II.

PARTNERSHIP AND CO-OWNERSHIP

1. Evangelista, et al. v. CIR, GR No. L-9996, October 15, 1957

Facts:

Herein petitioners seek a review of CTA’s decision holding them liable for income tax, real
estate dealer’s tax and residence tax. As stipulated, petitioners borrowed from their father a
certain sum for the purpose of buying real properties. Within February 1943 to April 1994, they
have bought parcels of land from different persons, the management of said properties was
charged to their brother Simeon evidenced by a document. These properties were then leased
or rented to various tenants.

On September 1954, CIR demanded the payment of income tax on corporations, real estate
dealer’s fixed tax. Said letter of demand and corresponding assessments were delivered to
petitioners on December 3, 1954, whereupon they instituted the present case in the Court of
Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of
demand dated September 24, 1954" be reversed, and that they be absolved from the payment
of the taxes in question, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied,
the case is now before Us for review at the instance of the petitioners.

Issue:
Whether petitioners are subject to the tax on corporations provided for in Sec. 24 of C.A. No.
466, otherwise known as the NIRC, as well as to the residence tax for corporations and the real
estate dealers fixed tax.

Ruling:

The Court ruled that with respect to the tax on corporations, the issue hinges on the meaning of
the terms “corporation” and “partnership” as used in Section 24 (provides that a tax shall be
levied on every corporation no matter how created or organized except general co-partnerships)
and 84 (provides that the term corporation includes among others, partnership) of the NIRC.
Pursuant to Article 1767, NCC (provides for the concept of partnership), its essential elements
are: (a) an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties.

It is of the opinion of the Court that the first element is undoubtedly present for petitioners have
agreed to, and did, contribute money and property to a common fund. As to the second
element, the Court fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves as indicated by the following
circumstances:

1. The common fund was not something they found already in existence nor a property
inherited by them pro indiviso. It was created purposely, jointly borrowing a
substantial portion thereof in order to establish said common fund;
2. They invested the same not merely in one transaction, but in a series of transactions.
The number of lots acquired and transactions undertake is strongly indicative of a
 pattern or common design that was not limited to the conservation and preservation
of the aforementioned common fund or even of the property acquired. In other
words, one cannot but perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain;
3. Said properties were not devoted to residential purposes, or to other personal uses,
of petitioners but were leased separately to several persons;
4. They were under the management of one person where the affairs relative to said
properties have been handled as if the same belonged to a corporation or business
and enterprise operated for profit;
5. Existed for more than ten years, or, to be exact, over fifteen years, since the first
property was acquired, and over twelve years, since Simeon Evangelista became the
manager;
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence.

Although they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave no room for doubt on the existence
of said intent in petitioners herein. Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence, those cases are not in point.

Also, petitioners’ argument that their being mere co-owners did not create a separate legal
entity was rejected because, according to the Court, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and different from "partnerships". When the
NIRC includes "partnerships" among the entities subject to the tax on "corporations", said Code
must allude, therefore, to organizations which are not necessarily "partnerships", in the technical
sense of the term. The qualifying expression found in Section 24 and 84(b) clearly indicates that
a joint venture need not be undertaken in any of the standard forms, or in conformity with the
usual requirements of the law on partnerships, in order that one could be deemed constituted
for purposes of the tax on corporations. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein referred to. For
purposes of the tax on corporations, NIRC includes these partnerships - with the exception only
of duly registered general co partnerships - within the purview of the term "corporation." It is,
therefore, clear that petitioners herein constitute a partnership, insofar as said Code is
concerned and are subject to the income tax for corporations.

The American Law.. . . provides its own concept of a partnership, under the term 'partnership 'it
includes not only a partnership as known at common law but, as well, a syndicate, group, pool,
joint venture or other unincorporated organizations which carries on any business financial
operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a
corporation. . . (7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis
supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned and are subject to the income tax for
corporations.
As regards the residence of tax for corporations, section 2 of CA No. 465 provides in part:

Entities liable to residence tax.-Every corporation, no matter how created or organized,

whether domestic or resident foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual additional tax which in no case,
shall exceed one thousand pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership,
joint account (cuentas en participacion), association or insurance company, no
matter how created or organized. (emphasis supplied.)

Finally, on the issues of being liable for real estate dealer’s tax, they are also liable for the same
because the records show that petitioners have habitually engaged in leasing the properties
above mentioned for a period of over twelve years, and that the yearly gross rentals of said
properties from June 1945 to 1948. Thus, they are subject to the tax provided in section 193 (q)
of our National Internal Revenue:

Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year. .
. (emphasis supplied.)

DECISION: Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed
with costs against the petitioners herein. It is so ordered.

