1

LIMPAN VS CIR

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of
leasing real properties. It commenced actual business operations on July 1, 1955. Its principal
stockholders are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control
ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the
same Isabelo P. Lim.

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all
of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes
of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the
sums of P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they
discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and
P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the
sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings,
respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment
of deficiency income tax and surcharge against petitioner corporation, computed as follows:

90-AR-C-348-58/56
Net income per audited return P 3,287.81
Add: Unallowable deductions:
Undeclared Rental Receipt
(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00
Net income per investigation P27,746.00
Tax due thereon P5,549.00
Less: Amount already assessed 657.00
Balance P4,892.00
Add: 50% Surcharge 2,446.00
DEFICIENCY TAX DUE P7,338.00
90-AR-C-1196-58/57
Net income per audited return P11,098.00
Add: Unallowable deductions:
Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00
Net income per investigation P109,126.00
Tax due thereon P22,555.00
Less: Amount already assessed 2,220.00
Balance 20,335.00
Add: 50% Surcharge 10,167.50
DEFICIENCY TAX DUE P30,502.50

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the

above assessment but the latter denied said request and reiterated its original assessment and
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demand, plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment;
hence, the corporation filed its petition for review before the Tax Appeals court, questioning the
correctness and validity of the above assessment of respondent Commissioner of Internal Revenue.
It disclaimed having received or collected the amount of P20,199.00, as unreported rental income for
1956, or any part thereof, reasoning out that 'the previous owners of the leased building has (have) to
collect part of the total rentals in 1956 to apply to their payment of rental in the land in the amount of
P21,630.00" (par. 11, petition). It also denied having received or collected the amount of P81,690.00,
as unreported rental income for 1957, or any part thereof, explaining that part of said amount totalling
P31,380.00 was not declared as income in its 1957 tax return because its president, Isabelo P. Lim,
who collected and received P13,500.00 from certain tenants, did not turn the same over to petitioner
corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his
rentals amounting to P10,800.00, over which the corporation had no actual or constructive control;
and that a sub-tenant paid P4,200.00 which ought not be declared as rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent
Commissioner of its buildings in the above assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis,
who admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax
return and also the sum of P29,350.00 as rental income in its 1957 tax return. However, with respect
to the difference between this omitted income (P12,100.00) and the sum (P20,199.00) found by
respondent Commissioner as undeclared in 1956, petitioner corporation, through the same witness
(Solis), tried to establish that it did not collect or receive the same because, in view of the refusal of
some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the
former owners, on one hand, and the same Isabelo P. Lim, as president of petitioner corporation, on
the other, had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the
value of all its properties, computed at P21,630.00, in exchange for whatever rentals the Lims may
collect from the tenants. And, with respect to the difference between the admittedly undeclared sum
of P29,350.00 and that found by respondent Commissioner as unreported rental income,
(P81,690.00) in 1957, the same witness Solis also tried to establish that petitioner corporation did not
receive or collect the same but that its president, Isabelo P. Lim, collected part thereof and may have
reported the same in his own personal income tax return; that same Isabelo P. Lim collected
P13,500.00, which he turned over to petitioner in 1959 only; that a certain tenant (Go Tong deposited
in court his rentals (P10,800.00), over which the corporation had no actual or constructive control and
which were withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought not be
declared as rental income in 1957.

With regard to the depreciation which respondent disallowed and deducted from the returns filed by
petitioner, the same witness tried to establish that some of its buildings are old and out of style;
hence, they are entitled to higher rates of depreciation than those adopted by respondent in his
assessment.

Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis.

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the
investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the
respondent that he personally interviewed the tenants of petitioner and found that these tenants had
been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim,
but these payments were not declared in the corresponding returns; and that in applying rates of
depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal Revenue
Service.

On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and
demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner
has appealed to this Court.

Petitioner corporation pursues, the same theory advocated in the court below and assigns the
following alleged errors of the trial court in its brief, to wit:
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I. The respondent Court erred in holding that the petitioner had an unreported rental income of
P20,199.00 for the year 1956.

II. The respondent Court erred in holding that the petitioner had an unreported rental income of
P81,690.00 for the year 1957.

III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00
claimed by petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed.

