tax ii digests - y. sanchez

7/31/2019 Tax II Digests - Y. Sanchez

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Thomas Hanley died in 1922 in Zamboanga leaving a will w/c provided that:

o Any money left be given to nephew Matthewo All real estate shall not be sold or disposed of 10 years after his

death. It shall be managed by the executors. The proceeds shallbe given to nephew Matthew in Ireland to be used only for theeducation of Hanleys brother's children and their descendants.

o 10 years after Thomas death, his property be given to Matthew to

be disposed of in the way he thinks most advantageous

In 1924, the CFI appointed an administrator, Moore, eventually replaced by

Lorenzo (after Moore resigned).

CIR assessed the estate inheritance taxes from the time of Thomas death

including penalties for deliquency in payment (P2k+).

CIR filed a motion before the CFI praying that the Lorenzo be ordered to paythe said amount. The motion was granted. Lorenzo paid under protest and

asked for a refund. CIR refused to refund.

I:

Lorenzo asserts that article 657 of the Civil Code (the rights to the

succession of a person are transmitted from the moment of his death)operates only in so far as forced heirs are concerned.

HOWEVER, there is no distinction between different classes of heirs. The

Administrative Code imposes the tax upon the transmission of property of adecedent, made effective by his death. An excise or privilege tax imposed onthe right to succeed to, receive, or take property by or under a will or theintestacy law, or deed, grant, or gift to become operative at or after death.The property belongs to the heirs at the moment of the death of the ancestoras completely as if the ancestor had executed and delivered to them a deedfor the same before his death.

Since Thomas Hanley died on May 27, 1922, the inheritance tax accrued as of

the date.

However, it does not follow that the obligation to pay the tax arose as of the

date. The time for the payment on inheritance tax is fixed by the RevisedAdministrative Code w/c provides that the payment must be made beforeentrance into possession of the property of the fideicommissary or cestui quetrust. Thus, the tax should have been paid before the delivery of theproperties to Moore as trustee in 1924.

Plaintiff contends that the estate of Thomas Hanley could not legally pass to Matthew

until after the expiration of 10 years from the death of the testator in 1922 and theinheritance tax should be based on the value of the estate in 1932.Upon the death of the decedent, succession takes place and the right of the estate totax vests instantly. The tax should be measured by the value of the estate as it stoodat the time of the decedent's death, regardless of any subsequent contingency value ofany subsequent increase or decrease in value, or the postponement of the actualpossession or enjoyment of the estate by the beneficiary.

A trustee, no doubt, is entitled to receive a fair compensation for his services.However, it does not follow that the compensation due him may lawfully be deducted inarriving at the net value of the estate subject to tax. First, There is no statute requiringtrustees' commissions to be deducted in determining the net value of the estate subjectto inheritance tax. Second, though a testamentary trust has been created, the testator

intended that the duties of his executors and trustees should be separated.

The law at the time was section 1544 of the Revised Administrative Code, as amendedby Act No. 3031, which took effect on March 9, 1922. Inheritance taxation is governedby the statute in force at the time of the death of the decedent . A statute should beconsidered as prospective in its operation, whether it enacts, amends, or repeals aninheritance tax, unless the language of the statute clearly demands or expresses that itshall have a retroactive effect.

Walter G. Stevenson was born in the Philippines of British parents, married inManila to another British subject, Beatrice. He died in 1951 in Californiawhere he and his wife moved to.

In his will, he instituted Beatrice as his sole heiress to certain real and

personal properties, among which are 210,000 shares of stocks in MindanaoMother Lode Mines (Mines).

Ian Murray Statt (Statt), the appointed ancillary administrator of his estatefiled an estate and inheritance tax return. He made a preliminary return tosecure the waiver of the CIR on the inheritance of the Mines shares of stock.

In 1952, Beatrice assigned all her rights and interests in the estate to thespouses Fisher.

Statt filed an amended estate and inheritance tax return claiming

ADDITIOANL EXEMPTIONS, one of which is the estate and inheritance tax onthe Mines shares of stock pursuant to a proviso in the NIRC,

TAX 2 MONTERO | Y. Sanchez A2012


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hence, warranting a refund from what he initially paid. The collector deniedthe claim. He then filed in the CFI of Manila for the said amount.

CFI ruled that (a) the share of Beatrice should be deducted from the netestate of Walter, (b) the intangible personal property belonging to the estateof Walter is exempt from inheritance tax pursuant to the reciprocity proviso inNIRC.

I: W/N the estate can avail itself of the reciprocity proviso in the NIRCgranting exemption from the payment of taxes for the Mines shares of stock

R: No. Reciprocity must be total. If any of the two states collects or imposes or does

not exempt any transfer, death, legacy or succession tax of any character,the reciprocity does not work.

In the Philippines, upon the death of any citizen or resident, or non-resident

with properties, there are imposed upon his estate, both antax.

But, under the laws of California, is imposed. Also,

although the Federal Internal Revenue Code imposes an estate tax, it doesnot grant exemption on the basis of reciprocity. Thus, a Filipino citizen shall

always be at a disadvantage. This is not what the legislators intended. SPECIFICALLY:

Section122 of the provides that No tax shall be collected under this

Title in respect of intangible personal property

o (a) 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 atransfer of tax or death tax of any character in respect ofintangible personal property of citizens of the Philippines notresiding in that foreign country, or

o (b) if the laws of the foreign country of which the decedent was a

resident at the time of his death allow a similar exemption fromtransfer taxes or death taxes of every character in respect ofintangible personal property owned by citizens of the Philippines

not residing in that foreign country." On the other hand, Section 13851 of the

provides that intangible personal property is exemptfrom tax if the decedent at the time of his death was a resident of a territoryor another State of the United States or of a foreign state or country whichthen imposed a legacy, succession, or death tax in respect to intangiblepersonal property of its own residents, but either:.

(a) Did not impose a legacy, succession, or death tax of any characterin respect to intangible personal property of residents of this State, or

(b) Had in its laws a reciprocal provision under which intangiblepersonal property of a non-resident was exempt from legacy, succession, ordeath taxes of every character if the Territory or other State of the UnitedStates or foreign state or country in which the nonresident resided allowed asimilar exemption in respect to intangible personal property of residents of theTerritory or State of the United States or foreign state or country of residenceof the decedent."

Maria Cerdeira was a Spanish national by reason of

her marriage to a Spanish national.

She resided in Tangier, Morocco until she died. She

left some intangible properties in the Philippines.

The Commissioner of Internal Revenue (CIR) thenheld the administrator of her estate, Campos Rueda, to be liable for deficiencyestate and inheritance taxes after the transfer of Marias intangible properties inthe Philippines.

Campos Rueda countered this by saying that

Section 122 (now sec 104) of the NIRC provided for reciprocity and that in thelaws of Tangier, Morocco, "the transfers by reason of death of movable properties,corporeal or incorporeal, including furniture and personal effects as well as ofsecurities, bonds, shares, ..., were not subject

, on that date and in said zone, tothe payment of any death tax

, whatever might have been the nationality of thedeceased or his heirs and legatees."

Thus, Campos Rueda claimed an exemption in theamount that the CIR was claiming as a deficiency.

The CIR on the other hand claimed that thereciprocity clause could not apply since Tangier Morocco is not a foreign countryas required in sec 122.

I: W/N Tangier, Morocco is a Foreign country

within the meaning of section 122 (now sec 104) of the NIRC R: YES, Tangier is a foreign country

The expression "foreign country", used in the last

proviso of Section 122 of the National Internal Revenue Code, refers to agovernment of that foreign power which, although not an international person inthe sense of international law, does not impose transfer or death taxes uponintangible personal properties.

It is, therefore, not necessary that Tangier shouldhave been recognized by our Government order to entitle the petitioner to theexemption benefits of the proviso of Section 122 of our Tax. Code.



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Court also cited previous cases:

o CIR v. De Lara: State of California was considered a Foreign

country within the meaning of sec 122.o Kiene v. CIR: Liechtenstein was considered a foreign country

within the meaning of sec 122.

- In this case, it was stated that while US decisions held that intangiblepersonal property in the Philippines belonging to a non-resident foreigner,

who died outside of this country is subject to the estate tax, the congress, in

including sec 122 in the NIRC clearly provided for an exemption (reciprocity)

and this exemption must be honored.

Father Braulio Pineda died without any ascendantsor descendants leaving a will in which he instituted his sister Irene Pineda as hissole heiress.

During his lifetime Father Braulio donated some of

his property to the six plaintifffs

, his relatives, severally, with the condition thatsome of them would pay him a certain amount of rice, and others of money everyyear, and with the express provision that failure to fulfill this condition wouldrevoke the donations ipso facto.

The donations contained another clause that they

would take effect upon acceptance. They were accepted during Father Braulio'slifetime by every one of the donees.

