G.R. No.

L-10405 December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued, without
costs.

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An Act
Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a)
thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and
improvement" of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta — Gen. Lucban — Gen.
Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen. Lim)"; that, at the time of the
passage and approval of said Act, the aforementioned feeder roads were "nothing but projected and
planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . .
Pasig, Rizal" (according to the tracings attached to the petition as Annexes A and B, near Shaw
Boulevard, not far away from the intersection between the latter and Highway 54), which projected feeder
roads "do not connect any government property or any important premises to the main highway"; that the
aforementioned Antonio Subdivision (as well as the lands on which said feeder roads were to be
construed) were private properties of respondent Jose C. Zulueta, who, at the time of the passage and
approval of said Act, was a member of the Senate of the Philippines; that on May, 1953, respondent
Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to donate said projected
feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the
council, subject to the condition "that the donor would submit a plan of the said roads and agree to
change the names of two of them"; that no deed of donation in favor of the municipality of Pasig was,
however, executed; that on July 10, 1953, respondent Zulueta wrote another letter to said council, calling
attention to the approval of Republic Act. No. 920, and the sum of P85,000.00 appropriated therein for the
construction of the projected feeder roads in question; that the municipal council of Pasig endorsed said
letter of respondent Zulueta to the District Engineer of Rizal, who, up to the present "has not made any
endorsement thereon" that inasmuch as the projected feeder roads in question were private property at
the time of the passage and approval of Republic Act No. 920, the appropriation of P85,000.00 therein
made, for the construction, reconstruction, repair, extension and improvement of said projected feeder
roads, was illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made by
Congress because its members were made to believe that the projected feeder roads in question were
"public roads and not private streets of a private subdivision"'; that, "in order to give a semblance of
legality, when there is absolutely none, to the aforementioned appropriation", respondents Zulueta
executed on December 12, 1953, while he was a member of the Senate of the Philippines, an alleged
deed of donation — copy of which is annexed to the petition — of the four (4) parcels of land constituting
said projected feeder roads, in favor of the Government of the Republic of the Philippines; that said

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alleged deed of donation was, on the same date, accepted by the then Executive Secretary; that being
subject to an onerous condition, said donation partook of the nature of a contract; that, such, said
donation violated the provision of our fundamental law prohibiting members of Congress from being
directly or indirectly financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of the projected feeder roads in
question with public funds would greatly enhance or increase the value of the aforementioned subdivision
of respondent Zulueta, "aside from relieving him from the burden of constructing his subdivision streets or
roads at his own expense"; that the construction of said projected feeder roads was then being
undertaken by the Bureau of Public Highways; and that, unless restrained by the court, the respondents
would continue to execute, comply with, follow and implement the aforementioned illegal provision of law,
"to the irreparable damage, detriment and prejudice not only to the petitioner but to the Filipino nation."

Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and void;
that the alleged deed of donation of the feeder roads in question be "declared unconstitutional and,
therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta from
ordering or allowing the continuance of the above-mentioned feeder roads project, and from making and
securing any new and further releases on the aforementioned item of Republic Act No. 920, and the
disbursing officers of the Department of Public Works and Highways from making any further payments
out of said funds provided for in Republic Act No. 920; and that pending final hearing on the merits, a writ
of preliminary injunction be issued enjoining the aforementioned parties respondent from making and
securing any new and further releases on the aforesaid item of Republic Act No. 920 and from making
any further payments out of said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to sue",
and that the petition did "not state a cause of action". In support to this motion, respondent Zulueta
alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the Province of
Rizal, pursuant to section 1683 of the Revised Administrative Code; that said respondent is " not aware of
any law which makes illegal the appropriation of public funds for the improvements of . . . private
property"; and that, the constitutional provision invoked by petitioner is inapplicable to the donation in
question, the same being a pure act of liberality, not a contract. The other respondents, in turn,
maintained that petitioner could not assail the appropriation in question because "there is no actual bona
fide case . . . in which the validity of Republic Act No. 920 is necessarily involved" and petitioner "has not
shown that he has a personal and substantial interest" in said Act "and that its enforcement has caused or
will cause him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial Governor of
Rizal and the provincial fiscal thereof who represents him therein, "have the requisite personalities" to
question the constitutionality of the disputed item of Republic Act No. 920; that "the legislature is without
power appropriate public revenues for anything but a public purpose", that the instructions and
improvement of the feeder roads in question, if such roads where private property, would not be a public
purpose; that, being subject to the following condition:

The within donation is hereby made upon the condition that the Government of the Republic of the
Philippines will use the parcels of land hereby donated for street purposes only and for no other purposes
whatsoever; it being expressly understood that should the Government of the Republic of the Philippines
violate the condition hereby imposed upon it, the title to the land hereby donated shall, upon such
violation, ipso facto revert to the DONOR, JOSE C. ZULUETA. (Emphasis supplied.) which is onerous,

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the donation in question is a contract; that said donation or contract is "absolutely forbidden by
the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the Philippines,
declares in existence and void from the very beginning contracts "whose cause, objector purpose
is contrary to law, morals . . . or public policy"; that the legality of said donation may not be contested,
however, by petitioner herein, because his "interest are not directly affected" thereby; and that,
accordingly, the appropriation in question "should be upheld" and the case dismissed.

At the outset, it should be noted that we are concerned with a decision granting the aforementioned
motions to dismiss, which as much, are deemed to have admitted hypothetically the allegations of fact
made in the petition of appellant herein. According to said petition, respondent Zulueta is the owner of
several parcels of residential land situated in Pasig, Rizal, and known as the Antonio Subdivision, certain
portions of which had been reserved for the projected feeder roads aforementioned, which, admittedly,
were private property of said respondent when Republic Act No. 920, appropriating P85,000.00 for the
"construction, reconstruction, repair, extension and improvement" of said roads, was passed by
Congress, as well as when it was approved by the President on June 20, 1953. The petition further
alleges that the construction of said roads, to be undertaken with the aforementioned appropriation of
P85,000.00, would have the effect of relieving respondent Zulueta of the burden of constructing his
subdivision streets or roads at his own expenses, 1and would "greatly enhance or increase the value of
the subdivision" of said respondent. The lower court held that under these circumstances, the
appropriation in question was "clearly for a private, not a public purpose."

Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However, respondent
Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal because Congress is the
source of all laws . . . Aside from the fact that movant is not aware of any law which makes illegal the
appropriation of public funds for the improvement of what we, in the meantime, may assume as private
property . . . (Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of the
Government established under the Constitution of the Republic of the Philippines and the system of
checks and balances underlying our political structure. Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments deemed violative of the Constitution or organic laws. 3

As regards the legal feasibility of appropriating public funds for a public purpose, the principle according
to Ruling Case Law, is this:

It is a general rule that the legislature is without power to appropriate public revenue for anything
but a public purpose. . . . It is the essential character of the direct object of the expenditure which must
determine its validity as justifying a tax, and not the magnitude of the interest to be affected nor the
degree to which the general advantage of the community, and thus the public welfare, may be ultimately
benefited by their promotion. Incidental to the public or to the state, which results from the promotion of
private interest and the prosperity of private enterprises or business, does not justify their aid by the use
public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)

The rule is set forth in Corpus Juris Secundum in the following language:

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In accordance with the rule that the taxing power must be exercised for public purposes only, discussed
supra sec. 14, money raised by taxation can be expended only for public purposes and not for the
advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)

Explaining the reason underlying said rule, Corpus Juris Secundum states:

Generally, under the express or implied provisions of the constitution, public funds may be used only for
public purpose. The right of the legislature to appropriate funds is correlative with its right to tax, and,
under constitutional provisions against taxation except for public purposes and prohibiting the collection of
a tax for one purpose and the devotion thereof to another purpose, no appropriation of state funds can be
made for other than for a public purpose.

xxx xxx xxx

The test of the constitutionality of a statute requiring the use of public funds is whether the statute is
designed to promote the public interest, as opposed to the furtherance of the advantage of individuals,
although each advantage to individuals might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis
supplied.)

