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I. REMEDIES OF THE GOVERNMENT
A. Assessment and Collection Assessment precedes collection except when the unpaid tax is a tax due per return as in the case of a self-assessed income tax under the pay-as-you file system in which case collection may be instituted without need of assessment pursuant to Section 56 of the NIRC.
Sec. 56. Payment and Assessment of Income Tax for Individuals and Corporations. – (A) Payment of Tax. – (1) In General. — The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due.
(2) Installment Payment — When the tax due is in excess of Two Thousand Pesos (P2,000.00), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.
In cases where assessment is necessary, the primordial consideration is its final and unappealable nature. Collectibility of the tax liability attaches only when the assessment becomes final and unappealable.
An assessment contains not only a computation of tax liabilities but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by taxpayer. (CIR v. Pascor, 309 SCRA 402)
Commissioner’s recommendation letter cannot be considered as formal assessment of tax liability.
In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation by a revenue officer of the tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR examiner’s findings is not an assessment since it is yet indefinite. The recommendation letter of the Commissioner cannot be considered a formal assessment. Even a cursory perusal of the said letter would reveal three key points: 1. It was not addressed to the taxpayers. 2. There was no demand made on the taxpayers to pay the tax liability, nor a period for payment set therein. 3. The letter was never mailed or sent to the taxpayers by the Commissioner. In fine, the said recommendation letter served merely as the prima facie basis for filing criminal informations that the taxpayers had violated Sections 45(a) and (d), and 110, in relation to Section 100, as penalized under Section 255, and for violation of Section 253, in relation to Section 252 9(b) and (d) of the Tax Code. (Adamson v. Court of Appeals, 588 SCRA 27)
Presumption of Regularity of Assessment
CIR v. HON. COURT OF APPEALS, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION AND COURT OF TAX APPEALS
And ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION v. COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS 242 SCRA 289
FACTS:
On April 9, 1980, the Commissioner of Internal Revenue, acting on the basis of the report of the examiners of the Bureau of Internal Revenue (BIR), caused the service of an assessment notice and demand for payment of the amount of P12,391,070.51 representing deficiency ad valorem percentage and fixed taxes, including increments, for the taxable year 1975 against Atlas Consolidated Mining and Development Corporation (ACMDC). Likewise, on the basis of the BIR examiner’s report in another investigation separately conducted, the Commissioner had another assessment notice, with a demand for the payment of the amount of P13,531,466.80 representing the 1976 deficiency ad valorem and business taxes with P5,000.00 compromise penalty, served on ACMDC on September 23, 1980.
ACMDC protested both assessments but the same were denied. Assailing the tax liability imposed by the BIR, ACMDC elevated the matter to the Supreme Court, where one of the issues raised was the assessed contractor’s tax. ACMDC claimed that the leasing out of its personal properties was a mere isolated transaction, hence should not be subjected to contractor’s tax.
HELD:
ACMDC cannot validly claim that the leasing out of its personal properties was merely an isolated transaction. Its book of accounts shows that several distinct payments were made for the use of its personal properties such as its plane, motorboat and dump truck. The series of transactions engaged in by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that for the tax years 1975 and 1976 there were profits earned and reported therefor. It received a rental income of P630,171.56 for tax year 1975, and P2,450,218.62 for tax year 1976.
The allegation of ACMDC that it did not realize any profit from the leasing out of its said personal properties, since its income therefrom covered only the costs of operation such as salaries and fuel, is not supported by any documentary or substantial evidence. We are not, therefore, convinced by such disavowal.
Assessments are prima facie presumed correct and made in good faith. Contrary to the theory of ACMDC, it is the taxpayer and not the BIR who has the duty of proving otherwise. It is an elementary rule in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Verily, failure to present proof of error in assessments will justify judicial affirmance of said assessment.
Follow-up Letter Reiterating Demand for Payment Considered Notice of Assessment
REPUBLIC v. COURT OF APPEALS, and NIELSON & COMPANY, INC.
149 SCRA 351
FACTS:
In a demand letter dated 16 July 1955, the Commissioner of Internal Revenue assessed Nielson & Company deficiency taxes for the years 1949 to 1952, totaling P14,449.00. This demand was reiterated in three (3) more letters dated 24 April 1956, 19 September 1956, and 9 February 1960. On the theory that the assessment had become final and executory, the Commissioner filed a complaint for collection of the said amount with the then Court of First Instance.
