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Lutz vs. Araneta [December 22, 1955,
(98 Phil 148)]
FACTS: Commonwealth Act No. 567,
otherwise known as Sugar Adjustment Act
was promulgated in 1940 to stabilize the
sugar industry so as to prepare it for the
eventuality of the loss of its preferential
position in the United States market and the
imposition of export taxes. Plaintiff, Walter
Lutz, in his capacity as Judicial Administrator
of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector
of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under Sec.3 of the
Act, alleging that such tax is unconstitutional
and void, being levied for the aid and support
of the sugar industry exclusively, which in
plaintiffs opinion is not a public purpose for
which a tax may be constitutionally levied.
The action has been dismissed by the Court of
First Instance.
ISSUE: Whether or not the tax imposed is
constitutional.
HELD: Yes. The act is primarily an exercise
of the police power. It is shown in the Act that
the tax is levied with a regulatory purpose, to
provide means for the rehabilitation and
stabilization of thethreatened sugar industry.
It is inherent in the power to tax that a state
be free to select the subjects of taxation, and
it has been repeatedly held that inequalities
which result from a singling out of one
particular class for taxation
or exemption infringe no constitutional
limitation.
The funds raised under the Act should be
exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being
protected. It may be that other industries are
also in need of similar protection; but the
legislature is not required by the Constitution
to adhere to a policy of all or none.
Southern Cross Cement Corp. vs.
Cement Manufacturers Association of
the Philippines, et. al. (G.R. No.
1581540, August 3, 2005)
FACTS: The case centers on the
interpretation of provisions of Republic Act
No. 8800, the Safeguard Measures Act
(SMA), which was one of the laws enacted
by Congress soon after the Philippines
ratified the General Agreement on Tariff and
Trade (GATT) and the World Trade
Organization (WTO) Agreement. The SMA
provides the structure and mechanics for the
imposition of emergency measures, including
tariffs, to protect domestic industries and
producers from increased imports which
inflict or could inflict serious injury on them.
Philcemcor, an association of at least eighteen
(18) domestic cement manufacturers filed
with the DTI a petition seeking the imposition
of safeguard measures on gray Portland
cement, in accordance with the SMA. After the
DTI issued a provisional safeguard
measure, the application was referred to the
Tariff Commission for a formal investigation
pursuant to Section 9 of the SMA and its
Implementing Rules and Regulations, in order
to determine whether or not to impose a
definitive safeguard measure on imports of
gray Portland cement. The Tariff Commission
held public hearings and conducted its own
investigation, then on 13 March 2002, issued
its Formal Investigation Report (Report).
The Report determined as follows:
The elements of serious injury and imminent
threat of serious injury not having been
established, it is hereby recommended that
no definitive general safeguard measure be
imposed on the importation of gray Portland
cement.
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HELD: The Court recognizes that the
authority delegated to the President under
Section 28(2), Article VI may be exercised, in
accordance with legislative sanction, by
the alter egos of the President, such as
department secretaries. Indeed, for purposes
of the Presidents exercise of power to impose
tariffs under Article VI, Section 28(2), it is
generally the Secretary of Finance who acts
as alter ego of the President. The SMA
provides an exceptional instance wherein it is
the DTI or Agriculture Secretary who is
tasked by Congress, in their capacities as alter
egos of the President, to impose such
measures. Certainly, the DTI Secretary has no
inherent power, even as alter ego of the
President, to levy tariffs and imports.
When Congress tasks the President or
his/her alter egos to impose safeguard
measures under the delineated
conditions, the President or the alter
egos may be properly deemed as agents of
Congress to perform an act that inherently
belongs as a matter of right to the
legislature. It is basic agency law that the
agent may not act beyond the specifically
delegated powers or disregard the
restrictions imposed by the principal. In
short, Congress may establish the procedural