Needless to say, this Court is fully in accord with the foregoing views which, apart from being patently
sound, are a necessary corollary to our democratic system of government, which, as such, exists
primarily for the promotion of the general welfare. Besides, reflecting as they do, the established
jurisprudence in the United States, after whose constitutional system ours has been patterned, said views
and jurisprudence are, likewise, part and parcel of our own constitutional law.lawphil.net

This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon the
ground that petitioner may not contest the legality of the donation above referred to because the same
does not affect him directly. This conclusion is, presumably, based upon the following premises, namely:
(1) that, if valid, said donation cured the constitutional infirmity of the aforementioned appropriation; (2)
that the latter may not be annulled without a previous declaration of unconstitutionality of the said
donation; and (3) that the rule set forth in Article 1421 of the Civil Code is absolute, and admits of no
exception. We do not agree with these premises.

The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not
upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an
amendment of the organic law, removing, with retrospective operation, the constitutional limitation
infringed by said statute. Referring to the P85,000.00 appropriation for the projected feeder roads in
question, the legality thereof depended upon whether said roads were public or private property when the
bill, which, latter on, became Republic Act 920, was passed by Congress, or, when said bill was approved
by the President and the disbursement of said sum became effective, or on June 20, 1953 (see section
13 of said Act). Inasmuch as the land on which the projected feeder roads were to be constructed
belonged then to respondent Zulueta, the result is that said appropriation sought a private purpose, and
hence, was null and void. 4 The donation to the Government, over five (5) months after the approval and
effectivity of said Act, made, according to the petition, for the purpose of giving a "semblance of legality",
or legalizing, the appropriation in question, did not cure its aforementioned basic defect. Consequently, a
judicial nullification of said donation need not precede the declaration of unconstitutionality of said
appropriation.

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Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions. For
instance, the creditors of a party to an illegal contract may, under the conditions set forth in Article 1177 of
said Code, exercise the rights and actions of the latter, except only those which are inherent in his
person, including therefore, his right to the annulment of said contract, even though such creditors are not
affected by the same, except indirectly, in the manner indicated in said legal provision.

Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a direct
injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the instance of
taxpayers, laws providing for the disbursement of public funds, 5upon the theory that "the expenditure of
public funds by an officer of the State for the purpose of administering an unconstitutional act constitutes
a misapplication of such funds," which may be enjoined at the request of a taxpayer. 6Although there are
some decisions to the contrary, 7the prevailing view in the United States is stated in the American
Jurisprudence as follows:

In the determination of the degree of interest essential to give the requisite standing to attack the
constitutionality of a statute, the general rule is that not only persons individually affected, but also
taxpayers, have sufficient interest in preventing the illegal expenditure of moneys raised by taxation and
may therefore question the constitutionality of statutes requiring expenditure of public moneys. (11 Am.
Jur. 761; emphasis supplied.)

However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon (262
U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a taxpayer of
the U.S. to its Federal Government is different from that of a taxpayer of a municipal corporation to its
government. Indeed, under the composite system of government existing in the U.S., the states of the
Union are integral part of the Federation from an international viewpoint, but, each state enjoys internally
a substantial measure of sovereignty, subject to the limitations imposed by the Federal Constitution. In
fact, the same was made by representatives of each state of the Union, not of the people of the U.S.,
except insofar as the former represented the people of the respective States, and the people of each
State has, independently of that of the others, ratified said Constitution. In other words, the Federal
Constitution and the Federal statutes have become binding upon the people of the U.S. in consequence
of an act of, and, in this sense, through the respective states of the Union of which they are citizens. The
peculiar nature of the relation between said people and the Federal Government of the U.S. is reflected in
the election of its President, who is chosen directly, not by the people of the U.S., but by electors chosen
by each State, in such manner as the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net

The relation between the people of the Philippines and its taxpayers, on the other hand, and the Republic
of the Philippines, on the other, is not identical to that obtaining between the people and taxpayers of the
U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that existing between the
people and taxpayers of each state and the government thereof, except that the authority of the Republic
of the Philippines over the people of the Philippines is more fully direct than that of the states of the
Union, insofar as the simple and unitary type of our national government is not subject to limitations
analogous to those imposed by the Federal Constitution upon the states of the Union, and those imposed
upon the Federal Government in the interest of the Union. For this reason, the rule recognizing the right of
taxpayers to assail the constitutionality of a legislation appropriating local or state public funds — which
has been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has greater
application in the Philippines than that adopted with respect to acts of Congress of the United States
appropriating federal funds.

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Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by the
Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of contesting
the price being paid to the owner thereof, as unduly exorbitant. It is true that in Custodio vs. President of
the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the Government was not permitted to
question the constitutionality of an appropriation for backpay of members of Congress. However, in
Rodriguez vs. Treasurer of the Philippines and Barredo vs. Commission on Elections (84 Phil., 368; 45
Off. Gaz., 4411), we entertained the action of taxpayers impugning the validity of certain appropriations of
public funds, and invalidated the same. Moreover, the reason that impelled this Court to take such
position in said two (2) cases — the importance of the issues therein raised — is present in the case at
bar. Again, like the petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a
taxpayer. The Province of Rizal, which he represents officially as its Provincial Governor, is our most
populated political subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of
taxation, in the Philippines.

Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should not have
been dismissed by the lower court; and that the writ of preliminary injunction should have been
maintained.

Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the lower
court for further proceedings not inconsistent with this decision, with the costs of this instance against
respondent Jose C. Zulueta. It is so ordered.

CONSTITUTIONAL

Ormoc Sugar vs Treasurer of Ormoc City (1968)

Facts:

 In 1964, the Municipal Board of Ormoc City passed Ordinance 4, imposing on any and all productions of
centrifuga sugar milled at the Ormoc Sugar Co. Inc. in Ormoc City a municpal tax equivalent to 1% per
export sale to the United States and other foreign countries. The company paid the said tax under protest.
It subsequently filed a case seeking to invalidate the ordinance for being unconstitutional.

Issue: Whether the ordinance violates the equal protection clause.

Held: Yes. The Ordinance taxes only centrifugal sugar produced and exported by the Ormoc
Sugar Co. Inc. and none other. At the time of the taxing ordinance’s enacted, the company was the only
sugar central in Ormoc City. The classification, to be reasonable, should be in terms applicable to future
conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central, of the same class as the present company, from the coverage of
the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the
ordinance expressly points only to the company as the entity to be levied upon.

Herrera v Quezon City Board of Assessment GR No L-15270, September 30, 1961

FACTS:

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In 1952, the Director of the Bureau of Hospitals authorized Jose V. Herrera and Ester Ochangco
Herrera to establish and operate the St. Catherine’s Hospital. In 1953, the Herreras sent a letter to the
Quezon City Assessor requesting exemption from payment of real estate tax on the hospital, stating that
the same was established for charitable and humanitarian purposes and not for commercial gain. The
exemption was granted effective years 1953 to 1955. In 1955, however, the Assessor reclassified the
properties from “exempt” to “taxable” effective 1956, as it was ascertained that out of the 32 beds in the
hospital, 12 of which are for pay-patients. A school of midwifery is also operated within premises of the
hospital.

ISSUE:

Whether St. Catherine’s is exempt from realty tax

RULING:

Yes. The admission of pay-patients does not detract from the charitable character of a hospital, if all
its funds are devoted exclusively to the maintenance of the institution as a public charity.

The exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of said

purpose – a school for training nurses, a nurses’ home, etc.

Abra vs Hernando (1981)

Facts: The provincial assessor made a tax assessment on the properties of the Roman Catholic Bishop
of Bangued. The bishop claims tax exemption from real estate tax, through an action for declaratory
relief. A summary judgment was made granting the exemption without hearing the side of the Province of
Abra.

Issue: Whether the properties of the Bishop of Bangued are tax-exempt.

Held: The 1935 and the 1973 Constitutions differ in language as to the exemption of religious property
from taxes as they should not only be “exclusively” but also “actually” and “directly” used for
religious purposes. Herein, the judge accepted at its face the allegation of the Bishop instead of
demonstrating that there is compliance with the constitutional provision that allows an exemption. There
was an allegation of lack of jurisdiction and of lack of cause of action, which should have compelled the
judge to accord a hearing to the province rather than deciding the case immediately in favor of the
Bishop. Exemption from taxation is not favored and is never presumed, so that if granted, it must
be strictly construed  against the taxpayer. There must be proof of the actual and direct use of the
lands, buildings, and improvements for religious (or charitable) purposes to be exempted from taxation.

The case was remanded to the lower court for a trial on merits.

This is an old taxation case which had been covered by the 1935 Constitution.

Question: Is tax exemption which is embraced in the words "Exclusively Used for Educational
Purposes" liberally construed?

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Answer: YES.

Therefore: A reasonable emphasis can be made that the tax exemption may extend to facilities which are
INCIDENTAL TO and REASONABLY NECESSARY for the accomplishment of the main purpose (which
is to educate).

Further Question: Can a ground floor of an educational institution (which is tax exempted), being used for
commercial purpose and its second floor being used for residential purpose fall under said extension?

Further Answer: The residential issue may be qualified depending on who is residing. The commercial
issue? NO.

FACTS:

Abra Valley College (a private school), located at Benguet, Abra, an educational corporation and
institution of higher learning incorporated with the SEC filed a complaint with the Benguet provincial fiscal
to annul and declare void the NOTICE OF SEIZURE and a NOTICE OF SALE of its lot and building by
the municipal and provincial treasurers for non-payment of real estate taxes and its penalties.

So a certain Paterno Mellare who probably was with Public Respondent AQUINO (sorry I didn’t read any
further) who most probably (patay to, I’m inferring once again) are the municipal and provincial treasurers
filed through counsel a motion to dismiss the complaint.

So what the Provincial Fiscal did was they filed a memorandum for the government where they opined
that based on the evidence, the laws applicable, and previous court decisions and jurisprudence, the
school building and the school lot used for educational purpose of Abra Valley College are exempted from
payment of taxes.

The trial court disagreed. Lets try to look at the evidence and what they found out.

You see what actually happened here was that Abra Valley College (AVC) was renting out the ground
floor of its college building to Northern Marketing Corporation (NMC) while the second floor thereof is
used by the Director of the College for residential purposes. So this is precisely the reason why the
municipal and provincial treasurers served upon the College a “notice of seizure” and later a “notice of
sale” due to the alleged failure of the College to pay real estate taxes and penalties thereon.

So this falls under a case of a claim for tax exemption.

ISSUE:

Whether or not the tax imposition on the College is violative of the Constitutional prohibition against
taxation of religious, charitable, and educational entities?

Maybe we should rephrase the question. The question is, whether or not the lot and building in
question are used exclusively for educational purpose? E pinaparenta yung ground floor eh, ginawa
namang residential yung second floor. Kaya siguro sinabe ng municipal and provincial treasurers
“Pinaglololoko nyo kame, ok tataxan namen kayo, and pag di na kayo makabayad, we will seize that
property, then we will sell it” (again don’t quote me on that, para may istorya lang).

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RULING:

While the Court allows a more liberal and non-restrictive interpretation of the phrase “exclusively used for
educational purposes,” reasonable emphasis has always been made that exemption extends to facilities
which are incidental to and reasonably necessary for the accomplishment of the main purposes.

While the second floor’s use, as residence of the director, is incidental to education ; the lease of
the first floor cannot by any stretch of imagination be considered incidental to the purposes of
education.

The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution.

So there we go. Let's reiterate: While the use of the second floor of the main building in the case at bar
for residential purposes of the Director of the school and his family may find justification under the
concept of INCIDENTAL USE, which is complimentary to the main or primary purpose which is
educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any
stretch of imagination be considered incidental to the purpose of education.

So the Supreme Court affirmed the lower court ruling stating it correctly arrived at the conclusion that the
school building as well as the lot where it is built, should be taxed. Not because of the second floor issue
but of the first floor.

However since it is only a portion of its premises is used for purpose of commerce, the high court directed
that it is only fair that half of the assessed tax be returned to the school.

LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY AND CONSTANTINO P. ROSAS, IN HIS
CAPACITY AS CITY ASSESSOR OF QUEZON CITY

G.R. No. 144104, June 29, 2004

Facts:

The petitioner Lung Center is a non-stock and non-profit entity.

It is the registered owner of a parcel of land. Erected in the middle lot is a hospital known as the Lung
Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen
and small store spaces, and to medical or professional practitioners who use the same as their private
clinics for their patients whom they charge for their professional services.

Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle,
while a big portion on the right side, at the corner, is being leased for commercial purposes to a private
enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients,
both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual
subsidies from the government.

Both the land and the hospital building of the petitioner were assessed for real property taxes in the
amount of P4,554,860 by the City Assessor of Quezon City.

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The petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on
its claim that it is a charitable institution. The petitioner’s request was denied,

Issues

Whether the petitioner is a charitable institution

Whether the real properties of the petitioner are exempt from real property taxes

Ruling

First issue: petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions.

To determine whether an enterprise is a charitable institution/entity or not, the elements which should be
considered include the

Statute creating the enterprise,

Its corporate purposes,

Its constitution and by-laws,

The methods of administration,

The nature of the actual work performed,

The character of the services rendered,

The indefiniteness of the beneficiaries, and

The use and occupation of the properties.

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for
the benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or otherwise lessening
the burden of government.

The word “charitable” is not restricted to relief of the poor or sick. The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private
advantage.

Under P.D. No. 1823, the petitioner was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary diseases in the Philippines.

Hence, the medical services of the petitioner are to be rendered to the public in general in any and all
walks of life including those who are poor and the needy without discrimination. After all, any person, the
rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.

As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether out-patient, or confined in the

10 | P a g e
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.

In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies
from the government for its patients and for the operation of the hospital. It even incurred a net loss in
1991 and 1992 from its operations.

Second Issue: those portions of its real property that are leased to private entities are not exempt
from real property taxes as these are not actually, directly and exclusively used for charitable
purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption
from tax payments must be clearly shown and based on language in the law too plain to be mistaken.

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that
the petitioner shall enjoy the tax exemptions and privileges: The Lung Center of the Philippines shall
be exempt from the payment of taxes, charges and fees imposed by the Government or any political
subdivision or instrumentality thereof with respect to equipment purchases made by, or for the Lung
Center.

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2.

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus: Charitable institutions,
churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and
all lands, buildings, and improvements, actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation.

The tax exemption under this constitutional provision covers property taxes only. What is exempted is
not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes.”

In light of the changes in the Constitution, the petitioner cannot rely on our ruling in Herrera v. Quezon
City Board of Assessment Appeals which was promulgated on September 30, 1961 before the 1973 and
1987 Constitutions took effect.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption,
the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution;
and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.

11 | P a g e
 “Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from participation
or enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege exclusively.” If
real property is used for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation.

The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively”
without doing violence to the Constitutions and the law. Solely is synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution
is organized. It is not the use of the income from the real property that is determinative of whether
the property is used for tax-exempt purposes.

