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Case Digest 4 Tax

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  1 Commissioner of Internal Revenue vs Melchor Javier, Jr. In 1977, Victoria Javier received a $1 Million remittance in her bank account from her sister abroad, Dolores Ventosa. Melchor Javier, Jr., the husband of Victoria immediately withdrew the said amount and then appropriated it for himself. Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against the Javiers for estafa. Apparently, Ventosa only sent $1,000.00 to her sister Victoria but due to a clerical error in Mellon Bank, what was sent was the $1 Million. Meanwhile, Javier filed his income tax return. In his return, he place a footnote which states: Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation. The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting to P4.8 Million. The CIR also imposed a 50% penalty against Javier as the CIR deemed Javier’s return as a fraudulent return. ISSUE: Whether or not Javier is liable to pay the 50% penalty. HELD: No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer filing such fraudulent return. However, in this case, although Javier may be guilty of estafa due to misappropriating money that does not belong to him, as far as his tax return is concerned, there can be no fraud. There is no fraud in the filing of the return. Javier’s notation on his income tax return can be considered as a mere mistake of fact or law but not fraud. Such notation was practically an invitation for investigation and that Javier had literally “laid his cards on the table.” The government was never defrauded because by such notation, Javier opened himself for investigation. It must be noted that the fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. CONWI vs CTA 213 SCRA 83 Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as compensation. Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund were filed. CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund claims were denied. Issue: Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions Ruling: No. For the proper resolution of income tax cases, income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the fruits of one's labor. Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that —  a transaction in foreign exchange, foreign exchange being the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another. When petitioners were assigned to the  2 foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO spending in said currency. There was no conversion, therefore, from one currency to another. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. Commissioner of Internal Revenue vs. St Luke's Medical Center Facts:   St. Luke’s Medical Center, Inc. (St. Luke’s)  is a hospital organized as a non-stock and non-profit corporation. St. Luke’s  accepts both paying and non-paying patients. The BIR assessed St. Luke’s deficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and withholding tax. The BIR claimed that St. Luke’s should be liable for income tax at a preferential rate of 10% as provided for by Section 27(B). Further, the BIR claimed that St. Luke’s was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the hospital’s board of trustees, officers and employees directly benefit from its profits and assets. On the other hand, St. Luke’s maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption. Issue:   The sole issue is whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profit hospitals. Ruling:     Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals . The only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means private , following the definition of a “proprietary educational institution” as “any   private  school maintained and administered by private  individuals or groups” with a government permit. “Non - profit” means no net income or asset accrues to or benefits any member or specific person , with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit. “Non - profit”  does not necessarily mean “charitable.”  In Collector of Internal Revenue v. Club Filipino Inc. de Cebu , this Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. The club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-making enterprise. The sports club in Club Filipino Inc. de Cebu  may be non-profit, but it was not charitable. The Court defined “charity”  in Lung Center of the Philippines v. Quezon City   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 [by] otherwise lessening the burden of government. ” However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Sec. 30. To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center  . The issue in Lung Center   concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons  3 which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury The Constitution  exempts charitable institutions only from real property taxes . In the NIRC, Congress decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution “actually, directly and exclusively” use  the property for a charitable purpose. To be exempt from real property taxes , Section 28(3), Article VI of the Constitution requires that a charitable institution use the property “actually, directly and exclusively” for charitable purposes. To be exempt from income taxes , Section 30(E) of the NIRC requires that a charitable institution must be “or ganized and operated exclusively”  for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively”  for social welfare.   However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated exclusively” by providing that:  Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of  their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.  In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. Thus, even if the charitable institution must be “organized and operated exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt status for its not-for-profit activities. The only consequence is that the “income  of whatever kind and character” of a charitable institution “from  any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.”  Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%. The Court finds that St. Luke’s is a corporati on that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities.  Such income from for-   profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).   St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income.   However, it remains a proprietary non-profit hospital  4 under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non -profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. St. Luke’s is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke’s has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke’s is “a corporation for purely charitable and social welfare purposes” and thus exempt from income tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that “good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest.”  WHEREFORE, St. Luke’s Medical Center,  Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section 27(8) of the National Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED. COMMISSIONER OF INTERNAL REVENUE , vs .   DE LA SALLE UNIVERSITY, INC.   G.R. No. 196596, November 09, 2016  The Commissioner submits the following arguments: DLSU's rental income is taxable regardless of how such income is derived, used or disposed of. DLSU's operations of canteens and bookstores within its campus even though exclusively serving the university community do not negate income tax liability. Article XIV, Section 4 (3) of the Constitution and Section 30 (H) of the Tax Code “ the income of whatever kind and character   of [a non-stock and non-profit educational institution] from any of [its] properties, real or personal, or from any of (its] activities conducted for profit regardless of the disposition made of such income , shall be subject to tax imposed by this Code.” The Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax   but not from income tax on the rentals earned from property.  Thus, DLSU's income from the leases of its real properties is not exempt from taxation even if the income would be used for educational purposes. 41  DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues  of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties. ISSUE: Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes.  RULING: YES. The requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit educational institution ; and (2) the income  it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes . A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must have also been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues  is unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively for educational purposes, then said   Commented [WU1]: De la salle
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