framework under which such safeguard
measures may be imposed, and assign the
various offices in the government
bureaucracy respective tasks pursuant to the
imposition of such measures, the task
assignment including the factual
determination of whether the necessary
conditions exists to warrant such impositions.
Under the SMA, Congress assigned the DTI
Secretary and the Tariff Commission their
respective function in the legislatures
scheme of things.
There is only one viable ground for
challenging the legality of the limitations and
restrictions imposed by Congress under
Section 28(2) Article VI, and that is such
limitations and restrictions are themselves
violative of the Constitution. Thus, no matter
how distasteful or noxious these limitations
and restrictions may seem, the Court has no
choice but to uphold their validity unless
their constitutional infirmity can be
demonstrated.
What are these limitations and restrictions
that are material to the present case? The
entire SMA provides for a limited framework
under which the President, through the DTI
and Agriculture Secretaries, may impose
safeguard measures in the form of tariffs and
similar imposts. The limitation most relevant
to this case is contained in Section 5 of the
SMA, captioned Conditions for the Application
of General Safeguard Measures, and stating:
The Secretary shall apply a general
safeguard measure upon a positive final
determination of the [Tariff]
Commission that a product is being imported
into the country in increased quantities,
whether absolute or relative to the domestic
production, as to be a substantial cause of
serious injury or threat thereof to the
domestic industry; however, in the case of
non-agricultural products, the Secretary shall
first establish that the application of such
safeguard measures will be in the public
interest.
Vellila vs. Posadas (62 Phil. 624)
FACTS: This is an appeal from a judgment of
the Court of First Instance of Manila in an
action to recover from the defendant-appellee
as Collector of Internal Revenue the sum of
P77,018,39 as inheritance taxes and
P13,001.41 as income taxes assessed against
the estate of Arthur G. Moody, deceased.
It is alleged in the complaint that at the time
of his death, Arthur G. Moody was a "non-
resident of the Philippine Islands." The
answer, besides the general denial, sets up as
a special defense that "Arthur G. Moody, now
deceased, was and prior to the date of his
death, a resident in the City of Manila,
Philippine Islands, where he was engaged
actively in business.
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ISSUE: Whether or not the defendant
collector illegally assessed an income tax of
P13,001.41 against the Moody estate
HELD: No. The grounds for this assessment,
stated by the Collector of Internal Revenue in
his letter, Exhibit NN, appear to us to be
sound. That the amount of P259,986.69 was
received by the estate of Moody as dividends
declared out of surplus by the Camera Supply
Company is clearly established by the
evidence. The appellant contends that this
assessment involves triple taxation: First,
because the corporation paid income tax on
the same amount during the years it was
accumulated as surplus; second, that an
inheritance tax on the same amount was
assessed against the estate, and third, the
same amount is assessed as income of the
estate. As to the first, it appears from the
collectors assessment, Exhibit II, that the
collector allowed the estate a deduction of the
normal income tax on said amount because it
had already been paid at the source by the
Camera Supply Company. The only income
tax assessed against the estate was the
additional tax or surtax that had not been
paid by the Camera Supply Company for
which the estate, having actually received the
income, is clearly liable. As to the second
alleged double taxation, it is clear that the
inheritance tax and the additional income tax
in question are entirely distinct. They are
assessed under different statutes and we are
not convinced by the appellants argument
that the estate which received these
dividends should not be held liable for the
payment of the income tax thereon because
the operation was simply the conversion of
the surplus of the corporation into the
property of the individual stockholders. (Cf.
U. S. v. Phellis, 257 U. S., 171, and Taft v.
Bowers, 278 U. S., 460.) Section 4 of Act No.
2833 as amended, which is relied on by the
appellant, plainly provides that the income
from exempt property shall be included as
income subject to tax.

