Tax 2 Digest to Be Submitted

7/30/2019 Tax 2 Digest to Be Submitted

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RULING:

Under the provisions of the Rules of Court, together with the provision in the tax

code, the distribution of a decedents assets may only be ordered under thefollowing circumstances

1. When the inheritance tax, among others, is paid

2. When a sufficient bond is given to meet the payment of the inheritance taxand all other obligations of the nature enumerated

3. When the payment of the said tax and all the other obligations mentioned inthe Rule has been provided for.

None of these were present when the questioned orders were issued at the case atbar.

On the issue of attorneys fees, these should be shouldered by the heirs and not bythe estate. The attorneys fees payable were not for the benefit of the estate andthus, need not be paid by the estate.


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Commissioner of Internal Revenue vs. Gonzales and the CTAG.R. No. L-19495. November 24, 1966.

FACTS: Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs,

namely, Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural child.Intestate proceedings for the settlement of his estate were instituted in the Court of First Instance ofIloilo (Special Proceedings No. 459). Jose S. Yusay was therein appointed administrator.

On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and inheritancetax return declaring that the gross estate of Matias Yusay was P187,204.00. The return mentioned noheir. Upon investigation, however, the BIR found that several properties were not included in the

return filed by Jose Yusay and that the total gross estate of the deceased should be P219,584.32.

Based on the foregoing findings, the Bureau of Internal Revenue assessed on October 29, 1953 estateand inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively.

On July 12, 1957, an agent of the Bureau of Internal Revenue apprised the Commissioner of Internal

Revenue of the existence of a reamended project of partition. Whereupon, the Internal RevenueCommissioner caused the estate of Matias Yusay to be reinvestigated for estate and inheritance taxliability. The CIR found a huge underdeclaration of the gross estate of the deceased.

In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia PiccioVda. de Yusay, who succeeded him in the administration of the estate of Matias Yusay.

No payment having been made despite repeated demands, the Commissioner of Internal Revenuefiled a proof of claim for the estate and inheritance taxes due and a motion for its allowance with thesettlement court in voting priority of lien pursuant to Section 315 of the Tax Code.

On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing thelegality of the assessment dated February 13, 1958. After hearing the parties, said Court declared theright of the Commissioner of Internal Revenue to assess the estate and inheritance taxes in questionto have prescribed.

Hence, this petition.

ISSUE: Whether or not the right of the Commissioner of Internal Revenue to assess the estate andinheritance taxes in question has prescribed?

DECISION: Lilia Yusay claims that since the latest assessment was issued only on February 13, 1958or eight years, nine months and two days from the filing of the estate and inheritance tax return, theCommissioner's right to make it has expired. She would rest her stand on Section 331 of the Tax Codewhich limits the right of the Commissioner to assess the tax within five years from the filing of thereturn.

The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence therunning of the prescriptive period under Section 331 of the Tax Code rests on no solid ground.

A return need not be complete in all particulars. It is sufficient if it complies substantially with the law.There is substantial compliance (1) when the return is made in good faith and is not false orfraudulent; (2) when it covers the entire period involved; and (3) when it contains information as tothe various items of income, deduction and credit with such definiteness as to permit the computationand assessment of the tax.

First, it was incomplete. It declared only ninety-three parcels of land representing about 400 hectaresand left out ninety-two parcels covering 503 hectares. Said huge under declaration could not havebeen the result of an over-sight or mistake. As found in L-11378, supra note 7, Jose S. Yusay very


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- The petitioners paid P53,434.50 representing the amount of the basic taxes, and put up a suretybond to guarantee payment of the balance demanded.-On June 25, 1951, they requested the Collector of Internal Revenue for a revision of their taxassessments, and submitted donor's and donee's gift tax returns

-Appellants admit that the gifts were not reported; but contend that as the cash donated came fromthe conjugal funds, they constituted individual donations by each of the spouses Li Seng Giap andTang Ho of one half of the amount received by the donees in each instance

-They also claimed the benefit of gift tax exemptions (under section 110 and 112 of the InternalRevenue Code) at the rate of P2000 a year for each donation, plus P10,000 for each gift propternuptias made by either parent-The Collector refused to revise his original assessments; and the petitioners appealed to the then

Board of Tax Appeals-The Board of Tax Appeals upheld the decision of the respondent Collector of Internal Revenue; hence,this petition for review

ISSUEWON the donations made by petitioner Li Seng Giap to his children from the conjugal property are

taxable against husband and wife, and therefore, exemptions may be claimed twice

HELDNo.

