I M A Lawyer: taxation

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Sunday, June 17, 2012

Lung Center of the Philippines vs. Quezon City

G.R. No. 144104. June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City, respondents.

D E C I S I O N

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner and its hospital building constructed thereon are subject to assessment for purposes of real property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16, 1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes in the amount of P4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption5 from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. The petitioner’s request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition and holding the petitioner liable for real property taxes.6

The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of Quezon City (CBAA, for brevity)7 which ruled that the petitioner was not a charitable institution and that its real properties were not actually, directly and exclusively used for charitable purposes; hence, it was not entitled to real property tax exemption under the constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered judgment affirming the decision of the CBAA.8

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits paying patients and renders medical services to them, leases portions of the land to private parties, and rents out portions of the hospital to private medical practitioners from which it derives income to be used for operational expenses. The petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and of the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives subsidies from the government attests to its character as a charitable institution. It contends that the “exclusivity” required in the Constitution does not necessarily mean “solely.” Hence, even if a portion of its real estate is leased out to private individuals from whom it derives income, it does not lose its character as a charitable institution, and its exemption from the payment of real estate taxes on its real property. The petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose. The petitioner further contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The petitioner’s real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that it is a charitable institution and that the said property is actually, directly and exclusively used for charitable purposes. The respondents noted that in a newspaper report, it appears that graft charges were filed with the Sandiganbayan against the director of the petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for entering into a lease contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month, when the monthly rental should be P357,000 a month as determined by the Commission on Audit; and that instead of complying with the directive of the COA for the cancellation of the contract for being grossly prejudicial to the government, the petitioner renewed the same on March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses the subsidies granted by the government for charity patients and uses the rest of its income from the property for the benefit of paying patients, among other purposes. They aver that the petitioner failed to adduce substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved for indigent patients. The respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That before a patient is admitted for treatment in the Center, first impression is that it is pay-patient and required to pay a certain amount as deposit. That even if a patient is living below the poverty line, he is charged with high hospital bills. And, without these bills being first settled, the poor patient cannot be allowed to leave the hospital or be discharged without first paying the hospital bills or issue a promissory note guaranteed and indorsed by an influential agency or person known only to the Center; that even the remains of deceased poor patients suffered the same fate. Moreover, before a patient is admitted for treatment as free or charity patient, one must undergo a series of interviews and must submit all the requirements needed by the Center, usually accompanied by endorsement by an influential agency or person known only to the Center. These facts were heard and admitted by the Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent patients, instead of seeking treatment with the Center, they prefer to be treated at the Quezon Institute. Can such practice by the Center be called charitable?10

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real properties of the petitioner are exempt from real property taxes.

The Court’s Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.11

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government.12 It may be applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the improvement and promotion of the happiness of man.13 The word “charitable” is not restricted to relief of the poor or sick.14 The test of a charity and a charitable organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The raison d’etre for the creation of the petitioner is stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having been the leading cause of illness and death in the Philippines, comprising more than 45% of the total annual deaths from all causes, thus, exacting a tremendous toll on human resources, which ailments are likely to increase and degenerate into serious lung diseases on account of unabated pollution, industrialization and unchecked cigarette smoking in the country;

Whereas, the more common lung diseases are, to a great extent, preventable, and curable with early and adequate medical care, immunization and through prompt and intensive prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and efforts at preventing, treating and rehabilitating people affected by lung diseases, and to undertake research and training on the cure and prevention of lung diseases, through a Lung Center which will house and nurture the above and related activities and provide tertiary-level care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and financial support towards the establishment and maintenance of a Lung Center for the welfare and benefit of the Filipino people.15

The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated medical institution which shall specialize in the treatment, care, rehabilitation and/or relief of lung and allied diseases in line with the concern of the government to assist and provide material and financial support in the establishment and maintenance of a lung center primarily to benefit the people of the Philippines and in pursuance of the policy of the State to secure the well-being of the people by providing them specialized health and medical services and by minimizing the incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the prevention of lung or pulmonary ailments and the care of lung patients, including the holding of a series of relevant congresses, conventions, seminars and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the biological, demographic, social, economic, eugenic and physiological aspects of lung or pulmonary diseases and their control; and to collect and publish the findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on lung consciousness or awareness, and the development of fact-finding, information and reporting facilities for and in aid of the general purposes or objects aforesaid, especially in human lung requirements, general health and physical fitness, and other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers and medical and technical personnel in the practical and scientific implementation of services to lung patients;

6. To assist universities and research institutions in their studies about lung diseases, to encourage advanced training in matters of the lung and related fields and to support educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial and/or city and local levels; and to coordinate their various efforts and activities for the purpose of achieving a more effective programmatic approach on the common problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local foundations and organizations; and to administer grants and funds that may be given to the organization;