CIR V SC Johnson Inc. (June 25, 1999)
FACTS: Respondent is a domestic corporation
organized and operating under the Philippine
Laws, entered into a licensed agreement with
the SC Johnson and Son, USA, a non-resident
foreign corporation based in the USA
pursuant to which the respondent was
granted the right to use the trademark,
patents and technology owned by the later
including the right to manufacture, package
and distribute the products covered by the
Agreement and secure assistance
in management, marketing and production
from SC Johnson and Son USA.

For the use of trademark or
technology, respondent was obliged to pay SC
Johnson and Son, USA royalties based on a
percentage of net sales and subjected the
same to 25% withholding tax on
royalty payments whichrespondent paid
for the period covering July 1992 to May
1993 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with
the International Tax Affairs Division (ITAD)
of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, the
antecedent facts attending respondents case
fall squarely within the same circumstances
under which said MacGeorge and Gillette
rulings were issued. Since the agreement was
approved by the Technology Transfer Board,
the preferential tax rate of 10%
shouldapply to the respondent. So, royalties
paid by the respondent to SC Johnson and
Son, USA is only subject to 10% withholding
tax.

The Commissioner did not act on
said claim for refund. Private respondent SC
Johnson & Son, Inc. then filed a petition for
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review before the CTA, to claim a refund of
the overpaid withholding tax on
royalty payments from July 1992 to May
1993.

On May 7, 1996, the CTA rendered its
decision in favor of SC Johnson and ordered
the CIR to issue a tax credit certificate in the
amount of P163,266.00 representing
overpaid withholding tax on
royalty payments beginning July 1992 to May
1993.

The CIR thus filed a petition for review with
the CA which rendered the decision subject of
this appeal on November 7, 1996 finding
no merit in the petition and affirming in toto
the CTA ruling.

ISSUE: Whether or not tax refunds are
considered as tax exemptions

HELD: Yes. It bears stress that tax refunds are
in the nature of tax exemptions. As such they
are registered as in derogation of sovereign
authority and to be construed strictissimi
juris against the person or entity claiming the
exemption. The burden of proof is upon him
who claims the exemption in his favor and he
must be able to justify his claim by the
clearest grant of organic or statute law.
Private respondent is claiming for a refund of
the alleged overpayment of tax on royalties;
however there is nothing on record to
support a claim that the tax on royalties
under the RP-US Treaty is paid under similar
circumstances as the tax on royalties under
the RP-West Germany Tax Treaty.
Tolentino vs. Secretary of Finance (249
SCRA 628)
FACTS: Arturo Tolentino et al are questioning
the constitutionality of RA 7716 otherwise
known as the Expanded Value Added Tax
(EVAT) Law. Tolentino averred that this
revenue bill did not exclusively originate
from the House of Representatives as
required by Section 24, Article 6 of the
Constitution. Even though RA 7716 originated
as HB 11197 and that it passed the 3 readings
in the HoR, the same did not complete the 3
readings in Senate for after the 1
st
reading it
was referred to the Senate Ways & Means
Committee thereafter Senate passed its own
version known as Senate Bill 1630. Tolentino
averred that what Senate could have done is
amend HB 11197 by striking out its text and
substituting it with the text of SB 1630 in that
way the bill remains a House Bill and the
Senate version just becomes the text (only the
text) of the HB. (Its ironic however to note
that Tolentino and co-petitioner Raul Roco
even signed the said Senate Bill.)

ISSUE: Whether or not the EVAT law is
procedurally infirm

HELD: No. By a 9-6 vote, the Supreme Court
rejected the challenge, holding that such
consolidation was consistent with the power
of the Senate to propose or concur with
amendments to the version originated in the
HoR. What the Constitution simply means,
according to the 9 justices, is that the
initiative must come from the HoR. Note also
that there were several instances before
where Senate passed its own version rather
than having the HoR version as far as revenue
and other such bills are concerned. This
practice of amendment by substitution has
always been accepted. The proposition of
Tolentino concerns a mere matter of form.
There is no showing that it would make a
significant difference if Senate were to adopt
his over what has been done.
ABAKADA Guro Partylist vs. Purisima
(G.R. No. 166715, August 14, 2008)

