SALVADOR, respondents

The Antecedent Facts

Respondents are the registered owners of a parcel of land with a total land area of 229 square meters,
located in Kaingin Street, Barangay Parada, Valenzuela City, and covered by Transfer Certificate of Title
No. V-77660.

On November 9, 2011, the Republic, represented by the Department of Public Works and Highways
(DPWH), filed a verified Complaint 4 before the RTC for the expropriation of 83 square meters of said
parcel of land (subject property), as well as the improvements thereon, for the construction of the C-5
Northern Link Road Project Phase 2 (Segment 9) from the North Luzon Expressway (NLEX) to McArthur
Highway

The Issue:

Whether the capital gains tax on the transfer of the expropriated property can be considered as
consequential damages that may be awarded to respondents.

The Court's Ruling

In order to determine just compensation, the trial court should first ascertain the market value of the
property by considering the cost of acquisition, the current value of like properties, its actual or
potential uses, and in the particular case of lands, their size, shape, location, and the tax declarations
thereon. 26 If as a result of the expropriation, the remaining lot suffers from an impairment or decrease
in value, consequential damages may be awarded by the trial court, provided that the consequential
benefits which may arise from the expropriation do not exceed said damages suffered by the owner of
the property.

It is settled that the transfer of property through expropriation proceedings is a sale or exchange within
the meaning of Sections 24 (D) and 56 (A) (3) of the National Internal Revenue Code, and profit from the
transaction constitutes capital gain. 32 Since capital gains tax is a tax on passive income, it is the seller,
or respondents in this case, who are liable to shoulder the tax. 33

In fact, the Bureau of Internal Revenue (BIR), in BIR Ruling No. 476-2013 dated December 18, 2013, has
constituted the DPWH as a withholding agent tasked to withhold the 6% final withholding tax in the
expropriation of real property for infrastructure projects. Thus, as far as the government is concerned,
the capital gains tax in expropriation proceedings remains a liability of the seller, as it is a tax on the
seller's gain from the sale of real property. 34
Besides, as previously explained, consequential damages are only awarded if as a result of the
expropriation, the remaining property of the owner suffers from an impairment or decrease in value. 35
In this case, no evidence was submitted to prove any impairment or decrease in value of the subject
property as a result of the expropriation. More significantly, given that the payment of capital gains tax
on the transfer of the subject property has no effect on the increase or decrease in value of the
remaining property, it can hardly be considered as consequential damages that may be awarded to
respondents.

[G.R. No. 211093. June 6, 2017.]

MINDANAO SHOPPING DESTINATION CORPORATION, ACE HARDWARE PHILS., INC., INTERNATIONAL

TOYWORLD, INC., STAR APPLIANCE CENTER, INC., SURPLUS MARKETING CORPORATION, WATSONS
PERSONAL CARE STORES (PHILS.), INC., and SUPERVALUE, INC., petitioners, vs. HON. RODRIGO R.
DUTERTE, in his capacity as Mayor of Davao City, HON. SARA DUTERTE, Vice-Mayor of Davao City, in her
capacity as Presiding Officer of the Sangguniang Panlungsod, and THE SANGGUNIANG PANLUNGSOD
(CITY COUNCIL) NG DAVAO, respondents

The facts are as follows:

On November 16, 2005, respondent Sangguniang Panglungsod of Davao City (Sanggunian), after due
notice and hearing, enacted the assailed Davao City Ordinance No. 158-05, Series of 2005, otherwise
known as "An Ordinance Approving the 2005 Revenue Code of the City of Davao, as Amended" 5
attested to by Vice-Mayor Hon. Luis B. Bonguyan (respondent Vice-Mayor), as Presiding Officer of the
Sanggunian, and approved by then City Mayor, Hon. Rodrigo R. Duterte, now the President of the
Republic of the Philippines. The Ordinance took effect after the publication in the Mindanao Mercury
Times, a newspaper of general circulation in Davao City, for three (3) consecutive days, December 23, 24
and 25, 2005.

Petitioners claimed that they used to pay only 50% of 1% of the business tax rate under the old Davao
City Ordinance No. 230, Series of 1990, but in the assailed new ordinance, it will require them to pay a
tax rate of 1.5%, or an increase of 200% from the previous rate. Petitioners believe that the increase is
not allowed under Republic Act (RA) No. 7160, The Local Government Code (LGC). Consequently,
invoking the LGC, petitioners appealed to the DOJ, docketed as MTO-DOJ Case No. 02-2006, asserting
the unconstitutionality and illegality of Section 69 (d), for being unjust, excessive, oppressive,
confiscatory and contrary to the 1987 Constitution and the provisions of the LGC. Petitioners prayed
that the questioned ordinance, particularly Section 69 (d) thereof be declared as null and void ab initio.

