REPUBLIC v.

MARSMAN
Appeal from the decision of the Court of First Instance of Manila, the Honorable Conrado,
M. Vasquez, presiding, sentencing defendants-appellants to pay the amounts of
P44,134.35, P6,603.20 and P456.12, plus legal interest from August 26, 1959, on the first
item, and, from September 5, 1958, on the later two, representing sales taxes and forest
charges, together with surcharges and penalties.
As found by His Honor, the factual setting of the decision is as follows:
Defendant corporation was a timber licensee holding Timber Licensee Agreement No.
37-A, with concessions in the Municipality of Basud and Mondazo, Camarines Norte.
Sometime before October 15, 1953 an investigation was conducted on the business
operation and activities of the corporation leading to the discovery that certain taxes were
due (from) it on logs produced from its concession. On October 15, 1953, the Deputy
Collector of Internal Revenue demanded the payment of P13,136.00 representing forest
charges due from May 18, 1950 to September 30, 1953, and a surcharge of 25% (Exh.
M). On September 13, 1954, after further investigation another assessment was sent to
the defendant corporation by the Bureau of Internal Revenue demanding from it the total
sum of P45,541.66 representing deficiency sales tax, forest charges, surcharges and
penalties (Exh. A). On November 8, 1954 another assessment was addressed to the
defendant corporation for the payment of P456.12 as 25% surcharge for discharging
lumber without permit (Exh. P). The three assessments totalling P59,133.78 are the
subject matter of the instant case for collection.
xxx xxx xxx
The-contention of the defendant that the assessment in question have not yet become
final and executory is not borne out by the record. The Bureau of Internal Revenue made
its first demand for the payment of P13,136.00 as forest charges and surcharges in the
letter dated October 15, 1953 (Exh. M). After further investigation, a second assessment
in the total amount of P45,541.66 was demanded from the defendant corporation
representing sales tax and surcharges, and is contained in the letter dated September
13, 1954 (Exh. A). The third assessment for the payment of P456.12 representing 25%
surcharge for discharging lumber without permit was made on November 8, 1954 (Exh.
B).
The first acknowledgment by the defendant corporation of its receipt of assessment
contained in the letter of September 13, 1954, Exh. A, was the letter of the defendant
corporation under the signature of its counsel, Atty. Pedro L. Moya dated December 28,
1954, wherein it is requested that said defendant be furnished with an itemized statement
of the said taxes and wherein notice is served of its intention to question the validity and
the legality of the assessments and to appear before the Conference Staff of the Bureau
of Internal Revenue in connection with the said tax (Exhibit B). In reply to the letter, Exhibit
B, the Bureau of Internal Revenue wrote Atty. Moya a letter dated February 11, 1955
informing him that before the case may be acted upon by the Conference Staff, it was
necessary that the defendant corporation comply within 10 days from date of said letter,
with the provisions of Dept. Order No. 213 dated November 2, 1954 which required,
among others, that requests for reinvestigation or reexamination of tax assessments shall
be made in writing under oath of the taxpayer concerned, specifying the ground or
grounds relied upon for the revision of the assessment and accompanied by such
documents and other documents relied upon in support of the request; and that, as a
general rule, the revision will be granted only upon payment of one-half of the total
assessments and upon filing of a bond to guarantee the payment of the balance of the
tax (Exhibit C). Acknowledgment of Exhibit C was made by Atty. Moya in the latter's letter
of February 23, 1955 wherein, for the reasons therein stated, he requested exemption
from the requirements contained in the letter Exhibit C (Exhibit D). In Reply to Exhibit D,
the Collector of Internal Revenue wrote Atty. Moya on May 3, 1955 informing him that his
request to exempt his client from the requirements contained in the letter dated February
11, 1955, cannot be favorably considered and that in order that the Conference Staff may
be directed to hear the case on the merits, the said requirements must be complied with
within five days from receipt of said letter; otherwise, the "assessment will be considered
final" (Exhibit E). A follow-up letter dated June 4, 1955, was addressed to Atty. Moya after
discovering that the requirements mentioned in the letters dated February 11, 1955 and
March 3, 1955 have not been complied with inspite of the considerable length of time that
had already elapsed (Exhibit F). In the last paragraph of the said letter, Exhibit F, the
defendant corporation was warned that unless the aforementioned requirements are
complied with within five (5) days from receipt, the "case will be considered abandoned
and appropriate action will be taken in accordance with law". Again on November 14,
1955, after discovering that the letters dated February 11, 1955, March 3, 1955 and June
4, 1955 have remained unheeded by the defendant corporation, the latter was given
another chance of complying with the requirements mentioned within five days from
receipt of said letter otherwise, the Bureau of Internal Revenue "will be constrained to
enforce the immediate collection of the deficiency percentage tax and forest charges due"
(Exhibit G).
On April 27, 1956, the Bureau of Internal Revenue issued "final tax notices" to the
defendant corporation. Although the letters containing the "final tax notices" were not
presented in evidence, the defendants admit having received the same, as shown by the
contents of defendant corporation's letters dated May 10, 1956, Exhibit H, and August 7,
1956, Exhibit J. In said Exhibit H defendant corporation again protested the assessment
of P45,541.66 and reiterated its request for specification of the items disputing the
assessment in question. It further requests for a period of 30 days from the receipt of the
specifications within which to consider its tax liability, further reserving its right to contest
the legality or validity of the assessment or any particular items thereof within the said
period of 30 days. Defendant corporation also protested the sending of final notices and
requested that they be countermanded or withheld. Finding no merit in the protests of the
defendant corporation, a warrant of distraint and levy was issued against it by the Bureau
of Internal Revenue on July 3, 1956 (Exhibit O).
On August 3, 1956, defendant corporation again wrote the Collector of Internal Revenue
acknowledging the receipt of the warrant of distraint and levy served upon it and
reiterating its request for a specification of the different items of the assessment, subject
to the right to contest the legality and validity of the same within 30 days after receipt of
said specifications (Exh. J). The record does not show what action was taken on the
request contained in said letter on August 3, 1956. The next communication appearing in
the record is that of the Commissioner of Internal Revenue dated July 30, 1959,
addressed to the defendant corporation demanding on the letter the payment of the
assessment of P45,541.66 which has remained unpaid, and informing the said
corporation that if they do not settle said tax obligation within five days from receipt
thereof, the Bureau of Internal Revenue will be constrained to file an action in Court for
the collection thereof without further notice (Exhibit I). Defendant corporation replied to
Exhibit I in a letter dated August 17, 1959 stating that it needed more time to go over the
records and vouchers, and requesting for an extension of 10 days (Exhibit E). In another
letter of same date, the defendant corporation reiterated its exception to the validity and
legality of the assessment against it in the sum of P45,541.66 and its request for a detailed
statement of the transactions involved (Exhibit L). [Record on Appeal pp. 188-189, 190-
195.]
According to the Record on Appeal, and as additionally stated also by the trial court, the
original complaint filed on September 5, 1958 prayed for the payment of only P13,695.96,
and it was only in an amended complaint filed on August 26, 1959 and admitted on
September 23, 1959 that, for the first time, the amount of P59,133.78 was judicially
demanded to be paid.
Upon these facts, appellants now complain that
I
THE LOWER COURT ERRED IN DECLARING THAT THE NOTICES OF THE
COMMISSIONER OF INTERNAL REVENUE DATED APRIL 27, 1956 WERE THE
"ASSESSMENTS" THAT BECAME FINAL AND EXECUTORY.
II
THE LOWER COURT ERRED IN DECLARING THAT THE GOVERNMENT'S RIGHT TO
ASSESS AND COLLECT THE TAXES FOR THE YEARS 1947 TO SEPTEMBER 23,
1949 HAS NOT PRESCRIBED.
III
THE LOWER COURT LIKEWISE ERRED IN DECLARING THAT THE GOVERNMENT'S
RIGHT TO COLLECT THE SUM OF P45,541.66 HAS NOT PRESCRIBED.
IV
THE LOWER COURT FURTHER ERRED IN NOT DECLARING THAT SUIT AGAINST
F.H. BURGESS IN HIS CAPACITY AS LIQUIDATOR OF MARSMAN DEVELOPMENT
COMPANY HAS PRESCRIBED AND IN ORDERING HIM TO PAY THE SUMS
CONTAINED IN ITS DECISION.
The Court does not agree.
Anent the first assignment of error, it may be stated that regardless of what might have
been alleged in appellee's pleadings and memoranda, the facts proven by evidence,
which are not alleged to have been objected to as varying supposed judicial admissions,
unmistakably show that when Atty. Pedro L. Moya acknowledged receipt on December
28, 1954, on behalf of appellant corporation, of the Bureau of Internal Revenue's
assessments of September 13, 1954 and November 8, 1954, requesting at the same time
for a reinvestigation before the Conference Staff, he was informed that his request for
investigation would not be given due course unless his client priorly complied within ten
(10) days from Februaxy 11, 1955, the date of the letter of the Bureau, with the provisions
of Department Order No. 213, dated November 2, 1954, which required inter alia, that
requests for reinvestigation or reexamination of tax assessments should be made in
writing and under oath of the taxpayer concerned, specifying the ground or grounds relied
upon for the requested revision and accompanied by the documents relied upon, in
support of the request, as well as by the payment of one-half of the total assessments,
plus a bond to guarantee payment of the balance, but appellants failed to comply with
said conditions: that in reply to Atty. Moya's request for exemption from the Department
order, on March 3, 1955 (not May), the attorney was advised that his request was denied
and that if the corporation failed to comply therewith within five (5) days from receipt of
the letter, "the assessment (would) be considered final"; that on June 4, 1955, said Atty.
Moya was reminded in writing that the previous demands had not been properly attended
to, with the warning that should appellants further fail to comply with the requirements in
the letter of February 11, 1955, within five (5) days from receipt thereof, the "case (would)
be considered abandoned and appropriate action (would) be taken in accordance with
law"; that even as late as November 14, 1955, the corporation was again advised to
comply with the earlier communications of February 11, 1955, March 3, 1955 and June
4, 1955, within five days, otherwise, the Bureau of Internal Revenue would "be
constrained to enforce immediate collection of the deficiency percentage tax and forest
charges due"; that as nothing was done by it to comply with this last letter, the Bureau of
Internal Revenue issued, on April 27, 1956, "final tax notices" to it, and all that the latter
did after receipt thereof was to reiterate, by its letters of May 19, 1956 and August 7,
1956, its request for specification of the items involved in the assessment and for another
period of 30 days within which to consider its tax liabilities, reserving once more its right
to contest the legality or validity of the assessment and to protest the issuance of the "final
tax notices"; that evidently tired of awaiting compliance by the said appellant, the Bureau
of Internal Revenue issued on July 3, 1956 a warrant of distraint and levy against it, which
it acknowledged on August 3, 1956, only to reiterate again its position previously stated
of asking for specification and reserving its right to contest the validity of the assessment;
that, finally, on July 30, 1959, after three years, the Commissioner of Internal Revenue
made extrajudicial demand for payment of the amounts in question within five (5) days,
and since no payment came, and instead, defendants asked for more time to go over the
records and, under separate cover, questioned for the nth time, the validity of the
assessment, the present action was filed.