CIR then imposed upon the 6 plaintiffs separate

inheritance taxes on the property donated to them in accordance with Section1536 of the Administrative Code, as amended, which states that Everytransmission by virtue of inheritance, devise, bequest, gift mortis causaor advancein anticipation of inheritance, devise, or bequest of real property located in thePhilippine Islands and real rights in such property

The 6 plaintiffs paid the inheritance tax under

protest and subsequently filed a separate civil action against the CIR. The trialcourt in deciding these six cases, held that the donations to the six plaintiffs madeby the deceased Father Braulio Pineda are donations inter vivos, and therefore,not subject to the inheritance tax, and ordered the CIR to return to each of theplaintiffs the sums paid by the latter.

I: W/n the donation made by Father Braulio was in

fact a donation mortis causa, and thus taxable.

R: NO, the donation was inter vivos. It was thusnot taxable.

Donations were inter vivos considering that not

only was it stated as such in the instruments in which they appeared, but theywere also made in the nature of a donation inter vivos.

In donations mortis causa, it is the donors death

that determines the acquisition of, or the right to, the property, and that it isrevocable at the will of the donor. In donations inter vivos, as in the present case, thedonees acquired the right to the property while the donor was still alive, subjectonly to their acceptance and the condition that they pay the donor rice and/ormoney. The nature of these donations is not affected by the fact that they weresubject to the condition of payment since it was imposed as a resolutory condition,and in this sense, it is necessarily implies that the right came into existence first,otherwise there would be nothing to resolve upon the nonfulfillment of thecondition imposed.

If the donor's life is mentioned in connection with

this condition, it is only fix the donor's death as the end of the term within whichthe condition must be fulfilled

, and NOT because such death of the donor is the

cause which determines the birth of the right to the donation. The propertydonated passed to the ownership of the donees from the acceptance of thedonations, and these could not be revoked except upon the nonfulfillment of thecondition imposed, or for other causes prescribed by the law, but not by mere willof the donor.

(However, considering that these donations hadonerous conditions, they are not donations to the full extent. Rather, they arepartly contractual and partly donations. They are donations inter vivos only insofaras they exceed to the incumbrance imposed.)

Neither can these donations be considered as an

advance on inheritance or legacy, since they were not heirs or legatees of theirpredecessor in interest upon his death (Sec. 1540 of the Administrative Code).Neither can it be said that they obtained this inheritance or legacy by virtue of adocument which does not contain the requisites of a will (Sec. 618 of the Code of

Civil Pocedure). Besides, if the donations made by the plaintiffs are, as theappellants contended, mortis causa, then they must be governed by the law ontestate succession (art. 620 of the Civil Code). In such a case, the documents inwhich these donations appear, being instruments which do not contain therequisites of a will, are not valid to transmit the property to the donees (Sec. 618,Code of Civil Procedure.) Then the defendants are not justified in collecting fromthe donees the inheritance tax, on property which has not been legally transferredto them, and in which they acquired no right.

Dissenting Opinion by Justice Street:Justice Street

strongly believed that the present case involved advances in anticipation ofinheritance considering that the donees were entitled to receive an inheritance if



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no will had been made by the decedent. He believed that what transpired in thepresent case is an attempt by the donor to evade the payment of taxes bydisposing of the bulk of his property before his death.

In 1922, Esperanza Tuason Chuajap made a donation inter vivos of certainproperty to Mariano Tuason.

In 1923, she made another donation inter vivos, this time to Alfredo Tuason.

She died 3 years after leaving a will bequeathing P5,025 to Mariano Tuason

after the judicial administratix paid the prescribed inheritance tax on thesetwo bequests.

Consequently, Posadas collected the sums of P3, 809.76 and P6, 653.64 fromboth the petitioners as inheritance tax upon the gifts inter vivos made tothem against their opposition and protest.

They filed their protest and the judgment was that the defendant must returnthe amount claimed by the plaintiff. Posadas appealed and argued that thecollection of these amounts as inheritance tax is authorized by the law.

I: W/n Posadas was correct in collecting inheritance tax R: YES.

Section 1536 of the Administrative Code provides that every transmission by

virtue of inheritance, devise, bequest, gift mortis causa, or advance inanticipation of inheritance, devise, or bequest shall be subject to tax.

Section 1540 then provides that after deductions have been made, there shall

be added to the resulting amount the value of

When the law say all gifts, it doubtless refers to gifts inter vivos, and not

mortis causa. Both the letter and the spirit of the law leave no room for anyother interpretation.

The language refers to donation that took effect before the donor's death,

and not to mortis causa donations, which can only be made with theformalities of a will, and can only take effect after the donor's death.

In this case, it appears that the Tuazons, after the death of Espereanza,

were found to be legatees under her will. Thus, the donation inter vivos shehad made to them in 1922 and 1923, must be added to the net amount thatis to be taxed.

Dizon was assessed to pay P2k+ as inheritance tax from the properties he

received from his father prior to his fathers death through a deed of gift intervivos.

Dizon alleged that the tax was illegally collected because he received the

property prior to the death of his father, through a deed of gift inter vivoswhich was duly accepted and registered before the death of his fathermaking the property not an inheritance.

He further states that he was not trying to evade the inheritance tax that is

imposed on heirs when his father donated all his properties to him. Thus, noinheritance tax under Act No. 2601 (Chapter 40 of the Administrative Code),being the inheritance tax statute, should be imposed upon the saidproperties.

The Court, however, ruled in favor of Posadas, hence, this appeal.

I:W/N the inheritance tax was correctly imposed upon the properties

transferred through donation inter vivos

R: YES.

Section 1540 of the Administrative Code states that after deductions have

been made, there shall be added to the resulting amount the value of all giftsor advances made by the predecessor to any of those who, after his death,shall prove to be his heirs, devises, legatees, or donees mortis causa

In this case facts conveyance was made by the donor five days before hisdeath and accepted by the donee one day before the donor's death.Obviously, this was fraudulently made for the purpose of evading theinheritance tax.

As to Dizons contention that the he is not an heir because there is no

property to inherit anymore because he already received the properties of thefather through a donation inter vivos, SC said that even if they dont knoww/n the father left a will, Dizon should NOT be deprived of his share of theinheritance because the Civil Code confers upon him the status of a forcedheir.



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Thus, an advance made by the decedent to Dizon is subject to tax.

As to Dizons contention that Section 1540 is unconstitutional in taxing gifts

or donations because the act would then embrace two subjects, the Courtstates that: When the law says all gifts, it doubtless refers to gifts inter vivos,

and not mortis causa. Both the letter and the spirit of the law leave no roomfor any other interpretation. Such, clearly, is the tenor of the language whichrefers to donations that took effect before the donor's death, and not tomortis causadonations, which can only be made with the formalities of a will,and can only take effect after the donor's death.

The

"

Esperanza Tuazon by public document donated parcels of land situated in

Manila to plaintiffs Vidal de Roces, etc. with their respective husbands, accepted

them in the same public documents, which were duly recorded in the registry ofdeeds.

The plaintiffs took possession of the said lands, received the fruits and

obtained TCTs.

The donor then died w/o any forced heir and in her will, she bequeathed to

each of the donees the sum of P5,000.

After the estate had been distributed among the instituted legatees and

before delivery of their respective shares, the CIR ruled that the donees shouldpay inheritance tax.

They thus paid under protest, contending that Art 1540 of the RevisedAdministrative Code (after deductions have been made, there shall be added tothe resulting amount the value of all gifts / advances made by the predecessor toany of those who after his death prove to be heirs, devisees, legatees or donees

mortis causa) does NOT include donations inter vivos. If it does, it is null and voidas it violates uniformity of taxation.

I: W/n donations inter vivosis included in Sec. 1540 of the Administrative

Code

R: No.

The gifts referred to in section 1540 of the Revised Administration Code are,

obviously, those donations inter vivosthat take effect immediately or during thelifetime of the donor but are made in consideration or in contemplation of death.

Gifts inter vivos, the transmission of which is NOT MADE IN

CONTEMPLATION OF THE DONOR'S DEATH should not be understood as includedwithin the said legal provision for the reason that it would amount to imposing adirect tax on property and not on the transmission.

This act does not come within the scope of the provisions contained in Article

XI of Chapter 40 of the Administrative Code which deals expressly with the tax oninheritances, legacies and other acquisitions mortis causa.

Pedro Pajonar, a member of the Philippine Scout during WWII was a part of

the infamous Death March by reason of which he suffered shock and becameinsane.

His sister Josefina became the guardian over his person, while his property

was placed under the guardianship of the PNB by the RTC of Dumaguete.

After his death, PNB filed an accounting of his property under guardianship

valued at 3M in Special Proceedings. However, PNB did NOT file and estate tax return, instead it advised his heirs

to execute an extrajudicial settlement and to pay taxes on the estate.