-Appellants submit that all such donations of community property are to be regarded, for taxpurposes, as donations by both spouses, for which two separate exemptions may be claimed in eachinstance, one for each spouse.

-This presentation should be viewed in the light of the provisions of the Spanish Civil Code of 1889.Arts. 1409 and 1415, reading as follows:Art. 1409. The conjugal partnership shall also be chargeable with anything which may have beengiven or promised by the husband to the children born of the marriage solely in order to obtainemployment for them or give them a profession, or by both spouses by common consent, should theynot have stipulated that such expenditures should be borne in whole or in part by the separateproperty of one of them.ART. 1415. The husband may dispose of the property of the conjugal partnership for the purposesmentioned in Art. 1409.-In effect, these Articles clearly refute the appellants' theory that because the property donated iscommunity property, the donations should be viewed as made by both spouses. First, because the law

clearly differentiates the donations of such property "by the husband" from the "donations by bothspouses by common consent"-Next, the wording of Arts. 1409 and 1415 indicates that the lawful donations by the husband to thecommon children are valid and are chargeable to the community property, irrespective of whether thewife agrees or objects thereof. Obviously, should the wife object to the donation, she can not beregarded as a donor at all.-Appellants herein are therefore in error when they contend that it is enough that the propertydonated should belong to the conjugal partnership in order that the donation be considered and taxedas a donation of both husband and wife, even if the husband should appear as the sole donor. There isno blinking the fact that, under the old Civil Code, to be a donation by both spouses, taxable to both,the wife must expressly join the husband in making the gift; her participation therein cannot beimplied.-The consequence of the husband's legal power to donate community property is that, where made bythe husband alone, the donation is taxable as his own exclusive act. Hence, only one exemption or

deduction can be claimed for every such gift, and not two, as claimed by appellants herein


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TOLENTINO vs. SEC of FINANCE

Facts:

The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well ason the sale or exchange of services. RA 7716 seeks to widen the tax base of the existing VAT systemand enhance its administration by amending the National Internal Revenue Code. There are varioussuits challenging the constitutionality of RA 7716 on various grounds.

One contention is that RA 7716 did not originate exclusively in the House ofRepresentatives as required by Art. VI, Sec. 24 of the Constitution, because it is in fact the result ofthe consolidation of 2 distinct bills, H. No. 11197 and S. No. 1630. There is also a contention that S.No. 1630 did not pass 3 readings as required by the Constitution.

Issue: Whether or not RA 7716 violates Art. VI, Secs. 24 and 26(2) of the Constitution

Held:

The argument that RA 7716 did not originate exclusively in the House of Representatives as requiredby Art. VI, Sec. 24 of the Constitution will not bear analysis. To begin with, it is not the law but therevenue bill which is required by the Constitution to originate exclusively in the House ofRepresentatives. To insist that a revenue statute and not only the bill which initiated the legislativeprocess culminating in the enactment of the law must substantially be the same as the House billwould be to deny the Senates power not only to concur with amendments but also to proposeamendments. Indeed, what the Constitution simply means is that the initiative for filing revenue,tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of localapplication must come from the House of Representatives on the theory that, elected as they are fromthe districts, the members of the House can be expected to be more sensitive to the local needs andproblems. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipationof its receipt of the bill from the House, so long as action by the Senate as a body is withheld pendingreceipt of the House bill.

The next argument of the petitioners was that S. No. 1630 did not pass 3 readings on

separate days as required by the Constitution because the second and third readings were done onthe same day. But this was because the President had certified S. No. 1630 as urgent. Thepresidential certification dispensed with the requirement not only of printing but also that of readingthe bill on separate days. That upon the certification of a bill by the President the requirement of 3readings on separate days and of printing and distribution can be dispensed with is supported by theweight of legislative practice.


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ATLAS MINING VS CIR

FACTS:

Petitioner is a mining corporation, organized and existing under and by virtue of the laws of thePhilippines, operates a concession in Toledo City, Cebu. It actually used and/or consumed tax paidextra gasoline and diesel fuel for the mining operation purchased from Mobil Oil Philippines.