Accordingly, the portions of the land leased to private entities as well as those parts of the hospital
leased to private individuals are not exempt from such taxes. On the other hand, the portions of the
land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-
paying, are exempt from real property taxes.

DOUBLE TAXATION

Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., 309 SCRA 87 , June 25, 1999

Taxation; Tax Treaties; Double Taxation; International Law; A cursory reading of the various tax
treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation
as this is a matter of negotiation between the contracting parties.—The above construction is based
principally on syntax or sentence structure but fails to take into account the purpose animating the treaty
provisions in point. To begin with, we are not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which provides for the payment of royalties under
dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the
same for all the recipients of such royalties and there is no disparity based on nationality in the
circumstances of such payment. On the other hand, a cursory reading of the various tax treaties will show
that there is no similarity in the provisions on relief from or avoidance of double taxation as this is a matter
of negotiation between the contracting parties. As will be shown later, this dissimilarity is true particularly
in the treaties between the Philippines and the United States and between the Philippines and
West Germany.

Words and Phrases; International juridical double taxation is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical
periods; The apparent rationale for doing away with double taxation is to encourage the free flow of goods
and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies.—The RP-US Tax Treaty is just one of a number
of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. The
purpose of these international agreements is to reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More
precisely, the tax conventions are drafted with a view towards the elimination of international juridical
12 | P a g e
double taxation, which is defined as the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of goods and services and the movement of
capital, technology and persons between countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double taxation is crucial in creating such a
climate.

Methods resorted to in eliminating double taxation; Exemption and Credit Methods, Explained.—
Double taxation usually takes place when a person is resident of a contracting state and derives
income from, or owns capital in, the other contracting state and both states impose tax on that
income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it
sets out the respective rights to tax of the state of source or situs and of the state of residence with regard
to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of source is limited . The second method
for the elimination of double taxation applies whenever the state of source is given a full or limited
right to tax together with the state of residence. In this case, the treaties make it incumbent upon the
state of residence to allow relief in order to avoid double taxation. There are two methods of relief—the
exemption method and the credit method. In the exemption method, the income or capital which is
taxable in the state of source or situs is exempted in the state of residence, although in some instances it
may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or
capital. On the other hand, in the credit method, although the income or capital which is taxed in the state
of source is still taxable in the state of residence, the tax paid in the former is credited against the tax
levied in the latter. The basic difference between the two methods is that in the exemption method, the
focus is on the income or capital itself, whereas the credit method focuses upon the tax.

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines
will give up a part of the tax in the expectation that the tax given up for this particular investment
is not taxed by the other country.—In negotiating tax treaties, the underlying rationale for reducing the
tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country. Thus the petitioner correctly opined that the
phrase “royalties paid under similar circumstances” in the most favored nation clause of the US-RP
Tax Treaty necessarily contemplated “circumstances that are tax related.”

Most Favored Nation Clause; The concessional tax rate of 10 percent provided for in the RP-Germany
Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes
imposed under the two tax treaties are not paid under similar circumstances, they are not containing
similar provisions on tax crediting.—Given the purpose underlying tax treaties and the rationale for the
most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax
Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-
Germany Tax Treaty are paid under similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the
United States in respect of the taxes imposable upon royalties earned from sources within the
Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The
RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article
24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and
corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other

13 | P a g e
hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for
double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid.

Same; Same; Same; Same; Same; Statutory Construction; Laws are not just mere compositions, but
have ends to be achieved and that the general purpose is a more important aid to the meaning of
a law than any rule which grammar may lay down; A treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in
the light of its object and purpose.—The reason for construing the phrase “paid under similar
circumstances” as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored
upon a logical reading of the text in the light of the fundamental purpose of such treaty which is to grant
an incentive to the foreign investor by lowering the tax and at the same time crediting against the
domestic tax abroad a figure higher than what was collected in the Philippines. In one case, the Supreme
Court pointed out that laws are not just mere compositions, but have ends to be achieved and that the
general purpose is a more important aid to the meaning of a law than any rule which grammar may lay
down. It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the
purpose to be subserved, and should give the law a reasonable or liberal construction which will best
effectuate its purpose. The Vienna Convention on the Law of Treaties states that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpose.

Same; Same; Same; Same; Same; The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has been or may be granted to the “most
favored” among other countries.—The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has been or may be granted to the “most
favored” among other countries. The most favored nation clause is intended to establish the principle of
equality of international treatment by providing that the citizens or subjects of the contracting nations may
enjoy the privileges accorded by either party to those of the most favored nation. The essence of the
principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax
treaty to which the country of residence of such taxpayer is also a party provided that the subject matter
of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is
liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty,
above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The
entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties)
would derogate from the design behind the most favored nation clause to grant equality of international
treatment since the tax burden laid upon the income of the investor is not the same in the two countries.
The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored
nation treatment precisely to underscore the need for equality of treatment.

Same; Tax Refunds; Statutory Construction; Tax refunds are in the nature of tax exemptions, and as such
they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the
person or entity claiming the exemption.—It bears stress that tax refunds are in the nature of tax
exemptions. As such they are regarded as in derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who
claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic
or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties;
however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax
Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax
Treaty.

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DOCTRINE OF SET OFF

Republic v Mambulao Lumber Company, et al GR No L-17725, February 28, 1962

FACTS:

Mambulao Lumber Company paid the Government a total of P 9,127.50 as reforestation charges for the
years 1947 to 1956. It is the company’s contention that said sum of 9,127.50, not having been used in the
reforestation of the area covered by its license, the same is refundable to it or may be applied in
compensation of P 4,802.37 due from it as forest charges.

Court of First Instance of Manila ordered the company to pay the government the sum of P 4,802.37 with
6% interest thereon from date of the filing of the complaint until fully paid, plus costs. Thus, the present
appeal.

ISSUE: Whether the set-off or compensation is proper

RULING:

No. There is nothing in the law which requires that the amount collected as reforestation charges should
be used exclusively for the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same shall be refunded to him.

The conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature
of a tax which forms part of the Forestation Fund, payable by him irrespective of whether the area
covered by his license is reforested or not.

Said fund, as the law expressly provides, shall be expended in carrying out the purposes provided for
thereunder, namely, the reforestation or afforestation, among others, of denuded areas needing
reforestation or afforestation.

The weight of authority is to the effect that internal revenue taxes, such as the forest charges in question
is not subject to set-off or compensation. Taxes are not in the nature of contracts between the parties but
grow out of a duty to, and are positive acts of the government, to the making and enforcing of which, the
personal consent of the individual taxpayers is not required.

With respect to the forest charges which the company has paid to the government, they are in the coffers
of the government as tax collected, and the government does not owe anything. It is crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each
other, because compensation refers to mutual debts.

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Domingo v Garlitos

GR No L-18994, June 29, 1963

FACTS:

In the 1960 case of Domingo v Moscoso, the Supreme Court declared as final and executory the order
for the payment by the estate of the late Walter Scott Price of estate and inheritance taxes, charges and
penalties, amounting to P40,058.55 issued by the Court of First Instance – Leyte. The fiscal then
presented a petition for the execution of the judgment before the Court of First Instance – Leyte.

The petition was denied as the execution is not justifiable as the government is indebted to the estate
under administration in the amount of P 262,200. Hence, the present petition for certiorari and
mandamus.

ISSUE:

Is execution proper?

RULING:

No. The tax and the debt are compensated. The court having jurisdiction of the estate had found that the
claim of the estate against the government has been recognized and an amount of P262,200 has already
been appropriated by a corresponding law (RA 2700). Under the circumstances, both the claim of the
Government for the inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable as well as fully liquidated.

