1.

Perez vs CTA GR L-10507 – May 30, 1958

Facts:

Petitioner was assessed by the Collector with deficiency tax due to its increase in net worth. In making the deficiency
assessments, the Collector employed what is known as the "net worth" technique and started by determining the
opening net worth of petitioner at the start of the year 1947 which he fixed at P936.72. The Court of Tax Appeals
declared the "net worth" method of determining understated income to have been validly and properly applied; found
that the consistent underdeclaration of income, unexplained acquisition of properties, and the fact of petitioner's having
claimed fictitious losses evidenced fraudulent intent, and ordered him to pay deficiency income taxes and surcharges in
the sum of P241,547.77.

Issue:

(1) Whether the Collector of Internal Revenue is empowered by law toinvestigate appellant's (petitioner) income tax
returns for 1947, 1948, and1949 and to enforce collection of the alleged deficiency income taxes for saidyears by
summary proceedings of distraint and levy more than three yearsafter the income tax returns covering them were filed

(2) Whether the use ofthe "net worth" method by the respondent in computing appellant's netincome is valid

Ruling:

(1) No. Reiteratirg a long line of decisions to the effect that thethree-year prescriptive period under section 51 (d) of the
National InternalRevenue Code constituted a limitation to the right of the government to enforce the collection of
income taxes by summary proceedings of distraintand levy, though, it could proceed to recover the taxes due by the
institutionof the corresponding civil action. Nevertheless, the appealof the taxpayer vested jurisdiction on the Court of
Tax Appeals to reviewand determine his tax liability for the aforesaid period.

(2) Yes. This method of proving unreported income, according to the Court of TaxAppeals, is based upon the general
theory that money and other assets inexcess of liabilities of a taxpayer (after an accurate and proper adjustment ofnon-
deductible items) not accounted for by his income tax returns, leads tothe inference that part of his income has not
been reported (p. 6, B.T.A. 189).There is no question that the application of the "net worth" method ofdetermining the
taxable income of a taxpayer has been an accepted practice.

In fine, we hold:

That section 38 of our National Internal Revenue Code authorizes the application of the Net Worth Method in this
jurisdiction (Baiter, Fraud Under Fed.Tax Law, sec. 224; Vol. 2, 1951 CCH 386. Oil, Byer Net Worth Technique for
Determining Income, supra: Holland vs. U.S., supra; Estate of Bartley, 22 U.S.Tax Ct. lep. 1230; Hurley, 22 U. S. Tax Ct.
Rep. 1264; S B.T.A. 169).

That no civil cases, the Government need not prove the specific source of income (this is reasonable on the basic
assumption that most assets are derived from a taxable source and that when this is not true the taxpayer is in a
position to explain the discrepancy, {see Holland case, supra);

That the determination of the tax deficiency by the Government has prima facie validity and the burden rests upon the
taxpayer to overcome this presumption and to show to the satisfaction of the Tax Court that the determination was not
correct (Archer vs. Commissioner, supra; Thomas vs. Commissioner, supra; Laughinghouse vs. Commissioner, sutra:
William Lias, 24 T.C. No. 23,May 26, 1955, Virginia Law Review, 41 p. 7; Halle, 7 T.C. 245, aff'd 175 F. 2d 500, 339 U.S.
949; Byer, "Net Worth Technique for Determining Income").

And finally, that no sufficient grounds exist to warrant a reversal of the findings of fraud of the lower court as being
"clearly erroneous"; on the contrary, we find them supported by reason.

2. No digest

3. Commissioner of Internal Revenue vs Pascor Realty and Development Corporation

Pascor Realty and Development Corporation (PRDC) was found out to be liable for a total of P10.5 million tax deficiency
for the years 1986 and 1987. In March 1995, the Commissioner of Internal Revenue (CIR) filed a criminal complaint
against PRDC with the Department of Justice. Attached to the criminal complaint was a joint affidavit executed by the
tax examiners.
PRDC then filed a protest with the Court of Tax Appeals (CTA). PRDC averred that the affidavit attached to the criminal
complaint is tantamount to a formal assessment notice (FAN) hence can be subjected to protest; that there is a
simultaneous assessment and filing of criminal case; that the same is contrary to due process because it is its theory that
an assessment should come first before a criminal case of tax evasion should be filed. The CIR then filed a motion to
dismiss (MTD) on the ground that the CTA has no jurisdiction over the case because the CIR has not yet issued a FAN
against PRDC; that the affidavit attached to the complaint is not a FAN; that since there is no FAN, there cannot be a
valid subject of a protest.

