Tax Cases New

7/27/2019 Tax Cases New

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Definition of 'Tax Evasion'An illegal practice where a person, organization or corporation intentionally avoids paying

his/her/its true tax liability. Those caught evading taxes are generally subject to criminal

charges and substantial penalties.

Tax Evasion

The process whereby a person, through commission ofFraud,unlawfully pays less tax than the lawmandates.

Tax evasion is a criminal offense under federal and state statutes. A person who is convicted is subject toa prison sentence, a fine, or both. The failure to file a federal tax return is a misdemeanor, but aconsistent pattern of failure to file for several years will constitute evidence that these failures were part ofa scheme to avoid the payment of taxes. If this pattern is established, the violator may be charged with afelony under section 7201 of theInternal Revenue Code.

PAL vs. EDU, 164 SCRA 320

FACTS:

Philippine Airlines Inc. is engaged in air transportation business under a legislative franchise wherein it is

exempt from tax payment. PAL has not been paying motor vehicle registration since 1956. Subsequently,

the Land Registration Commissioner required all tax exempt entities including PAL to pay motor vehicle

registration fees.

ISSUE:

Whether or not registration fees as to motor vehicles are taxes to which PAL is exempted.

RULING:

Taxes are for revenue whereas fees are exactions for purposes of regulation and inspection, and are for

that reason limited in amount to what is necessary to cover the cost of the services rendered in that

connection. It is the object of the charge, and not the name, that determines whether a charge is a tax or a

fee. The money collected under Motor Vehicle Law is not intended for the expenditures of the MV Office

but accrues to the funds for the construction and maintenance of public roads, streets and bridges. As fees

are not collected for regulatory purposes as an incident to the enforcement of regulations governing the

operation of motor vehicles on public highways but to provide revenue with which the Government is to
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construct and maintain public highways for everyones use, they are veritable taxes, not merely fees .

PAL is thus exempt from paying such fees, except for the period between June 27, 1968 to April 9, 1979

where its tax exemption in the franchise was repealed.

PAL VS. EDU, 164 SCRA 320 (1988)

Facts of the case: The disputed registration fees were imposed by the commissioner Elevate pursuant to

Section 8, RA 4136, the Land Transportation and Traffic Code. PAL as a corporation is engaged in the air

transportation business under the legislative franchise. Under its franchise, PAL is exempt from the

payment of taxes. In 1971 however, appellee Commissioner elevate issued a regulation requiring all tax

exempt entities, among them PAL to pay motor vehicle registration fees. Despite PALs protest, appellee

refused to register the appellants motor vehicles unless the amounts imposed were paid. PAL thus paid,

under protest, P19,529.75 as registration fees of its motor vehicles. After paying under protest, PAL wrote

to Commissioner Edu demanding a refund of the amounts paid, invoking Calalang vs. Lorenzo where it

was held that motor vehicle registration fees are in reality taxes from the payment of which PAL is

exempt by virtue of its legislative franchise.Edu denied request for refund based on Republic v. Phil.

Rabbit Bus, that motor vehicle registration fees are regulatory and not revenue measures and, therefore,

do not come within the exemption granted to PAL under itsfranchise.PAL filed the complaint against

LTC Commissioner EDu and National Treasurer Carbonell.

ISSUE: What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

RULING ON TAX VS. LICENSE AND REGULATORY FEE

SC ruled that motor vehicles registration fees are TAXES. Fees may be regarded as taxes even though

they also serve as instruments of regulation because taxation may be made as an implementation of the

States police power. But if the purpose is primarily REVENUE, or if revenue is atleast, one of the real

and substantial purposes, then the exaction is properly called a TAX.

RULING ON PURPOSES OF TAX, OBJECTIVE OF TAXATION: GENERAL, FISCAL REVENUE

The Legislative intent and purpose behind the law requiring owners of vehicles , to pay for their

registration is mainly to raise funds for the construction and maintenance of highways and, to a much

lesser degree, pay for the operating expenses of the administering agency. It is possible for an exaction to

be both a tax and a regulation. License fees are charges, looked to as a source of revenue as well as a

means of regulation. The fees may be properly regarded as taxes eventhough they also serve as an


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instrument of regulation. If the purpose is primarily revenue, or if revenue is atleast one of the real and

substantial purposes, then the exaction is properly called a TAX.

