REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

SECOND DIVISION
***********

MARIPOSA PROPERTIES, INC., C.T.A. CASE No. 6402

Petitioner,
Members:

-versus- CASTANEDA, JR., Chairperson

UY,and
PALANCA-ENRIQUEZ, JJ.
COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondent.
FEB 1 3 2007 /
X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -7 --------- X

DECISION ~
UY,d_.:

This is a judicial appeal seeking the cancellation and withdrawal of the

\
assessments issued by the respondent against petitioner for deficiency income tax

(P2,615,267.49) , value-added tax (P33,223 .64) , expanded withholding tax

(P1 ,325.41) and documentary stamp tax (P2,402.50) for taxable year 1997 in the

aggregate amount of P2,652,219.04.

The Facts

The antecedent facts as borne by the records of this case are as follows :

Petitioner is a domestic corporation duly organized and existing under the

laws of the Republic of the Philippines with principal office at PHINMA Plaza , 39

Plaza Drive, Rockwell Center, Makati City.

Respondent, on the other hand , is the duly appointed Commissioner of

Internal Revenue , duly authorized to perform the duties of his office, including ,

among others, the power to decide, cancel and abate tax liabilities pursuant to
DECISION
CTA CASE NO . 6402
Page 2 of 23

Section 204 (B) of the National Internal Revenue Code (NIRC) of 1997 and to

enforce the provisions of the Code, with office address at the Fourth Floor, BIR

National Office Building , Agham Road , Diliman , Quezon City.

During the year of 1997, petitioner made a series of donations in cash and

property totaling P4,500,000.00 to Mariposa Foundation , Inc. (Foundation), a non-

stock, non-profit corporation duly organized and existing under and by virtue of the

laws of the Philippines, financed and maintained by means of donations and

contributions from any persons or entities,1 and recognized as a qualified donee

institution.2

On December 7, 1998, respondent issued Letter of Authority No. 138537

authorizing the examination of petitioner's books of accounts and other accounting

records for all internal revenue taxes for the period January 1 to December 31 ,

1997.3 This Letter of Authority was reval idated on June 15, 2000.

Consequently, on July 1, 2001 , petitioner received the letter of respondent of

same date, inviting the former for an informal conference to enable the petitioner to

go over the findings of the examiner and to submit whatever documentary evidence

it may have to support any objection against said findings .4

On October 31 , 2001 ,5 petitioner received from respondent Form al

Assessment Notices all numbered LA-138537-97-01 -852 and dated October 24,

2001 , informing it of the deficiency income tax (P2 ,615,267.49) , value-added tax

(P33,223.64), expanded withholding tax (P1 ,325.41) and documentary stamp tax

1
Articles of Incorporation, Exhibit "F".
2
Certificates of Registration, Exhibits "G" and " H".
3
Letter of Authority, BIR Records, p. 23 I .
4
Paragraph U), Stipul ation of Facts, Rollo, p. 90; Exhibit "2", BIR Records, p. 378.
5
See Letter-Protest dated November 23, 200 1; BIR Records, pp.479-485 .
'\
DECISION
CTA CASE NO . 6402
Page 3 of 23

(P2,402.50) assessments for taxable year 1997 together with the letter of

discrepancy, in the aggregate amount of P2,652 ,219.04.6

On November 26, 2001 , petitioner, through its external auditor, filed with the

respondent's Bureau of Internal Revenue (BIR) its protest letter dated November 23,

2001 contesting the propriety and legality insofar as the subject deficiency income

tax assessment issued against it for the taxable year 1997 is concerned . On the

other hand , likewise stated in said protest letter, petitioner signified its willingness to

pay the amounts of deficiency value-added tax (P33,223.64), expanded withholding

tax (P1 ,325.41) and documentary stamp tax (P2,402 .50) assessments for taxable

year 1997.7

In a letter dated January 30 , 2002 from the Regional Director of the Revenue

Region No. 8 of the BIR, received on February 4, 2002 by petitioner through its

external auditor, petitioner was informed that its request in the protest letter of

November 23, 2001 that the issues raised therein be first resolved before the

payment of the deficiency taxes attributable to undisputed portion of the deficiency

tax assessment was denied for lack of legal and factual basis .8

On March 1, 2002, the instant Petition for Review was filed by the petitioner.