2. Obillos, et al. v. CIR, GR No. L-68118, October 29, 1985

Facts:
On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square
meters of located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his
four children, the petitioners, to enable them to build their residences. The Torrens titles
issued to them showed that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to
the Walled City Securities Corporation and Olga Cruz Canada for the total sum of P313,050.
They derived from the sale a total profit of P134, 341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, the Commissioner of Internal Revenue required the four petitioners to pay
corporate income tax on the total profit of P134,336 in addition to individual income tax on
their shares thereof. The petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital
gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture The petitioners contested the assessments. Two Judges of the
Tax Court sustained the same. Hence, the instant appeal.
Issue:
Whether or not the petitioners had indeed formed a partnership or joint venture and thus liable
for corporate tax.

Held:
The Supreme Court held that the petitioners should not be considered to have formed a
partnership just because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves. To regard so would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-ownership
and a partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.

*Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right
or interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*

Their original purpose was to divide the lots for residential purposes. If later on they found it
not feasible to build their residences on the lots because of the high cost of construction, then
they had no choice but to resell the same to dissolve the co-ownership. The division of the
profit was merely incidental to the dissolution of the co-ownership which was in the nature of
things a temporary state. It had to be terminated sooner or later.

They did not contribute or invest additional ' capital to increase or expand the properties, nor
was there an unmistakable intention to form partnership or joint venture.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments
are cancelled. No costs.

All co-ownerships are not deemed unregistered partnership.—Co-Ownership who own

properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To hold
otherwise, would be to subject the income of all

Co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property

does not produce an income at all, it is not subject to any kind of income tax, whether the
income tax on individuals or the income tax on corporation.

As compared to other cases:

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as
a common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
This case is different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198,
where father and son purchased a lot and building, entrusted the administration of the building
to an administrator and divided equally the net income, and from Evangelista vs. Collector of
Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real
property which they leased to various tenants and derived rentals therefrom. Clearly, the
petitioners in these two cases had formed an unregistered partnership.

VII. TAX ON IMPROPERLY ACCUMULATED EARNINGS2 [Sec. 29, Tax Code]

1. Officemetro Philippines Inc., (Formerly Regus Centres, Inc.) vs. Commissioner of

Internal Revenue, CTA Case No. 8382, June 3, 2014

Bar Exam 2014 Suggested Answers in Taxation

XIX

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 65-
2012 imposing Value Added Tax (VAT) on association dues and membership fees collected by
condominium corporations from its member condominium-unit owners. The RMC’s validity is
challenged before the Supreme Court (SC) by the condominium corporations. The Solicitor
General, counsel for BIR, claims that association dues, membership fees, and other
assessment/charges collected by a condominium corporation are subject to VAT since they
constitute income payments or compensation for the beneficial services it provides to its
members and tenants.

On the other hand, the lawyer of the condominium corporations argues that such dues and fees
are merely held in trust by the condominium corporations exclusively for their members and
used solely for administrative expenses in implementing the condominium corporations
purposes. Accordingly, the condominium corporations do not actually render services for a fee
subject to VAT.

Whose argument is correct? Decide. (5%)

SUGGESTED ANSWERS: (either answer should be given credit)

SUGGESTED ANSWER 1:

The lawyer of the condominium corporations is correct. The association dues, membership fees,
and other assessments/charges do not constitute incoine payments because they were
collected for the benefit ‘ “of the unit owners and the condominium corporation is not created as
a business entity. The collection is the money of the unit owners pooled together and will be ..
spent exclusively for the purpose of maintaining and preserving the building and its premises
which they themselves own and possess (First e-Bank Tower Condominium Corp., V. BIR,
Special Civil Action No. 12-1236, RTC Br. 146, Makati City).

SUGGESTED ANSWER 2:

In the case of Office Metro Philippines, Inc. (formerly Regus Centres, Inc.) v.
Commissioner of Internal Revenue, CTA Case No. 8382, the Court only dealt with the EWT
issue as the VAT Section 105 shows that transactions in the course of a trade or business
(sells, barters, exchanges, leases goods or properties, renders services, imports goods) are
those subject to VAT, In the case of a condominium corporation, the function of the entity is
merely for administrative purposes and not a trade or business. Thus, payments in the form of
association dues should not be subjected to VAT.
Doctrine:
Taxation; Association/condominium dues and other fees and charges collected from members
that are used solely for administrative purposes are not subject to income tax and withholding
tax. The BIR in its various rulings, held that association/condominium dues, membership fees
and other assessment/charges collected from the members, which are merely held in trust and
which are to be used solely for administrative expenses in implementing their purpose(s), viz., to
protect and safeguard the welfare of the owners, lessees and occupants; provide utilities and
amenities for their members, and from which the corporation could not realize any gain or profit
as a result of their receipt thereof, must not be included in said corporation’s gross income. This
means that the same are not subject to income tax and to withholding tax.