Under these circumstances, it is plain that His Honor committed no error in holding that
the period to question the tax assessments herein involved had already expired when the
Commissioner of Internal Revenue initiated this suit against defendants. Defendant
corporation aknowledged receipt of the said assessments way back on December 28,
1954, and, in fact, it requested for a reinvestigation before the Conference Staff, but when
the Bureau demanded compliance with the prerequisites aforementioned of such
reinvestigation, the corporation failed to comply. The corporation did ask for exemption,
but when this request was denied, again there was no compliance. In view of such non-
compliance, in its letter of March 3, 1955, the Bureau unequivocally warned the
corporation that should it fail further to comply, within five days from receipt thereof, the
"assessments (would) be considered final". still no compliance came. Subsequent follow-
up letters brought no better results.
As it appears, therefore, appellant corporation, by its own omission, made it impossible
for the Bureau of Internal Revenue to act on its motion for reconsideration. Not that it
would have otherwise mattered, for it has been held that the mere filing of such a motion
does not suspend the running of the period for the collection of the tax, 1 which implies
that any assessment made by the Bureau is supposed to be final and executory, insofar
as the taxpayer is concerned, unless revised by the Bureau in accordance with law and
regulations, but it is to be emphasized that a taxpayer cannot delay the collection of taxes
by the simple expedient of barely asking for clarification or reconsideration, very often
unnecessary and unwarranted, without doing anything to comply with the statutory and
reglementary requirements for the reconsideration of the assessment made against him.
In any event, since appellant corporation did nothing from December, 1954 when it
acknowledged receipt of the assessment now impugned to appeal the same, if such an
appeal was possible, to the Court of Tax Appeals, even after it was warned by the Bureau
of Internal Revenue that its failure to comply with the requirements for reconsideration
within five (5) days would result in its being "considered" final, We find no merit in
appellants' posture that the assessments here in question has not yet become final and
executory. Consequently, overruling of appellants' first assignment of error is clearly in
order.
In their second assignment of error, appellants raise the issue of prescription. They point
out that the Collector of Internal Revenue had only five years within which to assess the
percentage and forest charges herein involved. Since it does not appear, however, that
appellant corporation had filed any return in relation to the taxes herein involved, and it
was incumbent upon appellants to show that such a return had been submitted,2 We find
the following holding of His Honor to be fully in accordance with law:
Defendants' contention that the right to assess the percentage and forest charges for the
period from 1947 to September 23, 1949 had already prescribed is based on the provision
of Section 231 of the Revenue Code which requires the Collector of Internal Revenue to
assess the tax within the period of five years. The Court agrees with the plaintiff that said
Section 231 is not applicable in this case inasmuch as defendant corporation did not file
returns for the taxes in question. The pertinent provision applicable herein is Section 332
(a) which provides that "in case of a false or fraudulent return or of a failure to file a return,
the tax may be assessed ... at anytime within ten years after the discovery of the falsity,
fraud or omission." The assessments made on October 15, 1953, September 13, 1954,
and November 3, 1954 were all within the aforecited 10-year period for the assessment
of the tax.
Even if the Court were to consider, as appellants suggest, the fact brought out in their
brief but not found by the trial court that what are being sought to be collected are
deficiency taxes, thereby implying a return must have been filed, nothing can he gained
by appellants, for in order that the filing of a return may serve as the starting point of the
period for the making of an assessment, the return must be as substantive complete as
to include the needed details on which the full assessment may be made, and appellants
have not shown that such was the nature of the return they would infer had been filed by
the corporation.3
Appellants' third assignment of error does not require any extended discussion. The
argument thereunder that the judicial action for the recovery of the bigger amount of
P45,541.66 was not filed within five (5) years from September 13, 1954, the date of the
earliest assessment, has neither factual nor legal basis. As aptly explained by his Honor,
such argument proceeds from the erroneous premises that because the amended
complaint in which the said amount was first alleged and demanded was formally
admitted by the court only on September 23, 1959 and that the filing of said amended
complaint on August 26, 1959 is immaterial. While in the procedural sense, especially in
relation to the possible necessity of and time for the filing of responsive and other
corresponding pleadings, an amended complaint is deemed filed only as of the date of its
admission, nothing in Breslin v. Luzon, 84 Phil. 625, relied upon by appellant, was
intended to modify the self-evident proposition that for practical reasons and to avoid the
complications that may rise from undue delays in the admission thereof, such an
amended complaint must be considered as filed, for the purposes of such a substantive
matter as prescription, on the date it is actually filed with the court, regardless of when it
is ultimately formally admitted by the court. After all, the only purpose of requiring leave
of and formal admission by the court of an amended pleading after issues have already
been joined as to the original ones is to prevent the injection of other issues which might
either to be considered as barred already or made the subject of another proceeding, if
they are not anyway indispensable for the resolution of the original ones and no
unnecessary multiplicity of suits would result; so, when the court ultimately admits the
amendment, the legal effect, for substantive purposes, of such admission retroacts as a
rule to the date of its actual filing.
Appellants' last assignment of error was disposed of by the trial court this wise:
The defendants further contend that the present action is already barred under section
77 of the Corporation Law, Act No. 1459, as amended, which allows the corporate
existence of a corporation to continue only for three years after its dissolution, for the
purpose of presenting or defending suits by or against it, and to settle and close its affairs.
They point out that inasmuch as the Marsman Development Co. was extra-judicially
dissolved on April 23, 1954, a fact admitted in the amended complaint, the filing of both
the original complaint on September 8, 1958 and the amended complaint on August 26,
1956 was beyond the aforesaid three-year period.
The record shows that the filing of the amended complaint was intended, among others,
to include as a party defendant, in an alternative capacity, Mr. F.H. Burgess, who is the
liquidator of the Marsman Development Co. Although it is an admitted fact that the
defendant corporation was extrajudicially dissolved on April 23, 1954, there is no claim
that the affairs of said corporation had already been finally liquidated or settled. Evidently,
Mr. F.H. Burgess is still continuing in his aforesaid capacity as liquidator of the Marsman
Development Co. While section 77 of the Corporation Law provides for a three-year
period for the continuation of the corporate existence of the corporation for purposes of
liquidation, there is nothing in said provision which bars an action for the recovery of the
debts of the corporation against the liquidator thereof, after the lapse of the said three-
year period.
We agree with His Honor. The stress given by appellants to the extinction of the corporate
and juridical personality as such of appellant corporation by virtue of its extra-judicial
dissolution which admittedly took place on April 23, 1954 is misdirected. While Section
77 of the Corporation Law does provide that:
Every corporation whose charter expires by its own limitation or is annulled by forfeiture
or otherwise, or whose corporate existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of prosecuting and defending
suits by or against it and of enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established.
the next provision, Section 78, adds for clarification:
At any time during said three years said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of members, stock-holders, creditors,
and others interested. From and after any such conveyance by the corporation of its
property in trust for the benefit of its members, stockholders, creditors, and others in
interest, all interest which the corporation had in the property terminates, the legal interest
vests in the trustee, and the beneficial interest in the members, stockholders, creditors,
or other persons in interest.
It is to be recalled that the assessments against appellant corporation for deficiency taxes
due for its operations since 1947 were made by the Bureau of Internal Revenue on
October 15, 1953, September 13, 1954 and November 8, 1954, such that the first was
before its dissolution and the last two not later than six months after such dissolution.
Thus, in whatever way the matter may be viewed, the Government became the creditor
of the corporation before the completion of its dissolution by the liquidation of its assets.
Appellant F.H. Burgess, whom it chose as liquidator, became in law the trustee of all its
assets for the benefit of all persons enumerated in Section 78, including its creditors,
among whom is the Government, for the taxes herein involved. To assume otherwise
would render the extra-judicial dissolution illegal and void, since, according to Section 62
of the Corporation Law, such kind of dissolution is permitted only when it "does not affect
the rights of any creditor having a claim against the corporation." It is immaterial that the
present action was filed after the expiration of three years after April 23, 1954, for at the
very least, and assuming that judicial enforcement of taxes may not be initiated after said
three years despite the fact that the actual liquidation has not been terminated and the
one in charge thereof is still holding the assets of the corporation, obviously for the benefit
of all the creditors thereof, the assessment aforementioned, made within the three years,
definitely established the Government as a creditor of the corporation for whom the
liquidator is supposed to hold assets of the corporation. And since the suit at bar is only
for the collection of taxes finally assessed against the corporation within the three years
invoked by appellants, their fourth assignment of error cannot be sustained. As to the
allegation that appellant Burgess has not in fact received any property or asset of the
corporation, that is a matter that can well be taken care of in the execution of the judgment
which may be rendered herein, albeit it seems some kind of fraud would be perceptible,
if the corporation had been dissolved without leaving any assets whatsoever with the
liquidator.
ACCORDINGLY, the judgment of the trial court is affirmed with costs against the
appellants.
 CIR v. PHOENIX ASSURANCE
From a judgment of the Court of Tax Appeals in C.T.A. Cases Nos. 305 and 543,
consolidated and jointly heard therein, these two appeals were taken. Since they involve
the same facts and interrelated issues, the appeals are herein decided together.
Phoenix Assurance Co., Ltd., a foreign insurance corporation organized under the laws
of Great Britain, is licensed to do business in the Philippines with head office in London.
Through its head office, it entered in London into worldwide reinsurance treaties with
various foreign insurance companies. It agree to cede a portion of premiums received
on original insurances underwritten by its head office, subsidiaries, and branch offices
throughout the world, in consideration for assumption by the foreign insurance
companies of an equivalent portion of the liability from such original
insurances.1wph1.t
Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded portions of
the premiums it earned from its underwriting business in the Philippines, as follows:
Ye
Amount Ceded
ar
195
P316,526.75
2
195
P246,082.04
3
195
P203,384.69
4
upon which the Commissioner of Internal Revenue, by letter of May 6, 1958, assessed
the following withholding tax:
Ye
Withholding Tax
ar
195
P 75,966.42
2
195
59,059.68
3
195
48,812.32
4