Pursuant to BIRs assessment, the estate of Pedro paid taxes in the amount

of 2k.

Josefina then filed a petition w/ RTC of Dumaguete for the issuance in her

favor of letters of administration of the estate of her brother.

RTC appointed Josefina as regular administratrix of Pedros estate.

The BIR then made a 2nd amendment for deficiency estate tax, w/c Josefina

paid under protest.

Without waiting for her protest to be resolved by the BIR, Josefina then filed

a petition for review w/ the CTA praying for the refund of 1.5M OR the

alternative 840k as erroneously paid estate tax. CTA ordered CIR to refund Josefina the amount of 252k, representing

erroneously paid estate tax. Among the deductions from the gross estateallowed by CTA were the

plus

I: W/N the notarial fee and attys fees paid for the EJ Settlement may be

allowed as deductions fro the gross estate of decedent in order to arrive atthe value of the net estate.



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R: YES, they are allowed deductions.

ATTYs FEES:

Under American Jurisprudence, expenses incurred in the EJ Settlement of the

estate should be allowed as deduction from the gross estate. There is notrequirement of formal administration. It is sufficient that the expense be a

NECESSARY contribution toward the settlement to the case.

Attys fees in order to be deductible from the gross estate must be essential

and related to the settlement of estate. In this case, the attys fees paid for

guardianship proceeding was necessary for the distribution of the property of

the late Pedro Pajonar to his rightful heirs. Thus, it was deductible.

Necessary expenses of administration are such expenses as are entailed for

the preservation and productivity of the estate and for its management for

the purposes of liquidation, payment of debts and distribution of the residue

among the persons entitled.

NOTARIAL FEES:

Although tax code specifies judicial expenses of the testamentary or

intestate proceedings, there is no reason why expenses incurred in the

administration and settlement of an estate in EJ proceedings should not be

allowed. However, deduction is limited to such administration expenses as

are actually and necessarily incurred in the collection of the assets of the

estate, payment of debts, and distribution of the remainder among those

entitled thereto. Such expenses may include executors or administrators

fees, attys fees, court fees and charges, appraisers fees, clerk hire, costs of

preserving and distributing the estate and storing or maintaining it, brokerage

fees or commissions for selling or disposing of the estate.

It is clear that the EJ settlement was for the purpose of payment of taxes and

the distribution of the estate to the heirs. The execution of EJ settlement

necessitated the notarization of the same. Thus the 60k for notarial fee forthe EJ Settlement should be allowed as a deduction from the gross estate.

Judicial expenses are expenses for administration. Administration expenses

are deductible from the gross estate. Expenses must be essential to the

proper settlement of the estate.

Felix Guzman died and was survived by eight children.

One of the properties he left was a residential house located in the

poblacion.

In conformity with his last will, that house and the lot on which it

stands were adjudicated to his eight children, each being given a one-eighthproindiviso. The administrator submitted four accounting reports for the periodfrom June 16, 1964 to September, 1967.

Three of the heirs Crispina de Guzmans-Carillo Honorata de

Guzman-Mendiola and Arsenio de Guzman interposed objections to theadministrator's disbursements in the total sum of P13,610.48.

I: W/n expenses incurred by the administrator are deductible

R: YES.

P10,399.59. These expensesconsisted of disbursements for the repair of the terrace and interior of thefamily home, the renovation of the bathroom, and the construction of a

fence. The probate court allowed those expenses because an administratorhas the duty to "maintain in tenantable repair the houses and otherstructures and fences belonging to the estate, and deliver the same in suchrepair to the heirs or devises" when directed to do so by the court (Sec. 2,Rule 84, Rules of Court).

These were PERSONAL expenses of Librada de Guzman, inuring to herbenefit. Those expenses, not being reasonable administration expensesincurred by the administrator, should not be charged against the income ofthe estate. Librada de Guzman, as an heir, is entitled to share in the netincome of the estate. She occupied the house without paying rent. Sheshould use her income for her living expenses while occupying the familyresidence.

They have(Nicolas vs. Nicolas 63 Phil 332).

The



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was properly allowed as a

legitimate expense of administration.

Justice Arsenio Dizon and petitioner Atty. Dizon were appointed as Specialand Assistant Special Administrator, respectively, of the Estate of JoseFernandez.

Justice Dizon authorized Atty. Gonzales to sign and file the required estatetax return.

Atty. Gonzales filed the estate tax return with the BIR Regional Office of San

Pablo City, showing a NIL estate tax liability (no tax liability- in this case,because the deductions exceed the gross estate).

Ten days after, the BIR Regional Director issued Certifications stating that the

taxes due on the transfer of real and personal properties of Jose had beenfully paid and said properties may be transferred to his heirs.

Justice Dizon died thus the probate court appointed petitioner as theadministrator of the Estate.

Atty. Dizon requested the probate courts authority to sell several propertiesof the Estate to pay its creditors. HOWEVER, BIR issued a notice demandingthe payment of P66k+ deficiency estate tax.

Atty. Gonzales moved for a reconsideration of the Assessment but the CIR

denied the request and reiterated the Estates liability. A petition for Reviewwas filed with the CTA.

I: W/n deficiency estate tax must be imposed against the Estate R: No.

Claims existing at time of death should be allowed as deductions to the gross

estate.

Even in the United States, there is some dispute as to whether the deductible

amount for a claim against the estate is fixed as of the decedent's deathwhich is the general rule, or the same should be adjusted to reflect post-death developments, such as where a settlement between the parties resultsin the reduction of the amount actually paid. On one hand, the U.S. courtruled that the appropriate deduction is the "value" that the claim had at thedate of the decedent's death.

On the other hand, the Internal Revenue Service (IRS) opines that post-death settlement should be taken into consideration and the claim should beallowed as a deduction only to the extent of the amount actually paid.

SC agreed w/ date-of-death valuation rule.

First, there is no law, nor any legislative intent in our tax laws, which

disregards the date-of-death valuation principle and particularly provides that

. It bears emphasis that tax burdens are not to be

imposed, nor presumed to be imposed, beyond what the statute expresslyand clearly imports, tax statutes being construed strictissimi juris against thegovernment. Any doubt on whether a person, article or activity is taxable isgenerally resolved against taxation.

Second. Such construction finds relevance and consistency in our Rules on

Special Proceedings wherein the term "claims" required to be presentedagainst a decedent's estate is generally construed to mean debts or demandsof a pecuniary nature which could have been enforced against the deceasedin his lifetime, or liability contracted by the deceased before his death .Therefore, the are significant to,and should be made the basis of, the determination of allowable deductions.

Florentino Pamintuan filed an income tax return for the year 1919 and paidan amount on the basis of said return.

When Florentino died in 1925, intestate proceedings were instituted where

the court appointed commissioners for the appraisal of the value of theproperty left by Florentino.

The court then ordered the delivery to the heirs of their respective shares of

the inheritance after paying the corresponding inheritance taxes which wereduly paid.

During the pendency of the intestate proceedings, the administrator JoseRamirez filed income tax returns for the estate of the deceasedcorresponding to the years 1925 and 1926. The intestate proceedings werethen closed in 1926.

In 1927, subsequent to the distribution of Florentinos estate, the

,from which he realized an income of P11,000 which was not included in hisincome tax return filed in 1919.

The government demanded payment of the income tax but the heirs refusedto pay. The lower court ruled that the government was barred from collectingthe income tax due to its failure to file its claim with the committee on claimsand appraisals.

I: W/n the gov can still collect the income tax despite its failure to file its

claim with the committee on claims and appraisals



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R: Yes. A claim for taxes and assessments whether assessed before or after

the death of the decedent, are not required to be presented to thecommittee.

The administration proceedings of the late Florentino having been closed, andhis estate distributed among his heirs, the heirs are responsible for thepayment of the income tax here in question.

The claims for income taxes need not be filed with the committee on claimsand appraisals appointed in the course of testate proceedings and may becollected even after the distribution of the decedents estate among his heirs,who shall be liable therefor in proportion to their share in the inheritance.

Atanasio Pineda died and was survived by his wife Felicisima (the appointed

administratrix) and 15 children.

Estate proceedings were instituted in the CFI of Manila. The estate was

divided among and awarded to the heirs and the proceedings terminated onJune 8, 1948.

After the estate proceedings, the BIR investigated the income tax liability ofthe estate for the years 1945, 1946, 1947 and 1948 and it found that thecorresponding income tax returns were not filed.

The CIR found the estate liable for Deficiency Income Tax ), Additional

residence tax for 1945 and Real Estate dealer's tax for the 4 th

qtr of 1946 and the whole year of 1947 .