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FACTS: Republic Act No. 9335 was enacted to
optimize the revenue-generation capability
and collection of the Bureau of Internal
Revenue (BIR) and the Bureau of Customs
(BOC). It provides a system of rewards and
sanctions through the creation of Rewards
and Incentives Fund (Fund) and a Revenue
Performance Evaluation Board (Board) to BIR
and BOC officials and employees if they
exceed their revenue targets. It covers all
officials and employees of the BIR and the
BOC with at least six months of service,
regardless of employment status.
Petitioners, invoking their right as taxpayers,
filed this petition challenging the
constitutionality of RA 9335, a tax reform
legislation. They contend that the limiting the
scope of the system of rewards and incentives
only to officials and employees of the BIR and
the BOC violates the constitutional guarantee
of equal protection. There is no valid basis for
classification or distinction as to why such a
system should not apply to officials and
employees of all other government agencies.
Respondent contends that the allegation that
the reward system will breed mercenaries is
mere speculation and does not suffice to
invalidate the law. Seen in conjunction with
the declared objective of RA 9335, the law
validly classifies the BIR and the BOC because
the functions they perform are distinct from
those of the other government agencies and
instrumentalities.
ISSUE: Whether or not there is a violation of
equal protection clause.
HELD: No. Equality protection is equality
among equals, not similarity of treatment of
persons who are classified based on
substantial differences in relation to the
object to be accomplished. When things or
persons are different in fact or circumstance,
they may be treated in law differently.
The Constitution does not require that
things which are different in fact be
treated in law as though they were the
same. The equal protection clause does
not forbid discrimination as to things that
are different. It does not prohibit
legislation which is limited either in the
object to which it is directed.
The equal protection clause recognizes a valid
classification, that is, a classification that has
a reasonable foundation or rational basis and
not arbitrary. With respect to RA 9335, its
expressed public policy is the optimization of
the revenue-generation capability and
collection of the BIR and the BOC. Since the
subject of the law is the revenue- generation
capability and collection of the BIR and the
BOC, the incentives and/or sanctions
provided in the law should logically pertain to
the said agencies. Moreover, the law concerns
only the BIR and the BOC because they have
the common distinct primary function of
generating revenues for the national
government through the collection of taxes,
customs duties, fees and charges.
Both the BIR and the BOC are bureaus under
the DOF. They principally perform the special
function of being the instrumentalities
through which the State exercises one of its
great inherent functions taxation.
Indubitably, such substantial distinction is
germane and intimately related to the
purpose of the law. Hence, the classification
and treatment accorded to the BIR and the
BOC under RA 9335 fully satisfy the demands
of equal protection.
Silkair (Singapore) Pte. Ltd. vs.
Commissioner of Internal Revenue
(G.R. No. 166482, January 25, 2012)
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FACTS: Silkair (Singapore) is a foreign
corporation licensed to do business in the
Philippines as an on-line international carrier.
It purchased aviation fuel from Petron and
paid the excise taxes. It filed an
administrative claim for refund for excise
taxes on the purchase of jet fuel from Petron,
which it alleged to have been erroneously
paid.
HELD: For indirect taxes, the proper party to
question or seek a refund of the tax is the
statutory taxpayer, the person on whom the
tax is imposed by law and who paid the same
even when he shifts the burden thereof to
another. Thus, Petron, not Silkair, is the
statutory taxpayer which is entitled to claim a
refund. Excise tax is due from the
manufacturers of the petroleum products and
is paid upon removal of the products from
their refineries. Even before the aviation jet
fuel is purchased from Petron, the excise tax
is already paid by Petron. Petron, being the
manufacturer, is the person subject to tax.
In this case, Petron, which paid the excise tax
upon removal of the products from its Bataan
refinery, is the person liable for tax.
Petitioner is neither a person liable for tax
nor a person subject to tax.
Lung Center of the Philippines vs.
Quezon City (G.R. No. 144104, June 29,
2004)
FACTS: Petitioner is a non-stock, non-profit
entity established by virtue of PD No. 1823,
seeks exemption from real property taxes
when the City Assessor issued Tax
Declarations for the land and the hospital
building. Petitioner predicted on its claim that
it is a charitable institution. The request was
denied, and a petition hereafter filed before
the Local Board of Assessment Appeals of
Quezon City (QC-LBAA) for reversal of the
resolution of the City Assessor. Petitioner
alleged that as a charitable institution, is
exempted from real property taxes under Sec
28(3) Art VI of the Constitution. QC-LBAA
dismissed the petition and the decision was
likewise affirmed on appeal by the Central
Board of Assessment Appeals of Quezon City.
The Court of Appeals affirmed the judgment
of the CBAA.

