G.R. No.

L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective
behalf and as judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Leido, Andrada, Perez and Associates for petitioners.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their
grandchildren by hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the
municipality of Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas,
Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the
lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia.
the parcels which they actually occupied. For its part, the Government, in consonance
with the constitutional mandate to acquire big landed estates and apportion them
among landless tenants-farmers, persuaded the Roxas brothers to part with their
landholdings. Conferences were held with the farmers in the early part of 1948 and
finally the Roxas brothers agreed to sell 13,500 hectares to the Government for
distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for
survey and subdivision expenses.
It turned out however that the Government did not have funds to cover the purchase
price, and so a special arrangement was made for the Rehabilitation Finance
Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral
for such loan were the lands proposed to be sold to the farmers. Under the
arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but
by installment, and contracted with the Rehabilitation Finance Corporation to pay its
loan from the proceeds of the yearly amortizations paid by the farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of
P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax
purposes as gain on the sale of capital asset held for more than one year pursuant to
Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at Wright
St., Malate, Manila, which they inherited from their grandparents. After Antonio and
Eduardo got married, they resided somewhere else leaving only Jose in the old house.
In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of
P8,000.00 a year.
ASSESSMENTS
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia
the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00
compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952
plus P10.00 compromise penalty for late payment. The assessment for real estate
dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose
Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of
a real estate who derives a yearly rental income therefrom in the amount of P3,000.00
or more is considered a real estate dealer and is liable to pay the corresponding fixed
tax.
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers
of securities against Roxas y Cia., on the fact that said partnership made profits from
the purchase and sale of securities.
In the same assessment, the Commissioner assessed deficiency income taxes against
the Roxas Brothers for the years 1953 and 1955, as follows:

Antonio Roxas
Eduardo Roxas
Jose Roxas

1953
1955
P7,010.00 P5,813.00
7,281.00 5,828.00
6,323.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of
the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the
Nasugbu farm lands to the tenants, and the disallowance of deductions from gross
income of various business expenses and contributions claimed by Roxas y Cia. and
the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands
and sold them to the farmers on installment, the Commissioner considered the
partnership as engaged in the business of real estate, hence, 100% of the profits
derived therefrom was taxed.

The following deductions were disallowed:

ROXAS Y CIA.:
1953
Tickets for Banquet in honor of
S. Osmea

P
40.00

Gifts of San Miguel beer

28.00

Contributions to
Philippine Air Force Chapel

100.00

Manila Police Trust Fund

150.00

Philippines Herald's fund for

Manila's neediest families

100.00

Contributions to Contribution
to
Our Lady of Fatima
Chapel, FEU

50.00

1955

ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas
Fund

25.00

Pasay City Police Dept. X'mas

fund

50.00

1955
Contributions to
Baguio City Police Christmas
fund

25.00

Pasay City Firemen Christmas

fund

25.00

Pasay City Police Christmas

fund

50.00

EDUARDO ROXAS:
1953
Contributions to
Hijas de Jesus' Retiro de
Manresa

450.00

Philippines Herald's fund for

Manila's neediest families

100.00

Contributions to Philippines
Herald's fund for
Manila's
neediest families

120.00

1955

JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for
Manila's
neediest families

120.00

The Roxas brothers protested the assessment but inasmuch as said protest was
denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The
Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the
assessment except the demand for the payment of the fixed tax on dealer of securities
and the disallowance of the deductions for contributions to the Philippine Air Force
Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to
petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby
ordered to pay the respondent Commissioner of Internal Revenue the amounts of
P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income
taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest
as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to
the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real
estate dealer's tax. With costs against petitioners.

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The
Commissioner of Internal Revenue did not appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain,
hence 100% taxable?
(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered
a real estate dealer because it engaged in the business of selling real estate. The
business activity alluded to was the act of subdividing the Nasugbu farm lands and
selling them to the farmers-occupants on installment. To bolster his stand on the point,
he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership,
quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden
pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones,
estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben
conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of
Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its
peculiar circumstances in spite of the fact that there were hundreds of vendees.
Although they paid for their respective holdings in installment for a period of ten years, it
would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the
ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers
who tilled them for generations was not only in consonance with, but more in obedience
to the request and pursuant to the policy of our Government to allocate lands to the
landless. It was the bounden duty of the Government to pay the agreed compensation
after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide
them among the farmers at very reasonable terms and prices. However, the
Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia.
shouldered the Government's burden, went out of its way and sold lands directly to the
farmers in the same way and under the same terms as would have been the case had
the Government done it itself. For this magnanimous act, the municipal council of
Nasugbu passed a resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that

lays the golden egg". And, in order to maintain the general public's trust and confidence
in the Government this power must be used justly and not treacherously. It does not
conform with Our sense of justice in the instant case for the Government to persuade
the taxpayer to lend it a helping hand and later on to penalize him for duly answering
the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question.
Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital
assets, and the gain derived from the sale thereof is capital gain, taxable only to the
extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a
banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as
gifts to various persons. The deduction were claimed as representation expenses.
Representation expenses are deductible from gross income as expenditures incurred in
carrying on a trade or business under Section 30(a) of the Tax Code provided the
taxpayer proves that they are reasonable in amount, ordinary and necessary, and
incurred in connection with his business. In the case at bar, the evidence does not show
such link between the expenses and the business of Roxas y Cia. The findings of the
Court of Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay
City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund,
Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel
at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen
and Baguio City Police are not deductible for the reason that the Christmas funds were
not spent for public purposes but as Christmas gifts to the families of the members of
said entities. Under Section 39(h), a contribution to a government entity is deductible
when used exclusively for public purposes. For this reason, the disallowance must be
sustained. On the other hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila Police, a government
entity, intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families were
disallowed on the ground that the Philippines Herald is not a corporation or an
association contemplated in Section 30 (h) of the Tax Code. It should be noted however
that the contributions were not made to the Philippines Herald but to a group of civic
spirited citizens organized by the Philippines Herald solely for charitable purposes.
There is no question that the members of this group of citizens do not receive profits, for
all the funds they raised were for Manila's neediest families. Such a group of citizens
may be classified as an association organized exclusively for charitable purposes
mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady
of Fatima chapel at the Far Eastern University on the ground that the said university
gives dividends to its stockholders. Located within the premises of the university, the
chapel in question has not been shown to belong to the Catholic Church or any religious
organization. On the other hand, the lower court found that it belongs to the Far Eastern
University, contributions to which are not deductible under Section 30(h) of the Tax
Code for the reason that the net income of said university injures to the benefit of its
stockholders. The disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it,
because although it earned a rental income of P8,000.00 per annum in 1952, said rental
income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in
considering as real estate dealers owners of real estate receiving rentals of at least
P3,000.00 a year, does not provide any qualification as to the persons paying the
rentals. The law, which states: 1wph1.t
. . . "Real estate dealer" includes any person engaged in the business of buying,
selling, exchanging, leasing or renting property on his own account as principal
and holding himself out as a full or part-time dealer in real estate or as an owner
of rental property or properties rented or offered to rent for an aggregate amount
of three thousand pesos or more a year: . . . (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals
or, this point is sustained.1wph1.t
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo
Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the
sum of P109.00, P91.00 and P49.00, respectively, computed as follows: *
ANTONIO ROXAS
Net income per return
Add: 1/3 share, profits in
Roxas y Cia.

P315,476.59
P 153,249.15

Less amount declared

146,135.46

Amount understated

P 7,113.69

Contributions disallowed

115.00
P 7,228.69

Less 1/3 share of

contributions amounting to

7,042.02

186.67

P21,126.06 disallowed from

partnership but allowed to
partners
Net income per review

P315,663.26

Less: Exemptions

4,200.00

Net taxable income

P311,463.26

Tax due

154,169.00

Tax paid

154,060.00

Deficiency

P 109.00
==========
EDUARDO ROXAS
P
304,166.92

Net income per return

Add: 1/3 share, profits in
Roxas y Cia

P 153,249.15

Less profits declared

146,052.58

Amount understated

P 7,196.57

Less 1/3 share in

contributions amounting to
P21,126.06 disallowed from
partnership but allowed to
partners

7,042.02

Net income per review

P304,322.47

Less: Exemptions

4,800.00

Net taxable income

P299,592.47

Tax Due

P147,250.00

Tax paid

147,159.00

Deficiency

155.55

P91.00
===========
JOSE ROXAS
Net income per return
Add: 1/3 share, profits in
Roxas y Cia.
Less amount reported