Sometime in 1978 petitioner filed with the Commissioner of Internal Revenue a written claim for taxcredit. It claimed 25% of the specific taxes paid on said fuel oils pursuant to Sec. 5 of Republic Act No.1435 in relation to Sec. 142 and 145 of the Tax Code

There being no action taken on its claim for refund, petitioner filed before the CTA a judicial claim forrefund. The CTA granted the claim for refund and ordered the CIR to refund and/or credit amount

The CIR then appealed to the CA. Petitioner that Atlas is not entitled to the tax refund because noadditional tax was imposed on it under any city or municipal ordinance as provided under Section 4 of

R.A. No. 1435. The CA affirmed the decision of the CTA. Its Motion for reconsideration having failedhence, this recourse.

ISSUE: Whether or not in the instant case, the petitioner may raise a new issue for the first time onappeal.

HELD:

The Supreme Court may review such matters as may be necessary to serve the interest of justice. Ithas ample authority to review and resolve matters not specifically raised or assigned as error by theparties if it finds that the consideration and determination of the same is necessary in arriving at ajust resolution of a case. Where the issues already raised also rest on other issues not specificallypresented, as long as the latter issues bear relevance and close relation to the former and as long asthey arise from matters on record, the Court has the authority to include them in its discussion of thecontroversy as well as to pass upon them. Wherefore, the petition is GRANTED.


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CIR vs Philippine Global Communication

Facts:

Philippine Global (respondent) is a corporation engaged in telecommunications, filed its Annual IncomeTax Return for taxable year 1990 on 15 April 1991. On 13 April 1992, the Commissioner of Internal

Revenue (CIR) issued Letter of Authority No. 0002307, authorizing the appropriate Bureau of InternalRevenue (BIR) officials to examine the books of account and other accounting records of respondent,in connection with the investigation of respondents 1990 income tax liability. BIR sent a letter torespondent requesting the latter to present for examination certain records and documents, but

respondent failed to present any document. Respondent received a Preliminary Assessment Noticedated 13 April 1994 for deficiency income tax inclusive of surcharge, interest, and compromisepenalty, arising from deductions that were disallowed for failure to pay the withholding tax andinterest expenses that were likewise disallowed. On the following day, 22 April 1994, respondentreceived a Formal Assessment Notice with Assessment Notice No. 000688-80-7333, dated 14 April1994, for deficiency income tax.

Phil Global filed two letters of protests, in both letters, respondent requested for the cancellation ofthe tax assessment. More than eight years after the assessment was presumably issued, respondentreceived from the CIR a Final Decision dated 8 October 2002 denying the respondents protest against

Assessment Notice No. 000688-80-7333, and affirming the said assessment in toto.

CTA rendered a Decision in favor of respondent on 9 June 2004. It decided that the protest letters

filed by the respondent cannot constitute a request for reinvestigation, hence, they cannot toll therunning of the prescriptive period to collect the assessed deficiency income tax. Thus, since more thanthree years had lapsed from the time Assessment Notice No. 000688-80-7333 was issued, the CIRsright to collect the same has prescribed in conformity with Section 269 of the National InternalRevenue Code of 1977.

Issues:

(1) Whether or not CIRs right to collect respondents alleged deficiency income tax is barred byprescription under Section 269(c) of the Tax Code of 1977

(2) Whether or not the prescription on assessment was suspended by virtue of the alleged request ofreinvestigation by Phil Global

Held: Petition was denied.

The law prescribed a period of three years from the date the return was actually filed or from the lastdate prescribed by law for the filing of such return, whichever came later, within which the BIR mayassess a national internal revenue tax. However, the law increased the prescriptive period to assess orto begin a court proceeding for the collection without an assessment to ten years when a false orfraudulent return was filed with the intent of evading the tax or when no return was filed at all. Insuch cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity,fraud or omission.

If the BIR issued this assessment within the three-year period or the ten-year period, whichever was

applicable, the law provided another three years after the assessment for the collection of the tax duethereon through the administrative process of distraint and/or levy or through judicialproceedings. The three-year period for collection of the assessed tax began to run on the date theassessment notice had been released, mailed or sent by the BIR.

The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did notdispute the CIRs claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrantof Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR,the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its


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Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-yearprescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax.