9. To extend, whenever possible and expedient, medical services to the public and, in general, to promote and protect the health of the masses of our people, which has long been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the people in any and all walks of life, including those who are poor and needy, all without regard to or discrimination, because of race, creed, color or political belief of the persons helped; and to enable them to obtain treatment when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and carried on to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment, educational materials and supplies by purchase, donation, or otherwise and to dispose of and distribute the same in such manner, and, on such basis as the Center shall, from time to time, deem proper and best, under the particular circumstances, to serve its general and non-profit purposes and objectives;

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of properties, whether real or personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the powers herein set forth and to do every other act and thing incidental thereto or connected therewith.16

Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.17

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.18 In Congregational Sunday School, etc. v. Board of Review,19 the State Supreme Court of Illinois held, thus:

… [A]n institution does not lose its charitable character, and consequent exemption from taxation, by reason of the fact that those recipients of its benefits who are able to pay are required to do so, where no profit is made by the institution and the amounts so received are applied in furthering its charitable purposes, and those benefits are refused to none on account of inability to pay therefor. The fundamental ground upon which all exemptions in favor of charitable institutions are based is the benefit conferred upon the public by them, and a consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its citizens.20

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South Dakota v. Baker:21

… [T]he fact that paying patients are taken, the profits derived from attendance upon these patients being exclusively devoted to the maintenance of the charity, seems rather to enhance the usefulness of the institution to the poor; for it is a matter of common observation amongst those who have gone about at all amongst the suffering classes, that the deserving poor can with difficulty be persuaded to enter an asylum of any kind confined to the reception of objects of charity; and that their honest pride is much less wounded by being placed in an institution in which paying patients are also received. The fact of receiving money from some of the patients does not, we think, at all impair the character of the charity, so long as the money thus received is devoted altogether to the charitable object which the institution is intended to further.22

The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit.23

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a charitable institution simply because the gift or donation is in the form of subsidies granted by the government. As held by the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt Lake County:24

Second, the … government subsidy payments are provided to the project. Thus, those payments are like a gift or donation of any other kind except they come from the government. In both Intermountain Health Care and the present case, the crux is the presence or absence of material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a private benefactor, chose to make up the deficit resulting from the exchange between St. Mark’s Tower and the tenants by making a contribution to the landlord, just as it would have been irrelevant in Intermountain Health Care if the patients’ income supplements had come from private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the government rather than private charitable contributions does not dictate the denial of a charitable exemption if the facts otherwise support such an exemption, as they do here.25

In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.26 As held in Salvation Army v. Hoehn:27

An intention on the part of the legislature to grant an exemption from the taxing power of the state will never be implied from language which will admit of any other reasonable construction. Such an intention must be expressed in clear and unmistakable terms, or must appear by necessary implication from the language used, for it is a well settled principle that, when a special privilege or exemption is claimed under a statute, charter or act of incorporation, it is to be construed strictly against the property owner and in favor of the public. This principle applies with peculiar force to a claim of exemption from taxation . …28

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines, all donations, contributions, endowments and equipment and supplies to be imported by authorized entities or persons and by the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income and gift taxes, the same further deductible in full for the purpose of determining the maximum deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the Government or any political subdivision or instrumentality thereof with respect to equipment purchases made by, or for the Lung Center.29

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon. If the intentions were otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person, thing, or consequence implies the exclusion of all others. The rule is expressed in the familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of the rule is principle that what is expressed puts an end to that which is implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to other matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive interpretation. They are based on the rules of logic and the natural workings of the human mind. They are predicated upon one’s own voluntary act and not upon that of others. They proceed from the premise that the legislature would not have made specified enumeration in a statute had the intention been not to restrict its meaning and confine its terms to those expressly mentioned.30

The exemption must not be so enlarged by construction since the reasonable presumption is that the State has granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of the statute the favor would be intended beyond what was meant.31

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.32

The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: “. . . what is exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.”34

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes.35

We note that under the 1935 Constitution, “... all lands, buildings, and improvements used ‘exclusively’ for … charitable … purposes shall be exempt from taxation.”36 However, under the 1973 and the present Constitutions, for “lands, buildings, and improvements” of the charitable institution to be considered exempt, the same should not only be “exclusively” used for charitable purposes; it is required that such property be used “actually” and “directly” for such purposes.37

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961 before the 1973 and 1987 Constitutions took effect.38 As this Court held in Province of Abra v. Hernando:39

… Under the 1935 Constitution: “Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall be exempt from taxation.” The present Constitution added “charitable institutions, mosques, and non-profit cemeteries” and required that for the exemption of “lands, buildings, and improvements,” they should not only be “exclusively” but also “actually” and “directly” used for religious or charitable purposes. The Constitution is worded differently. The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the words “actually” as well as “directly” not added. There must be proof therefore of the actual and direct use of the lands, buildings, and improvements for religious or charitable purposes to be exempt from taxation. …

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. “Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege exclusively.”40 If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation.41 The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitutions and the law.42 Solely is synonymous with exclusively.43

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.44

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name “Elliptical Orchids and Garden Center.” Indeed, the petitioner’s evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes.45 On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and the area thereof which are leased to private persons, and to compute the real property taxes due thereon as provided for by law.

SO ORDERED.