P222,681.76
P153,429.15
146,135.46

Amount understated

7,113.69

Less 1/3 share of

contributions disallowed
from partnership but allowed
as deductions to partners

7,042.02

Net income per review

P222,753.43

Less: Exemption

1,800.00

Net income subject to tax

P220,953.43

Tax due

P102,763.00

Tax paid

102,714.00

Deficiency

71.67

P 49.00
===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered
to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas,
Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00,
P91.00 and P49.00 as their individual deficiency income tax all corresponding for the
year 1955. No costs. So ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Zaldivar, J., took no part.
Concepcion, C.J., is on leave.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue;
ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS
TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA,
Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit,
and CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition
proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a
showing of its constitutional infirmity. The assailed provision further amends Section 21
of the National Internal Revenue Code of 1977, which provides for rates of tax on
citizens or residents on (a) taxable compensation income, (b) taxable net income, (c)
royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any
other monetary benefit from deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in the net profits of taxable
partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue
thereof, "he would be unduly discriminated against by the imposition of higher rates of
tax upon his income arising from the exercise of his profession vis-a-vis those which are
imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the
above sction as arbitrary amounting to class legislation, oppressive and capricious in
character 5 For petitioner, therefore, there is a transgression of both the equal protection
and due process clauses 6 of the Constitution as well as of the rule requiring uniformity
in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer
within 10 days from notice. Such an answer, after two extensions were granted the
Office of the Solicitor General, was filed on May 28, 1982. 8The facts as alleged were
admitted but not the allegations which to their mind are "mere arguments, opinions or
conclusions on the part of the petitioner, the truth [for them] being those stated [in their]
Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big.
135 is a valid exercise of the State's power to tax. The authorities and cases cited while
correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for
the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The
reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas
which used to be left to private enterprise and initiative and which the government was
called upon to enter optionally, and only 'because it was better equipped to administer
for the public welfare than is any private individual or group of individuals,' continue to
lose their well-defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to meet the increasing social
challenges of the times." 11 Hence the need for more revenues. The power to tax, an
inherent prerogative, has to be availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds. To praphrase a recent decision,
taxes being the lifeblood of the government, their prompt and certain availability is of the
essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of
sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to
be admitted that for all its plenitude 'the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits . Adversely affecting as it does
properly rights, both the due process and equal protection clauses inay properly be
invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it
were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that
"the power to tax involves the power to destroy." 14 In a separate opinion in Graves v.
New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark
characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the
times following] a free use of absolutes." 16 This is merely to emphasize that it is riot
and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully
conclude: "The web of unreality spun from Marshall's famous dictum was brushed away
by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy
while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law
overrides any legislative or executive, act that runs counter to it. In any case therefore
where it can be demonstrated that the challenged statutory provision as petitioner
here alleges fails to abide by its command, then this Court must so declare and
adjudge it null. The injury thus is centered on the question of whether the imposition of a
higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here. does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a provision
as void or its face, he has not made out a case. This is merely to adhere to the
authoritative doctrine that were the due process and equal protection clauses are
invoked, considering that they arc not fixed rules but rather broad standards, there is a

need for of such persuasive character as would lead to such a conclusion. Absent such
a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is
so arbitrary that it finds no support in the Constitution. An obvious example is where it
can be shown to amount to the confiscation of property. That would be a clear abuse of
power. It then becomes the duty of this Court to say that such an arbitrary act amounted
to the exercise of an authority not conferred. That properly calls for the application of the
Holmes dictum. It has also been held that where the assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute
is so harsh and unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a
denial of this constitutional mandate whether the assailed act is in the exercise of the
lice power or the power of eminent domain is to demonstrated that the governmental act
assailed, far from being inspired by the attainment of the common weal was prompted
by the 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, the
conditions not being different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed. For the principle is that
equal protection and security shall be given to every person under circumtances which if
not Identical are analogous. If law be looked upon in terms of burden or charges, those
that fall within a class should be treated in the same fashion, whatever restrictions cast
on some in the group equally binding on the rest." 20 That same formulation applies as
well to taxation measures. The equal protection clause is, of course, inspired by the
noble concept of approximating the Ideal of the laws benefits being available to all and
the affairs of men being governed by that serene and impartial uniformity, which is of
the very essence of the Idea of law. There is, however, wisdom, as well as realism in
these words of Justice Frankfurter: "The equality at which the 'equal protection' clause
aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal
protection of the laws,' and laws are not abstract propositions. They do not relate to
abstract units A, B and C, but are expressions of policy arising out of specific difficulties,
address to the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or opinion to be treated in
law as though they were the same."21 Hence the constant reiteration of the view that
classification if rational in character is allowable. As a matter of fact, in a leading case of
Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at
any rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the
Constitution: "The rule of taxation shag be uniform and equitable." 24 This requirement is
met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in

1940, when the tax "operates with the same force and effect in every place where the
subject may be found. " 26 He likewise added: "The rule of uniformity does not call for
perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem
of classification did not present itself in that case. It did not arise until nine years later,
when the Supreme Court held: "Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same rate.
The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation"
complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 29 There is
quite a similarity then to the standard of equal protection for all that is required is that
the tax "applies equally to all persons, firms and corporations placed in similar
situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into
consideration the distinction between a tax rate and a tax base. There is no legal
objection to a broader tax base or taxable income by eliminating all deductible items
and at the same time reducing the applicable tax rate. Taxpayers may be classified into
different categories. To repeat, it. is enough that the classification must rest upon
substantial distinctions that make real differences. In the case of the gross income
taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification
is the susceptibility of the income to the application of generalized rules removing all
deductible items for all taxpayers within the class and fixing a set of reduced tax rates to
be applied to all of them. Taxpayers who are recipients of compensation income are set
apart as a class. As there is practically no overhead expense, these taxpayers are e not
entitled to make deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals in the practice of
their calling and businessmen, there is no uniformity in the costs or expenses necessary
to produce their income. It would not be just then to disregard the disparities by giving
all of them zero deduction and indiscriminately impose on all alike the same tax rates on
the basis of gross income. There is ample justification then for the Batasang Pambansa
to adopt the gross system of income taxation to compensation income, while continuing
the system of net income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering
the (1) lack of factual foundation to show the arbitrary character of the assailed
provision; 31 (2) the force of controlling doctrines on due process, equal protection, and
uniformity in taxation and (3) the reasonableness of the distinction between
compensation and taxable net income of professionals and businessman certainly not a
suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.

G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and
instill health consciousness among them.

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall be priority for the
needs of the underprivileged sick, elderly, disabled, women, and children. The State
shall endeavor to provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner
Philippine Health Care Providers, Inc.2

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain,

conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial responsibilities
of the organization." Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a hospital or
clinic owned, operated or accredited by it.

xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent

petitioner a formal demand letter and the corresponding assessment notices demanding
the payment of deficiency taxes, including surcharges and interest, for the taxable years
1996 and 1997 in the total amount of P224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners
health care agreement with the members of its health care program pursuant to Section
185 of the 1997 Tax Code xxxx

xxx

xxx

xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent
did not act on the protest, petitioner filed a petition for review in the Court of Tax
Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to
P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997
until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting
the said DST deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioners health care agreement was
a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioners health care
agreement was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner to desist from collecting the
same is REVERSED and SET ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as

deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25%
surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully
paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this
case.

xxx

xxx

xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs
decision. We held that petitioners health care agreement during the pertinent period
was in the nature of non-life insurance which is a contract of indemnity, citing Blue
Cross Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We
also ruled that petitioners contention that it is a health maintenance organization (HMO)
and not an insurance company is irrelevant because contracts between companies like
petitioner and the beneficiaries under their plans are treated as insurance contracts.
Moreover, DST is not a tax on the business transacted but an excise on the privilege,
opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed
only on a company engaged in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CAs disposition that health care services are not in the nature of an insurance
business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is
clear, especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are
not those contemplated under Section 185.