Compensation, therefore, takes place by operation of law, in accordance with Article 1279 and
1290 of the Civil Code, and both debts are extinguished to their concurrent amounts. If the obligation
to pay taxes and the taxpayer’s claim against the government are both overdue, demandable, as
well as fully liquidated, compensation takes place by operation of law and both obligations are
extinguished to their concurrent amounts.

ENGRACIO FRANCIA VS. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ

G.R. No. L-67649

June 28, 1988

162 SCRA 753

FACTS: Engracio Francia is the registered owner of a residential lot, 328 square meters, and a two-story
house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. On
October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic
of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the
assessed value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to pay his

16 | P a g e
real estate taxes. Thus, on December 5, 1977, his property was sold at public auction pursuant to
Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. On March 20, 1979,
Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24,
1980. The petitioner seeks to set aside the auction sale of his property which took place on December 5,
1977, and to allow him to recover a 203 square meter lot which was sold at public auction to Ho
Fernandez and ordered titled in the latter's name. He further averred that his tax delinquency of
P2,400.00 has been extinguished by legal compensation since the government owed him P4,
116.00 when a portion of his land was expropriated.

The lower court rendered a decision in favor Fernandez which was affirmed by the Intermediate Appellate
Court . Hence, this petition for review.

ISSUE: Whether or not the tax delinquency of Francia has been extinguished by legal compensation.

RULING: No. There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements
provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at
the same time a principal creditor of the other; (2) that the two debts be due.

The Court had consistently ruled that there can be no off-setting of taxes against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government. In addition, a taxpayer cannot
refuse to pay his tax when called upon by the collector because he has a claim against the governmental
body not included in the tax levy.

There are also other factors which compelled the Court to rule against the petitioner . The tax was due to
the city government while the expropriation was effected by the national government. Moreover,
the amount of P4,116.00 paid by the national government for the 125 square meter portion of his
lot was deposited with the Philippine National Bank long before the sale at public auction of his
remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.

Caltex Philippines, Inc. v Commission on Audit GR No. 92585, May 8, 1992

FACTS:

In 1989, COA sent a letter to Caltex, directing it to remit its collection to the Oil Price Stabilization Fund
(OPSF), excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum
products authorized under the PD 1956. Pending such remittance, all of its claims for reimbursement from
the OPSF shall be held in abeyance. The grant total of its unremitted collections of the above tax is
P1,287,668,820.

Caltex submitted a proposal to COA for the payment and the recovery of claims. COA approved the
proposal but prohibited Caltex from further offsetting remittances and reimbursements for the
current and ensuing years. Caltex moved for reconsideration but was denied. Hence, the present
petition.
17 | P a g e
ISSUE:

Whether the amounts due from Caltex to the OPSF may be offsetted against Caltex’s outstanding claims
from said funds

RULING:

No. Taxation is no longer envisioned as a measure merely to raise revenue to support the
existence of government. Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public interest as to be
within the police power of the State.

PD 1956, as amended by EO 137, explicitly provides that the source of OPSF is taxation . A taxpayer
may not offset taxes due from the claims he may have against the government. Taxes cannot be
subject of compensation because the government and taxpayer are not mutually creditors and debtors of
each other and a claim for taxes is not such a debt, demand,, contract or judgment as is allowed to be
set-off.

Hence, COA decision is affirmed except that Caltex’s claim for reimbursement of underrecovery arising
from sales to the National Power Corporation is allowed.

PHILEX MINING CORP. v. CIR

GR No. 125704, August 28, 1998 294 SCRA 687

FACTS:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals affirming the Court of Tax
Appeals decision ordering it to pay the amount of P110.7 M as excise tax liability for the period from the
2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from 1994 until fully paid
pursuant to Sections 248 and 249 of the Tax Code of 1977. Philex protested the demand for payment
of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it
paid for the years 1989 to 1991 in the amount of P120 M plus interest . Therefore these claims for tax
credit/refund should be applied against the tax liabilities.

ISSUE: Can there be an off-setting between the tax liabilities vis-a-vis claims of tax refund of the
petitioner?
18 | P a g e
HELD: No. Philex's claim is an outright disregard of the basic principle in tax law that taxes are the
lifeblood of the government and so should be collected without unnecessary hindrance. Evidently,
to countenance Philex's whimsical reason would render ineffective our tax collection system. Too
simplistic, it finds no support in law or in jurisprudence.

To be sure, Philex cannot be allowed to refuse the payment of its tax liabilities on the ground that
it has a pending tax claim for refund or credit against the government which has not yet been
granted.Taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. There is a material distinction between a tax
and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. xxx There can be no off-setting of taxes against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government.

When is Income Taxable?

G.R. NO. L-68275, April 15, 1988

FACTS:

Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under
Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not
engaged in trade for business in the Philippines.

Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company Glaro
dividends from which 35% withholding tax was withheld and paid to the BIR.

In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement,
contending that it is liable only to 15% withholding tax in accordance with sec. 24 (b) (1) of the Tax code,
as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad paid to and
collected by the government. petitioner failed to act on the said claim for refund, hence Wander filed a
petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax credit. CIR's petition
for reconsideration was denied hence the instant petition to the Supreme Court.

ISSUE:

Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends declared
and to remitted to its parent corporation.

HELD: Yes.

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Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case, reads:

sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby further
amended to read as follows:

(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged
in trade or business in the Philippines, including a foreign life insurance company not engaged in life
insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received
during its taxable year from all sources within the Philippines, as interest (except interest on a
foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensation,
remuneration for technical services or otherwise emolument, or other fixed determinable annual,
periodical ot casual gains, profits and income, and capital gains: xxx Provided, still further that on
dividends received from a domestic corporation liable to tax under this chapter, the tax shall be
15% of the dividends received, which shall be collected and paid as provided in sec 53 (d) of this
code, subject to the condition that the country in which the non-resident foreign corporation is domiciled
shall allow a credit against tax due from the non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%)
on corporation and the tax (15%) dividends as provided in this section: xxx."

From the above-quoted provision, the dividends received from a domestic corporation liable to
tax, the tax shall be 15% of the dividends received, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the Philippines
equivakent to 20% which represents the difference betqween the regular tax (35%) on
corpoorations and the tax (15%) on dividends.

While it may be true that claims for refund construed strictly against the claimant, nevertheless, the fact
that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines should
be considered as a full satisfaction if the given condition. For, as aptly stated by respondent Court, to
deny private respondent the privilege to withhold only 15% tax provided for under PD No. 369 amending
section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely
will adversely affect foreign corporations interest here and discourage them for investing capital in our
country.

TAX ON SCHOOLS

COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE’S MEDICAL CENTER, INC.

G.R. No. 195909, September 26, 2012

Facts:

Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit corporation.

The BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06 for 1998, comprised of
deficiency income tax, VAT, withholding tax on compensation and expanded withholding tax.

Luke’s filed an administrative protest with the BIR against the deficiency tax assessments.

20 | P a g e
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax
rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke’

The BIR claimed that St. Luke’s was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital’s board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke’s had total revenues of P1,730,367,965
or approximately P1.73 billion from patient services in 1998.

Luke’s contended that the BIR should not consider its total revenues, because its free services to patients
was P218,187,498 or 65.20% of its 1998 operating income of P334,642,615. St. Luke’s also claimed
that its income does not inure to the benefit of any individual.

Luke’s maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.

Issue:

Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

Ruling:

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B)
in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and
social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals.

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the
other hand, can be construed together without the removal of such tax exemption.

The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions,
namely, proprietary non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

The only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution” as “any private school maintained
and administered by private individuals or groups” with a government permit. “Non-profit” means no net
income or asset accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities conducted not for profit.