RULING ON NON-DELEGABILITY OF THE POWER TO TAX

It is clear from the provisions of section 73 of Commonwealth Act 123 and section 61 of the Land

Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners of

vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of

highways and to a much lesser degree, pay for the operating expenses of the administering agency. There

is a valid delegation to the Land Transportation Office. Simply put, if the exaction under RA 4136 were

merely a regulatory fee, the imposition on RA 5448 need not be an additional tax. RA4136 also speaks

of otherfees such as the special permit fees for certain types of motor vehicles (sec.10) and additional

fees for change of registration (sec.11). These are not to be understood as taxes because such fees are very

minimal to be revenue-raising. Thus they are not mentioned by Sec. 59 (b) of the Code as taxes like the

motor vehicle registration fee and chauffers license fee. Such fees are to go into the expenditures of the

Land Transportation Commission as provided for in the last proviso of Sec. 61.Motor vehicle registration

fees are at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes

intended for additional revenues of government even if one-fifth or less of the amount collected is set

aside for the operating expenses of the agency administering the program.

COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORPGR 148512June 26, 2006Azcuna,

J.:

FACTS: This is a petition for review under Rule 45 of Rules of Court seeking the nullification of CA

decision granting respondents claim for tax equal to the amount of the 20% that it extended to senior

citizens on the latters purchases pursuant to Senior Citizens Act. Respondent deducted the total amount

of Php219,778 from its gross income for the taxable year 1995 whereby respondent did not pay tax for

that year reporting a net loss of Php20,963 in its corporate income tax. In 1996, claiming that the

Php219,778 should be applied as a tax credit, respondent claimed for refund in the amount of Php150,

193.

ISSUE: Whether or not the 20% discount granted by the respondent to qualified senior citizens may be

claimed as tax credit or as deduction from gross sales?

RULING:Tax credit is explicitly provided for in Sec 4 of RA 7432. The discount given to Senior

citizens is a tax credit, not a deduction from the gross sales of the establishment concerned. The tax credit

that is contemplated under this Act is a form of just compensation, not a remedy for taxes that were


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erroneously or illegally assessed and collected. In the same vein, prior payment of any tax liability is a

pre-condition before a taxable entity can benefit from tax credit. The credit may be availed of upon

payment, if any. Where there is no tax liability or where a private establishment reports a net loss for the

period, the tax credit can be availed of and carried over to the next taxable year.

ClR vs. Central Luzon Drug Corporation

Central Luzon Drug Corporation is a retailer of medicines and other pharmaceutical products. For the

period January 1995 to December 1995, pursuant to the mandate of Sec.4(a) of Republic Act No.7432

,otherwise known as the Senior Citizens Act ,it granted a 20% discount on the sale of medicines to

qualified senior citizens amounting to P219 ,778.00.lt then deducted the same amount from its gross

income for the taxable year 1995 ,pursuant to Revenue Regulations No.2-94implementing the Senior

Citizens Act ,which states that the discount given to the senior citizens shall be deducted by the

establishment from its gross sales for value-added tax and other percentage tax purposes. For the said

taxable period, Central Luzon Drug reported a net loss of P20 ,963.00 in its corporate income tax returns

,thus it did not pay income tax for 1995.Subsequently,Central Luzon Drug filed a claim for refund in the

amount ofPI50 ,193.00 ,claiming that according to Sec. 4(a)of the Senior Citizens Act ,the amount of

P219 ,778.00 should be applied as tax credit. The Commissioner of Internal Revenue(CIR) was not able

to decide the claim on time ,hence, Central Luzon Drug filed a Petition for Review with the Court ofTax

Appeals. The latter dismissed the petition, declaring that even if the law treats the 20% discount granted

to senior citizens as a tax credit, the same cannot apply when there is no tax liability or the amount of the

tax credit is greater than the tax due. In the latter case , the tax credit will only be to the extent of the tax

liability. Furthermore , the law does not sate that a refund can be claimed by the establishment concerned

as an alternative to tax credit. Central Luzon Drug filed a Petition for Review with the Court of Appeals.