Davide, Jr., C.J., Puno, Panganiban, Quisumbing, Sandoval-Gutierrez, Carpio, Corona, Carpio-Morales, Azcuna, and Tinga, JJ., concur.

Vitug, J., on official leave.

Ynares-Santiago, and Austria-Martinez, JJ., on leave.

Abra vs. Hernando

GRN L-49336 August 31, 1981

THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial Assessor, petitioner, vs. HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF BANGUED, INC., represented by Bishop Odilo Etspueler and Reverend Felipe Flores, respondents.

D E C I S I O N

SECOND DIVISION

APPEARANCES OF COUNSEL

Sergio V. Paredes for petitioner.

Felix B. Claustro for respondent.

FERNANDO, C.J.:

On the face of this certiorari and mandamus petition filed by the Province of Abra,1 it clearly appears that the actuation of respondent Judge Harold M. Hernando of the Court of First Instance of Abra left much to be desired. First, there was a denial of a motion to dismiss2 an action for declaratory relief by private respondent Roman Catholic Bishop of Bangued desirous of being exempted from a real estate tax followed by a summary judgment3 granting such exemption, without even hearing the side of petitioner. In the rather vigorous language of the Acting Provincial Fiscal, as counsel for petitioner, respondent Judge "virtually ignored the pertinent provisions of the Rules of Court; ... want only violated the rights of petitioner to due process, by giving due course to the petition of private respondent for declaratory relief, and thereafter without allowing petitioner to answer and without any hearing, adjudged the case; all in total disregard of basic laws of procedure and basic provisions of due process in the constitution, thereby indicating a failure to grasp and understand the law, which goes into the competence of the Honorable Presiding Judge."4

It was the submission of counsel that an action for declaratory relief would be proper only before a breach or violation of any statute, executive order or regulation.5 Moreover, there being a tax assessment made by the Provincial Assessor on the properties of respondent Roman Catholic Bishop, petitioner failed to exhaust the administrative remedies available under Presidential Decree No. 464 before filing such court action. Further, it was pointed out to respondent Judge that he failed to abide by the pertinent provision of such Presidential Decree which provides as follows: "No court shall entertain any suit assailing the validity of a tax assessed under this Code until the taxpayer, shall have paid, under protest, the tax assessed against him nor shall any court declare any tax invalid by reason of irregularities or informalities in the proceedings of the officers charged with the assessment or collection of taxes, or of failure to perform their duties within this time herein specified for their performance unless such irregularities, informalities or failure shall have impaired the substantial rights of the taxpayers; nor shall any court declare any portion of the tax assessed under the provisions of this Code invalid except upon condition that the taxpayer shall pay the just amount of the tax, as determined by the court in the pending proceeding."6

When asked to comment, respondent Judge began with the allegation that there "is no question that the real properties sought to be taxed by the Province of Abra are properties of the respondent Roman Catholic Bishop of Bangued, Inc."7 The very next sentence assumed the very point it asked when he categorically stated: "Likewise, there is no dispute that the properties including their produce are actually, directly and exclusively used by the Roman Catholic Bishop of Bangued, Inc. for religious or charitable purposes."8 For him then: "The proper remedy of the petitioner is appeal and not this special civil action."9 A more exhaustive comment was submitted by private respondent Roman Catholic Bishop of Bangued, Inc. It was, however, unable to lessen the force of the objection raised by petitioner Province of Abra, especially the due process aspect.

It is to be admitted that his opposition to the petition, pressed with vigor, ostensibly finds a semblance of support from the authorities cited. It is thus impressed with a scholarly aspect. It suffers, however, from the grave infirmity of stating that only a pure question of law is presented when a claim for exemption is made.

The petition must be granted.

1. Respondent Judge would not have erred so grievously had he merely compared the provisions of the present Constitution with that appearing in the 1935 Charter on the tax exemption of "lands, buildings, and improvements." There is a marked difference. Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall be exempt from taxation."10 The present Constitution added "charitable institutions, mosques, and non-profit cemeteries" and required that for the exemption of "lands, buildings, and improvements," they should not only be "exclusively" but also "actually" and "directly" used for religious or charitable purposes.11 The Constitution is worded differently. The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the words "actually" as well as "directly" not added. There must be proof therefore of the actual and direct use of the lands, buildings, and improvements for religious or charitable purposes to be exempt from taxation. According to Commissioner of Internal Revenue v. Guerrero:12 "From 1906, in Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, it has been the constant and uniform holding that exemption from taxation is not favored and is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris."13 In Manila Electric Company v. Vera,14 a 1975 decision, such principle was reiterated, reference being made to Republic Flour Mills, Inc. v. Commissioner of Internal Revenue;15 Commissioner of Customs v. Philippine Acetylene Co. & CTA;16 and Davao Light and Power Co., Inc. v. Commissioner of Customs.17

