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TAX 2 DIGESTS

Lorenzo v. Posadas

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

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

after his death. It shall be managed by the executors.The proceeds shall be given to nephew Matthew inIreland to be used only for the education of Hanleysbrother's children and their descendants.

o 10 years after Thomas death, his property be given toMatthew to be disposed of in the way he thinks mostadvantageous

In 1924, the CFI appointed an administrator, Moore, eventuallyreplaced by Lorenzo (after Moore resigned).

CIR assessed the estate inheritance taxes from the time ofThomas death including penalties for deliquency in payment(P2k+).

CIR filed a motion before the CFI praying that the Lorenzo beordered to pay the said amount. The motion was granted. Lorenzopaid under protest and asked for a refund. CIR refused to refund.

I: (a) When does the inheritance tax accrue and when mustit be satisfied? UPON DEATH

Lorenzo asserts that article 657 of the Civil Code (the rights tothe succession of a person are transmitted from the moment of hisdeath) operates only in so far as forced heirs are concerned.

HOWEVER, there is no distinction between different classes ofheirs. The Administrative Code imposes the tax upon thetransmission of property of a decedent, made effective by hisdeath. An excise or privilege tax imposed on the right to succeedto, receive, or take property by or under a will or the intestacy law,or deed, grant, or gift to become operative at or after death. The

property belongs to the heirs at the moment of the death of theancestor as completely as if the ancestor had executed anddelivered to them a deed for the same before his death.

Since Thomas Hanley died on May 27, 1922, the inheritance taxaccrued as of the date.

However, it does not follow that the obligation to pay the tax aroseas of the date. The time for the payment on inheritance tax isfixed by the Revised Administrative Code w/c provides that thepayment must be made before entrance into possession of theproperty of the fideicommissary or cestui que trust. Thus, the tax

should have been paid before the delivery of the properties toMoore as trustee in 1924.

(b) Should the inheritance tax be computed on the basis ofthe value of the estate at the time of the testator's death,

or on its value ten years later? AT THE TIME OF DEATHPlaintiff contends that the estate of Thomas Hanley could not legally passto Matthew until after the expiration of 10 years from the death of thetestator in 1922 and the inheritance tax should be based on the value ofthe estate in 1932.Upon the death of the decedent, succession takes place and the right of theestate to tax vests instantly. The tax should be measured by the value ofthe estate as it stood at the time of the decedent's death, regardless of anysubsequent contingency value of any subsequent increase or decrease invalue, or the postponement of the actual possession or enjoyment of theestate by the beneficiary.(c) In determining the net value of the estate subject to tax, is itproper to deduct the compensation due to trustees? NOA trustee, no doubt, is entitled to receive a fair compensation for hisservices. However, it does not follow that the compensation due him may

lawfully be deducted in arriving at the net value of the estate subject totax. First, There is no statute requiring trustees' commissions to bededucted in determining the net value of the estate subject to inheritancetax. Second, though a testamentary trust has been created, the testatorintended that the duties of his executors and trustees should be separated.(d) What law governs the case at bar? Should the provisions of ActNo. 3606 favorable to the tax-payer be given retroactive effect?NOThe law at the time was section 1544 of the Revised Administrative Code,as amended by Act No. 3031, which took effect on March 9, 1922.Inheritance taxation is governed by the statute in force at the time of thedeath of the decedent . A statute should be considered as prospective inits operation, whether it enacts, amends, or repeals an inheritance tax,unless the language of the statute clearly demands or expresses that itshall have a retroactive effect.

CIR v Fisher

Walter G. Stevenson was born in the Philippines of British parents,married in Manila to another British subject, Beatrice. He died in1951 in California where he and his wife moved to.

In his will, he instituted Beatrice as his sole heiress to certain realand personal properties, among which are 210,000 shares ofstocks in Mindanao Mother Lode Mines (Mines).

Ian Murray Statt (Statt), the appointed ancillary administrator ofhis estate filed an estate and inheritance tax return. He made a

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preliminary return to secure the waiver of the CIR on theinheritance of the Mines shares of stock.

In 1952, Beatrice assigned all her rights and interests in the estateto the spouses Fisher.

Statt filed an amended estate and inheritance tax return claimingADDITIOANL EXEMPTIONS, one of which is the estate andinheritance tax on the Mines shares of stock pursuant to areciprocity proviso in the NIRC, hence, warranting a refund fromwhat he initially paid. The collector denied the claim. He then filedin the CFI of Manila for the said amount.

CFI ruled that (a) the share of Beatrice should be deducted fromthe net estate of Walter, (b) the intangible personal propertybelonging to the estate of Walter is exempt from inheritance taxpursuant to the reciprocity proviso in NIRC.

I: W/N the estate can avail itself of the reciprocity proviso in theNIRC granting exemption from the payment of taxes for the Minesshares of stock

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

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

In the Philippines, upon the death of any citizen or resident, ornon-resident with properties, there are imposed upon his estate,both an estate and an inheritance tax.

But, under the laws of California, only inheritance tax isimposed. Also, although the Federal Internal Revenue Codeimposes an estate tax, it does not grant exemption on the basis ofreciprocity. Thus, a Filipino citizen shall always be at adisadvantage. This is not what the legislators intended.

SPECIFICALLY:

Section122 of the NIRC provides that No tax shall be collectedunder this Title in respect of intangible personal property

o (a) if the decedent at the time of his death was a resident

of a foreign country which at the time of his death did notimpose a transfer of tax or death tax of any character inrespect of intangible personal property of citizens of thePhilippines not residing in that foreign country, or

o (b) if the laws of the foreign country of which thedecedent was a resident at the time of his death allow asimilar exemption from transfer taxes or death taxes ofevery character in respect of intangible personal propertyowned by citizens of the Philippines not residing in thatforeign country."

On the other hand, Section 13851 of the CaliforniaInheritance Tax Law provides that intangible personal propertyis exempt from tax if the decedent at the time of his death was aresident of a territory or another State of the United States or of a

foreign state or country which then imposed a legacy, succession,or death tax in respect to intangible personal property of its ownresidents, but either:.

(a) Did not impose a legacy, succession, or death tax of anycharacter in respect to intangible personal property of residents ofthis State, or(b) Had in its laws a reciprocal provision under whichintangible personal property of a non-resident was exempt fromlegacy, succession, or death taxes of every character if theTerritory or other State of the United States or foreign state orcountry in which the nonresident resided allowed a similarexemption in respect to intangible personal property of residents ofthe Territory or State of the United States or foreign state orcountry of residence of the decedent."

CIR v Campos Rueda

Maria Cerdeira was a Spanish national byreason of her marriage to a Spanish national. She resided in Tangier, Morocco until shedied. She left some intangible properties in the Philippines. The Commissioner of Internal Revenue (CIR)then held the administrator of her estate, Campos Rueda, to be liablefor deficiency estate and inheritance taxes after the transfer of Mariasintangible properties in the Philippines.

Campos Rueda countered this by sayingthat Section 122 (now sec 104) of the NIRC provided for reciprocity and that in the laws of Tangier, Morocco, "the transfers by reason of

death of movable properties, corporeal or incorporeal, includingfurniture and personal effects as well as of securities, bonds,shares, ..., were not subject, on that date and in said zone, to the

payment of any death tax, whatever might have been the nationalityof the deceased or his heirs and legatees."

Thus, Campos Rueda claimed an exemptionin the amount that the CIR was claiming as a deficiency. The CIR on the other hand claimed that thereciprocity clause could not apply since Tangier Morocco is not aforeign country as required in sec 122.


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I: W/N Tangier, Morocco is a Foreigncountry within the meaning of section 122 (now sec 104) of the NIRC R: YES, Tangier is a foreign country The expression "foreign country", used inthe last proviso of Section 122 of the National Internal Revenue Code,refers to a government of that foreign power which, although not aninternational person in the sense of international law, does not imposetransfer or death taxes upon intangible personal properties. It is, therefore, not necessary that Tangiershould have been recognized by our Government order to entitle thepetitioner to the exemption benefits of the proviso of Section 122 ofour Tax. Code. Court also cited previous cases:

o CIR v. De Lara: State of California was considered aForeign country within the meaning of sec 122.

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

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

resident foreigner, who died outside of this country is subject tothe estate tax, the congress, in including sec 122 in the NIRCclearly provided for an exemption (reciprocity) and thisexemption must be honored.

Zapanta v Posadas

Father Braulio Pineda died without anyascendants or descendants leaving a will in which he instituted hissister Irene Pineda as his sole heiress.

During his lifetime Father Braulio donatedsome of his property to the six plaintifffs, his relatives, severally, withthe condition that some of them would pay him a certain amount ofrice, and others of money every year, and with the express provision

that failure to fulfill this condition would revoke the donations ipsofacto.

The donations contained another clause thatthey would take effect upon acceptance. They were accepted duringFather Braulio's lifetime by every one of the donees.