In his Answer filed on May 30, 2002, which was admitted by this Court in the

Resolution dated July 18, 2002 , respondent asserts the following Special and

Affirmative Defenses:

"3. He reiterates and repleads the preceding paragraphs of

this answer as part of his Special and Affirmative Defenses;

4. Section 228 of the (1997) Tax Code , partly provides:

6
Paragraphs (c), (d) and (k), Stipulation of Facts, Rollo, pp. 89-90.
7
Paragraphs (e) and (m), Stipulation of Facts, Rollo, pp. 89-90.
8
Fi nal Decision, BIR Records, p. 522.
DECISION
CTA CASE NO . 6402
Page 4 of 23

'Sec. 228. Protesting of Assessment. - (xxx) Such

assessment may be protested administratively by
filing a request for reconsideration or reinvestigation
within thirty (30) days from receipt of the assessment
in such form and manner as may be prescribed by
implementing rules and regulations . Within sixty (60)
days from filing of the protest, all relevant supporting
documents shall have been submitted ; otherwise, the
assessment shall become final.' (Emphasis supplied)

Considering the failure of petitioner to submit all relevant

supporting documents within sixty (60) days from filing its protest, the
assessments have already become final by operation of law;

5. Since the assessments have become final , this

Honorable Court has no jurisdiction to act on the instant petition;

6. Assuming that this Honorable Court has jurisdiction over

the case , the assessments issued against petitioner for deficiency
income tax, value-added tax, expanded withholding tax and
documentary stamp tax for taxable year 1997, covered under Final
Assessment Notices all numbered LA-138537-97-01-852 all dated
October 24, 2001 were made in accordance with law and regulations;

7. Based on the records , petitioner failed to comply with the

requirements under Section 29 (h)(2)(C)(ii) of the 1993 Tax Code
which provides that (in order for a) 'donation made to qualified
institutions to be deductible in full, such recipient institutions must
utilize the donations not later than the fifteenth day of the third month
after the close of the recipient institutions ' taxable year in which the
donations were received' . From the foregoing , the claimed deduction
of petitioner for donations made to Mariposa Foundation, Inc., in the
amount of P4,500,000.00 is not deductible in full since only the amount
of P1 ,296,291 .26 was utilized by the foundation as of March 15, 1998.
Hence, the amount of P4,323,685.35 should be disallowed as valid
deduction from its gross income for taxable year 1997;

8. Petitioner failed to withhold and remit the corresponding

withholding tax on commission income payments, hence, the amount
of P7 ,500.00 representing commission expense due should be
disallowed as valid deduction from its gross income, pursuant to
Section 29 (J) of the Tax Code, as amended , which provides that 'any
amount paid or payable which is otherwise deductible from, or taken
into account in computing gross income or for which depreciation or
amortization may be allowed under this Section, shall be disallowed as
a deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the BIR in accordance with this
Section, Sections 51 and 74 of the Tax Code';
DECISION
CTA CASE NO. 6402
Page 5 of 23

9. Petitioner violated the provision under Section 29 (a)(1)

of the 1993 Tax Code since per comparison of its Financial Statement
for the year 1997 and Alpha List of employees , petitioner overstated
the claimed salaries and wages expense, hence , it cannot claimed
(sic) the amount of P6,318.00 as valid deduction from its gross income
for 1997;

10. Petitioner violates the provision under Section 100 (a) of

the 1993 Tax Code (now Section 106 [A] of the 1997 Tax Code)
since it failed to subject to value-added tax (VAT) the amount of
P188,000.00 which is the proceeds derived by petitioner from the sale
of its Smile City Homes residential unit;

11 . Petitioner failed to subject to the 10% expanded

withholding tax rate imposed under Revenue Regulations No. 6-85, the
amount of P7 ,500.00 which represents the discrepancy per
comparison of the income payments from petitioner's financial
statement as against the Alphalists in the amounts of P15,000.00 and
P7 ,500.00 , respectively;

12. Petitioner failed to pay documentary stamp tax due on

the lease of its real properties with total lease contracts in the amount
of P1 ,912 ,320.00, in violation of Section 194 of the 1997 Tax Code
which provides that 'on each /ease, agreement, memorandum, or
contract for hire, use or rent of any lands or tenements, or portions
thereof, there shall be collected a documentary stamp (tax) of three
pesos (P3.00) for the first Two Thousand pesos (P2,000.00), or
fractional thereof, in excess of the first Two Thousand pesos
(P2,000.00) for each year of the term of said contracts or agreemenf ;
and

13. All presumptions are in favor of the correctness of tax

assessments." 9

In a Resolution promulgated on September 6, 2002, this Court denied

petitioner's Motion for Reconsideration of the Resolution dated July 18, 2002

denying petitioner's Motion to Declare Respondent in Default and therefore , admitted

respondent's Answer; hence, the case was set for pre-trial. However, on November

22, 2002, petitioner filed a "Motion to Defer Pre-trial" on the ground that it filed a

Petition for Certiorari with the Court of Appeals raising the issue on the propriety of

9
Answer, Ro llo, pp. 44-46.
DECISION
CTA CASE NO. 6402
Page 6 of 23

the Resolution dated September 6, 2002, which this Court granted in its Order dated

November 27, 2002 .

The Second Division of the Court of Appeals , in two Resolutions dated

November 15, 2002 and April 11 , 2003 , dismissed the aforesaid petition by reasons

of deficiencies and for failure to comply with the pertinent Rules on Civil Procedure.