Tot
P183,838.42
al
=============
On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1950, claiming therein, among others, a deduction of P37,147.04 as net addition to
marine insurance reserve equivalent to 40% of the gross marine insurance premiums
received during the year. The Commissioner of Internal Revenue disallowed
P11,772.57 of such claim for deduction and subsequently assessed against Phoenix
Assurance Co., Ltd. the sum of P1,884.00 as deficiency income tax. The disallowance
resulted from the fixing by the Commissioner of the net addition to the marine insurance
reserve at 100% of the marine insurance premiums received during the last three
months of the year. The Commissioner assumed that "ninety and third, days are
approximately the length of time required before shipments reach their destination or
before claims are received by the insurance companies."
On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1952, declaring therein a deduction from gross income of P35,912.25 as part of the
head office expenses incurred for its Philippine business, computed at 5% on its gross
Philippine income.
On August 30, 1955 it amended its income tax return for 1952 by excluding from its
gross income the amount of P316,526.75 representing reinsurance premiums ceded to
foreign reinsurers and further eliminating deductions corresponding to the coded
premiums. The amended return showed an income tax due in the amount of P2,502.00.
The Commissioner of Internal Revenue disallowed P15,826.35 of the claimed deduction
for head office expenses and assessed a deficiency tax of P5,667.00 on July 24, 1958.
On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1953 and claimed therein a deduction from gross income of P33,070.88 as head office
expenses allocable to its Philippine business, equivalent to 5%, of its gross Philippine
income. On August 30, 1955 it amended its 1953 income tax return to exclude from its
gross income the amount of P246,082.04 representing reinsurance premiums ceded to
foreign reinsurers. At the same time, it requested the refund of P23,409.00 as overpaid
income tax for 1953. To avoid the prescriptive period provided for in Section 306 of the
Tax Code, it filed a petition for review on April 11, 1956 in the Court of Tax Appeals
praying for such refund. After verification of the amended income tax return the
Commissioner of Internal Revenue disallowed P12,304.10 of the deduction representing
head office expenses allocable to Philippine business thereby reducing the refundable
amount to P20,180.00.
On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1954 claiming therein, among others, a deduction from gross income of P99,624.75 as
head office expenses allocable to its Philippine business, computed at 5% of its gross
Philippine income. It also excluded from its gross income the amount of P203,384.69
representing reinsurance premiums ceded to foreign reinsurers not doing business in
the Philippines.
On August 1, 1958 the Bureau of Internal Revenue released the following assessment
for deficiency income tax for the years 1952 and 1954 against Phoenix Assurance Co.,
Ltd.:
1952
Net income per audited return P 12,511.61
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . . . . P 35,912.25
Amount allowed . . . . . . . . . . . . 20,085.90 P 15,826.35

Net income per investigation P 28,337.96

Tax due thereon P 5,667.00

===========
1954
Net income per audited P160,320.21
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . . . . P29,624.73
Amount allowed . . . . . . . . . . . . 19,455.50 10,16.23

Net income per investigation P170,489.41

Tax due thereon P 39,737.00

Less: amount already assessed 36,890.00

DEFICIENCY TAX DUE P 2,847.00

===========
The above assessment resulted from the disallowance of a portion of the deduction
claimed by Phoenix Assurance Co., Ltd. as head office expenses allocable to its
business in the Philippines fixed by the Commissioner at 5% of the net Philippine
income instead of 5% of the gross Philippine income as claimed in the returns.
Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for
withholding tax and deficiency income tax. However, the Commissioner of Internal
Revenue denied such protest. Subsequently, Phoenix Assurance Co., Ltd. appealed to
the Court of Tax Appeals. In a decision dated February 14, 1962, the Court of Tax
Appeals allowed in full the decision claimed by Phoenix Assurance Co., Ltd. for 1950 as
net addition to marine insurance reserve; determined the allowable head office
expenses allocable to Philippine business to be 5% of the net income in the Philippines;
declared the right of the Commissioner of Internal Revenue to assess deficiency income
tax for 1952 to have prescribed; absolved Phoenix Assurance Co., Ltd. from payment of
the statutory penalties for non-filing of withholding tax return; and, rendered the
following judgment:
WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is hereby ordered to pay
the Commissioner of Internal Revenue the respective amounts of P75,966.42,
P59,059.68 and P48,812.32, as withholding tax for the years 1952, 1953 and 1954, and
P2,847.00 as income tax for 1954, or the total sum of P186,685.42 within thirty (30)
days from the date this decision becomes final. Upon the other hand, the respondent
Commissioner is ordered to refund to petitioner the sum of P20,180.00 as overpaid
income tax for 1953, which sum is to be deducted from the total sum of P186,685.42
due as taxes.
If any amount of the tax is not paid within the time prescribed above, there shall be
collected a surcharge of 5% of the tax unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum
amount that may be collected as interest shall not exceed the amount corresponding to
a period of three (3) years. Without pronouncement as to costs.
Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue have appealed
to this Court raising the following issues: (1) Whether or not reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines pursuant to
reinsurance contracts executed abroad are subject to withholding tax; (2) Whether or
not the right of the Commissioner of Internal Revenue to assess deficiency income tax
for the year 1952 against Phoenix Assurance Co., Ltd., has prescribed; (3) Whether or
not the deduction of claimed by the Phoenix Assurance Co., Ltd.as net addition to
reserve for the year 1950 is excessive; (4) Whether or not the deductions claimed by
Phoenix Assurance Co., Ltd. for head office expenses allocable to Philippine business
for the years 1952, 1953 and 1954 are excessive.
The question of whether or not reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines pursuant to contracts executed abroad are income
from sources within the Philippines subject to withholding tax under Sections 53 and 54
of the Tax Code has already been resolved in the affirmative in British Traders'
Insurance Co., Ltd.v. Commisioner of Internal Revenue, L-20501, April 30, 1965. 1
We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its income tax
return for 1952 on April 1, 1953 showing a loss of P199,583.93. It amended said return
on August 30, 1955 reporting a tax liability of P2,502.00. On July 24, 1958, after
examination of the amended return, the Commissioner of Internal Revenue assessed
deficiency income tax in the sum of P5,667.00. The Court of Tax Appeals found the
right of the Commissioner of Internal Revenue barred by prescription, the same having
been exercised more than five years from the date the original return was filed. On the
other hand, the Commissioner of Internal Revenue insists that his right to issue the
assessment has not prescribed inasmuch as the same was availed of before the 5-year
period provided for in Section 331 of the Tax Code expired, counting the running of the
period from August 30, 1955, the date when the amended return was filed.
Section 331 of the Tax Code, which limits the right of the Commissioner of Internal
Revenue to assess income tax within five years from the Filipino of the income tax
return, states:
SEC. 331. Period of limitation upon assessment and collection. Except as provided in
the succeeding section internal revenue taxes shall be assessed within five years after
the return was filed, and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period. For the purposes of this
section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.
The question is: Should the running of the prescriptive period commence from the filing
of the original or amended return?
The Court of Tax Appears that the original return was a complete return containing
"information on various items of income and deduction from which respondent may
intelligently compute and determine the tax liability of petitioner, hence, the prescriptive
period should be counted from the filing of said original return. On the other hand, the
Commissioner of Internal Revenue maintains that:
"... the deficiency income tax in question could not possibly be determined, or assessed,
on the basis of the original return filed on April 1, 1953, for considering that the declared
loss amounted to P199,583.93, the mere disallowance of part of the head office
expenses could not probably result in said loss being completely wiped out and Phoenix
being liable to deficiency tax. Not until the amended return was filed on August 30, 1955
could the Commissioner assess the deficiency income tax in question."
Accordingly, he would wish to press for the counting of the prescriptive period from the
filing of the amended return.
To our mind, the Commissioner's view should be sustained. The changes and
alterations embodied in the amended income tax return consisted of the exclusion of
reinsurance premiums received from domestic insurance companies by Phoenix
Assurance Co., Ltd.'s London head office, reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines and various items of deduction
attributable to such excluded reinsurance premiums thereby substantially modifying the
original return. Furthermore, although the deduction for head office expenses allocable
to Philippine business, whose disallowance gave rise to the deficiency tax, was claimed
also in the original return, the Commissioner could not have possibly determined a
deficiency tax thereunder because Phoenix Assurance Co., Ltd. declared a loss of
P199,583.93 therein which would have more than offset such disallowance of
P15,826.35. Considering that the deficiency assessment was based on the amended
return which, as aforestated, is substantially different from the original return, the period
of limitation of the right to issue the same should be counted from the filing of the
amended income tax return. From August 30, 1955, when the amended return was
filed, to July 24, 1958, when the deficiency assessment was issued, less than five years
elapsed. The right of the Commissioner to assess the deficiency tax on such amended
return has not prescribed.
To strengthen our opinion, we believe that to hold otherwise, we would be paving the
way for taxpayers to evade the payment of taxes by simply reporting in their original
return heavy losses and amending the same more than five years later when the
Commissioner of Internal Revenue has lost his authority to assess the proper tax
thereunder. The object of the Tax Code is to impose taxes for the needs of the
Government, not to enhance tax avoidance to its prejudice.
We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 for
1950 representing net addition to reserve computed at 40% of the marine insurance
premiums received during the year. Treating said said deduction to be excessive, the
Commissioner of Internal Revenue reduced the same to P25,374.47 which is equivalent
to 100% of all marine insurance premiums received during the last months of the year.
Paragraph (a) of Section 32 of the Tax Code states:
SEC. 32. Special provisions regarding income and deductions of insurance companies,
whether domestic or foreign. (a) Special deductions allowed to insurance companies.
In the case of insurance companies, except domestic life insurance companies and
foreign life insurance companies doing business in the Philippines, the net additions, if
any, required by law to be made within the year to reserve funds and the sums other
than dividends paid within the year on policy and annuity contracts may be deducted
from their gross income: Provided, however, That the released reserve be treated as
income for the year of release.
Section 186 of the Insurance Law requires the setting up of reserves for liability on
marine insurance:
SEC. 186. ... Provided, That for marine risks the insuring company shall be required to
charge as the liability for reinsurance fifty per centum of the premiums written in the
policies upon yearly risks, and the full premiums written in the policies upon all other
marine risks not terminated (Emphasis supplied.)
The reserve required for marine insurance is determined on two bases: 50% of
premiums under policies on yearly risks and 100% of premiums under policies of marine
risks not terminated during the year. Section 32 (a) of the Tax Code quoted above
allows the full amount of such reserve to be deducted from gross income.
It may be noteworthy to observe that the formulas for determining the marine reserve
employed by Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue
40% of premiums received during the year and 100% of premiums received during
the last three months of the year, respectively do not comply with Section 186. Said
determination runs short of the requirement. For purposes of the Insurance Law, this
Court therefore cannot countenance the same. The reserve called for in Section 186 is
a safeguard to the general public and should be strictly followed not only because it is
an express provision but also as a matter of public policy. However, for income tax
purposes a taxpayer is free to deduct from its gross income a lesser amount, or not to
claim any deduction at all. What is prohibited by the income tax law is to claim a
deduction beyond the amount authorized therein.
Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less than the
amount required in Section 186 of the Insurance Law, the same cannot be and is not
excessive, and should therefore be fully allowed. *
We come now to the controversy on the taxpayer's claim for deduction on head office
expenses incurred during 1952, 1953, and 1954 allocable to its Philippine business
computed at 5% of its gross income in the Philippines The Commissioner of Internal
Revenue redetermined such deduction at 5% on Phoenix Assurance Co., Ltd's net
income thereby partially disallowing the latter's claim. The parties are agreed as to the
percentage 5% but differ as to the basis of computation. Phoenix Assurance Co.
Lt. insists that the 5% head office expenses be determined from the gross income, while
the Commissioner wants the computation to be made on the net income. What,
therefore, needs to be resolved is: Should the 5% be computed on the gross or net
income?
The record shows that the gross income of Phoenix Assurance Co., Ltd. consists of
income from its Philippine business as well as reinsurance premiums received for its
head office in London and reinsurance premiums ceded to foreign reinsurance. Since
the items of income not belonging to its Philippine business are not taxable to its
Philippine branch, they should be excluded in determining the head office expenses
allowable to said Philippine branch. This conclusion finds support in paragraph 2,
subsection (a), Section 30 of the Tax Code, quoted hereunder:
(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the
case of a non-resident alien individual or a foreign corporation, the expenses deductible
are the, necessary expenses paid or incurred in carrying on any business or trade
conducted within the Philippines exclusively. (Emphasis supplied.)
Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting from
partial disallowance of deduction representing head office expenses, are sustained.
Finally, the Commissioner of Internal Revenue assails the dispositive portion of the Tax
Court's decision limiting the maximum amount of interest collectible for deliquency of an
amount corresponding to a period of three years. He contends that since such limitation
was incorporated into Section 51 of the Tax Code by Republic Act 2343 which took
effect only on June 20, 1959, it must not be applied retroactively on withholding tax for
the years 1952, 1953 and 1954.
The imposition of interest on unpaid taxes is one of the statutory penalties for tax
delinquency, from the payments of which the Court of Tax Appeals absolved the
Phoenix Assurance Co., Ltd. on the equitable ground that the latter's failure to pay the
withholding tax was due to the Commissioner's opinion that no withholding tax was due.
Consequently, the taxpayer could be held liable for the payment of statutory penalties
only upon its failure to comply with the Tax Court's judgment rendered on February 14.
1962, after Republic Act 2343 took effect. This part of the ruling of the lower court ought
not to be disturbed.
WHEREFORE, the decision appealed from is modified, Phoenix Assurance Co., Ltd. is
hereby ordered to pay the Commissioner, of Internal Revenue the amount of
P75,966.42, P59,059.68 and P48,812.32 as withholding tax for the years 1952, 1953
and 1954, respectively, and the sums of P5,667.00 and P2,847.00 as income tax for
1952 and 1954 or a total of P192,352.42. The Commissioner of Internal Revenue is
ordered to refund to Phoenix Assurance Co., Ltd. the amount of P20,180.00 as overpaid
income tax for 1953, which should be deducted from the amount of P192,352.42.
If the amount of P192,352.42 or a portion thereof is not paid within thirty (30) days from
the date this judgment becomes final, there should be collected a surcharge and
interest as provided for in Section 51(c) (2) of the Tax Code. No costs. It is so ordered.