CIR then imposed upon the 6 plaintiffsseparate inheritance taxes on the property donated to them inaccordance with Section 1536 of the Administrative Code, as amended,which states that Every transmission by virtue of inheritance, devise,bequest, gift mortis causa or advance in anticipation of inheritance,

devise, or bequest of real property located in the Philippine Islands andreal rights in such property

The 6 plaintiffs paid the inheritance taxunder protest and subsequently filed a separate civil action against the

CIR. The trial court in deciding these six cases, held that the donationsto the six plaintiffs made by the deceased Father Braulio Pineda aredonations inter vivos, and therefore, not subject to the inheritance tax,and ordered the CIR to return to each of the plaintiffs the sums paid bythe latter. I: W/n the donation made by Father Brauliowas in fact a donation mortis causa, and thus taxable. R: NO, the donation was inter vivos. It wasthus not taxable. Donations were inter vivos considering thatnot only was it stated as such in the instruments in which theyappeared, but they were also made in the nature of a donation intervivos. In donations mortis causa, it is the donorsdeath that determines the acquisition of, or the right to, the property,

and that it is revocable at the will of the donor. In donations inter vivos, as in the presentcase, the donees acquired the right to the property while the donorwas still alive, subject only to their acceptance and the condition thatthey pay the donor rice and/or money. The nature of these donations isnot affected by the fact that they were subject to the condition ofpayment since it was imposed as a resolutory condition, and in thissense, it is necessarily implies that the right came into existence first,otherwise there would be nothing to resolve upon the nonfulfillment ofthe condition imposed.

If the donor's life is mentioned in connectionwith this condition, it is only fix the donor's death as the end of theterm within which the condition must be fulfilled, and NOT becausesuch death of the donor is the cause which determines the birth of the

right to the donation. The property donated passed to the ownership ofthe donees from the acceptance of the donations, and these could notbe revoked except upon the nonfulfillment of the condition imposed, orfor other causes prescribed by the law, but not by mere will of thedonor. (However, considering that these donationshad onerous conditions, they are not donations to the full extent.Rather, they are partly contractual and partly donations. They aredonations inter vivos only insofar as they exceed to the incumbranceimposed.)


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Neither can these donations be consideredas an advance on inheritance or legacy, since they were not heirs orlegatees of their predecessor in interest upon his death (Sec. 1540 ofthe Administrative Code). Neither can it be said that they obtained this

inheritance or legacy by virtue of a document which does not containthe requisites of a will (Sec. 618 of the Code of Civil Pocedure).Besides, if the donations made by the plaintiffs are, as the appellantscontended, mortis causa, then they must be governed by the law ontestate succession (art. 620 of the Civil Code). In such a case, thedocuments in which these donations appear, being instruments whichdo not contain the requisites of a will, are not valid to transmit the

property to the donees (Sec. 618, Code of Civil Procedure.) Then thedefendants are not justified in collecting from the donees theinheritance tax, on property which has not been legally transferred tothem, and in which they acquired no right.

Dissenting Opinion by Justice Street: JusticeStreet strongly believed that the present case involved advances inanticipation of inheritance considering that the donees were entitledto receive an inheritance if no will had been made by the decedent. Hebelieved that what transpired in the present case is an attempt by thedonor to evade the payment of taxes by disposing of the bulk of his

property before his death.

Tuason v Posadas

In 1922, Esperanza Tuason Chuajap made a donation inter vivos ofcertain property to Mariano Tuason.

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

She died 3 years after leaving a will bequeathing P5,025 toMariano Tuason after the judicial administratix paid the prescribedinheritance tax on these two bequests.

Consequently, Posadas collected the sums of P3, 809.76 and P6,

653.64 from both the petitioners as inheritance tax upon the giftsinter vivos made to them against their opposition and protest. They filed their protest and the judgment was that the defendant

must return the amount claimed by the plaintiff. Posadas appealedand argued that the collection of these amounts as inheritance taxis authorized by the law.

I: W/n Posadas was correct in collecting inheritance tax R: YES. Section 1536 of the Administrative Code provides that every

transmission by virtue of inheritance, devise, bequest, gift mortis

causa, or advance in anticipation of inheritance, devise, orbequest shall be subject to tax.

Section 1540 then provides that after deductions have been made,there shall be added to the resulting amount the value ofall gifts

or advances made by the predecessor to any of those who,after his death, shall prove to be his heirs, devisees,legatees, or donees mortis causa.

When the law say all gifts, it doubtless refers to gifts inter vivos,and not mortis causa. Both the letter and the spirit of the lawleave no room for any other interpretation.

The language refers to donation that took effect before the donor'sdeath, and not to mortis causa donations, which can only be madewith the formalities of a will, and can only take effect after thedonor's death.

In this case, it appears that the Tuazons, after the death ofEspereanza, were found to be legatees under her will. Thus, thedonation inter vivos she had made to them in 1922 and 1923,must be added to the net amount that is to be taxed.

If the donee inter vivos was found to be legatees, heirs,devisees OR donees mortis causa of the decedent, thenthey would have to pay the inheritance tax.

The reason for this is because the donation inter vivos isdeemed to be a transfer in anticipation ofinheritance/death, meaning that it is a scheme to evadepayment of taxes.

Dizon v Posadas

Dizon was assessed to pay P2k+ as inheritance tax from theproperties he received from his father prior to his fathers deaththrough a deed of gift inter vivos.

Dizon alleged that the tax was illegally collected because hereceived the property prior to the death of his father, through adeed of gift inter vivos which was duly accepted and registeredbefore the death of his father making the property not aninheritance.

He further states that he was not trying to evade the inheritancetax that is imposed on heirs when his father donated all hisproperties to him. Thus, no inheritance tax under Act No. 2601(Chapter 40 of the Administrative Code), being the inheritance taxstatute, should be imposed upon the said properties.

The Court, however, ruled in favor of Posadas, hence, this appeal. I:W/N the inheritance tax was correctly imposed upon the

properties transferred through donation inter vivos


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R: YES.

Section 1540 of the Administrative Code states that afterdeductions have been made, there shall be added to the resultingamount the value of all gifts or advances made by the predecessor

to any of those who, after his death, shall prove to be his heirs,devises, legatees, or donees mortis causa

In this case facts conveyance was made by the donor five daysbefore his death and accepted by the donee one day before thedonor's death. Obviously, this was fraudulently made for thepurpose of evading the inheritance tax.

As to Dizons contention that the he is not an heir because there isno property to inherit anymore because he already received theproperties of the father through a donation inter vivos, SC saidthat even if they dont know w/n the father left a will, Dizon shouldNOT be deprived of his share of the inheritance because the CivilCode confers upon him the status of a forced heir.

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

As to Dizons contention that Section 1540 is unconstitutional in

taxing gifts or donations because the act would then embrace twosubjects, the Court states that: When the law says all gifts, itdoubtless refers to gifts inter vivos, and not mortis causa. Both theletter and the spirit of the law leave no room for any otherinterpretation. Such, clearly, is the tenor of the language whichrefers to donations that took effect before the donor's death, andnot to mortis causa donations, which can only be made with theformalities of a will, and can only take effect after the donor'sdeath.

The law presumes that such gifts have been made inancitipation of inheritance in order to EVADE tax. Thus, toprevent this, they are added to the resulting amount."

Vidal de Roces v Posadas

Esperanza Tuazon by public document donated parcels of landsituated in Manila to p laintiffs Vidal de Roces, etc. with their respectivehusbands, accepted them in the same public documents, which wereduly recorded in the registry of deeds. The plaintiffs took possession of the said lands, received the fruitsand obtained TCTs. The donor then died w/o any forced heir and in her will, shebequeathed to each of the donees the sum of P5,000. After the estate had been distributed among the institutedlegatees and before delivery of their respective shares, the CIR ruledthat the donees should pay inheritance tax.

They thus paid under protest, contending that Art 1540 of theRevised Administrative Code (after deductions have been made, thereshall be added to the resulting amount the value of all gifts / advancesmade by the predecessor to any of those who after his death prove tobe heirs, devisees, legatees or donees mortis causa) does NOT includedonations inter vivos. If it does, it is null and void as it violatesuniformity of taxation.

I: W/n donations inter vivos is included in Sec. 1540 of theAdministrative Code R: No.

The gifts referred to in section 1540 of the Revised AdministrationCode are, obviously, those donations inter vivos that take effectimmediately or during the lifetime of the donor but are made inconsideration or in contemplation of death.

Gifts inter vivos, the transmission of which is NOT MADE INCONTEMPLATION OF THE DONOR'S DEATH should not be understoodas included within the said legal provision for the reason that it wouldamount to imposing a direct tax on property and not on the

transmission.

This act does not come within the scope of the provisionscontained in Article XI of Chapter 40 of the Administrative Code whichdeals expressly with the tax on inheritances, legacies and otheracquisitions mortis causa.