This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness (Vicente
G. Solis), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of
P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more
than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same
examiners as unreported rental income for the year 1957, contrary to its original claim to the revenue
authorities, it was incumbent upon it to establish the remainder of its pretensions by clear and
convincing evidence, that in the case is lacking.

With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the
excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and
only later transferred or disposed of the ownership of the buildings existing thereon to petitioner
corporation, so as to justify the alleged verbal agreement whereby they would turn over to petitioner
corporation six percent (6%) of the value of its properties to be applied to the rentals of the land and
in exchange for whatever rentals they may collect from the tenants who refused to recognize the new
owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors,
or by any document or unbiased evidence. Hence, the first assigned error is without merit.

As to the second assigned error, petitioner's denial and explanation of the non-receipt of the
remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As above
noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957
personal income tax return submitted in court to establish that the rental income which he allegedly
collected and received in 1957 were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient
justification for the non-declaration of said income in 1957, since the deposit was resorted to due to
the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is
deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957
should have been reported as rental income in said year, since it is income just the same regardless
of its source.

On the third assigned error, suffice it to state that this Court has already held that "depreciation is a
question of fact and is not measured by theoretical yardstick, but should be determined by a
consideration of actual facts", and the findings of the Tax Court in this respect should not be disturbed
when not shown to be arbitrary or in abuse of discretion (Commissioner of Internal Revenue vs.
Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner has not shown any arbitrariness or
abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive
depreciation in its returns. It appearing that the Tax Court applied rates of depreciation in accordance
with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having
strong persuasive effect in this jurisdiction, for having been the result of scientific studies and
observation for a long period in the United States, after whose Income Tax Law ours is patterned (M.
Zamora vs. Collector of internal Revenue & Collector of Internal Revenue vs. M. Zamora; E. Zamora
vs. Collector of Internal Revenue and Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, L-
15290, L-15289 and L-15281, May 31, 1963), the foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-
appellant, Limpan Investment Corporation.

RP VS DELA RAMA
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This is an appeal from the decision of the Court of First Instance of Manila, dated December 23,
1961, in its Civil Case No. 46494, dismissing the complaint of the Republic of the Philippines against
the heirs of the late Esteban de la Rama from the collection of P56,032.50 as deficiency income tax,
inclusive of 50% surcharge, for the year 1950.

The estate of the late Esteban de la Rama was the subject of Special Proceedings No. 401 of the
Court of First Instance of Iloilo. The executor-administrator, Eliseo Hervas, filed on March 12, 1951,
income tax returns of the estate corresponding to the taxable year 1950, declaring a net income of
P22,796.59, on the basis of which the amount of P3,919.00 was assessed and was paid by the estate
as income tax. The Bureau of Internal Revenue later claimed that it had found out that there had been
received by the estate in 1950 from the De la Rama Steamship Company, Inc. cash dividends
amounting to P86,800.00, which amount was not declared in the income tax return of the estate for
the year 1950. The Bureau of Internal Revenue then, on March 7, 1956, made an assessment as
deficiency income tax against the estate in the sum of P56,032.50 of which amount P37,355.00 was
the deficiency and P18,677.50 was the 50% surcharge.

The Collector of Internal Revenue wrote a letter, dated February 29, 1956, to Mrs. Lourdes de la
Rama-Osmeña informing her of the deficiency income tax and asking payment thereof. On March 13,
1956 the latter's counsel wrote to the Collector acknowledging receipt of the assessment but
contended that Lourdes de la Rama-Osmeña had no authority to represent the estate, and that the
assessment should be sent to Leonor de la Rama who was pointed to by said counsel as the
administratrix of the estate of her late father. On the basis of this information the Deputy Collector of
Internal Revenue, on November 22, 1956, sent a letter to Leonor de la Rama as administratrix of the
estate, asking payment. The tax, as assessed, not having been paid, the Deputy Commissioner of
Internal Revenue, on September 7, 1959, wrote another letter to Mrs. Lourdes de la Rama-Osmeña
demanding, through her, upon the heirs, the payment of the deficiency income tax within the period of
thirty days from receipt thereof. The counsel of Lourdes de la Rama-Osmeña, in a letter dated
September 25, 1959, insisted that the letter should be sent to Leonor de la Rama. The Deputy
Commissioner of Internal Revenue wrote to Leonor de la Rama another letter, dated February 11,
1960, demanding, through her as administratrix, upon the heirs of Esteban de la Rama, the payment
of the sum of P56,032.50, as deficiency income tax including the 50% surcharge, to the City
Treasurer of Pasay City within thirty days from receipt thereof.

The deficiency income tax not having been paid, the Republic of the Philippines filed on March 6,
1961 with the Court of First Instance of Manila a complaint against the heirs of Esteban de la Rama,
seeking to collect from each heir his/her proportionate share in the income tax liability of the estate.
An amended complaint dated August 31, 1961, was admitted by the court.

The defendants-appellees, Lourdes de la Rama-Osmeña, Leonor de la Rama, Estefania de la Rama-

Pirovano, Dolores de la Rama-Lopez, Charles Miller, and Aniceta de la Rama-Sian, thru counsel,
filed their respective answers, the gist of their allegations and/or defenses being (1) that no cash
dividends of P86,800.00 had been paid to the estate; (2) that the administration of the estate had
been extended by the probate court precisely for the purpose of collecting said dividends; (3) that
Leonor dela Rama had never been administratrix of the estate; (4) that the executor of the estate,
Eliseo Hervas, had never been given notice of the assessment, and consequently the assessment
had never become final; and (5) that the collection of the alleged deficiency income tax had
prescribed. Fausto F. Gonzales, Jr., one of the defendants, not having filed an answer, was declared
in default.

From the evidence introduced at the trial, both oral and documentary, the lower court found that the
dividends of P86,800.00 declared by the De la Rama Steamship Co. in favor of the late Esteban de la
Rama were applied to the obligation of the estate to the company declaring the dividends; that Leonor
de la Rama was not the administratrix of the estate, but it was the late Eliseo Hervas who was the
executor-administrator; that the administration of the estate was extended for the purpose of
recovering for the estate said dividends from the De la Rama Steamship Co., Inc.; and that the
question of whether the deceased Esteban de la Rama was a debtor to the entity known as the Hijos
de I. de la Rama, which was also indebted to the De la Rama Steamship Co., Inc., was not a settled
one.
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After trial, the lower court rendered its decision, dated December 23, 1961, dismissing the complaint.
The Republic of the Philippines appealed from said decision to the Court of Appeals, but the appeal
was later certified to this Court because only questions of law are involved.

Plaintiff-appellant contends that the trial court erred (1) in holding that there was no basis for the
assessment upon the ground that it was not proved that the income in question was received by the
estate of Esteban de la Rama or by his heirs; (2) in not holding that the income was constructively
received by the estate of the late Esteban de la Rama; (3) in not holding that the heirs and legatees of
the late Esteban de la Rama were liable for the payment of the deficiency income tax; (4) in not
holding that the assessment involved in the case had long become final; (5) in not holding that the
service of the notice of assessment on Lourdes de la Rama-Osmeña and Leonor de la Rama was
proper and valid; and (6) in not holding that said court had no jurisdiction to take cognizance of
appellees' defense that the assessment in question was erroneous.

Plaintiff-appellant argues that the deficiency income tax in this case was assessed in the sum of
P86,800.00 representing cash dividends declared in ]1950 by the De la Rama Steamship Co., Inc. in
favor of the late Esteban de la Rama and was applied as payment of the latter's account with the
former. The application of payment appears in the books of said creditor company as follows:

Against accounts
receivable due from
Esteban de la Rama P25,255.24
Against the account
due from Hijos de I.
de la Rama, Inc., of
which Don Esteban
de la Rama was the
principal owner P61,544.76
Total P86,800.00

The plaintiff-appellant maintains that this crediting of accounts in the books of the company
constituted a constructive receipt by the estate or the heirs of Esteban de la Rama of the dividends,
and this dividend was an income of the estate and was, therefore, taxable.

It is not disputed that the dividends in question were not actually paid either to the estate, or to the
heirs, of the late Esteban de la Rama. The question to be resolved is whether or not the said
application of the dividends to the personal accounts of the deceased Esteban de la Rama
constituted constructive payment to, and hence, constructively received by, the estate or the heirs. If
the debts to which the dividends were applied really existed, and were legally demandable and
chargeable against the deceased, there was constructive receipt of the dividends; if there were no
such debts, then there was no constructive receipt.

The first debt, as above indicated, had been contested by the executor-administrator of the estate. It
does not even appear that the De la Rama Steamship Co., Inc. had ever filed a claim against the
estate in connection with that indebtedness. The existence and the validity of the debt is, therefore, in
dispute, and there was no proof adduced to show the existence and validity of the debt.

The second debt to which the dividends were partly applied were accounts "due from Hijos de I. de la
Rama, Inc." The alleged debtor here was an entity separate and distinct from the deceased. If that
was so, its debts could not be charged against the deceased, even if the deceased was the principal
owner thereof, in the absence of proof of substitution of debtor. There is no evidence in the instant
case that the late Esteban de la Rama substituted the "Hijos de I. de la Rama" as debtor to the De la
Rama Steamship Co., Inc.; nor was there evidence that the estate of the late Esteban de la Rama
owned the "Hijos de I. de la Rama, Inc.," this fact being, as found by the lower court, not a settled
question because the same was denied by the administrator.

Under the National Internal Revenue Code, income tax is assessed on income that has been
received. Thus, Section 21 of the Code requires that the income must be received by an individual
before a tax can be levied thereon.
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Sec. 21. Rates of tax on citizens or residents.—There shall be levied, collected, and paid
annually upon the entire net income received in the preceding taxable year from all sources by
every individual, a citizen or resident of the Philippines, . . .

Section 56 also requires receipt of income by an estate before an income tax can be assessed
thereon. It provides:

Sec. 56. Imposition of tax.—(a) Application of tax.—The taxes imposed by this Title upon
individuals shall apply to the income of estates or of any kind of property held in trust, including
—

(3) Income received by estates of deceased persons during the period of administration or
settlement of the estate; . . .

Hence, if income has not been received, no income tax can be assessed thereon. Inasmuch as, the
income was not received either by the estate, or by the heirs, neither the estate nor the heir can be
liable for the payment of income tax therefor.

The trial court, therefore, did not err when it held in its decision that:

After a study of the proofs, the Court is constrained to sustain the position of the defendants on
the fundamental issue that there could have been no correct and real basis for the assessment
or that there is no proof that the income in question had been received; it was not actually
delivered unto the Estate since it was retained by the De la Rama Steamship Co., Inc.; which
applied said dividends to certain accounts receivable due from the deceased allegedly, Exh. A-
1; now if truly there had been such indebtedness owing from the deceased unto said De la
Rama Steamship Co., Inc., the Court will agree with plaintiff that the offsetting of the dividends
against such indebtedness amounted to constructive delivery; but here has not been
presented any proof to that effect, i.e., that there was such an indebtedness due from
deceased; on the contrary what the evidence shows is that the former administrator of the
Estate had challenged the validity of said indebtedness, Exh. D, motion of 4 June, 1951; that
being the case, there is no clear showing that income in the form of said dividends had really
been received, which is the verb used in Section 21 of the Internal Revenue Code, by the
Estate whether actually or constructively; and the income tax being collected by the
Government on income received, the Government's position is here without a clear basis; the
position becomes worse when it be considered that it is not even the Estate that is being sued
but the heirs themselves, who admittedly had not received any of said dividends themselves;
the fiction of transfer of ownership by succession from the death of the decedent will have to
give way to actual fact that the dividends have not been adjudicated at all to the heirs up to
now at least so far as the evidence shows. This being the conclusion of the Court, there will be
no need to discuss the question of whether the action has or has not prescribed.

The factual findings of the trial court, as stated in the above-quoted portion of the decision, are
decisive in the determination of the legal issues in this case.

Appellant cites the case of Herbert v. Commissioner of Internal Revenue, 81 F. (2d) 912 as authority
that the crediting of dividends against accounts constitutes payment and constructive receipt of the
dividends. The citation of authority misses the point in issue. In that case the existence of the
indebtedness of Leon S. Herbert to the corporation that declared the dividends and against which
indebtedness the dividends were applied, was never put in issue, and was admitted. In the instant
case, the existence of the obligations has been disputed and, as the trial court found, has not been
proved. It having been shown in the instant case that there was no basis for the assessment of the
income tax, the assessment itself and the sending of notices regarding the assessment would neither
have basis, and so that assessment and the notices produced no legal effect that would warrant the
collection of the tax.

The appellant also contends that the assessment had become final, because the decision of the
Collector of Internal Revenue was sent in a letter dated February 11, 1960 and addressed to the heirs
of the late Esteban de la Rama, through Leonor de la Rama as administratrix of the estate, and was
not disputed or contested by way of appeal within thirty days from receipt thereof to the Court of Tax
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Appeals. This contention is untenable. The lower court found that Leonor de la Rama was not the
administratrix of the estate of Esteban de la Rama. The alleged deficiency income tax for 1950 was
chargeable against the estate of the deceased Esteban de la Rama. On December 5, 1955, when the
letter of notice for the assessment of the deficiency income tax was first sent to Leonor de la Rama
(See Annex "A" of Answer of defendant Lourdes de la Rama-Osmeña, pp. 16-17, Record on Appeal,
the administration proceedings, in Special Proceedings No. 401 of the Court of First Instance of Iloilo,
were still open with respect to the controverted matter regarding the cash dividends upon which the
deficiency assessment was levied. This is clear from the order dated June 21, 1951 (Exhibit "E") of
the Court of First Instance of Iloilo which in part provides:

El albacea-administrador hace constar, sin embargo, que quedan por cobrar ciertos
dividendos declarados y devengados por las acciones del finado Esteban de la Rama en The
De la Rama Steamship Co., Inc., que los funcionarios de dicha corporacion . . . no han pagado
aun . . . y que por tales motivos habria necesidad de prolongar la administracion, solamente
para que esta continue atendiendo con autorizacion, a tales menesteres.

xxx xxx xxx

Se ordena el cierre de la Administracion; pero se provee, sin embargo, la extension de la

misma, solamente para el proposito de iniciar y proseguir hasta su terminacion una accion
contra The De la Rama Steamship Co., Inc. para el cobro de dividendos declarados por dicha
corporacion en Diciembre 31, 1950 sobre las 869 acciones del finado Esteban de la Rama en
la misma . . . .

Y finalmente, queda relevado el Administrador Sr. Eliseo Hervas de toda responsibilidad en

relacion con su administracion, excepto en lo que respecta al cobro de dividendos . . . .

The estate was still under the administration of Eliseo Hervas as regards the collection of said
dividends. The administrator was the representative of the estate, whose duty it was to pay and
discharge all debts and charges on the estate and to perform all orders of the court by him to be
performed (Rule 71, Section 1), and to pay the taxes and assessments due to the Government or any
branch or subdivision thereof (Section 7, Rule 89, Old Rules of Court). The tax must be collected from
the estate of the deceased, and it is the administrator who is under obligation to pay such claim
(Estate of Claude E. Haygood.) (Collector of Internal Revenue v. Haygood, 65 Phil. 520). The notice
of assessment, therefore, should have been sent to the administrator. In this case, notice was first
sent to Lourdes de la Rama-Osmeña on February 29, 1956, and later to Leonor de la Rama on
November 27, 1956, neither of whom had authority to represent the estate. As the lower court said in
its decision: "Leonor de la Rama was not the administratrix of the estate of the late Esteban de la
Rama and as such the demand unto her, Exh. Def. 8, p. 112, was not a correct demand before
November 27, 1956, because the real administrator was the late Eliseo Hervas; . . . ." (p. 45, Record
on Appeal) The notice was not sent to the taxpayer for the purpose of giving effect to the assessment,
and said notice could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of
Internal Revenue, L-12259, May 27, 1959, this Court had occasion to state that "the assessment is
deemed made when the notice to this effect is released, mailed or sent to the taxpayer for the
purpose of giving effect to said assessment." It appearing that the person liable for the payment of the
tax did not receive the assessment, the assessment could not become final and executory (R. A.
1125, Section 11).

Plaintiff-appellant also contends that the lower court could not take cognizance of the defense that the
assessment was erroneous, this being a matter that is within the exclusive jurisdiction of the Court of
Tax Appeals. This contention has no merit. According to Republic Act 1125, the Court of Tax Appeals
has exclusive jurisdiction to review by appeal decisions of the Collector of Internal Revenue in cases
involving disputed assessments, and the disputed assessment must be appealed by the person
adversely affected by the decision within thirty days after the receipt of the decision. In the instant
case, the person adversely affected should have been the administrator of the estate, and the notice
of the assessment should have been sent to him. The administrator had not received the notice of
assessment, and he could not appeal the assessment to the Court of Tax Appeals within 30 days
from notice. Hence the assessment did not fall within the exclusive jurisdiction of the Court of Tax
Appeals.
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CIR VS TOUR SPECIALISTS

The Commissioner of Internal Revenue filed a petition to review on certiorari to the CTA decision
which ruled that the money entrusted to private respondent Tours Specialist (TS), earmarked and
paid for hotel room charges of tourists, travellers and/or foreign travel agencies do not form part of its
gross receipt subject to 3% independent contractor’s tax.

Tours Specialist derived income from its activities and services as a travel agency, which included
booking tourists in local hotels. To supply such service, TS and its counterpart tourist agencies
abroad have agreed to offer a package fee for the tourists (payment of hotel room accommodations,
food and other personal expenses). By arrangement, the foreign tour agency entrusts to TS the fund
for hotel room accommodation, which in turn paid by the latter to the local hotel when billed.

Despite this arrangement, CIR assessed private respondent for deficiency 3% contractor’s tax as
independent contractor including the entrusted hotel room charges in its gross receipts from services
for years 1974-1976 plus compromise penalty.

During cross-examination, TS General Manager stated that the payment through them “is only an act
of accommodation on (its) part” and “the agent abroad instead of sending several telexes and saving
on bank charges they take the option to send the money to (TS) to be held in trust to be endorsed to
the hotel.”’

Nevertheless, CIR caused the issuance of a warrant of distraint and levy, and had TS’ bank deposits
garnished.

Issue:
W/N amounts received by a local tourist and travel agency included in a package fee from tourists or
foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts
subject to 3% contractor’s tax

Held:
No. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to
the taxpayer which do not belong to them and do not redound to the taxpayer’s benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies or receipts within
the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by
the foreign travel agencies to the private respondents do not form part of its gross receipts within the
definition of the Tax Code. The said receipts never belonged to the private respondent. The private
respondent never benefited from their payment to the local hotels. This arrangement was only to
accommodate the foreign travel agencies.

CIR VS JAVIER 199 SCRA 824

• 1977: Victoria Javier, wife of Javier-respondent, received $999k from Prudential Bank remitted by
her sister Dolores through Mellon Bank in US.
• Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal against Javier claiming that its
remittance of $1M was a clerical error and should have been $1k only and praying that the excess be
returned on the ground that the Javiers are just trustees of an implied trust for the benefit of Mellon
Bank.
• CFI charged Javier with estafa alleging that they misappropriated and converted it to their own
personal use.
• A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote that “the
taxpayer was recipient of some money received abroad which he presumed to be a gift but turned out
to be an error and is now subject of litigation”
• The Commissioner of Internal Revenue wrote a letter to Javier demanding him to pay taxes for the
deficiency, due to the remittance.
• Javier replied to the Commissioner and said that he will pay the deficiency but denied that he had
any undeclared income for 1977 and requested that the assessment of 1977 be made to await final
court decision on the case filed against him for filing an allegedly fraudulent return.

• Commissioner replied that “the amount of Mellon Bank’s erroneous remittance which you were able
to dispose is definitely taxable” and the Commissioner imposed a 50% fraud penalty on Javier.
 9

ISSUE: Whether or not Javier is liable for the 50% penalty.

HELD: No.
• The court held that there was no actual and intentional fraud through willful and deliberate
misleading of the BIR in the case. Javier even noted that “the taxpayer was recipient of some money
received abroad which he presumed to be a gift but turned out to be an error and is now subject of
litigation”
• (the ff are not expressly written in the case, in fact the doctrine I just found it elsewhere but this is
relevant to the topic rather than the issue in the case)
o Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of a definite and unconditional obligation to return or repay.
o In this case, the remittance was not a taxable gain, since it is still under litigation and there is a
chance that Javier might have the obligation to return it. It will only become taxable once the case has
been settled because by then whatever amount that will be rewarded, Javier has a claim of right over
it.

CIR VS CA GR 124043

YMCA has earned income from leasing out a portion of its premises to small shop owners, like restau
rants and canteen operators, and also from parking fees collected from non-
members. The Commissioner of internal revenue (CIR) said that it should be taxed. It invoked then t
he fundamental law, that Article VI, Section 28 of par. 3 of the 1987 Constitution, exempts charitable i
nstitutions from the payment not only of property taxes but also of income tax from any source.