Thus, petitioner filed its "Manifestation and Motion" on May 21 , 2003 before this

Court stating that it has already subscribed to the judgment of the Court of Appeals

and moved to set the case for pre-trial. The Court granted said motion and

proceeded with the pre-trial conference on June 27, 2003.

As previously manifested by petitioner, it is wi lling to settle the deficiency

assessments except the income tax assessment. Accordingly , on September 12,

2003, petitioner paid the amounts corresponding to the subject deficiency value-

added tax, expanded withholding tax and documentary stamp tax.10 Thus, what

remains for determination is the validity of the deficiency income tax in the amount of

P2 ,615,267.49 for taxable year 1997.

During trial , petitioner's Assistant Treasurer, Marilyn A. Silvala , testified to

prove that the BIR disallowed the donation of petitioner to Mariposa Foundation in

the amount of P4,500,000.00 in cash and shares of stocks; while its witness Rosario

M. Garado, Accountant of the Foundation , testified, among others, that the

Foundation accepted the said donation and the shares of stocks donated were

recorded at its fair market value. Both witnesses identified numerous documents in

10
BIR Tax Payment Deposit Slips and Payment Forms; Exhibits "C", "D" and "E", inclusive; Roll o, pp. 117- \.\}1\
122. ~ '
DECISION
CTA CASE NO . 6402
Page 7 of 23

relation thereto.11 Respondent, on the other hand , did not present any evidence , but

merely marked his documentary exhibits.

Both parties were allowed to file their respective memoranda within thirty (30)

days from notice.

However, on September 6, 2004, petitioner, through its new counsel , filed an

"Urgent Omnibus Motion"12 to: (a) re-open case for trial and leave of court to present

additional evidence; and (b) to defer submission of memoranda , which was granted

in open court and confirmed in the Resolution of October 28, 2004 . Therefore,

petitioner's witnesses were re-called , and further testified and identified additional

documentary evidence .

Finally, in a Resolution dated November 22 , 2005, petitioner was deemed to

have rested its case. Accordingly , the parties were allowed to file their respective

memoranda within thirty (30) days from notice. Only petitioner filed its

Memorandum .

Hence , this decision .

The Issues

In their Joint Stipulation of Facts and Issues filed on July 30, 2003, the parties

submitted the following issues for this Court's resolution :

"a) Whether or not the petitioner was furnished in writing of

the factual basis for the issuance of the deficiency income tax
assessment for the year 1997;

b) Whether or not the donation made by petitioner to

Mariposa Foundation , Inc. in the amount of P4,500,000.00 should be
allowed as deduction from its gross income for the year 1997 pursuant
to Section 29 (H)(2)(C)(ii) of the National Internal Revenue Code, as
amended ;

11
TSN, Hearing on September 17, 2003.
12
Roll o, pp. 150-156.
DECISION
CTA CASE NO. 6402
Page 8 of 23

c) Whether or not the recipient of the above donation ,

Mariposa Foundation , Inc. has complied with the requirements on the
utilization of the aforesaid donation pursuant to Section 29 (H)(2)(C) of
the National Internal Revenue Code, as amended , in order that said
donation would be considered as allowable deduction of petitioner for
1997; and

d) Whether or not petitioner is liable for deficiency income

tax assessment in the amount of P2,615,267.49 for taxable year 1997."

This Court's Ruling

The focal point of the controversy hinges on petitioner's alleged liability for

deficiency income tax in the amount of P2 ,615 ,267.49 for taxable year 1997 by

reason of respondent's disallowance of certain items of expense, to wit: (a)

P4,323,685.35 representing donation made to Mariposa Foundation , Inc.; (b)

P7,500.00 representing commiss ion expenses; and (c) P6,318.00 representing

salaries and wages expenses.

Regarding the first issue which refers to a procedural matter, We deem it

apropos to resolve the propriety of the subject formal assessment notices issued

against petitioner pursuant to Section 228 of the NIRC of 1997, in relation to Section

3 of Revenue Regulations No. 12-99, relevant portions of which are hereunder

respectively quoted :

"SEC. 228. Protesting of Assessment. - When the

Commissioner or his duly authorized representative finds that proper
taxes should be assessed , he shall first notify the taxpayer of his
findings : xxx

XXX XXX XXX

The taxpayer shall be informed in writing of the law and the

facts on which the assessment is made; otherwise , the assessment
shall be void."

"SEC. 3. Due Process Requirement in the Issuance of a

Deficiency Tax Assessment. - xxx
DEC ISION
CT A CASE NO . 6402
Page 9 of 2 3

(3.1.4) Formal Letter of Demand and Assessment Notice.- The

formal letter of demand and assessment notice shall be issued by the
Commissioner or his duly authorized representative . The letter of
demand calling for payment of the taxpayer's deficiency tax or taxes
shall state the facts, the law, rules and regulations , or jurisprudence on
which the assessment is based , otherwise , the formal letter of demand
and assessment notice shall be void . The same shall be sent to the
taxpayer only by registered mail or by personal delivery. If sent by
personal delivery, the taxpayer or his duly authorized representative
shall acknowledge receipt thereof in the duplicate copy of the letter of
demand , showing the following : (a) His name; (b) signature; (c)
designation and authority to act for in behalf of the taxpayer, if
acknowledged received by a person other than taxpayer himself; and
(d) date of receipt thereof."