CIR v CA and Pajonar

Pedro Pajonar, a member of the Philippine Scout during WWII wasa part of the infamous Death March by reason of which he sufferedshock and became insane.

His sister Josefina became the guardian over his person, while hisproperty was placed under the guardianship of the PNB by the RTCof Dumaguete.

After his death, PNB filed an accounting of his property underguardianship valued at 3M in Special Proceedings.

However, PNB did NOT file and estate tax return, instead itadvised his heirs to execute an extrajudicial settlement and to paytaxes on the estate.

Pursuant to BIRs assessment, the estate of Pedro paid taxes inthe amount of 2k.

Josefina then filed a petition w/ RTC of Dumaguete for the issuancein her favor of letters of administration of the estate of herbrother.

RTC appointed Josefina as regular administratrix of Pedros estate.


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The BIR then made a 2nd amendment for deficiency estate tax, w/cJosefina paid under protest.

Without waiting for her protest to be resolved by the BIR, Josefinathen filed a petition for review w/ the CTA praying for the refund of

1.5M OR the alternative 840k as erroneously paid estate tax. CTA ordered CIR to refund Josefina the amount of 252k,

representing erroneously paid estate tax. Among the deductionsfrom the gross estate allowed by CTA were the amounts of 60Krepresenting notarial fee for Extrajudicial Settlement plusattys fees for guardianship proceedings.

I: W/N the notarial fee and attys fees paid for the EJ Settlementmay be allowed as deductions fro the gross estate of decedent inorder to arrive at the value of the net estate.

R: YES, they are allowed deductions. ATTYs FEES: Under American Jurisprudence, expenses incurred in the EJ

Settlement of the estate should be allowed as deduction from thegross estate. There is not requirement of formal administration. It

is sufficient that the expense be a NECESSARY contribution towardthe settlement to the case.

Attys fees in order to be deductible from the gross estate must beessential and related to the settlement of estate. In this case, theattys fees paid for guardianship proceeding was necessary for thedistribution of the property of the late Pedro Pajonar to his rightfulheirs. Thus, it was deductible.

Necessary expenses of administration are such expenses as areentailed for the preservation and productivity of the estate and forits management for the purposes of liquidation, payment of debtsand distribution of the residue among the persons entitled.

NOTARIAL FEES:

Although tax code specifies judicial expenses of the testamentaryor intestate proceedings, there is no reason why expenses

incurred in the administration and settlement of an estate in EJproceedings should not be allowed. However, deduction is limitedto such administration expenses as are actually and necessarilyincurred in the collection of the assets of the estate, payment ofdebts, and distribution of the remainder among those entitledthereto. Such expenses may include executors or administratorsfees, attys fees, court fees and charges, appraisers fees, clerkhire, costs of preserving and distributing the estate and storing ormaintaining it, brokerage fees or commissions for selling ordisposing of the estate.

It is clear that the EJ settlement was for the purpose of payment oftaxes and the distribution of the estate to the heirs. The executionof EJ settlement necessitated the notarization of the same. Thusthe 60k for notarial fee for the EJ Settlement should be allowed asa deduction from the gross estate.

Judicial expenses are expenses for administration. Administrationexpenses are deductible from the gross estate. Expenses must beessential to the proper settlement of the estate.

Testate Estate of the late Felix de Guzman v de Guzman-Carillo

Felix Guzman died and was survived by eight children. One of the properties he left was a residential houselocated in the poblacion.

In conformity with his last will, that house and the lot onwhich it stands were adjudicated to his eight children, each beinggiven a one-eighthproindiviso. The administrator submitted four accounting reports forthe period from June 16, 1964 to September, 1967. Three of the heirs Crispina de Guzmans-Carillo Honoratade Guzman-Mendiola and Arsenio de Guzman interposedobjections to the administrator's disbursements in the total sum ofP13,610.48. I: W/n expenses incurred by the administrator aredeductible R: YES.

(Deductible) 1. Expenses for the renovation andimprovement of the family residence P10,399.59. Theseexpenses consisted of disbursements for the repair of the terraceand interior of the family home, the renovation of the bathroom,and the construction of a fence. The probate court allowed thoseexpenses because an administrator has the duty to "maintain intenantable repair the houses and other structures and fences

belonging to the estate, and deliver the same in such repair to theheirs or devises" when directed to do so by the court (Sec. 2, Rule84, Rules of Court).

(Non-deductible) 2. Expenses incurred by Libradade Guzman as occupant of the family residence withoutpaying rent These were PERSONAL expenses of Librada deGuzman, inuring to her benefit. Those expenses, not beingreasonable administration expenses incurred by the administrator,should not be charged against the income of the estate. Libradade Guzman, as an heir, is entitled to share in the net income of theestate. She occupied the house without paying rent. She should


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use her income for her living expenses while occupying the familyresidence.

The STENOGRAPHIC NOTES, REPRESENTATIONEXPENSES and EXPENSES DURING THE CELEBRATION OF

THE 1ST

DEATH ANNIVERSARY OF THE DECEASED should bedisallowed.They have no connection with the care,management and settlement of the decedent's estate(Nicolas vs. Nicolas 63 Phil 332).

The other expenses, namely, P19.30 for thelawyer's subsistence and P144 as the cost of the gift to thephysician who attended to the testator during his last s areallowable expenses.

(Deductible) 4. Irrigation feewas properly allowed asa legitimate expense of administration.

Dizon in his capacity as Administrator of the deceased Fernandez vCIR

Justice Arsenio Dizon and petitioner Atty. Dizon were appointed as

Special and Assistant Special Administrator, respectively, of theEstate of Jose Fernandez.

Justice Dizon authorized Atty. Gonzales to sign and file therequired estate tax return.

Atty. Gonzales filed the estate tax return with the BIR RegionalOffice of San Pablo City, showing a NIL estate tax liability (no taxliability- in this case, because the deductions exceed the grossestate).

Ten days after, the BIR Regional Director issued Certificationsstating that the taxes due on the transfer of real and personalpropertiesof Jose had been fully paid and said properties may betransferred to his heirs.

Justice Dizon died thus the probate court appointed petitioner asthe administrator of the Estate.

Atty. Dizon requested the probate courts authority to sell severalproperties of the Estate to pay its creditors. HOWEVER, BIR issueda notice demanding the payment of P66k+ deficiency estate tax.

Atty. Gonzales moved for a reconsideration of the Assessment butthe CIR denied the request and reiterated the Estates liability. Apetition for Review was filed with the CTA.

I: W/n deficiency estate tax must be imposed against the Estate R: No. Claims existing at time of death should be allowed as deductions

to the gross estate.

Even in the United States, there is some dispute as to whether thedeductible amount for a claim against the estate is fixed as of thedecedent's death which is the general rule, or the same should beadjusted to reflect post-death developments, such as where a

settlement between the parties results in the reduction of theamount actually paid.On one hand, the U.S. court ruled that theappropriate deduction is the "value" that the claim had at the dateof the decedent's death.

On the other hand, the Internal Revenue Service (IRS) opines thatpost-death settlement should be taken into consideration and theclaim should be allowed as a deduction only to the extent of theamount actually paid.

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

First, there is no law, nor any legislative intent in our tax laws,which disregards the date-of-death valuation principle andparticularly provides that post-death developments must beconsidered in determining the net value of the estate. Itbears emphasis that tax burdens are not to be imposed, nor

presumed to be imposed, beyond what the statute expressly andclearly imports, tax statutes being construed strictissimi jurisagainst the government. Any doubt on whether a person, article oractivity is taxable is generally resolved against taxation.

Second. Such construction finds relevance and consistency in ourRules on Special Proceedings wherein the term "claims" requiredto be presented against a decedent's estate is generally construedto mean debts or demands of a pecuniary nature which could havebeen enforced against the deceased in his lifetime, or liabilitycontracted by the deceased before his death . Therefore, theclaims existing at the time of death are significant to, andshould be made the basis of, the determination of allowabledeductions.

Gov of the Phils v Pamintuan Florentino Pamintuan filed an income tax return for the year 1919

and paid an amount on the basis of said return. When Florentino died in 1925, intestate proceedings were

instituted where the court appointed commissioners for theappraisal of the value of the property left by Florentino.

The court then ordered the delivery to the heirs of their respectiveshares of the inheritance after paying the correspondinginheritance taxes which were duly paid.

During the pendency of the intestate proceedings, theadministrator Jose Ramirez filed income tax returns for the estate


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of the deceased corresponding to the years 1925 and 1926. Theintestate proceedings were then closed in 1926.

In 1927, subsequent to the distribution of Florentinos estate, thegovernment discovered that Florentino had not paid P462

as additional income for 1919 on account of the sale of hishouse, from which he realized an income of P11,000 which wasnot included in his income tax return filed in 1919.