Manuel, the eldest child, contested the assessment. Subsequently, he

appealed to the CTA alleging that he was appealing "only that proportionatepart or portion pertaining to him as one of the heirs."

CTA held that Manuel was liable for payment corresponding to his share ofsuch taxes.

On the other hand, CIR insisted that Manuel should be liable for the payment

of ALL the taxes found by the Tax Court to be due from the estate instead ofonly for the amount of taxes corresponding to his share in the estate.

Manuel opposed the proposition on the ground that as an heir he is liable for

unpaid income tax due the estate only up to the extent of and in proportionto any share he received, relying on on Government of the Philippine Islandsv. Pamintuan.1

1The SC held that "after the partition of an estate, heirs and distributees are liable individually for the

payment of all lawful outstanding claims against the estate in proportion to the amount or value ofthe property they have respectively received from the estate."

I: W/n Manuel can be required to pay the FULL amount of the tax assessed

by the BIR.

R: YES, he can be required to pay the full amount.

Pineda is liable for the assessment as (1) AN HEIR and as (2) A HOLDER-

TRANSFEREE of property belonging to the estate/taxpayer.o As an As an heir he is individually answerable for the part

of the tax proportionate to the share he received from theinheritance. His liability, however, cannot exceed the amount of hisshare.

o As a HOLDER OF PROPERTY belonging to the estate: Pineda is

liable for the tax up to the amount of the property in hispossession. The reason is that onthe P2,500.00 received by him from the estate as his share in theinheritance, for unpaid income taxes for which said estate is liable,pursuant to the last paragraph of Section 315 of the TaxCode.2

Therefore, the Government has TWO WAYS of collecting the tax in question:

o One, by and collecting from each oneof them the amount of the tax proportionate to the inheritancereceived. This remedy was adopted in Government of thePhilippine Islands v. Pamintuan. In said case, the Government filedan action for the collection of the tax. Thisaction rests on the concept that hereditary property consists onlyof that part which remains after the settlement of all lawful claimsagainst the estate, for the settlement of which the entire estate isfirst liable.

o Another remedy is

the estate. This second remedy is thevery avenue the Government took in this case to collect the tax.

The BIR should be given the necessary discretion to avail itself of the mostexpeditious way to collect the tax as may be envisioned in the 315, because

2If any person, corporation, partnership, joint-account (cuenta en participacion), association, or

insurance company liable to pay the income tax, neglects or refuses to pay the same after demand,

the amount shall be a lien in favor of the Government of the Philippines from the time when the

assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties,

and costs that may accrue in addition thereto upon all property and rights to property belonging to

the taxpayer: . . .



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taxes are the lifeblood of government and their prompt and certainavailability is an imperious need.

And as afore-stated in this case the suit seeks to achieve only one objective:payment of the tax. The adjustment of the respective shares due to the heirsfrom the inheritance, as lessened by the tax, is left to await the suit forcontribution by the heir from whom the Government recovered said tax.

Matias Yusay died leaving his two children as his heirs, Jose & Lilia.

Jose was appointed administrator who filed with BIR an estate and

inheritance tax return declaring personal & real properties of their father butthe return did not mention any heir.

On January 25, 1955, BIR demanded payment of assessed estate andinheritance taxes (approx P30k in total).

Jose requested for an extension of time within which to pay the tax, whichthe CIR denied.

During the pendency of the said proceedings in Iloilo and afterreinvestigation, BIR reassessed the estate and inheritance tax liability and

issued a reassessment of taxes in a total of P69k. Lilia disputed the legality of the 1958 assessment alleging that the right to

make the same has prescribed since more than 5 years had elapsed since thefiling of estate and inheritance tax return on May 11, 1949.

CTA ruled in favor of Lilia.

CIR appealed to the SC alleging that the right to assess the taxes in question

has not been lost by prescription since the return which did not name theheirs cannot be considered true and complete return to start the running ofthe period of limitations of 5 years under Sec 331 of Tax Code and pursuantto Sec 332 he has 10 years within which to make the assessment countedfrom the discovery on September 24, 1953 of the identity of the heirs.

I: W/n the right of the CIR to assess the estate and inheritance taxes in

question has prescribed - NO

W/n the return filed by Jose sufficient to commence the running of theprescriptive period to assess said taxes NO

R:

A return need not be complete in all particulars. It is sufficient if it compliessubstantially with law. There is substantial compliance

(1) when the return is made in good faith & is not false or

fraudulent;

(2) when it covers the entire period involved;

(3) when it contains information as to the various items of income,

deductions and credits with such definiteness as to permit the

computation and assessment of the tax.

In this case, t

It was incomplete. It declared only 93 parcels of land and leaving

out 92 others. This was a huge underdeclaration.

Moreover, the return mentioned no heir. Thus, no inheritance tax

could be assessed. As a matter of law, on the basis of return, there

would be no occasion for the imposition of estate and inheritance

taxes, When there is no heir, the estate is escheated to the State.

The state does not tax itself.

BECAUSE the return was made on the wrong form. The taxpayer

failed to observe the law (Sec 332) w/c grants the CIR 10 years (starting

from date the fraud was discovered) within which to bring action for taxcollection, applies. He is obligated to make a return or amend one already

filed based on his own knowledge & information obtained through testimony

or otherwise, & subsequently to assess taxes due.

On MR filed by Lilia: Lilia insists that since she administers only 1/3 of the estate of her

father, she should not be liable for the whole tax. And she suggests that the intestate

estate of Matias Yusay should be liable for the said taxes, 1/3 to be paid by Lilia and

2/3 to be paid by Florencia (wife of deceased Jose).

Ruling of the Court: Estate and inheritance taxes are satisfied from the estate and are

to be paid by the executor or administrator. Where there are 2 or more executors, all of

them are severally liable for the payment of the estate tax. The inheritance tax,

although charged against the account of each beneficiary, should be paid by the

executor or administrator.Failure to pay the estate and the inheritance taxes before distribution of the estate

would subject the executor or administrator to criminal liability. It is immaterial that Lilia

administers only 1/3 of the estate & will receive as her share only said portion, for her

right to the estate comes after taxes. As an administratrix, she is liable for the entire

estate tax. As an heir, she is liable for the entire inheritance tax although her liability

would not exceed the amount of her share in the estate.



10/32

Li Seng Giap, his wife Tang Ho and their 13 children were stockholders of two

close family corporations.

BIR examiners made an examination of the books of the two corporations

and found that each of Li Seng Giaps children had a total investment there ofapproximately P63k+ in shares issued to them by their father (who was themanager and controlling stockholder of the two corporations)

CIR regarded these transfers as undeclared gifts made in the respective

years, and assessed against Li Seng Giap and his children donor's and donee'staxes due to delayed payment (P76k+).

They thus paid the sum of P53k+ representing the amount of the basic taxes,

and put up a surety bond to guarantee payment of the balance demanded.

Sometime later, they requested the CIR for a revision of their tax

assessments, and submitted donor's and donee's gift tax returns showing that thechildren received gifts inter vivos and proper nuptias.

o each child received by way of gift inter vivos, every year from 1939

to 1950 (except in 1947 and 1948) P4,000 in cash;o each of the eight children who married during the period aforesaid,

were given an additional P20,000 as dowry or gift propter nuptias;

o unmarried children received roughly an equivalent amount in 1949,

also by way of gifts inter vivos, so that the total donations made toeach and every child, as of 1950, stood at P63,190.



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I: W/n the donations made by Li Seng Giap to his children from the conjugal

property should be taxed against husband and wife

R: No. A donation of property belonging to the conjugal partnership, made

during its existence, by the husband alone in favor of the common children, istaxable to him exclusively as sole donor.

To be a donation by bothspouses, taxable to both, the wife must

join the husband in making the gift. Her participation cannot be implied.

THUS, in this case, ONLY ONE exemption or deduction can be claimed for

every such gift, and not two, as claimed by petitioners.

Speculation on the Tang Ho case: Why were they insisting that the dowrywas made in cash? Does the law say that for a dowry to be considered asexemption, it has to be in cash? No. The reason why they were insisting that itwas made in cash and then this cash was used to buy stock so that it can fallwithin the time period that the dowry should be given before celebration or within1 year thereafter.

Allison and Esther Gibbs executed documents entitled Deed of Sale and

Declaration of Trust whereby they transferred 53, 000 Lepanto ConsolidatedMines shares of stock to their 5 children, in consideration of the sum of P26,227.70 to be paid on or before December 1950. The instituted trustee was Allisons brother, Finley Gibb.

Spouses Gibb sent a letter to the CIR asking for a ruling on whether or not

gift taxes should be paid.

CIR initially assessed the spouses a donee gift tax of P75 on each of the

beneficiaries or a total of about P750. These assessments were based upon theDIFFERENCE between said market value of the shares of stock and the stipulatedconsideration for transfer thereof.