The Decision

The assailed ordinance does not violate the limitation imposed by Section 191 of the LGC on the
adjustment of tax rate for the following reasons:

Firstly, Section 191 of the LGC presupposes that the following requirements are present for it to apply,
to wit: (i) there is a tax ordinance that already imposes a tax in accordance with the provisions of the
LGC; and (ii) there is a second tax ordinance that made adjustment on the tax rate fixed by the first tax
ordinance. In the instant case, both elements are not present.

As to the first requirement, it cannot be said that the old tax ordinance (first ordinance) was imposed in
accordance with the provisions of the LGC. To reiterate, the old tax ordinance of Davao City was enacted
before the LGC came into law. Thus, the assailed new ordinance, Davao City Ordinance No. 158-05,
Series of 2005 was actually the first to impose the tax on retailers in accordance with the provisions of
the LGC.

As to the second requirement, the new tax ordinance (second ordinance) imposed the new tax base and
the new tax rate as provided by the LGC for retailers. It must be emphasized that a tax has two
components, a tax base and a tax rate. However, Section 191 contemplates a situation where there is
already an existing tax as authorized under the LGC and only a change in the tax rate would be effected.
Again, the new ordinance Davao City provided, not only a tax rate, but also a tax base that were
appropriate for retailers, following the parameters provided under the LGC. Suffice it to say, the second
requirement is absent. Thus, given the absence of the above two requirements for the application of
Section 191 of the LGC, there is no reason for the latter to cover a situation where the ordinance, as in
this case, was an initial implementation of R.A. 7160.

Secondly, Section 191 of the LGC will not apply because with the assailed tax ordinance, there is no
outright or unilateral increase of tax to speak of. The resulting increase in the tax rate for retailers was
merely incidental. When Davao City enacted the assailed ordinance, it merely intended to rectify the
glaring error in the classification of wholesaler and retailer in the old ordinance. Petitioners are retailers
as contemplated by the LGC. Petitioners never disputed their classification as retailers. 20 Thus, being
retailers, they are subject to the tax rate provided under Section 69 (d) and not under Section 69 (b) of
the assailed ordinance. In effect, under the assailed ordinance as amended, petitioners as retailers are
now assessed at the tax rate of one and one-fourth (1 1/4%) percent on their gross sales and not the
fifty-five (55%) percent of one (1%) percent on their gross sales since the latter tax rate is only applicable
to wholesalers, distributors, or dealers. The assailed ordinance merely imposes and collects the proper
and legal tax due to the local government pursuant to the LGC. While it may appear that there was
indeed a significant adjustment on the tax rate of retailers which affected the petitioners, it must,
however, be emphasized that the adjustment was not by virtue of a unilateral increase of the tax rate of
petitioners as retailers, but again, merely incidental as a result of the correction of the classification of
wholesalers and retailers and its corresponding tax rates in accordance with the provisions of the LGC.

Thirdly, it must be pointed out that the limitation under Section 191 of the LGC was provided to guard
against possible abuse of the LGU's power to tax. 23 In this case, however, strictly speaking, the new tax
rate for petitioners as retailers under the assailed ordinance is not a case where there was an imposition
of a new tax rate, rather there is merely a rectification of an erroneous classification of taxpayers and
tax rates, i.e., of grouping retailers and wholesalers in one category, and their corresponding rates. The
amendment of the old tax ordinance was not intended to abuse the LGU's taxing powers but merely
sought to impose the rates as provided under the LGC as in fact the tax rate imposed was even lower
than the rate authorized by the LGC. In effect, the assailed ordinance merely corrected the old
ordinance so that it will be in accord with the LGC. To rule otherwise is tantamount to pronouncing that
Davao City can no longer correct the apparent error in classifying wholesaler and retailer in the same
category under its old tax ordinance. Such proposition runs counter to the well-entrenched principle
that estoppel does not apply to the government, especially on matters of taxation. Taxes are the
nation's lifeblood through which government agencies continue to operate and with which the State
discharges its functions for the welfare of its constituents

This case will surely come out in the bar exams

[G.R. No. 222743. April 5, 2017.]

MEDICARD PHILIPPINES, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical
insurance coverage to its clients. Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and curative medical services
provided by duly licensed physicians, specialists and other professional technical staff participating in
the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.

MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment
System (EFPS) on April 20, 2006, July 25, 2006 And October 20, 2006, respectively, and its Fourth
Quarterly VAT Return on January 25, 2007.