2. Petitioner Province of Abra is therefore fully justified in invoking the protection of procedural due process. If there is any case where proof is necessary to demonstrate that there is compliance with the constitutional provision that allows an exemption, this is it. Instead, respondent Judge accepted at its face the allegation of private respondent. All that was alleged in the petition for declaratory relief filed by private respondents, after mentioning certain parcels of land owned by it, are that they are used "actually, directly and exclusively" as sources of support of the parish priest and his helpers and also of private respondent Bishop.18 In the motion to dismiss filed on behalf of petitioner Province of Abra, the objection was based primarily on the lack of jurisdiction, as the validity of a tax assessment may be questioned before the Local Board of Assessment Appeals and not with a court. There was also mention of a lack of a cause of action, but only because, in its view, declaratory relief is not proper, as there had been breach or violation of the right of government to assess and collect taxes on such property. It clearly appears, therefore, that in failing to accord a hearing to petitioner Province of Abra and deciding the case immediately in favor of private respondent, respondent Judge failed to abide by the constitutional command of procedural due process.

WHEREFORE, the petition is granted and the resolution of June 19, 1978 is set aside. Respondent Judge, or who ever is acting on his behalf, is ordered to hear the case on the merit. No costs.

Barredo, Concepcion, Jr. and De Castro, JJ., concur.

Aquino, J., concurs in the result. The trial court should resolve the jurisdictional issue raised by the provincial assessor.

Abad Santos, J., is on official leave.

Ormoc Sugar Central vs. City Treasurer

GRN L-23794 February 17, 1968

ORMOC SUGAR COMPANY, INC., plaintiff and 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 and appellees. Ormoc Sugar Co., Inc, vs. The Treasurer of Ormoc City. et et al.

1. MUNICIPAL CORPORATIONS; POWER TO IMPOSE EXPORT OR IMPORT TAX; REP. ACT 2264, SEC. 2; EFFECT ON SEC, 2287 OF REVISED ADMINISTRATIVE CODE.-Section 2 of Rep. Act 2264 which became effective on June 19, 1959, gave chartered cities, municipalities and municipal districts authority to levy for public purposes just and uniform taxes, licenses or fees. This provision of law has repealed Sec. 2287 of the Revised Administrative Code (Nin Bay Mining Co. vs. Municipality of Roxas, L-20125, July 20, 1965), which withheld from municipalities the power to impose an import or export tax upon such goods in the guise of an unreasonable charge for wharfage.

2. CONSTITUTIONAL LAW; EQUAL PROTECTION OF LAW; REASONABLE CLASSIFICATION; REQUISITES.- The equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of legislation. A classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies only to those who belong to the same class.

3. ID.; ID.; ID.; TAX ORDINANCE SHOULD NOT BE SINGULAR AND EXCLUSIVE.- When the taxing ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugar central in the City. A reasonable classification should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central.

4. TAXATION; TAX, REFUND OF; NO INTEREST CAN BE CLAIMED; REASONS.-Appellant is not entitled to interest on the refund because the taxes were not arbitrarily collected. There is sufficient basis to preclude arbitrariness. The constitutionality of the statute is presumed until declared otherwise.

APPEAL from a judgment of the Court of First Instance of Leyte, Estenzo, J.

The facts are stated in the opinion of the Court.

Ponce Enrile, Siguion Reyna, Montecillo & Belo for appellant.

City Fiscal Ramon O. De Veyra for appellee.

BENGZON, J.P., J.:

On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series of 1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries." 2

Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March 20, 1964 for P7,087.50 and on April 20, 1964 for P5,000.00, or a total of P12,087.50.

On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte, with service of a copy upon the Solicitor General, a complaint 3 against the City of Ormoc as well as its Treasurer, Municipal Board and Mayor, alleging that the aforestated ordinance is unconstitutional for being violative of the equal protection clause (Sec. 1 [I], Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1], Art. VI, Constitution), aside from being an export tax forbidden under Section 2287 of the Revised Administrative Code. It further alleged that the tax is neither a production nor a license tax which Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act 2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that the tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of Republic Act 2264 because the tax is on both the sale and export of sugar.

Answering, the defendants asserted that the tax ordinance was within defendant city's power to enact under the Local Autonomy Act and that the same did not violate the afore-cited constitutional limitations. After pre-trial and submission of the case on memoranda, the Court of First Instance, on August 6, 1964, rendered a decision that upheld the constitutionality of the ordinance and declared the taxing power of defendant chartered city broadened by the Local Autonomy Act to include all other forms of taxes, licenses or fees not excluded in its charter.

Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant alleges the same statutory and constitutional violations in the aforesaid taxing ordinance mentioned earlier.

Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company Incorporated, in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries." Though referred to as a "production tax", the imposition actually amounts to a tax on the export of centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only time the tax applies is when the sugar produced is exported.

Appellant questions the authority of the defendant Municipal Board to levy such an export tax, in view of Section 2287 of the Revised Administrative Code which denies from municipal councils the power to impose an export tax. Section 2287 in part states: "It shall not be in the power of the municipal council to impose a tax in any form whatever, upon goods and merchandise carried into the municipality, or out of the same, and any attempt to impose an import or export tax upon such goods in the guise of an unreasonable charge for wharfage, use of bridges or otherwise, shall be void."