2. COMMISSIONER OF INTERNAL REVENUE (CIR) vs. Pilipinas Shell Petroleum

Corporation; G.R. No. 188497, April 25, 2012
Doctrine: Because an excise tax is a tax on the manufacturer and not on the purchaser, and
there being no express grant under the NIRC of exemption from payment of excise tax to local
manufacturers of petroleum products sold to international carriers, and absent any provision in
the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec.
135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to the
international carriers who buys petroleum products from the local manufacturers. The provision
merely allows the international carriers to purchase petroleum products without the excise tax
component as an added cost in the price fixed by the manufacturers or distributors/sellers.
Consequently, the oil companies which sold such petroleum products to international carriers
are not entitled to a refund of excise taxes previously paid on the goods.

Facts:
Respondent is engaged in the business of processing, treating and refining petroleum for the
purpose of producing marketable products and the subsequent sale thereof. Respondent filed
several formal claims with the Large Taxpayers Audit & Investigation Division II of the BIR on
the following dates:
a. On July 2002 for refund or tax credit in the total amount of P28,064,925.15,
representing excise taxes it allegedly paid on sales and deliveries of gas and fuel
oils to various international carriers during the period October to December 2001.
b. On October 2002, a similar claim for refund or tax credit was filed by respondent
with the BIR covering the period January to March 2002 in the amount
of P41,614,827.99.
c. On July 2003, a formal claim for refund or tax credit in the amount
of P30,652,890.55 covering deliveries from April to June 2002

Since no action was taken by the petitioner on its claims, respondent filed petitions for review
before the CTA on September and December of 2003.
CTA’s First Division ruled that respondent is entitled to the refund of excise taxes in the
reduced amount of P95,014,283.00. The CTA First Division relied on a previous ruling
rendered by the CTA En Banc in the case of “Pilipinas Shell Petroleum Corporation v. CIR (Nov.
2006)” where the CTA also granted respondent’s claim for refund on the basis of excise tax
exemption for petroleum products sold to international carriers of foreign registry for their use or
consumption outside the Philippines. Petitioner’s MR denied.
On appeal, CTA En Banc upheld the ruling of the First Division. Petitioner’s MR with CTA
likewise denied. Hence, this petition.
Respondent claims it is entitled to a tax refund because those petroleum products it sold to
international carriers are not subject to excise tax, hence the excise taxes it paid upon
withdrawal of those products were erroneously or illegally collected and should not have been
paid in the first place. Since the excise tax exemption attached to the petroleum products
themselves, the manufacturer or producer is under no duty to pay the excise tax thereon.

Issue:
Whether respondent as manufacturer or producer of petroleum products is exempt from the
payment of excise tax on such petroleum products it sold to international carriers?

