TAX 1 CASES FOR JUNE 11, 2013 1. VERA V FERNANDEZ FIRST DIVISION G.R. No.

L-31364 March 30, 1979 MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regio nal Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners, vs.HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch V, and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D. TONGOY respondents. DE CASTRO, J.: Appeal from two orders of the Court of First Instance of Negros Occidental, Bran ch V in Special Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969 di smissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the Government of the Republic of the Ph ilippines against the Estate of the late Luis D. Tongoy, for deficiency income taxes for the years 1963 and 1964 of the d ecedent in the total amount of P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second, dated October 7, 1969, denying the Motion for reconsideration of the Order of dismissal. The Motion for allowance of claim and for payment of taxes dated May 28, 1969 wa s filed on June 3, 1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo) . The claim represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency income taxes in the tot al sum of P3,254.80 as above stated, covered by Assessment Notices Nos. 11-50-29-1-11061-21-63 and 11-50-291-1 1087564, to which motion was attached Proof of Claim (Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely on the ground that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4 , Opposition to Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the respondent Ju dge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein petitioner, Regional Director of t he Bureau of Internal Revenue, in an order dated July 29, 1969 (Annex D, Petition, p. 26, Rollo). On September 18, 1969, a motion for reconsideration was filed, of the order of July 29, 1969, but was denied in an Order dated October 7, 1969. Hence, this appeal on certiorari, petitioner assigning the following errors: 1. The lower court erred in holding that the claim for taxes by the government a gainst the estate of Luis D. Tongoy was filed beyond the period provided in Section 2, Rule 86 of the Rule s of Court. 2. The lower court erred in holding that the claim for taxes of the government w as already barred under Section 5, Rule 86 of the Rules of Court. which raise the sole issue of whether or not the statute of non-claims Section 5 , Rule 86 of the New Rule of Court, bars claim of the government for unpaid taxes, still within the period of limitation prescribed in Section 331 and 332 of the

National Internal Revenue Code. Section 5, Rule 86, as invoked by the respondent Administrator in hid Opposition s to the Motion for Allowance of Claim, etc. of the petitioners reads as follows: All claims for money against the decedent, arising from contracts, express or im plied, whether the same be due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness of the decedent, and judgment for money against the decedent, must be filed within the time limited in they notice; otherwise they are barred forever, except that they may be set forth as counter claims in any action that the executor or administrator may bring against the claimants. Where the executor or administrator commence an action, or prosecutes an action already commenced by t he deceased in his lifetime, the debtor may set forth may answer the claims he has against the dece dents, instead of presenting them independently to the court has herein provided, and mutual claim s may be set off against each other in such action; and in final judgment is rendered in favored of the decedent, the amount to determined shall be considered the true balance against the estate, as though the claim has been presented directly before the court in the administration proceedings. Clai ms not yet due, or contingent may be approved at their present value. A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary obligation of the decedent created by law, such as taxes which is entirely of different character from the claims expressly enumerated therein, such as: "all claims for money against the decedent arising from contract, express or implied, whether the same be due, not due

or contingent, all claim for funeral expenses and expenses for the last sickness of the decedent and judgment for money against the decedent." Under the familiar rule of statutory construction of expr essio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily, and by implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334-335). In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well as the matter of prescription thereof are governed by the provisions of the National Internal revenue Code, particularly S ections 331 and 332 thereof, and not by other provisions of law. (See also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No. L-10681, March 29, 1958). Even without being specifically mentioned, th e provisions of Section 2 of Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind of t he Court as not affecting the aforecited Section of the National Internal Revenue Code. In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointed ly held that "taxes assessed against the estate of a deceased person ... need not be submitted to the committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the estate." The abolition of the Comm ittee on Claims does not alter the basic ruling laid down giving exception to the claim for taxes from being filed as the other claims mentioned in the Rule should be filed before the Court. Claims for taxes may be collected even after the dist ribution of the decedent's estate among his heirs who shall be liable therefor in proportion of their share in the inheritan ce. (Government of the Philippines vs. Pamintuan, 55 Phil. 13). The reason for the more liberal treatment of claims for taxes against a decedent 's estate in the form of exception from the application of the statute of non-claims, is not hard to find. Taxes are the lif eblood of the Government and their prompt and certain availability are imperious need. (Commissioner of Internal Revenue v s. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation depends the Government ability to serve th e people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officia ls entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same mann er as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affairs. This should not hold true to government officials with respect to matte rs not of their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the op eration of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge

No. 761, Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCR A 162; Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc ., 66 SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Reve nue, L-23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected even after the distribution of the estate of the decedent among his heirs (Government of the Philippines vs. Pamintuan,supra; Pineda vs. CFI of Taya bas, supra Clara Diluangco Palanca vs. Commissioner of Internal Revenue, G. R. No. L-16661, January 31, 1962). Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citi ng the last paragraph of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the Government of the Philippines from the time the assessment was made by the Commissioner of Internal Revenue until paid with inte rests, penalties, etc. By virtue of such lien, this court held that the property of the estate already in the hands of an heir or transferee may be subject to the payment of the tax due the estate. A fortiori before the inheritance has passed to the heirs, the unpaid taxes due the decedent may be collected, even without its having been presented under Section 2 of Rule 86 of the Rules of Court. It may truly be said that until the property of the estate of the decedent has vest ed in the heirs, the decedent, represented by his estate, continues as if he were still alive, subject to the payment of such taxes as would be collectible from the estate even after his death. Thus in the case above cited, the income taxes sought to b e collected were due from the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945. Even assuming arguendo that claims for taxes have to be filed within the time pr escribed in Section 2, Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration of the time originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited which reads:

Section 2. Time within which claims shall be filed. -In the notice provided in t he preceding section, the court shall state the time for the filing of claims against the estate, which sh all not be more than twelve (12) nor less than six (6) months after the date of the first publication of the notice. However, at any time before an order of distribution is entered, on application of a creditor wh o has failed to file his claim within the time previously limited the court may, for cause shown and on s uch terms as are equitable, allow such claim to be flied within a time not exceeding one (1) mont h. (Emphasis supplied) In the instant case, petitioners filed an application (Motion for Allowance of C laim and for an Order of Payment of Taxes) which, though filed after the expiration of the time previously limited but befo re an order of the distribution is entered, should have been granted by the respondent court, in the absence of any valid gr ound, as none was shown, justifying denial of the motion, specially considering that it was for allowance Of claim f or taxes due from the estate, which in effect represents a claim of the people at large, the only reason given for the denial that the claim was filed out of the previously limited period, sustaining thereby private respondents' contention, erroneously as has been demonstrated. WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's asse ssment in the total amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Cod e is a final one and the respondent estate's sole defense of prescription has been herein overruled, the Motion for Allowance of Claim is herein granted and respondent estate is ordered to pay and discharge the same, subject only to the limitation of the interest collectible thereon as provided by the Tax Code. No pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Makasiar, Fernandez, Guerrero, and Melencio-He rrera, JJ., concur. 2. Commissioner vs. Algue, Inc. COMMISSIONER v. ALGUE, INC. GR No. L-28896, February 17, 1988 158 SCRA 9 FACTS: Private respondent corporation Algue Inc. filed its income tax returns fo r 1958 and 1959showing deductions, for promotional fees paid, from their gross income, thus lowering their taxable inco me. The BIR assessed Algue based on such deductions contending that the claimed deduction is disallowed because it was no t an ordinary, reasonable and necessary expense. ISSUE: Should an uncommon business expense be disallowed as a proper deduction i n computation of income taxes, corollary to the doctrine that taxes are the lifeblood of the government? HELD: No. Private respondent has proved that the payment of the fees was necessa ry and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an xperimental enterprise and involve themselves in a new business requiring millions of pesos. This was n o mean feat and should be, as it was, sufficiently recompensed. It is well-settled that taxes are the lifeblood of the government and so should

be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with l aw as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the ap parently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome pow er of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed. Posted 8th July 2012 by cLutz FIRST DIVISION G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ALGUE, INC., and THE COURT OF T AX APPEALS, respondents. CRUZ, J.: Taxes are the lifeblood of the government and so should be collected without unn ecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting intere sts of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision o f the Collector of Internal Revenue was made on time and in accordance with law. We deal first with the procedural question. The record shows that on January 14, 1965, the private respondent, a domestic co rporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2On March 12, 1965, a warrant of distraint and levy was presented to the private responden t, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed t hat the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and l evy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6 The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a r equest for reconsideration," 9being "tantamount to an outright denial thereof and makes the said request deemed reje cted." 10 But there is a special circumstance in the case at bar that prevents application of this accepted doctr ine.