The government demanded payment of the income tax but theheirs refused to pay. The lower court ruled that the governmentwas barred from collecting the income tax due to its failure to fileits claim with the committee on claims and appraisals.

I: W/n the gov can still collect the income tax despite its failure tofile its claim with the committee on claims and appraisals

R: Yes. A claim for taxes and assessments whether assessedbefore or after the death of the decedent, are not required to bepresented to the committee.

Heirs are liable for the deficiency income taxes, inproportion to their share in the inheritance.

The administration proceedings of the late Florentino having been

closed, and his estate distributed among his heirs, the heirs areresponsible for the payment of the income tax here in question.

The claims for income taxes need not be filed with the committeeon claims and appraisals appointed in the course of testateproceedings and may be collected even after the distribution ofthe decedents estate among his heirs, who shall be liable thereforin proportion to their share in the inheritance.

CIR v Pineda

Atanasio Pineda died and was survived by his wife Felicisima (theappointed administratrix) and 15 children.

Estate proceedings were instituted in the CFI of Manila. The estatewas divided among and awarded to the heirs and the proceedingsterminated on June 8, 1948.

After the estate proceedings, the BIR investigated the income taxliability of the estate for the years 1945, 1946, 1947 and 1948 andit found that the corresponding income tax returns were not filed.

The CIR found the estate liable for Deficiency Income Tax (DIT),Additional residence tax for 1945 (ART 45), and Real Estatedealer's tax for the 4th qtr of 1946 and the whole year of 1947(REDT 46-47) .

Manuel, the eldest child, contested the assessment. Subsequently,he appealed to the CTA alleging that he was appealing "only thatproportionate part or portion pertaining to him as one of theheirs."

CTA held that Manuel was liable for payment corresponding to hisshare of such taxes.

On the other hand, CIR insisted that Manuel should be liable forthe payment of ALL the taxes found by the Tax Court to be due

from the estate instead of only for the amount of taxescorresponding to his share in the estate.

Manuel opposed the proposition on the ground that as an heir heis liable for unpaid income tax due the estate only up to the extentof and in proportion to any share he received, relying onon Government of the Philippine Islands v. Pamintuan. 1

I: W/n Manuel can be required to pay the FULL amount of the taxassessed by the BIR.

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

Pineda is liable for the assessment as (1) AN HEIR and as (2) AHOLDER-TRANSFEREE of property belonging to theestate/taxpayer.

o As an HEIR: As an heir he is individually answerable for

the part of the tax proportionate to the share he received

from the inheritance. His liability, however,cannot exceed the amount of his share.

o As a HOLDER OF PROPERTY belonging to the estate:

Pineda is liable for the tax up to the amount of theproperty in his possession. The reason is thatthe Government has a lien on the P2,500.00 receivedby him from the estate as his share in the inheritance, forunpaid income taxes for which said estate is liable,pursuant to the last paragraph of Section 315 of the

Tax Code.2 Therefore, the Government has TWO WAYS of collecting the tax in

question:

o One, by going after ALL the heirs and collecting from

each one of them the amount of the tax proportionate to

the inheritance received. This remedy was adoptedin Government of the Philippine Islands v. Pamintuan. In

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

the payment of all lawful outstanding claims against the estate in proportion to the amount or valueof the property they have respectively received from the estate."2

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

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

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

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

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

the taxpayer: . . .


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said case, the Government filed an action against allthe heirs for the collection of the tax. This action restson the concept that hereditary property consists only ofthat part which remains after the settlement of all lawfulclaims against the estate, for the settlement of which the

entire estate is first liable. The reason for filing a suitis to achieve thereby two results: first, payment ofthe tax; and second, adjustment of the shares ofeach heir in the distributed estate as lessened bythe tax.

o Another remedy is by subjecting said property of the

estate which is in the hands of an heir ortransferee to the payment of the tax due, theestate. This second remedy is the very avenue theGovernment took in this case to collect the tax.

The BIR should be given the necessary discretion to avail itself ofthe most expeditious way to collect the tax as may be envisionedin the 315, because taxes are the lifeblood of government andtheir prompt and certain availability is an imperious need.

And as afore-stated in this case the suit seeks to achieve only oneobjective: payment of the tax. The adjustment of the respectiveshares due to the heirs from the inheritance, as lessened by thetax, is left to await the suit for contribution by the heir from whomthe Government recovered said tax.

CIR v Gonzales

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

Jose was appointed administrator who filed with BIR an estate andinheritance tax return declaring personal & real properties of theirfather but the return did not mention any heir.

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

Jose requested for an extension of time within which to pay the

tax, which the CIR denied. During the pendency of the said proceedings in Iloilo and after

reinvestigation, BIR reassessed the estate and inheritance taxliability and issued a reassessment of taxes in a total of P69k.

Lilia disputed the legality of the 1958 assessment alleging thatthe right to make the same has prescribed since more than 5years had elapsed since the filing of estate and inheritance taxreturn on May 11, 1949.

CTA ruled in favor of Lilia. CIR appealed to the SC alleging that the right to assess the taxes

in question has not been lost by prescription since the return

which did not name the heirs cannot be considered true andcomplete return to start the running of the period of limitations of5 years under Sec 331 of Tax Code and pursuant to Sec 332 hehas 10 years within which to make the assessment counted fromthe discovery on September 24, 1953 of the identity of the heirs.

I: W/n the right of the CIR to assess the estate and inheritancetaxes in question has prescribed - NO

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

R: When tax return is considered sufficient

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

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

(2) when it covers the entire period involved; (3) when it contains information as to the various items of

income, deductions and credits with such definiteness asto permit the computation and assessment of the tax.

In this case, the estate and inheritance tax filed by Jose wassubstantially defective:

It was incomplete. It declared only 93 parcels of landand leaving out 92 others. This was a hugeunderdeclaration.

Moreover, the return mentioned no heir. Thus, noinheritance tax could be assessed. As a matter of law, onthe basis of return, there would be no occasion for theimposition of estate and inheritance taxes, When there isno heir, the estate is escheated to the State. The statedoes not tax itself.

The deficient return did not start the running of the periodof limitations BECAUSE the return was made on the wrong form.

The taxpayer failed to observe the law (Sec 332) w/c grants the

CIR 10 years (starting from date the fraud was discovered) withinwhich to bring action for tax collection, applies. He is obligated tomake a return or amend one already filed based on his ownknowledge & information obtained through testimony orotherwise, & subsequently to assess taxes due.

On MR filed by Lilia: Lilia insists that since she administers only 1/3 of theestate of her father, she should not be liable for the whole tax. And shesuggests that the intestate estate of Matias Yusay should be liable for thesaid taxes, 1/3 to be paid by Lilia and 2/3 to be paid by Florencia (wife ofdeceased Jose).


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Ruling of the Court: Estate and inheritance taxes are satisfied from theestate and are to be paid by the executor or administrator. Where thereare 2 or more executors, all of them are severally liable for the payment ofthe estate tax. The inheritance tax, although charged against the accountof each beneficiary, should be paid by the executor or administrator.

Failure to pay the estate and the inheritance taxes before distribution ofthe estate would subject the executor or administrator to criminal liability.It is immaterial that Lilia administers only 1/3 of the estate & will receive asher share only said portion, for her right to the estate comes after taxes. Asan administratrix, she is liable for the entire estate tax. As an heir, she isliable for the entire inheritance tax although her liability would not exceedthe amount of her share in the estate.

DONORS TAX

Tang Ho v. CIR

Li Seng Giap, his wife Tang Ho and their 13 children werestockholders of two close family corporations. BIR examiners made an examination of the books of the twocorporations and found that each of Li Seng Giaps children had a totalinvestment there of approximately P63k+ in shares issued to them bytheir father (who was the manager and controlling stockholder of thetwo corporations) CIR regarded these transfers as undeclared gifts made in therespective years, and assessed against Li Seng Giap and his childrendonor's and donee's taxes due to delayed payment (P76k+). They thus paid the sum of P53k+ representing the amount of thebasic taxes, and put up a surety bond to guarantee payment of thebalance demanded. Sometime later, they requested the CIR for a revision of their taxassessments, and submitted donor's and donee's gift tax returnsshowing that the children received gifts inter vivos and proper nuptias.


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

from 1939 to 1950 (except in 1947 and 1948) P4,000 incash;

o each of the eight children who married during the period

aforesaid, were given an additional P20,000 as dowry orgift propter nuptias;

o unmarried children received roughly an equivalent

amount in 1949, also by way of gifts inter vivos, so thatthe total donations made to each and every child, as of1950, stood at P63,190.

They contended that since the cash donated came from theconjugal funds, they are be considered as donations by BOTHspouses, for which two separate TAX exemptions may beclaimed in each instance, one for each spouse.

I: W/n the donations made by Li Seng Giap to his children from theconjugal property should be taxed against husband and wife R: No. A donation of property belonging to the conjugalpartnership, made during its existence, by the husband alone in favor

of the common children, is taxable to him exclusively as sole donor.