Subsequently, however, Section 2 of Republic Act 2264, effective June 19, 1959, gave chartered cities, municipalities and municipal districts authority to levy for public purposes just and uniform taxes, licenses or fees. Anent the inconsistency between Section 2287 of the Revised Administrative Code and Section 2 of Republic Act 2264, this Court, in Nin Bay Mining Co. v. Municipality of Roxas, 4 held the former to have been repeated by the latter. And expressing Our awareness of the transcendental effects that municipal export or import taxes or licenses will have on the national economy, due to Section 2 of Republic Act 2264, We stated that there was no other alternative until Congress acts to provide remedial measures to forestall any unfavorable results.

The point remains to be determined, however, whether constitutional limits on the power of taxation, specifically the equal protection clause and rule of uniformity of taxation, were infringed.

The Constitution in the bill of rights provides: nor shall any person be denied the equal protection of the laws." (Sec. 1[I], Art. III) In Felwa v. Salas 5 We ruled that the equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of legislation, and a classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies only to those who belong to the same class.

A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, from the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc Sugar Company, Inc. as the entity to be levied upon.

Appellant, however, is not entitled to interest on the refund because the taxes were not arbitrarily collected (Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the ordinance provided a sufficient basis to preclude arbitrariness, the same being then presumed constitutional until declared otherwise.

Wherefore, the decision appealed from is hereby reversed, the challenged ordinance is declared unconstitutional and the defendants-appellees are hereby ordered to refund the P12,087.50 plaintiff-appellant paid under protest. No. costs.

So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles, and Fernando, JJ., concur.

Decision reversed.

Friday, October 16, 2009

2009 Bar Questions - TAXATION

PART I

TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the statement is false. Explain your answer in not more than two (2) sentences. (5%)

A law that allows taxes to be paid either in cash or in kind is valid.
When the financial position of the taxpayer demonstrates a clear inability to pay the tax, the Commissioner of Internal Revenue may validly compromise the tax liability.
The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to offset tax liabilities with his claim of overpayment.
A law imposing a tax on income of religious institutions derived from the sale of religious articles is valid.
A false return and a fraudulent return are one and the same.

Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%)

III

Melissa inherited from her father a 300-square-meter lot. At the time of her father's death on March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600,000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3,000.00 per square meter.

Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not? (4%)
Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and why? If not, why not? (4%)

International Technologies, Inc. (ITI) filed a claim for refund for unutilized input VAT with the Court of Tax Appeals (CTA). In the course of the trial, ITI engaged the services of an independent Certified Public Accountant (CPA) who examined the voluminous invoices and receipts of ITI. ITI offered in evidence only the summary prepared by the CPA, without the invoices and the receipts, and then submitted the case for decision.

Can the CTA grant ITI's claim for refund based only on the CPA's summary? Explain. (4%)

Jessie brought into the Philippines a foreign-made luxury car, and paid less than the actual taxes and duties due. Due to the discrepancy, the Bureau of Customs instituted seizure proceedings and issued a warrant of seizure and detention. The car, then parked inside a pay parking garage, was seized and brought by government agents to a government impounding facility. The Collector of Customs denied Jessie's request for the withdrawal of the warrant.

Aggrieved, Jessie filed against the Collector a criminal complaint for usurpation of judicial functions on the ground that only a judge may issue a warrant of search and seizure.

Resolve with reasons Jessie's criminal complaint. (4%)
Would your answer be the same if the luxury car was seized while parked inside the garage of Jessie's residence? Why or why not? (4%)

The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee of ten centavos (P0.10) for every 100 kilos of copra deposited in any bodega within the Municipality's jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the copra purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under protest.

Is the ordinance valid? Explain your answer. (4%)

VII

Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. Its commercial airplanes do not operate within Philippine territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Philippine Airlines (PAL), a Philippine corporation.

KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA's airline ticket sales constituted income derived from sources within the Philippines.

KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory.

Is the position of KIA tenable? Reasons. (4%)

VII

Is the position of KIA tenable? Reasons. (4%)

VIII

The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%)

Republic Power Corporation (RPC) is a government-owned and controlled corporation engaged in the supply, generation and transmission of electric power. In 2005, in order to provide electricity to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation (JEC), for the lease of JEC's power barges which shall be berthed at the port of Batangas City. The contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The contract also stipulates that all real estate taxes and assessments, rates and other charges, in respect of the power barges, shall be for the account of RPC.

In 2007, JEC received an assessment of real property taxes on the power barges from the Assessor of Batangas City. JEC sought reconsideration of the assessment on the ground that the power barges are exempt from real estate taxes under Section 234 [c] of R.A. 7160 as they are actually, directly and exclusively used by RPC, a government-owned and controlled corporation. Furthermore, even assuming that the power barges are subject to real property tax, RPC should be held liable therefor, in accordance with the terms of the lease agreement. Is the contention of JEC correct? Explain your answer. (4%)

ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2^nd quarter of 1983, these U.S.-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income --- 30% for individual and 35% for corporate non-resident stockholders --- was deducted at source and remitted to the BIR.