The CTA however denied the MTD. It ruled that the joint affidavit attached to the complaint submitted to the DOJ
constitutes an assessment; that an assessment is defined as simply the statement of the details and the amount of tax
due from a taxpayer; that therefore, the joint affidavit which contains a computation of the tax liability of PRDC is in
effect an assessment which can be the subject of a protest. This ruling was affirmed by the Court of Appeals.

ISSUE: Whether or not the Court of Tax Appeal is correct.

HELD: No. An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period. It also signals the time when penalties and protests begin to accrue against the taxpayer. To enable
the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the
taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and
attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the
CTA. Further, such affidavit was not issued to the taxpayer, it was submitted as an attachment to the DOJ. It must also
be noted that not every document coming from the Bureau of Internal Revenue which provides a computation of the tax
liability of a taxpayer can be considered as an assessment. An assessment is deemed made only when the CIR releases,
mails or sends such notice to the taxpayer.

Anent the issue of the filing of the criminal complaint, Section 222 of the National Internal Revenue Code specifically
states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case,
proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the NIRC clearly
mandates that the civil and criminal aspects of the case may be pursued simultaneously.

4. Quirico Ungab vs Vicente Cusi

FACTS: BIR Examiner Ben Garcia examined the income tax returns filed by Quirico P. Ungab, for the calendar year ending
December 31, 1973. In the course of his examination, he discovered that the petitioner failed to report his income
derived from sales of banana saplings. As a result, the BIR District Revenue Officer at Davao City sent a "Notice of
Taxpayer" to the petitioner informing him that there is due from him (Ungab) the amount of P104,980.81, representing
income, business tax and forest charges for the year 1973 and inviting petitioner to an informal conference where the
petitioner, duly assisted by counsel, may present his objections to the findings of the BIR Examiner. Upon receipt of the
notice, the petitioner wrote the BIR District Revenue Officer protesting the assessment, claiming that he was only a
dealer or agent on commission basis in the banana sapling business and that his income. BIR Examiner Ben Garcia,
however, was fully convinced that the petitioner had filed a fraudulent income tax return so that he submitted a "Fraud
Referral Report," to the Tax Fraud Unit of the BIR. Consequently, the Special Investigation Division of the BIR found
sufficient proof that the herein petitioner is guilty of tax evasion for the taxable year 1973 and recommended his
prosecution. Ungab filed a motion to quash the informations on the ground that his pending protest with the CIR has not
yet been acted upon hence the assessment is not yet final and executory and therefore the trial court has no jurisdiction
yet over the criminal cases.

ISSUE: Whether or not the contention of Ungab is correct

RULING: The contention is without merit. What is involved here is not the collection of taxes where the assessment of
the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for
violations of the National Internal Revenue Code which is within the cognizance of courts of first instance. While there
can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed,
there is no requirement for the precise computation and assessment of the tax before there can be a criminal
prosecution under the Code.

Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of the
prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of law.
Obviously, the protest of the petitioner against the assessment of the District Revenue Officer cannot stop his
prosecution for violation of the National Internal Revenue Code. Accordingly, the respondent Judge did not abuse his
discretion in denying the motion to quash filed by the petitioner.
5. No digest

6. No digest

7. National Development Company v CIR (1987)

FACTS:
The National Development Company (NDC) entered into contracts in Tokyo with several Japanese shipbuilding
companies for the construction of 12 ocean-going vessels. Initial payments were made in cash and through irrevocable
letters of credit. When the vessels were completed and delivered to the NDC in Tokyo, the latter remitted to the
shipbuilders the amount of US$ 4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The
Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed.
NDC went to CTA. BIR was sustained by CTA. BIR was sustained by CTA. Hence, this petition for certiorari.

ISSUE:
Is NDC liable for the tax?

RULING:
Yes.
Although NDC is not the one taxed since it was the Japanese shipbuilders who were liable on the interest remitted to
them under Section 37 of the Tax Code, still, the imposition is valid.
The imposition of the deficiency taxes on NDC is a penalty for its failure to withhold the same from the Japanese
shipbuilders. Such liability is imposed by Section 53c of the Tax Code. NDC was remiss in the discharge of its obligation as
the withholding agent of the government and so should be liable for the omission.

8. CIR vs. MARUBENI

GR No. 137377| J. Puno

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency income, branch
profit remittance and contractor’s taxes from Marubeni Corp after finding the latter to have properly availed of the tax
amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction, is duly
registered in the Philippines with Manila branch office. CIR examined the Manila branch’s books of accounts for fiscal
year ending March 1985, and found that respondent had undeclared income from contracts with NDC and Philphos for
construction of a wharf/port complex and ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine sources, hence subject to internal revenue taxes. On Sept
1986, respondent filed 2 petitions for review with CTA: the first, questioned the deficiency income, branch profit
remittance and contractor’s tax assessments and second questioned the deficiency commercial broker’s assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers who wished to
avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and business tax
under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who already availed
amnesty under EO 41 should file an amended return to avail of the new benefits. Marubeni filed a supplemental tax
amnesty return on Dec 15, 1986.

CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA affirmed
on appeal.

Issue:

W/N Marubeni is exempted from paying tax

Held:
Yes.

1. On date of effectivity

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO 41:

“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein granted: xxx b) Those
with income tax cases already filed in Court as of the effectivity hereof;”

Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had already been
filed and was pending before the CTA and Marubeni therefore fell under the exception. However, the point of reference
is the date of effectivity of EO 41 and that the filing of income tax cases must have been made before and as of its
effectivity.

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26, 1986. When
EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception and is thus, not
disqualified from availing of the amnesty under EO 41 for taxes on income and branch profit remittance.

The difficulty herein is with respect to the contractor’s tax assessment (business tax) and respondent’s availment of the
amnesty under EO 64, which expanded EO 41’s coverage. When EO 64 took effect on Nov 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate and donor’s taxes. Instead, Section 8 said EO provided
that:

“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this
amendatory Executive Order shall remain in full force and effect.”

Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The general rule
is that an amendatory act operates prospectively. It may not be given a retroactive effect unless it is so provided
expressly or by necessary implication and no vested right or obligations of contract are thereby impaired.

2. On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax because
the income from the projects came from the “Offshore Portion” as opposed to “Onshore Portion”. It claims all materials
and equipment in the contract under the “Offshore Portion” were manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine taxes.

(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the contracts,
the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and financed either by
OECF or by supplier’s credit. The Japanese Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese
Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already paid
the Onshore Portion, a fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and
the materials provided and services rendered were all done and completed within the territorial jurisdiction of the
Philippines. Accordingly, respondent’s entire receipts from the contracts, including its receipts from the Offshore
Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be
subjected to contractor’s tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on
products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines because
some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of the contracts.
All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese
Yen Portion I were made and completed in Japan. These services were rendered outside Philippines’ taxing jurisdiction
and are therefore not subject to contractor’s tax. Petition denied.

9. PHIL. GUARANTY CO., INC. v. CIR

GR No. L-22074, April 30, 1965
FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts
with foreign insurance companies not doing business in the country, thereby ceding to foreign reinsurers a portion of
the premiums on insurance it has originally underwritten in the Philippines. The premiums paid by such companies were
excluded by the petitioner from its gross income when it file its income tax returns for 1953 and 1954. Furthermore, it
did not withhold or pay tax on them. Consequently, the CIR assessed against the petitioner withholding taxes on the
ceded reinsurance premiums to which the latter protested the assessment on the ground that the premiums are not
subject to tax for the premiums did not constitute income from sources within the Philippines because the foreign
reinsurers did not engage in business in the Philippines, and CIR's previous rulings did not require insurance companies
to withhold income tax due from foreign companies.

ISSUE: Are insurance companies not required to withhold tax on reinsurance premiums ceded to foreign
insurance companies, which deprives the government from collecting the tax due from them?

HELD: No. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a
navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a
government is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by
the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.

The petitioner's defense of reliance of good faith on rulings of the CIR requiring no withholding of tax due on
reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The
Government is not estopped from collecting taxes by the mistakes or errors of its agents.

10. ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS vs CIR

FACTS:
1. In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance contracts with 32
Britishinsurance companies not engaged in trade or business in the Philippines, whereby the former agreed to cede to
them aportion of the premiums on insurances on fire, marine and other risks it has underwritten in the Philippines.2.
The reinsurance contracts were prepared and signed by the foreign reinsurers in England and sent to Manila
whereCommonwealth Insurance Co. signed them.3. Alexander Howden & Co., Ltd., also a British corporation,
represented the British insurance companies.4. Pursuant to the contracts, Commonwealth Insurance Co remitted
P798,297.47 to Alexander Howden & Co., Ltd., asreinsurance premiums.5. In behalf of Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed an income tax return declaring the sum of P798,297.47, with accrued interest in the
amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for calendar year 1951. It also paid the BIR
P66,112.00 income tax.

6. On May 12, 1954, Alexander Howden & Co., Ltd. filed with the BIR a claim for
refund of the P66,112.00, later reduced toP65,115.00, because it agreed to the payment of P977.00 as income tax on
the P4,985.77 accrued interest.

7. A ruling of the CIR was invoked, stating that it exempted from withholding tax reinsurance premiums received from
domestic insurance companies by foreign insurance companies not authorized to do business in the Philippines.8.
Subsequently, petitioner. instituted an action in the CFI of Manila for the recovery of the amount claimed. Tax Court
denied the claim.

ISSUE#1:
Are portions of premiums earned from insurances locally underwritten by a domestic corporation, ceded to and
received by non-resident foreign reinsurance companies, thru a non-resident foreign insurance broker, pursuant to
reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in the Philippines, subject
to income tax or not?

HELD
YES. Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign corporation's income from
sources within the Philippines.

RATIO:
Appellants contends that the reinsurance premiums came from sources outside the Philippines, for these reasons: (1)
The contracts of reinsurance, out of which the reinsurance premiums were earned, were prepared and signed abroad (2)
There insurers, not being engaged in business in the Philippines, received the reinsurance premiums as income from
their business conducted in England and, as such, taxable in England; and, (3) Section 37 of the Tax Code, enumerating
what are income from sources within the Philippines, does not include reinsurance premiums.

The source of an income is the property, activity or service that produced the income The reinsurance premiums
remitted to appellants by virtue of the reinsurance contracts, had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines.

In the first place, the reinsured, the liabilities insured and the risks originally underwritten by Commonwealth Insurance
Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines.

Secondly, contrary to appellants' view, the

reinsurance contracts were perfected in the Philippines for Commonwealth Insurance Co. signed them last in Manila.

Thirdly, the parties to the reinsurance contracts in question evidently intended Philippine law to govern.
Article 11 thereof provided for arbitration in Manila, and the contracts provided for the use of Philippine currency as the
medium of exchange and for the payment of Philippine taxes.

Section 24 of the Tax Code does not require a foreign corporation to be engaged in business in the Philippines in order
for its income from sources within the Philippines to be taxable. It subjects foreign corporations not doing business in
the Philippines to tax for income from sources within the Philippines. If by source of income is meant the business of the
taxpayer, foreign corporations not engaged in business in the Philippines would be exempt from taxation on their
income from sources within the Philippines.

"Income" refers to the flow of wealth.

Such flow, proceeded from the Philippines. Such income enjoyed the protection of the Philippine Government. As
wealth flowing from within the taxing jurisdiction of the Philippines and in consideration for protection accorded it by
the Philippines, said income should properly share the burden of maintaining the government.

Appellants further contend that reinsurance premiums not being among those mentioned in Section 37 of the Tax Code
as income from sources within the Philippines, the same should not be treated as such. Section 37, however, is not an
all-inclusive enumeration. It states that "the following items of gross income shall be treated as gross income from
sources within the Philippines." It does not state or imply that an income not listed therein is necessarily from sources
outside the Philippines.

As to appellants' contention that reinsurance premiums constitute "gross receipts" instead of "gross income", not
subject to income tax, suffice it to say that, "gross receipts" of amounts that do not constitute return of capital, such as
reinsurance premiums, are part of the gross income of a taxpayer. At any rate, the tax actually collected in this case was
computed not on the basis of gross premium receipts but on the net premium income, that is, after deducting general
expenses, payment of policies and taxes.

11. No digest