The appellate court held that the 20% discount given to senior citizens which is treated as a tax credit is

considered just compensation and ,as such, may be carried over to the next taxable period if there Is no

current tax liability.

Whether or not the 20% discount granted by the Central Luzon Drug to qualified senior citizens pursuant

to Section 4(a) of the Senior Citizens Act may be claimed as a tax credit or as a deduction from gross

sales in accordance with Section 2(1) of Revenue Regulations No.2-94.

!

The Petition is denied.

!


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Section 4(a) of the Senior Citizen Acts provides:

"Section

4.

Privileges for the Senior Citizens.- The senior citizens shall be entitled to the following:(a) the grant of

twenty percent (20%) discount from all establishments relative to utilization of transportations services

,hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines

anywhere in the country: Provided, That private establishments may claim the cost as tax credit. "

The above provision explicitly employed the term ''taxcredit." Nothing in this provision suggests for it to

mean a "deduction" from gross sales. Thus ,the 20% discount required by the law to be given to senior

citizens is tax credit ,not a deduction from the gross sales of the establishment concerned. As a corollary

to this ,the definition of''tax credit" found in Sec. 2(1) of Revenue Regulations No. 2 -94 is erroneous as it

refers to tax credit as the amount representing the 20% discount that "shall be deducted by the said

establishment from their gross sales for value added tax and other percentage tax purposes."When the law

says that the cost of the discount may be claimed as a tax credit, it means that the amount, when claimed,

shall be treated as a reduction from any tax liability. The law cannot be amended by a mere regulation.

Finally, for purposes of clarity, Section 229 of the Tax Code does not apply to cases that fall under Sec. 4

of the Senior Citizens Act because the former provision governs exclusively all kinds of refund or credit

internal revenue taxes that were erroneously or illegally imposed an collected pursuant to the Tax Code

while the latter extends the tax credit benefit to the private establishments concerned even before tax

payments have been made. The tax credit that is contemplated under the Senior Citizens Act is a form of

just compensation, not a remedy for taxes that were erroneously or illegally assessed and collected. In the

same vein, proper payment of any tax liability is not a precondition before taxable entity can benefit from

the tax credit. The credit may be availed of upon payment of the tax due ,if any. Where there is no tax

liability or where a private establishment reports a net loss for the period, the tax credit can be availed of

and carried over the next taxable year.

Conwi vs. CTA

Petitioners are Filipino Citizens and employees of Procter and Gamble Philippines who were assigned for

certain periods in other subsidiaries of Procter and Gamble outside the Philippines and were therefore,

paid in US dollars as compensation for their services in their foreign assignments. When petitioners filed

their income tax returns, they computed their returns applying the dollar-to-peso conversion provided in

BIR ruling no. 70-027 as follows; (1) From January 1-February20,1970 at the conversation rate of Php


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3.90 to US $ 1.00 and (2)From February 21 to December 31, 1970 at the conversation rate of Php 6.25 to

US $ 1.00. However, upon the release of their returns, the Commissioner based his computation of

Section 48of RA No. 265 in relation to Section 6 of Commonwealth Act No.699 as basis for converting

their dollar income into Philippine Peso which resulted to overpayments, refunds, and/or tax credit.

Arising from this, petitioners filed their claims before the CTA, which denied their petitions therefore

giving rise to this case.

Whether or not the petitioner's dollar earnings are receipts derived from foreign exchange transactions;

Whether or not the proper rate of conversion of petitioner's dollar earnings for tax purposes in the

prevailing free market rate of exchange and not the par value of the peso; Whether or not the par value of

the peso to convert petitioner's dollar earnings for tax purposes into Philippine Pesos is "unrealistic" and

therefore, the prevailing free market rate should be the rate used. The Supreme Court held that CTA erred

in deciding that the petitioner's dollar earnings are derived from foreign exchange transactions, being that

the petitioners were "assigned" to the foreign subsidiaries of Procter and Gamble, they were earning in

their assigned nation's currency and were also spending their currency, therefore, there was no conversion

from one currency to another. The petitioners argued that Circular No. 289 shall be applied to them which

provides for the specific instances when the par value of the peso shall not be the conversion rate used.