On May 15, 1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. The Commissioner denied the claim.

On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund.

Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? Why or why not? (3%)
Is the contention of ABCD Corporation correct? Why or why not? (3%)

PART II

Raffy and Wena, husband and wife, are both employed by XXX Corporation. After office hours, they jointly manage a coffee shop at the ground floor of their house. The coffee shop is registered in the name of both spouses. Which of the following is the correct way to prepare their income tax return? Write the letter only. DO NOT EXPLAIN YOUR ANSWER. (2%)

Raffy will declare as his income the salaries of both spouses, while Wena will declare the income from the coffee shop.
Wena will declare the combined compensation income of the spouses, and Raffy will declare the income from the coffee shop.
All the income will be declared by Raffy alone, because only one consolidated return is required to be filed by the spouses.
Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Each spouse shall be taxed separately on their corresponding taxable income to be covered by one consolidated return for the spouses.
Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Raffy will file one income tax return to cover all the income of both spouses, and the tax is computed on the aggregate taxable income of the spouses.

XII

YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to defend the corporation's title over a property used in the business. For the legal services rendered in 2007, the law firm billed the corporation only in 2008. The corporation duly paid.

YYY Corporation claimed this expense as a deduction from gross income in its 2008 return, because the exact amount of the expense was determined only in 2008. Is YYY's claim of deduction proper? Reasons. (4%)

XIII

In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was P1-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's death. Zandro died in 2007, and Wilma succeeded to the property.

Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to estate tax? Explain. (3%)
Should the painting be included in the gross estate of Zandro in 2007 and thus, be subject to estate tax? Explain. (3%)
May a vanishing deduction be allowed in either or both of the estates? Explain. (3%)

XIV

Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000.00 to P10,000.00. His gross rental income for one year is P1,650,000.00. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? (4%)

Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property.

Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%)
Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor's tax? Why or why not? (3%)

XVI

Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for 2007 claiming optional standard deductions. Realizing that he has enough documents to substantiate his profession-connected expenses, he now plans to file an amended income tax return for 2007, in order to claim itemized deductions, since no audit has been commenced by the BIR on the return he previously filed. Will Ernesto be allowed to amend his return? Why or why not? (4%)

XVII

A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same.

Is the CTA correct in dismissing the petition for review? Explain your answer. (4%)
Assume that the CTA's decision dismissing the petition for review has become final. May the Commissioner legally enforce collection of the delinquent tax? Explain. (4%)

XVIII

A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he filed a protest, in the form of a request for reinvestigation, against the assessment and submitted all relevant documents in support of the protest. On September 11, 2009, the taxpayer, apprehensive because he had not yet received notice of a decision by the Commissioner on his protest, sought your advice.

What remedy or remedies are available to the taxpayer? Explain. (4%)

XIX

Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny's 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment.

What advice will you give the trustee? Explain. (3%)
Will your advice be the same if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority? Why or why not? (3%)

Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included the advertising expense as deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? Explain. (3%)

-NOTHING FOLLOWS-

Wednesday, July 15, 2009

Palanca vs. City of Manila, G.R. No. L-15819, October 27, 1920

Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-15819 October 27, 1920

CARLOS PALANCA, plaintiff-appelle,
vs.
THE CITY OF MANILA and WENCESLAO TRINIDAD, defendants-appellants.

City Fiscal Diaz for appellants.
Cohn & Fisher for appellee.

MALCOLM, J.:

This is an appeal from an amended decision of the Court of First Instance of the city of Manila, the Honorable Simplicio del Rosario presiding, requiring the defendant City to pay to the plaintiff the sum of P2,400 with legal interest thereon from the respective dates on which the several payments composing the amount were made, without costs. It is one of those exceptional cases in which the facts are agreed upon the law is certain, and in which there is merely needed, in our judgment, the application of the law to the facts to decide the issue. We propose to set out in order the facts, the law, the issue, and the opinion.

F A C T S.

Omitting the formal paragraphs 1 and 8 of the stipulation, the facts are:

2. That at all times between the 1st day of July, 1914, to and including the 30th day of June, 1916, plaintiff herein has been engaged in the business of distilling spirituous liquors in the city of Manila, Philippine Islands, and has been, during all of said period of time, the lawful holder of the distiller's license required by the laws of the Philippine Islands then in force for the operation and conduct of said business, and that he has paid the taxes imposed upon holders of such licenses.

3. That the premises in which plaintiff conducted his said business of wholesale liquor distiller under said license during the said period of time are located at No. 1925 Calle Anloague, Manila, Philippine Islands.

4. That between the 1st day of June, 1914, and the 30th day of June, 1916, both dates inclusive, plaintiff maintained a store at Nos. 538-540 Calle Pinpin, in the city of Manila, Philippine Islands, for the sale at wholesale of distilled liquors, as hereinafter specified; which said store is not adjacent to plaintiff's said distillery, but is entirely separate and distinct therefrom.