Petitioner pointed out that the Formal Assessment Notices all numbered LA-

138537-97-01 -852 , duly received by petitioner on October 31 , 2001 , failed to state

the law and the facts upon which the assessments were based . According to

petitioner, it could only speculate and make its best guess on how the provisions of

the NIRC of 1993 and 1997 were allegedly violated considering that the basis of the

same is couched in a vague language. Thus, petitioner concluded that it was not

sufficiently informed of the law and the facts on which the subject assessments we re

made in violation of the abovementioned provisions and of its right to due process.

After a meticulous review of the records of the case , We cannot sustain

petitioner's allegation . If indeed it was not informed of the law and the facts on wh ich

the subject assessments were made, it could not have been able to pose verbal or

written protest/objection thereto in detail.

As can be gleaned from the records , petitioner was given an opportunity to

controvert the findings of the respondent's examiners through an informal conference

set for the purpose.13 As a matter of fact, petitioner's Assistant Treasu rer, Marilyn A.

13
Exhibit " 2", BIR Records, p. 378; paragraph U), Stipu lation of Facts, Rollo, p. 90.
. '

DECISION
CT A CASE NO . 6402
Page 10 of 23

Silvala , who was also its witness during the trial proper, attended said conference to

manifest petitioner's protesUobjection to the subject assessments . Moreover,

petitioner admitted that it received the Formal Assessment Notices together with the

Details of Discrepancies dated October 24 , 2001 .14 The computations/deta ils of

discrepancies attached to the Formal Assessment Notices clearly show both factual

and legal bases contemplated under Section 228 of the NIRC of 1997, in relation to

Section 3 of Revenue Regulations No. 12-99, stating the specific provisions of law

from which the assessments were based and the facts on how the amounts of the

deficiency taxes were arrived at.

Substantially, the aforesaid details of discrepancies clea rly explained in

various reasons why the subject donations (P4,323 ,685.35) , comm ission expenses

(P7,500.00) and salaries and wages expenses (P6 ,318.00) were not allowed as

deductions from petitioner's gross income for taxable year 1997. Undoubtedly,

petitioner did not merely presume but in fact knew the bases of the assailed

assessments because it was able to intelligently protest the same in its letter

protest15 and supplement letter protest16 dated November 23, 200 1 and Jan uary 19,

2002, respectively.

It bears stressing that the purpose of Section 228 of the NIRC of 1997 in

req ui ring that "[t]he taxpayer shall be informed in writing of the law and facts on

which the assessment is made" is to give the taxpayer the opportunity to refute the

find ings of the examiner and give a more accurate and detailed explanation

regard ing the proposed assessment(s) .17 The purpose of the said law having been

14
Exhibit "3", BIR Records, p.452; paragraphs (c), (d) and (k), Stipulati on of Facts, Roll o, p. 89.
15
BIR Records, pp. 502- 508.
16
Ibi d, pp. 5 17-5 l 9.
17
Belle Corporation vs. Commi ssioner of Internal Revenue, CTA Case No. 593 0, April4, 2002 .
DEC ISION
CTA CASE NO. 6402
Page 11 of 23

served in the instant case , Section 228 of the said Code has been complied with .

Therefore , the subject assessments, including the deficiency income tax, issued

against the petitioner are not null and void .

Generally, a final assessment is a finding by the respondent that the taxpayer

has not paid his correct taxes . The purpose of this assessment is to enable the

taxpayer to know the law and the facts on which the assessment is made, and to

afford him his right to due process once it is served and received . Its ultimate

purpose is to ascertain the amount that a taxpayer should pay. This purpose was

accomplished in the present case.

The first issue having been settled , this Court now proceeds to rule on the

remaining issues, which being interrelated or intertwined , shall be tackled jointly for

convenience and brevity.