Held:
NO. CTA decision REVERSED and SET ASIDE. The claims for tax refund or credit filed by
respondent are DENIED for lack of basis.
Excise taxes, as the term is used in the NIRC, refer to taxes applicable to certain specified
goods or articles manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition and to things imported into the Philippines. These
taxes are imposed in addition to the value-added tax (VAT). As to petroleum products, Sec. 148
provides that excise taxes attach to the following refined and manufactured mineral oils and
motor fuels as soon as they are in existence.
Beginning January 1, 1999, excise taxes levied on locally manufactured petroleum products and
indigenous petroleum are required to be paid before their removal from the place of production.
However, Sec. 135 provides: “Petroleum Products Sold to International Carriers and Exempt
Entities or Agencies. – Petroleum products sold to the following are exempt from excise tax:
International carriers of Philippine or foreign registry on their use or consumption outside the
Philippines: Provided, That the petroleum products sold to these international carriers shall be
stored in a bonded storage tank and may be disposed of only in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner; x x x
Under Chapter II “Exemption or Conditional Tax-Free Removal of Certain Goods” of Title VI,
Sections 133, 137, 138, 139 and 140 cover conditional tax-free removal of specified goods or
articles, whereas Sections 134 and 135 provide for tax exemptions. While the exemption found
in Sec. 134 makes reference to the nature and quality of the goods manufactured (domestic
denatured alcohol) without regard to the tax status of the buyer of the said goods, Sec. 135
deals with the tax treatment of a specified article (petroleum products) in relation to its buyer or
consumer. Respondent’s failure to make this important distinction apparently led it to
mistakenly assume that the tax exemption under Sec. 135 (a) “attaches to the goods
themselves” such that the excise tax should not have been paid in the first place.
On July 1996, petitioner Commissioner issued Revenue Regulations 8-96 (“Excise Taxation of
Petroleum Products”) which provides: “SEC. 4. Time and Manner of Payment of Excise Tax on
Petroleum Products, Non-Metallic Minerals and Indigenous Petroleum – I. Petroleum
Products x x x x a) On locally manufactured petroleum products: The specific tax on
petroleum products locally manufactured or produced in the Philippines shall be paid by
the manufacturer, producer, owner or person having possession of the same, and such
tax shall be paid within fifteen (15) days from date of removal from the place of production.
Thus, if an airline company purchased jet fuel from an unregistered supplier who could
not present proof of payment of specific tax, the company is liable to pay the specific tax
on the date of purchase. Since the excise tax must be paid upon withdrawal from the
place of production, respondent cannot anchor its claim for refund on the theory that the
excise taxes due thereon should not have been collected or paid in the first place.
Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally collected. An
“erroneous or illegal tax” is defined as one levied without statutory authority, or upon
property not subject to taxation or by some officer having no authority to levy the tax, or one
which is some other similar respect is illegal.
Respondent’s locally manufactured petroleum products are clearly subject to excise tax under
Sec. 148. Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC
allowing a refund of erroneous or excess payment of tax. Respondent’s claim is premised on
what it determined as a tax exemption “attaching to the goods themselves,” which must be
based on a statute granting tax exemption, or “the result of legislative grace.” Such a claim is to
be construed strictissimi juris against the taxpayer, meaning that the claim cannot be made to
rest on vague inference. Where the rule of strict interpretation against the taxpayer is applicable
as the claim for refund partakes of the nature of an exemption, the claimant must show that he
clearly falls under the exempting statute.
The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred
on international carriers who purchased the same for their use or consumption outside
the Philippines. The only condition set by law is for these petroleum products to be stored in a
bonded storage tank and may be disposed of only in accordance with the rules and regulations
to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
[JURISPRUDENCE] In addition, the Solicitor General, argues that respondent cannot shift the
tax burden to international carriers who are allowed to purchase its petroleum products without
having to pay the added cost of the excise tax. In Philippine Acetylene Co., Inc. v. CIR, this
Court held that petitioner manufacturer who sold its oxygen and acetylene gases to NPC, a tax-
exempt entity, cannot claim exemption from the payment of sales tax simply because its buyer
NPC is exempt from taxation. The Court explained that the percentage tax on sales of
merchandise imposed by the Tax Code is due from the manufacturer and not from the buyer.
The language of Sec. 135 indicates that the tax exemption mentioned therein is conferred on
specified buyers or consumers of the excisable articles or goods. Unlike Sec. 134 which
explicitly exempted the article or goods itself without due regard to the tax status of the buyer or
purchaser, Sec. 135 exempts from excise tax petroleum products which were sold to
international carriers and other tax-exempt agencies and entities.
Considering that the excise taxes attaches to petroleum products “as soon as they are in
existence as such, ”there can be no outright exemption from the payment of excise tax on
petroleum products sold to international carriers. The sole basis then of respondent’s claim for
refund is the express grant of excise tax exemption in favor of international carriers under Sec.
135 (a) for their purchases of locally manufactured petroleum products. Pursuant to our ruling
in Philippine Acetylene, a tax exemption being enjoyed by the buyer cannot be the basis of a
claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as
the manufacturer or seller. The excise tax imposed on petroleum products under Sec. 148 is
the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted
to its buyers who are international carriers.
In Maceda v. Macaraig, Jr., the Court specifically mentioned excise tax as an example of an
indirect tax where the tax burden can be shifted to the buyer. However, because of the tax
exemptions privileges being enjoyed by NPC under existing laws, the tax burden may not be
shifted to it by the oil companies who shall pay for fuel oil taxes on oil they supplied to NPC.
On April 1978, then President Ferdinand E. Marcos issued Presidential Decree (P.D.) No. 1359
which amended the 1077 Tax Code provided under 2nd par. of Sec. 134: “However, petroleum
products sold to an international carrier for its use or consumption outside of the Philippines
shall not be subject to specific tax, provided, that the country of said carrier exempts from tax
petroleum products sold to Philippine carriers.”
Founded on the principles of international comity and reciprocity, P.D. No. 1359 granted
exemption from payment of excise tax but only to foreign international carriers who are allowed
to purchase petroleum products free of specific tax provided the country of said carrier also
grants tax exemption to Philippine carriers. Both the earlier amendment in the 1977 Tax
Code and the present Sec. 135 of the 1997 NIRC did not exempt the oil companies from the
payment of excise tax on petroleum products manufactured and sold by them to international
carriers.
THUS:
Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being
no express grant under the NIRC of exemption from payment of excise tax to local
manufacturers of petroleum products sold to international carriers, and absent any provision in
the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec.
135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to the
international carriers who buys petroleum products from the local manufacturers. Said provision
thus merely allows the international carriers to purchase petroleum products without the excise
tax component as an added cost in the price fixed by the manufacturers or
distributors/sellers. Consequently, the oil companies which sold such petroleum products to
international carriers are not entitled to a refund of excise taxes previously paid on the goods.
Time and again, we have held that tax refunds are in the nature of tax exemptions which result
to loss of revenue for the government. Upon the person claiming an exemption from tax
payments rests the burden of justifying the exemption by words too plain to be mistaken and too
categorical to be misinterpreted, it is never presumed nor be allowed solely on the ground of
equity. These exemptions, therefore, must not rest on vague, uncertain or indefinite inference,
but should be granted only by a clear and unequivocal provision of law on the basis of language
too plain to be mistaken. Such exemptions must be strictly construed against the taxpayer, as
taxes are the lifeblood of the government.

3. Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue

GR Number 188550
Date: August 28, 2013
Ponente: Sereno, C. J.

Facts:
Pursuant to the National Internal Revenue Code of 1997, on October 21, 2003, the petitioner
remitted to the respondent the amount of Php 67,688,553.51, representing fifteen (15) percent
of the branch profit remittance tax (BPRT) on its regular banking unit (RBU) net income remitted
to the Deutsche Bank of Germany (DB Germany) for 2002 and prior taxable years.
Believing that they made an overpayment of the BPRT, on October 4, 2005, the petitioner filed
with the BIR Large Taxpayers Assessment and Investigation Division an administrative claim for
refund or a tax credit certificate representing the alleged excess BPRT paid (amount of Php
22,562,851.17). The petitioners also requested from the International Tax Affairs Division (ITAD)
for a confirmation of its entitlement to a preferential tax rate of 10% under the RP-Germany Tax
Treaty.

Because of the alleged inaction of the BIR on the administrative claim, on October 18, 2005, the
petitioner filed a petition for review with the Court of Tax Appeals (CTA), reiterating its claim for
refund or tax credit certificate representing the alleged excess BPRT paid. The claim was
denied on the ground that application for tax treaty relief was not filed with ITAD prior to the
payment of BPRT, thereby violating the fifteen-day period mandated under Section III,
paragraph 2 of the Revenue Memorandum Order No. 1-2000. Also, the CTA Second Division
relied on an en banc decision of the CTA that before the benefits of a tax treaty may be
extended to a foreign corporation, the latter should first invoke the provisions of the tax treaty
and prove that they indeed apply to the corporation (Mirant Operations Corporation v
Commissioner of Internal Revenue).

Hence this petition.

Issue:

Whether or not the failure to strictly comply with the provisions of RMO No. 1-2000 will deprive
persons or corporations the benefit of a tax treaty.

Ruling:

No. The constitution provides for the adherence to the general principles of international law as
part of the law of the land (Article II, Section 2). Every treaty is binding upon the parties, and
obligations must be performed (Article 26, Vienna Convention on the Law on Treaties). There is
nothing in RMO 1-2000 indicating a deprivation of entitlement to a tax treaty for failure to comply
with the fifteen-day period. The denial of availment of tax relief for the failure to apply within the
prescribed period (under the administrative issuance) would impair the value of the tax treaty.
Also, the obligation to comply with the tax treaty must take precedence over the objective of
RMO 1-2000 because the non-compliance with tax treaties would have negative implications on
international affairs and would discourage foreign investments.

Dispositive:

The petition was granted, the CTA en banc decision was set aside and reversed. The
respondent was ordered to refund or issue a tax credit certificate (the amount of Php
22,562,851.17) in favor of the petitioner.

4. CIR v. General Foods (Phils) Inc.; G.R. No. 143672. April 24, 2003

Topic: Deductions- Expenses

Facts:
CIR Commissioner, petitioner, assails the resolution of the Court of Appeals reversing the
decision of the Court of Tax Appeals which denied the protest filed by respondent General
Foods (Phils.), Inc., regarding the assessment made against the latter for deficiency taxes.

On June 14, 1985, General Foods, manufacturer of beverages such as “Tang,” “Calumet” and
“Kool-Aid,” filed its ITR for the fiscal year ending February 28, 1985. In said tax return, it
claimed as a deduction for business expenses, the amount of P9,461,246 for media advertising
for “Tang.”

On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent corporation.

The parties are in agreement that the subject advertising expense was paid or incurred within
the corresponding taxable year and was incurred in carrying on a trade or business. Hence, it
was necessary. However, their views conflict as to whether or not it was ordinary.

To be deductible, an advertising expense should not only be necessary but also ordinary.
These two requirements must be met.

The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence:
a) “reasonableness” of the amount incurred
b) the amount incurred must not be a capital outlay to create “goodwill” for the product
and/or private respondent’s business.
• Otherwise, the expense must be considered a capital expenditure to be spread out over a
reasonable time.

Consequently, General Foods was assessed deficiency income taxes in the amount of P2,635,
141.42. The latter filed a motion for reconsideration but the same was denied.

On September 1989, General Foods appealed to the CTA but the appeal was dismissed.

General foods, filed a petition for review at the CAwhich rendered a decision reversing and
setting aside the decision of the CTA: claiming that the deduction was not sufficiently
established as excessive.

