Separate Opinion of Justice Bersamin in CIR vs.

Pilipinas Shell,
GR No. 188497 dated February 19, 2014
(Is Estate Tax a Property Tax or Excise Tax?)
DOCTRINE:
FACTS:
The Supreme Court (SC) ruled that the Court of Tax Appeals (CTA) erred in granting
respondent Pilipinas Shell’s claim for tax refund because the latter failed to
establish a tax exemption in its favor under Section 135(a) of the National Internal
Revenue Code of 1997 (NIRC). Respondent filed a claim for refund for excise taxes it
paid on sales of gas and fuel oils to various international carriers. SC initially denied
the claims but the respondent filed a Motion for Reconsideration.
Hence, this MR filed by Pilipinas Shell. It argued:
- That a plain reading of Section 135 of the NIRC reveals that it is the petroleum
products sold to international carriers which are exempt from excise tax for which
reason no excise taxes are deemed to have been due in the first place;
- That excise tax being an indirect tax, Section 135 in relation to Section 148 should
be interpreted as referring to a tax exemption from the point of production and
removal from the place of production considering that it is only at that point that an
excise tax is imposed;
- That the situation is unlike the value-added tax (VAT) which is imposed at every
point of turnover
– from production to wholesale, to retail and to end-consumer;
- That exemption could only refer to the imposition of the tax on the statutory seller,
in this case Pilipinas Shell, because when a tax paid by the statutory seller is passed
on to the buyer it is no longer in the nature of a tax but an added cost to the
purchase price of the product sold.
- That the SC’s ruling that Section 135 only prohibits local petroleum manufacturers
like respondent from shifting the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the domestic oil industry and places
them at a competitive disadvantage since foreign oil producers, particularly those
whose governments with which we have entered into bilateral service agreements,
are not subject to excise tax for the same transaction. Respondent fears this could
lead to cessation of supply of petroleum products to international carriers,
retrenchment of employees of domestic manufacturers/producers to prevent further
losses, or worse, shutting down of their production. Under this scenario,
participation of Filipino capital, management and labor in the domestic oil industry
is effectively diminished.
- That the imposition by the Philippine Government of excise tax on petroleum
products sold to international carriers is in violation of the Chicago Convention on
International Aviation ("Chicago Convention") to which it is a signatory, as well as
other international agreements (the Republic of the Philippines’ air transport
agreements with the United States of America, Netherlands, Belgium and Japan).
The Solicitor General, in behalf of the CIR, argued that in the case of Exxonmobil
Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal
Revenue, the SC held that the excise tax, when passed on to the purchaser,
becomes part of the purchase price. Hence, this refutes respondent’s theory that
the exemption attaches to the petroleum product itself and not to the purchaser for
it would have been erroneous for the seller to pay the excise tax and inequitable to
pass it on to the purchaser if the excise tax exemption attaches to the product.
ISSUE: Whether an Estate Tax is a Property Tax or Excise Tax
RULING:
An Estate Tax is an Excise Tax according to the separate opinion of Justice Bersamin.
Taxes are classified, according to subject matter or object, into three groups, to wit:
(1) personal, capitation or poll taxes;
(2) property taxes; and
(3) excise or license taxes.
Personal, capitation or poll taxes are fixed amounts imposed upon residents or
persons of a certain class without regard to their property or business, an example
of which is the basic community tax. Property taxes are assessed on property or
things of a certain class, whether real or personal, in proportion to their value or
other reasonable method of apportionment, such as the real estate tax.

The Collector Of Internal Revenue vs Campos Rueda

42 SCRA 238 [GR No. L-13250 October 29, 1971]
Facts: This is an appeal interposed by herein respondent Antonio Campos Rueda as
administrator of the estate of the deceased Doña Maria de la Estrella Soriano Vda
de Cedeira, from the decision of the petitioner, collector of internal revenue,
assessing against and demanding from the former the sum of Php161,874.95 as
deficiency estate and inheritance taxes, including interest therein and penalties, on
the transfer of intangible personal properties situated in the Philippines and
belonging to said Maria Cedeira. She is a spanish national, by reason of her
marriage to a spanish citizen and was a resident of Tangier, Morocco from 1931 up
to her death on January 2, 1955. At the time of her demise, she left among others,
intangible personal properties in the Philippines. On September 29, 1955,
respondent filed a provisional estate and inheritance tax return on all the properties
of Maria Cedeira. On the same date, petitioner, pending investigation issued an
assessment for estate and inheritance tax in the respective amounts of
Php111,592.48 and Php 157,791.48 or a total of Php369,383.96 which tax liabilities
were paid by respondent. On November 27, 1955, an amended return was filed
wherein intangible personal properties with the value of Php396,308.90 were
claimed as exempt from taxes. On November 23, 1955, petitioner issued another
assessment for estate and inheritance taxes in the amounts of Php 202,262.40 and
Php267,402.84 respectively or a total of Php469,665.24. In a letter dated January
11, 1956, respondent denied the request for the exemption on the ground that the
law of Tangier is not reciprocal with section 122 of the National Internal Revenue
Code. Hence, respondent demanded the payment of the sums of Php239,439.79
representing the deficiency estate and inheritance taxes including ad valorem
penalties, surcharges, interest and compromise penalties. In a letter dated February
8, 1956, respondent requested for the reconsideration of the decision denying the
claim for the tax exemption. However, the same was denied. The denial was
premise on the ground that there was no reciprocity with Tangier, which was
moreover a mere principality, not a foreign country.
Issue: Whether or not the intangible personal properties of Maria Cedeira are
exempt from estate and inheritance tax.
Held: Yes. The controlling legal provision as noted is a proviso in section 122 of the
NIRC. It reads thus:
that no tax shall be collected under this title in respect of intangible personal
properties
1. if the decedent at the time of his death was a resident of a foreign country
which at the time of his death did not impose a transfer tax or death tax of
any character in respect of intangible personal properties of the Philippines
not residing in that foreign country; or
2. if the laws of the foreign country of which the decedent was a resident at the
time of his death allow a similar exemption from transfer taxes or death
taxes of every character in respect of intangible personal properties owned
by citizens of the Philippines not residing in that foreign country.
This court commit itself to the doctrine that even a tiny principality, hardly an
international personality in the sense did fall under the exempt category.
The expression “foreign country,” was used in the last proviso of section 122 of
NIRC refers to a government of that foreign power which although not an
international person in the sense of international law does not impose transfer or
death upon intangible person properties of our citizens not residing therein whose
law allow a similar exemption from such taxes. It is therefore not necessary that
Tangier should have been recognized by our government in order to entitle the
respondent to the exemption benefits of the proviso of said section 122 of our tax
code.
G.R. Nos. L-11622 and L-11668. January 28, 1961 (Case Brief / Digest)
Title:
The Collector of Internal Revenue vs. Douglas Fisher and Bettina Fisher,
and The Court of Tax Appeals (Estate Tax Case)Law firm websites
Facts:
Walter G. Stevenson, a British subject born in the Philippines, married Beatrice
Mauricia, also British, in Manila. They moved to San Francisco, California in 1945
and Walter died there in 1951, leaving an estate with assets in the Philippines.
Ancillary administration proceedings for the estate began in Manila. Ian Murray
Scott, the ancillary administrator, made a preliminary estate and inheritance tax
return, which was later amended to seek revaluation of assets and additional
exemptions.