(f) Assuming arguendo that petitioners agreements are akin to health insurance, health
insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned
in Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year
2005 and all prior years. Therefore, the questioned assessments on the DST are now
rendered moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a
tax amnesty under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully
paying the amount of P5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.8

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.9 It is engaged in the dispensation of the following
medical services to individuals who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family

planning counseling, consultation and advices on diet, exercise and other healthy
habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,

fecalysis, complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the enrolled
member.10

Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to enrolled
members in a hospital or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with it. It negotiates with
such health care practitioners regarding payment schemes, financing and other
procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those
directly employed by it11 or whose services are contracted by it.12 Petitioner also
provides hospital services such as room and board accommodation, laboratory
services, operating rooms, x-ray facilities and general nursing care.13 If and when a
member avails of the benefits under the agreement, petitioner pays the participating
physicians and other health care providers for the services rendered, at pre-agreed
rates.14

To avail of petitioners health care programs, the individual members are required to
sign and execute a standard health care agreement embodying the terms and
conditions for the provision of the health care services. The same agreement contains
the various health care services that can be engaged by the enrolled member, i.e.,
preventive, diagnostic and curative medical services. Except for the curative aspect of

the medical service offered, the enrolled member may actually make use of the health
care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and
not an insurer because its agreements are treated as insurance contracts and the DST
is not a tax on the business but an excise on the privilege, opportunity or facility used in
the transaction of the business.15

Petitioner, however, submits that it is of critical importance to characterize the business

it is engaged in, that is, to determine whether it is an HMO or an insurance company, as
this distinction is indispensable in turn to the issue of whether or not it is liable for DST
on its health care agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies
of insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), and all bonds, undertakings, or recognizances,
conditioned for the performance of the duties of any office or position, for the doing or
not doing of anything therein specified, and on all obligations guaranteeing the validity
or legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any
real estate, or guaranteeing any mercantile credits, which may be made or renewed by
any such person, company or corporation, there shall be collected a documentary
stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof,
of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or

part of a statute shall be considered surplusage or superfluous, meaningless, void and
insignificant. To this end, a construction which renders every word operative is preferred
over that which makes some words idle and nugatory.17 This principle is expressed in
the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which
gives effect to the whole of the statute its every word.18

From the language of Section 185, it is evident that two requisites must concur before
the DST can apply, namely: (1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2) the maker should be transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act
of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a fixed prepaid premium."19
The payments do not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance
during the pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what
constitutes "doing an insurance business" or "transacting an insurance business:"

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation and

not as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized

as constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the

foregoing in a manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the
making thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test
that they have applied is whether the assumption of risk and indemnification of loss
(which are elements of an insurance business) are the principal object and purpose of
the organization or whether they are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But if they are merely incidental
and service is the principal purpose, then the business is not insurance.

Applying the "principal object and purpose test,"22 there is significant American case
law supporting the argument that a corporation (such as an HMO, whether or not
organized for profit), whose main object is to provide the members of a group with
health services, is not engaged in the insurance business.

The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of
Appeals of the District of Columbia Circuit held that Group Health Association should
not be considered as engaged in insurance activities since it was created primarily for
the distribution of health care services rather than the assumption of insurance risk.

xxx Although Group Healths activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The
functions of such an organization are not identical with those of insurance or indemnity
companies. The latter are concerned primarily, if not exclusively, with risk and the

consequences of its descent, not with service, or its extension in kind, quantity or
distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with getting
service rendered to its members and doing so at lower prices made possible by quantity
purchasing and economies in operation. Its primary purpose is to reduce the cost rather
than the risk of medical care; to broaden the service to the individual in kind and
quantity; to enlarge the number receiving it; to regularize it as an everyday incident of
living, like purchasing food and clothing or oil and gas, rather than merely protecting
against the financial loss caused by extraordinary and unusual occurrences, such as
death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds,
ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as
the more serious and unusual illness. To summarize, the distinctive features of the
cooperative are the rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of service as well as
payment, the substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance arrangement. There is, therefore,
a substantial difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to stand its cost
when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function
becomes faint, if not extinct. This is especially true when the contract is for the sale of
goods or services on contingency. But obviously it was not the purpose of the insurance
statutes to regulate all arrangements for assumption or distribution of risk. That view
would cause them to engulf practically all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in looking only at the risk element, to the
exclusion of all others present or their subordination to it. The question turns, not on
whether risk is involved or assumed, but on whether that or something else to which it is
related in the particular plan is its principal object purpose.24 (Emphasis supplied)

In California Physicians Service v. Garrison,25 the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service rather
than indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not
engaged in the insurance business. Absence or presence of assumption of risk or peril

is not the sole test to be applied in determining its status. The question, more broadly, is
whether, looking at the plan of operation as a whole, service rather than indemnity is
its principal object and purpose. Certainly the objects and purposes of the corporation
organized and maintained by the California physicians have a wide scope in the field of
social service. Probably there is no more impelling need than that of adequate medical
care on a voluntary, low-cost basis for persons of small income. The medical profession
unitedly is endeavoring to meet that need. Unquestionably this is service of a high
order and not indemnity.26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of
New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical services
through participating physicians, thus relieving subscribers of any further financial
burden, while the latter only undertake to indemnify an insured for medical expenses up
to, but not beyond, the schedule of rates contained in the policy.

xxx

xxx

xxx

The primary purpose of a medical service corporation, however, is an undertaking to

provide physicians who will render services to subscribers on a prepaid basis. Hence, if
there are no physicians participating in the medical service corporations plan, not only
will the subscribers be deprived of the protection which they might reasonably have
expected would be provided, but the corporation will, in effect, be doing business solely
as a health and accident indemnity insurer without having qualified as such and
rendering itself subject to the more stringent financial requirements of the General
Insurance Laws.

A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service

corporation in return for which the health service corporation agrees to make payment
directly to the participating provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary
purpose of the business to provide medical services as needed, with payment made
directly to the provider of these services.29 In short, even if petitioner assumes the risk
of paying the cost of these services even if significantly more than what the member has
prepaid, it nevertheless cannot be considered as being engaged in the insurance
business.

By the same token, any indemnification resulting from the payment for services
rendered in case of emergency by non-participating health providers would still be
incidental to petitioners purpose of providing and arranging for health care services and
does not transform it into an insurer. To fulfill its obligations to its members under the
agreements, petitioner is required to set up a system and the facilities for the delivery of
such medical services. This indubitably shows that indemnification is not its sole object.

In fact, a substantial portion of petitioners services covers preventive and diagnostic

medical services intended to keep members from developing medical conditions or
diseases.30 As an HMO, it is its obligation to maintain the good health of its members.
Accordingly, its health care programs are designed to prevent or to minimize the
possibility of any assumption of risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members against any loss or damage arising from a
medical condition but, on the contrary, to provide the health and medical services
needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with

respect to its curative medical services), but these are incidental to the principal activity
of providing them medical care. The "insurance-like" aspect of petitioners business is
miniscule compared to its noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance services, it cannot be considered as
being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the
above-quoted U.S. cases, we are not saying that petitioners operations are identical in
every respect to those of the HMOs or health providers which were parties to those

cases. What we are stating is that, for the purpose of determining what "doing an
insurance business" means, we have to scrutinize the operations of the business as a
whole and not its mere components. This is of course only prudent and appropriate,
taking into account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular
HMOs to be actually engaged in insurance activities.32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry.
This is evident from the fact that it is not supervised by the Insurance Commission but
by the Department of Health.33 In fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is not engaged in the insurance
business. This determination of the commissioner must be accorded great weight. It is
well-settled that the interpretation of an administrative agency which is tasked to
implement a statute is accorded great respect and ordinarily controls the interpretation
of laws by the courts. The reason behind this rule was explained in Nestle Philippines,
Inc. v. Court of Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of
a modern or modernizing society and the establishment of diverse administrative
agencies for addressing and satisfying those needs; it also relates to the accumulation
of experience and growth of specialized capabilities by the administrative agency
charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,35 the Court stressed that executive officials are presumed
to have familiarized themselves with all the considerations pertinent to the meaning and
purpose of the law, and to have formed an independent, conscientious and competent
expert opinion thereon. The courts give much weight to the government agency officials
charged with the implementation of the law, their competence, expertness, experience
and informed judgment, and the fact that they frequently are the drafters of the law they
interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section

185 Of The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance or obligations of
the nature of indemnity for loss, damage, or liability." In our decision dated June 12,
2008, we ruled that petitioners health care agreements are contracts of indemnity and
are therefore insurance contracts:

It is incorrect to say that the health care agreement is not based on loss or damage
because, under the said agreement, petitioner assumes the liability and indemnifies its
member for hospital, medical and related expenses (such as professional fees of
physicians). The term "loss or damage" is broad enough to cover the monetary expense
or liability a member will incur in case of illness or injury.

Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of socalled "out-patient services" (including physical examination, x-ray and laboratory tests,
medical consultations, vaccine administration and family planning counseling) is the
contingent event which gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are
prepaid. The expenses to be incurred by each member cannot be predicted beforehand,
if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the
services even if they are significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the other
members of the health care program. This is insurance.37

We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies
of insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are
strictly construed against the taxing authority.38 This is because taxation is a
destructive power which interferes with the personal and property rights of the people

and takes from them a portion of their property for the support of the government.39
Hence, tax laws may not be extended by implication beyond the clear import of their
language, nor their operation enlarged so as to embrace matters not specifically
provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. However, those cases did not involve the interpretation of a tax provision.
Instead, they dealt with the liability of a health service provider to a member under the
terms of their health care agreement. Such contracts, as contracts of adhesion, are
liberally interpreted in favor of the member and strictly against the HMO. For this
reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement

whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. An insurance contract exists
where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among
a large group of persons bearing a similar risk and

5. In consideration of the insurers promise, the insured pays a premium.41

Do the agreements between petitioner and its members possess all these elements?
They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even
if a contract contains all the elements of an insurance contract, if its primary purpose is
the rendering of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an insurance contract. For example, a
law firm which enters into contracts with clients whereby in consideration of periodical
payments, it promises to represent such clients in all suits for or against them, is not
engaged in the insurance business. Its contracts are simply for the purpose of rendering
personal services. On the other hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own expense to defend a physician
against all suits for damages for malpractice is one of insurance, and the corporation
will be deemed as engaged in the business of insurance. Unlike the lawyers retainer
contract, the essential purpose of such a contract is not to render personal services, but
to indemnify against loss and damage resulting from the defense of actions for
malpractice.42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in
petitioners agreements. To begin with, there is no loss, damage or liability on the part of
the member that should be indemnified by petitioner as an HMO. Under the agreement,
the member pays petitioner a predetermined consideration in exchange for the hospital,
medical and professional services rendered by the petitioners physician or affiliated
physician to him. In case of availment by a member of the benefits under the
agreement, petitioner does not reimburse or indemnify the member as the latter does
not pay any third party. Instead, it is the petitioner who pays the participating physicians
and other health care providers for the services rendered at pre-agreed rates. The
member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary
liability on the part of the member to any third party-provider of medical services which
might in turn necessitate indemnification from petitioner. The terms "indemnify" or
"indemnity" presuppose that a liability or claim has already been incurred. There is no
indemnity precisely because the member merely avails of medical services to be paid or
already paid in advance at a pre-agreed price under the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the
benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination
and consultations, vaccine administration as well as family planning counseling, even in
the absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who

receives care from a non-participating physician or hospital. However, this is only a very
minor part of the list of services available. The assumption of the expense by petitioner
is not confined to the happening of a contingency but includes incidents even in the
absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43

although the health care contracts called for the defendant to partially reimburse a
subscriber for treatment received from a non-designated doctor, this did not make
defendant an insurer. Citing Jordan, the Court determined that "the primary activity of
the defendant (was) the provision of podiatric services to subscribers in consideration of
prepayment for such services."44 Since indemnity of the insured was not the focal point
of the agreement but the extension of medical services to the member at an affordable
cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily

true that risk alone is sufficient to establish it. Almost anyone who undertakes a
contractual obligation always bears a certain degree of financial risk. Consequently,
there is a need to distinguish prepaid service contracts (like those of petitioner) from the
usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide

health services: the risk that it might fail to earn a reasonable return on its investment.
But it is not the risk of the type peculiar only to insurance companies. Insurance risk,
also known as actuarial risk, is the risk that the cost of insurance claims might be higher
than the premiums paid. The amount of premium is calculated on the basis of
assumptions made relative to the insured.45

However, assuming that petitioners commitment to provide medical services to its

members can be construed as an acceptance of the risk that it will shell out more than
the prepaid fees, it still will not qualify as an insurance contract because petitioners
objective is to provide medical services at reduced cost, not to distribute risk like an
insurer.

In sum, an examination of petitioners agreements with its members leads us to

conclude that it is not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on

petitioners health care agreements under Section 185 of the NIRC of 1997 is the
provisions legislative history. The text of Section 185 came into U.S. law as early as
1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise
known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997
is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several
bonds, debentures, or certificates of stock and indebtedness, and other documents,
instruments, matters, and things mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which such instrument, matters, or
things or any of them shall be written or printed by any person or persons who shall
make, sign, or issue the same, on and after January first, nineteen hundred and five, the
several taxes following:

xxx

xxx

xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity
for loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employers liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except
life, marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted
revising and consolidating the laws relating to internal revenue. The aforecited pertinent
portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section
30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items
subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced
as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its
amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of
Act No. 2711, otherwise known as the Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC
of 1939), which codified all the internal revenue laws of the Philippines. In an
amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but
the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again
increased.1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC
of 1977 was renumbered as Section 198. And under Section 23 of EO47 273 dated July
25, 1987, it was again renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only
with respect to the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or

the NIRC of 1997), the subject legal provision was retained as the present Section 185.
In 2004, amendments to the DST provisions were introduced by RA 924348 but Section
185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the
formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was
later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare).
However, there are those who claim that Health Maintenance, Inc. is the HMO industry
pioneer, having set foot in the Philippines as early as 1965 and having been formally
incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36
registered HMOs with a total enrollment of more than 2 million.49

We can clearly see from these two histories (of the DST on the one hand and HMOs on
the other) that when the law imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various amendments to the DST law
were enacted, they were already in existence in the Philippines and the term had in fact
already been defined by RA 7875. If it had been the intent of the legislature to impose
DST on health care agreements, it could have done so in clear and categorical terms. It
had many opportunities to do so. But it did not. The fact that the NIRC contained no
specific provision on the DST liability of health care agreements of HMOs at a time they
were already known as such, belies any legislative intent to impose it on them. As a
matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after
more than a decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it
would be safe to say that health care agreements were never, at any time, recognized
as insurance contracts or deemed engaged in the business of insurance within the
context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.51 So potent indeed is the power that it was once opined
that "the power to tax involves the power to destroy."52

Petitioner claims that the assessed DST to date which amounts to P376 million53 is
way beyond its net worth of P259 million.54 Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the government to throttle private business.
On the contrary, the government ought to encourage private enterprise.55 Petitioner,
just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of

existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the nations thrust towards
a better economy which will ultimately benefit the majority of our people.59

Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic60 when it availed of the tax amnesty
under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5% of its net
worth as of the year ended December 31, 2005 and complied with all requirements of
the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment
of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative
penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or administrative
penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the
preceding years.

In view of petitioners availment of the benefits of [RA 9840], and without conceding the
merits of this case as discussed above, respondent concedes that such tax amnesty
extinguishes the tax liabilities of petitioner. This admission, however, is not meant to
preclude a revocation of the amnesty granted in case it is found to have been granted
under circumstances amounting to tax fraud under Section 10 of said amnesty law.62
(Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax
amnesty program under RA 9480.63 There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished
by its availment of the tax amnesty under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this
Court is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a
health care agreement of Philamcare Health Systems is not an insurance contract for
purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this
Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner
argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on
the merits; hence, the Court should apply the CA ruling there that a health care
agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that case
has already become final.67 When a minute resolution denies or dismisses a petition for
failure to comply with formal and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions, are deemed sustained.68 But
what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata.69 However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v.
Baier-Nickel71 involving the same parties and the same issues, was previously
disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining
the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no
bearing" on the latter case because the two cases involved different subject matters as
they were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court and
certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners
liability for DST on its health care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute resolution in that case (which
is not even binding precedent) in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact that petitioners health care
agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of
Section 185 of the NIRC and there was never any legislative intent to impose the same
on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its
coverage.

It is a matter of common knowledge that there is a great social need for adequate
medical services at a cost which the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the furtherance of the goal of providing a
more efficient and inexpensive health care system made possible by quantity
purchasing of services and economies of scale. They offer advantages over the pay-forservice system (wherein individuals are charged a fee each time they receive medical
services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about
by a fluctuating economy. Accordingly, they play an important role in society as partners
of the State in achieving its constitutional mandate of providing its citizens with
affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74
Its imposition will elevate the cost of health care services. This will in turn necessitate an
increase in the membership fees, resulting in either placing health services beyond the
reach of the ordinary wage earner or driving the industry to the ground. At the end of the
day, neither side wins, considering the indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004
decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said
tax.

No costs.

SO ORDERED.

CHAMBER OF REAL G.R. No. 160756

ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF

FINANCE JUANITA D. AMATONG,

and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated:

March 9, 2010

x-------------------------------------------------x
DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real
Estate and Builders Associations, Inc. is questioning the constitutionality of Section 27
(E) of Republic Act (RA) 8424[2] and the revenue regulations (RRs) issued by the
Bureau of Internal Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.[3]

Petitioner is an association of real estate developers and builders in the Philippines. It

impleaded former Executive Secretary Alberto Romulo, then acting Secretary of
Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo
Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT)
on corporations and creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98. Petitioner argues that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe
the rules and procedures for the collection of CWT on the sale of real properties
categorized as ordinary assets. Petitioner contends that these revenue regulations are
contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, respondent Secretary of Finance has no
authority to collect CWT, much less, to base the CWT on the gross selling price or fair
market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied upon
real estate enterprises but not on other business enterprises, more particularly those in
the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is

unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties
classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the
normal corporate income tax imposed under Section 27(A).[4] If the regular income tax
is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the
MCIT over the normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years. Section 27(E) of RA
8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1)
Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year, as defined herein, is hereby imposed on a corporation taxable
under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum income
tax is greater than the tax computed under Subsection (A) of this Section for the taxable
year.

(2)
Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the
normal income tax as computed under Subsection (A) of this Section shall be carried
forward and credited against the normal income tax for the three (3) immediately
succeeding taxable years.