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the
CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated September 20,
2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against MEDICARD for
deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending the
issuance of a Formal Assessment Notice (FAN) against MEDICARD.

On July 20, 2009, MEDICARD proceeded to file a petition for review before the CTA, reiterating its
position before the tax authorities.

The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of
Letter of Authority (LOA) alone as the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it of the
discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue
Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning the
validity of the assessment on the ground of lack of LOA since the assessment issued against MEDICARD
contained the requisite legal and factual bases that put MEDICARD on notice of the deficiencies and it in
fact availed of the remedies provided by law without questioning the nullity of the assessment; (4) the
amounts that MEDICARD earmarked and eventually paid to doctors, hospitals and clinics cannot be
excluded from the computation of its gross receipts under the provisions of RR No. 4-2007 because the
act of earmarking or allocation is by itself an act of ownership and management over the funds by
MEDICARD which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its
clinics and laboratory facilities cannot be excluded from its gross receipts because the operation of
these clinics and laboratory is merely an incident to MEDICARD's main line of business as an HMO and
there is no evidence that MEDICARD segregated the amounts pertaining to this at the time it received
the premium from its members; and (6) MEDICARD was not able to substantiate the amount pertaining
to its January 2006 income and therefore has no basis to impose a 10% VAT rate.

The Issues

1. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE
MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.

Ruling of the Court

The absence of an LOA violated MEDICARD's right to due process

An LOA is the authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of account and other
accounting records of a taxpayer for the purpose of collecting the correct amount of tax. 25 An LOA is
premised on the fact that the examination of a taxpayer who has already filed his tax returns is a power
that statutorily belongs only to the CIR himself or his duly authorized representatives. Section 6 of the
NIRC clearly provides as follows:

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for
Tax Administration and Enforcement. —

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly
authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be
undertaken. The circumstances contemplated under Section 6 where the taxpayer may be assessed
through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do
with the LOA. These are simply methods of examining the taxpayer in order to arrive at the correct
amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives,
other tax agents may not validly conduct any of these kinds of examinations without prior authority.

With the advances in information and communication technology, the Bureau of Internal Revenue (BIR)
promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then incipient
centralized Data Warehouse (DW) becomes fully operational in conjunction with its Reconciliation of
Listing for Enforcement System (RELIEF System). 26 This system can detect tax leaks by matching the
data available under the BIR's Integrated Tax System (ITS) with data gathered from third-party sources.
Through the consolidation and cross-referencing of third-party information, discrepancy reports on sales
and purchases can be generated to uncover under declared income and over claimed purchases of
goods and services.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit
approach" in the CIR's exercise of its power to authorize any examination of taxpayer and the
assessment of the correct amount of tax. The no-contact-audit approach includes the process of
computerized matching of sales and purchases data contained in the Schedules of Sales and Domestic
Purchases, and Schedule of Importation submitted by VAT taxpayers under the RELIEF System pursuant
to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of
data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees
subject to Final or Creditable Withholding Taxes.

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an
LOA before any investigation or examination of the taxpayer may be conducted. As provided in the RMO
No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However, for a Notice of
Informal Conference, which generally precedes the issuance of an assessment notice to be valid, the
same presupposes that the revenue officer who issued the same is properly authorized in the first place.

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against
MEDICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also
not converted into an LOA contrary to the above quoted provision. Surprisingly, the CIR did not even
dispute the applicability of the above provision of RMO 32-2005 in the present case which is clear and
unequivocal on the necessity of an LOA for the assessment proceeding to be valid. Hence, the CTA's
disregard of MEDICARD's right to due process warrant the reversal of the assailed decision and
resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc., 29 the Court said that:

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity. 30
(Emphasis and underlining ours)

The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue
officer is specifically required under the NIRC before an examination of a taxpayer may be had while an
LN is not found in the NIRC and is only for the purpose of notifying the taxpayer that a discrepancy is
found based on the BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of issue
while an LN has no such limitation. Third, an LOA gives the revenue officer only a period of 120 days
from receipt of LOA to conduct his examination of the taxpayer whereas an LN does not contain such a
limitation. 31 Simply put, LN is entirely different and serves a different purpose than an LOA. Due
process demands, as recognized under RMO No. 32-2005, that after an LN has serve its purpose, the
revenue officer should have properly secured an LOA before proceeding with the further examination
and assessment of the petitioner.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the
CTA en banc grounded as it is on due process violation. The Court likewise rules that for purposes of
determining the VAT liability of an HMO, the amounts earmarked and actually spent for medical
utilization of its members should not be included in the computation of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition of Medicard is hereby