ISSUES:
1. Whether or not petitioner is a charitable
institution within the context of PD 1823 and
the 1973 and 1987 Constitution and Section
234(b) of RA 7160.

2. Whether or not petitioner is exempted
from real property taxes.

HELD:
1. Yes. The Court hold that the petitioner is a
charitable institution within the context of
the 1973 and 1987 Constitution. Under PD
1823, the petitioner is a non-profit and non-
stock corporation which, subject to the
provisions of the decree, is to be
administered by the Office of the President
with the Ministry of Health and the Ministry
of Human Settlements. The purpose for which
it was created was to render medical services
to the public in general including those who
are poor and also the rich, and become a
subject of charity. Under PD 1823, petitioner
is entitled to receive donations, even if the gift
or donation is in the form of subsidies
granted by the government.

2. Partly No. Under PD 1823, the lung center
does not enjoy any property tax exemption
privileges for its real properties as well as the
building constructed thereon.
The property tax exemption under Sec. 28(3),
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Art. VI of the Constitution speaks of property
taxes only. This provision was implanted by
Sec.243 (b) of RA 7160.which provides that in
order to be entitled to the exemption, the
lung center must be able to prove that: it is a
charitable institution and; its real properties
are actually, directly and exclusively used for
charitable purpose. Accordingly, the portions
occupied by the hospital used for its patients
are exempt from real property taxes while
those leased to private entities are not
exempt from such taxes.
Commissioner of Internal Revenue vs.
St. Luke's Medical Center, Inc. (G.R. No.
195909, September 26, 2012)

FACTS: St. Lukes Medical Center, Inc. (St.
Lukes) is a hospital organized as a non-stock
and non-profit corporation.

The BIR assessed St. Lukes deficiency taxes
for 1998 comprised of deficiency income tax,
value-added tax, and withholding tax. The BIR
claimed that St. Lukes should be liable for
income tax at a preferential rate of 10% as
provided for by Section 27(B). Further, the
BIR claimed that St. Lukes was actually
operating for profit in 1998 because only
13% of its revenues came from charitable
purposes. Moreover, the hospitals board of
trustees, officers and employees directly
benefit from its profits and assets.

On the other hand, St. Lukes maintained that
it is a non-stock and non-profit institution for
charitable and social welfare purposes
exempt from income tax under Section 30(E)
and (G) of the NIRC. It argued that the making
of profit per se does not destroy its income
tax exemption.

ISSUE: The sole issue is whether St. Lukes is
liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a
preferential tax rate of 10% on the income of
proprietary non-profit hospitals.

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

Section 27(B) of the NIRC imposes a 10%
preferential tax rate on the income of (1)
proprietary non-profit educational
institutions and (2) proprietary non-profit
hospitals. The only qualifications for
hospitals are that they must be proprietary
and non-profit. Proprietary means
private, following the definition of a
proprietary educational institution as
any private school maintained and
administered by private individuals or
groups with a government permit. Non-
profit means no net income or asset
accrues to or benefits any member or
specific person, with all the net income or
asset devoted to the institutions purposes
and all its activities conducted not for profit.