(3)
Relief from the [MCIT] under certain conditions. The Secretary of Finance is
hereby authorized to suspend the imposition of the [MCIT] on any corporation which
suffers losses on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of

the Commissioner, the necessary rules and regulations that shall define the terms and
conditions under which he may suspend the imposition of the [MCIT] in a meritorious
case.

(4)
Gross Income Defined. For purposes of applying the [MCIT] provided under
Subsection (E) hereof, the term gross income shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. Cost of goods sold shall include all
business expenses directly incurred to produce the merchandise to bring them to their
present location and use.

For trading or merchandising concern, cost of goods sold shall include the invoice cost
of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of goods manufactured and sold shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, gross income means gross
receipts less sales returns, allowances, discounts and cost of services. Cost of services
shall mean all direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in the case of banks, cost
of services shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the

recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 9-98
implementing Section 27(E).[5] The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, normal income tax means the income tax
rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective
January 1, 2000 and thereafter.

xxx xxx xxx

(2)
Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal
income tax as computed under Sec. 27(A) of the Code shall be carried forward on an
annual basis and credited against the normal income tax for the three (3) immediately
succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of

respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.[6] Under Section 2.57.2(J) of RR No. 2-98, income
payments from the sale, exchange or transfer of real property, other than capital assets,
by persons residing in the Philippines and habitually engaged in the real estate
business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. Real property, other than capital
assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and
the seller/transferor is habitually engaged in the real estate business in accordance with
the following schedule
Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5
of these regulations.

Exempt

With a selling price of five hundred thousand pesos (P500,000.00) or less.

1.5%

With a selling price of more than five hundred thousand pesos (P500,000.00) but not
more than two million pesos (P2,000,000.00).

3.0%

With selling price of more than two million pesos (P2,000,000.00)

5.0%

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair market value of the property received in
exchange, as determined in the Income Tax Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is

required to be made on the periodic installment payments where the buyer is an
individual not engaged in trade or business. In such a case, the applicable rate of tax
based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or

otherwise, the tax shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J)
Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of real property classified as ordinary
asset. - A [CWT] based on the gross selling price/total amount of consideration or the
fair market value determined in accordance with Section 6(E) of the Code, whichever is
higher, paid to the seller/owner for the sale, transfer or exchange of real property, other
than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance
with the following schedule:

Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of
these regulations.

Exempt

Upon the following values of real property, where the seller/transferor is habitually
engaged in the real estate business.

With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not
more than Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million Pesos (P2,000,000.00).

5.0%
xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the
fair market value determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair market value of the property
received in exchange shall be considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or

otherwise, these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year
of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld
by the buyer on every installment.

(ii) If, on the other hand, the sale is on a cash basis or is a deferred-payment sale not on
the installment plan (that is, payments in the year of sale exceed 25% of the selling
price), the buyer shall withhold the tax based on the gross selling price or fair market
value of the property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than
capital asset has been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any
sale, barter or exchange subject to the CWT will not be recorded by the Registry of
Deeds until the CIR has certified that such transfers and conveyances have been
reported and the taxes thereof have been duly paid:[7]

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges
subject to the creditable expanded withholding tax shall not be recorded by the Register
of Deeds unless the [CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded withholding tax,
inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the guidelines
in determining whether a particular real property is a capital or an ordinary asset for
purposes of imposing the MCIT, among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. Gains/Income derived from sale, exchange, or other disposition of real properties shall,
unless otherwise exempt, be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as capital assets or ordinary
assets;

a.
In the case of individual citizen (including estates and trusts), resident aliens,
and non-resident aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii)
The sale of real property located in the Philippines, classified as ordinary
assets, shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as
amended, based on the gross selling price or current fair market value as determined in
accordance with Section 6(E) of the Code, whichever is higher, and consequently, to
the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the
case may be, based on net taxable income.

xxx xxx xxx

c.

In the case of domestic corporations.

xxx xxx xxx

(ii)
The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless of the

classification thereof, all of which are located in the Philippines, shall be subject to the
[CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently,
to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the following
requisites are satisfied: (1) there must be an actual case calling for the exercise of
judicial review; (2) the question before the court must be ripe for adjudication; (3) the
person challenging the validity of the act must have standing to do so; (4) the question
of constitutionality must have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.[9]

Respondents aver that the first three requisites are absent in this case. According to
them, there is no actual case calling for the exercise of judicial power and it is not yet
ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has
been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property.
Neither did petitioner allege that its members have shut down their businesses as a
result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere
abstract and hypothetical form without any actual, specific and concrete instances cited

that the assailed law and revenue regulations have actually and adversely affected it.
Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic
exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for

adjudicating abstract issues. Otherwise, adjudication would be no different from the
giving of advisory opinion that does not really settle legal issues.[10]

An actual case or controversy involves a conflict of legal rights or an assertion of

opposite legal claims which is susceptible of judicial resolution as distinguished from a
hypothetical or abstract difference or dispute.[11] On the other hand, a question is
considered ripe for adjudication when the act being challenged has a direct adverse
effect on the individual challenging it.[12]

Contrary to respondents assertion, we do not have to wait until petitioners members

have shut down their operations as a result of the MCIT or CWT. The assailed
provisions are already being implemented. As we stated in Didipio Earth-Savers MultiPurpose Association, Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is said to have ripened into a judicial controversy even without any other overt
act. Indeed, even a singular violation of the Constitution and/or the law is enough to
awaken judicial duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better time than the
present to settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did

not allege any material interest or any wrong that it may suffer from the enforcement of
[the assailed provisions].[15]

Legal standing or locus standi is a partys personal and substantial interest in a case
such that it has sustained or will sustain direct injury as a result of the governmental act
being challenged.[16] In Holy Spirit Homeowners Association, Inc. v. Defensor,[17] we
held that the association had legal standing because its members stood to be injured by
the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is
no dispute that the individual members of petitioner association are residents of the
NGC. As such they are covered and stand to be either benefited or injured by the
enforcement of the IRR, particularly as regards the selection process of beneficiaries
and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those
provisions in the IRR which it believes to be unfavorable to the rights of its members.
xxx Certainly, petitioner and its members have sustained direct injury arising from the
enforcement of the IRR in that they have been disqualified and eliminated from the
selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does not
satisfy the requirements of an actual case, ripeness or legal standing when paramount
public interest is involved.[19] The questioned MCIT and CWT affect not only petitioners
but practically all domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to society make it
proper for us to take cognizance of this petition.[20]

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the

Philippine taxation system. It came about as a result of the perceived inadequacy of the
self-assessment system in capturing the true income of corporations.[21] It was devised
as a relatively simple and effective revenue-raising instrument compared to the normal

income tax which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the public sector. The
congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the payment of
taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform
Act introduces for the first time a new concept called the [MCIT] so as to minimize tax
evasion, tax avoidance, tax manipulation in the country and for administrative
convenience. This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement.[22]

Domestic corporations owe their corporate existence and their privilege to do business
to the government. They also benefit from the efforts of the government to improve the
financial market and to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having
large turn-overs, report minimal or negative net income resulting in minimal or zero
income taxes year in and year out, through under-declaration of income or overdeduction of expenses otherwise called tax shelters.[23]

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have
proposed the [MCIT]. Because from experience too, you have corporations which have
been losing year in and year out and paid no tax. So, if the corporation has been losing
for the past five years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year out? So, we have
this provision to avoid this type of tax shelters, Your Honor.[24]

The primary purpose of any legitimate business is to earn a profit. Continued and
repeated losses after operations of a corporation or consistent reports of minimal net
income render its financial statements and its tax payments suspect. For sure, certain
tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The
MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax
evasion and minimizes tax avoidance schemes achieved through sophisticated and

artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were
incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup
initial major capital expenditures, the imposition of the MCIT commences only on the
fourth taxable year immediately following the year in which the corporation commenced
its operations.[25] This grace period allows a new business to stabilize first and make its
ventures viable before it is subjected to the MCIT.[26]

Second, the law allows the carrying forward of any excess of the MCIT paid over the
normal income tax which shall be credited against the normal income tax for the three
immediately succeeding years.[27]
Third, since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation
suffers losses due to prolonged labor dispute, force majeure and legitimate business
reverses.[28]
Even before the legislature introduced the MCIT to the Philippine taxation system,
several other countries already had their own system of minimum corporate income
taxation. Our lawmakers noted that most developing countries, particularly Latin
American and Asian countries, have the same form of safeguards as we do. As pointed
out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit
of room for underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a
percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before
deductions and exemptions. Of course the different countries have different basis for
that minimum income tax.