Court has also clarified that the statute of limitations on the collection of taxes should benefit both the

Government and the taxpayers further illustrated the harmful effects that the delay in the assessmentand collection of taxes inflicts upon taxpayers, that is for the purpose of expediting the collection oftaxes, so that the agency charged with the assessment and collection may not tarry too long or

indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and forthe taxpayer so that within a reasonable time after filing his return, he may know the amount of theassessment he is required to pay, whether or not such assessment is well founded and reasonable sothat he may either pay the amount of the assessment or contest its validity in court.

The Tax Code of 1977, as amended, provides instances when the running of the statute of limitationson the assessment and collection of national internal revenue taxes could be suspended, even in theabsence of a waiver, Among the exceptions, and invoked by the CIR as a ground for this petition, isthe instance when the taxpayer requests for a reinvestigation which is granted by the Commissioner.However, this exception does not apply to this case since the respondent never requested for a

reinvestigation.

Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment ofthe Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the

request for reconsideration and the request for reinvestigation.

Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a written

request for reconsideration or reinvestigation specifying the following particulars:

x x x x

For the purpose of protest herein

(a) Request for reconsideration-- refers to a plea for a re-evaluation of an assessment on the basis ofexisting records without need of additional evidence. It may involve both a question of fact or of lawor both.

(b) Request for reinvestigationrefers to a plea for re-evaluation of an assessment on the basis of

newly-discovered evidence or additional evidence that a taxpayer intends to present in theinvestigation. It may also involve a question of fact or law or both.

The main difference between these two types of protests lies in the records or evidence to beexamined by internal revenue officers, whether these are existing records or newly discovered oradditional evidence. A re-evaluation of existing records which results from a request forreconsideration does not toll the running of the prescription period for the collection of an assessedtax. Section 271 distinctly limits the suspension of the running of the statute of limitations toinstances when reinvestigation is requested by a taxpayer and is granted by the CIR.

In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requestsfor reconsideration. The CIRs allegation that there was a request for reinvestigation is inconceivablesince respondent consistently and categorically refused to submit new evidence and cooperate in anyreinvestigation proceedings.

The distinction between a request for reconsideration and a request for reinvestigation is significant. Itbears repetition that a request for reconsideration, unlike a request for reinvestigation, cannotsuspend the statute of limitations on the collection of an assessed tax. If both types of protest caneffectively interrupt the running of the statute of limitations, an erroneous assessment may neverprescribe. If the taxpayer fails to file a protest, then the erroneous assessment would become finaland unappealable. On the other hand, if the taxpayer does file the protest on a patently erroneousassessment, the statute of limitations would automatically be suspended and the tax thereon may becollected long after it was assessed. Meanwhile the interest on the deficiencies and the surchargescontinue to accumulate. And for an unrestricted number of years, the taxpayers remain uncertain and


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are burdened with the costs of preserving their books and records. This is the predicament that thelaw on the statute of limitations seeks to prevent.


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CIR VS ROYAL INTEROCEAN LINES

FACTS:

Both vessels of petitioner N.V. ReederijAmsterdam called on Philippine ports to load cargoesfor foreign destinations. The freight fees for these transactions were paid in abroad. In these twotransactions, petition Royal Interocean Lines acted as husbanding agent for a fee or commission on

said vessels. No income tax has been paid by Amsterdam on the freight receipts.

As a result, Commissioner of Internal Revenue filed the corresponding income tax returns forthe petitioner. Commissioner assessed petitioner for deficiency of income tax, as a non-resident

foreign corporation NOT engaged in trade or business. On the assumption that the said petitioner is aforeign corporation engaged in trade or business in the Philippines, petitioner Royal Interocean Linesfiled an income tax return of the aforementioned vessels and paid the tax in pursuant to theirsupposed classification.

On the same date, petitioner Royal Interocean Lines, as the husbanding agent of

Amsterdam, filed a written protest against the abovementioned assessment made by the respondentCommissioner. The protest was denied. On appeal, CTA modified the assessment by eliminating the50% fraud compromise penalties imposed upon petitioners. Petitioner still was not satisfied anddecided to appeal to the SC.

ISSUE: Whether or not N.V. Reederij Amsterdam should be taxed as a foreign corporation notengaged in trade or business in the Philippines?