The proven fact is that four days after the private respondent received the peti tioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of dis traint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervenin g period, the warrant was premature and could therefore not be served. As the Court of Tax Appeals correctly noted," 11 the protest filed by private re spondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal wa s filed on April 23, 1965, only 20 days of the reglementary period had been consumed. Now for the substantive question. The petitioner contends that the claimed deduction of P75,000.00 was properly di sallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it d ifferently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for ac tual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their wo rk in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the pro perties of the Philippine Sugar Estate Development Company. Parenthetically, it may be observed that the petitioner had Originally claimed t hese promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts o f the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as

its agent, authorizing it to sell its land, factories and oil manufacturing proc ess. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanche z, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PS EDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission t hat the P75,000.00 promotional fees were paid to the aforenamed individuals. 16 There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after e xamining the evidence, that no distribution of dividends was involved. 18 The petitioner claims that these payments are fictitious because most of the pay ees are members of the same family in control of Algue. It is argued that no indication was made as to how such paymen ts were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the pet itioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction. We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in on e lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that th is was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fe es received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This a rrangement was understandable, however, in view of the close relationship among the persons in the family corpo ration. We agree with the respondent court that the amount of the promotional fees was n ot excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P12 5,000.00. 21 After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transacti on. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual pur chase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision o f the Tax Code: SEC. 30. Deductions from gross income.--In computing net income there shall be a llowed as deductions (a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22 and Revenue Regulations No. 2, Section 70 (1), reading as follows: SEC. 70. Compensation for personal services.--Among the ordinary and necessary e xpenses paid or incurred in carrying on any trade or business may be included a reasonable allow ance for salaries or other compensation for personal services actually rendered. The test of deductib ility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application ma y be further stated and illustrated as follows: Any amount paid in the form of compensation, but not in fact as the purchase pri ce of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Pr actically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings o f the officers of employees, it would seem likely that the salaries are not paid wholly for servic es rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulg ated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23 The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharg ed satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the ligh t of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enter prise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. It is said that taxes are what we pay for civilization society. Without taxes, t he government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctan ce to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute hi s share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exactio n by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If i t is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed. We hold that the appeal of the private respondent from the decision of the petit ioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore no t have been disallowed by the petitioner. ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in to to, without costs. SO ORDERED. Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur. 3. Bull v. United States, 295 U.S. 247 (1935) No. 649 Argued April 9, 1935 Decided April 29, 1935 295 U.S. 247 SYLLABUS 1. Moneys received by a deceased partner's estate as his share of profits earned by the firm before he died, are taxable as his income and also are to be included as part of his estate in computing the fe deral estate tax. P. 295 U. S. 254. 2. Where the articles of a personal service partnership having no invested capit al provide that, in the event of a partner's

death, the survivors, if his representative does not object, shall be at liberty to continue the business for a year, the estate in that case to share the profits or losses as the deceased partner would if liv ing, the profits coming to the estate from such continuation of the business are not to be regarded as the fruits of a sale of a ny interest of the deceased to the survivors, but are income of the estate, taxable as such; they are no part of the corpus of the estate left by the decedent upon which the federal estate tax is to be computed. P. 295 U. S. 255. 3. Retention by the Government of money wrongfully exacted as taxes is immoral, and amounts in law to a fraud on the taxpayer's rights. P. 295 U. S. 261. 4. A claim for recovery of money so held may not only be the subject of a suit i n the Court of Claims, but may be used by way of recoupment and credit in an action by the United States arising out of th e same transaction, and this even though an independent suit against the Government to enforce the claim would be barred by the statute of limitations. P. 295 U. S. 261. 5. Recoupment is in the nature of a defense arising out of some feature of the t ransaction upon which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so lon g as the main action itself is timely. P. 295 U. S. 262.

Page 295 U. S. 248 6. The Government wrongfully collected and retained an estate tax on moneys earn ed for and paid to an estate in partnership transactions after the decedent's death, and which were not part of the corpus of the estate and were properly taxable only as income of the estate. Before the time allowed for claiming reimb ursement had elapsed, the Government proceeded to assess and collect an income tax on the identical moneys. Held: (1) That the taxpayer was entitled to recoup from the amount of the income tax t he amount of the unlawful estate tax by suit for the difference in the Court of Claims, although suit to recover the unl awful tax independently had become barred. Pp. 295 U. S. 261-262. (2) A complaint by which the taxpayer prayed judgment in the alternative, either for the amount of the income tax or for what should have been credited against it on account of the estate tax, was suff icient to put in suit the right to recoupment. P. 295 U. S. 263. 7. The Court of Claims is not bound by any special rules of pleading; all that i s required is that the petition shall contain a plain and concise statement of the fact relied on and give the United States rea sonable notice of the matters it is called upon to meet. P. 295 U. S. 263. 79 Ct.Cls. 133, 6 F.Supp. 141, reversed. Certiorari, 294 U.S. 704, to review a judgment rejecting a claim for money unlaw fully exacted as taxes. Page 295 U. S. 251 BULL v. UNITED STATES, 295 U.S. 247 (1935) 295 U.S. 247 Argued April 9, 1935. Decided April 29, 1935. [295 U.S. 247, 248] Messrs. Loring M. Black, Jr., and David A. Buckley, Jr., bot h of Washington, D.C., for petitioner. [295 U.S. 247, 250] The Attorney General and Mr. James W. Morris, of Washington, D.C., for the United States. [295 U.S. 247, 251] Mr. Justice ROBERTS delivered the opinion of the Court. Archibald H. Bull died February 13, 1920. He had been a member of a partnership engaged in the business of shipbrokers. The agreement of association provided that in the event a partner died the survivors should continue the business for one year subsequent to his death, and his estate should 'receive the same in terests, or participate in the losses to the same extent,' as the deceased partner would, if living, 'based on the usual meth od of ascertaining what the said profits or losses would be . ... Or the estate of the deceased partner shall have the optio n of withdrawing his interest from the firm within thirty days after the probate of will ... and all adjustments of profits or losses shall be made as of the date of such withdrawal.' The estate's representative did not exercise the option to withdraw

in thirty days, and the business was conducted until December 31, 1920, as contemplated by the agreement. The enterprise required no capital and none was ever invested by the partners. B ull's share of profits from January 1, 1920, to the date of his death, February 13, 1920, was $24,124.20; he had no oth er accumulated profits [295 U.S. 247, 252] and no interest in any tangible property belonging to the firm. Profits acc ruing to the estate for the period from the decedent's death to the end of 1920 were $212,718.79; $200,117.90 being paid dur ing the year, and $12, 601.70 during the first two months of 1921 The Court of Claims found:

'When filing an estate tax return, the executor included the decedent's interest in the partnership at a value of $24,124.20, which represented the decedent's share of the earnings accrued to th e date of death, whereas the Commissioner, in 1921, valued such interest at $235,202. 99, and subjected such increased value to the payment of an estate tax, which was paid in June and August, 1921. The lastmentioned amount wa s made up of the amount of $24,124.20 plus the amount of $212,718.79, hereinbefore mentioned. The estate ta x on this increased amount was $41, 517.45.1 'April 14, 1921, plaintiff filed an income tax return for the period February 13 , 1920, to December 31, 1920, for the estate of the decedent, which return did not include, as income, the amount of $ 200,117.09 received as the share of the profits earned by the partnership during the period for which the return was fil ed. The estate employed the cash receipts and disbursement method of accounting. 'Thereafter, in July, 1925, the Commissioner determined that the sum of $200,117 .09 received in 1920 should have been returned by the executor as income to the estate for the period February 13 to D ecember 31, 1920, and notified plaintiff of a deficiency in income tax due from the estate for that period of $261,212.65 , which was due in part to the inclusion of that amount as taxable income and in part to adjustments not here in contro-[295 U.S. 247, 253] versy. No deduction was allowed by the Commissioner from the amount of $ 200,117.09 on account of th e value of the decedent's interest in the partnership at his death.' 6 F.Supp. 141, 142. September 5, 1925, the executor appealed to the Board of Tax Appeals from the de ficiency of income tax so determined. The Board sustained the Commissioner's action in including the item of $200,117. 99 without any reduction on account of the value of the decedent's interest in the partnership at the date of death,2 a nd determined a deficiency of $55,166. 49, which, with interest of $7,510.95, was paid April 14, 1928. July 11, 1928, the executor filed a claim for refund of this amount, setting for th that the $200,117.99, by reason of which the additional tax was assessed and paid, was corpus; that it was so originally determined by the Commissioner and the estate tax assessed thereon was paid by the executor; and that the subsequent as sessment of an income tax against the estate for the receipt of the same sum was erroneous. The claim was rejected May 8, 1929. September 16, 1930, the executor brought suit in the Court of Claims, and in his petition, after setting forth the facts as he alleged them to be, prayed judgment in the alternative: (1) For the principal sum of $62,677.44, the amount paid April 14, 1928, as a deficiency of income tax unlawfully assessed and collected; or (2) for the sum o f $47,643.44 on the theory that if the sum of $200,117.99 was income for the year 1920 and taxable as such, the United Stat es should have credited against the income tax attributable to the receipt of this sum the overpayment of estate tax resulting from including the amount in the taxable estate-$34,035,3 with interest thereon. [295 U.S. 247, 254] The Cour t of Claims held that the item was income and properly so taxed. With respect to the alternative relief sought, it said: 'We cannot consider whether the