Subsequently, CIR revised the assessment by INCREASING them.

The spouses paid within the period fixed by law but SOUGHT a refund. Their demand was denied.

Trustee Finley Gibb appealed to the Secretary of Finance and instituted a civil

suit in the CFI for recovery of the amount.

Spouses Gibb again executed 10 additional and separate trusts containing the

same stipulations and conditions.

These additional deeds of trust impelled CIR to assess donor gift taxes. CIR

held that the gift taxes are available on the FULL MARKET VALUE of all the shares

of stock thus placed in trust instead of upon the difference between said marketvalue and the stipulated considerations. CTA agreed.

I: W/n CTA was correct in ruling that the gift taxes on the transfer of the

shares of stock should be based on the full market value of shares of stock (NOT

diff between market value and stipulated consideration) R: YES, CTA was correct, tax should be based on full MV.

CTA was correct in finding that the agreements made by the parties were

mere devises of the corresponding gifttaxes:

o If the trustors were earnestly concerned in providing ample funds

to assure the support, maintenance, care, health, higher educationand travel of their children and the launching of their career afterthey had become of age, the trustors would not have really meantto require them to pay the consideration stipulated in the trustagreements.

o If the intent was really that the stipulated interest be paid, the

trustee could have authorized the trustors to sell, mortgage,hypothecate or otherwise dispose of the stocks to raise thenecessary funds.

o The compromise agreements were made with knowledge of the

fact that the CIR was already investigating whether the stipulatedconsideration was real or fictitious.

There being no real consideration for the transfer, gift taxes should be based

on the full market value of the shares of stock at the time of the respectivetransfer, and not merely on the difference between the said market value andthe consideration stipulated in the trust agreements.

Enrico Pirovano was the father Carla Pirovano.

De la Rama Steamship Co. insured the life of said Enrico Pirovano (then itsPresident and General Manager) with various Philippine and American insurance

companies for 1M, designating itself as the beneficiary. Enrico Pirovano died during the World War II.

The BOD of De la Rama Steamship Co. adopted a resolution granting the

proceeds expected to be collected on Enricos life insurance policies w/c was P400kfor equal division among his 4 minor children, to be convertible into 4k shares ofstock (1k shares / child0.

The Company received the total sum of P643K as proceeds of the said life

insurance policies obtained from American insurers.



12/32

The BOD modified their resolution by renouncing all its rights title, and

interest to the said amount of P643k in favor of the minor children of thedeceased, subject to the express condition that said amount should be retained bythe Company in the to it, drawing interest at the rate of 5%

per annum, and payable to the Pirovano children after the Company shall havefirst settled its bonded indebtedness of 5M. This resolution was allowed by the childrens guardian.

BOD again modified their resolution by providing that the Company shall pay

the proceeds of said life insurance policies to the heirs after the Company shallhave settled in full the balance of its present remaining bonded indebtedness, butthe annual interests accruing on the principal shall be paid to the heirs of Pirovanowhenever the Company is in a position to meet said obligation. The mother of the children ACCEPTED this resolution with a PUBLICDOCUMENT.

The SH of the Company ratified the resolutions with

that the payment of the donation shall not be effecteduntil suchtime as the Company shall have first duly liquidated its present bondedindebtedness (P3.2M) with the Natl Devt Company and that any and all taxes,legal fees, and expenses in any way connected with the above transaction shall bechargeable and deducted from the proceeds of the life insurance policies.

HOWEVER, the majority stockholders of the Company voted to revoke thedonation.

As a consequence of this revocation and refusal of the Company to pay thebalance of the donation amounting to P564K despite demands, the PIROVANOSbrought an action for the recovery of said amount.

The RTC ordered that the donation was valid. Thus, the CIR assessed the

amount of P60K as donees' gift tax against each of the heir, and a donor's gift taxin the total amount of P34K assessed against De la Rama Steamship Co., whichthe latter paid.

The PIROVANOS contested CIRs assessment and imposition of the donees'gift taxes and donor's gift tax and also made a claim for refund of the donor's gift

tax so collected. I: W/n the PRIVANOS are obliged to pay donees' gift taxes as well as the

imposition of surcharge and interest on the amount of donees' gift taxes

R: YES.

A donation made by the corporation to the heirs of a deceased officer

for the officer's past services is considered a donation and is subject todonee's gift tax.

Art. 726 of the CivCode states that When a person gives to another a

thing ... on account of the latter's merits or ofthe services rendered by him to the

donor, provided they do not constitute a demandable debt, ..., there is also adonation.

.

he value of such services which do not constitute a recoverable debt

is NOT deductible from the donation.

The

. Gratitude has no economic value and isnot "consideration" in the sense that the word is used under the Tax Code.

Sec111 [where property is transferred for less than adequate consideration,

amt exceeding consideration deemed a gift] is NOT applicable). Whether remuneratory or simple, the conveyance remained a gift.

The definition of CONSIDERATION is anything that is bargained for by the

promisor and given by the promisee in exchange for the promise Pirovano's successful activities as officer of the De la Rama Steamship Co.cannot be deemed such consideration for the gift to his heirs, since the serviceswere rendered long before the Company ceded the value of the life policies to saidheirs; cession and services were not the result of one bargain or of a mutualexchange of promises.

A subsequent promise to pay for past services is a nudum pactumi.e., one

that is unenforceable in view of the common law rule that consideration mustconsist in a legal benefit to the promisee or some legal detriment to the promisor.

Diego and Catalina Danlag were owners of 6 parcels of unregistered lands.

They executed in favor of Mercedes

Danlag-Pilapil covering 4 parcels. All deeds contained the reservation of rights of

donors to amend / revoke the donation during their lifetime AND to sell,mortgage / encumber the properties if necessary.

Diego w/ the consent of Catalina then executed a

covering the aforementioned lots plus 2 other parcels again in favor ofrespondent Mercedes.

This contained two conditions

o (1) that Danlag spouses shall continue to enjoy the fruits of land

during their lifetime



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o (2) the donee cannot sell or dispose of the land during the lifetime

of the said spouses w/o their consent.

The Danlags sold parcels 3 and 4 to petitioners Gestopa and executed a deed

of revocation recovering 6 parcels of land subject to deed of donation inter vivos.

Mecedes filed with RTC against the Gestopas and the Danlags for quieting of

title over the parcels of land. She alleged that she was an illegitimate daughter of Diego Danlag that shelived and rendered incalculable beneficial services to Diego and his mother Maura,when she was still alive.

In recognition of her services, Diego executed Deed of Donation conveying toher 6 parcels of land.

She accepted the donation in the same instrument, openly and publicly

exercised rights of ownership over the donated properties, and caused the transferof the tax declarations in her name.

Through the machination, intimidation and undue influence, Diego persuadedthe husband of Mercedes, Eulalio Pilapil to buy 2 of the 6 parcels covered by thedeed of donation. The inter vivos donation was coupled with conditions she

complied with. She alleges she had not been guilty of any act of ingratitude andthat the revocation had no legal basis.

Gestopas and Danlags opposed by saying that the deed of donation was nulland void because it was obtained by Mercedes through machination and undueinfluence. Even assuming it was validly executed, the intention was for thedonation to take effect upon death of donor. Further, the donation was void for itleft the donor Diego w/o any property at all.

he donation was inter vivos or mortis causa inter vivos

W/n the revocation was valid NO, it was not.

R: The donation is INTER VIVOS. Revocation was not proper. (ruling in favorof Mercedes)

Crucial in resolving whether the donation was inter vivos or mortis causa isthe determination of whether the donor intended to transfer ownership over theproperties upon the execution of the deed.

In ascertaining the intention of the donor, all the deeds provisions must be

read together:

o IRST, the granting clause shows that Diego donated the properties

out of love and affection for Mercedes. This is a mark of a donationinter vivos.

o SECOND, the reservation of lifetime usufruct indicates that the

donor intended to transfer the naked ownership of the properties.As correctly posed by the CA, what was the need for such

reservation if the donor and his spouse remained the owners of theproperties?

o THIRD, the donor reserved sufficient properties for his

maintenance w/ his standing in society, indicating that the donor

intended to part w/ 6 parcels.o Lastly the donee accepted the donation.

Alejandro vs. Geraldez: An is a mark that the donation

is inter vivos. Acceptance is a requirement for donations inter vivos.

Donations mortis causa, being in a form of a will, are not required to beaccepted by the donees during the donors lifetime.

THUS, the right to dispose the properties belonged to Mercedes. Diegos right

to give consent was merely intended to protect his usufructuary interests.

The limitation on the right to sell during the donors lifetime implied that

ownership had passed to the donees and donation was effective during thedonors lifetime.