Issue:
WON the subject media advertising expense for “Tang” incurred by respondent corporation was
an ordinary and necessary expense fully deductible under the National Internal Revenue Code
(NIRC).

Held:
No, CA committed reversible error when it declared the subject media advertising expense to be
deductible as an ordinary and necessary expense on the ground that “it has not been
established that the item being claimed as deduction is excessive.

Ratio:
1. We find the subject expense for the advertisement of a single product to be
inordinately large. Therefore, even if it is necessary, it cannot be considered an
ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.

2. The P9,461,246 media advertising expense for the promotion of a single product,
almost one-half of petitioner corporation’s entire claim for marketing expenses for
that year, inclusive of other advertising and promotion expenses of P2,678,328 and
P1,548,614 for consumer promotion, is doubtlessly unreasonable.

3. Furthermore, the subject advertising expense was of the second kind. Not only was
the amount staggering; Gen Foods also admitted that the subject media expense
was incurred in order to protect its brand franchise.

4. The protection of brand franchise is analogous to the maintenance of goodwill or title

to one’s property. To protect its brand franchise was tantamount to efforts to
establish a reputation. This was akin to the acquisition of capital assets and therefore
expenses related thereto were not to be considered as business expenses but as
capital expenditures

5. Hence, we consider that the subject advertising expense as a capital outlay since it
created goodwill for its business and/or product.

6. CA decision REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the
Tax Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its
deficiency income tax in the amount of P2,635,141.42, plus 25% surcharge for late
payment and 20% annual interest computed from August 25, 1989, the date of the
denial of its protest, until the same is fully paid.

DOCTRINE:

1. Deductions for income tax purposes partake of the nature of tax exemptions; hence,
if tax exemptions are strictly construed, then deductions must also be strictly
construed.

2. To be deductible from gross income, the subject advertising expense must comply
with the following requisites:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year;
 c. it must have been paid or incurred in carrying on the trade or business of the
taxpayer;
d. it must be supported by receipts, records or other pertinent papers

3. Advertising is generally of two kinds:

a. 1stkind: Advertising to stimulate the current sale of merchandise or use of
service: except as to the question of the reasonableness of amount, there is
no doubt such expenditures are deductible as business expenses.

b. 2nd kind: Advertising designed to stimulate the future sale of merchandise or

use of services: The second type involves expenditures incurred, in whole or
in part, to create or maintain some form of goodwill for the taxpayer’s trade or
business or for the industry or profession of which the taxpayer is a member.

If, however, the expenditures are for advertising of the second kind, then normally they should
be spread out over a reasonable period of time.

4. Gutierrez v Collector of Internal Revenue (14 SCRA 33)

Facts:
Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid
real estate broker’s privilege tax. The Collector assessed against Gutierrez deficiency income
tax amounting to P11,841.

The deficiency tax came about by the disallowance of deductions from gross income
representing depreciation expenses Gutierrez allegedly incurred in carrying on his business.
The expenses consisted of:

1. Transportation expenses incurred to attend the funeral of his friends,

2. Procurement and installation of an iron door,
3. Cost of furniture given by the taxpayer in furtherance of a business transaction,
4. Membership fees in organizations established by those engaged in the real estate
trade,
5. Car expenses, salary of his driver and car depreciation,
6. Repairing taxpayer’s rental apartments,
7. Litigation expenses,
8. Depreciation of Gutierrez’ residence,
9. Fines and penalties for late payment of taxes,
10. Alms given to in indigent family and a donation consisting of officer’s jewels and
aprons to Biak-na-Bato Lodge No. 7.

Issue:
Whether or not claims for deduction are proper and allowable.
Held:
To be deductible, an expense must be:
· Ordinary and necessary
· Paid or incurred within the taxable year
· Paid or incurred in carrying on a trade or business.

1. Transportation expenses which petitioner incurred to attend the funeral of his friends and
the cost of admission tickets to operas - expenses relative to his personal and social
activities rather than to his business of leasing real estate.

2. Procurement and installation of an iron door to - purely a personal expense. Personal,

living, or family expenses are not deductible.

3. Cost of furniture given by the taxpayer as commission in furtherance of a business

transaction - the expenses incurred in attending the National Convention of Filipino
Businessmen, luncheon meeting and cruise to Corregidor of the Homeowners'
Association were shown to have been made in the pursuit of his business. Commissions
given in consideration for bringing about a profitable transaction are part of the cost of
the business transaction and are deductible.

4. Membership and activities in connection therewith were solely to enhance his business -
Gutierrez was an officer of the Junior Chamber of Commerce which sponsored the
National Convention of Filipino Businessmen. He was also the president of the
Homeowners' Association, an organization established by those engaged in the real
estate trade. Having proved that his, the expenses incurred are deductible as ordinary
and necessary business expenses.