The Supreme Court decided that the petitioners erred in such claim, being that Circular No. 289 shall only

be applied to export products, invisibles, receipts of foreign exchange, foreign exchange payments, new

foreign borrowing and investments, nothing by way of income tax payments. Petitioners also claimed that

conversion is unrealistic and that there were no remittances and acceptances of their salaries and wages in

US dollar into the Philippines, therefore they are exempted. The Supreme Court held that pursuant to

RMC No.7-71 and 41-71 providing that a uniform exchange rate for internal revenue tax purpose, is valid

and therefore is applicable to them, being citizens of the Philippines, and as provided for in Sec 21 of the

NIRC. Thus, the petitioner's claim are denied for lack of merit.

CONWI vs. CTA213 SCRA 83NOCON, August 31, 1992

NATURE

Petition for Review on Certiorari

FACTS

-Petitioners were Filipino citizens who were employees of P & G Phils. During 1970 to 1971, they were

assigned to other subsidiaries of P & G outside RP, thus, were paid in US dollars as compensation for

services in their foreign assignments. So when they filed their income tax returns (ITR) for 1970, they


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computed the tax due by applying the dollar-to-peso conversation on the basis of the floating rate

ordained under BIR Ruling No. 70-27 (rates under Revenue Memorandum Circulars Nos. 7-71 and 41-

71) dated May 14, 1970

1.The same conversion rate was used for their 1971 ITR.-However, on February 8, 1973, the petitioners

filed with CIR an amended ITR for 1970 & 1971 which used par value of the peso as prescribed in RA

265,Sec.48 in relation to CA 699, Sec.6 for converting their dollar income into pesos for purposes of

computing and paying the corresponding income tax due from them. The amended ITR resulted into

alleged overpayments/refund and/or tax credit. Therefore, the petitioners claimed for refund from CIR.-

CTA: the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the

dollar earnings of petitioners are the rates prescribed under RMC Nos. 7-71 and 41-71 .Claim for refund

denied.

ISSUE

WON the petitioners are entitled to refund (What exchange rate should be used to determine the peso

equivalent of the foreign earnings of petitioners for income tax purposes)

HELD

NO. Reasoning.

Definition of Income:

an amount of money coming to a person or corporation within a specified time, whether as payment for

services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent.

Income can also be thought of as a flow of the fruits of one's labor.

Definition of foreign exchange transactions

(petitioners claim that their dollar earnings were not foreign exchange transactions): a transaction in

foreign exchange, foreign exchange being "the conversion of an amount of money or currency of one

country into an equivalent amount of money or currency of another." There was no conversion

(petitioners earned dollars, also spent dollars during their stay abroad) so no foreign exchange transaction

On what should be the basis for conversion: RMCs 7-71 and 41-71 CB Circular No. 289: shows that the

subject matters involved therein are export products, invisibles, receipts of foreign exchange, foreign

exchange payments, new foreign borrowing and investments nothing by way of income tax payments.


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Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to them, the

par value of the peso should be the guiding rate used for income tax purposes.

RMCs 7-71 and 41-71: issued to prescribe a uniform rate of exchange from US dollars to Philippine pesos

for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971,respectively. Said revenue

circulars were a valid exercise of the authority given to the Secretary of Finance by the Legislature which

enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said code until

revoked by the Secretary of Finance himself. Petitioners, who were arguing that there were no remittances

and acceptances of their salaries and wages in US dollars into RP, they are exempt from the coverage of

the RMCs, are NOT EXEMPT from the RMCs as they are citizens of the Philippines, and their income,

Within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC2, as

amended, does not brook any exemption.

Disposition.

WHEREFORE" the petitions are denied for lack of merit. The dismissal by the respondent Court of Tax

Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971is AFFIRMED.

Costs against petitioners. SO ORDERED.