Commissioner correctly included the total amount received from the business in t he net estate of the decedent subject to estate tax for the reason that the suit was not timely instituted.' Judgment wen t for the United States. 4 Because of the novelty and importance of the question presented we granted certiorari. 5 1. We concur in the view of the Court of Claims that the amount received from th e partnership as profits earned prior to Bull's death was income earned by him in his lifetime and taxable to him as such ; and that it was also corpus of his estate and as such to be included in his gross estate for computation of estate tax. We also agree that the sums paid his estate as profits earned after his death were not corpus but income received by his execut or, and to be reckoned in computing income tax for the years 1920 and 1921. Where the effect of the contract is that the deceased partner's estate shall leave his interest in the business and the surviving partners shall acquire it by paym ents to the estate, the transaction is a sale, and payments made to the estate are for the account of the survivors. It results that the surviving partners are taxable upon firm profits and the estate is not. 6 Here, however, the survivors have pur chased nothing belonging to the decedent, who had made no investment in the business and owned no tangible property connec ted with it. The portion of the profits paid his estate was therefore income and not corpus; and this is so whether we c onsider the executor a member of the old firm for the remainder [295 U.S. 247, 255] of the year, or hold that the estate became a partner in a new association formed upon the decedent's demise. 2. A serious and difficult issue is raised by the claim that the same receipt ha s been made the basis of both income and estate tax, although the item cannot in the circumstances be both income and cor pus; and that the alternative prayer of the petition required the court to render a judgment which would redress the ill egality and injustice resulting from the erroneous inclusion of the sum in the gross estate for estate tax. The responden t presents two arguments in opposition, one addressed to the merits and the other to the bar of the statute of limitatio ns.

On the merits it is insisted that the government was entitled to both estate tax and income tax in virtue of the right conferred on the estate by the partnership agreement and the fruits of it. The p osition is that, as the contract gave Bull a valuable right which passed to his estate at his death, the Commissioner correct ly included it for estate tax. And the propriety of treating the share of profits paid to the estate as income is said to be equally clear. The same sum of money in different aspects may be the basis of both forms of tax. An example is found in this estate. The decedent's share of profits accrued to the date of his death was $24,124. 20. This was income to him in his lifetime and his executor was bound to return it as such. But the sum was paid to the executor by the surviving partner s, and thus became an asset of the estate; accordingly, the petitioner returned that amount as part of the gross estate for computation of estate tax and the Commissioner properly treated it as such. We are told that, since the right to profits is distinct from the profits actual ly collected, we cannot now say more than that perhaps the Commissioner put too high a value on the contract right when he valu ed it as equal to the amount [295 U.S. 247, 256] of profits received-$212,718.99. This error, if error it was, the gove rnment says is now beyond correction. While, as we have said, the same sum may in different aspects be used for the co mputation of both an income and an estate tax, this fact will not here serve to justify the Commissioner's rulings. They were inconsistent. The identical moneynot a right to receive the amount, on the one hand, and actual receipt resulting from that right on the other-was the basis of two assessments. The double taxation involved in this inconsistent treatment of that sum of money is made clear by the lower court's finding we have quoted. The Commissioner assessed estate tax on th e total obtained by adding $24,124.20, the decedent's share of profits earned prior to his death, and $212,718.79, the estate's share of profits earned thereafter. He treated the two items as of like quality, considered them both as capital or corpus; and viewed neither as the measure of value of a right passing from the decedent at death. No other conclusion may be drawn from the finding of the Court of Claims. In the light of the facts it would not have been permissible to place a value of $212,718.99 or any other value on the mere right of continuance of the partnership relation inuring to Bull's estate. Had h e lived, his share of profits would have been income. By the terms of the agreement his estate was to sustain precisely the sa me status quoad the firm as he had, in respect of profits and losses. Since the partners contributed no capital and own ed no tangible property connected with the business, there is no justification for characterizing the right of a living par tner to his share of earnings as part of his capital; and if the right was not capital to him, it could not be such to his es tate. Let us suppose Bull had, while living, assigned his interest in the firm, with his partners' consent, to a third person for a valuable consideration, and in making return of income had valued or capitalized the right to profits which [295 U.S. 247, 257] he had thus sold, had deducted

such valuation from the consideration received, and returned the difference only as gain. We think the Commissioner would rightly have insisted that the entire amount received was income. Since the firm was a personal service concern and no tangible property was invol ved in its transactions, if it had not been for the terms of the agreement, no accounting would have ever been made upon Bul l's death for anything other than his share of profits accrued to the date of his death-$24,124.20-and this would have been the only amount to be included in his estate in connection with his membership in the firm. As respects the status after death, the form of the stipulation is significant. The declaration is that the surviving partners 'are to be at libert y' to continue the business for a year, in the same relation with the deceased partner's estate as if it were in fact the deced ent himself still alive and a member of the firm. His personal representative is given a veto which will prevent the continu ance of the firm's business. The purpose may well have been to protect the good will of the enterprise in the interest of the survivors and to afford them a reasonable time in which to arrange for their future activities. But no sale of the decedent's interest or share in the good will can be spelled out. Indeed the government strenuously asserted, in supporti ng the treatment of the payments to the estate as income, that the estate sold nothing to the surviving partners; and we agree. An analogous situation would be presented if Bull had not died, but the partnership had terminated by limitation on February 13, 1920, and the agreement had provided that, if Bull's partners so desired, the relation should continue f or another year. It could not successfully be contended that, in such case, Bull's share of profit for the additional year was capital. We think there was no estate tax due in respect of xecutor as profits for the period subsequent to the decedent's death. [295 U.S. 247, point is that if the use of profits accruing to the estate in computing estate tax was ions bars correction of the error in the present action. So the Court of Claims thought. We the $212,718.79 paid to the e 258] The government's second wrong, the statute of limitat hold otherwise.

The petitioner included in his estate tax return, as the value of Bull's interes t in the partnership, only $24,124.20, the profit accrued prior to his death. The Commissioner added $212,718.79, the sum r eceived as profits after Bull's death, and determined the total represented the value of the interest. The petitioner acqui esced and paid the tax assessed in full in August, 1921. He had no reason to assume the Commissioner would adjudge the $212 ,718.79 income and taxable as such. Nor was this done until July, 1925. The petitioner thereupon asserted, as we think correctly, that the item could not be both corpus and income of the estate. The Commissioner apparently held a cont rary view. The petitioner appealed to the Board of Tax Appeals from the proposed deficiency of income tax. His appeal was dismissed April 9, 1928. It was then too late to file a claim for refund of overpayment of estate tax due to the erro r of inclusion in the estate of its share of firm profits. 7 Inability to obtain a refund or credit, or to sue the United States, did not, however, alter the fact that if the government should insist on payment of the full deficiency of income tax, it wou ld be in possession of some $41,000 in excess of the sum to which it was justly entitled. Payment was demanded. The pet itioner paid April 14, 1928, and on June 11, 1928, presented a claim for refund, in which he still insisted the amount in question was corpus, had been so determined and estate tax paid on that basis, and should not be classified for t axation as income. The claim was rejected May 8, 1929, and the present action instituted September 16, 1930. [295 U.S. 247 , 259] The fact that the petitioner relied on the Commissioner's assessment for estate tax, and believed the inconsi stent claim of deficiency of income tax was of no force, cannot avail to toll the statute of limitations, which forbade the bringing of any action in 1930 for refund of the estate tax payments made in 1921. As the income tax was properly collected, suit for the recovery of any part of the amount paid on that account was futile. Upon what theory, then, may the petition er obtain redress in the present action for the unlawful retention of the money of the estate? Before an answer can be g iven the system of enforcing the government's claims for taxes must be considered in its relation to the problem. A tax is an exaction by the sovereign, and necessarily the sovereign has an enfo rceable claim against every one within the taxable class for the amount lawfully due from him. The statute prescribes the r ule of taxation. Some machinery must be provided for applying the rule to the facts in each taxpayer's case, in order to ascertain the amount due. The chosen instrumentality for the purpose is an administrative agency whose action is call ed an assessment. The assessment may be a valuation of property subject to taxation, which valuation is to be multiplied b y the statutory rate to ascertain the amount of tax. Or it may include the calculation and fix the amount of tax payable, and assessments of federal estate and income taxes are of this type. Once the tax is assessed, the taxpayer will owe the sove reign the amount when the date fixed by law for payment arrives. Default in meeting the obligation calls for some procedure whereby payment can be enforced. The statute might remit the government to an action at law wherein the taxpayer coul d offer such defense as he had. A

judgment against him might be collected by the levy of an execution. But taxes a re the lifeblood of government, and their prompt and certain availability an imperious need. Time out of mind, therefore, the sovereign has resorted to more drastic [295 U.S. 247, 260] means of collection. The assessment is given the for ce of a judgment, and if the amount assessed is not paid when due, administrative officials may seize the debtor's p roperty to satisfy the debt. In recognition of the fact that erroneous determinations and assessments will in evitably occur, the statutes, in a spirit of fairness, invariably afford the taxpayer an opportunity at some stage to have mi stakes rectified. Often an administrative hearing is afforded before the assessment becomes final; or administrative machi nery is provided whereby an erroneous collection may be refunded; in some instances both administrative relief and red ress by an action against the sovereign in one of its courts are permitted methods of restitution of excessive or illegal e xaction. Thus, the usual procedure for the recovery of debts is reversed in the field of taxation. Payment precedes defense , and the burden of proof, normally on the claimant, is shifted to the taxpayer. The assessment supersedes the pleading, pr oof, and judgment necessary in an action at law, and has the force of such a judgment. The ordinary defendant stands in judg ment only after a hearing. The taxpayer often is afforded his hearing after judgment and after payment, and his only red ress for unjust administrative action is the right to claim restitution. But these reversals of the normal process of collect ing a claim cannot obscure the fact that after all what is being accomplished is the recovery of a just debt owed the sovereign . If that which the sovereign retains was unjustly taken in violation of its own statute, the withholding is wrongful. Res titution is owed the taxpayer. Nevertheless he may be without a remedy. But we think this is not true here. In a proceeding for the collection of estate tax, the United States through a pa lpable mistake took more than it was entitled to. Retention of the money was against morality and conscience. But claim for re fund or credit [295 U.S. 247, 261] was not presented or action instituted for restitution within the period fixed by th e statute of limitations. If nothing further had occurred, congressional action would have been the sole avenue of redress.