Circumstances show that the intention of the donor was to transferownership to Mercedes. Prior to the donation inter vivos, the Danlag spouses

already executed 3 donations mortis causa. The Danlag spouses were aware of the difference between the two

donations. If they did not intend to donate inter vivos, they would not againdonate the four lots already donated mortis causa.

A valid donation, once accepted, becomes

irrevocable, EXCEPT on account of inofficiousness, failure by donee to complywith charges imposed in donation, or ingratitude.

The Danlag spouses did NOT invoke any of these. Finally, the records do not

show that the donor-spouses instituted any action to revoke the donation inaccordance w/ Art. 769. The revocation has no legal effect.

During the 1987 national elections, petitioners, who are partners ACCRA law

firm contributed about P882k+ each to the campaign funds of SenatorAngara, then running for the Senate.

BIR assessed each of the petitioners donors tax for their contributions.

Petitioners questioned the assessment through a letter to the BIR. They

claimed that political or electoral contributions are NOT considered giftsunder the NIRC and that, therefore, they are not liable for donors tax.

The claim for exemption was denied by the Commissioner. I: W/n political contributions can be considered a donation and w/n

petitioners are liable for Donors tax



14/32

R: YES, political contributions ARE donations and petitioners ARE liable fordonors tax.

A d

o

o

o

The

.

Petitioners, each contributed to the campaign funds of Senator Edgardo

Angara, without any material consideration.

All three elements of a donation are present. The patrimony of the four

petitioners were reduced by P882k+, while Senator Edgardo Angaraspatrimony correspondingly increased.

2) Petitioners attempt is strained.

Senator Angara was under no obligation to benefit the petitioners. Theproper performance of his duties as a legislator is his obligation as an electedpublic servant of the Filipino people and not a consideration for the politicalcontributions he received.

In fact, as a public servant, he may even be called to enact laws that arecontrary to the interests of his benefactors, for the benefit of the greatergood.

Finally, this Court takes note of the fact that subsequent to the donations

involved in this case, Congress approved Republic Act No. 7166 on November25, 1991, providing in Section 13 thereof that political/electoral contributions,duly reported to the Commission on Elections, are NOT subject to thepayment of any gift tax. This all the more shows that the politicalcontributions herein made are subject to the payment of gift taxes, since thesame were made PRIOR to the exempting legislation, and Republic Act No.7166 provides no retroactive effect on this point.



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Mitsubishi MPC NPC

MPC, formerly Southern Energy Quezon, Inc., is a domestic firm engaged inthe generation of power which it sells to the National Power Corporation (NPC). For the construction of the electrical and mechanical equipment portion of itsPagbilao, Quezon plant, MPC secured the services of Mitsubishi Corporation(Mitsubishi) of Japan.

Under R.A. 6395, NPC is exempt from all taxes (which covers both direct and

indirect taxes).

In the light of the NPC's tax exempt status, MPC, on the belief that its sale of

power generation services to NPC is zero-rated for VAT purposes, filed anApplication for Effective Zero Rating.

CIR issued a ruling stating that the supply of electricity by MPC to the NPC

shall be subject to zero percent (0%) VAT.

Consistent with its belief to be zero-rated, MPC opted not to pay the VATcomponent of the progress billings from Mitsubishi for the period covering April1993 to September 1996 - for the E & M Equipment Erection Portion of MPC'scontract with Mitsubishi. This prompted Mitsubishi to advance the VAT component as this serves as itsoutput VAT which is essential for the determination of its VAT payment.

MPC, while awaiting approval of its application, filed its quarterly VAT return

for the second quarter of 1998 where it reflected an input VAT of P148M+, assupported by an OR.

MPC filed an administrative claim for refund of unutilized input VAT.

BIR failed to act on its claim for refund.

MPC went to the CTA via a petition for review to forestall the running of thetwo-year prescriptive period.

BIR asserted that MPC's claim for refund CANNOT be granted since MPC's

sale of electricity to NPC is NOT zero-rated for its failure to secure an approvedapplication for zero-rating.

The CTA granted MPC's claim for input VAT refund or credit for PhP10,766,939.48. The CA rendered its assailed decision modifying that of the CTAdecision by granting most of MPC's claims for tax refund or credit forP146,760,509.48.

I: W/n MPC is entitled to the refund of its input VAT payments made from

1993 to 1996

R: Yes, but only to the extent of P10M+, given that claim has prescribed.

MP's claim for refund / tax credit for the creditable input VAT

was filed beyond the period provided by law for such claim. Sec. 112(A) of theNIRC provides that any VAT-registered person, whose sales are zero-rated mayapply for the issuance of tax credit WITHIN 2 YEARS after the close of the taxablequarter when the sales were made. MPC filed a refund in Dec 1999 when it shouldhave filed in Sept 1998 (since the close of the quarter was Sept 1996).

is an indirect tax which can be shifted or passed on

to the buyer, transferee, or lessee of the goods, properties, or services of thetaxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt

client, resulting in a zero-rated or effectively zero-rated transaction, does NOT,standing alone, deprive the taxpayer of its right to a refund for any unutilizedcreditable input VAT, albeit the erroneous, illegal, or wrongful payment angle doesnot enter the equation.

The law that originally imposed the VAT in the country, as

well as the subsequent amendments of that law, has been drawn from the taxcredit method (practiced in Europe).

If at the end of a taxable quarter the output taxes charged by a seller areEQUAL to the input taxes passed on by the suppliers, no payment is required.HOWEVER, when output taxes EXCEED input taxes, the excess has to be paid. Onthe other hand, if the input taxes EXCEED the output taxes, the excess shall beCARRIED OVER TO THE succeeding quarter/s.

Should the input taxes result from zero-rated or effectively zero-ratedtransactions or from the acquisition of capital goods, any EXCESS over the output

taxes shall be refunded to the taxpayer / credited against other internal revenuetaxes.

generally refer to the export sale of goods and

supply of services. The tax rate is set at zero. When applied to the tax base, suchrate obviously results in no tax chargeable against the purchaser. The seller ofsuch transactions charges no output tax, but can claim a refund of or a tax creditcertificate for the VAT previously charged by suppliers.

BIR and other tax agencies have a duty to treat claims for refunds and taxcredits with proper attention and urgency. Had RDO No. 60 and, later, the BIR



16/32

proper acted, instead of sitting, on MPC's underlying application for effective zerorating, the matter of addressing MPC's right, or lack of it, to tax credit or refundcould have plausibly been addressed at their level and perchance freed thetaxpayer and the government from the rigors of a tedious litigation.

The official receipt proves payment by MPC of its creditable input VAT relativeto its purchases from Mitsubishi. BIR is precluded from requiring additional

evidence to prove that input tax had indeed paid or, in fine, that the taxpayer isindeed entitled to a tax refund or credit for input VAT, we agree with the CA'sabove disposition. As the Court distinctly notes, the law considers a duly-executedVAT invoice or OR referred to in the above provision as sufficient evidence tosupport a claim for input tax credit.

The Philippine Health Care Providers (PHCPI), a health care organization for

sick and disabled persons enrolled in a health care plan, wrote BIR inquiringwhether the services it provides are exempt from the payment of the VAT.

BIR issued a ruling, confirmed by the BIR Regional Director, stating that

PHCPI was exempt from the VAT coverage.

BIR then sent PHCPI 2 notices for deficiency in its payment of the VAT and

documentary stamp taxes (DST) f P224M+ for taxable years 1996 and 1997.

PHCPI protested, but BIR did not take any action, so PHCPI filed with the

CTA a petition for review.

CTA ordered PHCPI to pay a reduced deficiency VAT and declared the BIR

ruling void, saying that PHCPI is a since itdoes not actually render medical service but merely acts as a conduit between themembers and petitioner's accredited and recognized hospitals and clinics.

However, after a careful review of the facts of the case, the CTA resolved to

grant petitioner's "Motion for Partial Reconsideration relying on Sec.246 of the

1977 Tax code which provides that in the absence of showing of bad faith, theretroactive revocation of the BIR Ruling will be prejudicial to PHCPI. Accordingly,the VAT assessment issued against PHCPI for the taxable years 1996 and 1997was WITHDRAWN and SET ASIDE.

I: 1. W/n PHCPI's services are subject to VAT

R: YES. HOWEVER, because of the VAT ruling exempting PHCPI from VAT, it

cannot be retroactively revoked and therefore, PHCPI is still exempt.

1) Section 102 of the NIRC as amended provides that there shall be levied a

VAT equivalent to 12% of gross receipts derived from the

The phrase "sale or exchange of service" means the performance of allkinds of services in the Philippines for consideration.

Section 103 of the same Code specifies the exempt transactions from the

provision, which includes medical, dental, hospital and veterinary services except

those rendered by professionals. It can be seen from PHCPIs letter to BIR that its services that it

Thus, it does NOT fall under VAT-exempt transactions.