The court a quo rendered a decision against Nielson & Company. On appeal to the Court of Appeals, the decision was reversed, on the ground that there was no proof of receipt by Nielson & Co. of the 16 July 1955 assessment. The BIR filed a petition for review on certiorari, asserting that the assessment letter must be presumed to have been received by Nielson in the ordinary course of mail. HELD:
[W]hile the contention of the petitioner (BIR) is correct that a mailed letter is deemed received by the addressee in the ordinary course of mail, still this is merely a disputable presumption, subject the controversy, and a direct denial of the reces thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee. xxx
Since the petitioner has not adduced proof that private respondent (Nielson & Co.) had in fact received the demand letter of 16 July 1955, it cannot be assumed that private respondent received said letter. Records, however, show that petitioner wrote private respondent a follow-up letter dated 19 September 1956, reiterating its demand for the payment of taxes as originally demanded in petitioner’s letter dated 16 July 1955. This follow-up letter is considered a notice of assessment in itself which was duly received by private respondent in accordance with its own admission.
Under Section 7 of Republic Act 1125, the assessment is appealable to the Court of Tax Appeals within thirty (30) days from receipt of the letter. The taxpayer’s failure to appeal in due time, as in the case at bar, makes the assessment in question final, executory and demandable. Thus, private respondent is now barred from disputing the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits.
Assessment Deemed Made
An assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. A revenue officer’s Affidavit merely contained a computation of respondents’ tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers.’
Meaning of Best Evidence
The “best evidence” envisaged in Section 16 of the 1977 NIRC (now Sec. 6 of the present NIRC), as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. Such evidence also includes data, record, paper. document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income: and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission.
The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer’s records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business. In this era of developing information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayer’s return.
In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment.
Section 6(B) of the National Internal Revenue Code provides:
Failure to Submit Required Returns, Statements, Reports and other Documents. – When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.
However, the best evidence obtainable does not include mere photocopies of records/documents. The BIR, in making a preliminary and final tax deficiency assessment against å taxpayer, cannot anchor the assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. Indeed, in United States v. Davey, the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a taxpayer’s return is being checked, the government is entitled to use the original records rather than be forced to accept purported copies which present the risk of error or tampering. (CIR v. Hantex Trading Co., Inc., 454 SCRA 301)
Assessment Based on Estimate: 50% Rule, In the Absence of Receipts to Prove Actual Amount of Expense Deduction
If there is showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowable in computing the taxpayer’s taxable income bearing heavily against the taxpayer whose inexactitude is of his own making. That disallowance of 50% of the taxpayer’s claimed deduction is valid.
Networth Method of Investigation
Determination of the taxpayer’s taxable income through the networth method of investigation is valid. This is authorized under Section 43 of the NIRC which provides:
The taxable income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer’s annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.
If a taxpayer commits a violation of the law, hiding his income to evade payment of taxes, the Government must be permitted to resort to all evidence or sources available to determine his said income, so that the tax may be collected for public purposes. There is and there should be a presumption of regularity accorded this action of the Collector of Internal Revenue in assessing the tax on the best evidence obtainable otherwise, it would be impossible to assess taxes due from a dishonest taxpayer.4 B. Remedies for Collection of Delinquent Taxes
Some of the important remedies of the government in collecting taxes under the National Internal Revenue Code are the following: 1. Distraint of personal property such as goods,
chattels, or effects, including stocks and other securities, debts, credits, bank accounts and interest in and rights to personal property, and levy upon real property and interest in
or rights to real property (Sec. 205); 2. Civil or criminal action (Sec. 205); 3. Compromise (Sec. 204); 4. Tax lien (Sec. 219); 5. Forfeiture (Sec. 224); 6. Civil penalties (Sec. 248).
PROCEDURE FOR ACTUAL DISTRAINT
The steps or procedure for actual distraint are outlined under Sections 208 to 212 of the NIRC, viz.:
Sec. 208. Procedure for Distraint and Garnishment. – The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects or other personal property distrained, a copy of which, signed by himself, shall be left either with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, or at the dwelling or place of business of such person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and note of the time and place of sale.
Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the taxpayer and upon the president, manager, treasurer or
1. Distraint and Levy
Distraint is a remedy whereby the collection of the tax is enforced on the goods, chattels, or effects of the taxpayer including other personal property of whatever character as well as stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property.
On the other hand, levy refers to the seizure of real properties and interest in or rights to such properties for the satisfaction of taxes due from the delinquent taxpayer. Levy can be made before, simultaneously, or after the distraint of personal property.