In July, 1925, the government brought a new proceeding arising out of the same t ransaction involved in the earlier proceeding. This time however, its claim was for income tax. The taxpayer oppose d payment in full, by demanding recoupment of the amount mistakenly collected as estate tax and wrongfully retai ned. Had the government instituted an action at law, the defense would have been good. The United States, we have held , cannot, as against the claim of an innocent party, hold his money which has gone into its treasury by means of the fraud of their agent. United States v. State Bank, 96 U.S. 30 . While here the money was taken through mistake without any el ement of fraud, the unjust retention is immoral and amounts in law to a fraud on the taxpayer's rights. What was said in the State Bank Case applies with equal force to this situation. 'An action will lie whenever the defendant has received money which is the property of the plaintiff, and which the defendant is obliged by natural justice and equity to r efund. The form of the indebtedness or the mode in which it was incurred is immaterial. ... In these cases (cited in the op inion), and many others that might be cited, the rules of law applicable to individuals were applied to the United States' 96 U.S. (pages 35, 36).8 A claim for recovery of money so held may not only be the subject of a suit in the Court of Claims, a s shown by the authority referred to, but may be used by way of recoupment and credit in an action by the United States ar ising out of the same transaction. United States v. Macdaniel, 7 Pet. 1, 16, 17; United States v. Ringgold, 8 Pet. 150, 16 3, 164. In the [295 U.S. 247, 262] latter case this language was used: 'No direct suit can be maintained against the United Sta tes; but when an action is brought by the United States, to recover money in the hands of a party, who has a legal claim a gainst them, it would be a very rigid principle, to deny to him the right of setting up such claim in a court of justi ce, and turn him round to an application to congress. If the right of the party is fixed by the existing law, there can be n o necessity for an application to congress, except for the purpose of remedy. And no such necessity can exist, when this rig ht can properly be set up by way of defence, to a suit by the United States.' 9 If the claim for income tax deficien cy had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained, notwithstanding the statute of limitations had barred an independent suit agains t the government therefor. This is because recoupment is in the nature of a defense arising out of some feature of the tran saction upon which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so long a s the main action itself is timely. 10 The circumstance that both claims, the one for estate tax and the other for inco me tax, were prosecuted to judgment and execution in summary form does not obscure the fact that in substance the procee dings were actions to collect debts alleged to be due the United States. It is [295 U.S. 247, 263] immaterial that i n the second case, owing to the summary nature of the remedy, the taxpayer was required to pay the tax and afterwards se ek refundment. This procedural requirement does not obliterate his substantial right to rely on his cross-deman d for credit of the amount which, if the

United States had sued him for income tax, he could have recouped against his li ability on that score. To the objection that the sovereign is not liable to respond to the petitioner t he answer is that it has given him a right of credit or refund, which, though he could not assert it in an action brought by h im in 1930, had accrued and was available to him, since it was actionable and not barred in 1925 when the govern ment proceeded against him for the collection of income tax. The pleading was sufficient to put in issue the right to recoupment. The Court o f Claims is not bound by any special rules of pleading;11 all that is required is that the petition shall contain a plain a nd concise statement of the facts relied on and give the United States reasonable notice of the matters it is called upon to mee t. 12 And a prayer for alternative relief, based upon the facts set out in the petition, may be the basis of the judgment r endered. 13 We are of opinion that the petitioner was entitled to have credited against the deficiency of income tax the amount of his overpayment of estate tax with interest, and that he should have been given judg ment accordingly. The judgment must be reversed, and the cause remanded for further proceedings in conformity with this opinion. So ordered. 4. CIR V PINEDA EN BANC G.R. No. L-22734 September 15, 1967 COMMISSIONER OF INTERNAL REVENUE, vs.MANUEL B. PINEDA, as one of the heirs of de ceased ATANASIO PINEDA BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, a nd 15 children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00. After the estate proceedings were closed, the Bureau of Internal Revenue investi gated the income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the correspondi ng income tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue filed said re turns for the estate on the basis of information and data obtained from the aforesaid estate proceedings and issued a n assessment for the following: 1. Deficiency income tax 1945 P135.83 1946 436.95 1947 1,206.91 P1,779.69 Add: 5% surcharge 1% monthly interest from November 30, 88.98 1953 to April 15, 1957 720.77 Compromise for late filing 80.00 Compromise for late payment 40.00 Total amount due P2,707.44 =========== Additional residence tax for P14.50 2. 1945 =========== 3. Real Estate dealer's tax for the fourth quarter of 1946 and the P207.50 whole year of 1947 =========== Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to him as one of the heirs." After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the Commissioner on the ground that his right to assess and collect the tax has prescribed. The C ommissioner appealed and this Court

affirmed the findings of the Tax Court in respect to the assessment for income t ax for the year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24, 1953; assessments for both taxable years were made within five years therefrom or on October 19, 1953; and the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return was filed on March 1, 1948; the assessment was made on Octob er 19, 1953, more than five years from the date the return was filed; hence, the right to assess income tax for 19 47 had prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate proceedings.1 In the Tax Court, the parties submitted the case for decision without additional evidence. On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B . Pineda liable for the payment corresponding to his share of the following taxes: Deficiency income tax 1945 P135.83 1946 436.95 Real estate dealer's P187.50 fixed tax 4th quarter

of 1946 and whole year of 1947 The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in the estate.1awphl.nt Manuel B. Pineda opposes the proposition on the ground that as an heir he is lia ble for unpaid income tax due the estate only up to the extent of and in proportion to any share he received. He r elies on Government of the Philippine Islands v. Pamintuan2 where We held that "after the partition of an estate, heir s and distributees are liable individually for the payment of all lawful outstanding claims against the estate in proportion to the amount or value of the property they have respectively received from the estate." We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed. Pineda is liable for the assessment as an heir and as a holder-transferee of pro perty belonging to the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate t o the share he received from the inheritance.3 His liability, however, cannot exceed the amount of his share.4 As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his possession. The reason is that the Government has a lien on the P2,500.00 receiv ed by him from the estate as his share in the inheritance, for unpaid income taxes4a for which said estate is liable, purs uant to the last paragraph of Section 315 of the Tax Code, which we quote hereunder: If any person, corporation, partnership, joint-account (cuenta en participacion) , association, or insurance company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assess ment was made by the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: . . . By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After suc h payment, Pineda will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper share of each heir in the distributable estate. All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inhe ritance received. This remedy was

adopted in Government of the Philippine Islands v. Pamintuan, supra. In said cas e, the Government filed an action against all the heirs for the collection of the tax. This action rests on the concept th at hereditary property consists only of that part which remains after the settlement of all lawful claims against the estate, for the settlement of which the entire estate is first liable.6 The reason why in case suit is filed against all the heirs the ta x due from the estate is levied proportionately against them is to achieve thereby two results: first, payment of the tax; and s econd, adjustment of the shares of each heir in the distributed estate as lessened by the tax. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate. This s econd remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblo od of government and their prompt and certain availability is an imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective shares due to the heirs fro m the inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government rec overed said tax. WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby or dered to pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, w ithout prejudice to his right of contribution for his co-heirs. No costs. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, A ngeles and Fernando, JJ., concur. 5. CIR v CA