5. That the said store at Nos. 538-540 Calle Pinpin was operated and maintained by plaintiff soley and exclusively for the sale at wholesale of liquors distilled by him at his said licensed distillery at No. 1925 Calle Anloague; and that at no time has plaintiff sold or offered for sale, or stored or kept for sale at said store Nos. 538-540 Calle Pinpin any liquors other than those distilled by him at his said distillery; that during the period of time to which this stipulation relates no sales of the products of plaintiff's distillery were made at the distillery, but the sales of the entire product of said distillery were made at the said store at Calle Pinpin, Nos. 538-540.

6. That the defendant, the city of Manila, through the city assessor and collector, made demand upon plaintiff that he take out a wholesale liquor dealer's license and pay therefor at the rate of P1,200 a year, as a condition to allowing plaintiff to operate and maintain his said store at Nos. 538-540 Calle Pinpin and sell therein at wholesale the liquors distilled by him pursuant to his said distiller's license; and plaintiff, therefore, under protest, took out the license required of him with respect to said store.1awph!l.net

7. That thereafter, the plaintiff paid to the city assessor and collector of the city of Manila, acting for and on behalf of the defendant, city of Manila, and on account of the wholesale liquor dealer's license mentioned in paragraph 6 of this stipulation, the sum of P300 for each of the third and fourth quarters of the year 1914, a like sum for each of the quarters of the year 1915, and a like sum for each of the first and second quarters of the year 1916, making a total of payments made during said period of the sum of P2,400; that at the time of making the said payments, the plaintiff duly protested the same in writing; that said protests were overruled and denied, and no part of the money so paid under protest has been refunded to plaintiff.

L A W.

It will be noted that the protested payments cover the period between July 1, 1914 and June 30, 1916. The law then in force regulating the sale of intoxicating liquors within the city of Manila was the Manila Liquor License Act No. 59, as amended by Act No. 95. Section 16 and 17 thereof, the latter as superseded by Act No. 95, provided:

Sec. 16. Licenses for periods of one year may be issued to any person or persons of good character, authorizing him or them to conduct the business of a distiller of alcoholic liquors and to sell, give away or otherwise dispose of the products of such distillery, in quantities of one gallon (three and seventy-eight one-hundredths litres) or more, upon payment in advance of the sum of six hundred pesos. A license of this class shall be known as a "distiller's license," and it shall be unlawful for any person or persons to conduct any distillery for the manufacture of alcoholic liquors without such license, or, having secured such license, to sell, give away or otherwise dispose of the products of such distillery except as herein prescribed.

Sec. 17. Licenses for periods of one year may be issued to any person or persons of good character, authorizing him or them to keep in stock and sell or give away fermented malt, vinous and spirituous liquors in quantities of one gallon (three and seventy-eight one-hundredths litres) or more, upon payment in advance of the sum of twelve hundred pesos; but such licenses may be paid in advance in four quarterly installments of three hundred pesos each, at the election of the licensee. A license of this class shall be known as a "First Class Wholesale Liquor License," and it shall be unlawful for any person or persons to sell or otherwise dispose of fermented malt, vinous and spirituous liquors at wholesale without such license, or having obtained such license, to sell or otherwise dispose of such liquors except as herein prescribed, but nothing herein shall be construed as prohibiting any person or persons holding a "Brewer's License" or "Distiller's License" from disposing of the products of such brewery or distillery.

I S S U E.

The sole question presented by the appeal is whether plaintiff, by taking out and paying for his license as a distiller, was entitled to sell the products of his distillery in a store separate and distinct therefrom without the necessity of taking out and paying for an additional license as a wholesale liquor dealer.

O P I N I O N.

Although the city fiscal advances numerous canons of statutory construction which are not debatable in support of his plea for a revocation, we yet reiterate what we said in the beginning of this decision, that there is merely needed the application of the law to the facts to decide the issue. Statues which are plain and specific should be applied without attempted construction and interpretation. (Lizarraga Hermanos vs. Yap Tico [1913], 24 Phil., 504; Philippine Railway Co. vs. Nolting [1916], 34 Phil., 401; U.S. vs. Fisher [1804], 3 Cranch, 358.)

Concentrating our attention, therefore, on the specific legal provisions, it is first noted that according to section 16 of the Manila Liquor License Act, the license to be granted to distillers not only authorizes the licensee "to conduct the business of a distiller of alcoholic liquors" but also "to sell, give away or otherwise dispose of the products of such distillery, in quantities of one gallon or more." The legislative intention is reinforced by the succeeding section of the same Act as amended, which provides that persons desiring to engage in business as wholesale liquor dealers shall obtain the wholesale liquor dealer's license, with the proviso that "nothing herein shall be construed as prohibiting any person or persons holding a 'brewer's license' or 'distiller's license' from disposing of the products of such brewery or distillery." No provision of the Act limits the place of sale or disposition of the products of the licensed distiller to the distillery proper. To read into the law the words "at the place of production" would be doing violence to its phraseology and would be invading the legislative sphere.