5. Car expenses, salary of his driver and car depreciation – 1/3 of the same was disallowed
by the Commissioner on the ground that the taxpayer used his car and driver both for
personal and business purposes. There is no clear showing, however, that the car was
devoted more for the taxpayer's business than for his personal and business needs.
According to the evidence, the taxpayer's car was utilized both for personal and
business needs. It is reasonable to allow as deduction 1/2 of the driver's salary, car
expenses and depreciation.

6. Those used to repair the taxpayer's rental apartments - did not increase the value of
such apartments, or prolong their life. They merely kept the apartments in an ordinary
operating condition. Hence, the expenses incurred are deductible as necessary
expenditures for the maintenance of the taxpayer's business.

7. Litigation expenses - defrayed by Gutierrez to collect apartment rentals and to eject

delinquent tenants are ordinary and necessary expenses in pursuing his business. It is
routinary and necessary for one in the leasing business to collect rentals and to eject
tenants who refuse to pay their accounts.
 8. Depreciation of Gutierrez' residence - not deductible. A taxpayer may deduct from gross
income a reasonable allowance for deterioration of property arising out of its use or
employment in business or trade. Gutierrez' residence was not used in his trade or
business.

9. Deduction the fines and penalties which he paid for late payment of taxes - while Section
30 allows taxes to be deducted from gross income, it does not specifically allow fines
and penalties to be so deducted.

Deductions from gross income are matters of legislative grace; what is not expressly
granted by Congress is withheld. Moreover, when acts are condemned, by law and their
commission is made punishable by fines or forfeitures, to allow them to be deducted
from the wrongdoer's gross income, reduces, and so in part defeats, the prescribed
punishment.

10. Alms to an indigent family and various individuals, contributions to Lydia Yamson and G.
Trinidad and a donation consisting of officers' jewels and aprons to Biak-na-Bato Lodge
No. 7 - not deductible from gross income inasmuch as their recipients have not been
shown to be among those specified by law. Contributions are deductible when given to
the Government of the Philippines, or any of its political subdivisions for exclusively
public purposes, to domestic corporations or associations organized and operated
exclusively for religious, charitable, scientific, athletic, cultural or educational purposes,
or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children
or animals, no part of the net income of which inures to the benefit of any private
stockholder or individual.

5. CIR v Isabela Cultural Corporation (ICC), G.R. No. 172231, February 12, 2007
Ponente: YNARES-SANTIAGO, J.:

DOCTRINE:
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent papers. The requisite that it must have
been paid or incurred during the taxable year is further qualified by Section 45 of the NIRC
which states that: "[t]he deduction provided for in this Title shall be taken for the taxable year in
which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the
basis of which the net income is computed x x x".

QUICK FACTS:
BIR disallowed the following ICC expenses for years 1984-1986 to be included in ICC’s 1986
tax expense deductions: (1) Expenses for auditing services for year ending 31 December 1985;
(2) Expenses for legal services for years 1984 and 1985; and (3) Expense for security services
for months of April and May 1986. BIR thus charged ICC for deficiency income taxes. ICC
contested the assessment.

FACTS:
On Feb 23, 1990, ICC received from BIR Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) BIR disallowance of ICC’s claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:
(a) Expenses for auditing services of SGV & Co., for the year ending Dec 31, 1985
(b) Expenses for legal services [incl of retainer fees] of law firm Bengzon for 1984 and 1985
(c) Expense for security services of El Tigre Security for months of April and May 1986
(2) Understatement of ICC interest income on 3 promissory notes due from Realty Investment

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.

On March 23, 1990, ICC sought for a reconsideration, but on Feb 9, 1995, it received a final
notice before seizure demanding payment of amounts stated in the said notices.

CTA held that petition is premature because final notice of assessment cannot be considered as
a final decision appealable to the tax court. CA reversed the holding that a demand letter of the
BIR reiterating the payment of deficiency tax, amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA. This conclusion was sustained
by this Court on July 1, 2001, G.R. No. 135210. Case was remanded to CTA for further
proceedings.

CTA rendered a decision canceling and setting aside the assessment notices issued against
ICC. It held that the claimed deductions for professional and security services were properly
claimed by ICC in 1986 because it was only in the said year when the bills demanding payment
were sent to ICC. Hence, even if some of these professional services were rendered to ICC in
1984 or 1985, it could not declare the same as deduction for the said years as the amount could
not be determined at that time. ICC did not understate its interest income on the subject
promissory notes. It was the BIR which made an overstatement of said income when it
compounded the interest income receivable by ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a stipulation in the contract. CTA also found that ICC in
fact withheld 1% expanded withholding tax on its claimed deduction for security services as
shown by the various confirmation receipts it presented as evidence.
CA affirmed CTA decision, holding that although the professional services (legal and auditing)
were rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at
that time, hence, it could be considered as deductible expenses only in 1986 when ICC received
the billing statements for said services. It further ruled that ICC did not understate its interest
income from the promissory notes of Realty Investment, Inc., and that ICC properly withheld
and remitted taxes on the payments for security services for the taxable year 1986.