The other thing youll notice is the preponderance of Latin American countries that
employed this method. Okay, those are additional Latin American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and
Hungary have their own versions of the MCIT.[30]

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional
because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation
of property without due process of law. It explains that gross income as defined under
said provision only considers the cost of goods sold and other direct expenses; other
major expenditures, such as administrative and interest expenses which are equally
necessary to produce gross income, were not taken into account.[31] Thus, pegging the
tax base of the MCIT to a corporations gross income is tantamount to a confiscation of
capital because gross income, unlike net income, is not realized gain.[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither
exist nor endure. The exercise of taxing power derives its source from the very
existence of the State whose social contract with its citizens obliges it to promote public
interest and the common good.[33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely

legislative.[35] Essentially, this means that in the legislature primarily lies the discretion
to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and
situs (place) of taxation.[36] It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its jurisdiction. In other
words, the legislature wields the power to define what tax shall be imposed, why it
should be imposed, how much tax shall be imposed, against whom (or what) it shall be
imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging
in its very nature no limits, so that the principal check against its abuse is to be found
only in the responsibility of the legislature (which imposes the tax) to its constituency
who are to pay it.[37] Nevertheless, it is circumscribed by constitutional limitations. At
the same time, like any other statute, tax legislation carries a presumption of
constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no] person shall be
deprived of life, liberty or property without due process of law. In Sison, Jr. v. Ancheta,
et al.,[38] we held that the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure[39] when it amounts to a confiscation of
property.[40] But in the same case, we also explained that we will not strike down a
revenue measure as unconstitutional (for being violative of the due process clause) on
the mere allegation of arbitrariness by the taxpayer.[41] There must be a factual
foundation to such an unconstitutional taint.[42] This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering that it is not a fixed
rule but rather a broad standard, there is a need for proof of such persuasive
character.[43]

Petitioner is correct in saying that income is distinct from capital.[44] Income means all
the wealth which flows into the taxpayer other than a mere return on capital. Capital is a
fund or property existing at one distinct point in time while income denotes a flow of
wealth during a definite period of time.[45] Income is gain derived and severed from
capital.[46] For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is
not income. In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent
by a corporation in the sale of its goods, i.e., the cost of goods[48] and other direct
expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the
normal net income tax, and only if the normal income tax is suspiciously low. The MCIT
merely approximates the amount of net income tax due from a corporation, pegging the
rate at a very much reduced 2% and uses as the base the corporations gross income.

Besides, there is no legal objection to a broader tax base or taxable income by

eliminating all deductible items and at the same time reducing the applicable tax
rate.[49]

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations

are found in many jurisdictions. Tax thereon is generally held to be within the power of a
state to impose; or constitutional, unless it interferes with interstate commerce or
violates the requirement as to uniformity of taxation.[50]

The United States has a similar alternative minimum tax (AMT) system which is
generally characterized by a lower tax rate but a broader tax base.[51] Since our
income tax laws are of American origin, interpretations by American courts of our
parallel tax laws have persuasive effect on the interpretation of these laws.[52] Although
our MCIT is not exactly the same as the AMT, the policy behind them and the procedure
of their implementation are comparable. On the question of the AMTs constitutionality,
the United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner:[53]

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust
of the system growing from large numbers of taxpayers with large incomes who were
yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx
[It] is a rational means of obtaining a broad-based tax, and therefore is
constitutional.[54]

The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate governmental
end to which the AMT bore a reasonable relation.[55]
American courts have also emphasized that Congress has the power to condition, limit
or deny deductions from gross income in order to arrive at the net that it chooses to
tax.[56] This is because deductions are a matter of legislative grace.[57]

Absent any other valid objection, the assignment of gross income, instead of net
income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32%
to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the
MCIT is arbitrary and confiscatory. The Court cannot strike down a law as
unconstitutional simply because of its yokes.[58] Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights.[59] The party alleging the
laws unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.[60]

RR 9-98 MERELY CLARIFIES

SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law
because the MCIT is being imposed and collected even when there is actually a loss, or
a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of [MCIT] is greater than
the normal income tax due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has
zero or negative taxable income, merely defines the coverage of Section 27(E). This
means that even if a corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross
income. This is consistent with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income. But the law also states that the MCIT is
to be paid only if it is greater than the normal net income. Obviously, it may well be the
case that the MCIT would be less than the net income of the corporation which posts a
zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes)
are collected.[61] Under Section 57 of RA 8424, the types of income subject to
withholding tax are divided into three categories: (a) withholding of final tax on certain
incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds.
Petitioner is concerned with the second category (CWT) and maintains that the revenue
regulations on the collection of CWT on sale of real estate categorized as ordinary
assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under
RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii)
and (c)(ii) of RR 7-2003 were promulgated with grave abuse of discretion amounting to
lack of jurisdiction and patently in contravention of law[62] because they ignore such
distinctions. Petitioners conclusion is based on the following premises: (a) the revenue
regulations use gross selling price (GSP) or fair market value (FMV) of the real estate

as basis for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per transaction basis, i.e.,
upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the
payment of the net income at the end of the taxable period.[63]
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets
differently, respondents cannot disregard the distinctions set by the legislators as
regards the tax base, modes of collection and payment of taxes on income from the
sale of capital and ordinary assets.
Petitioners arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE COLLECTION OF

CWT ON SALES OF REAL PROPERTY CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations for the effective enforcement of the
provisions of the law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and in harmony with, the law
they seek to apply and implement.[64] It is well-settled that an administrative agency
cannot amend an act of Congress.[65]

We have long recognized that the method of withholding tax at source is a procedure of
collecting income tax which is sanctioned by our tax laws.[66] The withholding tax
system was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially reduced through
failure to file the corresponding returns and third, to improve the governments cash
flow.[67] This results in administrative savings, prompt and efficient collection of taxes,
prevention of delinquencies and reduction of governmental effort to collect taxes
through more complicated means and remedies.[68]
Respondent Secretary has the authority to require the withholding of a tax on items of
income payable to any person, national or juridical, residing in the Philippines. Such
authority is derived from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given
by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the
1%-32% range; the withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF INDIVIDUALS OR
CORPORATIONS ENGAGED IN THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real
estate business income tax from net income to GSP or FMV of the property sold.
Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
extinguish its possible tax obligation. [69] They are installments on the annual tax which
may be due at the end of the taxable year.[70]
Under RR 2-98, the tax base of the income tax from the sale of real property classified
as ordinary assets remains to be the entitys net income imposed under Section 24
(resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of
RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from
the net income tax payable by the taxpayer at the end of the taxable year.[71] Precisely,
Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. Gains/Income derived from sale, exchange, or other disposition of real properties shall
unless otherwise exempt, be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as capital assets or ordinary
assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as
amended, based on the [GSP] or current [FMV] as determined in accordance with
Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based
on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property
(other than land and/or building treated as capital asset), regardless of the classification
thereof, all of which are located in the Philippines, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the
ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax,
however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of
the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return
and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the
tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on
the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to
a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
purposes of practicality and convenience. Obviously, the withholding agent/buyer who is
obligated to withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agents knowledge and privity are limited only to the particular transaction in
which he is a party. In such a case, his basis can only be the GSP or FMV as these are
the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS AND CAPITAL

ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real
property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA
8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from

the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at
source.[72]
The differences between the two forms of withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same manner as capital assets. Final
withholding tax (FWT) and CWT are distinguished as follows:

FWT
CWT
a) The amount of income tax withheld by the withholding agent is constituted as a full
and final payment of the income tax due from the payee on the said income.

a) Taxes withheld on certain income payments are intended to equal or at least

approximate the tax due of the payee on said income.
b)The liability for payment of the tax rests primarily on the payor as a withholding agent.
b) Payee of income is required to report the income and/or pay the difference between
the tax withheld and the tax due on the income. The payee also has the right to ask for
a refund if the tax withheld is more than the tax due.
c) The payee is not required to file an income tax return for the particular income.[73]

c) The income recipient is still required to file an income tax return, as prescribed in
Sec. 51 and Sec. 52 of the NIRC, as amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other hand,
CWT is imposed on the sale of ordinary assets. The inherent and substantial
differences between FWT and CWT disprove petitioners contention that ordinary assets
are being lumped together with, and treated similarly as, capital assets in contravention
of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction
are contrary to the provisions of RA 8424 on the manner and time of filing of the return,
payment and assessment of income tax involving ordinary assets.[75]
The fact that the tax is withheld at source does not automatically mean that it is treated
exactly the same way as capital gains. As aforementioned, the mechanics of the FWT
are distinct from those of the CWT. The withholding agent/buyers act of collecting the
tax at the time of the transaction by withholding the tax due from the income payable is
the essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax,
whether final or creditable. According to petitioner, the whole of Section 57 governs the
withholding of income tax on passive income. The enumeration in Section 57(A) refers
to passive income being subjected to FWT. It follows that Section 57(B) on CWT should
also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing
of income tax return by certain income payees, the tax imposed or prescribed by
Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D),
25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by
payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income

payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income
and enumerates these as passive income. The BIR defines passive income by stating
what it is not:

if the income is generated in the active pursuit and performance of the corporations
primary purposes, the same is not passive income[76]