Legislative intention is most eloquently demonstrated by a comparison of the law as it existed in 1914 to 1916 and as it now exists. The Administrative Code of 1916 in its sections 2502 and 2503 and the Administrative Code of 1917 in its sections 2530 and 2531, continue the identical language of Act No. 59 as amended by Act No. 95, but with the careful insertion of the phrases "in the distillery" and "at the place of production." Since the enactment of the Administrative Code of 1916, there can be no doubt that a distiller disposing of the products of his distillery at an establishment separate and distinct from the distillery itself must obtain a wholesale liquor dealer's license. And the fact that the Legislature found it necessary, in order to effect that purpose, to modify the terms of the original statute when reenacting it as a part of the Administrative Code, by the insertion of the words "at the place of production," shows that prior to the introduction of that amendment the statute had a different meaning. It is an express recognition on the part of the legislative branch of the government that without the use of such words of limitation the license to the distiller would permit him to sell the products of the distillery at places other than "the place of production."

Among the numerous points made by the city fiscal to support his case, is one intended to show that the Manila Liquor License Act was taken from the State of Ohio; that this is shown by the fact that the bill was presented in the Philippine Commission by its President Mr. Taft; That years before, Mr. Taft had taken part as counsel in a case before the Supreme Court of Ohio, the result of which bears out the contention of the city fiscal; and that, accordingly, the statute adopted from Ohio carried with it the construction there given to it. We agree that both pursuant to the Philippine Code of Civil Procedure (secs. 275, 313, as amended by Act No. 2210, sec. 1) and the rules of statutory construction, the courts could avail themselves of the actual proceedings of the legislative body to assist in determining the construction of a statute of doubtful import. (U.S. vs. Pons [1916], 34 Phil., 729; 25 R.C.L., pp. 1039, 1040.) But waiving for the moment the observation before made, to the effect that the true meaning of the language used in the statute is not at all obscure, the proceedings in the Philippine Commission prove in this instance to be of little assistance. The public session minutes of the Philippine Commission, as quoted in the brief of the fiscal, simply showed in a general way the power of the Commission to enact legislation of this character.

As to the case cited by counsel, in which Mr. Taft was an attorney (Senior vs. Ratterman [1887], 44 Ohio St., 661), the principal holding there was that wholesale liquor dealers not manufacturers are within the terms of the Act of the General Assembly passed May 14, 1986, and are liable to the tax therein imposed. A later decision of much more importance, which the fiscal overlooked, coming from the same court, is Brewing Co. vs. Talbot ([1898], 59 Ohio, St., 511). In the course of the decision, it was said: "As the statute formerly stood manufacturers were exempt from the tax without regard to the place or places where they sold their products. But since the amendment of March 21, 1887 (84 O.L., 224) they are so exempt only when they confine their business to selling at the manufactory. By that amendment the words 'at the manufactory' were inserted as they now appear in sections 4364-16, above quoted, and they are so far restrictive of the class of exemptions from the tax as they existed prior to the amendment, that thereafter manufacturers who should engage in the business of selling their liquors elsewhere than at the manufactory, become liable to the tax like other dealers. If that was not the purpose and effect of the amendment it had non whatever." If then the fiscal's rather far-fetched assumptions predicated on the statues of Ohio show anything, it is that in Ohio, like in the Philippines, legislative amendment was required before liquor manufactures became liable to the tax imposed on other dealers.

We hold that under the law in force during the period to which this litigation relates, the plaintiff under his distiller's license could not be required to take out an additional license as a wholesale liquor dealer for the sale of the products of his distillery.

Two minor points quire brief consideration before we bring this decision to a close. The judgment of the trial court permitted the plaintiff to recover the amount of the license fee paid under protest with interest. This was correct for a number of reasons. In the first place, the Manila Liquor License Act, both as previously existing and as now existing, is a part of the Manila Charter; so that under no condition would section 1579 of the Administrative Code of 1917 permitting actions for the recovery of internal revenue taxes illegally collected "without interest," be applicable. And in the second place, this action concerns taxes collected before the enactment of said section 1579 (Hongkong & Shanghai Banking Corporation vs. Rafferty [1918], 39 Phil., 145)

On the insistence of the fiscal, the trial court was persuaded to amend the judgment rendered by eliminating therefrom the payment of costs by the defendant to the plaintiff. In so doing the attorney led the court to commit an error which, unfortunately, cannot now be righted, since the plaintiff did not appeal, by misinterpreting the language of our decision in Hongkong & Shanghai Banking Corporation vs. Rafferty, supra. The ruling in that case was that no costs shall be allowed against the Government of the Philippine Islands where the Government is the unsuccessful party. There is, however, a marked difference between sovereignties, such as the United States, and States, and governments such as exist in Porto Rico and the Philippine Islands, and public corporations which sue and can be sued. It is admitted herein that the defendant is the City of Manila. Consequently, the general rule that costs are imposed upon the unsuccessful party applies in municipal corporation cases. Plaintiff has the right to his costs in this instance.

Judgment is affirmed, with costs against the appellants. So ordered.

Mapa, C.J., Johnson, Araullo, Avanceña and Villamor, JJ., concur.