Both remedies are summary in nature and either may be pursued in the discretion of the authorities charged with the collection of tax independently, or simultaneously with civil and criminal action once the assessment becomes final and demandable. (Central Cement Corp. V. Commissioner, CTA Case No. 4312, December 21, 1988)
It bears to stress, however, that the remedy of distraint and levy shall not be availed of where the amount of the tax involved is not more than one hundred pesos (P100.00).
(a) Actual and Constructive Distraint. — Under Section 206, the Commissioner, to safeguard the interest of the Government, may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is: 1. retiring from any business subject to the tax;
intending to leave the Philippines or to remove his property therefrom or to hide or conceal his
property; 3. intending to perform any act tending to obstruct
the proceedings for collecting the tax due or which may be due from him.
other responsible officer of the corporation, compa association, which issued the said stocks or securită
Debts and credits shall be distrained by leavin with the person owing the debts or having in h possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The warran of distraint shall be sufficient authority to the person owning the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits.
Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. (208)
Sec. 209. Sale of Property Distrained and Disposition of Proceeds. – The Revenue District Officer or his duly authorized representative, other than the officer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the distraint is made, specifying the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice to the owner or possessor of the property as above specified and the publication or posting of such notice. One place for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained.
At the time and place fixed in such notice the said revenue officer shall sell all the goods, chattels, or effects, or other personal property, including stocks
COLLECTOR OF INTERNAL REVENUE v. ROBERTA FLORES VDA. DE CODINERA, WENCESLAO CODINERA, PIO CODINERA AND COURT OF TAX APPEALS
102 Phil. 1165
FACTS: . Appeal from the decision of the Court of Tax Appeals. The case hinges on whether the attachment levied upon in Civil Case No. 4862 barred the enforcement of the warrant of distraint issued by the Collector of Internal Revenue.
HELD:
Property levied upon by the order of a competent court may, with the consent thereof, be subsequently distrained, subject to the prior lien of the attachment creditor. The attachment merely deprives the Collector of Internal Revenue or his agents of the power to divest the Court of its jurisdiction over said property. It does not impair such rights as the Government may have for the collection of taxes. While the lien for taxes must be recognized and enforced, the orderly administration of justice requires this to be done by and under the sanction of the court.
PROCEDURE ON LEVY OF REAL PROPERTY
Sec. 207(B). Levy on Real Property. – After the expiration of the time required to pay the delinquent tax or delinquent revenue as prescribed in this Section, real property may be levied upon, before, simultaneously, or after the distraint of personal property belonging to the delinquent. To his end, any internal revenue officer designated by the Commissioner or his duly authorized representative shall prepare a duly authenticated certificate showing the name of the taxpayer and the amounts of the tax and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines.
Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or the city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question.
Sec. 213. Advertisement and Sale. — Within twenty (20) days after the levy, the officer conducting the proceedings shall proceed to advertise the property or a usable portion thereof as may be necessary to satisfy the claim and cost of sale; and such advertisement shall cover a period of at least thirty (30) days. It shall be effectuated by posting a notice at the main entrance of the municipal building or city hall and in a public and conspicuous place in the barrio or district in which the real estate lies and by publication once a week for three (3) consecutive weeks in a newspaper of general circulation in the municipality or city where the property is located. The advertisement shall contain a statement of the amount of taxes and penalties so due and the time and place of sale, the name of the taxpayer against whom taxes are levied, and a short description of the property to be sold. At any time before the day fixed for the sale, the taxpayer may discontinue all the proceedings by paying the taxes, the sale shall entrance of the
ises to be sold, 11 determine and
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penalties and interest. If he does not do so, the sai proceed and shall be held either at the main entrance municipal building or city hall, or on the premises to be as the officer conducting the proceedings shall determis as the notice of sale shall specify.
Within five (5) days after the sale, a return bu 11 distraining or levying officer shall be entered upo records of the Revenue Collection Officer, the Reve District Officer and the Regional Director. The Reve Collection Officer, in consultation with the Revenue Distr Officer, shall then make out and deliver to the purchaser certificate from his records, showing the proceedings of the sale, describing the property sold, stating the name of the purchaser and setting out the exact amount of all taxes penalties and interest: Provided, however, That in case the proceeds of the sale exceeds the claim and cost of sale, the excess shall be turned over to the owner of the property.
The Revenue Collection Officer, upon approval by the Revenue District Officer may, out of his collection advance an amount sufficient to defray the costs of collection by means of the summary remedies provided for in this Code, including the preservation or transportation in case of personal property, and the advertisement and subsequent sale, both in cases of personal and real property including the improvements found on the latter. In his monthly collection reports, such advances shall be reflected and supported by receipts.