GRANTED. The Decision dated September 2, 2015 and Resolution dated January 29, 2016 issued by the
Court of Tax Appeals en banc in CTA EB No. 1224 against Medicard are REVERSED and SET ASIDE. The
definition of gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section
108 (A) of the National Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty percent (80%) of the
amount of the contract price earmarked as fiduciary funds for the medical utilization of its members.
Further, the Value-Added Tax deficiency assessment issued against Medicard Philippines, Inc. is hereby
declared unauthorized for having been issued without a Letter of Authority by the Commissioner of
Internal Revenue or his duly authorized representatives.

[G.R. No. 213943. March 22, 2017.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE DAILY INQUIRER, INC., respondent.

The Antecedent Facts

The facts of this case, as presented by the CTA, are as follows:

PDI is a corporation engaged in the business of newspaper publication. On 15 April 2005, it filed its
Annual Income Tax Return for taxable year 2004

On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020 Large Taxpayers' Service
of BIR under LN No. 116-AS-04-00-00038. BIR alleged that based on the computerized matching it
conducted on the information and data provided by third party sources against PDI's declaration on its
VAT Returns for taxable year 2004, there was an underdeclaration of domestic purchases from its
suppliers amounting to P317,705,610.52. The BIR invited PDI to reconcile the deficiencies with BIR's
Large Taxpayers Audit & Investigation Division I (BIR-LTAID). In response, PDI submitted reconciliation
reports, attached to its letters dated 22 August 2006 and 19 December 2006, to BIR-LTAID. On 21 March
2007, PDI executed a Waiver of the Statute of Limitation (First Waiver) consenting to the assessment
and/or collection of taxes for the year 2004 which may be found due after the investigation, at any time
before or after the lapse of the period of limitations fixed by Sections 203 and 222 of the National
Internal Revenue Code (NIRC) but not later than 30 June 2007. The First Waiver was received on 23
March 2007 by Nestor Valeroso (Valeroso), OIC-ACIR of the Large Taxpayer Service. In a letter dated 7
May 2007, PDI submitted additional partial reconciliation and explanations on the discrepancies found
by the BIR. On 30 May 2007, PDI received a letter dated 28 May 2007 from Mr. Gerardo Florendo, Chief
of the BIR-LTAID, informing it that the results of the evaluation relative to the matching of sales of its
suppliers against its purchases for the taxable year 2004 had been submitted by Revenue Officer Narciso
Laguerta under Group Supervisor Fe Caling. In the same letter, BIR invited PDI to an informal conference
to present any objections that it might have on the BIR's findings. On 5 June 2007, PDI executed a
Waiver of the Statute of Limitation (Second Waiver), which Valeroso accepted on 8 June 2007.
The ISSUE;

Whether the BIR's assessment was made within the prescriptive period.

Prescription and Estoppel

The CIR alleges that PDI filed a false or fraudulent return. As such, Section 222 of the NIRC should apply
to this case and the applicable prescriptive period is 10 years from the discovery of the falsity of the
return. The CIR argues that the ten-year period starts from the time of the issuance of its Letter Notice
on 10 August 2006. As such, the assessment made through the Formal Letter of Demand dated 11
March 2008 is within the prescriptive period.

We do not agree.

Under Section 203 of the NIRC, the prescriptive period to assess is set at three years. This rule is subject
to the exceptions provided under Section 222 of the NIRC. The CIR invokes Section 222 (a) which
provides:

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. —

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.

In Commissioner of Internal Revenue v. Javier, this Court ruled that fraud is never imputed. The Court
stated that it will not sustain findings of fraud upon circumstances which, at most, create only suspicion.
The Court added that the mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion. The Court explained:

x x x. 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 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. x x x.

In Samar-I Electric Cooperative v. Commissioner of Internal Revenue, the Court differentiated between
false and fraudulent returns. Quoting Aznar v. Court of Tax Appeals, 29 the Court explained in Samar-I
the acts or omissions that may constitute falsity, thus:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and
fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists
contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial
underdeclarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence
of the income tax returns with an intent to evade the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not deny
that the findings of facts by the Court of Tax Appeals, supported as they are by very substantial
evidence, carry great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We
believe that the proper and reasonable interpretation of said provision should be that in the three
different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun
without assessment, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3)
omission. Our stand that the law should be interpreted to mean a separation of the three different
situations of false return, fraudulent return with intent to evade tax, and failure to file a return is
strengthened immeasurably by the last portion of the provision which segregates the situation into
three different classes, namely "falsity," "fraud," and "omission." That there is a difference between
"false return" and "fraudulent return" cannot be denied. While the first implies deviation from the truth,
whether intentional or not, the second implies intentional or deceitful entry with intent to evade the
taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the
NIRC should be applicable to normal circumstances, but whenever the government is placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten
years provided for in Sec. 332 (a) NIRC, from the time of discovery of the falsity, fraud or omission even
seems to be inadequate and should be the one enforced.

Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was
intentional and done with intent to evade the taxes due, the filing of a false return can be intentional or
due to honest mistake. In CIR v. B.F. Goodrich Phils., Inc., 31 the Court stated that the entry of wrong
information due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute
a false return. In this case, we do not find enough evidence to prove fraud or intentional falsity on the
part of PDI.

Since the case does not fall under the exceptions, Section 203 of the NIRC should apply. It provides:

SEC. 203. Period of Limitation Upon Assessment and Collection. — Except as provided in Section
222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law
for the filing of the return, and no proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period. Provided, That in a case where a return is filed
beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return
was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day.

Indeed, the Waivers executed by the BIR and PDI were meant to extend the three-year prescriptive
period, and would have extended such period were it not for the defects found by the CTA. This further
shows that at the outset, the BIR did not find any ground that would make the assessment fall under the
exceptions.

In Commissioner of Internal Revenue v. Kudos Metal Corporation, 32 the Court ruled:

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended
upon a written agreement between the CIR and the taxpayer executed before the expiration of the
three-year period. RMO 20-90 issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 lay
down the procedure for the proper execution of the waiver, to wit:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after
________ 19___," which indicates the expiry date of the period agreed upon to assess/collect the tax
after the regular three-year period of prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the
case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority
is delegated by the taxpayer to a representative, such delegation should be in writing and duly
notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR
has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated.
However, before signing the waiver, the CIR or the revenue official authorized by him must make sure
that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly
authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be
before the expiration of the period of prescription or before the lapse of the period agreed upon in case
a subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of
the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The
fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the
taxpayer was notified of the acceptance of the BIR and the perfection of the agreement. 33

In this case, the CTA found that contrary to PDI's allegations, the First and Second Waivers were
executed in three copies. However, the CTA also found that the CIR failed to provide the office accepting
the First and Second Waivers with their respective third copies, as the CTA found them still attached to
the docket of the case. In addition, the CTA found that the Third Waiver was not executed in three
copies.

The failure to provide the office accepting the waiver with the third copy violates RMO 20-90 and RDAO
05-01. Therefore, the First Waiver was not properly executed on 21 March 2007 and thus, could not
have extended the three-year prescriptive period to assess and collect taxes for the year 2004. To make
matters worse, the CIR committed the same error in the execution of the Second Waiver on 5 June
2007. Even if we consider that the First Waiver was validly executed, the Second Waiver failed to extend
the prescriptive period because its execution was contrary to the procedure set forth in RMO 20-90 and
RDAO 05-01. Granting further that the First and Second Waivers were validly executed, the Third Waiver
executed on 12 December 2007 still failed to extend the three-year prescriptive period because it was
not executed in three copies. In short, the records of the case showed that the CIR's three-year
prescriptive period to assess deficiency tax had already prescribed due to the defects of all the Waivers.

In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Incorporated, 34 the Court
explained the nature of a waiver of assessment. The Court said:

In Philippine Journalist, Inc. v. Commissioner of Internal Revenue, the Court categorically stated that a
Waiver must strictly conform to RMO No. 20-90. The mandatory nature of the requirements set forth in
RMO No. 20-90, as ruled upon by this Court, was recognized by the BIR itself in the latter's subsequent
issuances, namely, Revenue Memorandum Circular (RMC) Nos. 6-2005 and 29-2012. Thus, the BIR
cannot claim the benefits of extending the period to collect the deficiency tax as a consequence of the
Waiver when, in truth it was the BIR's inaction which is the proximate cause of the defects of the
Waiver. The BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90 as
they have the burden of securing the right of the government to assess and collect tax deficiencies. This
right would prescribe absent any showing of a valid extension of the period set by the law.

To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either
by conforming to or by disagreeing with the extension. A waiver of the statute of limitations, whether on
assessment or collection, should not be construed as a waiver of the right to invoke the defense of
prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date
certain, within which the latter could still assess or collect taxes due. The waiver does not imply that the
taxpayer relinquishes the right to invoke prescription unequivocally.