*Para di magulo footnotes*

RMC 7-71

SUBJECT: Prescribing a uniform rate for U.S. Dollars to Philippine Pesos for Internal Revenue Tax

Purposes. TO: All Internal Revenue Officers and others concerned: For the Purpose of establishing a

uniform rate of exchange to U.S. dollars to Philippine pesos for internal revenue tax purposes for the year

1970, the following schedule of exchange rates are hereby prescribed for reference and guidelines of all

concerned; Schedule of Exchange Rates1. In all cases of transactions involving remittances and

acceptances of U.S. dollars occurring during the period from January 1 to February 20, 1970, the official

rate of exchange of P3.90 to $1.00 shall be used.2. The case of transactions involving remittances or

acceptance of U.S. dollars occurring after February 20, 1970the following rules shall govern:(a) In the

case of regular or habitual transactions involving remittances and acceptances of U.S. dollars, such as

salaries, royalty payments and the like, the uniform rate of P6.25 to U.S. $1.00 shall be used; provided

however, that an the case of transactions involving the computation of advance sales or compensating

taxes, the rates used by the Bureau of Customs at the time of the payment of such taxes shall prevail.(b) In

the case of an isolated or casual transaction involving remittances or acceptances of U.S. dollars, such as

dividends, occasional sales of property and the like the exchange rate quoted by the Foreign Exchange


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Department of the Central bank of the Philippines prevailing at the time of such remittances or acceptance

shall be used. Enforcement and Publicity All internal revenue officers and others charged with the

enforcement of internal revenue laws are enjoined to enforce the provisions of this circular accordingly

and to give as wide a publicity as possible.(Sgd.) MISAEL P. VERA Commissioner of Internal Revenue

APPROVED:(Sgd.) CESAR VIRATA Secretary of Finance"

RMC 41-71

SUBJECT: Prescribing a uniform exchange rate for U.S.dollars to Philippine pesos for internal revenue

tax purposes. TO: All Internal Revenue Officers and othersconcerned:For the purpose of establishing a

uniform rate of exchange to U.S. dollars or other foreign currencies toPhilippine pesos for internal

revenue tax purposes for theyear 1971, the following schedule of exchange rates arehereby prescribed for

reference and guidelines of allconcerned:Schedule of Exchange RatesIn all cases of transactions involving

remittances andacceptances of U.S. dollars and other foreign currenciesoccurring during the year 1971,

the following rules shallgovern:(a) In the case of regular or habitual transactionsinvolving remittances or

acceptances of US dollars or otherforeign currencies such as salaries, wages, fees or otherrenominations

for personal services, royalties, rents,

interests or other fixed or determinable annual or periodicalincome, the uniform rate of P6.25 to U.S.

$1.00 shall beused.(b) In the case of transactions involving thecomputation of advance sales or

compensating taxes, therate of exchange used by the Bureau of Customs at the timeof the payment of

such taxes shall prevail.(c) In the case of an isolated or casual transactioninvolving remittances of

acceptances of U.S. dollars or otherforeign currencies such as dividends, interests, capital gainsor other

gains from occasional sales of property and the like,the exchange rate quoted by the Foreign

ExchangeDepartment of the Central Bank of the Philippines prevailingat the time of such remittances or

acceptances shall beused.(d) Where the currency involved is other than U.S.dollars, the foreign currency

shall first be converted to U.S.dollars at the prevailing rate of exchange between the twocurrencies. The

resulting amount shall then be converted toPhilippine pesos in accordance with the above-

promulgatedrules.All internal revenue officers and others charged withthe enforcement of internal

revenue laws are enjoined toenforce the provisions of this circular accordingly and to giveit as wide a

publicity as possible.

Conwi, et.al. vs. CTA and CIR

Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation,

subsidiary of Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were


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assigned to other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were

paid US dollars as compensation.

Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso

conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened

ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged

overpayments, refund and/or tax credit, for which claims for refund were filed.

CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income

tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars

Nos. 7-71 and 41-71. The refund claims were denied.

Issues:

(1) Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions;

NO.

(2) Whether or not the proper rate of conversion of petitioners' dollar earnings for tax purposes in the

prevailing free market rate of exchange and not the par value of the peso; YES.

Held: For the proper resolution of income tax cases, income may be defined as an amount of money

coming to a person or corporation within a specified time, whether as payment for services, interest or

profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be

though of as flow of the fruits of one's labor.

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign

exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign

exchange, foreign exchange being "the conversion of an amount of money or currency of one country into


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an equivalent amount of money or currency of another." When petitioners were assigned to the foreign

subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO

spending in said currency. There was no conversion, therefore, from one currency to another.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &

Gamble. It was a definite amount of money which came to them within a specified period of time of two

years as payment for their services.