It is income generated by the taxpayers assets. These assets can be in the form of real
properties that return rental income, shares of stock in a corporation that earn dividends
or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on
income payable to natural or juridical persons, residing in the Philippines. There is no
requirement that this income be passive income. If that were the intent of Congress, it
could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section
57(B) pertains to CWT. The former covers the kinds of passive income enumerated
therein and the latter encompasses any income other than those listed in 57(A). Since
the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate

from the text of Section 57(B). RR 2-98 merely implements the law by specifying what
income is subject to CWT. It has been held that, where a statute does not require any
particular procedure to be followed by an administrative agency, the agency may adopt

any reasonable method to carry out its functions.[77] Similarly, considering that the law
uses the general term income, the Secretary and CIR may specify the kinds of income
the rules will apply to based on what is feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight and respect by the courts[78] in view
of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as
ordinary assets deprives its members of their property without due process of law
because, in their line of business, gain is never assured by mere receipt of the selling
price. As a result, the government is collecting tax from net income not yet gained or
earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the
property at the end of the taxable year. The seller will be able to claim a tax refund if its
net income is less than the taxes withheld. Nothing is taken that is not due so there is
no confiscation of property repugnant to the constitutional guarantee of due process.
More importantly, the due process requirement applies to the power to tax.[79] The
CWT does not impose new taxes nor does it increase taxes.[80] It relates entirely to the
method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome
because taxpayers have to wait years and may even resort to litigation before they are
granted a refund.[81] This argument is misleading. The practical problems encountered
in claiming a tax refund do not affect the constitutionality and validity of the CWT as a
method of collecting the tax.
Petitioner complains that the amount withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of money and other expenses which can
then save the entity from having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs;

heavy taxes and prohibitive up-front regulatory fees from at least 20 government
agencies.[82]
Petitioners lamentations will not support its attack on the constitutionality of the CWT.
Petitioners complaints are essentially matters of policy best addressed to the executive
and legislative branches of the government. Besides, the CWT is applied only on the
amounts actually received or receivable by the real estate entity. Sales on installment
are taxed on a per-installment basis.[83] Petitioners desire to utilize for its operational
and capital expenses money earmarked for the payment of taxes may be a practical
business option but it is not a fundamental right which can be demanded from the court
or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection clause
because the CWT is being levied only on real estate enterprises. Specifically, petitioner
points out that manufacturing enterprises are not similarly imposed a CWT on their
sales, even if their manner of doing business is not much different from that of a real
estate enterprise. Like a manufacturing concern, a real estate business is involved in a
continuous process of production and it incurs costs and expenditures on a regular
basis. The only difference is that goods produced by the real estate business are house
and lot units.[84]

Again, we disagree.

The equal protection clause under the Constitution means that no person or class of
persons shall be deprived of the same protection of laws which is enjoyed by other
persons or other classes in the same place and in like circumstances.[85] Stated
differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a

reasonable classification. Classification, to be valid, must (1) rest on substantial

distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing
conditions only and (4) apply equally to all members of the same class.[86]

The taxing power has the authority to make reasonable classifications for purposes of
taxation.[87] Inequalities which result from a singling out of one particular class for
taxation, or exemption, infringe no constitutional limitation.[88] The real estate industry
is, by itself, a class and can be validly treated differently from other business
enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing

enterprises, fails to realize that what distinguishes the real estate business from other
manufacturing enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the number of transactions
involved. The income from the sale of a real property is bigger and its frequency of
transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month involving both minimal and
substantial amounts. To require the customers of manufacturing enterprises, at present,
to withhold the taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inefficient and unmanageable system of taxation and may
well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also
sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital
goods yet these are not similarly subjected to the CWT.[89] As already discussed, the
Secretary may adopt any reasonable method to carry out its functions.[90] Under
Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is
not accurate. The sales of manufacturers who have clients within the top 5,000
corporations, as specified by the BIR, are also subject to CWT for their transactions with
said 5,000 corporations.[91]

SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of
Deeds should not effect the regisration of any document transferring real property
unless a certification is issued by the CIR that the withholding tax has been paid.
Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore,
this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring

real property shall be effected by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfer has been reported, and the
capital gains or [CWT], if any, has been paid: xxxx any violation of this provision by the
Register of Deeds shall be subject to the penalties imposed under Section 269 of this
Code. (Emphasis supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing in
the world to understand is the income tax.[92] When a party questions the
constitutionality of an income tax measure, it has to contend not only with Einsteins

observation but also with the vast and well-established jurisprudence in support of the
plenary powers of Congress to impose taxes. Petitioner has miserably failed to
discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

G.R. No. L-24813

April 28, 1969

DR. HERMENEGILDO SERAFICA, plaintiff-appellant,

vs.
THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY,
HON. ESTEBAN C. CONEJOS, as Mayor of Ormoc City and ORMOC CITY,
defendants-appellees.

Cleto P. Evangelista for plaintiff-appellant.

The City Fiscal of Ormoc City for defendant-appellees.

CONCEPCION, C.J.:

Direct appeal from a decision of the Court of First Instance of Leyte dismissing plaintiff's
complaint, without pronouncement as to costs.

Plaintiff, Dr. Hermenegildo Serafica, seeks a declaration of nullity of Ordinance No. 13,
Series of 1964, of Ormoc City, imposing a "tax of five pesos (P5.00) for every one
thousand (1,000) board feet of lumber sold at Ormoc City by any person, partnership,
firm, association, corporation, or entities", pursuant to which the Treasurer of said City
levied on and collected from said plaintiff, as owner of the Serafica Sawmill, the
aggregate sum of P1,837.84, as tax on 367,568 board feet of lumber sold, in said City,
during the third quarter of 1964. After appropriate proceedings, the lower court rendered
judgment upholding the validity of said ordinance and denying the relief prayed for by
Dr. Serafica. Hence, this appeal by the latter.

The contested ordinance reads:

ORDINANCE NO. 13

AN ORDINANCE IMPOSING A TAX OF FIVE PESOS (P5.00) FOR EVERY ONE

THOUSAND BOARD FEET OF LUMBER SOLD AT ORMOC CITY AND FOR OTHER
PURPOSES.

BE IT ORDAINED, by authority of the Municipal Board of Ormoc City, Philippines,

pursuant to the provisions of Republic Act 179, as amended by RA 429, otherwise
known as the Charter of Ormoc City, That:

SECTION 1. City tax. There shall be paid to the City Treasurer a city tax of five
pesos (P5.00) for every one thousand (1,000) board feet of lumber sold at Ormoc City
by any person, partnership, firm, association, corporation or entity.

SECTION 2. Time and manner of payment and penalty for delinquency. The city tax
herein prescribed shall be payable without penalty within twenty (20) days after the
close of every quarter for which the tax is due. Failure to pay the tax within the

prescribed time shall render the taxpayer subject to a surcharge of fifty percentum
(50%) for the first offense and one hundred percentum (100%) for subsequent failures
to pay within the prescribed period.

SECTION 3. Payment to be rendered by taxpayer. The taxpayer is hereby obliged to

include the tax due in every invoice issued for the sale of lumber which tax shall be
submitted for payment to the City Treasurer within twenty (20) days after the close of
every quarter.

SECTION 4. Inspection of taxpayer's books and records. For the purpose of

enforcing the provisions of this Ordinance, the City Treasurer or any of his deputies
specifically authorized in writing for the purpose, shall have authority to examine the
books and records of any person, partnership, firm, association, corporation or entity
subject to the tax herein imposed, PROVIDED, HOWEVER, That such examination
shall be made only during regular business hours, unless the person, partnership, firm,
association, corporation or entity concerned shall consent otherwise.

SEC. 5. Penalty for violation. Any violation of the provisions of the Ordinance shall be
punishable by a fine of not more than five hundred (P500.00) pesos and an
imprisonment of not more than three (3) months.

SEC. 6. Construction of this Ordinance. If any part or section of this Ordinance shall
be declared unconstitutional or ultra vires, such part or section shall not invalidate any
other provision hereof.

SEC. 7. Effectivity. This Ordinance shall take effect immediately upon approval.
ENACTED, June 17, 1964.lawphi1.nt

RESOLVED, FURTHER, to authorize the City Treasurer to copies of this Ordinance for
issuance to all concerned;

RESOLVED, FINALLY, to furnish a copy of this resolution-ordinance each to the City

Treasurer, the City Auditor, the City Fiscal, the City Judge, and all concerned;

CARRIED. Six affirmative votes registered by Councilors Tugonon, Alfaro, Kierulf, Abas,
Besabella, and Du; one abstention registered by Councilor Aviles.

xxx

xxx

xxx

Plaintiff assails this ordinance as null and void upon the grounds that: (1) the Charter of
Ormoc City (Republic Acts Nos. 179 and 429) authorizes the same to "regulate", but not
to "tax" lumber yards; (2) the ordinance in question imposes, in effect, double taxation,
because the business of lumberyard is already regulated under said Charter and the
sale of lumber is "a mere incident to the business of lumber yard"; (3) the tax imposed is
"unfair, unjust, arbitrary, unreasonable, oppressive and contrary to the principles of
taxation"; and (4) "the public was not heard and given a chance to air its views" thereon.

With respect to the first ground, We have held in Ormoc Sugar Co. v. Municipal Board
of Ormoc City, 1 that the taxing power of the City of Ormoc, under section 2 of the Local
Autonomy Act 2 is "broad" and "sufficiently plenary to cover everything, excepting those
mentioned therein". 3 It should be noted that in said case of Ormoc Sugar Co., We
upheld the validity of a sales tax.

As regards the second ground, suffice it to say that regulation and taxation are two
different things, the first being an exercise of police power, whereas the latter is not,
apart from the fact that double taxation is not prohibited in the Philippines. 4

The third objection is premised upon the fact that the tax in question is imposed
regardless of the class of lumber sold, although there are several categories thereof,
commanding different prices. Plaintiff has not proven, however, or even alleged the
prices corresponding to each category, so that, like the lower court, We have no means
to ascertain the accuracy of the conclusion drawn by him, and must, accordingly, rely
upon the presumption that the City Council had merely complied with its duty and that
the ordinance is valid, unless and until the contrary has been duly established. 5

The last objection is based upon Provincial Circular No. 24 of the Department of
Finance, dated March 31, 1960, suggesting that, "in the enactment of tax ordinances ..
under the Local Autonomy Act ... where practicable, public hearings be held wherein the
views of the public ... may be heard." This is, however, a mere suggestion, compliance
with which is not obligatory, so that failure to act in accordance therewith can not and
does not affect the validity of the tax ordinance.

Indeed, since local governments are subject, not to the control, but merely to the
general supervision of the President, it is to say the least, doubtful that the latter could
have made compliance with said circular obligatory. 6

We have not overlooked the fact that, pursuant to Sec. 2 of Republic Act No. 2264 as
amended "no city, municipality or municipal district may levy or impose ...

xxx

xxx

xxx

(e) Taxes on forest products or forest concessions."

Although lumber is a forest product, this imitation has no application to the case at bar,
the tax in question being imposed, not upon lumber, but upon its sale. Said tax is not
levied upon the lumber in plaintiff's sawmill and does not become due until after the
lumber has been sold. Hence, the case at bar is distinguishable from Golden Ribbon
Lumber Co., Inc. v. City of Butuan 7 in that the ordinance involved therein provided that
"every person, association or corporation operating a lumber mill and/or lumber yard
within the territory of the City of Butuan shall pay to the City a tax of two-fifths (P.004)
centavo for every board foot of lumber sawn, manufactured and/or produced." In short,
the tax in that case was imposed upon the "lumber" a forest product, not subject to
local taxation whether sold or not. Similarly, Santos Lumber Co. v. City of Cebu 8
and Jose S. Johnston & Sons v. Ramon Regondola 9 cited by the plaintiff, refer to
situations arising before the enactment of Republic Act No. 2264, 10 and, hence, are
inapplicable to the present case.

Neither have We overlooked the proviso in Sec. 2 of said Act prohibiting the imposition
of "any percentage tax on sales or other taxes in any form based thereon," for this
injunction is directed exclusively to "municipalities and municipal districts," and does not
apply to cities.

WHEREFORE, the decision appealed from should be, as it is hereby affirmed, with
costs against plaintiff herein. It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando and Barredo, JJ., concur.
Castro and Capistrano, JJ., took no part.
Teehankee, J., concurs in the result.

Footnotes

G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased

Antonio Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General
Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the
Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of

emergency, due to the threat to our industry by the imminent imposition of export taxes
upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its
preferential position in the United States market"; wherefore, the national policy was
expressed "to obtain a readjustment of the benefits derived from the sugar industry by
the component elements thereof" and "to stabilize the sugar industry so as to prepare it
for the eventuality of the loss of its preferential position in the United States market and
the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while
section 3 levies on owners or persons in control of lands devoted to the cultivation of
sugar cane and ceded to others for a consideration, on lease or otherwise

a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the assessed
value of such land.

According to section 6 of the law

SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and
shall be paid out only for any or all of the following purposes or to attain any or all of the
following objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself, despite the gradual loss
of the preferntial position of the Philippine sugar in the United States market, and
ultimately to insure its continued existence notwithstanding the loss of that market and
the consequent necessity of meeting competition in the free markets of the world;

Second, to readjust the benefits derived from the sugar industry by all of the component
elements thereof the mill, the landowner, the planter of the sugar cane, and the
laborers in the factory and in the field so that all might continue profitably to engage
therein;lawphi1.net

Third, to limit the production of sugar to areas more economically suited to the
production thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their living
and working conditions: Provided, That the President of the Philippines may, until the
adjourment of the next regular session of the National Assembly, make the necessary
disbursements from the fund herein created (1) for the establishment and operation of
sugar experiment station or stations and the undertaking of researchers (a) to increase
the recoveries of the centrifugal sugar factories with the view of reducing manufacturing
costs, (b) to produce and propagate higher yielding varieties of sugar cane more
adaptable to different district conditions in the Philippines, (c) to lower the costs of
raising sugar cane, (d) to improve the buying quality of denatured alcohol from
molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products
of the industry, (f) to determine what crop or crops are suitable for rotation and for the
utilization of excess cane lands, and (g) on other problems the solution of which would
help rehabilitate and stabilize the industry, and (2) for the improvement of living and
working conditions in sugar mills and sugar plantations, authorizing him to organize the
necessary agency or agencies to take charge of the expenditure and allocation of said
funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the
disbursement from the fund herein created of the necessary amount or amounts needed
for salaries, wages, travelling expenses, equipment, and other sundry expenses of said
agency or agencies.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of
Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the
sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop
years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void,
being levied for the aid and support of the sugar industry exclusively, which in plaintiff's
opinion is not a public purpose for which a tax may be constitutioally levied. The action
having been dismissed by the Court of First Instance, the plaintifs appealed the case
directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act,
and particularly of section 6 (heretofore quoted in full), will show that the tax is levied
with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily an exercise of the police
power.

This Court can take judicial notice of the fact that sugar production is one of the great
industries of our nation, sugar occupying a leading position among its export products;
that it gives employment to thousands of laborers in fields and factories; that it is a great
source of the state's wealth, is one of the important sources of foreign exchange needed
by our government, and is thus pivotal in the plans of a regime committed to a policy of
currency stability. Its promotion, protection and advancement, therefore redounds
greatly to the general welfare. Hence it was competent for the legislature to find that the
general welfare demanded that the sugar industry should be stabilized in turn; and in
the wide field of its police power, the lawmaking body could provide that the distribution
of benefits therefrom be readjusted among its components to enable it to resist the
added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S.
52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy
Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in
Florida

The protection of a large industry constituting one of the great sources of the state's
wealth and therefore directly or indirectly affecting the welfare of so great a portion of

the population of the State is affected to such an extent by public interests as to be

within the police power of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of the sugar industry
is a matter of public concern, it follows that the Legislature may determine within
reasonable bounds what is necessary for its protection and expedient for its promotion.
Here, the legislative discretion must be allowed fully play, subject only to the test of
reasonableness; and it is not contended that the means provided in section 6 of the law
(above quoted) bear no relation to the objective pursued or are oppressive in character.
If objective and methods are alike constitutionally valid, no reason is seen why the state
may not levy taxes to raise funds for their prosecution and attainment. Taxation may be
made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean,
301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs.
Maryland, 4 Wheat. 316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a
ground of complaint; indeed, it appears rational that the tax be obtained precisely from
those who are to be benefited from the expenditure of the funds derived from it. At any
rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional limitation"
(Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing
numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised
under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of
the sugar industry, since it is that very enterprise that is being protected. It may be that
other industries are also in need of similar protection; that the legislature is not required
by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel.
Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the
evil where it is most felt, it is not to be overthrown because there are other instances to
which it might have been applied;" and that "the legislative authority, exerted within its
proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones &
Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the
devotion of tax money to experimental stations to seek increase of efficiency in sugar
production, utilization of by-products and solution of allied problems, as well as to the

improvements of living and working conditions in sugar mills or plantations, without any
part of such money being channeled directly to private persons, constitutes expenditure
of tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed.
472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.