To be a donation by bothspouses, taxable to both, the wife mustexpressly join the husband in making the gift. Her participationcannot be implied. THUS, in this case, ONLY ONE exemption or deduction can beclaimed for every such gift, and not two, as claimed by petitioners. Speculation on the Tang Ho case: Why were they insisting thatthe dowry was made in cash? Does the law say that for a dowry to beconsidered as exemption, it has to be in cash? No. The reason whythey were insisting that it was made in cash and then this cash wasused to buy stock so that it can fall within the time period that thedowry should be given before celebration or within 1 year thereafter.

Gibbs v. CIR

Allison and Esther Gibbs executed documents entitled Deed ofSale and Declaration of Trust whereby they transferred 53, 000Lepanto Consolidated Mines shares of stock to their 5 children, inconsideration of the sum of P26, 227.70 to be paid on or beforeDecember 1950. The instituted trustee was Allisons brother, Finley Gibb. Spouses Gibb sent a letter to the CIR asking for a ruling onwhether or not gift taxes should be paid. CIR initially assessed the spouses a donee gift tax of P75 on eachof the beneficiaries or a total of about P750. These assessments were

based upon the DIFFERENCE between said market value of the sharesof stock and the stipulated consideration for transfer thereof. Subsequently, CIR revised the assessment by INCREASING them. The spouses paid within the period fixed by law but SOUGHT arefund. Their demand was denied. Trustee Finley Gibb appealed to the Secretary of Finance andinstituted a civil suit in the CFI for recovery of the amount. Spouses Gibb again executed 10 additional and separate trustscontaining the same stipulations and conditions. These additional deeds of trust impelled CIR to assess donor gifttaxes. CIR held that the gift taxes are available on the FULL MARKETVALUE of all the shares of stock thus placed in trust instead of uponthe difference between said market value and the stipulatedconsiderations. CTA agreed. I: W/n CTA was correct in ruling that the gift taxes on the transferof the shares of stock should be based on the full market value ofshares of stock (NOT diff between market value and stipulatedconsideration)

R: YES, CTA was correct, tax should be based on full MV. CTA was correct in finding that the agreements made by theparties were mere devises to avoid and evade the payment of thecorresponding gift taxes:

o If the trustors were earnestly concerned in providing

ample funds to assure the support, maintenance, care,health, higher education and travel of their children andthe launching of their career after they had become ofage, the trustors would not have really meant to requirethem to pay the consideration stipulated in the trustagreements.

o If the intent was really that the stipulated interest bepaid, the trustee could have authorized the trustors tosell, mortgage, hypothecate or otherwise dispose of the

stocks to raise the necessary funds.o The compromise agreements were made with knowledge

of the fact that the CIR was already investigating whetherthe stipulated consideration was real or fictitious.

There being no real consideration for the transfer, gift taxesshould be based on the full market value of the shares of stock atthe time of the respective transfer, and not merely on thedifference between the said market value and the considerationstipulated in the trust agreements.


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PIROVANO vs. CIR

Enrico Pirovano was the father Carla Pirovano. De la Rama Steamship Co. insured the life of said Enrico Pirovano(then its President and General Manager) with various Philippine andAmerican insurance companies for 1M, designating itself as the

beneficiary. Enrico Pirovano died during the World War II. The BOD of De la Rama Steamship Co. adopted a resolutiongranting the proceeds expected to be collected on Enricos lifeinsurance policies w/c was P400k for equal division among his 4 minorchildren, to be convertible into 4k shares of stock (1k shares / child0.

The Company received the total sum of P643K as proceeds of thesaid life insurance policies obtained from American insurers.

The BOD modified their resolution by renouncing all its rights title,and interest to the said amount of P643k in favor of the minor childrenof the deceased, subject to the express condition that said amountshould be retained by the Company in the nature of a loan to it,drawing interest at the rate of 5% per annum, and payable to the

Pirovano children after the Company shall have first settled its bondedindebtedness of 5M. This resolution was allowed by the childrens guardian.

BOD again modified their resolution by providing that theCompany shall pay the proceeds of said life insurance policies to theheirs after the Company shall have settled in full the balance of itspresent remaining bonded indebtedness, but the annual interestsaccruing on the principal shall be paid to the heirs of Pirovanowhenever the Company is in a position to meet said obligation. The mother of the children ACCEPTED this resolution with aPUBLIC DOCUMENT.

The SH of the Company ratified the resolutions with certainclarifying modifications that the payment of the donation shall notbe effected until such time as the Company shall have first duly

liquidated its present bonded indebtedness (P3.2M) with the Natl DevtCompany and that any and all taxes, legal fees, and expenses in anyway connected with the above transaction shall be chargeable anddeducted from the proceeds of the life insurance policies. HOWEVER, the majority stockholders of the Company voted torevoke the donation. As a consequence of this revocation and refusal of the Company topay the balance of the donation amounting to P564K despite demands,the PIROVANOS brought an action for the recovery of said amount.

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

assessed the amount of P60K as donees' gift tax against each of theheir, and a donor's gift tax in the total amount of P34K assessedagainst De la Rama Steamship Co., which the latter paid. The PIROVANOS contested CIRs assessment and imposition of thedonees' gift taxes and donor's gift tax and also made a claim for refund

of the donor's gift tax so collected.

I: W/n the PRIVANOS are obliged to pay donees' gift taxes as wellas the imposition of surcharge and interest on the amount of donees'gift taxes R: YES.

A donation made by the corporation to the heirs of a deceasedofficer out of gratitude for the officer's past services is considered adonation and is subject to donee's gift tax.

Art. 726 of the CivCode states that When a person gives toanother a thing ... on account of the latter's merits or of the servicesrendered by him to the donor, provided they do not constitute ademandable debt, ..., there is also a donation.

The fact that his services contributed in a large measure tothe success of the company did not give rise to a recoverable

debt, and the conveyances made by the company to his heirsremain a gift or donation.

ALSO, the value of such services which do not constitute arecoverable debt is NOT deductible from the donation.

The actual consideration for the cession of the policies wasthe Company's gratitude to Pirovano. Gratitude has no economicvalue and is not "consideration" in the sense that the word is usedunder the Tax Code. OTHERS:

Sec111 [where property is transferred for less than adequateconsideration, amt exceeding consideration deemed a gift] is NOT

applicable). Whether remuneratory or simple, the conveyance remained a gift. The definition of CONSIDERATION is anything that is bargainedfor by the promisor and given by the promisee in exchange for thepromise Pirovano's successful activities as officer of the De la RamaSteamship Co. cannot be deemed such consideration for the gift to hisheirs, since the services were rendered long before the Companyceded the value of the life policies to said heirs; cession and serviceswere not the result of one bargain or of a mutual exchange ofpromises.


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A subsequent promise to pay for past services is a nudum pactumi.e., one that is unenforceable in view of the common law rule thatconsideration must consist in a legal benefit to the promisee or somelegal detriment to the promisor.

SPS. Gestopa vs. CA ad Mercedes Danlag

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

They executed 3 deeds of donation mortis causa in favor ofMercedes Danlag-Pilapil covering 4 parcels. All deeds contained thereservation of rights of donors to amend / revoke the donation duringtheir lifetime AND to sell, mortgage / encumber the properties ifnecessary.

Diego w/ the consent of Catalina then executed a deed ofdonation inter vivos covering the aforementioned lots plus 2 otherparcels again in favor of respondent Mercedes. This contained two conditions

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

of land during their lifetimeo (2) the donee cannot sell or dispose of the land during

the lifetime of the said spouses w/o their consent. The Danlags sold parcels 3 and 4 to petitioners Gestopa andexecuted a deed of revocation recovering 6 parcels of land subject todeed of donation inter vivos. Mecedes filed with RTC against the Gestopas and the Danlags forquieting of title over the parcels of land. She alleged that she was an illegitimate daughter of Diego Danlagthat she lived and rendered incalculable beneficial services to Diegoand his mother Maura, when she was still alive. In recognition of her services, Diego executed Deed of Donationconveying to her 6 parcels of land. She accepted the donation in the same instrument, openly and

publicly exercised rights of ownership over the donated properties, andcaused the transfer of the tax declarations in her name. Through the machination, intimidation and undue influence, Diegopersuaded the husband of Mercedes, Eulalio Pilapil to buy 2 of the 6parcels covered by the deed of donation. The inter vivos donation wascoupled with conditions she complied with. She alleges she had notbeen guilty of any act of ingratitude and that the revocation had nolegal basis. Gestopas and Danlags opposed by saying that the deed ofdonation was null and void because it was obtained by Mercedesthrough machination and undue influence. Even assuming it was

validly executed, the intention was for the donation to take effect upondeath of donor. Further, the donation was void for it left the donorDiego w/o any property at all.