Sec. 214. Redemption of Property Sold. – Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties and interest thereon from the date of delinquency to the date of sale, together with interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of purchase to the date of redemption, and such payment shall entitle the person paying to the delivery of the certificate issueu to the purchaser and a certificate from the said Revenue, District Officer that he has thus redeemed the property, anu SOME PRINCIPLES GOVERNING DISTRAINT AND LEVY
(a) The distraint and levy shall be effected anytime the situation so demands but only after reasonable efforts have been exerted to collect the tax by ordinary methods of collection.
(b) Distraint and levy should be resorted to before court action although it may be done simultaneously.
(c) If there is already a court action, a warrant of distraint and levy should be issued simultaneously with such filing.
(d) Warrant of distraint and levy shall not be issued
for the collection only of a compromise penalty for the violation of internal revenue laws and regulations.
(e) A notice of tax lien should be filed with the Office of the Register of Deeds before or simultaneously with the issuance of a warrant of distraint and levy.
Any taxpayer whose property has been placed under constructive distraint, who sells, transfers, encumbers or in any way disposes of said property, or any part thereof, without the knowledge and consent of the Commissioner, shall, upon conviction for each act or omission, be punished by a fine not less than twice the value of the property so sold, encumbered, or disposed of, but not less than five thousand pesos (P5,000.00), or suffer imprisonment of not less than two (2) years and one (1) day but not more than four (4) years or both. (Sec. 276) Any person who fails or refuses to surrender property placed under distraint and levy shall be liable in his own person and estate to the Government in a sum equal to the value of the property or rights not so surrendered but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such warrant had been issued, together with the costs and interest if any, from the date of such warrant. In addition, such person shall, upon conviction for each act or omission, be punished by a fine of not less than five thousand pesos (P5,000.00), or suffer imprisonment of not less than six (6) months and one (1) day but not more than two (2) years, or both. (Sec. 277) (h) The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected. (Sec. 217)
2. Civil Action
A civil action is resorted to when a tax liability becomes collectible, that is, the assessment becomes final and unappealable, or the decision of the Commissioner has become final, executory, and demandable. This occurs when: 1. A tax is assessed and the taxpayer fails to file an administrative protest by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment (Sec. 228, NIRC); 2. A protest against the assessment is filed by the taxpayer but the Commissioner’s decision denying in whole or in part the said protest, was not appealed to the Court of Tax Appeals within thirty (30) days from receipt of such decision.
It must be stressed that within sixty (60) days from filing of the protest, all relevant supporting documents should be submitted, otherwise, the assessment shall become final. Failure on the part of the Commissioner to act upon a protest within one hundred eighty (180) days from the submission of the documents shall be considered a denial of the protest; the taxpayer must appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the 180 days; otherwise, the assessment shall become final and demandable. (Sec. 228, Ibid.)
In this connection, the ruling of the Supreme Court in Republic v. Lim Tian Teng Sons, Inc., 16 SCRA 584, bears significance. In that case, the High Court held that when the Commissioner did not reply to the taxpayer’s request for reconsideration and instead referred the case to the Solicitor General for judicial collection, this was indicative of his decision against reinvestigation. This is therefore another instance where the Commissioner’s action is in effect a decision of denial which is appealable to the Court of Tav Appeals. Also, in a similar case, it was ruled that the filing of a civil action in court to collect a tax which was the subject of a pending protest in the BIR was a justifiable basis for the taxpayer to appeal to the Court of Tax Appeals and to move for the dismissal in the trial court of the Government’s action to collect the tax under dispute. (Yabes v. Flojo, 115 SCRA 278).
But once an action for collection is filed with the regular court, the taxpayer can no longer assail the legality or validity of the assessment. A disputed assessment falls within the exclusive jurisdiction of the Court of Tax Appeals. (CIR v. Lillia Yusay Gonzales, 18 SCRA 757) Likewise, the prescription of the Government’s right to assess is no longer available as a defense in a civil action for collection; the same should have been ventilated before the Court of Tax Appeals. (Augusto Basa v. Republic, 138 SCRA 34) But the right of the Government to object to the defense of prescription may be waived if it litigated the issue of prescription and submitted said issue for the resolution of the court. (Republic v. Ker & Co., 18 SCRA 207)
A proceeding in court after the collection of tax may be begun without assessment
The law is clear. When fraudulent tax returns are involved, a proceeding in court after the collection of such tax may be begun without assessment. In the case of Adamson v. Court of Appeals, 588 SCRA 27, the private respondents filed the capital gains tax return and the VAT returns, and paid the taxes they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited.