Tomas Calasanz vs CIR (GR No. L-26284, October 8, 1986) Facts: Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in Cainta, Rizal. In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were i ntroduced to make the lots saleable. Soon after, the lots were sold to the public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as taxable capital gains. Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business as real estate dealers, and assessed a deficiency income tax on profits derived from the sale of the lots based on the rates for ordinary income. Petitioners filed with the Court of Tax Appeals a petition for review contesting the aforementioned assessments, but t he Tax Court upheld the respondent Commissioner. The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of Section 34[a] [1] of the Tax Code and that an heir who liquidated his inheritance cannot be said to have engaged in the real estate business and may not be denied the the preferential tax treatment given to gains gains from sale of capital assets, merely because he disposed of it in the only possible and advantageous way. Respondent Commissioner maintained that the imposition of the taxes in question is in accordance with law since petitioners are deemed to be in the real estate business for having been involved in a series of real estate transactions pursued for profit. Respondent argued that property acquired by inheritance may be converted from an investment property to a business property if, as in the present case, it was subdivided, improved, and subsequently sold and the number, continuity and frequency of the sales were such as to constitute "doing business." Respondent concluded that since the lots are ordi nary assets, the profits realized r ealized therefrom t herefrom are ordinary gains, hence taxable in full. Issue: Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates. Held: Taxable as ordinary income.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer [whether or not connected with his trade or business], but does not include, stock in trade of the taxpayer taxpayer or other property of a kind which would properly be included, in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection [f] of section thirty; or real property used in the trade or business of the taxpayer. The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets. Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a co mbination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business. Upon an examination of the facts on record, We are convinced that the activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. One strong factor against petitioners' contention is the business element of development which is very much in evidence. Petitioners did not sell the land in the condition in which they acquired it. While the land was originally devoted to rice and fruit trees, it was subdivided into small lots and in the process converted into a residential subdivision Extensive improvements like the laying out of streets, construction of concrete gutters and installation of lighting system and drainage facilities, among others, were undertaken to enhance the value of the lots and make them more attractive to prospective buyers. Another distinctive feature of the real estate business discernible from the records is the existence of contracts receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The sizable amount of receivables in comparison with the sales volume of P446,407.00 during the same period signifies that the lots were sold on installment basis and suggests the number, continuity and frequency of the sales. Also of significance is the circumstance that the lots were advertised for sale to the public and that sales and collection commissions were paid out during the period in question.
CHINA BANKING CORP vs CA & CIR GR No. 125508, July 19, 2000 FACTS: China Banking Corp made a 53% equity investment in First CBC Capital, a Hong Kong subsidiary engaged in financing and investment with “deposit“deposit -taking” function.
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A regular examination by Bangko Sentral on China Bank’s financial book and investment portfolio shows that First CBC Capital has become insolvent. With the approval of Bangko Sentral, China Bank wrote off as being worthless its investment in First CBC in its 1987 Income Tax Return, and treated it as a bad debt or as an ordinary loss deductible from its gross income. CIR disallowed the deduction, contending that it should be capital loss.
A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets.
Issue: 1) Whether it is a capital loss or an ordinary loss. 2) WON China Banking is allowed to claim for the deductions.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer.
Held: 1) CAPITAL LOSS. Equity investment is a capital asset resulting in a capital gain or a capital loss. A capital asset is defined negatively in Section 33(1) of the NIRC: (1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include: stock in trade of the taxpayer; or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of t he taxable year; or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or business of the taxpayer
COMPAGNIE FINANCIERE vs. CIR G.R. No. 133834, August 28, 2006
FACTS: Compagnie Financiere Sucres et Denree is a non-resident private corporation duly organized and existing under the laws of the Republic of France. On October 21, 1991, petitioner transferred its 8% equity interest in the Makati Shangri-La Hotel and Resort, Incorporated to Kerry Holdings Ltd. (formerly Sligo Holdings Ltd), as shown by a Deed of Sale and Assignment of Subscription and Right of Subscription of the same date. Transferred were (a) 107,929 issued shares of stock valued at P100.00 per share with a total par value of P10,792,900.00; (b) 152,031 with a par value of P100.00 per share with a total par value of P15,203,100.00; (c) deposits on stock subscriptions amounting to P43,147,630.28; and (d) petitioners right of subscription.
Thus, shares of stock; like the other securities defined in Section 20(t)[4] of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities.
On November 29, 1991, petitioner paid the documentary stamps tax and capital gains tax on the transfer under protest. Thereafter, they filed a claim for refund of overpaid capital gains tax in the amount of P107,869.00 and overpaid documentary stamps taxes in the sum of P951,830.00 or a total of P1,059,699.00. Petitioner alleged that the transfer of deposits on stock subscriptions is not a sale/assignment of shares of stock subject to documentary stamps tax and capital gains tax. However, respondent did not act on petitioners claim for refund. Thus, petitioner filed with the CTA a petition for review.
Section 20(u) of the NIRC defines a dealer in securities as a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom.
CTA denied petitioners claim for refund. The CTA held that it is clear from Section 176 of the Tax Code that sales to secure the future payment of money or for the future transfer of any bond, due-bill, certificates of obligation or stock are taxable. Furthermore, petitioner admitted that it profited from the sale of shares of stocks. Such profit is subject to capital gains tax. Petitioner’s Motion for reconsideration were denied.
In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets.
ISSUE: Whether the Court of Appeals erred in holding that the assignment of deposits on stock subscriptions is subject to documentary stamps tax and capital gains tax.
2)
NO. Loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction.
HELD: Along with police power and eminent domain, taxation is one of the three basic and necessary attributes of sovereignty. Thus, the State cannot be deprived of this most essential power and attribute of sovereignty by vague implications of law. Rather, 2
being derogatory of sovereignty, the governing principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of statute. Significantly, petitioner cannot point to any specific provision of the National Internal Revenue Code authorizing its claim for an exemption or refund. Rather, Section 176 of the National Internal Revenue Code applicable to the issue provides that the future transfer of shares of stocks is subject to documentary stamp tax. Clearly, under this provision, sales to secure the future transfer of due-bills, certificates of obligation or certificates of stock are liable for documentary stamp tax. No exemption from such payment of documentary stamp tax is specified therein. Petitioner contends that the assignment of its deposits on stock subscription is not subject to capital gains tax because there is no gain to speak of. In the Capital Gains Tax Return on Stock Transaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition cost of the shares it sold, including the stock subscription is P69,143,630.28. The transfer price to Kerry Holdings, Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the amount of P1,189,239.64. As the CTA aptly ruled, a tax on the profit of sale on net capital gain is the very essence of the net capital gains tax law. To hold otherwise will ineluctably deprive the government of its due and unduly set free from tax liability persons who profited from said transactions.
SUPREME TRANSLINER v. BPI FACTS: Supreme Transliner took out a loan from respondent and was unable to pay. The respondent bank extrajudicially foreclosed the collateral and, before the expiration of the one-year redemption period, the mortgagors notified the bank of its intention to redeem the property. ISSUE: Is the mortgagee-bank liable to pay the capital gains tax upon the execution of the certificate of sale and before the expiry of the redemption period? HELD: NO. It is clear that in foreclosure sale there is no actual transfer of the mortgaged real property until after the expiration of the one-year period and title is consolidated in the name of the mortgagee in case of non-redemption.
This is because before the period expires there is yet no transfer of title and no profit or gain is realized by the mortgagor. DOCTRINES: National Internal Revenue Code; capital gains documentary stamp tax; if right of redemption exercised.
tax;
Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or other disposition of real property classified as capital asset under the National Internal
Revenue Code (NIRC) shall be subject to final capital gains tax. The term “sale” includes pacto de retro and other forms of conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86, as amended by RMO Nos. 16-88, 27-89 and 6-92, states that these conditional sales “necessarily includes mortgage foreclosure sales (judicial and extrajudicial foreclosure sales).” Further, for real property foreclosed by a bank on or after September 3, 1986, the capital gains tax and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank. Under Section 63 of Presidential Decree No. 1529, or the Property Registration Decree, if no right of redemption exists, the certificate of title of t he mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered by brief memorandum thereof made by the Register of Deeds on the certificate of title. It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after t he expiration of the one-year redemption period as provided in Act No. 3135, or An Act or Regulate the Sale of Property Under Special Powers Inserted In or Annexed to Real Estate Mortgages, and title thereto is consolidated in t he name of the mortgagee in case of non-redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale does not by itself transfer ownership. RR No. 4-99 (March 16, 1999), further amends RMO No. 6-92 relative to the payment of capital gains tax and documentary stamp tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies. Under this RMO, in case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be i mposed because no capital gain has been derived by the mortgagor and no sale or transfer of real property was realized. Moreover, the transaction will be subject to documentary stamp tax of only PhP 15 because no land or realty was sold or transferred for a consideration. National Internal Revenue Code; non-retroactivity of rulings; exception. Section 246 of the National Internal Revenue Code sets out that rule on non-retroactivity of rulings. In this case, the retroactive application of Revenue Regulations No. 4-99 [to the transaction which took place before its effectivity is more consistent with the policy of aiding the exercise of the right of redemption. As the Court of Tax Appeals concluded in one case, RR No. 499 “has curbed the inequity of imposing a capital gains tax even before the expiration of the redemption period [since] there is yet no transfer of title and no profit or gain is realized by the
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mortgagor at the time of foreclosure sale but only upon expiration of the redemption period.”
was ever secured. In view of these we find that the respondent court did commit the error charged.
In his commentaries [Hector] De Leon expressed the view that while revenue regulations as a general rule have no retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong construction cannot give rise to a vested right that can be invoked by a taxpayer. Supreme Transliner, Inc. vs BPI Family Savings Bank, Inc.
W/N the assessment violates Memorandum Order V-634 (An order of Commissioner granting Regional Directors authority close tax cases involving deficiency assessments not exceeding P10,000.00 in taxes and penalties)
*Gonzales vs CTA THE CITY LUMBER, INC. v. THE HON. MELENCIO R. DOMINGO, Commissioner of Internal Revenue and THE HON. COURT OF TAX APPEALS G.R. No. L-18611, 30 January 1964
The alleged loss of plywood were rejected because said loss was never reported in the books of petitioner; and neither was such loss reported in the income tax return of petitioner for the year, submitted some months after the alleged loss. Petitioner seeks the review of a decision of the Court Tax Appeals, upholding an assessment by respondent on an additional income of P16,678.63 representing minor deductions from the alleged expenses, on undisclosed sales of plywood, nails and GI sheets amounting to P7,902.07, and on a cash credit balance of P7,896.80. Petitioner claims that the respondent court erred in not holding that plywood and GI sheets were actually lost in a fire occuring in the city and in not considering the credit cash balance as a loan secured by petitioner. ISSUE: Whether or not petitioner can claim deductions on his expenses/loss? RULING: No. Petitioner introduced as a witnesses in his favor the Chief of Police of the City of Dumaguete to testify on the existence of a fire in the city by reason of which the store of petitioner was looted of plywood and kegs of nails. But said witness declared that they recovery only 100 pieces of plywood and 5 kegs of nails, but these were returned to petitioner. The Court below, however, rejected the alleged loss of plywood because said loss was never reported in the books of petitioner; and neither was such loss reported in the income tax return of petitioner for the year, submitted some months after the alleged loss.
We hold that the conduct of petitioner in not reporting said loss in his book of account or in his income tax turn proves that the alleged loss had not been suffered. On the alleged loan of the sum of around P8,000.00 which petitioner claims to be the cash credit balance appearing petitioner claims to be his book of account.
Petitioner's book of account failed to show such a loan also. Neither were any receipts or other evidence produced t o show that said amount was a loan secured by petitioner, or that a loan
The order in question was applicable only to subordinate officers of the BIR and could not bind the Commissioner himself, who has been entrusted by law to make final assessments. The Commissioner cannot delegate this power to make a final assessment to his subordinate. Delegatus nor potest delegare; i.e. the person to whom an office or duty is delegated cannot lawfully devolve the duty on another.
PLARIDEL SURETY vs. CIR G.R. No. L-21520, December 11, 1967
FACTS: Petitioner Plaridel Surety & Insurance Co., is a domestic corporation engaged in the bonding business. Petitioner, as surety, and Constancio San Jose, as principal, solidarily executed a performance bond in favor of the P. L. Galang Machinery Co., Inc., to secure the performance of San Jose's contractual obligation to produce and supply logs to the latter. To afford itself adequate protection against loss or damage on the performance bond, petitioner required San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves, solidarily, to indemnify petitioner for whatever liability it may incur by reason of said performance bond. San Jose later failed to deliver the logs to Galang Machinery and the latter sued on the performance bond. San Jose constituted a chattel mortgage on logging machineries and other movables in petitioner's favor while Ramon Cuervo executed a real estate mortgage. Petitioner effected payment in favor of Galang Machinery in the total sum of P44,490.00. In its income tax return for the year 1957, petitioner claimed the said amount of P44,490.00 as deductible loss from its gross income. CIR disallowed the claimed deduction of P44,490.00 and assessed against petitioner the sum of P8,898.00, plus interest, as deficiency income tax for the year 1957. ISSUE: Whether or not the payment effected to Galang Machining is a deductible loss from the gross income of petitioner surety company? RULE: No. Petitioner was duly compensated for otherwise than by insurance — thru the mortgages in its favor executed by San Jose and Cuervo — and it had not yet exhausted all its available remedies, especially as against Cuervo, to minimize its loss.
Loss is deductible only in the taxable year it actually happens or is sustained. However, if it is compensable by insurance or otherwise, deduction for the loss suffered is postponed to a subsequent year, which, to be precise, is that year in which it
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appears that no compensation at all can be had, or that there is a remaining or net loss, i.e., no full compensation. There is no question that the year in which the petitioner Insurance Co. effected payment to Galang Machinery pursuant to a final decision occurred in 1957. However, under the same court decision, San Jose and Cuervo were obligated to reimburse petitioner for whatever payments it would make to Galang Machinery. Clearly, petitioner's loss is compensable otherwise (than by insurance). It should follow, then, that the loss deduction cannot be claimed in 1957.
CIR vs Priscilla Estate Facts : The corporation duly filed its income tax returns for the years 1949, 1950 and 1951. On 13 June 1952, however, it amended its income tax returns for 1951 and paid the tax corresponding to the assessment made by the petitioner on the basis of the returns, as amended; and on 13 September 1952, the company claimed a refund of P4,941.00 as overpaid income tax for the year 1950 for having deducted from gross i ncome only the sum of P6,013.85 instead of P39,673.25 as its loss in the sale of a lot and building. Thereupon, the Commissioner of Internal Revenue conducted an investigation of the company's income tax returns for 1949 through 1951 and, thereafter, granted a tax credit of P1,443.00 for 1950 but assessed on 3 November 1953 deficiency income taxes of P3,575.49 for 1949 and P22,166.10 for 1951.
The Priscila Estate, Inc., contested the deficiency assessments and when the Commissioner of Internal Revenue refused to reconsider them, the former brought suit to the tax court which after trial, rendered the decision that, in 1961, the Commissioner elevated to this Supreme Court for review. Issues: 1. WON the Barong Barong should not be charged as a deduction to the gross income but rather added to the cost of the new building? 2. WON the basis for depreciation should be limited to the capital invested which is the assessed value? Ruling: 1. It should be charged as deduction to the Gross income. the tax court found that the removal of the "barong-barong", instead of being voluntary, was forced upon the corporation by the city engineer because the structure was a fire hazard; that the rental income of the old building was about P3,730.00 per month, and that t he corporation had no funds but had to borrow, in order to construct a new building. All these facts, taken together, belie any intention on the part of the corporation to demolish the old building merely for the purpose of erecting another in its place. Since the demolished building was not compensated for by insurance or otherwise, its loss should be charged off as deduction from gross income
2.
Depreciation is a question of fact, and is "not measured by a theoretical yardstick, but should be determined by a consideration of the actual facts." The petitioner himself on
page 26 of his appeal brief, asserts that "what consist of the depreciable amount (sic) is elusive and is a question of fact." Since the petitioner does not claim that the tax court, in applying certain rates and basis to arrive at the allowed amounts of depreciation of the various properties, was, arbitrary or had abused its discretion, and since the Supreme Court, before the Revised Rules, limited its review of decisions of the Court of Tax Appeals to questions of law only, the findings of the tax court on the depreciation of the several assets should not be disturbed. Dumaguete Cathedral vs. CIR (GR No. 182722, Jan. 22, 2010)
Cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax must give way to foster the creation and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: "The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice." FACTS: Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative with the following objectives and purposes: (1) to increase the income and purchasing power of the members; (2) to pool the resources of the members by encouraging savings and promoting thrift to mobilize capital formation for development activities; and (3) to extend loans to members for provident and productive purposes. (BIR) Operations Group Deputy Commissioner, issued Letters of Authority authorizing BIR Officers to examine petitioner’s books of accounts and other accounting records for all internal revenue taxes for the taxable years 1999 and 2000. On 2002, DCCCO received Pre-Assessment Notices for deficiency withholding taxes for taxable years 1999 and 2000. The deficiency withholding taxes cover the payments of the honorarium of the Board of Directors, security and janitorial services, legal and professional fees, and interest on savings and time deposits of its members. DCCCO informed BIR that it would ONLY pay the deficiency withholding taxes corresponding to the honorarium of the Board of Directors, security and janitorial services, legal and professional fees for the year 1999 and 2000, EXCLUDING penalties and interest. After payment, DCCCO received from the BIR Tr anscripts of Assessment and Audit Results/Assessment Notices, ordering petitioner to pay the deficiency withholding taxes, INCLUSIVE of penalties, for the years 1999 and 2000. DCCO's contention: Under Sec. 24. Income Tax Rates. — x x x x (B) Rate of Tax on Certain Passive Income: — (1) Interests, Royalties, Prizes, and Other Winnings. — A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; x x x applies only to 5
banks and not to cooperatives, since the phrase "similar arrangements" is preceded by terms referring to banking transactions that have deposit peculiarities. Therefore, the savings and time deposits of members of cooperatives are not included in the enumeration, and thus not subject to the 20% final tax. Also, pursuant to Article XII, Section 15 of the Constitution 25 and Article 2 of Republic Act No. 6938 (RA 6938) or the Cooperative Code of the Philippines, cooperatives enjoy a preferential tax treatment which exempts their members from the application of Section 24(B)(1) of the NIRC. ISSUE: Whether or not DCCCO is liable to pay the deficiency withholding taxes on interest from savings and time deposits of its members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per annum RULING: DCCCO is not liable. The NIRC states that a "final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from the deposit substitutes and from trust funds and similar arrangement x x x" for individuals under Section 24(B)(1) and for domestic corporations under Section 27(D)(1). Considering the members’ deposits with the cooperatives are not currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply to members of cooperatives and to deposits of primaries with federations, respectively.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster t he creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. Thus, to encourage the formation of cooperatives and to create an atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax treatment. The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61 and 62 of RA 6938, which read: ART. 61. Tax Treatment of Cooperatives. — Duly registered cooperatives under this Code which do not transact any business with non-members or the general public shall not be subject to any government taxes and fees imposed under the Internal Revenue Laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section. ART. 62. Tax and Other Exemptions. — Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provision of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. I t must be emphasized that cooperatives exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide goods and services to its members to enable them to
attain increased income, savings, investments, and productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the other hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only mentions cooperatives, this should be construed to include the members. It is also worthy to note that t he tax exemption in RA 6938 was retained in RA 9520. The only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938) now expressly states that transactions of members with the cooperatives are not subject to any taxes and fees. T hus: ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both members and non-members shall not be subjected to tax on their transactions with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on members’ deposits and documentary tax. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions. Moreover, no less than our Constitution guarantees the protection of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the for egoing provisions, the Court found that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC is more in keeping with the letter and spirit of the Constitution.
AFISCO INSURANCE CORPORATION et. Al, vs. CIR Facts: The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the P hilippines entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener RuckversicherungsGesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an Information Return of Organization Exempt from Income Tax for the year ending in 1975, on the basis of which it was assessed by the CIR deficiency corporate taxes and withholding taxes in the amount on dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co. On January 27, 1986, the CIR denied the protest and ordered the petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest, and with[h]olding tax. The CA ruled in the main that the pool of machinery insurers was a 6
partnership taxable as a corporation, Hence, this Petition for Review before us.
income of which is derived from engaging in any trade or business.
Issues: 1. Whether or not the contend that the pool or clearing house was an informal partnership, which was taxable as a corporation under the NIRC; 2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were dividends subject to tax; and 3. Whether or not the respondent Commissioners right to assess the Clearing House had already prescribed.
Thus, the Court in E vangelista v. C ollector of I nternal Revenue held that Section 24 covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members. In Evangelista: xxx Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court said: The term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on.
First Issue:
Pool Taxable as a Corporation Petitioner’s Contention: They point out that the reinsurance policies were written by them individually and separately, and that their liability was limited to the extent of their allocated share in the original risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its role was limited to its principal function of allocating and distributing the risk(s) arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc. The Court is not persuaded. Section 24 of the NIRC, provides: SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, but not including duly registered general co partnership, general professional partnerships, private educational institutions, and building and loan associations xxx. Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Parenthetically, the NLRCs inclusion of such entities in the tax on corporations was made even clearer by t he Tax Reform Act of 1997, which amended the Tax Code. Pertinent provisions of the new law read as follows: SEC. 22. -- Definition. -- When used in this Title: (B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government. General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Its requisites are: (1) mutual contribution to a common stock, and (2) a joint interest in the profits. In other words, a partnership is formed when persons contract to devote to a common purpose either money, property, or labor with the intention of dividing the profits between themselves. Meanwhile, an association implies associates who enter into a joint enterprise x x x for the transaction of business. In the case before us, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool. (2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. (3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share in the business ceded to the pool and in the expenses according to a Rules of Distribution annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pools formation. As aptly found by the CTA: xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or coaction was indispensable [to] the transaction of the business. x x x If 7
together they have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted.
to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the creation of said pool.
The petitioners reliance on Pascual v. Commissioner is misplaced, in Pascual, there was no unregistered partnership, but merely a co-ownership which took up only two isolated transactions. The Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more than ten years, as in the case before us.
Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is manifest from a reading of the Quota Share Reinsurance Treaty and Articles of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to be mistaken.
Second Issue:
Pools R emittances Are Taxable Petitioners contention: further contend that the remittances of the pool to the ceding companies and Munich are not dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double taxation, as it would result in taxing the same premium income twice in the hands of the same taxpayer. Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be deemed dividends. Double taxation means taxing the same property twice when it should be taxed only once. That is, xxx taxing the same person twice by the same jurisdiction for the same thing. In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no double taxation here. The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right. Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed. Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon reinsurance by any company that has already paid the tax xxx. This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former as their own.
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984. Third Issue: Prescription
Petitioners also argue that the government’s right to assess and collect the subject tax had prescribed. They claim that the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981. Thus, the petit ioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed, and that the internal revenue commissioner was already barred by prescription from making an assessment. We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was tolled under then Section 333 of the NIRC, because the taxpayer cannot be located at the address given in the information return filed and for which reason there was delay in sending the assessment. Indeed, whether the governments right to collect and assess the tax has prescribed involves facts which have been ruled upon by the l ower courts. It is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as in this case, this Court must not overturn the factual findings of the CA and the CTA.
On the other hand, Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type of remittances forwarded 8