BUTUAN SAWMILL v. CTA

Appeal from a decision of the Court of Tax Appeals, in its CTA Case No. 965, ordering
petitioner herein, Butuan Sawmill, Inc., to pay respondent Commissioner of Internal
Revenue the sum of P36,107.74 as deficiency sales tax and surcharge due on its sales
of logs to buyers in Japan from January 31, 1951 to June 8, 1953.
The facts, as found and stated by the lower court in its decision, are in full accord with
the evidences presented therein; hence, we quote them hereunder:
. . . that during the period from January 31, 1951 to June 8, 1953, it sold logs to
Japanese firms at prices FOB Vessel Magallanes, Agusan (in some cases FOB Vessel,
Nasipit, also in Agusan); that the FOB prices included costs of loading, wharfage
stevedoring and other costs in the Philippines; that the quality, quantity and
measurement specifications of the logs were certified by the Bureau of Forestry; that the
freight was paid by the Japanese buyers; and the payments of the logs were effected by
means of irrevocable letters of credit in favor of petitioner and payable through the
Philippine National Bank or any other bank named by it.
Upon investigation by the Bureau of Internal Revenue, it was ascertained that no sales
tax return was filed by the petitioner and neither did it pay the corresponding tax on the
sales. On the basis of agent Antonio Mole's report dated September 17, 1957,
respondent, on August 27, 1958, determined against petitioner the sum of P40,004.01
representing sales tax, surcharge and compromise penalty on its sales [tax, surcharge
and compromise penalty on its sales] of logs from January 1951 to June 1953 pursuant
to Sections 183, 186 and 209 of the National Internal Revenue Code (Exhibit "E", p. 14,
CTA rec. & p. 14, BIR rec.). And in consequence of a reinvestigation, respondent, on
November 6, 1958, amended the amount of the previous assessment to P38,917.74
(Exh. "F", p. 52, BIR rec.). Subsequent requests for reconsideration of the amended
assessment having been denied (Exh. "G", p. 55, BIR rec.; Exh. "H", pp. 75-76, BIR
rec.: Exh. "I", pp. 79-80, BIR rec.; Exh. "J", p. 81, BIR rec.), petitioner filed the instant
petition for review on November 7, 1960.
On the bases of the above-quoted findings and circumstances, the lower court upheld
the legality and correctness of the amended assessment of the sales tax and surcharge,
ruling that the sales in question, in the light of our previous decisions1, were domestic or
"local" sales, and, therefore, subject to sales tax under the provision of section 186 of
the Tax Code, as amended by Republic Acts Nos. 558 and 594; and that the
assessment thereof was made well within the ten-year period prescribed by Section
332(a) of the same Code, since petitioner herein omitted to file its sales tax returns for
the years 1951, 1952 and 1953, and this omission was discovered only on September
17, 1957. The imposition of the compromise penalty was, however, eliminated
therefrom for want of agreement between the taxpayer and the Collector (now
Commissioner) of Internal Revenue. A motion to reconsider said decision having been
denied, petitioner herein interposed the present appeal before this Court.
The issues presented in this appeal are: whether or not petitioner herein is liable to pay
the 5% sales tax as then prescribed by Section 186 of the Tax Code on its sales of logs
to the Japanese buyers; and whether or not the assessment thereof was made within
the prescriptive period provided by law therefor.1wph1.t
On the first issue, petitioner herein insists that the circumstances enumerated in the
above finding, which this Court had, in previous decisions (Cf. footnote [1]), considered
as determinative of the place of transfer of ownership of the logs sold, for purposes of
taxation, are not in themselves evidentiary indications to show that the parties intended
the title of the logs to pass to the Japanese buyers in Japan. Thus, it points out that the
"FOB" feature of the sales contract was made only to fix its price and not to fix the place
of delivery; that the requirement of certification of quality, quantity, and measurement
specifications of the logs by local authorities was done to comply with local laws, rules,
and regulations, and was not a part of the sales arrangement; that the payment of
freight by the Japanese buyers is not an uncommon feature of "FOB" shipments; and
that the payment of prices by means of irrevocable letters of credit is but a common
established business practice to secure payment of the price to the seller. It also insists
that, even assuming that the "FOB" feature of the disputed sales determines the situs of
transfer of ownership, the same is merely a prima facie presumption which yields to
contrary proof such as that the logs were made deliverable to the "order of the shipper"
and the logs were shipped at the risk of the shipper, which circumstances, if considered,
would negate the above implications. Hence, petitioner herein contends that the
disputed sales were consummated in Japan, and, therefore, not subject to the taxing
jurisdiction of our Government.
The above contentions of petitioner are devoid of merit. In a decided case with
practically identical set of facts obtaining in the case at bar, this Court declared:
. . . it is admitted that the agreed price was "F.O.B. Agusan", thus indicating, although
prima facie, that the parties intended the title to pass to the buyer upon delivery of the
logs in Agusan; on board the vessels that took the goods to Japan. Moreover, said
prima facie proof was bolstered up by the following circumstances, namely:
1. Irrevocable letters of credit were opened by the Japanese buyers in favor of the
petitioners.
2. Payment of freight charges of every shipment by the Japanese buyers.
3. The Japanese buyers chartered the ships that carried the logs they purchased from
the Philippines to Japan.
4. The Japanese buyers insured the shipment of logs and collected the insurance
coverage in case of loss in transit.
5. The petitioner collected the purchase price of every shipment of logs by surrendering
the covering letter of credit, bill of lading, which was indorsed in blank, tally sheet,
invoice and export entry, to the corresponding bank in Manila of the Japanese agent
bank with whom the Japanese buyers opened letters of credit.
6. In case of natural defects in logs shipped to the buyers discovered in Japan, instead
of returning such defective logs, accepted them, but were granted a corresponding
credit based on the contract price.
7. The logs purchased by the Japanese buyers were measured by a representative of
the Director of Forestry and such measurement was final, thereby making the
Government of the Philippines a sort of agent of the Japanese buyers.
Upon the foregoing facts and authority of Bislig (Bay) Lumber Co., Inc. vs. Collector of
Internal Revenue, G.R. No. L-13186 (January 28, 1961), Misamis Lumber Co., Inc. vs.
Collector of Internal Revenue (56 Off. Gaz. 517) and Western Mindanao Lumber
Development Co., Inc. vs. Court of Tax Appeals, et al. (G.R. No. L-11710, June 30,
1958), it is clear that said export sales had been consummated in the Philippines and
were, accordingly, subject to sales tax therein." (Taligaman Lumber Co., Inc. vs.
Collector of Internal Revenue, G.R. No. L-15716, March 31, 1962).
With respect to petitioner's contention that there are proofs to rebut the prima facie
finding and circumstances that the disputed sales were consummated here in the
Philippines, we find that the allegation is not borne out by the law or the evidence.
That the specification in the bill of lading to the effect that the goods are deliverable to
the order of the seller or his agent does not necessarily negate the passing of title to the
goods upon delivery to the carrier is clear from the second part of paragraph 2 of Article
1503 of the Civil Code of the Philippines (which appellant's counsel improperly omits
from his citation):
Where goods are shipped, and by the bill of lading the goods are deliverable to the
seller or his agent, or to the order of the seller or of his agent, the seller thereby
reserves the ownership in the goods. But, if except for the form of the bill of lading, the
ownership would have passed to the buyer on shipment of the goods, the sellers's
property in the goods shall be deemed to be only for the purpose of securing
performance by the buyer of his obligations under the contract.
Moreover, it has been "a settled rule that in petitions to review decisions of the Court of
Tax Appeals, only questions of law may be raised and may be passed upon by this
Court" (Gutierrez vs. Court of Tax Appeals & Collector of Internal Revenue vs.
Gutierrez, G.R. Nos. L-7938 & L-9771, May 21, 1957, cited in Sanchez vs.
Commissioner of Customs, G.R. No. L-8556, September 30, 1957); and it having been
found that there is no proof to substantiate the foregoing contention of petitioner, the
same should also be ruled as devoid of merit.
On the second issue, petitioner avers that the filing of its income tax returns, wherein
the proceeds of the disputed sales were declared, is substantial compliance with the
requirement of filing a sales tax return, and, if there should be deemed a return filed,
Section 331, and not Section 332(a), of the Tax Code providing for a five-year
prescriptive period within which to make an assessment and collection of the tax in
question from the time the return was deemed filed, should be applied to the case at
bar. Since petitioner filed its income tax returns for the years 1951, 1952 and 1953, and
the assessment was made in 1957 only, it further contends that the assessment of the
sales tax corresponding to the years 1951 and 1952 has already prescribed for having
been made outside the five-year period prescribed in Section 331 of the Tax Code and
should, therefore, be deducted from the assessment of the deficiency sales tax made by
respondent.
The above contention has already been raised and rejected as not meritorious in a
previous case decided by this Court. Thus, we held that an income tax return cannot be
considered as a return for compensating tax for purposes of computing the period of
prescription under Section 331 of the Tax Code, and that the taxpayer must file a return
for the particular tax required by law in order to avail himself of the benefits of Section
331 of the Tax Code; otherwise, if he does not file a return, an assessment may be
made within the time stated in Section 332(a) of the same Code (Bisaya Land
Transportation Co., Inc. vs. Collector of Internal Revenue & Collector of Internal
Revenue vs. Bisaya Land Transportation Co., Inc., G.R. Nos. L-12100 & L-11812, May
29, 1959). The principle enunciated in this last cited case is applicable by analogy to the
case at bar.
It being undisputed that petitioner failed to file a return for the disputed sales
corresponding to the years 1951, 1952 and 1953, and this omission was discovered
only on September 17, 1957, and that under Section 332(a) of the Tax Code
assessment thereof may be made within ten (10) years from and after the discovery of
the omission to file the return, it is evident that the lower court correctly held that the
assessment and collection of the sales tax in question has not yet prescribed.
Wherefore, the decision appealed from should be, as it is hereby affirmed, with costs
against petitioner.