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section

338 thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to

effectively enforce its provisions pursuant to this authority, Revenue Memorandum Circular Nos. 7-71

and 41-71 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for

INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue

circulars were a valid exercise of the authority given to the Secretary of Finance by the Legislature which

enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said code until

revoked by the Secretary of Finance himself.

Petitioners are citizens of the Philippines, and their income, within or without, and in these cases wholly

without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

DENIED FOR LACK OF MERIT.

Conwi v. Court of Tax Appeals | Nocon

G.R. Nos. 48532 & 48533, August 31, 1992 | 213 SCRA 83

Keywords: Procter & Gamble, Filipino citizens temporarily working abroad earning in dollars, taxable

income

RATIO DECIDENDI

Income of Filipino citizens temporarily residing in a foreign country, even if totally derived from outside

the Philippines, is subject to tax by virtue of Sec. 21, NIRC, viz: A tax is hereby imposed upon the


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taxable net income received x x x from all sources by every individual, whether a citizen of the

Philippines residing therein or abroad x x x (italics mine)

FACTS

Hernando Conwi et al. (Conwi et al.) are employees of Procter & Gamble Philippine

Manufacturing Corporation, a local subsidiary of U.S.-based

Procter & Gamble.

Conwi et al. were temporarily assigned to subsidiaries of Procter & Gamble outside of the

Philippines, where they were paid in U.S. dollars.

It is claimed that they earned and spent their money exclusively abroad, and that they did not

remit money back into the Philippines during the time they were outside of the country earning in dollars.

In the years 1970 and 1971, Conwi et al., since they were earning in U.S. currency, in order to

pay their income tax liabilities in Philippine peso, used the prevailing free market rate of conversion

prescribed under a Bureau of Internal Revenue ruling and two Revenue Memorandum Circulars.

However, in 1973, Conwi et al. filed with the Commissioner of Internal Revenue (CIR) amended income

tax returns for the said years, this time using the par value of the peso as conversion rate. The adjustment

caused a disparity between what was initially paid and what they were now claiming to be their actual tax

liabilities. Consequently, they asked for a refund of the overpayment.

Even before the CIR could rule on the matter, Conwi et al. filed a petition for review before the

Court of Tax Appeals (CTA), which eventually denied their claim for tax refund and/or tax credit.

Aggrieved, Conwi et al., via a petition for review, elevated the matter to the Supreme Court.

ISSUES & ARGUMENTS

W/N the ruling and circulars above apply to Conwi et al.

(Note: Conti et al. argue that since there were no remittances and acceptances of their salaries and wages

in U.S. dollars into the Philippines, they are exempt from the coverage of such ruling and circulars.)


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HELD & RATIONALE

YES, the said ruling and circulars apply to Conwi et al.

Income may be defined as an amount of money coming to a person or corporation within a

specified time, whether as payment for services, interest, or profit from investment. x x x Income can

also be thought of as a flow of the fruits of ones labor. (See pages 87-88 of the case)

The dollar earnings of Conwi et al. are fruits of their labor in the foreign subsidiaries of Procter &

Gamble. They were given a definite amount of money which came to them within a specified period of

time as payment for their services.

Sec. 21, NIRC, states: A tax is hereby imposed upon the taxable net income received x x x from

all sources by every individual, whether a citizen of the Philippines residing therein or abroad x x x

As such, their income is taxable even if there were no inward remittances during the time they

were earning in dollars abroad.

The ruling and the circulars are a valid exercise of power on the part of the Secretary of Finance

by virtue of Sec. 338, NIRC, which empowers him to promulgate all needful rules and regulations to

effectively enforce its provisions.

Besides, they have already paid their taxes using the prescribed rate of conversion. There is no

need for the CIR to give them a tax refund and/or credit.

FALLO

Petition of Conwi et al. DENIED. The denial of their claim for tax refund and/or credit by the CTA is

AFFIRMED.

MADRIGAL VS. RAFFERTY

The essenti al dif ference between capital and income is that capital is a fund; income is a flow. A f und

of property existing at an instant of time is called capital. A f low of services rendered by that capital by

the payment of money from it or any other benef it rendered by a fund of capital in relation to such

fund through a peri od of time is call ed income. Capital i s wealth, whil e income is the service of wealth.