The Collector of Internal Revenue assessed estate and inheritance taxes, which the
estate paid but later filed an amended return seeking a refund of a purported
overpayment. The estate availed itself of reciprocity provisions under Philippine tax
law to assert tax exemptions on intangible personal property inherited by a non-
resident alien and claimed certain deductions. The Court of Tax Appeals partly
favored the estate, resulting in both parties appealing to the Philippine Supreme
Court.
Issues:
1. Whether Walter G. Stevenson’s estate must include the share of his surviving
spouse as part of the taxable net estate under the conjugal partnership law.
2. Whether the estate of Stevenson can claim reciprocity exemption under Section
122 of the National Internal Revenue Code (NIRC) in relation to California’s
Inheritance Tax Law.Legal aid organizationsLaw firm websites
3. Whether the estate is entitled to a deduction under the U.S. Federal Estate Tax
Law in connection with reciprocal tax exemptions under Section 122 NIRC.
4. Whether the valuation of the real estate properties and shares of stock used for
tax purposes was correct.
5. Whether the estate can claim deductions for judicial and administration
expenses, funeral expenses, real estate taxes, and indebtedness incurred by the
decedent.
Court’s Decision:
The Philippine Supreme Court upheld Section 89(c) of the NIRC which provides that
in the absence of an ante-nuptial agreement, a conjugal partnership is presumed,
hence half of the marital property was deductible. The estate was not entitled to a
reciprocity exemption from inheritance taxes because of the lack of complete
reciprocity between Philippine law and California law as well as federal U.S. law,
which did not recognize reciprocal tax exemptions for non-residents. The deduction
under the U.S. Federal Estate Tax Law was disallowed as it pertained to deductions,
not exemptions. The valuation of the real estate properties and shares of stock were
affirmed at higher values than those reported by the estate. The court agreed with
the disallowance of the claimed indebtedness deduction and affirmed various other
deductions based on the Tax Court’s decision, including the additional allowance for
funeral expenses. The claim for interest on the overpaid amount was denied.
Doctrine:
This case reiterates the principle that the determination of a foreign national’s
conjugal partnership is influenced by their national law when no ante-nuptial
agreement exists and acknowledges the “processual presumption” that foreign laws
are the same as Philippine laws in the absence of proof. Furthermore, it establishes
that reciprocity in tax exemptions must be total and not partial, and the principle
that specific statutory provisions are needed for a government to be liable for
payment of interest on tax refunds.

Class Notes:
1. Conjugal Partnership Presumption: Under Philippine law, without an ante-nuptial
agreement, spouses are presumed to adopt a conjugal partnership.
2. Reciprocity Exemption: Total reciprocity is required for claiming exemptions under
Section 122 of the NIRC; partial reciprocity is inadequate.
3. Estate Tax Deductions: Deductions related to the U.S. Federal Estate Tax are not
implicitly allowed on reciprocity grounds.
4. Valuation of Assets: The fair market value of assets is assessed at the time of the
deceased’s death and not based on speculative future values.
5. Deductions Allowable: Proof of expenses such as funeral costs, judicial and
administrative fees, and real estate taxes is necessary to claim deductions.
6. Proof of Foreign Law: Foreign laws must be duly proven in court; they are not self-
proving.
7. Legal Interest on Tax Refunds: The government cannot be required to pay interest
on tax refunds in the absence of a clear statutory provision directing such payment.
Historical Background:
This case reflects the legal complexities arising from the settlement of estates
involving foreign nationals, the intricacies of international tax law, and the
application of reciprocity principles. It underscores how changes in tax laws and
international relations can impact legal interpretations and the enforcement of
existing statutes. The decision occurred at a time when Philippines tax law was
undergoing scrutiny and development, emphasizing the significance of national
sovereignty in tax matters.
G.R. No. 140944. April 30, 2008 (Case Brief / Digest)
**Title:** Rafael Arsenio S. Dizon vs. Court of Tax Appeals and
Commissioner of Internal RevenueLaw firm websites
**Facts:**
This case involves the estate tax liabilities of the deceased Jose P. Fernandez. After
Fernandez’s death on November 7, 1987, a probate court process began, appointing
Arsenio P. Dizon and Rafael Arsenio P. Dizon as administrators. In 1990, the estate
filed a tax return indicating no estate tax liability, which the BIR Regional Director
accepted, issuing certifications that taxes were fully paid and properties could be
transferred to heirs.
However, in 1991, the BIR issued an estate tax assessment notice demanding
payment of deficiency estate tax amounting to P66,973,985.40, including
surcharges and interest, due to late filing and payment, among other issues. The
estate contested this assessment, but the BIR Commissioner upheld it in 1994. The
estate then appealed to the Court of Tax Appeals (CTA), which, in 1997, recalculated
the deficiency tax but still ordered the estate to pay P37,419,493.71 plus interest.
This decision was affirmed by the Court of Appeals in 1999, prompting the estate to
escalate the matter to the Supreme Court.

**Issues:**
1. The admissibility and effect of evidence not formally offered by the BIR before the
CTA.
2. The correctness of the deficiency estate tax assessment against the estate,
considering the allowable deductions and liabilities.Law firm websites
**Court’s Decision:**
The Supreme Court found merit in the petition, ruling that the CTA and the CA erred
in admitting evidence not formally offered by the BIR. The Court held that all
evidentiary value to the BIR’s documents was lost due to the failure to formally offer
them in accordance with the rules on documentary evidence. Moreover, the Court
clarified the allowable deductions for estate tax purposes, emphasizing the claims
against the estate must be taken as of the decedent’s time of death. The Court
reversed the decisions of the CTA and CA, nullifying the BIR’s deficiency estate tax
assessment against the estate.
**Doctrine:**
1. Evidence not formally offered cannot be given any probative value.
2. The claims against the estate for allowable deductions in computing net estate
should be valued as of the date of death.
**Class Notes:**
– Formal Offer of Evidence: Essential for evidence to be considered by the court.
– Estate Tax Deductions: Claims against the estate should refer to debts or demands
enforceable against the deceased at the time of death and valued as such.
– Historical Background Context: Reflects the stringent enforcement of tax laws and
the importance of adherence to procedural rules in tax assessments.Law firm
websites
– Legal Basis: The National Internal Revenue Code provisions on estate tax liabilities
and deductions.
**Historical Background:**
The intricacies of this case, Rafael Arsenio S. Dizon vs. Court of Tax Appeals and
Commissioner of Internal Revenue, engage with essential aspects of Philippine tax
law, particularly the procedural formalities governing the presentation and
admission of evidence in tax disputes. It underscores the adherence to procedural
rules in judicial proceedings, illustrating the Judiciary’s strict stance on formal offer
requirements as a means to ensure proper assessment and presentation before a
legal verdict. This decision reinforces principles vital for law students and
practitioners, emphasizing that deviations from prescribed procedures can result in
the dismissal of significant claims or defenses, reflecting a broader historical
commitment towards the meticulous examination of evidence in Philippine
jurisprudence.
ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL vs. CIR
GR. No. 155541; January 27, 2004

Facts: During the lifetime of the decedent Juliana vda. De Gabriel, her business
affairs were managed by the Philippine Trust Company (PhilTrust). The decedent
died on April 3, 1979 but two days after her death, PhilTrust filed her income tax
return for 1978 not indicating that the decedent had died. The BIR conducted an
administrative investigation of the decedent’s tax liability and found a deficiency
income tax for the year 1997 in the amount of P318,233.93. Thus, in November 18,
1982, the BIR sent by registered mail a demand letter and assessment notice
addressed to the decedent “c/o PhilTrust, Sta. Cruz, Manila, which was the address
stated in her 1978 income tax return. On June 18, 1984, respondent Commissioner
of Internal Revenue issued warrants of distraint and levy to enforce the collection of
decedent’s deficiency income tax liability and serve the same upon her heir,
Francisco Gabriel. On November 22, 1984, Commissioner filed a motion to allow his
claim with probate court for the deficiency tax. The Court denied BIR’s claim against
the estate on the ground that no proper notice of the tax assessment was made on
the proper party. On appeal, the CA held that BIR’s service on PhilTrust of the notice
of assessment was binding on the estate as PhilTrust failed in its legal duty to inform
the respondent of antecedent’s death. Consequently, as the estate failed to
question the assessment within the statutory period of thirty days, the assessment
became final, executory, and incontestable.

Issue: (1) Whether or not the CA erred in holding that the service of deficiency tax
assessment on Juliana through PhilTrust was a valid service as to bind the estate; (2)
Whether or not the CA erred in holding that the tax assessment had become final,
executory, and incontestable.