I: W/n the donation was inter vivos or mortis causa inter vivos

W/n the revocation was valid NO, it was not. R: The donation is INTER VIVOS. Revocation was not proper. (rulingin favor of Mercedes) Crucial in resolving whether the donation was inter vivos or mortiscausa is the determination of whether the donor intended to transferownership over the properties upon the execution of the deed. In ascertaining the intention of the donor, all the deeds provisionsmust be read together:

o IRST, the granting clause shows that Diego donated the

properties out of love and affection for Mercedes. This isa mark of a donation inter vivos.

o SECOND, the reservation of lifetime usufruct indicates

that the donor intended to transfer the naked ownershipof the properties. As correctly posed by the CA, what was

the need for such reservation if the donor and his spouseremained the owners of the properties?

o THIRD, the donor reserved sufficient properties for hismaintenance w/ his standing in society, indicating thatthe donor intended to part w/ 6 parcels.

o Lastly the donee accepted the donation.

Alejandro vs. Geraldez: An acceptance clause is a mark that thedonation is inter vivos. Acceptance is a requirement for donationsinter vivos.

Donations mortis causa, being in a form of a will, are not requiredto be accepted by the donees during the donors lifetime.

THUS, the right to dispose the properties belonged to Mercedes.Diegos right to give consent was merely intended to protect hisusufructuary interests.

The limitation on the right to sell during the donors lifetimeimplied that ownership had passed to the donees and donationwas effective during the donors lifetime.

Circumstances show that the intention of the donor was to transferownership to Mercedes. Prior to the donation inter vivos, theDanlag spouses already executed 3 donations mortis causa.

The Danlag spouses were aware of the difference between the twodonations. If they did not intend to donate inter vivos, they wouldnot again donate the four lots already donated mortis causa.


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Was the revocation valid? A valid donation, once accepted,becomes irrevocable, EXCEPT on account of inofficiousness, failureby donee to comply with charges imposed in donation, oringratitude.

The Danlag spouses did NOT invoke any of these. Finally, therecords do not show that the donor-spouses instituted any actionto revoke the donation in accordance w/ Art. 769. The revocationhas no legal effect.

ACCRA v. CIR

During the 1987 national elections, petitioners, who are partnersACCRA law firm contributed about P882k+ each to the campaignfunds of Senator Angara, then running for the Senate.

BIR assessed each of the petitioners donors tax for theircontributions.

Petitioners questioned the assessment through a letter to the BIR.They claimed that political or electoral contributions are NOTconsidered gifts under the NIRC and that, therefore, they are notliable for donors tax.

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

petitioners are liable for Donors tax R: YES, political contributions ARE donations and petitioners ARE

liable for donors tax.

A donation has the following elements:o (a) the reduction of the patrimony of the donor;o (b) the increase in the patrimony of the donee;

and,

o (c) the intent to do an act of liberality / animus

donandi

The present case falls squarely within the definition of a

donation. Petitioners, each contributed to the campaign funds of Senator

Edgardo Angara, without any material consideration.

All three elements of a donation are present. The patrimony of thefour petitioners were reduced by P882k+, while Senator EdgardoAngaras patrimony correspondingly increased.

There was intent to do an act of liberality / animusdonandi was present since each of the petitioners gavetheir contributions without any consideration.

2) Petitioners attempt is strained. The fact that petitioners willsomehow in the future benefit from the election of thecandidate to whom they contribute, in no way amounts toa valuable material consideration so as to remove political

contributions from the purview of a donation. Senator Angara was under no obligation to benefit the petitioners.

The proper performance of his duties as a legislator is hisobligation as an elected public servant of the Filipino people andnot a consideration for the political contributions he received.

In fact, as a public servant, he may even be called to enact lawsthat are contrary to the interests of his benefactors, for the benefitof the greater good.

In fine, the purpose for which the sums of money weregiven, which was to fund the campaign of Senator Angarain his bid for a senatorial seat, cannot be considered as amaterial consideration so as to negate a donation.

Finally, this Court takes note of the fact that subsequent to thedonations involved in this case, Congress approved Republic ActNo. 7166 on November 25, 1991, providing in Section 13 thereof

that political/electoral contributions, duly reported to theCommission on Elections, are NOT subject to the payment of anygift tax. This all the more shows that the political contributionsherein made are subject to the payment of gift taxes, since thesame were made PRIOR to the exempting legislation, and RepublicAct No. 7166 provides no retroactive effect on this point.


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VAT

Commissioner of Internal Revenue v. Mirant Pagbilao Corporation

Mitsubishi MPC NPC

MPC, formerly Southern Energy Quezon, Inc., is a domestic firmengaged in the generation of power which it sells to the National PowerCorporation (NPC). For the construction of the electrical and mechanical equipmentportion of its Pagbilao, Quezon plant, MPC secured the services ofMitsubishi Corporation (Mitsubishi) of Japan. Under R.A. 6395, NPC is exempt from all taxes (which covers bothdirect and indirect taxes).

In the light of the NPC's tax exempt status, MPC, on the belief thatits sale of power generation services to NPC is zero-rated for VATpurposes, filed an Application for Effective Zero Rating. CIR issued a ruling stating that the supply of electricity by MPC to

the NPC shall be subject to zero percent (0%) VAT. Consistent with its belief to be zero-rated, MPC opted not to paythe VAT component of the progress billings from Mitsubishi for theperiod covering April 1993 to September 1996 - for the E & MEquipment Erection Portion of MPC's contract with Mitsubishi. This prompted Mitsubishi to advance the VAT component as thisserves as its output VAT which is essential for the determination of itsVAT payment. MPC, while awaiting approval of its application, filed its quarterlyVAT return for the second quarter of 1998 where it reflected an inputVAT of P148M+, as supported by an OR. MPC filed an administrative claim for refund of unutilized inputVAT. BIR failed to act on its claim for refund. MPC went to the CTA via a petition for review to forestall the

running of the two-year prescriptive period. BIR asserted that MPC's claim for refund CANNOT be grantedsince MPC's sale of electricity to NPC is NOT zero-rated for its failure tosecure an approved application for zero-rating. The CTA granted MPC's claim for input VAT refund or credit for PhP10,766,939.48. The CA rendered its assailed decision modifying that ofthe CTA decision by granting most of MPC's claims for tax refund orcredit for P146,760,509.48.

I: W/n MPC is entitled to the refund of its input VAT paymentsmade from 1993 to 1996 R: Yes, but only to the extent of P10M+, given that claim hasprescribed.

Prescription. MP's claim for refund / tax credit for the creditableinput VAT was filed beyond the period provided by law for such claim.

Sec. 112(A) of the NIRC provides that any VAT-registered person,whose sales are zero-rated may apply for the issuance of tax creditWITHIN 2 YEARS after the close of the taxable quarter when the saleswere made. MPC filed a refund in Dec 1999 when it should have filed inSept 1998 (since the close of the quarter was Sept 1996).

Creditable input VAT is an indirect tax which can be shifted orpassed on to the buyer, transferee, or lessee of the goods, properties,or services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated or effectively zero-rated


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transaction, does NOT, standing alone, deprive the taxpayer of its rightto a refund for any unutilized creditable input VAT, albeit theerroneous, illegal, or wrongful payment angle does not enter theequation.

History of VAT.The law that originally imposed the VAT in thecountry, as well as the subsequent amendments of that law, has been

drawn from the tax credit method (practiced in Europe). If at the end of a taxable quarter the output taxes charged by aseller are EQUAL to the input taxes passed on by the suppliers, nopayment is required. HOWEVER, when output taxes EXCEED inputtaxes, the excess has to be paid. On the other hand, if the input taxesEXCEED the output taxes, the excess shall be CARRIED OVER TO THEsucceeding quarter/s. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any EXCESSover the output taxes shall be refunded to the taxpayer / creditedagainst other internal revenue taxes.

Zero-rated transactions generally refer to the export sale ofgoods and supply of services. The tax rate is set at zero. When appliedto the tax base, such rate obviously results in no tax chargeableagainst the purchaser. The seller of such transactions charges nooutput tax, but can claim a refund of or a tax credit certificate for theVAT previously charged by suppliers. OTHERS:

BIR and other tax agencies have a duty to treat claims for refundsand tax credits with proper attention and urgency. Had RDO No. 60and, later, the BIR proper acted, instead of sitting, on MPC's underlyingapplication for effective zero rating, the matter of addressing MPC'sright, or lack of it, to tax credit or refund could have plausibly beenaddressed at their level and perchance freed the taxpayer and thegovernment from the rigors of a tedious litigation.

The official receipt proves payment by MPC of its creditable inputVAT relative to its purchases from Mitsubishi. BIR is precluded from

requiring additional evidence to prove that input tax had indeed paidor, in fine, that the taxpayer is indeed entitled to a tax refund or creditfor input VAT, we agree with the CA's above disposition. As the Courtdistinctly notes, the law considers a duly-executed VAT invoice or ORreferred to in the above provision as sufficient evidence to support aclaim for input tax credit.