CIR v. CA, CITY TRUST BANKING CORP. GR No. 86785, November 21, 1991, 234 SCRA 34 8 FACTS: Respondent corporation Citytrust filed a refund of overpaid taxes with th e BIR by which the latter denied on the ground of prescription. Citytrust filed a petition for review before the CTA. Th e case was submitted for decision based solely on the pleadings and evidence submitted by the respondent because the CIR could not present any evidence by reason of the repeated failure of the Tax Credit/Refud Division of the BIR to tr ansmit the records of the case, as well as the investigation report thereon, to the Solicitor General. CTA rendered the decisio n ordering BIR to grant the respondent's request for tax refund amounting to P 13.3 million. ISSUE: Failure of the CIR to present evidence to support the case of the governm ent, should the respondent's claim be granted? HELD: Not yet. It is a long and firmly settled rule of law that the Government i s not bound by the errors committed by its agents. In the performance of its governmental functions, the State cannot be es topped by the neglect of its agent and officers. Although the Government may generally be estopped through the affirmat ive acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in th is case will not and should not produce that effect. Nowhere is the aforestated rule more true than in the field of taxation. It is a xiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the life blood of the nation through which the government agencies continue to operate and with which the State effects its fun ctions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopard ize the Government's financial position, especially in the case at bar where the amount involves millions of pesos the co llection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy. Thus, it is proper that the ca se be remanded back to the CTA for further proceedings and reception of evidence. WALA PA ANG COPY SG DECISION!!! 6. YMCA v CIR G.R. No. 124043 October 14, 1998 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents. PANGANIBAN, J.: Is the income derived from rentals of real property owned by the Young Men's Chr istian Association of the Philippines, established as "a welfare, educational and charitable non-profit cor Inc. (YMCA) poration" subject to income tax under the National Internal Revenue Code (NIRC) and the Constitution? The Case This is the main question raised before us in this petition for review on certio

rari challenging two Resolutions issued by the Court of Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to cla im tax exemption on the latter's income from the lease of its real property. The Facts The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit i nstitution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and P44,259.00 fro m parking fees collected from nonmembers. On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge and interest, for deficiency inc ome tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding ta x on wages. Private respondent formally protested the assessment and, as a supplement to its basic protest, filed a lett er dated October 8, 1985. In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at th e Court of Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA: . . . [T]he leasing of [private respondent's] facilities to small shop owners, t o restaurant and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the [private respondents]. It appears fr om the testimonies of the witnesses for the [private respondent] particularly Mr. James C. Delote, former accountant of YMCA, that these facilities were leased to members and that they have to service the n eeds of its members and their guests. The rentals were minimal as for example, the barbershop was only c harged P300 per month. He also testified that there was actually no lot devoted for parking spac e but the parking was done at the sides of the building. The parking was primarily for members with st ickers on the windshields of their cars and they charged P.50 for non-members. The rentals and parking fees were just enough to cover the costs of operation and maintenance only. The earning[s] from these rentals and parking charges including those from lodging and other charges for the use of th e recreational facilities constitute [the] bulk of its income which [is] channeled to support its many act ivities and attainment of its objectives. As pointed out earlier, the membership dues are very insufficien t to support its program. We find it reasonably necessary therefore for [private respondent] to make [the] most out [of] its existing facilities to earn some income. It would have been different if under the circum stances, [private respondent] will purchase a lot and convert it to a parking lot to cater to the needs of the general public for a fee, or construct a building and lease it out to the highest bidder or at the market rate for commercial purposes, or should it invest its funds in the buy and sell of proper ties, real or personal. Under these circumstances, we could conclude that the activities are already pro fit oriented, not incidental and reasonably necessary to the pursuit of the objectives of the asso ciation and therefore, will fall under the last paragraph of Section 27 of the Tax Code and any income deriv ed therefrom shall be taxable. Considering our findings that [private respondent] was not engaged in the busine ss of operating or contracting [a] parking lot, we find no legal basis also for the imposition of [ a] deficiency fixed tax and [a] contractor's tax in the amount[s] of P353.15 and P3,129.73, respectively. xxx xxx xxx WHEREFORE, in view of all the foregoing, the following assessments are hereby di smissed for lack of merit: 1980 Deficiency Fixed Tax P353,15;

1980 Deficiency Contractor's Tax P3,129.23; 1980 Deficiency Income Tax P372,578.20. While the following assessments are hereby sustained: 1980 Deficiency Expanded Withholding Tax P1,798.93; 1980 Deficiency Withholding Tax on Wages P33,058.82 plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National Internal Reve nue Code effective as of 1984. 5 Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appe als (CA). In its Decision of February 16, 1994, the CA 6 initially decided in favor of the CIR and disposed of the appeal in the following manner: Following the ruling in the afore-cited cases of Province of Abra vs. Hernando a nd Abra Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that "the lea sing of petitioner's (herein respondent's) facilities to small shop owners, to restaurant and canteen operato rs and the operation of the parking lot are reasonably incidental to and reasonably necessary for the ac complishment of the objectives of the petitioners, and the income derived therefrom are tax exempt, must be reversed. WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed th e assessment for: 1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractor's Tax P 3,129.23, & 1980 Deficiency Income Tax P 372,578.20 but the same is AFFIRMED in all other respect. 7 Aggrieved, the YMCA asked for reconsideration based on the following grounds: I The findings of facts of the Public Respondent Court of Tax Appeals being suppor ted by substantial evidence [are] final and conclusive. II The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income on rentals of small shops and parking fees [are] in accord with the applicable law and jurisprudence. 8 Finding merit in the Motion for Reconsideration filed by the YMCA, the CA revers ed itself and promulgated on September 28, 1995 its first assailed Resolution which, in part, reads: The Court cannot depart from the CTA's findings of fact, as they are supported b y evidence beyond what is considered as substantial. xxx xxx xxx The second ground raised is that the respondent CTA did not err in saying that t he rental from small shops and parking fees do not result in the loss of the exemption. Not even the petitioner would hazard the suggestion that YMCA is designed for profit. Consequently, the little income from small shops and parking fees help[s] to keep its head above the water, so to speak, and allow it to continue with its laudable work. The Court, therefore, finds the second ground of the motion to be meritorious an d in accord with law and jurisprudence. WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's decis ion is AFFIRMED in toto. 9 The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of the Rules of Court. 10 The Issues Before us, petitioner imputes to the Court of Appeals the following errors: I In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when it rendered its Decision dated February 16, 1994; and II In affirming the conclusion of Respondent Court of Tax Appeals that the income o f private respondent

from rentals of small shops and parking fees [is] exempt from taxation. 11 This Court's Ruling The petition is meritorious. First Issue: Factual Findings of the CTA Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the leasing of private respondent's facilities to small shop owners, to restaurant and canteen operators and the ope ration of parking lots are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the private respondent and that the income derived therefrom are tax exempt." 12 Petitioner insists that what the ap pellate court reversed was the legal conclusion, not the factual finding, of the CTA. 13 The commissioner has a point .

Indeed, it is a basic rule in taxation that the factual findings of the CTA, whe n supported by substantial evidence, will be disturbed on appeal unless it is shown that the said court committed gross error in the appreciation of facts. 14 In the present case, this Court finds that the February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied the law to the facts as found by the CTA and ruled on the issue r aised by the CIR: "Whether or not the collection or earnings of rental income from the lease of certain premises and i ncome earned from parking fees shall fall under the last paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended." 15 Clearly, the CA did not alter any fact or evidence. It merely resolved the afore mentioned issue, as indeed it was expected to. That it did so in a manner different from that of the CTA did not necessaril y imply a reversal of factual findings. The distinction between a question of law and a question of fact is clear-cut. I t has been held that "[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or falsehood of alle ged facts." 16 In the present case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely applied th e law to the facts. That its interpretation or conclusion is different from that of the CTA is not irregular or abnormal. Second Issue: Is the Rental Income of the YMCA Taxable? We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At the outset, we set forth the relevant provision of the NIRC: Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such xxx xxx xxx (g) Civic league or organization not organized for profit but operated exclusive ly for the promotion of social welfare; (h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockhol der or member; xxx xxx xxx Notwithstanding the provisions in the preceding paragraphs, the income of whatev er kind and character of the foregoing organizations from any of their properties, real or personal, o r from any of their activities conducted for profit, regardless of the disposition made of such inco me, shall be subject to the tax imposed under this Code. (as amended by Pres. Decree No. 1457)