As regards the issue of the deductibility of the series of donations made by

petitioner to the Foundation , the same primarily devolves upon the proper

interpretation of Section 29 (h)(2)(C)(ii) of the NIRC of 1993,18 which provides:

"SECTION 29. Deductions From Gross Income. - In

computing taxable income subject to tax under Sections 21 (a) , 24(a) ,
(b) and (c) ; and 25 (a) (1), there shall be allowed as deductions the
items specified in paragraphs (a) to (i) of this section : xxx

XXX XXX XXX

(h) Charitable and other contributions. - (1) In general. -

Contributions or gifts actually paid or made within the taxable year to,
or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof for exclusively public
purposes, or to domestic-corporations or associations organized and
operated exclusively for religious , charitable , scientific, youth and
sports development, cultural or educational purposes or for the
rehabilitation of veterans , or to social welfare institutions, no part of the
net income of which inures to the benefit of any private stockholder or

18
Now Section 34 (H)(2)(c)(2) of the NIRC of 1997. Please note that all reference to the term " pri vate
foundation" has been replaced by "nongovernment organization".
DECISION
CTA CASE NO. 6402
Page 12 of 23

individual in an amount not in excess of 6% in the case of an

individual , and 3% in the case of a corporation , of the taxpayer's
income derived from business as computed without the benefit of this
and the following subparagraphs.

(2) Contributions deductible in full. - Notwithstanding the

provisions of the preceding subparagraph , donations to the following
institutions or entities shall be deductible in full :

XXX XXX XXX

(C) Donations to certain private foundations . - The term

"private foundation" means a non-profit domestic corporation :

(i) Organized and operated exclusively for scientific,

research , educational , character-building and youth and sports
development, health , social welfare, cultural or charitable purposes, or
a combination thereof, no part of the net income of which inures to the
benefit of any private individual ;

(ii) Which , not later than the 15th day of the third month after
the close of the foundation's taxable year in which contributions are
received, makes utilization directly for the active conduct of the
activities constituting the purpose or function for which it is organized
and operated . unless an extended period is granted by the Secretary
of Finance in accordance with the rules and regulation to be
promulgated ;

(iii) The level of administrative expense of which , shall on an

annual basis conform with the rules and regulations to be prescribed
by the Secretary of Finance but in no case to exceed thirty percent
(30%) of total expenses; and

(iv) The assets of which in the event of dissolution would be

distributed to another non-profit domestic corporation organized for
similar purpose or purposes, or to the State for public purpose, or
would be distributed by a court to another organization to be used in
such manner as in the judgment of said court shall best accomplish the
general purpose for which the dissolved organization was organized .

Subject to such terms and conditions as may be prescribed by

the Secretary of Finance, the term "utilization" means:

(i) Any amount in cash or in kind (including administrative

expenses) paid or utilized to accomplish one or more purposes for
which the private foundation was created or organized .
DECISION
CT A CASE NO. 6402
Page 13 of 23

(ii) Any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes for which the
foundation was created or organized .

An amount set aside for a specific project which comes within

one or more purposes of the foundation may be treated as a utilization ,
but only if at the time such amount is set aside, the private foundation
establishes to the satisfaction of the Commissioner of Internal
Revenue that the amount will be paid for the specific project within a
period to be prescribed in regulations to be promulgated by the
Secretary of Finance, but not to exceed 5 years, and the project is one
which can be better accomplished by setting aside such amount than
by immediate payment of funds ." (Underscoring Ours)

It is evident that the deductibility of donation is not governed by the ordinary

rules on deductibility of an expense as provided for under Section 39 of the NIRC of

1993 [now Section 45 of the NIRC of 1997]. Donation is recognized as a deduction

from gross income in the year such donation was actually paid or made, pursuant to

the provisions of Section 29(h) of the NIRC of 1993 [now Section 34(H) of the NIRC

of 1997]. In other words , "[i]t can be inferred from the foregoing law that donation

must be both perfected and consummated before it can be allowed as an expense .

Irrespective of the accounting method used, contributions or gifts are deductible only

from petitioner's gross income in the year they were actually paid or made". 19

In the case at bench , the series of donations made by petitioner to the

Foundation in the year 1997 amounting to P4,500,000.00, comprise of cash as

evidenced by various Certificates of Donations and official receipts 20 issued by the

latter and of personal property in the form of shares of stock under the Deed of

Donation dated August 25, 1997.21 A perusal of said documentary evidence shows

19
Phi lippine Stock Exchange, Inc. vs. Commi ssioner of Internal Revenue, CTA Case No . 5995, October 15,
2002.
20 ~
Exhibits "K" to "DD", inclusive.
21
Exhi bit " I".
DECISION
CTA CASE NO . 6402
Page 14 of 23

that the series of donations were actually perfected and consummated within the

year 1997. Thus, said deductions may be claimed as deduction from gross income.

Corollary thereto , BIR-NEDA Regulations No. 1-81 , as amended , in

implementing the abovequoted Section ,22 provides:

"SEC. 2. Definitions. - In these REGULATIONS unless the

contrary intention appears, the following terms:

XXX XXX XXX

F. 'Private foundation ' means a non-profit Domestic

Corporation or Association organized and operated exclusively for
scientific research , education , character building and youth sports
development, health , social welfare , cultural or charitable purpose or a
combination thereof, no part of the net income of which inures to the
benefit of any private individual.