“Non-profit” does not necessarily mean “charitable.”

The Court defined “charity” in Lung Center of the Philippines v. Quezon City as “a gift, to be
applied consistently with existing laws, for the benefit of an indefinite number of persons, either
by bringing their minds and hearts under the influence of education or religion, by assisting them
to establish themselves in life or by otherwise lessening the burden of government.”

21 | P a g e
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung
Center. The issue in Lung Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction.

In other words, charitable institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government
forgoes taxes which should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of charitable
institutions.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for
a tax exemption are specified by the law granting it. The requirements for a tax exemption are strictly
construed against the taxpayer because an exemption restricts the collection of taxes necessary
for the existence of the government.

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

For real property taxes, the incidental generation of income is permissible because the test of exemption
is the use of the property. The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use the property in a certain way, i.e. for a
charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its charitable
character when it used a portion of its lot for commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.

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

Section 30(E) of the NIRC provides that a charitable institution must be:
A non-stock corporation or association;
Organized exclusively for charitable purposes;
Operated exclusively for charitable purposes;

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

Thus, both the organization and operations of the charitable institution must be devoted
“exclusively” for charitable purposes. The organization of the institution refers to its corporate form, as
shown by its articles of incorporation, by-laws and other constitutive documents.

Section 30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is
defined by the Corporation Code as “one where no part of its income is distributable as dividends to its
members, trustees, or officers” and that any profit “obtained as an incident to its operations shall,

22 | P a g e
whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.”

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated
exclusively” by providing that: Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code.

In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately P1.73 billion from paying patients is not
an institution “operated exclusively” for charitable purposes. Clearly, revenues from paying patients
are income received from “activities conducted for profit.” Indeed, St. Luke’s admits that it derived
profits from its paying patients. St. Luke’s declared P1,730,367,965 as “Revenues from Services to
Patients” in contrast to its “Free Services” expenditure of P218,187,498.

Services to paying patients are activities conducted for profit. They cannot be considered any other way.
There is a “purpose to make profit over and above the cost” of services. The P1.73 billion total revenues
from paying patients is not even incidental to St. Luke’s charity expenditure of P218,187,498 for non-
paying patients.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the
clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt
from income tax.

CIR V DLSU G.R. 196596 Nov. 9 2016

Facts

In 2004, the Bureau of Internal Revenue (BIR) issued a letter authorizing it’s revenue officers to examine
the book of accounts of and records for the year 2003 De La Salle University (DLSU) and later on issued
a demand letter to demand payment of tax deficiencies for:

Income tax on rental earnings from restaurants/canteens and bookstores operating within the campus;

Value-added tax (VAT) on business income; and

Documentary stamp tax (DST) on loans and lease contracts for the years 2001,2002, and 2003,
amounting to P17,303,001.12.

DLSU protested the assessment that was however not acted upon, and later on filed a petition for review
with the Court of Tax Appeals(CTA). DLSU argues that as a non-stock, non-profit educational institution, it
is exempt from paying taxes according to Article XIV, Section 4 (3) of the Constitution (All revenues and

23 | P a g e
assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.)

The CTA only granted the removal of assessment on the load transactions. Both CIR and DLSU moved
for reconsideration, the motion of the CIR was denied. The CIR appealed to the CTA en banc arguing that
DLSU’s use of its revenues and assets for non-educational or commercial purposes removed these items
from the exemption, that a tax-exempt organization like DLSU is exempt only from property tax but not
from income tax on the rentals earned from property. Thus, DLSU’s income from the leases of its real
properties is not exempt from taxation even if the income would be used for educational purposes.

DLSU on the other hand offered supplemental pieces of documentary evidence to prove that its rental
income was used actually, directly and exclusively for educational purposes and no objection was made
by the CIR.

REPORT THIS AD

Thereafter, DLSU filed a separate petition for review with the CTA En Banc on the following grounds:

The entire assessment should have been cancelled because it was based on an invalid LOA;

Assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because
DLSU submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in a
separate case where the CTA cancelled Ateneo’s tax assessment; and

The CTA Division erred in finding that a portion of DLSU’s rental income was not proved to have been
used actually, directly and exclusively for educational purposes.

That under RMO No.43-90, LOA should cover only 1 year, the LOA issued by CIR is invalid for covering
the years 2001-2003

The CTA en banc ruled that the case of Ateneo is not applicable because it involved different parties,
factual settings, bases of assessments, sets of evidence, and defenses, it however further reduced the
liability of DLSU to P2,554,825.47

CIR argued that the rental income is taxable regardless of how such income is derived, used or
disposed of. DLSU’s operations of canteens and bookstores within its campus even though
exclusively serving the university community do not negate income tax liability. Article XIV, Section
4 (3) of the Constitution must be harmonized with Section 30 (H) of the Tax Code, which states among
others, that the income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of (its] activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed by this Code.

that a tax-exempt organization like DLSU is exempt only from property tax but not from income
tax on the rentals earned from property. Thus, DLSU’s income from the leases of its real properties is
not exempt from taxation even if the income would be used for educational purposes.

DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues
of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties. Under the doctrine of constitutional

24 | P a g e
supremacy, which renders any subsequent law that is contrary to the Constitution void and without any
force and effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of whatever
kind and character of a non-stock and non-profit educational institution from any of its properties, real or
personal, or from any of its activities conducted for profit regardless of the disposition made of such
income, should be declared without force and effect in view of the constitutionally granted tax exemption
on “all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes.“That it complied with the requirements for the application of Article
XIV, Section 4 (3) of the Constitution.

Issue:

Whether DLSU is taxable as a non-stock, non-profit educational institution whose income have
been used actually, directly and exclusively for educational purposes.

Whether the entire assessment should be void because of the defective LOA

Held:

First issue:

A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the
revenues and income must have also been sourced from educational activities or activities related
to the purposes of an educational institution. The phrase all revenues is unqualified by any reference
to the source of revenues. Thus, so long as the revenues and income are used actually, directly and
exclusively for educational purposes, then said revenues and income shall be exempt from taxes and
duties.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations. It
may refer to the sale of goods, rendition of services, or the return of an investment. Revenue is a
component of the tax base in income tax, VAT, and local business tax (LBT). Assets, on the other hand,
are the tangible and intangible properties owned by a person or entity. It may refer to real estate, cash
deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property from
which the person or entity may derive income or use to generate the same. In Philippine taxation, the fair
market value of real property is a component of the tax base in real property tax (RPT). Also, the landed
cost of imported goods is a component of the tax base in VAT on importation and tariff duties. Thus, when
a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and
exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other
hand, when it also shows that it uses its assets in the form of real property for educational purposes, it
shall be exempted from RPT.

The last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purpose. We make
this declaration in the exercise of and consistent with our duty to uphold the primacy of the Constitution.

Second Issue:

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No.“A Letter of Authority LOA should cover a taxable period not exceeding one taxable year . The
practice of issuing LOAs covering audit of unverified prior years is hereby prohibited. If the audit of a
taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.”

The requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the
extent of the audit and the scope of the revenue officer’s authority. Without this rule, a revenue officer can
unduly burden the taxpayer by demanding random accounting records from random unverified years,
which may include documents from as far back as ten years in cases of fraud audit.

The assessment for taxable year 2003 is valid because this taxable period is specified in the LOA. DLSU
was fully apprised that it was being audited for taxable year 2003. While the assessments for taxable
years 2001 and 2002 are void for having been unspecified on separate LOAs as required under RMO No.
43-90.

