Case Summary (G.R. No. L-26379)
Facts
– July 7, 1959: Reagan assigned to Clark Air Base, Pampanga.
– April 22, 1960: He imported a 1960 Cadillac tax-free (landed cost US$6,443.83).
– July 11, 1960: With Base Commander’s permit, he sold the vehicle for US$6,600 to Pfc. Willie Johnson, Jr., at Clark Air Base. Johnson immediately resold it in Manila for ₱32,000.
– Post-transaction: The Commissioner computed taxable gain of ₱17,912.34 and tax due of ₱2,979.00. Reagan paid under protest and sought refund, then filed before the Court of Tax Appeals (CTA).
– May 12, 1966: CTA denied the refund, holding the sale taxable. Reagan appealed to the Supreme Court.
Issue
Whether a sale of personal property effected within the leased U.S. military base in the Philippines occurs on “foreign soil” and is therefore beyond Philippine taxing jurisdiction.
Applicable Law
– 1935 Philippine Constitution (in force in 1969) – Supreme sovereignty and territorial jurisdiction.
– National Internal Revenue Code (Section 34 on income tax computation; Section 186 on sales tax).
– Military Bases Agreement of 1947 (Act XII, exemption of certain U.S. nationals from Philippine income tax except on Philippine‐source income).
– Precedents on territorial sovereignty and obiter dicta (Schooner Exchange v. M’Faddon; Brown v. Duchesne; Co Po v. CIR; Saura Import & Export Co. v. Meer).
Court’s Ruling
The Supreme Court affirmed the CTA decision. The automobile sale occurred within Philippine territory and Reagan remained liable for the resulting income tax.
Rationale
- Sovereignty over leased military bases remains with the Philippines unless expressly limited by treaty.
- The Military Bases Agreement grants the U.S. certain jurisdiction by comity but does not convert base areas into foreign territory or remove Philippine power to tax transactions within them.
- Prior references to bases as “foreign soil” were mere legal fictions or obiter dicta, intended to prevent tax evasion, and cannot override the clear terms of constitutional sovereignty and the Agreement.
- The exemption claus
Case Syllabus (G.R. No. L-26379)
Facts of the Case
- William C. Reagan, a U.S. citizen and civilian employee of Bendix Radio, was assigned to Clark Air Base, Philippines, to provide technical assistance to the U.S. Air Force.
- On April 22, 1960, Reagan imported a tax-free 1960 Cadillac with accessories valued at US$6,443.83 (including freight, insurance, and other charges).
- On July 11, 1960, Reagan obtained permission from the Base Commander to sell the car to a member of the U.S. Armed Forces or a U.S. citizen employed at U.S. bases in the Philippines.
- He sold the Cadillac the same day for US$6,600 to Pfc. Willie Johnson, Jr. at Clark Air Base; Johnson subsequently sold it in Manila for P32,000.
- The Commissioner of Internal Revenue computed Reagan’s net taxable income from the sale at P17,912.34 (after deducting landed cost and personal exemption) and assessed income tax of P2,979.00.
Procedural Posture
- Reagan paid the assessed P2,979.00 and filed for a refund with the Commissioner.
- While the refund request was pending, he petitioned the Court of Tax Appeals (CTA) to recover P2,979.00 plus interest.
- The CTA denied the refund, ruling the assessment and payment valid; Reagan appealed to the Supreme Court.
Applicable Law and Citations
- National Internal Revenue Code: establishes rules for income tax assessment and allowable exemptions.
- Military Bases Agreement of 1947 (Act XII): exempts U.S. nationals employed on Philippine bases from Philippine income tax except on Philippine‐sourced income.
- Key judicial authorities on territorial jurisdiction:
• Schooner Exchange v. McFaddon (7 Cranch 116, 1812)
• Brown v. Duchesne (19 How. 183, 1857)
• In re Debs (158 U.S. 564, 1894)
• Cunard Steamship Co. v. Mellon (262 U.S. 100, 1922) - Philippine jurisprudence on similar issues:
• Sau