XXX XXX XXX

R. 'Utilization by a qualified donee' means-

(a) Any amount in cash or in kind (including

administrative expenses) paid or utilized to
accomplish one or more purposes for which it was
created or organized ; or

(b) Any amount paid to acquire an asset used (or held

for use) directly in carrying out one or more
purposes for which the donee was created or
organized ; or

(c) Any amount set aside for a specific project subject

to the conditions provided for under Section 9 of the
regulations; or

(d) Any amount in cash or in kind invested in any

activity related to the purpose for which it was
created or organized. 23

SEC. 3. Conditions for Deductibility. -

XXX XXX XXX

22
As amended by Batasan Pambansa Bi g. 45.
23
As amended by Revenue Regulations No. I 0-82 after amendm ents by BIR-NE DA Regul atio ns No . 1-82.
DECISION
CTA CASE NO . 6402
Page 15 of 23

B. Full Deductibility. -All donations in cash or in kind except

personal sources , given to the following institutions or entities shall be
deductible in full for income tax purposes;

(a) xxx;

(b) xxx ;

(c) Private Foundation which :

(i) Is duly registered with the SEC and governed

by trustees who received no compensation
nor any type of remuneration in cash or in
kind ;

(ii) Not later than the 151h day of the third month
after the close of the foundation 's taxable
year in which contributions are received ,
makes utilization directly for the active
conduct of the activities consistent with the
purpose or function for which it is organized
and operated , unless an extended period is
granted by the Minister of Finance not
exceeding thirty (30) days in accordance with
these rules and regulations ;

(iii) The level of administrative expenses on an

annual basis does not exceed 30% of its total
utilization during the taxable year;

(iv) xxx"

"SEC. 9. Utilization Requirements. -

XXX XXX XXX

B. For private foundations.

(a) Administrative expenses. - Administrative expenses

shall not exceed 30% of total donations for the
taxable year.

(b) Approval requirements for amounts set aside. -

Amounts set aside or to be set aside for a specific
project must have the prior approval of the
Comm issioner of Internal Revenue in writing .
Application therefor must contain the following :
DEC ISION
CTA CASE NO. 6402
Page 16 of 23

(i) The nature and purpose of the specific

project and the amount programmed therefor;

(ii) A detailed description of the project, including

estimated costs , sources of any future funds
expected to be used for completion of the
project, and the location or locations (general
or specific) of any physical facilities to be
acquired or constructed as part of the project;
and

(iii) A statement by an authorized official of the

corporation or association that the amount to
be set aside will actually be disbursed for the
specific project within five years from the date
of the approval of the Commissioner of
Internal Revenue , pursuant to paragraph (b)
hereof unless the nature of the project is such
that the five-year period is impracticable.

(c) Evidence of an amount set aside. - Amounts set

aside shall be evidenced by book of entries and
documents showing evidence of deposits or
investments, or other documents that the
Commissioner may require ." 24 (Underscoring Ours)

From the foregoing, all donations, in cash or in kind , given to a private

foundation or nongovernment organization , are deductible in full for income tax

purposes, provided the following requisites are complied with :

1) The private foundation/nongovernment organization must be

duly registered with the Securities and Exchange Commission
(SEC) to be a qualified donee;

2) The private foundation/nongovernment organization must utilize

such donations/contributions in any of the manner provided for
in Section 2 (R) , paragraphs (a) to (d) of BIR-NEDA Regulations
No. 1-81 , as amended ;

3) Such utilization must be made not later than the fifteenth (151h)
day of the third (3rd) month after the close of the foundation 's
taxable year in which donations/contributions are received

24
As amended by BIR-NEDA Regulations No. 1-82.
DECISION
CTA CASE NO . 6402
Page 17 of 23

unless extended by the Minister of Finance for a period not

exceeding thirty (30) days; and

4) The level of administrative expenses on an annual basis does

not exceed thirty (30%) percent of the private
foundation 's/nongovernment organization 's total utilization
during the taxable year.

Anent the first requisite , there is no doubt that the Foundation is a duly

registered private foundation . Petitioner presented the Foundation 's Articles of

lncorporation ,25 together with the Certificates of Registration 26 issued by the BIR,

showing that it is indeed a private foundation defined under Section 29 (h)(2)(C)(i) of

the NIRC of 1993 and Section 2(F) of BIR-NEDA Regulations No. 1-81 , as amended .

As the regards the second , third and fourth requisites , petitioner presented a

schedule 27 consisting of five (5) pages showing the alleged utilization by the

Foundation of the subject donations/contributions during the years 1997 to 2000.

Particularly, it submitted numerous documents 28 to establish that the total amount of

P1 ,078,741 .00 has in fact been utilized by tile Foundation in the year 1997 to

accomplish one or more purposes or to invest in any activity related thereto for which

it was created or organized .