ISSUE:

1. Whether or not the income derived from rentals of real property owned by the Young Mens Christian
Association of the Philippines, Inc. (YMCA) established as a welfare, educational and charitable non-
profit corporation subject to income tax under Article VI, Section 28 of par. 3 of the 1987 Constitution.
2. Whether or not the YMCA is aneducational institution within the purview of Article XIV, Section 4, par
.3 of the Constitution.

RULING:

1. Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of this Cou
rt, stressed during the Concom debates that what is exempted is not the institution itself; those exemp
ted from real estate taxes are lands, buildings and improvements actually, directly and exclusively us
ed for religious, charitable or educational purposes. Hence, Indeed, the income tax exemption claime
d by private respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution.

3. Laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the e
xemption it claims under Article XIV, Section 4, par.3 of the Constitution, it must prove with substantia
l evidence that (1) it falls under the classification non-stock, non-
profit educational institution; and (2) the income it seeks to be exempted from taxation is used actuall
y, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of e
vidence was submitted by private respondent to prove that it met the said requisites.

Under the Education Act of 1982, term educational institution refers to schools. The school system is
synonymous with formal education, which refers to the hierarchically structured and chronological gra
ded learnings organized and provided by the formal school system and for which certification is requir
ed in order for the learner to progress through the grades or move to the higher levels.] The Court has
examined the Amended Articles of Incorporation and By-
Laws of the YMCA, but found nothing in them that even hints that it is a school or an educational instit
ution.
 10

CIR v. CA, CTA, AdMU

F A C T S: Private respondent, Ateneo de Manila University, is a non-stock, non-profit educational

institution with auxiliary units and branches all over the country. The Institute of Philippine Culture
(IPC) is an auxiliary unit with no legal personality separate and distinct from private respondent. The
IPC is a Philippine unit engaged in social science studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its research activities from international organizations,
private foundations and government agencies.

On 8 July 1983, private respondent received from CIR a demand letter dated 3 June 1983, assessing
private respondent the sum of P174,043.97 for alleged deficiency contractor’s tax, and an
assessment dated 27 June 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for
the fiscal year ended 31 March 1978. Denying said tax liabilities, private respondent sent petitioner a
letter-protest and subsequently filed with the latter a memorandum contesting the validity of the
assessments.

After some time petitioner issued a final decision dated 3 August 1988 reducing the assessment for
deficiency contractor’s tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

The lower courts ruled in favor of respondent. Hence this petition.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila
University "falls within the definition" of an independent contractor and "is not one of those mentioned
as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the
foregoing provision of law. Petitioner states that the "term 'independent contractor' is not specifically
defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and
mental service for a fee, is now indubitably considered an independent contractor liable to 3%
contractor's tax."

I S S U E: Whether or not private respondent falls under the purview of independent contractor
pursuant to Section 205 of the Tax Code and is subject to a 3% contractors tax.

H E LD: The petition is unmeritorious.

The term "independent contractors" include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code)
whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether
or not the performance of the service calls for the exercise or use of the physical or mental faculties of
such contractors or their employees.

Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without
first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously
both illogical and impractical to determine who are exempted without first determining who are
covered by the aforesaid provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing
taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom.

Interpretation of Tax Laws. The doctrine in the interpretation of tax laws is that “(a) statute will not
be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . . (A) tax
cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and
the provisions of a taxing act are not to be extended by implication.” In case of doubt, such statutes
are to be construed most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly
and clearly import.

Ateneo’s Institute of Philippine Culture never sold its services for a fee to anyone or was ever
engaged in a business apart from and independently of the academic purposes of the university.
Funds received by the Ateneo de Manila University are technically not a fee. They may however fall
as gifts or donations which are “tax-exempt” as shown by private respondent’s compliance with the
 11

requirement of Section 123 of the National Internal Revenue Code providing for the exemption of
such gifts to an educational institution.

Transaction of IPC not a contract of sale nor a contract for a piece of work. The transactions of
Ateneo’s Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract for
a piece of work. By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money
or its equivalent. In the case of a contract for a piece of work, “the contractor binds himself to execute
a piece of work for the employer, in consideration of a certain price or compensation. . . . If the
contractor agrees to produce the work from materials furnished by him, he shall deliver the thing
produced to the employer and transfer dominion over the thing. . . .” In the case at bench, it is clear
from the evidence on record that there was no sale either of objects or services because, as adverted
to earlier, there was no transfer of ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine Culture.