TAX ON GOCC’S

Basco vs. PAGCOR (G.R. No. 91649) - Digest

Facts:

Petitioner is seeking to annul the Philippine Amusement and Gaming Corporation (PAGCOR) Charter --
PD 1869, because it is allegedly contrary to morals, public policy and order, and because it constitutes a
waiver of a right prejudicial to a third person with a right recognized by law. It waived the Manila Cit
government’s right to impose taxes and license fees, which is recognized by law. For the same reason,
the law has intruded into the local government’s right to impose local taxes and license fees. This is in
contravention of the constitutionally enshrined principle of local autonomy.

Issue:

Whether or not Presidential Decree No. 1869 is valid.

Ruling:

1. The City of Manila, being a mere Municipal corporation has no inherent right to impose taxes. Their
charter or statute must plainly show an intent to confer that power, otherwise the municipality cannot
assume it. Its power to tax therefore must always yield to a legislative act which is superior having
been passed upon by the state itself which has the “inherent power to tax.”

The Charter of Manila is subject to control by Congress. It should be stressed that “municipal
corporations are mere creatures of Congress”, which has the power to “create and abolish
municipal corporations” due to its “general legislative powers”. Congress, therefore, has the
power of control over the Local governments. And if Congress can grant the City of Manila the power
to tax certain matters, it can also provide for exemptions or even take back the power.

2. The City of Manila’s power to impose license fees on gambling, has long been revoked by P.D. No.
771 and vested exclusively on the National Government. Therefore, only the National Government
has the power to issue “license or permits” for the operation of gambling.
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3. Local governments have no power to tax instrumentalities of the National Government. PAGCOR is
government owned or controlled corporation with an original charter, P.D. No. 1869. All of its shares of
stocks are owned by the National Government. PAGCOR has a dual role, to operate and to regulate
gambling casinos. The latter role is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to
control by a mere Local Government.

4. Petitioners also argue that the Local Autonomy Clause of the Constitution will be violated by P.D. No.
1869.

Article 10, Section 5 of the 1987 Constitution:

“Each local government unit shall have the power to create its own source of revenue and to levy taxes,
fees, and other charges subject to such guidelines and limitation as the congress may provide, consistent
with the basic policy on local autonomy. Such taxes, fees and charges shall accrue exclusively to the
local government.”

SC said this is a pointless argument. The power of the local government to “impose taxes and fees” is
always subject to “limitations” which Congress may provide by law. Besides, the principle of local
autonomy under the 1987 Constitution simply means “decentralization.” It does not make local
governments sovereign within the state.

Wherefore, the petition is DISMISSED.

MCIAA vs. MARCOS G.R. No. 120082, September 11, 1996 261 SCRA 667 Public Corporation,
Taxation, Local Government Code, Realty Tax,

OCTOBER 30, 2017

FACTS:

Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act 6958.
Since the time of its creation, MCIAA enjoyed the privilege of exemption from payment of realty
taxes in accordance with Section 14 of its Charter. However on 11 October 1994, the Office of the
Treasurer of Cebu, demanded for the payment of realty taxes on several parcels of land belonging to the
petitioner.

Petitioner objected to such demand for payment as baseless and unjustified and asserted that it is
an instrumentality of the government performing governmental functions, which puts limitations on
the taxing powers of local government units.

The City refused to cancel and set aside petitioner’s realty tax account, insisting that the MCIAA is
a government controlled corporation whose tax exemption privilege has been withdrawn by virtue
of Sections 193 and 234 of the Local Government Code (LGC), and not an instrumentality of the

27 | P a g e
government but merely a government owned corporation performing proprietary functions. MCIAA paid its
tax account “under protest” when City is about to issue a warrant of levy against the MCIAA’s properties.

MCIAA filed a Petition of Declaratory Relief with the RTC contending that the taxing power of local
government units do not extend to the levy of taxes or fees on an instrumentality of the national
government. It contends that by the nature of its powers and functions, it has the footing of an agency or
instrumentality of the national government; which claim the City rejects. The trial court dismissed the
petition, citing that close reading of the LGC provides the express cancellation and withdrawal of tax
exemptions of Government Owned and Controlled Corporations.

ISSUE: Whether the MCIAA is exempted from realty taxes.

RULING:

Tax statutes are construed strictly against the government and liberally in favor of the taxpayer .
But since taxes are paid for civilized society, or are the lifeblood of the nation, the law frowns against
exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority.

A claim of exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken. Taxation is the rule, exemption therefrom is the exception. However, if the
grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction
does not apply because the practical effect of the exemption is merely to reduce the amount of
money that has to be handled by the government in the course of its operations.

Further, since taxation is the rule and exemption therefrom the exception, the exemption may be
withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption
was granted to private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution.

MCIAA is a “taxable person” under its Charter (RA 6958), and was only exempted from the
payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive
proof of the legislative intent to make it a taxable person subject to all taxes, except real property
tax.

Since Republic Act 7160 or the Local Government Code (LGC) expressly provides that “All general and
special laws, acts, city charters, decrees [sic], executive orders, proclamations and administrative
regulations, or part of parts thereof which are inconsistent with any of the provisions of this Code are
hereby repealed or modified accordingly.”

With that repealing clause in the LGC, the tax exemption provided for in RA 6958 had been expressly
repealed by the provisions of the LGC. Therefore, MCIAA has to pay the assessed realty tax of its
properties effective after January 1, 1992 until the present.

LRT VS CITY OF MANILA (342 SCRA 692)

Light Rail Transit Authority vs Central Board of Assessment Appeals

28 | P a g e
342 SCRA 692 [GR No. 127316 October 12, 2000]

Facts: The LRTA is a government-owned and controlled corporation created and organized under EO
603, dated July 12, 1980 primarily responsible for the construction, operation, maintenance and/or lease
of light rail transit system in the Philippines, giving due regard to the reasonable requirements of the
public transportation of the country. LRTA acquired real properties, constructed structional improvements,
such as buildings, carriage ways, passenger terminal stations and installed various kinds of machinery
and equipment and facilities for the purpose of its operations. For an effective maintenance, operation
and management, it entered into a contract of management with the MERALCO transit organization in
which the latter undertook to manage, operate and maintain the light rail transit system owned by the
LRTA subject to the specific stipulations contained in said agreement, including payments of a
management fee and real property taxes. That it commenced its operations in 1984, and that sometime
that year, respondent-appellee city of assessor of manila assessed the real properties of petitioner
consisting of lands, buildings, carriage ways and passenger terminal stations machinery and equipment
which he considered real property under the real property tax code, to commence with the year 1985.
That petitioner paid its real property taxes on all its real property holdings, except the carriage ways and
passenger terminal stations including the land where it constructed on the ground that the same are not
real properties under the real property tax code, and if the same are real property, these are for public
use/purpose, therefore exempt from realty taxation which claim was denied by the respondent-appellee
city assessor of Manila.

Issue: Whether or not petitioner’s carriage ways and passenger terminal stations are subject to real
property tax.

Held: No. Under the real property tax code, real property owned by the Republic of the Philippines
or any of its political subdivisions and any government-owned or controlled corporation so
exempt by its charter, provided, however, that this exemption shall not apply to real property of
the above named entities the beneficial use of which has been granted, for consideration or
otherwise, to a taxable person.

EO 603, the charter of petitioner, does not provide for any real estate tax exemption in its favor . Its
exemption is limited to direct and indirect taxes, duties or fees in connection with the importation
of equipment not locally available.

Even granting that the national government indeed owns the carriage ways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable
entity.

Taxation is the rule and exemption is the exception. Any claim for tax exemption is strictly construed
against the claimant. LRTA has not shown its eligibility for exemption; hence, it’s subject to tax.