On March 15, 1998, being the fifteenth ( 151h) day of the third (3rd) month after

the close of the Foundation 's taxable year in which the subject

donations/contributions were received , petitioner admitted that only the amount of

P1 ,296,291 .26 from the total donation of P4,500,000.00 was utilized . However, it

argues that the term "makes utilization" contemplated under Section 29 (h)(2)(C)(ii)

of the NIRC of 1993, in relation to Section 3 (B)(c)(ii) of BIR-NEDA Regulations No .

25
Exhibit "F"
26
Exhi bits "G'" and " H".
27
Exh ibits "8" to "8-4"; Rollo, pp. 11 2 -116.
28
Exhibi ts " RRRRRRRRRR" to " KK.KK.KK.KKKKKK.-1 ", inclusive.
DECISION
CTA CASE NO. 6402
Page 18 of 23

1-81 , as amended , does not require that the entire amount of donation be fully

disbursed in the succeeding year in order for the donation to be deductible in full

from the donor's gross income. Hence, petitioner believes that, as long as the donee

institution makes initial disbursements or payments of "any amount" forming part of

the donation , the donee is deemed to have made utilization of said donation .

We agree with petitioner's contentions.

Section 29 (h)(2)(C)(ii) of the NIRC of 1993, in relation to Section 3 (B)(c)(ii) of

BIR-NEDA Regulations No. 1-81, as amended, clearly provides that a private

foundation/nongovernment organization shall , not later than the fifteenth (151h) day of

the third (3rd) month after the close of its taxable year in which contributions are

received, make utilization of said contributions directly for the active conduct of the

activities constituting the purpose or function for which it is organized and operated .

The law does not require full payment or utilization of the donations/contributions it

received . As long as a portion of such donations/contributions was proven to be

utilized in any of the manner provided for in Section 29 (h)(2)(C) of the NIRC of 1993

and Section 2 (R) , paragraphs (a) to (d) of BIR-NEDA Regulations No. 1-81 , as

amended , it may be deducted in full from the donor's gross income.

However, it bears stressing that, BIR-NEDA Regulations No. 1-81 , as

amended , enumerates the procedures and requirements for the deductibility or the

non-deductibility of donations in general:

"SEC. 11. Verification procedure and substantiation

requirements.

A For Donors. - Donors claiming deduction from their

taxable income for donations authorized by Batasan Pambansa Big . 45
should submit evidence of the BIR showing submission of the
Certificate of Donation and/or Notice of Donation.
DECISION
CTA CASE NO. 6402
Page 19 of 23

(a) Actual receipt by the donee of the donation and the

date of receipt thereof; and

(b) The amount of the donation , if in cash ; if real

property, the value thereof at the time of the
donation , which shall be based on the assessors'
most recent valuation ; and if personal property had
already been used at the time of donation , the
depreciated or book value thereof.

B. For Donees. - Donees shall include in their income tax

return an annual information report with the BIR, Provided, that donees
covered by the national priority plan , must furnish the NEDA with the
annual information report by accomplishing NEDA Forms 3A, 38 and
3C . The report shall be certified by the authorized official of the
Institution or Association and shall contain:

(a) A list of the donations and income received during

the year, showing the name and address of the
donor; the source of income; the amount or market
value of each donation and items of income and the
disposition thereof;

(b) A list of the activities and/or project undertaken by

the institution and the cost of each undertaking
indicating in particular where and how the donation
has been utilized ;

(c) A list of projects; their corresponding costs ; the

amount 'set aside' and the status of funds balances
at the end of the year;

(d) That the utilization requirements under Section 9 of

these Regulations have been sufficiently complied
with ;

(e) That no part of its net income inures to the benefit of

any private stockholder or individual." (Underscoring
Ours)

A careful review of the records shows that neither the Foundation 's income

tax return and audited financial statements, nor the annual information report duly

certified by the authorized official of the Foundation containing the above-

enumerated information, was ever presented or submitted by petitioner in this case.

DECISION
CTA CASE NO . 6402
Page 20 of 23

Although petitioner may have substantially complied with the substantiation

requirements for the donors,29 it however miserably failed to establish that the

Foundation has been complying with the substantiation requirements for the donees.

The significance of the aforesaid requirements is further bolstered by the fact

that in the Foundation 's Certificates of Registration dated October 29, 1993 and

January 10, 2002 , submission of its Annual Information Return with the lists of

donations and income received , activities and/or projects undertaken , projects and

amounts set aside, among others, is one of the terms and conditions 30 to be

compl ied with in order to entitle the donor (petitioner) to full deduction and the donee

(Foundation) to exemption from donor's tax pursuant to the applicable provisions of

the law. In view of the foregoing considerations , this Court is constrained to deny

petitioner's claim for the deduction of its series of donations for its failure to establish

with clear and convincing evidence that the Foundation complied with the

substantiation requirements set forth in Section 11 (B) of BIR-NEDA Regulations No .

1-81 , as amended .

In addition , neither an alleged Resolution 31 issued by the Foundation 's Board

of Trustees nor an express provision in the Foundation 's Articles of lncorporation 32

could establish that the level of its administrative expenses on an annual basis did

not exceed thirty (30%) percent of its total utilization during the subject taxable year.