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FACTS:

Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage was

contracted under the provisions of law concerning conjugal partnership

On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73

Vicente Madrigal was contending that the said declared income does not represent his income for the

year 1914 as it was the income of his conjugal partnership with Paterno. He said that in computing for his

additional income tax, the amount declared should be divided by 2.

The revenue officer was not satisfied with Madrigals explanation and ultimately, the United States

Commissioner of Internal Revenue decided against the claim of Madrigal.

Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged to have

been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing

for the additional income tax.

HELD:

No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income

and not upon capital and property.

The essential difference between capital and income is that capital is a fund; income is a flow. A fund of

property existing at an instant of time is called capital. A flow of services rendered by that capital by the

payment of money from it or any other benefit rendered by a fund of capital in relation to such fund

through a period of time is called income. Capital is wealth, while income is the service of wealth.

As Paterno has no estate and income, actually and legally vested in her and entirely distinct from her

husbands property, the income cannot properly be considered the separate income of the wife for the

purposes of the additional tax.


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To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing

that he has a conjugal partnership with his wife. However, the court ruled that the one that should be

taxed is the income which is the flow of the capital, thus it should not be divided into 2.

Madrigal vs Rafferty

Vicente Madrigal and Susana Paterno, married underconjugal partnership filed a sworn declaration with

the Collectorof Internal Revenue showing that his net income for the year being Php 296,302.73.

Subsequently, Madrigal submitted a claimthat the indicated income was in fact the income of the

conjugalpartnership existing between him and his wife. He furtherargued that the income should be

divided into two parts; one tohis wife and one onhiswife, Susana. The General Questions wasthen

submitted to the Attorney General of the Philippine Islandswhich decided in favor of Madrigal, in which

case, the Collectorof Internal Revenue forwarded the case to the United StatesTreasury Department where

it was made to find that;Php 362,407.67- profits made by Vicente Madrigal inhis coal and shipping

business;Php 4,086.50 were profits made by Susana Paternoin her embroidery business; Php16,687.80

were profits made by VicenteMadrigal in a pawnshop business;This in sum is Php 383,181.97-

representing theGross Income of Vicente and Susana Paterno.Generaldeductions-Php 86,879.24, resulting

to anincome of Php296,30273As a result, other specific deductions were included; (1)Php 16,687.80 the

taxto be made at source and (2) Php 8,000exemption granted to Vicente Madrigal and

SusanaPaterno,husband and wife with then a remainder of Php 271,614.93.Thedispute was then found to

be in favor of the defendants.

Whether or not the argument of the plaintiff as to whether theincometaxof husband and wife should be

divided into twoequal parts,because of the conjugal partnership existing between them (sociedad de

gananciales) thus having separate income tax returns

As provided in a regulation of the US TreasuryDepartment states that; "If a wife has a separate estate

managed by herself as her own property, and receives an income of morethan $3,000, she may make

return of her own income, and if thehusband has other net income, making the aggregate of bothincomes

more than $4,000, the wife's return should be attachedto the return of her husband, or his income should

be included inher return, in order that a deduction of $4,000 may be ,madefrom the aggregate of both

incomes. In the present case, Vicenteand Susana is governed by the conjugal partnership of

marriage,therefore the regulation stated above is not applicable. SusanaPaterno has no absolute right to

one half of the income ofconjugal partnership. Not being seized of a separate estate, shecannot make a

separate return in order to receive benefit of theexemption which would give rise to a benefit of


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exemption. Bylaw, husband and wives are only entitled to Php 8,000 exemption, therefore, there can be

no additional claim forVicente Madrigal and Susana Paterno.

Nestle Philippines, Inc. vs. Court of Appeals

G.R. No. 134114. July 6, 2001.

Facts:

Petitioner Nestle Philippines, Inc. transacted sixteen separate importations of milk and milk products from

different countries between the period of July and November 1984. It paid the corresponding customs

duties and advance sales taxes to the Collector of Customs of Manila for each transaction based on the

published Home Consumption Value (HCV) as indicated in the Bureau of Customs Revision Orders, but

it seasonably filed the corresponding protests before the said Collector of Customs. In the said protests,

petitioner claimed for the refund of the alleged overpaid import duties and advance sales taxes. With

regards to the advance sales taxes, the Court of Tax Appeals eventually ruled in favor of the petitioner.