Petitioner argues that while the income received by the organizations enumerated in Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income recei ved by them as such," the exemption does not apply to income derived ". . . from any of their properties, real or persona l, or from any of their activities conducted for profit, regardless of the disposition made of such income . . . ." Petitioner adds that "rental income derived by a tax-exempt organization from th e lease of its properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income [is] exclu sively used for the accomplishment of its objectives." 17 We agree with the commissioner. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory exemption from t axation should be manifest. and unmistakable from the language of the law on which it is based. Thus, the claime d exemption "must expressly be granted in a statute stated in a language too clear to be mistaken." 19 In the instant case, the exemption claimed by the YMCA is expressly disallowed b y the very wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organiza tions (such as the YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Co de. Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property, 20 the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convo luted attempt at construction. It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be applied. 21Parenthetically, a consideration of the question of construction must not even begin, particularly when such

question is on whether to apply a strict construction or a liberal one on statut es that grant tax exemptions to "religious, charitable and educational propert[ies] or institutions." 22 The last paragraph of Section 27, the YMCA argues, should be "subject to the qua lification that the income from the properties must arise from activities 'conducted for profit' before it may be co nsidered taxable." 23 This argument is erroneous. As previously stated, a reading of said paragraph ineludibly shows th at the income from any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The phrase "any of their activities conducted for profit" does not qualify the word "properties." This ma kes from the property of the organization taxable, regardless of how that income is used whether for profit or for lofty n on-profit purposes. Verba legis non est recedendum. Hence, Respondent Court of Appeals committed rev ersible error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from ren ting out its real property, on the solitary but unconvincing ground that the said income is not collected for profi t but is merely incidental to its operation. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we. Constitutional Provisions On Taxation Invoking not only the NIRC but also the fundamental law, private respondent subm its that Article VI, Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions" from the payment not only of property taxes but also of income tax from any source. 25 In support of its novel theory, it compares the u se of the words "charitable institutions," "actually" and "directly" in the 1973 and the 1987 Constitutions, on the one han d; and in Article VI, Section 22, par. 3 of the 1935 Constitution, on the other hand. 26 Private respondent enunciates three points. First, the present provision is divi sible into two categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant thereto, mosques a nd non-profit cemeteries," the incomes of which are, from whatever source, all tax-exempt; 27 and (2) "[a]ll lands, bui ldings and improvements actually and directly used for religious, charitable or educational purposes," which are exem pt only from property taxes.28 Second, Lladoc v. Commissioner of Internal Revenue, 29 which limited the exemption only to the payment of property taxes, referred to the provision of the 1935 Constitution and not to its counterparts i n the 1973 and the 1987 Constitutions. 30 Third, the phrase "actually, directly and exclusively used for religious, charitable or educational purposes" refers not only to "all lands, buildings and improvements," but also t o the above-quoted first category which includes charitable institutions like the private respondent. 31

The Court is not persuaded. The debates, interpellations and expressions of opin ion of the framers of the Constitution reveal their intent which, in turn, may have guided the people in ratifying the Charter. 32 Such intent must be effectuated. Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissione r, who is now a member of this Court, stressed during the Concom debates that ". . . what is exempted is not the insti tution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclus ively used for religious, charitable or educational purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of the Concom, adhered to the same view that the exemption created by said provision pertained only to property taxes. 34 In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t ]he tax exemption covers property taxes only." 35 Indeed, the income tax exemption claimed by private respondent finds n o basis in Article VI, Section 26, par. 3 of the Constitution. Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that the YMCA "is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively for educational purposes so it is exempt from taxes on its properties and income." 37 We reitera te that private respondent is exempt from the payment of property tax, but not income tax on the rentals from its property . The bare allegation alone that it is a non-stock, non-profit educational institution is insufficient to justify its exe mption from the payment of income tax. As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with subst antial 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 actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites. Is the YMCA an educational institution within the purview of Article XIV, Sectio n 4, par. 3 of the Constitution? We rule that it is not. The term "educational institution" or "institution of learning" has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. 38 U nder the Education Act of 1982, such term refers to schools. 39 The school system is synonymous with formal educ ation, 40 which "refers to the hierarchically structured and chronologically graded learnings organized and pro vided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels."41 The Court has examined the "Amended Articles of Incorporation" and "B y-Laws" 43 of the YMCA, but found nothing in them that even hints that it is a school or an educational institutio n. 44 Furthermore, under the Education Act of 1982, even non-formal education is under stood to be school-based and "private auspices such as foundations and civic-spirited organizations" are ruled out. 45 It is settled that the term "educational institution," when used in laws granting tax exemptions, refers to a ". . . scho ol seminary, college or educational establishment . . . ." 46 Therefore, the private respondent cannot be deemed one of the educational institutions covered by the constitutional provision under consideration. . . . Words used in the Constitution are to be taken in their ordinary acceptati on. While in its broadest and best sense education embraces all forms and phases of instruction, improveme nt and development of mind and body, and as well of religious and moral sentiments, yet in the comm on understanding and application it means a place where systematic instruction in any or all of the u seful branches of learning is given by methods common to schools and institutions of learning. That we conc eive to be the true intent and scope of the term [educational institutions,] as used in the Constitution. 47 Moreover, without conceding that Private Respondent YMCA is an educational insti tution, the Court also notes that the former did not submit proof of the proportionate amount of the subject income th at was actually, directly and exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-laws, whic h formed part of the evidence submitted, is patently insufficient, since the same merely signified that "[t]he net income derived from the rentals of the commercial buildings shall be apportioned to the Federation and Member Associations as the National Board may decide." 48 In sum, we find no basis for granting the YMCA exemption from income tax under the const itutional provision invoked. Cases Cited by Private

Respondent Inapplicable The cases 49 relied on by private respondent do not support its cause. YMCA of M anila v. Collector of Internal Revenue 50 and Abra Valley College, Inc. v. Aquino 51 are not applicable, becaus e the controversy in both cases involved exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not in point either, because it involves a claim for exemption from the payment of regu latory fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City an issue not at all relat ed to that involved in a claimed exemption from the payment of income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the party therein, which claimed an exemption from the paym ent of income tax, was an educational institution which submitted substantial evidence that the income subject of the controversy had been devoted or used solely for educational purposes. On the other hand, the private respondent in th e present case has not given any proof that it is an educational institution, or that part of its rent income is actual ly, directly and exclusively used for educational purposes. Epilogue In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates the nobility of its cause. However, the Court's power and function are limited merely to applying th e law fairly and objectively. It cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, i t would be overspilling its role and invading the realm of legislation. We concede that private respondent deserves the help and the encouragement of th e government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets tha t, given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government. Indeed, some of the members of the Court may even believe in the wis dom and prudence of granting more

tax exemptions to private respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the power to change or amend the law. WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals date d September 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income derived by petitioner from renta ls of its real property is subject to income tax. No pronouncement as to costs. SO ORDERED. Davide, Jr., Vitug and Quisumbing, JJ., concur. Bellosillo, J., Please see Dissenting Opinion. Separate Opinions BELLOSILLO, J., dissenting; I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax Appeals when supported by substantial evidence will not be disturbed on appeal unless it is shown that the court committed grave error in the appreciation of facts. 1 In the instant case, there is no dispute as to the vali dity of the findings of the Court of Tax Appeals that private respondent Young Men's Christian Association (YMCA) is an associati on organized and operated exclusively for the promotion of social welfare and other non-profitable purposes, particula rly the physical and character development of the youth. 2 The enduring objectives of respondent YMCA as reflec ted in its Constitution and By-laws are: (a) To develop well-balanced Christian personality, mission in life, usefulness of individuals, and the promotion of unity among Christians and understanding among peoples of all faith s, to the end that the Brotherhood of Man under the Fatherhood of God may be fostered in an atmosphere of mutual respect and understanding; (b) To promote on equal basis the physical, mental, and spiritual welfare of the youth, with emphasis on reverence for God, social discipline, responsibility for the common good, respec t for human dignity, and the observance of the Golden Rule; (c) To encourage members of the Young Men's Christian Associations in the Philip pines to participate loyally in the life of their respective churches; to bring these churches closer together; and to participate in the effort to realize the church Universal; (d) To strengthen and coordinate the work of the Young Men's Christian Associati ons in the Philippines and to foster the extension of the Youth Men's Christian Associations to new are as; (e) To help its Member Associations develop and adopt their programs to the need s of the youth; (f) To assist the Member Associations in developing and maintaining a high stand

ard of management, operation and practice; and (g) To undertake and sponsor national and international programs and activities in pursuance of its purposes and objectives. 3 Pursuant to these objectives, YMCA has continuously organized and undertaken thr oughout the country various programs for the youth through actual workshops, seminars, training, sports and summer camps, conferences on the cultivation of Christian moral values, drug addiction, out-of-school youth, thos e with handicap and physical defects and youth alcoholism. To fulfill these multifarious projects and attain the laudable objectives of YMCA, fund raising has become an indispensable and integral part of the activities of the Association. YMCA derives its funds from various sources such as membership dues, charges on the use of facilities like bowling a nd billiards, lodging, interest income, parking fees, restaurant and canteen. Since the membership dues are very minimal , the Association derives funds from rentals of small shops, restaurant, canteen and parking fees. For the taxable ye ar ending December 1980, YMCA earned gross rental income of P676,829.00 and P44,259.00 from parking fees which became the subject of the questioned assessment by petitioner. The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of petitioner's facilities to small shop owners and to restaurant and canteen operators in addition to the operation of a parking lot are reasonably necessary for and incidental to the accomplishment of the objectives of YMCA. 4 In fact, these facilities are leased to

members in order to service their needs and those of their guests. The rentals a re minimal, such as, the rent of P300.00 for the barbershop. With regard to parking space, there is no lot actually devoted t herefor and the parking is done only along the sides of the building. The parking is primarily for members with car sticker s but to non-members, parking fee is P0.50 only. The rentals and parking fees are just enough to cover the operation and ma intenance costs of these facilities. The earnings which YMCA derives from these rentals and parking fees, together with t he charges for lodging and use of recreational facilities, constitute the bulk or majority of its income used to s upport its programs and activities. In its decision of 16 February 1994, the Court of Appeals thus committed grave e rror in departing from the findings of the Court of Tax Appeals by declaring that the leasing of YMCA's facilities to s hop owners and restaurant operators and the operation of a parking lot are used for commercial purposes or for profit, w hich fact takes YMCA outside the coverage of tax exemption. In later granting the motion for reconsideration filed by resp ondent YMCA, the Court of Appeals correctly reversed its earlier decision and upheld the findings of the Court of Tax Appeals by ruling that YMCA is not designed for profit and the little income it derives from rentals and parking fe es helps maintain its noble existence for the fulfillment of its goals for the Christian development of the youth. Respondent YMCA is undoubtedly exempt from corporate income tax under the provis ions of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code, to wit: Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such . . . (g) civic league or organization not organized for profit but operated exclusively for the promotion of social welfar e; (h) club organized and operated exclusively for pleasure, recreation and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member . . . . Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and characte r of the foregoing organizations from any of their properties, real or personal, or from any of the ir activities conducted for profit, regardless of the disposition made of such income, shall be subject to t ax imposed under this Code. The majority of the Court accepted petitioner's view that while the income of or ganizations enumerated in Sec. 27 are exempt from income tax, such exemption does not however extend to their income o f whatever kind or character from any of their properties real or personal regardless of the disposition made of s uch income; that based on the wording of the law which is plain and simple and does not need any interpretation, any inco me of a tax exempt entity from any of its properties is a taxable income; hence, the rental income derived by a tax exempt organization from the lease of its

properties is not therefore exempt from income taxation even if such income is e xclusively used for the accomplishment of its objectives. Income derived from its property by a tax exempt organization is not absolutely taxable. Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind and character . . . f rom any of their properties" might easily convey a meaning quite different from the one actually intended and evident when a word or phrase is considered with those with which it is associated. 5 It is a rule in statutory construction that every part of the statute must be interpreted with reference to the context, that every part of the statute must be considered together with the other parts and kept subservient to the general intent of the whole enactment. 6 A close reading of t he last paragraph of Sec. 27 of the National Internal Revenue Code, in relation to the whole section on tax exemption of the organizations enumerated therein, shows that the phrase "conducted for profit" in the last paragraph of Sec. 27 qualifie s, limits and describes "the income of whatever kind and character of the foregoing organizations from any of their pro perties, real or personal, or from any of their activities" in order to make such income taxable. It is the exception to S ec. 27 pars. (g) and (h) providing for the tax exemptions of the income of said organizations. Hence, if such income from prope rty or any other property is not conducted for profit, then it is not taxable. Even taken alone and understood according to its plain, simple and literal meani ng, the word "income" which is derived from property, real or personal, provided in the last paragraph of Sec. 27 means the amount of money coming to a person or corporation within a specified time as profit from investment; the return in money from one's business or capital invested. 7 Income from property also means gains and profits derived from the s ale or other disposition of capital assets; the money which any person or corporation periodically receives either as profit s from business, or as returns from investments 8 The word "income" as used in tax statutes is to be taken in its or dinary sense as gain or profit. 9 Clearly, therefore, income derived from property whether real or personal connot es profit from business or from investment of the same. If we are to apply the ordinary meaning of income from p roperty as profit to the language of the

last paragraph of Sec. 27 of the NIRC, then only those profits arising from busi ness and investment involving property are taxable. In the instant case, there is no question that in leasing its facilitie s to small shop owners and in operating parking spaces, YMCA does not engage in any profit-making business. Both the Court of Ta x Appeals, and the Court of Appeals in its resolution of 25 September 1995, categorically found that these activities c onducted on YMCA's property were aimed not only at fulfilling the needs and requirements of its members as part of YMCA 's youth program but, more importantly, at raising funds to finance the multifarious projects of the Association. As the Court has ruled in one case, the fact that an educational institution cha rges tuition fees and other fees for the different services it renders to the students does not in itself make the school a profit-making enterprise that would place it beyond the purview of the law exempting it from taxation. The mere realizatio n of profits out of its operation does not automatically result in the loss of an educational institution's exemption from income tax as long as no part of its profits inures to the benefit of any stockholder or individual. 10 In order to claim exe mption from income tax, a corporation or association must show that it is organized and operated exclusively for religiou s, charitable, scientific, athletic, cultural or educational purposes or for the rehabilitation of veterans, and that no part of its income inures to the benefit of any private stockholder or individual. 11 The main evidence of the purpose of a corp oration should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in the articles of incorporation, and the by-laws outline the administrative organization of the corporation which, in tur n, is supposed to insure or facilitate the accomplishment of said purpose. 12 The foregoing principle applies to income derived by tax exempt corporations fro m their property. The criterion or test in order to make such income taxable is when it arises from purely profit-making bu siness. Otherwise, when the income derived from use of property is reasonable and incidental to the charitable, ben evolent, educational or religious purpose for which the corporation or association is created, such income should be tax-e xempt. In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held In this connection, it should be noted that respondent therein is a corporation organized for "charitable, educational and religious purposes"; that no part of its net income inures to th e benefit of any private individual; that it is exempt from paying income tax; that it operates a hospita l in which MEDICAL assistance is given to destitute persons free of charge; that it maintains a pha rmacy department within the premises of said hospital, to supply drugs and medicines only to charity and paying patients confined therein; and that only the paying patients are required to pay the medicines sup plied to them, for which they are charged the cost of the medicines, plus an additional 10% thereof, to p artly offset the cost of

medicines supplied free of charge to charity patients. Under these facts we are of the opinion and so hold that the Hospital may not be regarded as engaged in "business" by reason of said sale of medicines to its paying patients . . . (W)e held that the UST Hospital was not established for pr ofit-making purposes, despite the fact that it had 140 paying beds, because the same were maintained o nly to partly finance the expenses of the free wards containing 203 beds for charity patients. In YMCA of Manila v. Collector of Internal Revenue, 14 this Court explained It is claimed however that the institution is run as a business in that it keeps a lodging and boarding house. It may be admitted that there are 64 persons occupying rooms in the main building as lodgers or roomers and that they take their meals at the restaurant below. These facts howe ver are far from constituting a business in the ordinary acceptation of the word. In the first pl ace, no profit is realized by the association in any sense. In the second place it is undoubted, as it is undi sputed, that the purpose of the association is not primarily to obtain the money which comes from the lodger s and boarders. The real purpose is to keep the membership continually within the sphere of influenc e of the institution; and thereby to prevent, as far as possible, the opportunities which vice presents to young men in foreign countries who lack home or other similar influences. The majority, if not all, of the income of the organizations covered by the exem ption provided in Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If we are to in terpret the last paragraph of Sec. 27 to the effect that all income of whatever kind from the properties of said organization , real or personal, are taxable, even if not conducted for profit, then Sec. 27, pars. (g) and (h), would be rendered ineffec tive and nugatory. As this Court elucidated in Jesus Sacred Heart College v. Collector of Internal Revenue, 15 every respons ible organization must be so run as to at least insure its existence by operating within the limits of its own resources, especially its regular income. It should always strive whenever possible to have a surplus. If the benefits of the exemption wou ld be limited to institutions which do not

hope or propose to have such surplus, then the exemption would apply only to sch ools which are on the verge of bankruptcy. Unlike the United States where a substantial number of institutions of learning are dependent upon voluntary contributions and still enjoy economic stability, such as Harvard, the trust fund of which has been steadily increasing with the years, there are and there have always been very few educati onal enterprises in the Philippines which are supported by donations, and these organizations usually have a very precario us existence. 16 Finally, the non-taxability of all income and properties of educational institut ions finds enduring support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution (3) All revenues and assets of non-stock, non-profit educational institutions us ed actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically h eld and found YMCA to be an educational institution exclusively devoted to educational and charitable purpos es and not operated for profit. The purposes of the Association as set forth in its charter and constitution are "to develop the Christian character and usefulness of its members, to improve the spiritual, intellectual, social and ph ysical condition of young men and to acquire, hold, mortgage and dispose of the necessary lands, buildings and person al property for the use of said corporation exclusively for religious, charitable and educational purposes, and not for investment or profit." YMCA has an educational department, the aim of which is to furnish, at much less than cost, instructions on subjects that will greatly increase the mental efficiency and wage-earning capacity of young men, prepare t hem in special lines of business and offer them special lines of study. We ruled therein that YMCA cannot be said to be an institution used exclusively for religious purposes or an institution devoted exclusively for charitable purposes or an institution devoted exclusively to educational purposes, but it can be truthfully said that it is an institution us ed exclusively for all three purposes and that, as such, it is entitled to be exempted from taxation. YMCA v CIR CIR v. YMCA GR No. 124043, October 14, 1998 298 SCRA 83 FACTS: Private Respondent YMCA--a non-stock, non-profit institution, which condu cts various programs beneficial to the public pursuant to its religious, educational and charitable objectives--lea ses out a portion of its premises to small shop owners, like restaurants and canteen operators, deriving substantial income for such. Seeing this, the Commissioner of Internal Revenue (CIR) issued an assessment to private respondent for deficie ncy income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding ta