CIR v. Phil Health Care Providers, Inc.

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

organization for sick and disabled persons enrolled in a health careplan, wrote BIR inquiring whether the services it provides are exemptfrom the payment of the VAT.

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

that PHCPI was exempt from the VAT coverage. BIR then sent PHCPI 2 notices for deficiency in its payment of theVAT and documentary stamp taxes (DST) f P224M+ for taxable years1996 and 1997. PHCPI protested, but BIR did not take any action, so PHCPI filedwith the CTA a petition for review.

CTA ordered PHCPI to pay a reduced deficiency VAT and declaredthe BIR ruling void, saying that PHCPI is a service contractor subjectto VAT since it does not actually render medical service but merelyacts as a conduit between the members and petitioner's accreditedand recognized hospitals and clinics. However, after a careful review of the facts of the case, the CTAresolved to grant petitioner's "Motion for Partial Reconsiderationrelying on Sec.246 of the 1977 Tax code which provides that in the

absence of showing of bad faith, the retroactive revocation of the BIRRuling will be prejudicial to PHCPI. Accordingly, the VAT assessmentissued against PHCPI for the taxable years 1996 and 1997 wasWITHDRAWN and SET ASIDE. I: 1. W/n PHCPI's services are subject to VAT R: YES. HOWEVER, because of the VAT ruling exempting PHCPIfrom VAT, it cannot be retroactively revoked and therefore, PHCPI isstill exempt.

1) Section 102 of the NIRC as amended provides that there shallbe levied a VAT equivalent to 12% of gross receipts derived from thesale or exchange of services The phrase "sale or exchange ofservice" means the performance of all kinds of services in thePhilippines for consideration. Section 103 of the same Code specifies the exempt transactions

from the provision, which includes medical, dental, hospital andveterinary services except those rendered by professionals.

It can be seen from PHCPIs letter to BIR that its services that it isnot actually rendering medical service but merely acting as aconduit between the members and their accredited andrecognized hospitals and clinics.

Thus, it does NOT fall under VAT-exempt transactions. 2) Section 246 of the 1997 Tax Code, as amended, provides thatrulings, circulars, rules and regulations promulgated by the CIR haveno retroactive application if to apply them would prejudice the


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taxpayer. The exceptions to this rule are:

o (1) where the taxpayer deliberately misstates or omitsmaterial facts from his return or in any documentrequired of him by the BIR

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

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

PHCPI did not fall under any of these exceptions. PHCPI's failure to refer to itself as a health maintenanceorganization is not an indication of bad faith or a deliberate attempt tomake false representations. The term "health maintenance organization" was first recorded inthe Philippine statute books only upon the passage of "The NationalHealth Insurance Act of 1995" which defines a "health maintenanceorg" as one of the classes of a "health care provider." Thus, the VAT Ruling was issued in PHCPI's favor, and the term"health maintenance organization" was yet unknown or had no

significance for taxation purposes. PHCPI therefore, believed in goodfaith that it was VAT exempt for the taxable years 1996 and 1997 onthe basis of the VAT Ruling. CIR is precluded from adopting a position contrary to onepreviously taken where injustice would result to the taxpayer.

CIR v Acesite (Philippines) Hotel Corporation

Acesite is the owner and operator of the Holiday Inn ManilaPavilion Hotel. It leases a portion of the hotels premises to thePAGCOR for casino operations. It also caters food and beverages toPAGCORs casino patrons through the hotels restaurant outlets. From 1996 to 1997, Acesite incurred VAT amounting to P30M+from its rental income and sale of food and beverages to PAGCORduring said period. Acesite tried to shift the said taxes to PAGCOR by incorporating it

in the amount assessed to PAGCOR but the latter refused to pay thetaxes on account of its tax exempt status. Thus, PAGCOR paid the amount due to Acesite minus the P30M+VAT while Acesite paid the VAT to the CIR. However, Acesite belatedly arrived at the conclusion that itstransaction with PAGCOR was subject to zero rate as it was rendered toa tax-exempt entity. In 1998, Acesite filed an administrative claim forrefund with the CIR but CIR failed to resolve the same, so the case waselevated to the CTA. I: W/n the 0% VAT rate (under then Sec 108 (B)(3) of the NIRC)applies to Acesite

R: Yes. PD 1869 w/c created PAGCOR granted it an exemption frompaying taxes. A close scrutiny of the provisions of the said law gives PAGCOR ablanket exemption to taxes with no distinction on whether the taxes

are direct or indirect. The law even grants tax exempt status to persons dealing withPAGCOR in casino operations. The unmistakable conclusion is thatPAGCOR is not liable for the P30M+ VAT and neither is Acesite asAcesite is effectively subject to zero percent rate under the NIRC. By extending the exemption to entities or individuals dealing withPAGCOR, the legislature clearly granted exemption also from indirecttaxes. It must be noted that the indirect tax of VAT, as in the instantcase, can be shifted or passed to the buyer, transferee, or lessee of thegoods, properties, or services subject to VAT. Thus, by extending thetax exemption to entities or individuals dealing with PAGCOR in casinooperations, it is exempting PAGCOR from being liable to indirect taxes. The NIRC provides that transactions subject to 0% VAT includeservices rendered to persons whose exemption under special laws or

international agreements subjects the supply of such services to 0%rate. OTHERS:

It is true that VAT can either be incorporated in the value of thegoods, properties, or services sold or leased, in which case it iscomputed as 1/11 of such value, or charged as an additional 10% tothe value. Verily, the seller or lessor has the option to follow either wayin charging its clients and customer.

In the instant case, Acesite followed the latter method, that is,charging an additional 10% of the gross sales and rentals. Be that as itmay, the use of either method, and in particular, the first method, doesnot denigrate the fact that PAGCOR is exempt from an indirect tax, likeVAT.

CIR v. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR

MINDANAO, INC. A foreign consortium composed of BWSC-Denmark, MitsuiEngineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. enteredinto a contract with NAPOCOR for the operation and maintenance of 2power barges. BWSC-Denmark, the coordination manager, established BWSC-Mindanao (domestic corp doing business in Davao) whichsubcontracted the actual operation and maintenance of NAPOCORstwo power barges.


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NAPOCOR paid capacity and energy fees to the Consortium in amixture of currencies (Mark, Yen, and Peso). The freely convertiblenon-Peso component is deposited directly to the Consortiums bankaccounts in Denmark and Japan, while the Peso-denominated

component is deposited in a separate and special designated bankaccount in the Philippines. On the other hand, the Consortium paid BWSC-Mindanao in foreigncurrency inwardly remitted to the Philippines through the bankingsystem. In order to ascertain the tax implications of the abovetransactions, BWSC-Mindanao sought a ruling from the BIR, w/cresponded with a Ruling declaring that if BWSC-Min chose to registeras a VAT person and the consideration for its services is paid for inacceptable foreign currency and accounted for in accordance with therules and regulations of the BSP, the aforesaid services shall be subjectto VAT at zero-rate. BSWC-Mindanao chose to register as a VAT taxpayer.

In conformity with RR 5-96 allowing zero-rated VAT for servicesother than processing, manufacturing and repacking of goods, itsubjected its sale of services to the Consortium to the 10% VAT andpaid the amount of P6M+ as its output tax liability for the year 1996. It then filed a claim for the issuance of a tax credit certificate withthe BIR, believing that it erroneously paid the output VAT for 1996 dueto its availment of the Voluntary Assessment Program (VAP) of the BIR. CTA ordered BIR to issue a tax credit certificate for the P6M+ infavor of BSCW-Mindanao. This was affirmed by the CA.

I: W/n BWSC-Mindanao is entitled to the refund of P6,994,659.67as erroneously paid output VAT for the year 1996 R: Yes, they are entitled to refund. Their services ARE actually stillsubject to 10% VAT BUT they are not liable for such given their relianceon BIR Rulings.

An essential condition for qualification to zero-rating under Section

102(b)(2) of RR 5-96 is that services other than processing,manufacturing, or repacking of goods must be performed for personsdoing business OUTSIDE the Philippines. In this case, the payer-recipient of BWSC-Mindanaos services isthe Consortium which is a joint-venture doing business in thePhilippines. While the Consortiums principal members are non-residentforeign corporations, the Consortium itself is doing business in thePhilippines. This is shown clearly in BIR Ruling No. 023-95 which statesthat the contract between the Consortium and NAPOCOR is for a 15-year term. Considering this length of time, the Consortiums operation

and maintenance of NAPOCORs power barges cannot be classified asa single or isolated transaction. The Consortium does not fall under Section 102(b)(2) whichrequires that the recipient of the services must be a person doingbusiness outside the Philippines.