HELD:

Petitioner is a foreign corporation not authorized or licensed to do business in the Philippines.It does not have a branch in the Philippines, and it only made two calls in Philippine ports, one in 1963and the other in 1964.In order that a foreign corporation may be considered engaged in trade or business, its businesstransactions must be continuous. A casual business activity in the Philippines by a foreign corporationdoes not amount to engaging in trade or business in the Philippines for income tax purposes. A foreigncorporation doing business in the Philippines is taxable on income solely from sources within the

Philippines.

It is permitted to claim deductions from gross income but only to the extent connected withincome earned in the Philippines. On the other hand, foreign corporations not doing business in thePhilippines are taxable on income from all sources within the Philippines . The tax is 30% (now 35%for non-resident foreign corp which is also known as foreign corp not engaged in trade or business) ofsuch gross income. (*take note that in a resident foreign corp, what is being taxed is the taxableincome, which is with deductions, as compared to a non-resident foreign corp which the tax base isgross income) Petiioner Amsterdam is a non-resident foreign corporation, organized and existing under the lawsof the Netherlands with principal office in Amsterdam and not licensed to do business in thePhilippines.


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LHUILLER VS CIRFACTS:

This case stemmed from an assessment for deficiency documentary stamp taxes on pawn

ticketsissued by petitioners for the year 1997. The CTA ruled for the cancellation of the assessment byholdingthat a pawn ticket is neither a security not a printed evidence of indebtedness and therefore,cannot besubject to DST. Ruling on the petition filed by respondent, the CA reversed the CTA decision

andsustained the assessment issued by the Commissioner. The CA ratiocinated that a pawn ticket, perse isnot subject to DST; rather, it is the transaction involved, which in this case is pledge, that is beingtaxed Not convinced, petitioner filed with the SC a petition for review on certiorari raising this sole

ISSUE: Whether the assessment for deficiency documentary stamp is valid.

HELD:

True, the law does not consider said ticket as an evidence of security ofindebtedness. However,for

purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concludinga contract of pledge. At any rate, it is nor said ticket that creates the pawnshopsobligation to pay DSTbut the exercise of the privilege to enter into a contract of pledge. There istherefore no basis forpetitioners assertion that a DST is literally a tax on a document and that notax may be imposed on a

pawn ticket.The SC in no certain terms said that contracts of pledge entered into by pawnshops aresubject toDST. The DST is essentially an excise tax; it is not an imposition on the document itself buton theprivilege to enter into a taxable transaction of pledge. This is clear under Section 195 of the

National Internal Revenue Code.IN a motion for reconsideration that was filed, the SC issued aResolution on September 11, 2006ordering the deletion of the surcharges and interest on theassessment. It took cognizance of theexistence of earlier rulings issued by the Commissioner thatpawnshop tickets are not subject to tax onthe basis of previous interpretation of government agenciestasked to implement the tax law, are sufficient justification to delete the imposition of surcharges andinterest.(citing Connell Bros. Co. (Phil.) vs.Collector, 119 Phil. 40, 1963; Tuazon, Jr. vs. ingad, 157Phil. 159; and Cir vs. Republic Cement Corporation, 124 SCRA 46)arellano lawissue:Are pawn ticketsubject to DST?The SC affirmed the decision of the CA and made the following justification, viz:


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CIR VS. FORTUNE TOBACCO CORPORATION

Facts: Respondent FTC is a domestic corporation that manufactures cigarettes packed by machine

under several brands. Prior to January 1, 1997, Section 142 of the 1977 Tax Code subjected saidcigarette brands to ad valorem tax. Annex D of R.A. No. 4280 prescribed the cigarette brands taxclassification rates based on their net retail price. On January 1, 1997, R.A. No. 8240 took effect. Sec.

145 thereof now subjects the cigarette brands to specific tax and also provides that: (1) the excise taxfrom any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shallnot be lower than the tax, which is due from each brand on October 1, 1996; (2) the rates of excisetax on cigarettes enumerated therein shall be increased by 12% on January 1, 2000; and (3) the

classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as setforth in Annex D shall remain in force until revised by Congress.

The Secretary of Finance issued RR No. 17-99 to implement the provision for the 12% excise taxincrease. RR No. 17-99 added the qualification that the new specific tax rate xxx shall not be lower

than the excise tax that is actually being paid prior to January 1, 2000. In effect, it provided that the12% tax increase must be based on the excise tax actually being paid prior to January 1, 2000 andnot on their actual net retail price.