x on wages. YMCA opposed arguing that its rental income is not subject to tax, mainly because of the provisions of Sec tion 27 of NIRC which provides that civic league or organizations not organized for profit but operate exclusively for pro motion of social welfare and those organized exclusively for pleasure, recreation and other non-profitble businesse s shall not be taxed. ISSUE: Is the contention of YMCA tenable? HELD: No. Because taxes are the lifeblood of the nation, the Court has always ap plied the doctrine of strict in interpretation in construing tax exemptions. Furthermore, a claim of statutory e xemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thu s, the claimed exemption "must expressly be granted in a statute stated in a language too clear to be mistaken. " 7. REYES v. ALMANZOR GR Nos. L-49839-46, April 26, 1991 196 SCRA 322 FACTS: Petitioners JBL Reyes et al. owned a parcel of land in Tondo which are le ased and occupied as dwelling units by tenants who were paying monthly rentals of not exceeding P300. Sometime in 1971 the Rental Freezing Law was passed prohibiting for one year from its effectivity, an increa se in monthly rentals of dwelling units where rentals do not exceed three hundred pesos (P300.00), so that the Rey eses were precluded from raising the rents and from ejecting the tenants. In 1973, respondent City Assess or of Manila re-classified and reassessed the value of the subject properties based on the schedule of market v alues, which entailed an increase in the corresponding tax rates prompting petitioners to file a Memorand um of Disagreement averring that the reassessments made were "excessive, unwarranted, inequitable, confiscat ory and unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual income derived from their

properties. They argued that the income approach should have been used in determ ining the land values instead of the comparable sales approach which the City Assessor adopted. ISSUE: Is the approach on tax assessment used by the City Assessor reasonable? HELD: No. The taxing power has the authority to make a reasonable and natural cl assification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, th e conditions not being different both in the privileges conferred and the liabilities imposed. Consequently, it stands to reason that petitioners who are burdened by the gover nment by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice shou ld not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties EN BANC G.R. Nos. L-49839-46 April 26, 1991 JOSE B. L. REYES and EDMUNDO A. REYES, petitioners, vs.PEDRO ALMANZOR, VICENTE A BAD SANTOS, JOSE ROO, in their capacities as appointed and Acting Members of the CENTRAL BOARD OF ASSESSM ENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities as appointe d and Acting Members of the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his capacity as Cit y Assessor of Manila,respondents. PARAS, J.:p This is a petition for review on certiorari to reverse the June 10, 1977 decisio n of the Central Board of Assessment Appeals 1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals of Manila and City Assessor of Manila" which affirmed the March 29, 1976 decision of the B oard of Tax Assessment Appeals 2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Asse ssor of Manila" and "Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification and asse ssments made by the City Assessor of Manila. The facts of the case are as follows: Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of la nd situated in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling si tes by tenants. Said tenants were paying monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On Ju ly 14, 1971, the National Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units or of lands on which another's dwelling is located, where such rentals do not exceed three hundred pesos (P300.00)

a month but allowing an increase in rent by not more than 10% thereafter. The sa id Act also suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity thereby disall owing the ejectment of lessees upon the expiration of the usual legal period of lease. On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly rentals below P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code, excepting leases with a definite per iod. Consequently, the Reyeses, petitioners herein, were precluded from raising the rentals and from ejecting the tenants. I n 1973, respondent City Assessor of Manila re-classified and reassessed the value of the subject properties based on the schedule of market values duly reviewed by the Secretary of Finance. The revision, as expected, entailed an inc rease in the corresponding tax rates prompting petitioners to file a Memorandum of Disagreement with the Board of Tax Assessment Appeals. They averred that the reassessments made were "excessive, unwarranted, inequitable, confiscat ory and unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual income derived from their properties. They argued that the income approach should have been used in determining the land values instead of the comparable sales approach which the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appea ls, however, considered the assessments valid, holding thus: WHEREFORE, and considering that the appellants have failed to submit concrete ev idence which could overcome the presumptive regularity of the classification and assessments appear to be in accordance with the base schedule of market values and of the base schedule of building uni t values, as approved by the Secretary of Finance, the cases should be, as they are hereby, upheld. SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals. They submitted, among others, the summary of the yearly rentals to show the income derived from the properties. Respondent City A ssessor, on the other hand, submitted three (3) deeds of sale showing the different market values of the real property situated in the same vicinity where the subject properties of petitioners are located. To better appreciate the location al and physical features of the land, the Board of Hearing Commissioners conducted an ocular inspection with the presence of two representatives of the City Assessor prior to the healing of the case. Neither the owners nor their authoriz ed representatives were present during the said ocular inspection despite proper notices served them. It was found that cer tain parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25). On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive portion of which reads: WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is affirmed. For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1 ) PD-266, the appealed Decision is modified by allowing a 20% reduction in their respective ma rket values and applying therein the assessment level of 30% to arrive at the corresponding asse ssed value. SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27) Petitioner's subsequent motion for reconsideration was denied, hence, this petit ion. The Reyeses assigned the following error: THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES. The petition is impressed with merit. The crux of the controversy is in the method used in tax assessment of the prope rties in question. Petitioners maintain that the "Income Approach" method would have been more realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on the market value of the properties affected, respondent Assessor o f the City of Manila unlawfully and unjustifiably set increased new assessed values at levels so high and successive that the resulting annual real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable by t he dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the values assigned to their propert ies as revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable, confiscatory and unconstitutional (Rollo, p. 10-A). On the other hand, while respondent Board of Tax Assessment Appeals admits in it

s decision that the income approach is used in determining land values in some vicinities, it maintains that when incom e is affected by some sort of price control, the same is rejected in the consideration and study of land values as in the cas e of properties affected by the Rent Control Law for they do not project the true market value in the open market ( Rollo, p. 21). Thus, respondents opted instead for the "Comparable Sales Approach" on the ground that the value estimate of the pro perties predicated upon prices paid in actual, market transactions would be a uniform and a more credible standards to use especially in case of mass appraisal of properties (Ibid.). Otherwise stated, public respondents would have this Cour t completely ignore the effects of the restrictions of P.D. No. 20 on the market value of properties within its coverag e. In any event, it is unquestionable that both the "Comparable Sales Approach" and the "Income Approach" are generally acc eptable methods of appraisal for taxation purposes (The Law on Transfer and Business Taxation by Hector S. De Leo n, 1988 Edition). However, it is conceded that the propriety of one as against the other would of course depend o n several factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (4 4 Phil. 383), it has been stressed that the assessors, in finding the value of the property, have to consider all the ci rcumstances and elements of value and must exercise a prudent discretion in reaching conclusions. Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule o f taxation must not only be uniform, but must also be equitable and progressive. Uniformity has been defined as that principle by which all taxable articles or k inds of property of the same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]). Notably in the 1935 Constitution, there was no mention of the equitable or progr essive aspects of taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second Edi tion). Thus, the need to examine closely and determine the specific mandate of the Constitution.

Taxation is said to be equitable when its burden falls on those better able to p ay. Taxation is progressive when its rate goes up depending on the resources of the person affected (Ibid.). The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all its plenitude the power to tax is not unconfined as there are restrictions. Adversel y effecting as it does property rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Mars hall's famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the powe r to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. C ommissioner of Internal Revenue, 139 SCRA 439 [1985]). In the same vein, the due process clause may be invoked where a taxing statute i s so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to confi scation of property. That would be a clear abuse of power (Sison v. Ancheta, supra). The taxing power has the authority to make a reasonable and natural classificati on for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very l east discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all pers ons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different b oth in the privileges conferred and the liabilities imposed (Ibid., p. 662). Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared t hat the first Fundamental Principle to guide the appraisal and assessment of real property for taxation purposes is tha t the property must be "appraised at its current and fair market value." By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the market value of properties not so covered. The former has naturally a much lesser marke t value in view of the rental restrictions. Ironically, in the case at bar, not even the factors determinant of the assessed value of subject properties under the "comparable sales approach" were presented by the public respondents, namely: (1 ) that the sale must represent abonafide arm's length transaction between a willing seller and a willing buyer and (2) the property must be comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of j udicial notice that for properties covered by P.D. 20 especially during the time in question, there were hardly any willing bu yers. As a general rule, there were no takers so that there can be no reasonable basis for the conclusion that these pr

operties were comparable with other residential properties not burdened by P.D. 20. Neither can the given circumstan ces be nonchalantly dismissed by public respondents as imposed under distressed conditions clearly implying that the sam e were merely temporary in character. At this point in time, the falsity of such premises cannot be more convincingly demonstrated by the fact that the law has existed for around twenty (20) years with no end to it in sight. Verily, taxes are the lifeblood of the government and so should be collected wit hout unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself It is therefore necessary to reconcile the apparently conflicting interes ts of the authorities and the taxpayers so that the real purpose of taxations, which is the promotion of the common good, may be achieved (Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to re ason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) unde r the principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties. By the public respondents' own computation the assessment by income approach wou ld amount to only P10.00 per sq. meter at the time in question. PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment Appeals of Manila and the City Assessor of Manila are ordered to make a new assessment by the income approach method to guarantee a fairer and mo re realistic basis of computation (Rollo, p. 71). SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancay co, Padilla, Bidin, Sarmiento, GrioAquino, Medialdea, Regalado and Davide, Jr., JJ., concur.