CASES
How did the case of Madrigal v. Rafferty distinguish income from capital?
Capital is like a tree or a fund of wealth existing at a given moment.
Income is the fruit or the flow generated by that capital over time.
Thus, a tax on income is a tax on the gains and profits, not on the property itself.
What is the Doctrine of Situs of Taxation?
No state may tax anything not within its jurisdiction without violating the due process clause of the constitution.
The taxing power of a state does not extend beyond its territorial limits, but within such limits it may tax persons, property, income or business.
What are the elements of taxation?
It is enforced proportional contribution from persons and properties
Imposed by State by virtue of its sovereignty
It is levied for support of the government
Income is only measured in terms of cash
FALSE. Income is not limited to cash receipts. The law recognizes other items that determine income, such as inventories, accounts receivable, depreciation or property exhaustion, and accounts payable for expenses incurred.
What are the requisites for income to be taxable?
there must be gain;
the gain must be realized or received; and
the gain must not be excluded by law or treaty from taxation.
In CIR v. Isabela, what is the test applied to determine if expenses are deductible? What are its requisites?
Under the accrual method, expenses are deductible when 2 requisites are met (all-events test):
There is a fixed liability, and
The amount can be determined with reasonable accuracy.
Discuss rules on tax exemptions in agencies performing governmental and propriety functions.
Proprietary functions are activities performed by governmental bodies that are commercial or private in nature, aiming for profit, and are not uniquely tied to the public welfare or governmental duties.
GR: Subject to tax
XPN: Unless expressly exempted
Governmental functions They are optional for the government and can be undertaken by private entities, such as providing goods and services for income.
GR: Tax exempt
XPN: Unless expressly taxed
What are the essential Characteristic / attributes of a tax?
1. Comprehensive
It covers persons, businesses, activities, professions, rights, and privileges.
2. Unlimited
It is so unlimited in force and extent, that the courts scarcely venture to declare that it is subject to any restriction, except such as resting in the discretion of the authority.
3. Plenary
It is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes.
4. Supreme
Inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.
The power to tax in no instance be delegated.
FALSE. Exceptions are:
Congress may authorize the President to impose tariff rates
Each LGU shall have the power to create its own sources of revenue, fees, charges
What is Severance or Realization Test?
There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.
Appreciation in value of property is not an accrual of income until it is realized through sale or conversion of the property.
May an individual/ entity be entitled to a refund or tax credit after the lapse of 2 year period? Are there any exceptions provided in law?
NO. CTA in CIR v. Manila Electric Co. held that where the law is clear, courts must apply it as written. Section 229 explicitly provides that all claims for refund must be filed within two years from payment, “regardless of any supervening cause.” This rule is mandatory and leaves no room for equitable considerations.
What is the required vote of Congress for the granting of tax exemptions?
A law granting any tax exemption shall be passed with the concurrence of a majority of all the Members of the Congress (CONST. Art. VI, Sec. 28, Par. 4). The phrase "majority of all the members of the Congress" means at least ½ plus 1 of all the members voting separately.
NOTE: ABSOLUTE MAJORITY REQUIRED
What is a sound tax system?
Fiscal Adequacy - sources of revenue must be adequate to cover government expenditures
Administrative Feasibility - the system should be at least capable of being effectively administered
Theoretical Justice - it should be fair and be based on a taxpayer’s ability to pay
A tax measure without a public purpose is considered a form of robbery and amounts to confiscating property under the guise of law.
TRUE. Taxes can only be levied for public purposes and cannot be used for purely private ends
The doctrine that says income is taxable to the person who has the power to dispose of it or who benefits from it, even if not received in hand.
Doctrine of Command or Control Income.
A corporation is exempt from tax on its income if it meets two tests, what are the tests according to the case of CIR v. St. Lukes Medical Center?
(a) It is organized and operated as a non-stock, non-profit organization; and (b) no part of its net income or assets inures to the benefit of private stockholders or individuals.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted “exclusively” for charitable purposes.
Why is return of capital not considered income?
Because return of capital is merely the recovery of the taxpayer’s own money that was previously invested. It does not represent a gain or profit, but simply the restoration of what already belonged to the taxpayer.
What are the inherent limitations of taxation? Explain each.
Public purpose
International comity
Territoriality
Non-delegation of power to tax
Various tax exemptions granted by the government agencies or instrumentalities
It is the House of Representatives that should initiate the filing of revenue and tariff bills.
Article VI, Section 24 of the 1987 Philippine Constitution states that appropriation, revenue, tariff bills, bills authorizing an increase in public debt, bills of local application, and private bills must originate exclusively in the House of Representatives, though the Senate is permitted to propose or concur with amendments to these bills
This term means “all income derived from whatever source,” less exempt income by law.
Gross income.
According to Caltex v. COA, are taxes subject to legal compensation/ offsetting? Are there any exceptions?
GR: The Civil Code allows legal compensation only when both parties are mutually debtors and creditors of each other with due, demandable, and liquidated debts (Art. 1279, Civil Code). Taxes, however, do not arise from mutual obligations: The government is not a “debtor” of taxpayers; taxes are obligations imposed by law, not by contract or agreement.
XPN:
1. When the determination of the taxpayer's liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally collected taxes under Sec. 229 of the NIRC.
2. Where both claims of the government and the taxpayer against each other have already become due, demandable, and fully liquidated
Why are "windfall receipts" taxable? What is the basis in law?
Under Sec. 32(A) of the NIRC, gross income includes “all income derived from whatever source,” such as compensation, business profits, interests, rents, royalties, gains from dealings in property, etc.
This wording is intentionally broad to capture even non-recurring or fortuitous receipts.
What are the characteristics of Income Tax Law?
Direct Tax: It is a tax for which a taxpayer is directly liable on the transaction or business it engages in.
Progressive: The tax rate increases as the tax base (amount) increases.
Comprehensive: It covers various persons, businesses, activities, professions, rights, and privileges. This is also reflected in the broad definition of gross income as "income from whatever source derived".
Semi-schedular or Semi-global Tax System: This means that certain types of income are taxed under a global system (all income reported in one return, taxed under the same rules), while others are taxed under a schedular system (separate returns and different tax treatments for different income types)
Section 28 (3), Article VI, Philippine Constitution This provision grants exemption from property tax only.
"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".
QUESTION: The test for this exemption is the use of the property, not the ownership.
TRUE. It is not the use of the income from the property that determines the exemption. Therefore, portions of a hospital or school facility that are leased to private commercial entities are subject to real property tax.
TRUE OR FALSE. Economic Benefit Tests provides that economic benefit to the employee that increases his net worth is taxable, regardless of the form.
TRUE.