Non-profit does not necessarily
mean charitable. In Collector of Internal
Revenue v. Club Filipino Inc. de Cebu, this
Court considered as non-profit a sports club
organized for recreation and entertainment
of its stockholders and members. The club
was primarily funded by membership fees
and dues. If it had profits, they were used for
overhead expenses and improving its golf
course. The club was non-profit because of its
purpose and there was no evidence that it
was engaged in a profit-making enterprise.

The sports club in Club Filipino Inc. de
Cebu may be non-profit, but it was not
charitable. The Court defined charity
in Lung Center of the Philippines v. Quezon
City as a gift, to be applied consistently
with existing laws, for the benefit of an
indefinite number of persons, either by
bringing their minds and hearts under the
influence of education or religion, by assisting
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them to establish themselves in life or [by]
otherwise lessening the burden of
government. However, despite its being a tax
exempt institution, any income such
institution earns from activities conducted for
profit is taxable, as expressly provided in the
last paragraph of Sec. 30.

To be a charitable institution, however, an
organization must meet the substantive test
of charity in Lung Center. The issue
in Lung Center concerns exemption from real
property tax and not income tax. However, it
provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens
the burden of government. In other words,
charitable institutions provide for free
goods and services to the public which
would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency,
the government forgoes taxes which should
have been spent to address public needs,
because certain private entities already
assume a part of the burden. This is the
rationale for the tax exemption of
charitable institutions. The loss of taxes
by the government is compensated by its
relief from doing public works which would
have been funded by appropriations from the
Treasury.

The Constitution exempts charitable
institutions only from real property taxes.
In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC
is materially different from Section 28(3),
Article VI of the Constitution. (Emphasis
supplied)

Section 30(E) of the NIRC defines the
corporation or association that is exempt
from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not
define a charitable institution, but requires
that the institution actually, directly and
exclusively use the property for a charitable
purpose. (Emphasis supplied)

To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution
requires that a charitable institution use the
property actually, directly and exclusively
for charitable purposes.(Emphasis supplied)

To be exempt from income taxes, Section
30(E) of the NIRC requires that a charitable
institution must be organized and
operated exclusively for charitable
purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC
requires that the institution be operated
exclusively for social welfare. (Emphasis
supplied)

However, the last paragraph of Section 30 of
the NIRC qualifies the words organized and
operated exclusively by providing that:

Notwithstanding the provisions in the
preceding paragraphs, the income of
whatever kind and character of the foregoing
organizations from any of their properties,
real or personal, or from any of their
activities conducted for profit regardless
of the disposition made of such income,
shall be subject to tax imposed under this
Code. (Emphasis supplied)

In short, the last paragraph of Section 30
provides that if a tax exempt charitable
institution conducts any activity for profit,
such activity is not tax exempt even as its
not-for-profit activities remain tax exempt.

Thus, even if the charitable institution must
be organized and operated exclusively for
charitable purposes, it is nevertheless
allowed to engage in activities conducted for
profit without losing its tax exempt status for
its not-for-profit activities. The only
consequence is that the income of
whatever kind and character of a
charitable institution from any of its
activities conducted for profit, regardless
of the disposition made of such income, shall
be subject to tax. Prior to the introduction of
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Section 27(B), the tax rate on such income
from for-profit activities was the ordinary
corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is
now 10%.(Emphasis supplied)

The Court finds that St. Lukes is a
corporation that is not operated exclusively
for charitable or social welfare
purposes insofar as its revenues from paying
patients are concerned. This ruling is based
not only on a strict interpretation of a
provision granting tax exemption, but also on
the clear and plain text of Section 30(E) and
(G). Section 30(E) and (G) of the NIRC
requires that an institution be operated
exclusively for charitable or social welfare
purposes to be completely exempt from
income tax. An institution under Section
30(E) or (G) does not lose its tax
exemption if it earns income from its for-
profit activities. Such income from for-profit
activities, under the last paragraph of Section
30, is merely subject to income tax,
previously at the ordinary corporate rate
but now at the preferential 10% rate
pursuant to Section 27(B). (Emphasis
supplied)

St. Lukes fails to meet the requirements
under Section 30(E) and (G) of the NIRC to
becompletely tax exempt from all its income.
However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as
long as it does not distribute any of its profits
to its members and such profits are
reinvested pursuant to its corporate
purposes. St. Lukes, as a proprietary non-
profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-
profit activities.