Again, the same information should have been included in the Foundation 's Annual

Income Tax Return/Annual Information Report for purposes of the donor's full

29
By presenting Certificates of Donations and official receipts issued by the Foundation; Exhibits " K" to " DO",
inclusive.
30
As set forth on the reverse side of Exhibits "G" and "H"; Records, pp. 27 1-272.
31
Exhibit "A-I"; Rollo, p. Ill (as contained in the Secretary's Certificate, Exh ibit "A"). \~
32
Supra, Article EIGHT; Ro llo, p. 268. \fJ v
DECISION
CTA CASE NO. 6402
Page 21 of 23

deduction and the donee's exemption from donor's tax. Hence , We could not verify

such allegation .

On the remaining matters raised by petitioner in its administrative protest and

Petition for Review, particularly those pertaining to the disallowance of commission

expenses and salaries and wages expenses in the amounts of P7 ,500.00 and

P6 ,318.00, respectively, this Court agrees with respondent in disallowing the same

as deductions considering that there are discrepancies between the amounts stated

in the Alphalists and in the Financial Statements submitted by petitioner. Petitioner

should have at least explained why such discrepancies exist and attempted to

reconcile the same in order to be allowed as a valid deduction from its gross income.

Unfortunately, it failed to do so.

It is settled that deductions are construed strictly against the taxpayer claiming

it. He who claims a deduction must point to the specific provision of the statute

authorizing it, and he must be able to prove that he is entitled to it. As a general rule ,

deductions are strictly construed against the taxpayer claiming them and it is

incumbent upon the taxpayer to establish a clear right to tax exemption . Tax

exemptions are looked upon with disfavor.33

Furthermore, the Court notes that although the Assessment Notice 34 issued

against petitioner for deficiency income tax for the year 1997 recommended for a

25% surcharge, it failed to include the same. Thus, it must be modified to include a

25% surcharge pursuant to Section 248 of the NIRC of 1997, in addition to the

income tax due.

33
V. C. Mamalateo, Philippine Income Tax, First Ed., 2004, p.l73 (citing Western Minolco Corporation vs. Commissioner
of Internal Revenue, 124 SCRA 121 [ 1983]).
34
BlR Records, p. 455 .
DECISION
CT A CASE NO . 6402
Page 22 of 23

Likewise, a 20% delinquency interest 35 shall also be included accruing from

February 4, 2002 , the day petitioner received respondent's Final Decision 36

demanding the payment of the assessed deficiency income tax. Accordingly , the

subject deficiency assessment shall be recomputed as follows :

Taxable Income Per Return p 1,377 ,155.00

Add : Discrepancies Per Audit
Donations and Contributions p 4,323 ,685 .35
Commission 7,500.00
Salaries and Wages Expense 6 318 .00 4,337,503.35
Taxable Income Per Audit p 5,714 ,658 .35
Income Tax Rate 35%
Income Tax Payable Per Audit p 2,000 ,130.42
Less: Tax Paid Per Return 482,004 .00
Tax Still Due Thereon p 1,518 ,126.42
Add : 20% Interest (04-16-98 to 11 -26-01) 1,097 ,141 .07
25% Surcharge 379,531 .61

TOTAL AMOUNT DUE p 2,994,799.10

WHEREFORE, the subject Petition for Review is hereby DISMISSED for lack

of merit. The assailed Decision of the Commissioner of Internal Revenue dated

January 30, 2002 is hereby AFFIRMED with some modifications.

Accordingly, petitioner is ORDERED TO PAY respondent the amount of TWO

MILLION NINE HUNDRED NINETY FOUR THOUSAND SEVEN HUNDRED

NINETY NINE PESOS and 10/100 (P2,994,799.10) representing deficiency income

tax for the taxable year 1997, plus 20% delinquency interest per annum from

February 4, 2002 until such time the said amount is fully paid .

SO ORDERED.

E~. UY
A:~stice
35
Sec. 249 of the NlRC of 1997.
36
B!R Records, p. 522; Annex " G", Petition for Review.
DECISION
CT A CASE NO. 6402
Page 23 of 23

WE CONCUR:

a~~~.c~~Q ~~ ~
ca'UANITO C. CASTANED~JR. OLGi PALANCA-E~
Associate Justice Associate Just1ce

ATTESTATION

I attest that the conclusions in the above Decision were reached in

consultation before the case was assigned to the writer of the opinion of the Court's

Division .

a~V&c.~~ S1
VJUANITO C. CASTANEDA~ ffR.
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Article VIII , Section 13 of the Constitution , and the Division

Chairperson 's Attestation , it is hereby certified that the conclusions in the above

Decision were reached in consultation before the case was assigned to the write r of

the opinion of the Court.

~~~ ~
ERNESTO D. ACOSTA
Presiding Justice