CIR v. AYALA SECURITIES

Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA
Case No. 1346, cancelling and declaring of no force and effect the assessment made
by the petitioner, Commissioner of Internal Revenue, against the accumulated surplus
of the respondent, Ayala Securities Corporation.
The factual background of the case is as follows:
On November 29, 1955, respondent Ayala Securities Corporation, a domestic
corporation organized and existing under the laws of the Philippines, filed its income tax
returns with the office of the petitioner for its fiscal year which ended on September 30,
1955. Attached to its income tax return was the audited financial statements of the
respondent corporation as of September 30, 1955, showing a surplus of P2,758,442.37.
The income tax due on the return of the respondent corporation was duly paid for within
the time prescribed by law.
In a letter dated February 21, 1961, petitioner advised the respondent corporation of the
assessment of P758.687.04 on its accumulated surplus reflected on its income tax
return for the fiscal year which ended September 30, 1955 (Exit. D). The respondent
corporation, on the other hand, in a letter dated April 19, 1961, protested against the
assessment on its retained and accumulated surplus pertaining to the taxable year 1955
and sought reconsideration thereof for the reasons (1) that the accumulation of the
surplus was for a bona fide business purpose and not to avoid the imposition of income
tax on the individual shareholders, and (2) that the said assessment was issued beyond
the five-year prescriptive period (Exh. E).
On May 30, 1961, petitioner wrote respondent corporation's auditing and accounting
firm with the "advise that your request for reconsideration will be the subject matter of
further reinvestigation and a thorough analysis of the issues involved conditioned,
however, upon the execution of your client of the enclosed form for waiver of the
defense of prescription". (Exh. F) However, respondent corporation did not execute the
requested waiver of the statute of limitations, considering its claim that the assessment
in question had already prescribed.
On February 21, 1963, respondent corporation received a letter dated February 18,
1963, from the Chief, Manila Examiners, of the Office of the herein petitioner, calling the
attention of the respondent corporation to its outstanding and unpaid tax in the amount
of P708,687.04 and thereby requesting for the payment of the said amount within five
(5) days from receipt of the said letter (Exh. G). Believing the aforesaid letter to be a
denial of its protest, the herein respondent corporation filed with the Court of Tax
Appeals a Petition for Review of the assessment, docketed as CTA Case No. 1346.
Respondent corporation in its Petition for Review alleges that the assessment made by
petitioner Commissioner of Internal Revenue is illegal and invalid considering that (1)
the assessment in question, having been issued only on February 21, 1961, and
received by the respondent corporation on March 22, 1961, the same was issued
beyond the five-year period from the date of the filing of respondent corporations
income tax return November 29, 1955, and, therefore, petitioner's right to make the
assessment has already prescribed, pursuant to the provision of Section 331 of the
National Internal Revenue Code; and (2) the respondent corporation's accumulation of
surplus for the taxable year 1955 was not improper, considering that the retention of
such surplus was intended for legitimate business purposes and was not availed of by
the corporation to prevent the imposition of the income tax upon its shareholders.
Petitioner in his answer alleged that the assessment made by his office on the
accumulated surplus of the corporation as reflected on its income tax return for the
taxable year 1955 has not as yet prescribed and, further, that the respondent
corporation's accumulation of surplus for the taxable year 1955 was improper as the
retention of such surplus was availed of by the corporation to prevent the imposition of
the income tax upon the individual shareholders or members of the said corporation.
After trial the Court of Tax Appeals rendered its decision of June 20, 1968, the
dispositive portion of which is as follows:
WHEREFORE, the decision of the respondent Commissioner of Internal Revenue
assessing petitioner the amount of P758,687.04 as 25 surtax and interest is reversed.
Accordingly, said assessment of respondent for 1955 is hereby cancelled and declared
of no force and effect. Without pronouncement as to costs.
From this decision, the Commissioner of Internal Revenue interposed this appeal.
Petitioner maintains that respondent Court of Tax Appeals erred in holding that the letter
dated February 18, 1963, (Exh. G) is a denial of the private respondent corporation's
protest against the assessment, and as such, is a decision contemplated under the
provisions of Sections 7 and 11 of Republic Act No. 1125. Petitioner contends that the
letter dated February 18, 1963, is merely an ordinary office letter designed to remind
delinquent taxpayers of their obligations to pay their taxes to the Government and,
certainly, not a decision on a disputed or protested assessment contemplated under
Section 7(1) of R.A. 1125.
Petitioner likewise maintains that the respondent Court of Tax Appeals erred in holding
that the assessment of P758,687.04 as surtax on private respondent corporation's
unreasonably accumulated profits or surplus had already prescribed. Petitioner further
contends that the applicable provision of law to this case is Section 332 (a) of the
National Internal Revenue Code which provides for a ten (10) year prescriptive period of
assessment, and not Section 331 thereof as held by the Tax Court which provides a
period of limitation of assessment for five (5) years only after the filing of the return.
Petitioner's theory, therefore, is to the effect that since the Corporate income tax return
in question was filed on, November 29, 1955, and the assessment thereto was issued
on February 21, 1961, said assessment is not barred by prescription as the same was
made very well within the ten (10) year period allowed by law.
Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding
the issue as to whether or not the accumulated profits or surplus is indispensable to the
business operations of the private respondent corporation. It is the contention of the
petitioner that the accumulation of profits or surplus was resorted to by the respondent
corporation in order to avoid the payment of taxes by its stockholders or members, and
was not availed of in order to meet the reasonable needs of its business operations.
The legal issues for resolution by this Court in this case are: (1) Whether or not the
instant case falls within the jurisdiction of the respondent Court of Tax Appeals; (2)
Whether or not the applicable provision of law to this case is Section 331 of the National
Internal Revenue Code, which provides for a five-year period of prescription of
assessment from the filing of the return, or Section 332(a) of the same Code which
provides for a ten-year period of limitation for the same purpose; and (3) Whether or not
the respondent Court of Tax Appeals committed a reversible error in not making any
ruling on the reasonableness or unreasonableness of the accumulated profits or surplus
in question of the private respondent corporation.
I
It is to be noted that the respondent Court of Tax Appeals is a court of special appellate
jurisdiction created under R. A. No. 1125. Thus under Section 7 (1), R. A. 1125, the
Court of Tax Appeals exercises exclusive appellate jurisdiction to review by appeal
"decisions of the Collector of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal Revenue
Code or other law or part of law administered by the Bureau of Internal Revenue".
The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a
denial of the reconsideration or protest of the respondent corporation on the
assessment made by the petitioner, considering that the said letter is in itself a
reiteration of the demand by the Bureau of Internal Revenue for the settlement of the
assessment already made, and for the immediate payment of the sum of P758, 687.04
in spite of the vehement protest of the respondent corporation on April 21, 1961. This
certainly is a clear indication of the firm stand of petitioner against the reconsideration of
the disputed assessment in view of the continued refusal of the respondent corporation
to execute the waiver of the period of limitation upon the assessment in question.
This being so, the said letter amounts to a decision on a disputed or protested
assessment and, therefore, the court a quo did not err in taking cognizance of this case.
II
On the issue of whether Sec. 331 or See. 332(a) of the National Internal Revenue Code
should apply to this case, there is no iota of evidence presented by the petitioner as to
any fraud or falsity on the return with intent to evade payment of tax, not even in the
income tax assessment (Exh. 5) nor in the letter-decision of February 18, 1963 (Exh.
G), nor in his answer to the petition for review. Petitioner merely relies on the provisions
of Sec 25 of the National Internal Revenue Code, violation of which, according to
Petitioner, presupposes the existence of fraud. But this is begging the question and We
do not subscribe to the view of the petitioner.
Fraud is a question of fact and the circumstances constituting fraud must be alleged and
proved in the court below. The finding of the trial court as to its existence and non-
existence is final and cannot be reviewed here unless clearly shown to be erroneous
(Republic of the Philippines vs. Ker & Company, Ltd., L-21609, Sept. 29, 1966, 18
SCRA 207; Commissioner of Internal Revenue vs. Lilia Yusay Gonzales and the Court
of Tax Appeals,
L-19495, Nov. 24, 1966, 18 SCRA 757). Fraud is never lightly to be presumed because
it is serious charge (Yutivo Sons Hardware Company vs. Court of Tax Appeals and
Collector of Internal Revenue, L-13203, January 28,1961, 1 SCRA 160).
The applicable provision of law in this case is Section 331 of the National Internal
Revenue Code, to wit:
SEC. 331. Period of limitation upon assessment and collection. Except as provided in
the succeeding section, internal revenue taxes shall be assessed within five years after
the return was filed, and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period. For the purposes of this
section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.
Under Section 46(d) of the National Internal Revenue Code, the Ayala Securities
Corporation designated September 30, 1955, as the last day of the closing of its fiscal
year, and under Section 46(b) the income tax returns for the said corporation shall be
filed on or before the fifteenth (15th) day of the fourth (4th) month following the close of
its fiscal year. The Ayala Securities Corporation could, therefore, file its income tax
returns on or before January 15, 1956. The assessment by the Commissioner of
Internal Revenue shall be made within five (5) years from January 15, 1956, or not later
than January 15, 1961, in accordance with Section 331 of the National Internal Revenue
Code herein above-quoted. As the assessment issued on February 21, 1961, which
was received by the Ayala Securities Corporation on March 22, 1961, was made
beyond the five-year period prescribed under Section 331 of said Code, the same was
made after the prescriptive period had expired and, therefore, was no longer binding on
the Ayala Securities Corporation.
This Court is of the opinion that the respondent court committed no reversible error in
not making any ruling on the reasonableness or unreasonableness of the accumulated
profits or surplus of the respondent corporation. For this reason, We are of the view that
after reaching the conclusion that the right of the Commissioner of Internal Revenue to
assess the 25% surtax had already prescribed under Section 331 of the National
Internal Revenue Code, to delve further into the reasonableness or unreasonableness
of the accumulated profits or surplus of the respondent corporation for the fiscal year
ending September 30, 1955, will only be an exercise in futility.
WHEREFORE, the decision appealed from is hereby affirmed in toto.
Without special pronouncement as to costs.