Held: (1) Since the relationship between PhilTrust and the decedent was
automatically severed the moment of the taxpayer’s death, none of the PhilTrust’s
acts or omissions could bind the estate of the taxpayer. Although the administrator
of the estate may have been remiss in his legal obligation to inform respondent of
the decedent’s death, the consequence thereof merely refer to the imposition of
certain penal sanction on the administrator. These do not include the indefinite
tolling of the prescriptive period for making deficiency tax assessment or waiver of
the notice requirement for such assessment.

(2) The assessment was served not even on an heir or the estate but on a
completely disinterested party. This improper service was clearly not binding on the
petitioner. The most crucial point to be remembered is that PhilTust had absolutely
no legal relationship with the deceased or to her Estate. There was therefore no
assessment served on the estate as to the alleged underpayment of tax. Absent this
assessment, no proceeding could be initiated in court for collection of said tax;
therefore, it could not have become final, executory and incontestable.
Respondent’s claim for collection filed with the court only on November 22, 1984
was barred for having been made beyond the five-year prescriptive period set by
law.
Commissioner of Internal Revenue vs Pineda
No. L-22734, September 15, 1967
FACTS:
Respondent Manuel Pineda, as one of the heirs of the deceased Atanasio Pineda,
received an amount of P2500 from the estate of his deceased father as his share in
the inheritance. The BIR assessed the estate with income tax deficiency and made
Manuel Pineda liable for the payment of all the taxes due from the estate in the
total amount of P760.28 instead of only for the amount of taxes corresponding to
his share in the estate.
ISSUE:
Can the Government require an heir to pay the full amount of the taxes assessed?
RULING:
Yes, an heir is liable but it cannot exceed the amount of his share. He is liable for
the assessment as an heir and as a holder-transferee of property belonging to the
estate-taxpayer. As an heir he is individually answerable for the part of the tax
proportionate to the share he received from the inheritance. As a holder of the
property belonging to the estate, he is liable for the tax up to the amount of the
property in his possession. The Government has a lien on such property. But after
payment of such amount, he will have a right to contribution from his co-heirs.
The Government has two ways of collecting the taxes in question:
1. By going after all the heirs and collecting from each one of them the amount of
the tax proportionate to the inheritance received; or
2. By subjecting said property of the estate which is in the hands of an heir or
transferee to the payment of the tax due the estate.
In this case, the BIR opted for the second remedy to collect the tax as it has the
discretion to avail the most expeditious way to collect the tax. Taxes are the
lifeblood of the government and their prompt and certain availability is an imperious
need.
G.R. No. 120880. June 05, 1997 (Case Brief / Digest) © 2024 - batas.org | 1
Title:
**Ferdinand R. Marcos II vs. Court of Appeals and Bureau of Internal
Revenue
** Facts: The case revolves around the assessments of deficiency income and estate
taxes against the late President Ferdinand E. Marcos by the Bureau of Internal
Revenue (BIR), and the subsequent levies on real properties to satisfy the tax
liabilities. After Ferdinand E. Marcos’s death on September 29, 1989, an audit team
investigated his tax obligations, failing to file notice of death, an estate tax return,
and income tax returns for specific years. On July 26, 1991, the BIR issued the
assessment notices, including a deficiency estate tax assessment of over P23
billion. Copies were constructively served upon Imelda Marcos (through her
caretaker) and upon Ferdinand “Bongbong” Marcos II (also through his caretaker).
The Marcoses did not contest the assessments within the prescribed period,
rendering them final and unappealable. Consequently, the BIR issued notices of levy
on several real properties. These actions led to Ferdinand R. Marcos II filing a
petition for certiorari and prohibition before the Court of Appeals (CA) on June 25,
1993. Despite service of notices on several occasions, the petitioner did not protest
the assessments nor appeal to the Court of Tax Appeals.
The CA dismissed the petition for lack of merit and affirmed the BIR’s actions.
Marcos II then brought the case before the Supreme Court, alleging errors on the
CA’s part and contending that estate tax assessment should be part of the probate
proceeding, which he argues is exclusive and mandatory for tax disputes related to
the estate of the deceased. He also claimed the BIR’s actions violated due process.
Issues:
1. Whether the BIR’s assessment and collection through summary remedies of
estate and income tax delinquencies, despite probate proceedings, is valid.
2. Whether the CA erred in disregarding the petitioner’s arguments related to the
merits of the BIR’s actions based on the finality of the tax assessments.
3. Whether the CA erred in denying injunctive relief to the petitioner and whether
the BIR’s method of collecting the alleged deficiency taxes was arbitrary.
Court’s Decision: The Supreme Court (SC) denied the petition and affirmed the CA’s
decision in all respects. The SC held that the BIR is not required to wait for the
probate court’s assessment or
collection of estate taxes and that taxes can be collected through summary
remedies independent of the probate court’s proceedings. The SC also decided that
the petitioner’s failure to contest the assessment resulted in its finality, making it
enforceable through levy upon real property. Furthermore, the SC found sufficient
notice of the assessments and subsequent levies to Marcos II and that the
petitioner’s arguments against the assessments, including the amount and timing,
should have been addressed through proper administrative and judicial channels.
The SC concluded the petitioner waived his right to challenge the assessments and,
subsequently, the levies and public auction by not acting within the provided legal
remedies.
Doctrine: The Court reiterates the doctrine that probate proceedings do not
preclude the BIR from assessing and collecting estate taxes through summary
remedies. It is not a mandatory requirement for the BIR to seek the probate court’s
approval before enforcing and collecting estate taxes.
Class Notes:
– Taxes are the lifeblood of the government and should be collected without
unnecessary hindrance. – Estate taxes are assessed against the decedent’s estate
and are collectible from the heirs proportionate to their inheritance.
– A final and unappealable assessment can be enforced and collected through
summary remedies such as levy and sale.
– Taxpayers must contest tax assessments through administrative protest and
judicial appeal within the prescribed periods under Sections 229 and 223 of the
NIRC. Otherwise, the assessment becomes final and executory.
– In probate proceedings, a Certification from the Commissioner of Internal Revenue
showing payment of estate taxes is required before the distribution of shares to
interested parties (NIRC Section 87).
Historical Background: The historical background of the case shows the prolonged
process of settling Ferdinand E. Marcos’s estate following his death while in exile.
His estate became controversial due to the massive tax liabilities assessed by the
BIR and the failure of his heirs to duly address these obligations. The SC’s decision
in this case underscores the government’s staunch position on its authority to levy
estate taxes irrespective of ongoing probate proceedings, emphasizing the
importance of following due process and existing remedies for contesting tax
assessments.
G.R. No. 208293. December 10, 2014 (Case Brief / Digest)
Philippine National Bank vs. Santos et al.
**Facts:**
Respondents, children of Angel C. Santos, discovered in 1996 that their deceased
father had deposits in Philippine National Bank (PNB). The deposits included a
premium savings account and a time deposit account. On April 26, 1998, when
respondents attempted to withdraw the funds after presenting the necessary
documents, PNB’s branch manager, Lina B. Aguilar, informed them that the funds
had been released to Bernardito Manimbo on April 1, 1997. Manimbo had submitted
fraudulent documentation, including an affidavit of self-adjudication falsely
attributed to one of the respondents, which led to the withdrawal of the funds.
Respondents filed a suit for a sum of money and damages against PNB and Aguilar.
**Procedural Posture:**
The Regional Trial Court (RTC) ruled in favor of respondents, finding PNB and Aguilar
jointly and severally liable for the release of the deposit funds and awarding
damages. Both PNB and Aguilar filed separate motions for reconsideration, which
were denied by the RTC. They then appealed to the Court of Appeals (CA), which
upheld the RTC’s decision but deleted the award of exemplary damages and
modified the interest rate to 12% per annum. PNB and Aguilar subsequently filed
petitions for review with the Supreme Court (SC).
**Issues:**
1. Whether PNB was negligent in releasing the deposit to Bernardito Manimbo.
2. Whether Lina B. Aguilar is jointly and severally liable with PNB for the release of
the deposit to Manimbo.
3. Whether respondents were properly awarded damages.
**Court’s Decision:**
1. **PNB’s Negligence (Issue 1)**:
– The SC affirmed that PNB was negligent. The bank accepted inadequate
documentation from Manimbo, disregarding its own procedural requirements
without due investigation. This failure breached the high standard of care and
diligence banks owe to their depositors, given the fiduciary nature of banking
relationships as prescribed by law.

2. **Liability of Lina B. Aguilar (Issue 2)**:

– Aguilar, as the branch manager, was found jointly and severally liable with PNB.
She had approved the fraudulent withdrawal without thorough verification, which
facilitated the unauthorized release of funds. The SC held that Aguilar’s actions
implicated her in the bank’s negligence despite her claim that she was merely
following directives from PNB’s Legal Department.
3. **Damages Awarded to Respondents (Issue 3)**:
– The SC confirmed the awards for moral damages due to significant emotional
suffering caused by the negligence. Additionally, the SC reinstated the award for
exemplary damages to set a public example and ensure high standards of diligence
by banks. The SC also upheld the award of attorney’s fees given the respondents’
necessity to go to court to recover the funds.
**Doctrine:**
– The standard of diligence required of banks is higher than the degree of diligence
of a good father of a family.
– Banks are fiduciaries of their depositors and must treat deposit accounts with
utmost care, adhering to high standards of diligence and integrity.
– A bank’s negligence resulting in unauthorized withdrawal from an account holds
both the institution and its officers liable for damages.
**Class Notes:**
1. **Fiduciary Duty of Banks**: Banks must treat deposit accounts with the highest
standard of care due to their fiduciary relationship with depositors.
2. **Negligence and Liability**: Negligence that fails the “good father of a family”
standard can hold both the financial institution and its officers jointly and severally
liable.
3. **Documentation Requirements**: Fulfilling all legal and procedural requirements
is mandatory before releasing deposits of a deceased person.
4. **Compensation for Damages**: Emotional suffering resulting from a breach of
duty warrants moral damages; exemplary damages may be awarded for gross
negligence to set a precedent.
**Historical Background:**
This case underscores the importance of banking scrutiny and adherence to
procedural regulations in the Philippines, within the broader context of fiduciary
obligations of financial institutions. It also highlights the protections afforded to
depositors against negligence and establishes stricter standards of care expected
from banks. The doctrines established reinforce the critical oversight role of banks
in ensuring the security of depositor funds, and the severe consequences they can
face for lapses in these duties, in a historically trust-dependent banking system.
REV. FR. CASIMIRO LLADOC v. The COMMISSIONER OF INTERNAL REVENUE
and The COURT of TAX APPEALS. G.R. No. L-19201. June 16, 1965
FACTS:
M.B. Estate, Inc. donated P10,000.00 in cash to the parish priest of Victorias, Negros
Occidental, for the construction of a new Catholic Church in the locality. The total
amount was actually spent for the purpose intended.
A year later, M.B. Estate, Inc., filed the donor's gift tax return. CIR issued an
assessment for donee's gift tax against the parish, of which petitioner was the
priest.
Petitioner filed a protest which was denied by the CIR. He then filed an appeal with
the CTA citing that he was not the parish priest at the time of donation, that there is
no legal entity or juridical person known as the "Catholic Parish Priest of Victorias,"
and, therefore, he should not be liable for the donee's gift tax and that assessment
of the gift tax is unconstitutional.
The CTA denied the appeal thus this case.
ISSUE: Whether petitioner and the parish are liable for the donee's gift tax.
RULING:
Yes for the parish. The Constitution only made mention of property tax and not of
excise tax as stated in Section 22, par 3. The assessment of the CIR did not rest
upon general ownership; it was an excise upon the use made of the properties,
upon the exercise of the privilege of receiving the properties. A gift tax is not a
property tax, but an excise tax imposed on the transfer of property by way of
gift inter vivos, the imposition of which on property used exclusively for religious
purposes, does not constitute an impairment of the Constitution.
No for the petitioner. The Court ordered petitioner to be substituted by the Head of
Diocese to pay the said gift tax after the CIR and Solicitor General did not object to
such substitution.
MARIA CARLA PIROVANO, etc., et al. v. THE COMMISSIONER OF INTERNAL
REVENUE. G.R. No. L-19865. July 31, 1965
FACTS:
De la Rama Steamship Co. insured the life of Enrico Pirovano, who was then its
President and General Manager until the time of his death. The Company then
received the total sum of P643,000.00 as proceeds of the said life insurance
policies. The Company renounced all its rights on the money in favor of the
decendent's children.
After a case that marred Estefania Pirovano, the guardian and the Company
(see Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.), the Company paid in
favor of the children.
The CIR then assessed donees' gift tax against Pirovano and donor's tax against the
Company. Pirovano contested with the CIR which she lost and thus appealed with
the CTA.
The CTA held that donees' gift tax were correctly assessed.
ISSUE: Whether Pirovano should pay the donees' gift tax.
RULING:
YES. Pirovano contends that the Court itself declared that the donation was
renumenatory and not simple and it was made for a full and adequate
compensation for the valuable services by decedent to the Company; hence, the
donation does not constitute a taxable gift under the provisions of Section 108 of
the National Internal Revenue Code (old law).
The Court states that it is a donation; that the consideration for the donation was,
therefore, the company's gratitude for his services, and not the services themselves
and whether the donation was simple or renumenatory, it was still a gift taxable
under the law.
### Title: Abello et al. v. Commissioner of Internal Revenue
### Facts:
In the 1987 national elections, the partners of the Angara, Abello, Concepcion,
Regala, and Cruz (ACCRA) law firm, namely, Manuel G. Abello, Jose C. Concepcion,
Teodoro D. Regala, and Avelino V. Cruz (petitioners), contributed P882,661.31 each
to Senator Edgardo Angara’s campaign fund. The Bureau of Internal Revenue (BIR)
assessed each petitioner a donor’s tax of P263,032.66 through letters dated April
21, 1988. The petitioners contested this assessment, stating their contributions
should not be considered gifts under the National Internal Revenue Code (NIRC) and
thus not liable to donor’s tax. Their claim was rejected by the Commissioner of the
Internal Revenue.
The petitioners then sought redress from the Court of Tax Appeals (CTA) on
September 12, 1988, which ruled in their favor on October 7, 1991, ordering the
Commissioner to desist from collecting the taxes. However, upon the
Commissioner’s appeal, the Court of Appeals reversed the CTA’s decision on April
20, 1994, directing the petitioners to pay the assessed donor’s tax. Following a
denied motion for reconsideration by the Court of Appeals, the petitioners elevated
the case to the Supreme Court via a petition for review on certiorari.
### Issues:
1. Whether the Court of Appeals erred in its interpretation of the gift tax law and its
application to political contributions.
2. Whether the definition of “electoral contribution” under the Omnibus Election
Code influences the determination of political contributions as taxable gifts.
3. Whether historical administrative practice and American jurisprudence influence
the taxability of political contributions in the Philippines.
### Court’s Decision:
The Supreme Court denied the petition, affirming the decision of the Court of
Appeals.
– The Court found that political contributions fell within the scope of taxable gifts
under Section 91 of the NIRC as these were voluntary transfers of property without
consideration.
– It held that the intention behind the contributions (to support a political campaign)
did not negate their character as donations or gifts, as they satisfied the Civil
Code’s definition of a donation—act of liberality, reduction of the donor’s patrimony,
increase in the donee’s patrimony, and intent to give.
– The Court dismissed the relevance of the definition of “electoral contribution”
under the Omnibus Election Code and the petitioners’ argument on longstanding
administrative practice and American jurisprudence, stating that the law was clear
and required no construction.
– Additionally, the Court noted that the subsequent enactment of Republic Act No.
7166, exempting political contributions from gift tax, further underscored that the
contested contributions were taxable under the existing laws at the time they were
made.
### Doctrine:
This case established the doctrine that political contributions are considered as gifts
subject to donor’s tax under Philippine tax laws unless explicitly exempted by
legislation. It confirmed that the presence of donative intent, determined by the act
of giving without expecting material consideration in return, qualifies such
contributions as taxable gifts.
### Class Notes:
– The definition of a taxable gift includes voluntary transfers of property without
consideration, in line with the NIRC and the Civil Code’s concept of a donation.
– Political contributions made without the expectation of direct material
consideration qualify as gifts and are subject to donor’s tax.
– The intention to support a political campaign does not remove the contribution
from the scope of taxable gifts.
– Legislative changes, such as Republic Act No. 7166, can exempt certain types of
contributions (e.g., political contributions) from the gift tax, highlighting the
importance of the current legal framework in determining tax liabilities.
### Historical Background:
The case provides insight into the evolving interpretation of tax laws in the
Philippines, especially concerning political contributions. Prior to this decision, there
was a prolonged administrative practice of not taxing political contributions as gifts.
However, this case underscored the principle that previous erroneous
interpretations by tax authorities do not preclude correct application of the law in
later instances, reinforcing the dynamic nature of legal interpretations in response
to changing societal contexts and legislative developments.
**Title:** Philippine American Life and General Insurance Company vs. The
Secretary of Finance and The Commissioner of Internal Revenue
**Facts:** The case began when The Philippine American Life and General Insurance
Company (Philamlife) decided to sell its 498,590 Class A shares in Philam Care
Health Systems, Inc. (PhilamCare) through competitive bidding as part of its
divestiture strategy from the health maintenance organization industry. On
September 24, 2009, the shares were sold to STI Investments, Inc. for USD
2,190,000 or approximately PhP 104,259,330, based on the prevailing exchange
rate. Subsequent to the sale, Philamlife fulfilled the required payment of
documentary stamp and capital gains taxes and sought a certificate for
registration/tax clearance from the Bureau of Internal Revenue (BIR) Large
Taxpayers Service Division for the transfer of shares.
Philamlife was advised to secure a BIR ruling to address potential donor’s tax
liability. On January 4, 2012, Philamlife requested BIR’s confirmation that the sale
was not subject to donor’s tax, highlighting that the transaction had no donative
intent and was conducted at fair market value and under a competitive bidding
process. However, the Commissioner of Internal Revenue denied the request via BIR
Ruling No. 015-12, stating the sales transaction’s price was below the book value of
the shares sold, thereby imposing donor’s tax on the price difference according to
the National Internal Revenue Code (NIRC) Section 100.
Philamlife sought a review from the Secretary of Finance, which upheld the
Commissioner’s ruling. Philamlife then filed a petition for review under Rule 43 with
the Court of Appeals (CA), which dismissed the petition outright for lack of
jurisdiction, concluding the Court of Tax Appeals (CTA) was the proper venue. A
motion for reconsideration was filed by Philamlife but was denied, leading to the
present petition for review on certiorari under Rule 45.
**Issues:**
1. Whether the CA erred in dismissing the petition for review for lack of jurisdiction.
2. Whether the price difference in Philamlife’s sale of shares in PhilamCare attracts
donor’s tax.
**Court’s Decision:**
1. Jurisdiction: The Supreme Court held that the CA’s dismissal was appropriate,
clarifying that the jurisdiction over the controversy indeed lies with the CTA. The
Court delineated that the respondent Commissioner’s action, covered under the first
paragraph of Section 4 of the NIRC (power to interpret tax laws), is rightfully subject
to review by the CTA. The ruling emphasized that cases involving the tax treatment
of transactions, including questions on the validity of revenue regulations under
which such assessments are made, fall within the exclusive appellate jurisdiction of
the CTA, even if it entails determining the validity of an administrative rule or
regulation.
2. Donor’s Tax: On the substantive issue, the Court affirmed the imposition of
donor’s tax on the price difference, underscoring that the absence of donative
intent does not exempt the sales transaction from donor’s tax due to the specific
provision of NIRC Section 100. It rationalized that the law intends to discourage sale
price manipulation to avoid taxes and ensures the government is not placed at a
disadvantageous position.
**Doctrine:** The ruling reiterates the broad jurisdiction of the Court of Tax Appeals
over tax-related matters, including the power to interpret tax laws and review
administrative rulings. It also affirms that transactions deemed gifts by law (via
Section 100 of the NIRC), regardless of the actual intent, are subject to donor’s tax
when the sale price is less than the fair market value.
**Class Notes:**
– Jurisdiction: The Court of Tax Appeals has exclusive appellate jurisdiction over
disputes involving tax assessments and other matters arising under the NIRC or
laws administered by the BIR, including the power of certiorari to determine the
validity of revenue regulations within its appellate jurisdiction.
– Donor’s Tax: A transaction may attract donor’s tax under Section 100 of the NIRC
when property is transferred for less than adequate and full consideration, treating
the difference as a deemed gift.
– Revenue Regulations: The power to issue revenue regulations, including those
defining the fair market value for taxation purposes, falls within the purview of the
BIR’s authority to interpret tax laws.
**Historical Background:** This case underscores the intricacies involved in tax law
interpretation and the jurisdictional challenges in adjudicating tax disputes in the
Philippines. It highlights the strategic role of administrative rulings and the appellate
process in tax law enforcement and the need for

Title: Aces Philippines Cellular Satellite Corporation vs. The Commissioner

of Internal Revenue: The Taxation of Income Derived from Satellite Airtime
Services
Facts: Aces Philippines Cellular Satellite Corporation (petitioner) engages in a legal
battle against the Commissioner of Internal Revenue (respondent) over deficiency
final withholding tax (FWT) for the taxable year 2006. The Philippine Long Distance
Telephone Company (PLDT) originally entered into a Gateway Agreement with Aces
Indonesia in 1995, which was followed by an Air Time Purchase Agreement in 1997.
These agreements essentially permitted Aces Indonesia to provide PLDT with the
equipment necessary to operate a gateway in the Philippines and to sell satellite
airtime to PLDT. Subsequently, Aces Indonesia transferred its rights under the Air
Time Purchase Agreement to Aces International Limited (Aces Bermuda), and PLDT
transferred its rights to its subsidiary, the petitioner. In 2007, the BIR audited the
petitioner’s books and assessed a deficiency FWT for payments made to Aces
Bermuda, arguing these were income paid to a non-resident foreign corporation
from sources within the Philippines. The petitioner protested administratively but
was unsuccessful, leading to a judicial protest before the CTA. The CTA Division and
the CTA En Banc upheld the assessment, prompting the petitioner to file a Petition
for Review on Certiorari before the Supreme Court.
Issues: The core legal issue resolved by the Supreme Court was whether the
satellite airtime fee payments to Aces Bermuda, a non-resident foreign corporation,
constituted income from sources within the Philippines, thereby subjecting it to
Philippine income tax and consequently to final withholding tax obligations on the
part of the petitioner.
Court’s Decision: The Supreme Court dismissed the petition, affirming the CTA En
Banc’s decision with modifications concerning the computation of interests. It held
that the satellite airtime fee payments to Aces Bermuda were indeed income from
sources within the Philippines. It elucidated that income was sourced within the
Philippines because the activity generating the income, i.e., the receipt and
utilization of satellite airtime facilitated by a gateway located in the Philippines, took
place in the country. Consequently, Aces Bermuda, through its business operations
facilitated by the petitioner, derived income from within the Philippines, thus
necessitating the imposition of tax
Doctrine: The case reiterates the principle of sourcing income based on the location
where the income-generating activities occur. It underscores that foreign entities
engaging in transactions that utilize facilities located within the Philippines to
generate income are subject to Philippine income tax on such income.
Class Notes:
1. Final Withholding Tax (FWT) – A type of tax wherein the amount of income tax is
withheld or deducted from the income payable to the recipient so that the recipient
receives the net income after tax.
2. Non-Resident Foreign Corporation (NRFC) – A corporation that is not domiciled in
the Philippines but derives income from sources within the Philippines.
3. Taxable Source of Income – Determined based on the situs of income, which
refers to the place where the right or property giving rise to the income is utilized or
where the service that generates the income is performed.
Historical Background: This case highlights the evolving nature of transactions
subject to income tax within the framework of globalization and technological
advancements. Satellites, though not physically located within any country’s
territory, are integral to telecommunications services that reach into various
countries, including the Philippines. The development emphasizes the necessity to
adapt legal principles, especially on taxation, to the realities of modern commerce
and technology
**Contex Corporation vs. Hon. Commissioner of Internal Revenue**
### Facts:
Contex Corporation, a domestic entity manufacturing hospital textiles for export and
operating within the Subic Bay Freeport Zone (SBFZ), availed itself of tax
exemptions under Republic Act No. 7227. It registered with the BIR as a non-VAT
entity, believing it was exempt from all national and local taxes, including VAT. From
1997 to 1998, Contex paid VAT on its purchases, believing these were erroneously
charged. After its initial tax refund request was denied by the BIR, Contex filed a
second request, which also went unaddressed, prompting it to seek recourse with
the Court of Tax Appeals (CTA). The CTA granted a partial refund, accepting Contex’s
claim for exemption from input VAT but limited the refund to VAT paid on materials
used directly in manufacturing and disallowed claims for VAT paid before June 29,
1997, due to the prescriptive period.
The Commissioner of Internal Revenue (CIR) appealed to the Court of Appeals (CA),
which reversed the CTA’s decision, arguing that Contex’s VAT exemption under RA
7227 did not extend to input VAT. The CA held that such exemptions are strictly
construed and only pertain to direct taxes. Contex’s motion for reconsideration was
denied, leading to the petition before the Supreme Court.
### Issues:
1. Whether RA 7227’s exemption from “all local and national internal revenue taxes”
includes VAT on purchases made by Contex Corporation.
2. Whether Contex Corporation is entitled to a tax refund or credit for the VAT paid
on its purchases of supplies and materials for the years 1997 and 1998.

### Court’s Decision:

The Supreme Court denied the petition, affirming the CA’s decision. The Court held
that while Contex is VAT-exempt as a purchaser, its exemption does not extend to
input VAT on its purchases since this would essentially grant Contex a benefit
intended for VAT-registered entities, namely, input VAT credit/refund. The Court
clarified that VAT is an indirect tax where the liability for the tax differs from the
burden of the tax, which can be passed to the buyer. The Court emphasized that tax
exemptions are granted expressly by law and are strictly construed. Since Contex is
registered as a non-VAT taxpayer, it cannot claim a refund or credit for input VAT
paid as it is exempt from VAT on all its sales and importations.
### Doctrine:
This decision reiterates the principle that VAT exemptions under special laws like RA
7227 are strictly construed and only pertain to taxes for which a taxpayer is directly
liable. It distinguishes between the liability for VAT and the burden of VAT, indicating
that only VAT-registered entities are eligible for input VAT credit/refund.
### Class Notes:
– VAT is an indirect tax, the burden of which can be passed on to the buyer but the
legal liability remains with the seller.
– Tax exemptions, especially under laws such as RA 7227, are strictly construed and
only extend to taxes for which the entity is directly liable.
– A VAT-exempt entity under RA 7227 cannot claim a refund or credit for input VAT
paid, as this contradicts its non-VAT taxpayer status.
### Historical Background:
Contex Corporation vs. Commissioner of Internal Revenue delves into the
application of VAT exemptions accorded by the special economic zone laws of the
Philippines, specifically RA 7227, which created the Subic Bay Freeport Zone. This
case highlights the complexities of tax laws in special economic zones, where
entities are often granted tax incentives and exemptions to encourage investment
and economic development. The decision underscores the nuanced interpretation of
tax exemption provisions within the framework of the country’s VAT system,
emphasizing the distinction between direct and indirect tax liabilities and the
specific eligibility criteria for claiming VAT refunds or credits.
[CASE DIGEST] CIR v. CA and COMASERCO (G.R. No. 125355)
March 30, 2000

Commissioner of Internal Revenue, petitioner

CA and Commonwealth Management and Services Corporation, respondents

FACTS:

1. Commonwealth Management and Services Corp. (COMASERCO) is a corporation

duly organized and existing under the laws of the Philippines. It is an affiliate of
Philippine American Life Insurance Co. (Philamlife), organized by the latter to
perform collection, consultative and other technical services, including functioning
as an internal auditor, of Philamlife and its other affiliates.

2. On January 24, 1992, the BIR issued an assessment to Commonwealth

Management and Services Corp. (COMASERCO) for deficiency value-added tax (VAT)
amounting to P351,851.01, for taxable year 1988

3. On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting
to the latter's finding of deficiency VAT. On August 20, 1992, the Commissioner of
Internal Revenue sent a collection letter to COMASERCO demanding payment of the
deficiency VAT.

4. On September 29,1992, COMASERCO filed with the CTA a petition for review
contesting the Commissioner's assessment. Its arguments are as follows:
 The services it rendered to Philamlife and its affiliates, relating to collections,
consultative and other technical assistance, including functioning as an
internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis;
  That it was not engaged in the business of providing services to Philamlife
and its affiliates and that it was established to ensure operational orderliness
and administrative efficiency of Philamlife and its affiliates, and not in the
sale of services; and
 That it was not profit-motivated, thus not engaged in business. In fact, it did
not generate profit but suffered a net loss in taxable year 1988. Since it was
not engaged in business, it was not liable to pay VAT.

CTA: Denied COMASERCO's petition. Affirmed the Commissioner's deficiency VAT

assessment for the year 1988.

CA: Reversed CTA ruling. Cancelled the assessment for deficiency VAT for the year
1988. The basis for the CA's ruling was a prior ruling it made in another case
involving COMASERCO, where it was held that COMASERCO was not liable to pay
fixed and contractor's tax for services rendered to Philamlife and its affiliates and as
such was not engaged in business of providing services to Philamlife and its
affiliates.

Hence, the instant petition for review on certiorari by the Commissioner.

ISSUE:

Whether COMASERCO was engaged in the sale of services, and thus liable to pay
VAT thereon.

HELD:

Petition granted. Reversed CA ruling. Reinstated CTA ruling. COMASERCO ordered to

pay deficiency VAT as per the assessment issued by the Commissioner for the
taxable year 1988.

1. Who are the persons liable for VAT?

"Section 99, NIRC. Persons liable. - Any person who, in the course of trade or
business, sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who imports goods shall be subject to the value-added
tax (VAT) imposed in Sections 100 to 102 of this Code.""

2. What does "in the course of trade or business" mean?

COMASERCO: The term "in the course of trade or business" requires that the
"business" is carried on with a view to profit or livelihood. In other words, the
activities of the entity must be profit-oriented.

SC: Under Sec. 105 (Persons Liable) of R.A. No. 7716, or the Expanded VAT Law
(EVAT), the phrase "in the course of trade or business" means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein is a
nonstock, nonprofit organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members of their guests), or government
entity.

This definition applies to all transactions even to those made prior to the enactment
of the EVAT Law, which merely stresses that even a nonstock, nonprofit organization
or government entity is liable to pay VAT for the sale of goods and services.

3. Are non-stock, nonprofit organizations or government entities (such as

COMASERCO) liable to pay VAT for the sale of goods and services?

COMASERCO: No, profit motive is material in ascertaining who to tax for purposes of
determining liability for VAT.

SC: Yes, even a non-stock, non-profit, organization or government entity, is liable to

pay VAT on the sale of goods or services.

It is immaterial whether the primary purpose of a corporation indicates that it

receives payments for services rendered to its affiliates on a reimbursement-on-cost
basis only, without realizing profit, for purposes of determining liability for VAT on
services rendered. As long as the entity provides service for a fee, remuneration or
consideration, then the service rendered is subject to VAT.
This contention finds support in BIR Ruling No. 010-98 issued by the Commissioner
on February 5, 1998, which provides that a domestic corporation that provided
technical, research, management and technical assistance to its affiliated
companies and received payments on a reimbursement-of-cost basis, without any
intention of realizing profit, was subject to VAT on services rendered. In fact, even if
such corporation was organized without any intention of realizing profit, any income
or profit generated by the entity in the conduct of its activities, was subject to
income tax.

4. Is COMASERCO liable to pay VAT?

COMASERCO: Because COMASERCO is not motivated by profit, as defined by its

primary purpose in the articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit," it couldn't be said that it is
performing acts in the course of trade or business. Hence, it is not liable for the
payment of VAT.

SC: The services rendered by COMASERCO to Philamlife and its affiliates are subject
to VAT. The performance of all kinds of services for others for a fee, remuneration or
consideration is considered as sale of services subject to VAT. (See items 1-3 in
ratio.)
5. Can the CA's ruling in a prior case involving COMASERCO be made applicable in
the instant case?

SC: No. The issue in the first case (i.e., whether COMASERCO is engaged in business
to determine liability for the payment of fixed and percentage taxes), is different
from the present case, which involves COMASERCO's liability for VAT.
Commissioner of Internal Revenue vs. Magsaysay Lines, Inc., et al.: A VAT
Exemption Case on Privatization and Sale of Vessels
### Facts:
In an effort to privatize, the National Development Company (NDC) decided to sell
its shares and five vessels owned through its subsidiary, National Marine
Corporation (NMC). These vessels were sold in one package during a public bidding
where Magsaysay Lines, Inc., along with Baliwag Navigation, Inc., and FIM Limited,
emerged as the winning bidders. The sale included a stipulation that the buyers
would shoulder any value-added tax (VAT) if applicable. Subsequently, both parties
sought clarification from the Bureau of Internal Revenue (BIR) regarding the VAT
liability. The BIR issued rulings indicating that the sale was subject to a 10% VAT,
identifying NDC as a VAT-registered entity.
The private respondents contested these rulings and, after NDC drew from a Letter
of Credit to cover the VAT payment, formally requested a refund from the Court of
Tax Appeals (CTA), arguing that the sale was not made in the ordinary course of
NDC’s business and thus should not be VAT-liable. The CTA sided with the
respondents, a decision the Commissioner of Internal Revenue (CIR) appealed to the
Court of Appeals. The appellate court initially reversed the CTA’s decision but
ultimately upheld it upon reconsideration, agreeing that the sale was not subject to
VAT as it was not conducted in the ordinary course of NDC’s business.
### Issues:
1. Whether the sale of NDC’s vessels is subject to VAT under the National Internal
Revenue Code of 1986.
2. The applicability of VAT on transactions not made in the ordinary course of trade
or business.
3. Interpretation of “deemed sale” provisions under VAT regulations.
### Court’s Decision:
The Supreme Court affirmed the appellate court’s ruling that the sale was not
subject to VAT. It clarified that transactions not undertaken in the ordinary course of
business do not attract VAT, aligning with the purpose of VAT as a consumption tax
ultimately borne by the end consumer. The Court emphasized the transaction’s
classification over its formality, underlining that the government program of
privatization was a singular event rather than a regular business activity of NDC.
### Doctrine:
The main doctrine established is that sales, barters, or exchanges of goods or
services not made in the ordinary and regular course of trade or business are
beyond the purview of VAT. A transaction’s incidental contribution to the production
chain does not necessarily imply VAT liability if it is not a regular business
activity.Law firm websites
### Class Notes:
– **Key Elements for VAT Liability:**
– Regularity of business transactions.
– Transactions must occur in the ordinary course of trade or business.
– **Statutory Provisions:**
– Section 99 of the Tax Code specifies persons liable for VAT.
– Section 100 details transactions deemed sales for VAT purposes, subject to the
ordinary course of business requirement.
– **Application:**
– The VAT system is designed to impose tax on every level of consumption but
exempts isolated transactions not part of regular business activities.
– “Deemed sale” provisions require contextual interpretation focused on whether
the activity constitutes a business’s regular operations.
### Historical Background:
This case highlights the intricacies of VAT implications in government privatization
efforts and the judicial interpretations regarding what constitutes regular business
activities for VAT purposes. It underscores the challenges in applying VAT laws to
transactions that, while potentially yielding revenue, do not emerge from an entity’s
ordinary business operations. This decision represents a pivotal moment in
clarifying the scope of VAT in the context of privatization and the sale of
government assets, reflecting broader economic policies and priorities.
### Title: Power Sector Assets and Liabilities Management Corporation v.
Commissioner of Internal Revenue ###
Facts: The Power Sector Assets and Liabilities Management Corporation (PSALM), a
governmentowned corporation created under the Electric Power Industry Reform Act
of 2001 (EPIRA), was mandated to manage the sale and privatization of the National
Power Corporation (NPC) assets. In June 2011, the Bureau of Internal Revenue (BIR)
issued a Final Assessment Notice (FAN) to PSALM for a deficiency value-added tax
(VAT) of P10,103,158,715.06 for the taxable year ending 31 December 2008. PSALM
protested this FAN, arguing that its privatization activities were part of its original
mandate and not subject to VAT. The BIR issued a final decision denying PSALM’s
protest. Consequently, PSALM filed a petition for review with the Court of Tax
Appeals (CTA).
The CTA Third Division partially granted PSALM’s petition allowing input tax credits
but found PSALM liable for deficiency VAT, stating that PSALM’s sale of generating
assets falls under transactions subject to VAT by virtue of RA 9337. PSALM’s motion
for reconsideration was denied, prompting an appeal to the CTA En Banc, which
affirmed the decision of the CTA Third Division. PSALM then filed a petition before
the Supreme Court.
### Issues:
1. Whether PSALM’s privatization activities are subject to VAT.
2. Whether PSALM is liable for deficiency VAT for transactions incidental to its
privatization activities.
3. Whether PSALM is liable for deficiency VAT for receivables not arising from the
sale of goods or services.
### Court’s Decision: The Supreme Court granted PSALM’s petition, reversing the
CTA’s decisions and canceling the assessment for deficiency VAT. The Court clarified
that PSALM’s sale of generating assets and other activities were conducted under
its mandate from the EPIRA and not in the course of trade or business, thus not
subject to VAT. The Court distinguished PSALM’s functions from those activities
subject to VAT under Sections 105 and 108 of the National Internal Revenue Code. It
emphasized that PSALM was carrying out a governmental function mandated by law
to privatize NPC assets, not a commercial activity. Therefore, PSALM’s transactions,
including the sale of generating assets, the lease of the Naga Complex, and
collections from various fees and receivables, are not VATable transactions.
### Doctrine: Transactions carried out in the performance of a governmental
function mandated by law, specifically for the purpose of privatizing assets to
liquidate financial obligations, are not considered as conducted in the course of
trade or business and thus, are not subject to VAT. The sale of assets by a
government-owned and controlled corporation created to privatize another state-
owned corporation’s assets is not subject to VAT when it is carried out as a part of
its governmental mandate and not in pursuit of any commercial or economic
activity.
### Class Notes:
– **VAT on Government Transactions**: Transactions carried out by government
entities may be subject to VAT if they resemble commercial activities conducted in
the regular course of trade or business.
– **Government Functions vs. Commercial Activities**: Functions carried out by
governmental entities under a specific statutory mandate aimed at achieving a
specific government policy or objective, such as privatization, are not considered
commercial activities subject to VAT.
– **Legal Basis for VAT Exemption**: The basis for exemption from VAT must be
clearly stipulated in the law. Reliance on administrative rulings claiming VAT