Therefore, BWSC-Mins services to the Consortium, not beingsupplied to a person doing business outside the Philippines, cannotlegally qualify for 0% VAT. The Court recognizes the rule that the VAT system generallyfollows the "destination principle" (exports are zero-rated whereasimports are taxed).

However, as the Court stated in American Express, there is anexception to this rule, which is the 0% VAT on services enumerated inSection 102 and performed in the Philippines. To be exempt from thedestination principle under Section 102(b)(1) and (2), the servicesmust be (a) performed in the Philippines; (b) for a person doingbusiness outside the Philippines; and (c) paid in acceptable foreigncurrency accounted for in accordance with BSP rules.

In contrast, this case involves a recipient of services theConsortium which is doing business in the Philippines. Nevertheless, in seeking a refund of its excess output tax,respondent relied on VAT Rulings insofar as they held that the servicesbeing rendered by BWSCMI is subject to VAT at zero percent (0%).BWSCs reliance on these BIR rulings binds BIR. BIRs revocation CANNOT be given retroactive effect since it willprejudice the taxpayer, w/c is prohibited by Sec 246 of the NIRC.Changing respondents status will deprive respondent of a refund of asubstantial amount representing excess output tax.

CIR v. Magsaysay Lines

NDC decided to sell its National Marine Corporation (NMC) sharesand 5 of its ships, w/c were offered for public bidding.

Among the stipulated terms and conditions for the public auctionwas that the winning bidder was to pay "a VAT of 10% on the value ofthe vessels. Magsaysay Lines offered to buy the shares and the vessels forP168M. The bid was made by Magsaysay Lines, purportedly for a newcompany still to be formed composed of itself, Baliwag Navigation, Inc.,and FIM Limited of the Marden Group based in Hongkong (collectively,private respondents) The bid was approved by the Committee on Privatization, and aNotice of Award was issued to Magsaysay Lines.


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Private respondents through counsel then received a VAT Rulingfrom the BIR, holding that the sale of the vessels was subject to the10% VAT. They filed a motion for reconsideration but their motion wasdenied so they elevated the case to the CTA. The NDC drew on the Letter of Credit to pay for the VAT, and the

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

CTA ruled that the sale of a vessel was an "isolated transaction,"not done in the ordinary course of NDCs business, and was thus notsubject to VAT, which under Section 99 of the Tax Code, was appliedonly to sales in the course of trade or business. I: W/N the sale is subject to VAT R: No, sale is NOT subject to VAT. Any sale, barter or exchange of goods or services not in the courseof trade or business is not subject to VAT.

mperial v. CIR: The term "carrying on business" does not meanthe performance of a single disconnected act, but means conducting,prosecuting and continuing business by performing progressively allthe acts normally incident thereof.

Thus, it connotes REGULARITY of activity. In the instant case, the sale was an isolated transaction. The salewhich was involuntary and made pursuant to the declared policy ofGovernment for privatization could no longer be repeated or carried onwith regularity. It should be emphasized that the normal VAT-registered activity ofNDC is leasing personal property. This finding is confirmed by the Revised Charter of the NDC whichbears no indication that the NDC was created for the primary purposeof selling real property. Thus, the sale of the vessels was not in the ordinary course oftrade or business of NDC so it should not be subject to VAT.

CIR v. SEKISUI

SEKISUI JUSHI is a domestic corporation with principal officelocated in the Special Export Processing Zone in Laguna. It is principally engaged in the business of manufacturing,importing, exporting, buying, selling wholesale such goods asstrapping bands and other packaging materials.

Having registered with the BIR as a VAT taxpayer, Sekisui filed itsquarterly returns with the BIR, in the amount of P4M paid by it inconnection with its domestic purchase of capital goods and services.

Said input taxes remained unutilized since Sekisui has notengaged in any business activity or transaction for which it may beliable for output tax and for which said input taxes may be credited. Sekisui then filed with the One-Stop-Shop Inter-Agency Tax Creditand Duty Drawback Center of the Department of Finance (CENTER-

DOF) two separate applications for tax credit/refund of VAT input taxespaid. CIR denied this, but CTA ruled that Sekisui was entitled to refund.

I: W/n SEKISUI is entitled to the refund/tax credit certificate asalleged unutilized input taxes paid on domestic purchase of capitalgoods and services R: Yes, it is entitled to refund Business enterprises registered with the Philippine Export ZoneAuthority (PEZA) may choose between two fiscal incentive schemes:

o (1) to pay a 5% preferential tax rate on its gross incomeand thus be exempt from all other taxes; or

o (b) to enjoy an income tax holiday, in which case it is notexempt from applicable national revenue taxes includingthe value-added tax (VAT).

If the entity avails itself of the 5% preferential tax rate under thefirst scheme, it is exempt from all taxes, including the VAT; Under the second, it is exempt from income taxes for a number ofyears, but not from other national internal revenue taxes like the VAT. A perusal of the pleadings and supporting documents indicatesthat Sekisui availed itself of the income tax holiday (second). By doingso, it became subject to VAT. It correctly registered as a VAT taxpayer,because its transactions were not VAT-exempt. Notwithstanding the fact that its purchases should have beenzero-rated, Sekisui was able to prove that it had paid input taxes in theamount of P4M, as substantially supported by invoices and ORs. While an ecozone is within the Philippines, it is deemed a separatecustoms territory. Sales by suppliers from outside the borders of theecozone to this separate customs territory are deemed as exports and

treated as export sales. Since 100% of Sekisui's products are exported, all its transactionsare deemed export sales and are thus VAT zero-rated. Sekisui has nooutput tax with which it could offset its paid input tax. Since thesubject input tax it paid for its domestic purchases of capital goods andservices remained unutilized, it can claim a refund for the input VATpreviously charged by its suppliers.

ABAKADA vs Ermita (Sept 1, 2005)

Several actions were filed by different petitioners assailing thevalidity of R.A. No. 9337 (increasing VAT to 12%) for being


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According to petitioner, the limitation on the creditable input tax ineffect allows VAT-registered establishments to retain a portion of thetaxes they collect, which violates the principle that tax collection andrevenue should be for public purposes and expenditures.

As earlier stated, the input tax is the tax paid by a person,passed on to him by the seller, when he buys goods. Outputtax meanwhile is the tax due to the person when he sellsgoods. In computing the VAT payable, three possible scenarios mayarise:

o If output tax = input tax = no paymento If output tax > input tax = person liable for excess, to be

paid to BIRo If input tax > output tax = excess shall be carried over to

the succeeding quarter or quarters.o IF input tax results from zero-rated or effectively zero-

rated transactions, any excess over the output taxes shallbe REFUNDED to the taxpayer / credited against otherinternal revenue taxes, at the taxpayers option.

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

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

There is no retention of any tax collection because thetaxpayer has already previously paid the input tax to a seller,and the seller will subsequently remit such input tax to theBIR. The party directly liable for the payment of the tax is the seller.What only needs to be done is for the person/taxpayer to apply orcredit these input taxes, as evidenced by receipts, against his outputtaxes. TAX IS REGRESSIVE, BUT IT IS NOT INVALID.

Taxation is PROGRESSIVE when its rate goes up depending on theresources of the person affected. The Constitution does not reallyprohibit the imposition of indirect taxes, like the VAT. What itsimply provides is that Congress shall "evolve a progressive

system of taxation."

*NOTE the distinction made by the court:VAT - A tax on spending or consumption. It is levied on the sale, barter,exchange or lease of goods or properties and services. Being an indirecttax on expenditure, the seller of goods or services may pass on the amountof tax paid to the buyer, with the seller acting merely as a tax collector. Theburden of VAT is intended to fall on the immediate buyers and ultimately,the end-consumers.

Direct tax is a tax for which a taxpayer is directly liable on the transactionor business it engages in, without transferring the burden to someone else.Examples are individual and corporate income taxes, transfer taxes, andresidence taxes.

ABAKADA v. Ermita (Oct 18, 2005)

This case is about the Resolution of the Motion for Reconsiderationfiled by herein petitioners based on the decision rendered by the courton Sept. 1, 2005, upholding the constitutionality of RA 9337 or the VATReform Act. Relevant issues are as follows:1. MR of Escudero, et al.: W/N there was grave abuse of discretion

amounting to lack or excess of jurisdiction on the part of theBicameral Committee when the No Pass-On Provisions for thesale of petroleum products and power generation services weredeleted.

2. MR of Bataan Governor Garcia, Jr.: W/N the VAT law isunconstitutional for being arbitrary, oppressive and inequitablebecause it burdens the consumers because of the price increase.

3. MR of Association of Pilipinas Shell Dealers: W/N the Court erredin upholding the constitutionality of Section 110(A)(2) andSection 110(B) of the NIRC as amended by the EVAT Lawimposing limitations on the amount of input VAT that maybe claimed as a credit against the output VAT; Section114(C) of the NIRC as amended by the EVAT Law, requi

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