PHILIPPINE JOURNALISTS v. CIR

This is a petition for review filed by Philippine Journalists, Incorporated (PJI) assailing
the Decision1 of the Court of Appeals dated August 5, 2003,2 which ordered petitioner to
pay the assessed tax liability of P111,291,214.46 and the Resolution3 dated March 31,
2004 which denied the Motion for Reconsideration.
The case arose from the Annual Income Tax Return filed by petitioner for the calendar
year ended December 31, 1994 which presented a net income of P30,877,387.00 and
the tax due of P10,807,086.00. After deducting tax credits for the year, petitioner paid
the amount of P10,247,384.00.
On August 10, 1995, Revenue District Office No. 33 of the Bureau of Internal Revenue
(BIR) issued Letter of Authority No. 871204 for Revenue Officer Federico de Vera, Jr.
and Group Supervisor Vivencio Gapasin to examine petitioners books of account and
other accounting records for internal revenue taxes for the period January 1, 1994 to
December 31, 1994.
From the examination, the petitioner was told that there were deficiency taxes, inclusive
of surcharges, interest and compromise penalty in the following amounts:
Value Added Tax P 229,527.90
Income Tax 125,002,892.95
Withholding Tax 2,748,012.35
Total P 127,980,433.20
In a letter dated August 29, 1997, Revenue District Officer Jaime Concepcion invited
petitioner to send a representative to an informal conference on September 15, 1997 for
an opportunity to object and present documentary evidence relative to the proposed
assessment. On September 22, 1997, petitioners Comptroller, Lorenza Tolentino,
executed a "Waiver of the Statute of Limitation Under the National Internal Revenue
Code (NIRC)".5 The document "waive[d] the running of the prescriptive period provided
by Sections 223 and 224 and other relevant provisions of the NIRC and consent[ed] to
the assessment and collection of taxes which may be found due after the examination
at any time after the lapse of the period of limitations fixed by said Sections 223 and 224
and other relevant provisions of the NIRC, until the completion of the investigation". 6
On July 2, 1998, Revenue Officer De Vera submitted his audit report recommending the
issuance of an assessment and finding that petitioner had deficiency taxes in the total
amount of P136,952,408.97. On October 5, 1998, the Assessment Division of the BIR
issued Pre-Assessment Notices which informed petitioner of the results of the
investigation. Thus, BIR Revenue Region No. 6, Assessment Division/Billing Section,
issued Assessment/Demand No. 33-1-000757-947 on December 9, 1998 stating the
following deficiency taxes, inclusive of interest and compromise penalty:
Income Tax P108,743,694.88
Value Added Tax 184,299.20
Expanded Withholding Tax 2,363,220.38
Total P111,291,214.46
On March 16, 1999, a Preliminary Collection Letter was sent by Deputy Commissioner
Romeo S. Panganiban to the petitioner to pay the assessment within ten (10) days from
receipt of the letter. On November 10, 1999, a Final Notice Before Seizure8 was issued
by the same deputy commissioner giving the petitioner ten (10) days from receipt to
pay. Petitioner received a copy of the final notice on November 24, 1999. By letters
dated November 26, 1999, petitioner asked to be clarified how the tax liability of
P111,291,214.46 was reached and requested an extension of thirty (30) days from
receipt of the clarification within which to reply.9
The BIR received a follow-up letter from the petitioner asserting that its (PJI) records do
not show receipt of Tax Assessment/Demand No. 33-1-000757-94.10 Petitioner also
contested that the assessment had no factual and legal basis. On March 28, 2000, a
Warrant of Distraint and/or Levy No. 33-06-04611 signed by Deputy Commissioner
Romeo Panganiban for the BIR was received by the petitioner.
Petitioner filed a Petition for Review12 with the Court of Tax Appeals (CTA) which was
amended on May 12, 2000. Petitioner complains: (a) that no assessment or demand
was received from the BIR; (b) that the warrant of distraint and/or levy was without
factual and legal bases as its issuance was premature; (c) that the assessment, having
been made beyond the 3-year prescriptive period, is null and void; (d) that the issuance
of the warrant without being given the opportunity to dispute the same violates its right
to due process; and (e) that the grave prejudice that will be sustained if the warrant is
enforced is enough basis for the issuance of the writ of preliminary injunction.
On May 14, 2002, the CTA rendered its decision,13 to wit:
As to whether or not the assessment notices were received by the petitioner, this Court
rules in the affirmative.
To disprove petitioners allegation of non-receipt of the aforesaid assessment notices,
respondent presented a certification issued by the Post Master of the Central Post
Office, Manila to the effect that Registered Letter No. 76134 sent by the BIR, Region
No. 6, Manila on December 15, 1998 addressed to Phil. Journalists, Inc. at Journal
Bldg., Railroad St., Manila was duly delivered to and received by a certain Alfonso
Sanchez, Jr. (Authorized Representative) on January 8, 1999. Respondent also showed
proof that in claiming Registered Letter No. 76134, Mr. Sanchez presented three
identification cards, one of which is his company ID with herein petitioner.

However, as to whether or not the Waiver of the Statute of Limitations is valid and
binding on the petitioner is another question. Since the subject assessments were
issued beyond the three-year prescriptive period, it becomes imperative on our part to
rule first on the validity of the waiver allegedly executed on September 22, 1997, for if
this court finds the same to be ineffective, then the assessments must necessarily fail.

After carefully examining the questioned Waiver of the Statute of Limitations, this Court
considers the same to be without any binding effect on the petitioner for the following
reasons:
The waiver is an unlimited waiver. It does not contain a definite expiration date. Under
RMO No. 20-90, the phrase indicating the expiry date of the period agreed upon to
assess/collect the tax after the regular three-year period of prescription should be filled
up

Secondly, the waiver failed to state the date of acceptance by the Bureau which under
the aforequoted RMO should likewise be indicated

Finally, petitioner was not furnished a copy of the waiver. It is to be noted that under
RMO No. 20-90, the waiver must be executed in three (3) copies, the second copy of
which is for the taxpayer. It is likewise required that the fact of receipt by the taxpayer of
his/her file copy be indicated in the original copy. Again, respondent failed to comply.
It bears stressing that RMO No. 20-90 is directed to all concerned internal revenue
officers. The said RMO even provides that the procedures found therein should be
strictly followed, under pain of being administratively dealt with should non-compliance
result to prescription of the right to assess/collect
Thus, finding the waiver executed by the petitioner on September 22, 1997 to be
suffering from legal infirmities, rendering the same invalid and ineffective, the Court
finds Assessment/Demand No. 33-1-000757-94 issued on December 5, 1998 to be
time-barred. Consequently, the Warrant of Distraint and/or Levy issued pursuant thereto
is considered null and void.
WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby
GRANTED. Accordingly, the deficiency income, value-added and expanded withholding
tax assessments issued by the respondent against the petitioner on December 9, 1998,
in the total amount of P111,291,214.46 for the year 1994 are hereby declared
CANCELLED, WITHDRAWN and WITH NO FORCE AND EFFECT. Likewise, Warrant
of Distraint and/or Levy No. 33-06-046 is hereby declared NULL and VOID.
SO ORDERED.14
After the motion for reconsideration of the Commissioner of Internal Revenue was denied
by the CTA in a Resolution dated August 2, 2002, an appeal was filed with the Court of
Appeals on August 12, 2002.
In its decision dated August 5, 2003, the Court of Appeals disagreed with the ruling of the
CTA, to wit:
The petition for review filed on 26 April 2000 with CTA was neither timely filed nor the
proper remedy. Only decisions of the BIR, denying the request for reconsideration or
reinvestigation may be appealed to the CTA. Mere assessment notices which have
become final after the lapse of the thirty (30)-day reglementary period are not appealable.
Thus, the CTA should not have entertained the petition at all.