2) Section 246 of the 1997 Tax Code, as amended, provides that rulings,

circulars, rules and regulations promulgated by the CIR have no retroactiveapplication if to apply them would prejudice the taxpayer.

The exceptions to this rule are:

o (1) where the taxpayer deliberately misstates or omits material

facts from his return or in any document required of him by theBIR

o (2) where the facts subsequently gathered by the BIR arematerially different from the facts on which the ruling is based, or

o (3) where the taxpayer acted in bad faith.

PHCPI did not fall under any of these exceptions. PHCPI's failure to refer to itself as a health maintenance organization is notan indication of bad faith or a deliberate attempt to make false representations.

The term "health maintenance organization" was first recorded in thePhilippine statute books only upon the passage of "The National Health InsuranceAct of 1995" which defines a "health maintenance org" as one of the classes of a"health care provider."

Thus, the VAT Ruling was issued in PHCPI's favor, and the term "healthmaintenance organization" was yet unknown or had no significance for taxationpurposes. PHCPI therefore, believed in good faith that it was VAT exempt for thetaxable years 1996 and 1997 on the basis of the VAT Ruling. CIR is precluded from adopting a position contrary to one previously takenwhere injustice would result to the taxpayer.

Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel. Itleases a portion of the hotels premises to the PAGCOR for casino operations. Italso caters food and beverages to PAGCORs casino patrons through the hotelsrestaurant outlets.

From 1996 to 1997, Acesite incurred VAT amounting to P30M+ from its rentalincome and sale of food and beverages to PAGCOR during said period.



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Acesite tried to shift the said taxes to PAGCOR by incorporating it in theamount assessed to PAGCOR but the latter refused to pay the taxes on account ofits tax exempt status.

Thus, PAGCOR paid the amount due to Acesite minus the P30M+ VAT whileAcesite paid the VAT to the CIR.

However, Acesite belatedly arrived at the conclusion that its transaction withPAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. In1998, Acesite filed an administrative claim for refund with the CIR but CIR failed toresolve the same, so the case was elevated to the CTA. I: W/n the 0% VAT rate (under then Sec 108 (B)(3) of the NIRC) applies toAcesite

R: Yes.

PD 1869 w/c created PAGCOR granted it an exemption from paying taxes. A close scrutiny of the provisions of the said law gives PAGCOR a blanketexemption to taxes with no distinction on whether the taxes are direct or indirect.

The law even grants tax exempt status to persons dealing with PAGCOR incasino operations. The unmistakable conclusion is that PAGCOR is not liable for theP30M+ VAT and neither is Acesite as Acesite is effectively subject to zero percentrate under the NIRC.

By extending the exemption to entities or individuals dealing with PAGCOR,the legislature clearly granted exemption also from indirect taxes. It must be notedthat the indirect tax of VAT, as in the instant case, can be shifted or passed to thebuyer, transferee, or lessee of the goods, properties, or services subject to VAT.Thus, by extending the tax exemption to entities or individuals dealing withPAGCOR in casino operations, it is exempting PAGCOR from being liable to indirecttaxes.

The NIRC provides that transactions subject to 0% VAT include servicesrendered to persons whose exemption under special laws or internationalagreements subjects the supply of such services to 0% rate.

It is true that VAT can either be incorporated in the value of the goods,properties, or services sold or leased, in which case it is computed as 1/11 of suchvalue, or charged as an additional 10% to the value. Verily, the seller or lessor has

the option to follow either way in charging its clients and customer. In the instant case, Acesite followed the latter method, that is, charging anadditional 10% of the gross sales and rentals. Be that as it may, the use of eithermethod, and in particular, the first method, does not denigrate the fact thatPAGCOR is exempt from an indirect tax, like VAT.

A composed of BWSC-Denmark, Mitsui Engineering

and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract withNAPOCOR for the operation and maintenance of 2 power barges.

BWSC-Denmark, the coordination manager, established BWSC-Mindanao

(domestic corp doing business in Davao) which subcontracted the actual operationand maintenance of NAPOCORs two power barges.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of

currencies (Mark, Yen, and Peso). The freely convertible non-Peso component isdeposited directly to the Consortiums bank accounts in Denmark and Japan, whilethe Peso-denominated component is deposited in a separate and specialdesignated bank account in the Philippines.

On the other hand, the Consortium paid BWSC-Mindanao in foreign currency

inwardly remitted to the Philippines through the banking system.

In order to ascertain the tax implications of the above transactions, BWSC-

Mindanao sought a ruling from the BIR, w/c responded with a Ruling declaringthat if BWSC-Min chose to register as a VAT person and the consideration for itsservices is paid for in acceptable foreign currency and accounted for in accordancewith the rules and regulations of the BSP, the aforesaid services shall be subject toVAT at zero-rate.

BSWC-Mindanao chose to register as a VAT taxpayer.

In conformity with RR 5-96 allowing zero-rated VAT for services other than

processing, manufacturing and repacking of goods, it subjected its sale of servicesto the Consortium to the 10% VAT and paid the amount of P6M+ as its output taxliability for the year 1996.

It then filed a claim for the issuance of a tax credit certificate with the BIR,

believing that it erroneously paid the output VAT for 1996 due to its availment ofthe Voluntary Assessment Program (VAP) of the BIR.

CTA ordered BIR to issue a tax credit certificate for the P6M+ in favor of

BSCW-Mindanao. This was affirmed by the CA.

I: W/n BWSC-Mindanao is entitled to the refund of P6,994,659.67 as

erroneously paid output VAT for the year 1996 R: Yes, they are entitled to refund. Their services ARE actually still subject to10% VAT BUT they are not liable for such given their reliance on BIR Rulings.

An essential condition for qualification to zero-rating under Section 102(b)(2)

of is that services other than processing, manufacturing, or repacking ofgoods must be performed for persons doing business OUTSIDE the Philippines.

In this case, the payer-recipient of BWSC-Mindanaos services is the

Consortium which is a joint-venture doing business in the Philippines.



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While the Consortiums principal members are non-resident foreigncorporations, the Consortium itself is doing business in the Philippines. This isshown clearly in BIR Ruling No. 023-95 which states that the contract between theConsortium and NAPOCOR is for a 15-year term. Considering this length of time,the Consortiums operation and maintenance of NAPOCORs power barges cannot

be classified as a single or isolated transaction.

The Consortium does not fall under Section 102(b)(2) which requires that the

recipient of the services must be a person doing business outside the Philippines.

Therefore, BWSC-Mins services to the Consortium, not being supplied to a

person doing business outside the Philippines, cannot legally qualify for 0% VAT.

The Court recognizes the rule that the VAT system generally follows the

"destination principle" (exports are zero-rated whereas imports are taxed).

However, as the Court stated in American Express, there is an exception to

this rule, which is the 0% VAT on services enumerated in Section 102 andperformed in the Philippines. To be exempt from the destination principle underSection 102(b)(1) and (2), the services must be (a) performed in the Philippines;(b) for a person ; and (c) paid in

acceptable foreign currency accounted for in accordance with BSP rules. In contrast, this case involves a recipient of services the Consortium

which is doing business in the Philippines.

Nevertheless, in seeking a refund of its excess output tax, respondent relied

on VAT Rulings insofar as they held that the services being rendered by BWSCMI issubject to VAT at zero percent (0%). BWSCs reliance on these BIR rulings bindsBIR.

BIRs revocation CANNOT be given retroactive effect since it will prejudice the

taxpayer, w/c is prohibited by Sec 246 of the NIRC. Changing respondents statuswill deprive respondent of a refund of a substantial amount representing excessoutput tax.

NDC decided to sell its National Marine Corporation (NMC) shares and 5 of its

ships, w/c were offered for public bidding.

Among the stipulated terms and conditions for the public auction was that the

winning bidder was to pay "a VAT of 10% on the value of the vessels.

Magsaysay Lines offered to buy the shares and the vessels for P168M. The

bid was made by Magsaysay Lines, purportedly for a new company still to beformed composed of itself, Baliwag Navigation, Inc., and FIM Limited of theMarden Group based in Hongkong (collectively, private respondents)

The bid was approved by the Committee on Privatization, and a Notice ofAward was issued to Magsaysay Lines.

Private respondents through counsel then received a VAT Ruling from the

BIR, holding that the sale of the vessels was subject to the 10% VAT. They filed a

motion for reconsideration but their motion was denied so they elevated the caseto the CTA.

The NDC drew on the Letter of Credit to pay for the VAT, and the amount of

P15,120,000.00 in taxes was paid on 16 March 1989.

CTA ruled that the sale of a vessel was an "isolated transaction," not done in

the ordinary course of NDCs business, and was thus not subject to VAT, whichunder Section 99 of the Tax Code, was applied only to sales in the course of tradeor business.