FTC filed 2 separate claims for refund or tax credit of its purportedly overpaid excise taxes for themonth of January 2000 and for the period January 1-December 31, 2002. It assailed the validity of RR

No. 17-99 in that it enlarges Section 145 by providing the aforesaid qualification. In this petition,petitioner CIR alleges that the literal interpretation given by the CTA and the CA of Section 145 wouldlead to a lower tax imposable on 1 January 2000 than that imposable during the transition period,which is contrary to the legislative intent to raise revenue.

Issue: Should the 12% tax increase be based on the net retail price of the cigarettes in the market asoutlined in Section 145 of the 1997 Tax Code?

Held: YES. Section 145 is clear and unequivocal. It states that during the transition period, i.e., within

the next 3 years from the effectivity of the 1997 Tax Code, the excise tax from any brand of cigarettesshall not be lower than the tax due from each brand on 1 October 1996. This qualification, however, isconspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettespacked by machine, among others, effective on 1 January 2000.

Clearly, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the12% increase effective on 1 January 2000 without regard to whether the revenue collection startingfrom this period may turn out to be lower than that collected prior to this date.

The qualification added by RR No. 17-99 imposes a tax which is the higher amount between the advalorem tax being paid at the end of the 3-year transition period and the specific tax under Section145, as increased by 12%a situation not supported by the plain wording of Section 145 of the 1997

Tax Code. Administrative issuances must not override, supplant or modify the law, but must remainconsistent with the law they intend to carry out.

Revenue generation is not the sole purpose of the passage of the 1997 Tax Code. The shift from thead valorem system to the specific tax system in the Code is likewise meant to promote faircompetition among the players in the industries concerned and to ensure an equitable distribution ofthe tax burden.


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CIR VS Lincoln Philippine Life Insurance Company, Inc.

FACTS:

Prior to 1984, Lincoln Philippine Life Insurance Company, Inc. (now called Jardine-CMA Life InsuranceCompany, Inc.) used to issue policies called Junior Estate Builder Policy. A clause therein provides

for an automatic increase in the amount of life insurance coverage upon attainment of a certain ageby the insured without the need of issuing a new policy. The clause was to take effect in the year1984. Documentary stamp taxes due on the policy were paid by Lincoln Philippine only on the initialsum assured.

When the clause became effective in 1984, the Commissioner of Internal Revenue assessed anadditional tax on the increased amount of the coverage of the said policies. Said tax was to cover thedeficiency documentary stamps tax for said year. The Court of Appeals ruled that there is only onepolicy and the automatic increase is not a separate policy; that said increase of coverage is notcovered by another documentary stamp tax.

ISSUE: Whether or not there is only one policy.

HELD: Yes. Section 49, Title VI of the Insurance Code defines an insurance policy as the writteninstrument in which a contract of insurance is set forth. Section 50 of the same Code provides that the

policy, which is required to be in printed form, may contain any word, phrase, clause, mark, sign,symbol, signature, number, or word necessary to complete the contract of insurance. It is thus clearthat any rider, clause, warranty or endorsement pasted or attached to the policy is considered part ofsuch policy or contract of insurance.

The subject insurance policy at the time it was issued contained an automatic increase clause.Although the clause was to take effect only in 1984, it was written into the policy at the time of itsissuance. The distinctive feature of the junior estate builder policy called the automatic increaseclause already formed part and parcel of the insurance contract, hence, there was no need for anexecution of a separate agreement for the increase in the coverage that took effect in 1984 when theassured reached a certain age.

The said increase however is imposable with documentary stamp taxes. The original documentarystamps tax paid by Lincoln Philippine covers the original amount of the policies without the projectedincrease. The said increase was already definite at the time of the issuance of the policy. Thus, theamount insured by the policy at the time of its issuance necessarily included the additional sumcovered by the automatic increase clause because it was already determinable at the time thetransaction was entered into and formed part of the policy.

While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumventedin order to evade the payment of just taxes. In the case at bar, to claim that the increase in theamount insured (by virtue of the automatic increase clause incorporated into the policy at the time ofissuance) should not be included in the computation of the documentary stamp taxes due on thepolicy would be a clear evasion of the law requiring that the tax be computed on the basis of theamount insured by the policy.

Documents

Tax 2 Digest to Be Submitted