[T]he CTA found the waiver executed by Phil. Journalists to be invalid for the following
reasons: (1) it does not indicate a definite expiration date; (2) it does not state the date of
acceptance by the BIR; and (3) Phil. Journalist, the taxpayer, was not furnished a copy of
the waiver. These grounds are merely formal in nature. The date of acceptance by the
BIR does not categorically appear in the document but it states at the bottom page that
the BIR "accepted and agreed to:", followed by the signature of the BIRs authorized
representative. Although the date of acceptance was not stated, the document was dated
22 September 1997. This date could reasonably be understood as the same date of
acceptance by the BIR since a different date was not otherwise indicated. As to the
allegation that Phil. Journalists was not furnished a copy of the waiver, this requirement
appears ridiculous. Phil. Journalists, through its comptroller, Lorenza Tolentino, signed
the waiver. Why would it need a copy of the document it knowingly executed when the
reason why copies are furnished to a party is to notify it of the existence of a document,
event or proceeding?
As regards the need for a definite expiration date, this is the biggest flaw of the decision.
The period of prescription for the assessment of taxes may be extended provided that the
extension be made in writing and that it be made prior to the expiration of the period of
prescription. These are the requirements for a valid extension of the prescriptive period.
To these requirements provided by law, the memorandum order adds that the length of
the extension be specified by indicating its expiration date. This requirement could be
reasonably construed from the rule on extension of the prescriptive period. But this
requirement does not apply in the instant case because what we have here is not an
extension of the prescriptive period but a waiver thereof. These are two (2) very different
things. What Phil. Journalists executed was a renunciation of its right to invoke the
defense of prescription. This is a valid waiver. When one waives the prescriptive period,
it is no longer necessary to indicate the length of the extension of the prescriptive period
since the person waiving may no longer use this defense.
WHEREFORE, the 02 August 2002 resolution and 14 May 2002 decision of the CTA are
hereby SET ASIDE. Respondent Phil. Journalists is ordered [to] pay its assessed tax
liability of P111,291,214.46.
SO ORDERED.15
Petitioners Motion for Reconsideration was denied in a Resolution dated March 31, 2004.
Hence, this appeal on the following assignment of errors:
I.
The Honorable Court of Appeals committed grave error in ruling that it is outside the
jurisdiction of the Court of Tax Appeals to entertain the Petition for Review filed by the
 herein Petitioner at the CTA despite the fact that such case inevitably rests upon the
validity of the issuance by the BIR of warrants of distraint and levy contrary to the
provisions of Section 7(1) of Republic Act No. 1125.
II.
The Honorable Court of Appeals gravely erred when it ruled that failure to comply with
the provisions of Revenue Memorandum Order (RMO) No. 20-90 is merely a formal
defect that does not invalidate the waiver of the statute of limitations without stating the
legal justification for such conclusion. Such ruling totally disregarded the mandatory
requirements of Section 222(b) of the Tax Code and its implementing regulation, RMO
No. 20-90 which are substantive in nature. The RMO provides that violation thereof
subjects the erring officer to administrative sanction. This directive shows that the RMO
is not merely cover forms.
III.
The Honorable Court of Appeals gravely erred when it ruled that the assessment
notices became final and unappealable. The assessment issued is void and legally non-
existent because the BIR has no power to issue an assessment beyond the three-year
prescriptive period where there is no valid and binding waiver of the statute of limitation.
IV.
The Honorable Court of Appeals gravely erred when it held that the assessment in
question has became final and executory due to the failure of the Petitioner to protest
the same. Respondent had no power to issue an assessment beyond the three year
period under the mandatory provisions of Section 203 of the NIRC. Such assessment
should be held void and non-existent, otherwise, Section 203, an expression of a public
policy, would be rendered useless and nugatory. Besides, such right to assess cannot
be validly granted after three years since it would arise from a violation of the mandatory
provisions of Section 203 and would go against the vested right of the Petitioner to
claim prescription of assessment.
V.
The Honorable Court of Appeals committed grave error when it HELD valid a defective
waiver by considering the latter a waiver of the right to invoke the defense of
prescription rather than an extension of the three year period of prescription (to make an
assessment) as provided under Section 222 in relation to Section 203 of the Tax Code,
an interpretation that is contrary to law, existing jurisprudence and outside of the
purpose and intent for which they were enacted.16
We find merit in the appeal.
The first assigned error relates to the jurisdiction of the CTA over the issues in this case.
The Court of Appeals ruled that only decisions of the BIR denying a request for
reconsideration or reinvestigation may be appealed to the CTA. Since the petitioner did
not file a request for reinvestigation or reconsideration within thirty (30) days, the
assessment notices became final and unappealable. The petitioner now argue that the
case was brought to the CTA because the warrant of distraint or levy was illegally
issued and that no assessment was issued because it was based on an invalid waiver
 of the statutes of limitations.
We agree with petitioner. Section 7(1) of Republic Act No. 1125, the Act Creating the
Court of Tax Appeals, provides for the jurisdiction of that special court:
SEC. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other laws or part of law administered by the Bureau of Internal
Revenue; (Emphasis supplied).
The appellate jurisdiction of the CTA is not limited to cases which involve decisions of
the Commissioner of Internal Revenue on matters relating to assessments or refunds.
The second part of the provision covers other cases that arise out of the NIRC or
related laws administered by the Bureau of Internal Revenue. The wording of the
provision is clear and simple. It gives the CTA the jurisdiction to determine if the warrant
of distraint and levy issued by the BIR is valid and to rule if the Waiver of Statute of
Limitations was validly effected.
This is not the first case where the CTA validly ruled on issues that did not relate directly
to a disputed assessment or a claim for refund. In Pantoja v. David,17 we upheld the
jurisdiction of the CTA to act on a petition to invalidate and annul the distraint orders of
the Commissioner of Internal Revenue. Also, in Commissioner of Internal Revenue v.
Court of Appeals,18 the decision of the CTA declaring several waivers executed by the
taxpayer as null and void, thus invalidating the assessments issued by the BIR, was
upheld by this Court.
The second and fifth assigned errors both focus on Revenue Memorandum Circular No.
20-90 (RMO No. 20-90) on the requisites of a valid waiver of the statute of limitations.
The Court of Appeals held that the requirements and procedures laid down in the RMO
are only formal in nature and did not invalidate the waiver that was signed even if the
requirements were not strictly observed.
The NIRC, under Sections 203 and 222,19 provides for a statute of limitations on the
assessment and collection of internal revenue taxes in order to safeguard the interest of
the taxpayer against unreasonable investigation.20 Unreasonable investigation
contemplates cases where the period for assessment extends indefinitely because this
deprives the taxpayer of the assurance that it will no longer be subjected to further
investigation for taxes after the expiration of a reasonable period of time. As was held in
Republic of the Phils. v. Ablaza:21
The law prescribing a limitation of actions for the collection of the income tax is
beneficial both to the Government and to its citizens; to the Government because tax
officers would be obliged to act promptly in the making of assessment, and to citizens
because after the lapse of the period of prescription citizens would have a feeling of
security against unscrupulous tax agents who will always find an excuse to inspect the
books of taxpayers, not to determine the latters real liability, but to take advantage of
every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense
 taxpayers would furthermore be under obligation to always keep their books and keep
them open for inspection subject to harassment by unscrupulous tax agents. The law
on prescription being a remedial measure should be interpreted in a way
conducive to bringing about the beneficent purpose of affording protection to the
taxpayer within the contemplation of the Commission which recommend the
approval of the law. (Emphasis supplied)
RMO No. 20-90 implements these provisions of the NIRC relating to the period of
prescription for the assessment and collection of taxes. A cursory reading of the Order
supports petitioners argument that the RMO must be strictly followed, thus:
In the execution of said waiver, the following procedures should be followed:
1. The waiver must be in the form identified hereof. This form may be reproduced by
the Office concerned but there should be no deviation from such form. The phrase
"but not after __________ 19___" should be filled up
2.
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal
Revenue or the revenue official authorized by him, as hereinafter provided, shall
sign the waiver indicating that the Bureau has accepted and agreed to the waiver.
The date of such acceptance by the Bureau should be indicated
3. The following revenue officials are authorized to sign the waiver.
A. In the National Office

3. Commissioner For tax cases involving
more than P1M
B. In the Regional Offices
1. The Revenue District Officer with respect to tax cases still pending investigation and
the period to assess is about to prescribe regardless of amount.

5. The foregoing procedures shall be strictly followed. Any revenue official found
not to have complied with this Order resulting in prescription of the right to
assess/collect shall be administratively dealt with. (Emphasis supplied)22
A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation
of the taxpayers right to security against prolonged and unscrupulous investigations
and must therefore be carefully and strictly construed.23 The waiver of the statute of
limitations is not a waiver of the right to invoke the defense of prescription as
erroneously held by the Court of Appeals. It is an agreement between the taxpayer and
the BIR that the period to issue an assessment and collect the taxes due is extended to
a date certain. The waiver does not mean that the taxpayer relinquishes the right to
invoke prescription unequivocally particularly where the language of the document is
equivocal. For the purpose of safeguarding taxpayers from any unreasonable
examination, investigation or assessment, our tax law provides a statute of limitations in
the collection of taxes. Thus, the law on prescription, being a remedial measure, should
be liberally construed in order to afford such protection. As a corollary, the exceptions to
the law on prescription should perforce be strictly construed.24 RMO No. 20-90 explains
the rationale of a waiver:
... The phrase "but not after _________ 19___" should be filled up. This indicates the
expiry date of the period agreed upon to assess/collect the tax after the regular three-
year period of prescription. The period agreed upon shall constitute the time within
which to effect the assessment/collection of the tax in addition to the ordinary
prescriptive period. (Emphasis supplied)
As found by the CTA, the Waiver of Statute of Limitations, signed by petitioners
comptroller on September 22, 1997 is not valid and binding because it does not conform
with the provisions of RMO No. 20-90. It did not specify a definite agreed date between
the BIR and petitioner, within which the former may assess and collect revenue taxes.
Thus, petitioners waiver became unlimited in time, violating Section 222(b) of the NIRC.
The waiver is also defective from the government side because it was signed only by a
revenue district officer, not the Commissioner, as mandated by the NIRC and RMO No.
20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a bilateral
agreement between two parties to extend the period to a date certain. The conformity of
the BIR must be made by either the Commissioner or the Revenue District Officer. This
case involves taxes amounting to more than One Million Pesos (P1,000,000.00) and
executed almost seven months before the expiration of the three-year prescription
period. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign
for the BIR.
The case of Commissioner of Internal Revenue v. Court of Appeals,25 dealt with waivers
that were not signed by the Commissioner but were argued to have been given implied
consent by the BIR. We invalidated the subject waivers and ruled:
Petitioners submission is inaccurate

The Court of Appeals itself also passed upon the validity of the waivers executed by
Carnation, observing thus:
We cannot go along with the petitioners theory. Section 319 of the Tax Code earlier
quoted is clear and explicit that the waiver of the five-year26 prescriptive period must be
in writing and signed by both the BIR Commissioner and the taxpayer.
Here, the three waivers signed by Carnation do not bear the written consent of the BIR
Commissioner as required by law.
We agree with the CTA in holding "these waivers to be invalid and without any binding
effect on petitioner (Carnation) for the reason that there was no consent by the
respondent (Commissioner of Internal Revenue)."