I: W/N the sale is subject to VAT

R: No, sale is NOT subject to VAT.

Any sale, barter or exchange of goods or services not in the course of tradeor business is not subject to VAT.

mperial v. CIR: The term " does not mean the

performance of a single disconnected act, but means conducting, prosecuting andcontinuing business by performing progressively all the acts normally incidentthereof.

Thus, it connotes REGULARITY of activity.

In the instant case, the sale was an isolated transaction. The sale which wasinvoluntary and made pursuant to the declared policy of Government forprivatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC isleasing personal property. This finding is confirmed by the Revised Charter of the NDC which bears noindication that the NDC was created for the primary purpose of selling realproperty.

Thus, the sale of the vessels was not in the ordinary course of trade or

business of NDC so it should not be subject to VAT.

SEKISUI JUSHI is a domestic corporation with principal office located in the

Special Export Processing Zone in Laguna.

It is principally engaged in the business of manufacturing, importing,



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exporting, buying, selling wholesale such goods as strapping bands and otherpackaging materials.

Having registered with the BIR as a VAT taxpayer, Sekisui filed its quarterly

returns with the BIR, in the amount of P4M paid by it in connection with its

domestic purchase of capital goods and services. Said input taxes remained unutilized since Sekisui has not engaged in any

business activity or transaction for which it may be liable for output tax and forwhich said input taxes may be credited.

Sekisui then filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty

Drawback Center of the Department of Finance (CENTER-DOF) two separateapplications for tax credit/refund of VAT input taxes paid.

CIR denied this, but CTA ruled that Sekisui was entitled to refund.

I: W/n SEKISUI is entitled to the refund/tax credit certificate as alleged

unutilized input taxes paid on domestic purchase of capital goods and services R: Yes, it is entitled to refund

Business enterprises registered with the Philippine Export Zone Authority(PEZA) may choose between two fiscal incentive schemes:

o (1) to pay a 5% preferential tax rate on its gross income and thusbe exempt from all other taxes; or

o (b) to enjoy an income tax holiday, in which case it is not exempt

from applicable national revenue taxes including the value-addedtax (VAT).

If the entity avails itself of the 5% preferential tax rate under the first

scheme, it is exempt from all taxes, including the VAT;

Under the second, it is exempt from income taxes for a number of years, but

not from other national internal revenue taxes like the VAT.

A perusal of the pleadings and supporting documents indicates that Sekisui

availed itself of the income tax holiday (second). By doing so, it became subject toVAT. It correctly registered as a VAT taxpayer, because its transactions were notVAT-exempt.

Notwithstanding the fact that its purchases should have been zero-rated,Sekisui was able to prove that it had paid input taxes in the amount of P4M, assubstantially supported by invoices and ORs.

While an ecozone is within the Philippines, it is deemed a separate customs

territory. Sales by suppliers from outside the borders of the ecozone to thisseparate customs territory are deemed as exports and treated as export sales. Since 100% of Sekisui's products are exported, all its transactions aredeemed export sales and are thus VAT zero-rated. Sekisui has no output tax withwhich it could offset its paid input tax. Since the subject input tax it paid for itsdomestic purchases of capital goods and services remained unutilized, it can claim

a refund for the input VAT previously charged by its suppliers.

Several actions were filed by different petitioners assailing the validity of R.A.

No. 9337 (increasing VAT to 12%) for being unconstitutional, as it violates Art 6,Section 28, w/c provides that The rule of taxation shall be uniform andequitable. The Congress shall evolve a progressive system of taxation.

In particular, SHELL, etc. assailed Section 8, amending Section 110 (B) of the

NIRC,making it REGRESSIVE and unconstitutional.If at the end of any taxable quarter the

output tax exceeds the input tax, the excess shall be paid by theVAT-registered person. If the input tax exceeds the output tax, theexcess shall be carried over to the succeeding quarter or quarters:PROVIDED that the

:PROVIDED, HOWEVER, THAT any input tax attributable to zero-

rated sales by a VAT-registered person may at his option berefunded or credited against other internal revenue taxes. . .

I: W/n RA 9337 is unconstitutional for violating uniformity,

equitability and progressiveness of taxation No, it is VALID.

Uniformity in taxation means that all taxable articles or kinds of

property of the same class shall be taxed at the same rate.

The rule of uniform taxation does not deprive Congress of the

power to classify subjects of taxation, and only demands uniformitywithin the particular class.

In this case, the tax law is uniform because:

o 1) it provides a standard rate of 0% or 10% (or 12%) on all goods

and services;o ) it does not make any distinction as to the type of industry or

trade that will bear the 70% limitation on the creditable input tax, 5-yearamortization of input tax paid on purchase of capital goods or the 5% finalwithholding tax by the government.

(Taxes should equally burden all individuals

or entities in similar economic circumstances.)

The law is equipped with a threshold margin. The VAT rate of 0% or 10%

(or 12%) does not apply to sales of goods or services with gross annual sales orreceipts not exceeding P1.5M.

http://www.businessdictionary.com/definition/individual.htmlhttp://www.businessdictionary.com/definition/entity.htmlhttp://www.investorwords.com/1639/economic.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.businessdictionary.com/definition/entity.htmlhttp://www.investorwords.com/1639/economic.html


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Also, basic marine and agricultural food products in their original state are

still NOT subject to the tax, thus ensuring that prices at the grassroots level willremain accessible.

Although the law outs a premium on businesses with low profit margins, and

unduly favors those with high profit margins, Congress equalized the burden thelaw by likewise imposing a 3% percentage tax on VAT-exempt persons underSection 109(v), i.e., transactions with gross annual sales and/or receipts notexceeding P1.5 Million. This acts as an equalizer because in effect, bigger businesses that qualify forVAT coverage and VAT-exempt taxpayers stand on equal-footing. Moreover, Congress provided under mitigating measures to ease, as well asspread out, the burden of taxation, which would otherwise rest largely on theconsumers:o Excise taxes on petroleum products and natural gas were reduced.

Percentage tax on domestic carriers was removed. Power producers are nowexempt from paying franchise tax.

o Income tax rates of corporations, in order to distribute the burden of

taxation, were increased

o Domestic, foreign, and non-resident corporations are now subject to a 35%income tax rate, from a previous 32%.

o Intercorporate dividends of non-resident foreign corporations are still subject

to 15% final withholding tax but the tax credit allowed on the corporationsdomicile was increased to 20%.

o PAGCOR is not exempt from income taxes anymore.

o Even the sale by an artist of his works or services performed for the

production of such works was not spared.

*

Petitioner (Shell) assumes that the input tax exceeds 70% of the output tax,and therefore, the input tax in excess of 70% remains uncredited. However, tothe extent that the input tax is less than 70% of the output tax, then 100% ofsuch input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a businesssbooks of accounts and remains creditable in the succeeding quarter/s. This isexplicitly allowed by Section 110(B), which provides that if the input tax exceedsthe output tax, the excess shall be carried over to the succeeding quarter orquarters.

In addition, Section 112(B) allows a VAT-registered person to apply for theissuance of a tax credit certificate or refund for any unused input taxes, to theextent that such input taxes have not been applied against the output taxes. Suchunused input tax may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not adinfinitum, as petitioners exaggeratedly contend.

On the other hand, it appears that petitioner Garcia failed to comprehend the

operation of the 70% limitation on the input tax. According to petitioner, thelimitation on the creditable input tax in effect allows VAT-registered establishmentsto retain a portion of the taxes they collect, which violates the principle that tax

collection and revenue should be for public purposes and expenditures. As earlier stated,

. In computing the VATpayable, three possible scenarios may arise:

o If output tax = input tax = no payment

o If output tax > input tax = person liable for excess, to be paid to

BIR

o If input tax > output tax = excess shall be carried over to the

succeeding quarter or quarters.

o IF input tax results from zero-rated or effectively zero-rated

transactions, any excess over the output taxes shall be REFUNDEDto the taxpayer / credited against other internal revenue taxes, at

the taxpayers option.

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input

tax. Thus, a person can credit his input tax only up to the extent of 70% of theoutput tax.

There is

The party directlyliable for the payment of the tax is the seller. What only needs to be done is forthe person/taxpayer to apply or credit these input taxes, as evidenced by receipts,against his output taxes.

Taxation is PROGRESSIVE when its rate goes up depending on the resources

of the person affected.

*NOTE the distinction made by the court:- A tax on spending or consumption. It is levied on the sale, barter, exchange or

lease of goods or properties and services. Being an indirect tax on expenditure, theseller of goods or services may pass on the amount of tax paid to the buyer, with theseller acting merely as a tax collector. The burden of VAT is intended to fall on theimmediate buyers and ultimately, the end-consumers.



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is a tax for which a taxpayer is directly liable on the t

tax ii digests - y. sanchez

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