St. Lukes is therefore liable for deficiency
income tax in 1998 under Section 27(B) of
the NIRC. However, St. Lukes has good
reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Lukes
is a corporation for purely charitable and
social welfare purposes and thus exempt
from income tax.

In Michael J. Lhuillier, Inc. v. Commissioner of
Internal Revenue, the Court said that good
faith and honest belief that one is not subject
to tax on the basis of previous interpretation
of government agencies tasked to implement
the tax law, are sufficient justification to
delete the imposition of surcharges and
interest.

CIR vs. Estate of Benigno Toda (G.R. No.
147188, September 14, 2004)

FACTS: Cebiles Insurance Corporation
authorized Benigno P. Toda, Jr., President and
owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles
Building and the two parcels of land on which
the building stands for an amount of not less
than P90 million. Toda purportedly sold the
property for P100 million to Rafael A.
Altonaga. However, Altonaga in turn, sold the
same property on the same day to Royal
Match Inc. for P200 million. These two
transactions were evidenced by Deeds of
Absolute Sale notarized on the same day by
the same notary public. For the sale of the
property to Royal Dutch, Altonaga paid
capital gains tax [6%] in the amount of P10
million.
ISSUE: Whether or not the scheme employed
by Cibelis Insurance Company constitutes tax
evasion.

HELD: Yes. The scheme, explained the Court,
resorted to by CIC in making it appear that
there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is
tainted with fraud. Fraud in its general sense,
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10 | P a g e

is deemed to comprise anything calculated to
deceive, including all acts, omissions, and
concealment involving a breach of legal or
equitable duty, trust or confidence justly
reposed, resulting in the damage to another,
or by which an undue and unconscionable
advantage is taken of another.

It is obvious that the objective of the sale to
Altonaga was to reduce the amount of tax to
be paid especially that the transfer from him
to RMI would then subject the income to only
5% individual capital gains tax, and not the
35% corporate income tax. Altonagas sole
purpose of acquiring and transferring title of
the subject properties on the same day was to
create a tax shelter. Altonaga never
controlled the property and did not enjoy the
normal benefits and burdens of ownership.
The sale to him was merely a tax ploy, a sham,
and without business purpose and economic
substance. Doubtless, the execution of the
two sales was calculated to mislead the BIR
with the end in view of reducing the
consequent income tax liability.

In a nutshell, the intermediary
transaction, i.e., the sale of Altonaga, which
was prompted more on the mitigation of tax
liabilities than for legitimate business
purposes constitutes one of tax evasion.

Generally, a sale or exchange of assets will
have an income tax incidence only when it is
consummated. The incidence of taxation
depends upon the substance of a transaction.
The tax consequences arising from gains from
a sale of property are not finally to be
determined solely by the means employed to
transfer legal title. Rather, the transaction
must be viewed as a whole, and each step
from the commencement of negotiations to
the consummation of the sale is relevant. A
sale by one person cannot be transformed for
tax purposes into a sale by another by using
the latter as a conduit through which to pass
title. To permit the true nature of the
transaction to be disguised by mere
formalisms, which exist solely to alter tax
liabilities, would seriously impair the
effective administration of the tax policies of
Congress.

To allow a taxpayer to deny tax liability on
the ground that the sale was made through
another and distinct entity when it is proved
that the latter was merely a conduit is to
sanction a circumvention of our tax laws.
Hence, the sale to Altonaga should be
disregarded for income tax purposes. The two
sale transactions should be treated as a single
direct sale by CIC to RMI.