However, the Collector of Customs failed to render a decision on the sixteen protest cases for almost six

years for the alleged overpaid customs duties. In order to prevent the claims from becoming stale on the

ground of prescription, petitioner immediately filed a petition for review with the Court of Tax Appeals

(CTA). The CTA dismissed the said petition for want of jurisdiction. The issue was raised to the Court of

Appeals by way of petition for review, but it was also dismissed for failure to exhaust administrative

remedies.

Issue:

Whether or not the petitioners claims are governed by the rule on quasi-contracts or solutio

indebiti which prescribes in six (6) years under Article 1145 of the New Civil Code.

Held:

No. The Supreme Court ruled that the rule on quasi-contracts or solution indebiti is not applicable in this

case. In order for the rule on solution indebiti to apply, it is an essential condition that petitioner must first


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show that its payment of the customs duties was in excess of what was required by the law at the time

when the subject sixteen importations of milk and milk products were made. Unless shown otherwise, the

disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs.

In the present case, there is no factual showing that the collection of the alleged overpaid customs duties

was more than what is required of the petitioner when it made the aforesaid separate importations. There

is no factual finding yet by the government agency concerned that petitioner is indeed entitled to its claim

of overpayment and, if true, for how much it is entitled. It bears stress that in determining whether or not

petitioner is entitled to refund of alleged overpayment of customs duties, it is necessary to determine

exactly how much the Government is entitled to collect as customs duties on the importations. Thus, it

would only be just and fair that the petitioner-taxpayer and the Government alike be given equal

opportunities to avail of the remedies under the law to contest or defeat each other's claim and to

determine all matters of dispute between them in one single case. If the State expects its taxpayers to

observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in

refunding excess payments, if truly proven, of such taxes. Indeed, the State must lead by its own example

of honor, dignity and uprightness.

Thus, the remand of this case to the CTA is warranted for the proper verification and determination of the

factual basis and merits of the petition and in order that the ends of substantial justice and fair play may

be subserved. In the light of Sections 2308 and 2309 of the Tariff and Customs Code, it appeared that in

all cases subject to protest, the claim for refund of customs duties may be foreclosed only when the

interested party claiming refund fails to file a written protest before the Collector of Customs.

Accordingly, once a written protest is seasonably filed with the Collector of Customs the failure or

inaction of the latter to promptly perform his mandated duty under the Tariff and Customs Code should

not be allowed to prejudice the right of the party adversely affected thereby. Technicalities and legalisms,

however exalted, should not be misused by the government to keep money not belonging to it, if any is

proven, and thereby enrich itself at the expense of the taxpayers.

Allied Banking Corporation vs Commissioner of Internal Revenue

TaxationException to the Rules of Procedure Regarding Protest and Appeal


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In April 2004, the Bureau of Internal Revenue (BIR) issued a preliminary assessment notice (PAN) to

Allied Banking Corporation (ABC) demanding payment of P50 million in taxes. ABC then filed a protest

in May 2004. In July 2004, the BIR issued a formal assessment notice (FAN). The FAN included a formal

demand as well as this phrase:

xxx

This is our final decision based on investigation. If you disagree, you may appeal this final decision

within thirty (30) days from receipt hereof, otherwise said deficiency tax assessment shall become final,

executory and demandable.

ABC then appealed the FAN with the Court of Tax Appeals (CTA). The Commissioner of Internal

Revenue (CIR) then filed a motion to dismiss on the ground that ABC did not exhaust all administrative

remedies for failing to file a protest against the FAN.

ISSUE: Whether or not the CIR is correct.

HELD: No. It is true that a FAN is not appealable with the CTA. However, this case holds an exception.

The wordings of the FAN issued by the CIR made it appear that the FAN is actually the CIRs final

decision. It even advised ABC to file an appeal instead of filing a protest. ABC cannot therefore be

faulted for filing an appeal with the CTA instead of filing a protest with the CIR. The CIR as well as his

duly authorized representative must indicate clearly and unequivocally to the taxpayer whether an action

constitutes a final determination on a disputed assessment. Words must be carefully chosen in order to

avoid any confusion that could adversely affect the rights and interest of the taxpayer.

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