exemption must be supported by current legislation and can be superseded by later
laws or amendments.
– **Strategic Implications for GOCCs**: Government-owned and controlled
corporations (GOCCs) involved in transactions as part of their statutory mandates
must carefully evaluate the VAT implications of their activities, considering the
distinction between governmental and commercial functions.
### Historical Background: This case interprets the VAT implications for activities
conducted by PSALM, a GOCC created under the EPIRA law, against the backdrop of
the BIR’s efforts to impose VAT on its transactions. The resolution of this case
underscores the tension between tax collection efforts and statutory mandates
exempting specific governmental activities from VAT, illustrating the judiciary’s role
in delineating the scope of tax obligations for entities performing functions aimed at
public policy objectives, such as the privatization of stateowned assets
# **Lapanday Foods Corporation vs. Commissioner of Internal Revenue**
## **Facts**
Lapanday Foods Corporation (“Lapanday”), a domestic corporation engaged in
management services, was assessed by the Bureau of Internal Revenue (BIR) on
January 21, 2004, for deficiency taxes totaling PHP 8,561,775.88 (VAT), PHP
374,749.21 (EWT), PHP 5,815,233.36 (FWT), and PHP 1,578,579.59 (DST) for the
taxable year 2000. Lapanday protested the assessments, and the BIR issued a Final
Decision on Disputed Assessment (FDDA), which canceled FWT but maintained VAT,
DST, and EWT assessments with adjustments, resulting in a total liability of PHP
8,804,712.10.
Aggrieved, Lapanday filed an appeal with the Court of Tax Appeals (CTA), contesting
the timeliness and basis of the assessments. The CTA First Division partly granted
the appeal, canceling the EWT and DST assessments but sustaining the VAT
assessment. The CTA cited Section 105 of the NIRC, which includes transactions
incidental to the main trade or business. Lapanday’s loans to affiliates were
considered incidental to its management services.Law firm websites
The CTA En Banc upheld the CTA Division’s decision, leading Lapanday to seek relief
from the Supreme Court.
## **Issues**
1. **Prescription of Assessment** – Whether the assessment for the first quarter of
2000 was barred by prescription.
2. **Subject to VAT** – Whether the interest income on loans extended to affiliates
is subject to VAT.
3. **VAT Computation** – Whether the VAT deficiency should be computed as 1/11
of gross receipts or 10% of gross receipts.
## **Court’s Decision**
### **Prescription of Assessment**
The Supreme Court ruled that the assessment for the first quarter of 2000 had
prescribed. The prescriptive period for assessment under Section 203 of the NIRC is
three years from the filing of the return or the deadline for such filing, whichever is
later. Lapanday filed an original return on April 25, 2000, and an amended return on
September 4, 2001. Both returns showed the same amount of VAT payable, implying
the amended return was not substantially different. Therefore, the prescriptive
period began on April 25, 2000, and ended on April 25, 2003. The assessment
issued on January 21, 2004, was thus time-barred.Law firm websites
### **Interest on Loans as Subject to VAT**
The court held that the interest income on loans extended by Lapanday to its
affiliates is not subject to VAT. The primary question is whether the loans were made
“in the course of trade or business” and if they were incidental to Lapanday’s main
business activity. The court found that the loan transactions were occasional,
accommodated affiliates lacking credit lines, and were funded using Lapanday’s
credit lines with no profit motive, thus being merely passive incomes. Consequently,
the loans did not constitute a commercial or economic undertaking related to
Lapanday’s management services.
### **VAT Computation**
Considering the court’s ruling that the interest on the loans is not subject to VAT,
the issue regarding the appropriate method for computing VAT deficiency (1/11 of
gross receipts vs. 10%) was rendered moot.
## **Doctrine**
1. **Prescription of Tax Assessments**: The period for the prescriptive assessment is
three years from the date of filing the original return unless an amendment is
substantial. A mere formal amendment does not reset the prescription period.
2. **Incidental Transactions**: A transaction may be subject to VAT as incidental
under Section 105 if it can be shown to have an intimate connection to the main
business activity.
3. **Passive Income and VAT**: Passive incomes, such as isolated loans granted
without a profit motive, are not subject to VAT as they do not constitute a
commercial or economic undertaking.
## **Class Notes**
– **NIRC Section 203**: Defines the prescription period for tax assessments.
– **NIRC Section 105**: Defines “in the course of trade or business” for VAT
purposes, extends to incidental transactions.
– **NIRC Section 108(A)**: Determines gross receipts for VAT computation.
**Application**:
– A non-substantial amendment to a tax return does not alter the original filing date
for prescription purposes.
– VAT applies to transactions incidental to regular business activities but excludes
passive incomes without a profit motive.
## **Historical Background**
In the early 2000s, the Philippine government was strengthening tax collection
efforts to address fiscal deficits, leading to increased scrutiny and assessments on
corporate transactions. The BIR’s aggressive stance on tax assessments, including
VAT on incidental transactions, was part of these efforts to widen the tax base and
ensure compliance. The case of Lapanday Foods Corp. highlights the complexities of
tax liabilities for corporations engaging in diverse but interconnected commercial
activities and the judicial interpretations shaping Philippine tax jurisprudence.
### Title: **Medicard Philippines, Inc. vs. Commissioner of Internal
Revenue**
### Facts: Medicard Philippines, Inc. (MEDICARD), a Health Maintenance
Organization (HMO), provides prepaid health and medical insurance coverage. The
case stemmed from discrepancies found between MEDICARD’s Income and Value-
Added Tax (VAT) Returns for the taxable year 2006, leading to a deficiency VAT
assessment by the Commissioner of Internal Revenue (CIR). MEDICARD argued that
a significant portion of its revenues was derived from services outside the VAT
scope, including member fees from Philippine Export Zone Authority (PEZA) clients
and charges for medical services rendered directly or via owned facilities.
MEDICARD challenged the imposition of VAT on these amounts, the lack of a valid
Letter of Authority (LOA) for the assessment, and the inclusion of earmarked funds
for healthcare provision within its gross receipts subject to VAT. After internal
protests were denied, MEDICARD elevated its case to the Court of Tax Appeals
(CTA), which affirmed the CIR’s assessment with modifications. Both the CTA
division and en banc rulings maintained the deficiency assessment but adjusted the
figures. Ultimately, MEDICARD sought recourse from the Supreme Court.
### Issues:
1. **Validity of VAT Assessment Without LOA**: Whether the absence of a Letter of
Authority (LOA) to conduct tax assessment violates the taxpayer’s due process
rights.
2. **Inclusion of Earmarked Funds in Gross Receipts**: Whether amounts earmarked
and eventually paid by MEDICARD to medical service providers should form part of
its gross receipts for VAT purposes.
### Court’s Decision: The Supreme Court granted MEDICARD’s petition,
overturning the CTA en banc’s decision.
Key points include:
– **Regarding LOA**: The Court affirmed that the lack of an LOA indeed violated
MEDICARD’s right to due process, rendering the VAT assessment unauthorized and
void.
– **On Earmarked Funds**: The Court ruled that amounts earmarked for medical
services, corresponding to 80% of the membership fees, must be excluded from
gross receipts for VAT purposes. The decision emphasized that these amounts,
intended for direct medical

expenses, do not represent income to MEDICARD and thus should not be subjected
to VAT.
### Doctrine: This case reiterates the strict requirement for an LOA in conducting
tax assessments, underlining its critical role in ensuring due process. It also
establishes the principle that earmarked funds explicitly used for direct expenses
related to the service provider’s primary operation should not be included in the
calculation of gross receipts for VAT purposes.
### Class Notes:
– **LOA Requirement**: A valid Letter of Authority is indispensable for conducting
tax assessments, safeguarding taxpayer rights.
– **VAT on Gross Receipts**: For VAT purposes, gross receipts should only include
amounts received as compensation for services rendered or to be rendered,
excluding funds used directly for operational costs not constituting the taxpayers’
income.
– **Statutory Interpretation in Taxation**: Tax laws are strictly construed against the
government and in favor of the taxpayer, emphasizing clarity and explicitness in
imposing tax obligations.
### Historical Background: This case illustrates evolving challenges in the
application of VAT to diverse business models like HMOs. It highlights the judiciary’s
pivotal role in interpreting tax laws amidst changing business practices and
advances in technology that impact tax administration