KINDS OF INCOME TAX PAYERS

SEC 24,25, 28 AND 32

29 | P a g e
SOURCES OF INCOME

Sec. 42 and 23

Claim of Right Doctrine

NDC vs. CIR

The NDC entered into contract in Tokyo with several Japanese shipbuilding companies for the
construction of its 12 ocean-going vessels. The purchase price was to come from the proceeds of bonds
issued by the Central Bank. Initial payments were made in cash and through irrevocable letter of credit.
Fourteen (14) promissory notes were signed for the balance by the NDC guaranteed by Republic of the
Philippines.

Pursuant thereto, the remaining payments and the interest thereon were remitted in due time by the NDC
to Tokyo. The NDC remitted to the ship builders in Tokyo the total amount of US$4,066,580 as interest
on the balance of the purchase price. No tax was withheld.

The Commissioner then held the NDC liable on such tax in the total sum of PhP5,115,234.74. The BIR
thereupon served on the NDC a warrant of distraint and levy to enforcce collection of the claimed amount.

Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of the Tax
Code because all the related activities- the signing of the contract, the construction of the vessels, the
payment of the stipulated price, and their delivery to the NDC - were done in Tokyo.

ISSUE: WON the Tokyo shipbuilders are subject to tax?

HELD:

The law specifies: interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligation of resident, corporate or otherwise. Nothing there speak of the
'acts or activity' of non-residential corporation in the Philippines, or place where the contract is signed.

The residence of the obligor who pays the interest rather than the physical location of the
securities, bonds or notes or the place of payment, is the determining factor of the source of
interest income. Accordingly, if the obligor is a resident of the Philippines the interest payment paid by
him can have no other source than within the Philippines. The interest is paid not by the bond note or
other interest-bearing obligations, but by the obligor.

CAPITAL GAINS AND LOSSES

Calasanz vs CIR 144 SCRA 664

Facts:

Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make
such land saleable and later in it was sold to the public at a profit . The Revenue examiner adjudged

30 | P a g e
Ursula and her spouse as engaged in business as real estate dealers and required them to pay the real
estate dealer’s tax.

Issue:

Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or capital
gains taxable at capital gain rates

Ruling:

They are taxable as ordinary income. The activities of Calasanz are indistinguishable from those
invariably employed by one engaged in the business of selling real estate. One strong factor is the
business element of development which is very much in evidence. They did not sell the land in the
condition in which they acquired it. Inherited land which an heir subdivides and makes improvements
several times higher than the original cost of the land is not a capital asset but an ordinary asses. Thus, in
the course of selling the subdivided lots, they engaged in the real estate business and accordingly the
gains from

DIVIDENDS

COMMISSIONER vs. MANNING G.R. No. L-28398. August 6, 1975 Income Tax on Stock Dividends

DECEMBER 4, 2017

FACTS:

Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million divided
into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares each by the
Respondents. Reese entered into a trust agreement whereby it is stated that upon Reese’s death, the
company would purchase back all of its shares. Reese died. MANTRASCO repurchased the 24,700
shares. Thereafter, a resolution was passed authorizing that the 24,700 shares be declared as stock
dividends to be distributed to the stockholders. The BIR ordered an examination of MANTRASCO’s
books and discovered that the 24,700 shares declared as dividends were not disclosed by
respondents as part of their taxable income for the year 1958. Hence, the CIR issued notices of
assessment for deficiency income taxes to respondents. Respondents protested but the CIR denied.
Respondents appealed to the CTA. The CTA ruled in their favor. Hence, this petition by the CIR

ISSUE:

Whether the respondents are liable for deficiency income taxes on the stock dividends?

HELD: Dividends means any distribution made by a corporation to its shareholders out of its earnings or
profits. Stock dividends which represent transfer of surplus to capital account is not subject to
income tax. But if a corporation redeems stock issued so as to make a distribution, this is
essentially equivalent to the distribution of a taxable dividend the amount so distributed in the
redemption considered as taxable income.

The distinctions between a stock dividend which does not and one which does constitute taxable income
to the shareholders is that a stock dividend constitutes income if its gives the shareholder an
interest different from that which his former stockholdings represented. On the other hand, it does
constitute income if the new shares confer no different rights or interests than did the old shares .

31 | P a g e
Therefore, whenever the companies involved parted with a portion of their earnings to buy the corporate
holdings of Reese, they were making a distribution of such earnings to respondents. These amounts are
thus subject to income tax as a flow of cash benefits to respondents. Hence, respondents are
liable for deficiency income taxes.

COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF APPEALS, COURT OF TAX

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

FACTS:

Don Andres Soriano, a citizen and resident of the USA formed in the 1930's the corporation "A Soriano Y
Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased
it to P30M. In the same year, stock dividends worth 46,290 and 46,287 shares were respectively received
by the Don Andres estate and Doña Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864 common shares each.

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from
Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M
divided into 150,000 preferred shares and 600,000 common shares. About a year later ANSCOR again
redeemed 80,000 common shares from Don Andres' estate, further reducing the latter's common
shareholdings.

ANSCOR's business purpose for both redemptions of stock is to partially retire said stocks as treasury
shares in order to reduce the company's foreign exchange remittances in case cash dividends are
declared. In 1973, after examining ANSCOR's books of account and records Revenue Examiners issued
a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Secs
53 and 54 of the 1939 Revenue Code for the year 1968 and the second quarter of 1969 based on the
transactions of exchange and redemption of stocks.

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the CTA reversed the BIR's ruling after finding
sufficient evidence to overcome the prima facie correctness of the questioned assessments. In a petition
for review, the CA affirmed the ruling of the CTA.

ISSUE:

Whether ANSCOR's redemption of stocks from its stockholders as well as the exchange of common
shares can be considered as equivalent to the distribution of taxable dividend making the proceeds
thereof taxable under the provisions Section 83 (B) of the 1939 Revenue Act.

32 | P a g e
HELD:

The Supreme Court modified the decision of the Court of Appeals in that ANSCOR'S redemption of
82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable
dividends for which it is liable for the withholding tax-at-source. While the Board Resolutions authorizing
the redemptions state only one purpose — reduction of foreign exchange remittances in case cash
dividends are declared. Said purpose was not given credence by the court in case at bar. Records show
that despite the existence of enormous corporate profits no cash dividends were ever declared by
ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a corporation
under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends are
issued for about three decades, this circumstance negate the legitimacy of ANSCOR's alleged purposes.
With regard to the exchange of shares, the Court ruled that the exchange of common with preferred
shares is not taxable because it produces no realized income to the subscriber but only a modification of
the subscriber's rights and privileges which is not a flow of wealth for tax purposes.

Both the Tax Court and the CA found that ANSCOR reclassified its shares into common and preferred,
and that parts of the common shares of the Don Andres estate and all of Doña Carmen's shares were
exchanged for the whole 150,000 preferred shares. Thereafter, both the Don Andres estate and Doña
Carmen remained as corporate subscribers except that their subscriptions now include preferred shares.
There was no change in their proportional interest after the exchange. There was no cash flow. Both
stocks had the same par value. Under the facts herein, any difference in their market value would be
immaterial at the time of exchange because no income is yet realized — it was a mere corporate paper
transaction. It would have been different, if the exchange transaction resulted into a flow of wealth, in
which case income tax may be imposed. Reclassification of shares does not always bring any substantial
alteration in the subscriber's proportional interest. But the exchange is different — there would be a
shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights.
Yet neither the reclassification nor exchange per se, yields realize income for tax purposes. A common
stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily
and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata
division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends
and asset distribution. Both shares are part of the corporation's capital stock. Both stockholders are no
different from ordinary investors who take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in the profits and losses of the enterprise.
Moreover, under the doctrine of equality of shares — all stocks issued by the corporation are presumed
equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such
differences. In this case, the exchange of shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscriber's rights and privileges — which is not a flow of
wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his
entire interest and not when there is still maintenance of proprietary interest.

33 | P a g e