BIR contention: Since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 1985, should have been declared as deductions
from income during the said years and the failure of ICC to do so bars it from claiming said
expenses as deduction for the taxable year 1986.

Issue:
Whether the deduction of the expenses for professional and security services of 1984-1986 are
valid deductions from ICC’s gross income for 1986

Decision:
NO for audit services from SGV and legal services from Bengzon; YES for security services.

Held:
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent papers.

The requisite that it must have been paid or incurred during the taxable year is further qualified
by Sec 45 of the NIRC which states that: "[t]he deduction provided for in this Title shall be taken
for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method
of accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions. The accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.

The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do facts present
themselves in such a manner that the taxpayer must recognize an income or expense? The
accrual of income and expense is permitted when the all-events test has been met. It requires:
(1) the fixing of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The all-
events test is satisfied where computation remains uncertain, if its basis is unchangeable; the
test is satisfied where a computation may be unknown, but is not as much as unknowable,
within the taxable year. The amount of liability does not have to be determined exactly; it must
be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year. Accrual
method of accounting presents largely a question of fact; such that the taxpayer bears the
burden of proof of establishing the accrual of an item of income or deduction.

The expenses for professional fees for legal and auditing services pertain to 1984 and 1985
legal and retainer fees of the law firm Bengzon. As testified by the ICC Treasurer, the firm has
been its counsel since the 1960’s. From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known the
retainer fees charged by the firm as well as the compensation for its legal services. The failure
to determine the exact amount of the expense cannot be attributed solely to the delayed billing
of these liabilities by the firm. ICC could have inquired into the amount of their obligation to the
firm, especially since it is using the accrual method of accounting. It could also have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the rates charged
by their long time legal consultant.

SGV & Co. professional fees for auditing financial statements of ICC for 1985 cannot be validly
claimed as expense deductions in 1986. ICC failed to present evidence showing that even with
only "reasonable accuracy" as the standard to ascertain its liability to SGV & Co. in year 1985, it
cannot determine the professional fees which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue
Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income
for the said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred
by ICC in 1986 and could therefore be properly claimed as deductions for 1986.

6. H. TAMBUNTING PAWNSHOP VS. CIR

FACTS:
The stemmed from a pre-assessment issued by CIR against h. tambunting for among others, a
deficiency documentary stamp tax of P 50, 910. Thereafter, the CIR issued an assessment
notice with the corresponding demand letters for the payment of the DST and the corresponding
compromise penalty for taxable year 1997

Tambunting filed its written protest to the assessment notice alleging that it was not subject to
documentary stamp tax under Section 195 of the National Internal Revenue Code (NIRC)
because documentary stamp taxes were applicable only to pledge contracts, and the pawnshop
business did not involve contracts of pledge

Tambunting filed a petition for review when the protest it filed with the CIR was not acted upon

The court rendered a decision stating that petitioner is not subject to DST

ISSUE:
WHETHER THE PETITIONER, A PAWNSHOP, IS SUBJECT TO DST BASED ON ITS PAWN
TICKETS

HELD:
Petitioner contends that it is the document evidencing a pledge of personal property which is
subject to the DST. Petitioner further contends that the DST is imposed on the documents
issued, not the “transactions so had or accomplished.” It insists that the document to be taxed
under the transaction contemplated should be the pledge agreement, if any is issued, not the
pawn ticket.

On the other hand, commissioner contented that a documentary stamp tax shall be collected on
every pledge of personal property as a security for the fulfillment of the contract of loan. Since
the transactions in a pawnshop business partake of the nature of pledge transactions, then
pawn transactions evidenced by pawn tickets, are subject to documentary stamp taxes.
Petitioner’s contention is devoid of merit.

True, the pawn ticket is neither a security nor a printed evidence of indebtedness. But, precisely
being a receipt for a pawn, it documents the pledge. A pledge is a real contract, hence, it is
necessary in order to constitute the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement.

Consequently, the issuance of the pawn ticket by the pawnshop means that the thing pledged
has already been placed in its possession and that the pledge has been constituted.
Section 195 of the National Internal Revenue Code (NIRC) imposes a DST On every mortgage
or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever,
where the same shall be made as a security for the payment of any definite and certain sum of
money lent

All pledges are subject to DST, unless there is a law exempting them in clear and categorical
language.…

The law imposes DST on documents issued in respect of the specified transactions, such as
pledge, and not only on papers evidencing indebtedness. Therefore, a pawn ticket, being
issued in respect of a pledge transaction, is subject to documentary stamp tax