Although we recognize that the power of taxation is deemed inherent in order to support the
government, tax provisions are not all about raising revenue. Our legislature has provided safeguards
and remedies beneficial to both the taxpayer, to protect against abuse; and the government, to
promptly act for the availability and recovery of revenues. A statute of limitations on the assessment
and collection of internal revenue taxes was adopted to serve a purpose that would benefit both the
taxpayer and the government. 35

Clearly, the defects in the Waivers resulted to the non-extension of the period to assess or collect taxes,
and made the assessments issued by the BIR beyond the three-year prescriptive period void. 36

The CIR also argues that PDI is estopped from questioning the validity of the Waivers. We do not agree.
As stated by the CTA, the BIR cannot shift the blame to the taxpayer for issuing defective waivers. 37
The Court has ruled that the BIR cannot hide behind the doctrine of estoppel to cover its failure to
comply with RMO 20-90 and RDAO 05-01 which were issued by the BIR itself. 38 A waiver of the statute
of limitations is a derogation of the taxpayer's right to security against prolonged and unscrupulous
investigations and thus, it must be carefully and strictly construed. 39
Since the three Waivers in this case are defective, they do not produce any effect and did not suspend
the three-year prescriptive period under Section 203 of the NIRC. As such, we sustain the cancellation of
the Formal Letter of Demand dated 11 March 2008 and Assessment No. LN #116-AS-04-00-00038-
000526 for taxable year 2004 issued by the BIR against PDI.

[G.R. No. 215383. March 8, 2017.]

HON. KIM S. JACINTO-HENARES, in her official capacity as COMMISSIONER OF THE BUREAU OF

INTERNAL REVENUE, petitioner, vs. ST. PAUL COLLEGE OF MAKATI, respondent.

The Facts

On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then Commissioner of
Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing the Policies and Guidelines in the Issuance
of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and Associations under
Section 30 of the National Internal Revenue Code of 1997, as Amended."

On 29 November 2013, respondent St. Paul College of Makati (SPCM), a non-stock, non-profit
educational institution organized and existing under Philippine laws, filed a Civil Action to Declare
Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 with Prayer for Issuance of Temporary
Restraining Order and Writ of Preliminary Injunction before the RTC. SPCM alleged that "RMO No. 20-
2013 imposes as a prerequisite to the enjoyment by non-stock, non-profit educational institutions of the
privilege of tax exemption under Sec. 4 (3) of Article XIV of the Constitution both a registration and
approval requirement, i.e., that they submit an application for tax exemption to the BIR subject to
approval by CIR in the form of a Tax[]Exemption Ruling (TER) which is valid for a period of [three] years
and subject to renewal." According to SPCM, RMO No. 20-2013 adds a prerequisite to the requirement
under Department of Finance Order No. 137-87, and makes failure to file an annual information return a
ground for a non-stock, non-profit educational institution to "automatically lose its income tax-exempt
status."

The Issues

The CIR raises the following issues for resolution:

WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO [NO.] 20-2013 IMPOSES A
PREREQUISITE BEFORE A NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTION MAY AVAIL OF THE TAX
EXEMPTION UNDER SECTION 4 (3), ARTICLE XIV OF THE CONSTITUTION. IAETDc

WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO NO. 20-2013 ADDS TO THE
REQUIREMENT UNDER DEPARTMENT OF FINANCE ORDER NO. 137-87. 15

The Ruling of the Court

We deny the petition on the ground of mootness.

We take judicial notice that on 25 July 2016, the present CIR Caesar R. Dulay issued RMO No. 44-2016,
which provides that:

SUBJECT: Amending Revenue Memorandum Order No. 20-

2013, as amended (Prescribing the Policies and
Guidelines in the Issuance of Tax Exemption
Rulings to Qualified Non-Stock, Non-Profit
Corporations and Associations under Section 30 of
the National Internal Revenue Code of 1997, as
Amended)
In line with the Bureau's commitment to put in proper context the nature and tax status of non-profit,
non-stock educational institutions, this Order is being issued to exclude non-stock, non-profit
educational institutions from the coverage of Revenue Memorandum Order No. 20-2013, as amended.

SECTION 1. Nature of Tax Exemption. — The tax exemption of non-stock, non-profit educational
institutions is directly conferred by paragraph 3, Section 4, Article XIV of the 1987 Constitution, the
pertinent portion of which reads:

"All revenues and assets of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes shall be exempt from taxes and duties."

This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as amended, which
provides as follows:

"Sec. 30. Exempt from Tax on Corporations. — The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxx xxx xxx

(H) A non-stock and non-profit educational institution; x x x."

It is clear and unmistakable from the aforequoted constitutional provision that non-stock, non-profit
educational institutions are constitutionally exempt from tax on all revenues derived in pursuance of its
purpose as an educational institution and used actually, directly and exclusively for educational
purposes. This constitutional exemption gives the non-stock, non-profit educational institutions a
distinct character. And for the constitutional exemption to be enjoyed, jurisprudence and tax rulings
affirm the doctrinal rule that there are only two requisites: (1) The school must be non-stock and non-
profit; and (2) The income is actually, directly and exclusively used for educational purposes. There are
no other conditions and limitations.

In this light, the constitutional conferral of tax exemption upon non-stock and non-profit educational
institutions should not be implemented or interpreted in such a manner that will defeat or diminish the
intent and language of the Constitution.

A moot and academic case is one that ceases to present a justiciable controversy by virtue of
supervening events, so that an adjudication of the case or a declaration on the issue would be of no
practical value or use. 16 Courts generally decline jurisdiction over such case or dismiss it on the ground
of mootness.

With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered this petition
moot and academic, and subject to denial. The CIR, in her petition, assails the RTC Decision finding RMO
No. 20-2013 unconstitutional because it violated the non-stock, non-profit educational institutions' tax
exemption privilege under the Constitution. However, subsequently, RMO No. 44-2016 clarified that
non-stock, non-profit educational institutions are excluded from the coverage of RMO No. 20-2013.
Consequently, the RTC Decision no longer stands, and there is no longer any practical value in resolving
the issues raised in this petition.

WHEREFORE, we DENY the petition on the ground of mootness. We SET ASIDE the Decision dated 25
July 2014 and Joint Resolution dated 29 October 2014 of the Regional Trial Court, Branch 143, Makati
City, declaring Revenue Memorandum Order No. 20-2013 unconstitutional.

Potential bar question from this case

[G.R. No. 203514. February 13, 2017.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ST. LUKE'S MEDICAL CENTER, INC., respondent.

Factual Antecedents

On December 14, 2007, respondent St. Luke's Medical Center, Inc. (SLMC) received from the Large
Taxpayers Service-Documents Processing and Quality Assurance Division of the Bureau of Internal
Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-000096 5 and QA-07-000097, 6 assessing
respondent SLMC deficiency income tax under Section 27 (B) 7 of the 1997 National Internal Revenue
Code (NIRC), as amended, for taxable year 2005

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an
administrative protest 8 assailing the assessments. SLMC claimed that as a non-stock, non-profit
charitable and social welfare organization under Section 30 (E) and (G) 9 of the 1997 NIRC, as amended,
it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed Assessment 10 dated
April 9, 2008 increasing the deficiency income for the taxable year 2005 tax to P82,419,522.21 and for
the taxable year 2006 to P60,259,885.94

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and 195960,
entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc., 18 finding SLMC not
entitled to the tax exemption under Section 30 (E) and (G) of the NIRC of 1997 as it does not operate
exclusively for charitable or social welfare purposes insofar as its revenues from paying patients are
concerned.

.CIR's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under Section 27
(B) of the 1997 NIRC. 29 It likewise asserts that SLMC is liable to pay compromise penalty pursuant to
Section 248 (A) 30 of the 1997 NIRC for failing to file its quarterly income tax returns.

As to the alleged payment of the basic tax, CIR contends that this does not render the instant case moot
as the payment confirmation submitted by SLMC is not a competent proof of payment of its tax
liabilities.

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.) 33 positing that earning a
profit by a charitable, benevolent hospital or educational institution does not result in the withdrawal of
its tax exempt privilege. 34 SLMC further claims that the income it derives from operating a hospital is
not income from "activities conducted for profit." 35 Also, it maintains that in accordance with the ruling
of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.), 36 it is not liable for compromise penalties.

In any case, SLMC insists that the instant case should be dismissed in view of its payment of the basic
taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30, 2013.

Our Ruling

SLMC is liable for income tax under Section 27 (B) of the 1997 NIRC insofar as its revenues from paying
patients are concerned.

The issue of whether SLMC is liable for income tax under Section 27 (B) of the 1997 NIRC insofar as its
revenues from paying patients are concerned has been settled in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.), 39 where the Court ruled that:

x x x We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G)
on the other hand, can be construed together without the removal of such tax exemption. The effect of
the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. 'Proprietary' means private, following the
definition of a 'proprietary educational institution' as 'any private school maintained and administered
by private individuals or groups' with a government permit. 'Non-profit' means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v. Club Filipino, Inc.
de Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment of
its stockholders and members. The club was primarily funded by membership fees and dues. If it had
profits, they were used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-making enterprise.

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

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

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that '[n]o
law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress.' The requirements for a tax exemption are strictly construed against the taxpayer
because an exemption restricts the collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for
the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San
Juan and Jesus Sacred Heart College which says that receiving income from paying patients does not
destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether outpatient, or confined in the
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that '[c]haritable institutions, churches
and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.' The test of exemption is not strictly a requirement
on the intrinsic nature or character of the institution. The test requires that the institution use the
property in a certain way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes.
The effect of failing to meet the use requirement is simply to remove from the tax exemption that
portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the
NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but requires that the
institution 'actually, directly and exclusively' use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted 'exclusively' for
charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as 'one where no part of its income is distributable as dividends to its members,
trustees, or officers' and that any profit 'obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized.' However, under Lung Center, any profit by a charitable institution must not only be
plowed back 'whenever necessary or proper,' but must be 'devoted or used altogether to the charitable
object which it is intended to achieve.'

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that 'no
part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer
or any specific person.' The use of lands, buildings and improvements of the institution is but a part of
its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso
facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property 'actually, directly and exclusively' for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively' for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be 'operated exclusively' for
social welfare.

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

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

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
'any' activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the '[n]on-stock corporation or
association [must be] organized and operated exclusively for . . . charitable . . . purposes . . . .' It likewise
qualifies the requirement in Section 30(G) that the civic organization must be 'operated exclusively' for
the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively' for charitable
purposes, it is nevertheless allowed to engage in 'activities conducted for profit' without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the 'income of whatever kind
and character' of a charitable institution 'from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax.' Prior to the introduction of Section 27(B), the
tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an
institution 'operated exclusively' for charitable purposes. Clearly, revenues from paying patients are
income received from 'activities conducted for profit.' Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared P1,730,367,965 as 'Revenues from Services to Patients' in
contrast to its 'Free Services' expenditure of P218,187,498. In its Comment in G.R. No. 195909, St. Luke's
showed the following 'calculation' to support its claim that 65.20% of its 'income after expenses was
allocated to free or charitable services' in 1998.

xxx xxx xxx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from participation
or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying a privilege exclusively.' . .
. The words 'dominant use' or 'principal use' cannot be substituted for the words 'used exclusively'
without doing violence to the Constitution and the law. Solely is synonymous with exclusively.

The Court cannot expand the meaning of the words 'operated exclusively' without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other way.
There is a 'purpose to make profit over and above the cost' of services. The P1.73 billion total revenues
from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-
paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998.
However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said that
the income is 'devoted or used altogether to the charitable object which it is intended to achieve.' The
income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. In
any case, the last paragraph of Section 30 of the NIRC expressly qualities that income from activities for
profit is taxable 'regardless of the disposition made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase 'any
activity conducted for profit.' However, it quoted a deposition of Senator Mariano Jesus Cuenco, who
was a member of the Committee of Conference for the Senate, which introduced the phrase 'or from
any activity conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree Vd. que es una
actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

xxx xxx xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación series afirmativa; pero considerando
que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posición
social económica, lo que se paga por estos enfermos debe estar sujeto a 'income tax,' y es una de las
razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution like the College of
Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms
generally occupied by people of good economic standing, then it should be subject to income tax. He
said that this was one of the reasons Congress inserted the phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an educational institution. However, it is applicable
to charitable institutions because Senator Cuenco's response shows an intent to focus on the activities
of charitable institutions. Activities for profit should not escape the reach of taxation. Being a non-stock
and non-profit corporation does not, by this reason alone, completely exempt an institution from tax.
An institution cannot use its corporate form to prevent its profitable activities from being taxed.

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

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of
the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However,
St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St.
Luke's is 'a corporation for purely charitable and social welfare purposes' and thus exempt from income
tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that 'good faith and
honest belief that one is not subject to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.'

A careful review of the pleadings reveals that there is no countervailing consideration for the Court to
revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis, which states that "[o]nce a case
has been decided in one way, any other case involving exactly the same point at issue x x x should be
decided in the same manner," the Court finds that SLMC is subject to 10% income tax insofar as its
revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30 (E) and (G) of the
1997 NIRC requires said institution to operate exclusively for charitable or social welfare purpose. But in
case an exempt institution under Section 30 (E) or (G) of the said Code earns income from its for-profit
activities, it will not lose its tax exemption. However, its income from for-profit activities will be subject
to income tax at the preferential 10% rate pursuant to Section 27 (B) thereof.