For sure, no such written agreement concerning the said three waivers exists between
the petitioner and private respondent Carnation.

What is more, the waivers in question reveal that they are in no wise unequivocal, and
therefore necessitates for its binding effect the concurrence of the Commissioner of
Internal Revenue. On this basis neither implied consent can be presumed nor
can it be contended that the waiver required under Sec. 319 of the Tax Code is
one which is unilateral nor can it be said that concurrence to such an agreement
is a mere formality because it is the very signatures of both the Commissioner of
Internal Revenue and the taxpayer which give birth to such a valid agreement. 27
(Emphasis supplied)
The other defect noted in this case is the date of acceptance which makes it difficult to
fix with certainty if the waiver was actually agreed before the expiration of the three-year
prescriptive period. The Court of Appeals held that the date of the execution of the
waiver on September 22, 1997 could reasonably be understood as the same date of
acceptance by the BIR. Petitioner points out however that Revenue District Officer
Sarmiento could not have accepted the waiver yet because she was not the Revenue
District Officer of RDO No. 33 on such date. Ms. Sarmientos transfer and assignment to
RDO No. 33 was only signed by the BIR Commissioner on January 16, 1998 as shown
by the Revenue Travel Assignment Order No. 14-98.28 The Court of Tax Appeals noted
in its decision that it is unlikely as well that Ms. Sarmiento made the acceptance on
January 16, 1998 because "Revenue Officials normally have to conduct first an
inventory of their pending papers and property responsibilities." 29
Finally, the records show that petitioner was not furnished a copy of the waiver. Under
RMO No. 20-90, the waiver must be executed in three copies with the second copy for
the taxpayer. The Court of Appeals did not think this was important because the
petitioner need not have a copy of the document it knowingly executed. It stated that the
reason copies are furnished is for a party to be notified of the existence of a document,
event or proceeding.
The flaw in the appellate courts reasoning stems from its assumption that the waiver is
a unilateral act of the taxpayer when it is in fact and in law an agreement between the
taxpayer and the BIR. When the petitioners comptroller signed the waiver on
September 22, 1997, it was not yet complete and final because the BIR had not
assented. There is compliance with the provision of RMO No. 20-90 only after the
taxpayer received a copy of the waiver accepted by the BIR. The requirement to furnish
the taxpayer with a copy of the waiver is not only to give notice of the existence of the
document but of the acceptance by the BIR and the perfection of the agreement.
The waiver document is incomplete and defective and thus the three-year prescriptive
period was not tolled or extended and continued to run until April 17, 1998.
Consequently, the Assessment/Demand No. 33-1-000757-94 issued on December 9,
1998 was invalid because it was issued beyond the three (3) year period. In the same
manner, Warrant of Distraint and/or Levy No. 33-06-046 which petitioner received on
March 28, 2000 is also null and void for having been issued pursuant to an invalid
assessment.
WHEREFORE, premises considered, the instant petition for review is GRANTED. The
Decision of the Court of Appeals dated August 5, 2003 and its Resolution dated March
31, 2004 are REVERSED and SET ASIDE. The Decision of the Court of Tax Appeals in
CTA Case No. 6108 dated May 14, 2002, declaring Warrant of Distraint and/or Levy No.
33-06-046 null and void, is REINSTATED.
SO ORDERED.
CIR v. KUDOS METAL
The prescriptive period on when to assess taxes benefits both the government and the
taxpayer.1 Exceptions extending the period to assess must, therefore, be strictly
construed.
This Petition for Review on Certiorari seeks to set aside the Decision2 dated March 30,
2007 of the Court of Tax Appeals (CTA) affirming the cancellation of the assessment
notices for having been issued beyond the prescriptive period and the Resolution 3 dated
May 18, 2007 denying the motion for reconsideration.
Factual Antecedents
On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income Tax
Return (ITR) for the taxable year 1998.
Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of Internal
Revenue (BIR) served upon respondent three Notices of Presentation of Records.
Respondent failed to comply with these notices, hence, the BIR issued a Subpeona
Duces Tecum dated September 21, 2006, receipt of which was acknowledged by
respondents President, Mr. Chan Ching Bio, in a letter dated October 20, 2000.
A review and audit of respondents records then ensued.
On December 10, 2001, Nelia Pasco (Pasco), respondents accountant, executed a
Waiver of the Defense of Prescription,4 which was notarized on January 22, 2002,
received by the BIR Enforcement Service on January 31, 2002 and by the BIR Tax
Fraud Division on February 4, 2002, and accepted by the Assistant Commissioner of
the Enforcement Service, Percival T. Salazar (Salazar).
This was followed by a second Waiver of Defense of Prescription 5 executed by Pasco
on February 18, 2003, notarized on February 19, 2003, received by the BIR Tax Fraud
Division on February 28, 2003 and accepted by Assistant Commissioner Salazar.
On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the taxable
year 1998 against the respondent. This was followed by a Formal Letter of Demand with
Assessment Notices for taxable year 1998, dated September 26, 2003 which was
received by respondent on November 12, 2003.
Respondent challenged the assessments by filing its "Protest on Various Tax
Assessments" on December 3, 2003 and its "Legal Arguments and Documents in
Support of Protests against Various Assessments" on February 2, 2004.
On June 22, 2004, the BIR rendered a final Decision6 on the matter, requesting the
immediate payment of the following tax liabilities:
Kind of Tax Amount
Income Tax 9,693,897.85
VAT 13,962,460.90
EWT 1,712,336.76
Withholding Tax-Compensation 247,353.24
Penalties 8,000.00

Total 25,624,048.76

Ruling of the Court of Tax Appeals, Second Division

Believing that the governments right to assess taxes had prescribed, respondent filed
on August 27, 2004 a Petition for Review7 with the CTA. Petitioner in turn filed his
Answer.8
On April 11, 2005, respondent filed an "Urgent Motion for Preferential Resolution of the
Issue on Prescription."9
On October 4, 2005, the CTA Second Division issued a Resolution 10 canceling the
assessment notices issued against respondent for having been issued beyond the
prescriptive period. It found the first Waiver of the Statute of Limitations incomplete and
defective for failure to comply with the provisions of Revenue Memorandum Order
(RMO) No. 20-90. Thus:
First, the Assistant Commissioner is not the revenue official authorized to sign the
waiver, as the tax case involves more than 1,000,000.00. In this regard, only the
Commissioner is authorized to enter into agreement with the petitioner in extending the
period of assessment;
Secondly, the waiver failed to indicate the date of acceptance. Such date of acceptance
is necessary to determine whether the acceptance was made within the prescriptive
period;
Third, the fact of receipt by the taxpayer of his file copy was not indicated on the original
copy. The requirement to furnish the taxpayer with a copy of the waiver is not only to
give notice of the existence of the document but also of the acceptance by the BIR and
the perfection of the agreement.1avvphi1
The subject waiver is therefore incomplete and defective. As such, the three-year
prescriptive period was not tolled or extended and continued to run. x x x11
Petitioner moved for reconsideration but the CTA Second Division denied the motion in
a Resolution12 dated April 18, 2006.
Ruling of the Court of Tax Appeals, En Banc
On appeal, the CTA En Banc affirmed the cancellation of the assessment notices.
Although it ruled that the Assistant Commissioner was authorized to sign the waiver
pursuant to Revenue Delegation Authority Order (RDAO) No. 05-01, it found that the
first waiver was still invalid based on the second and third grounds stated by the CTA
Second Division. Pertinent portions of the Decision read as follows:
While the Court En Banc agrees with the second and third grounds for invalidating the
first waiver, it finds that the Assistant Commissioner of the Enforcement Service is
authorized to sign the waiver pursuant to RDAO No. 05-01, which provides in part as
follows:
A. For National Office cases
Designated Revenue Official
1. Assistant Commissioner (ACIR), For tax fraud and policy Enforcement Service cases
2. ACIR, Large Taxpayers Service For large taxpayers cases other than those cases
falling under Subsection B hereof
3. ACIR, Legal Service For cases pending verification and awaiting resolution of certain
legal issues prior to prescription and for issuance/compliance of Subpoena Duces
Tecum
4. ACIR, Assessment Service (AS) For cases which are pending in or subject to review
or approval by the ACIR, AS
Based on the foregoing, the Assistant Commissioner, Enforcement Service is
authorized to sign waivers in tax fraud cases. A perusal of the records reveals that the
investigation of the subject deficiency taxes in this case was conducted by the National
Investigation Division of the BIR, which was formerly named the Tax Fraud Division.
Thus, the subject assessment is a tax fraud case.
Nevertheless, the first waiver is still invalid based on the second and third grounds
stated by the Court in Division. Hence, it did not extend the prescriptive period to
assess.
Moreover, assuming arguendo that the first waiver is valid, the second waiver is invalid
for violating Section 222(b) of the 1997 Tax Code which mandates that the period
agreed upon in a waiver of the statute can still be extended by subsequent written
agreement, provided that it is executed prior to the expiration of the first period agreed
upon. As previously discussed, the exceptions to the law on prescription must be strictly
construed.
In the case at bar, the period agreed upon in the subject first waiver expired on
December 31, 2002. The second waiver in the instant case which was supposed to
extend the period to assess to December 31, 2003 was executed on February 18, 2003
and was notarized on February 19, 2003. Clearly, the second waiver was executed after
the expiration of the first period agreed upon. Consequently, the same could not have
tolled the 3-year prescriptive period to assess.13
Petitioner sought reconsideration but the same was unavailing.
Issue
Hence, the present recourse where petitioner interposes that:
THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE
GOVERNMENTS RIGHT TO ASSESS UNPAID TAXES OF RESPONDENT
PRESCRIBED.14
Petitioners Arguments
Petitioner argues that the governments right to assess taxes is not barred by
prescription as the two waivers executed by respondent, through its accountant,
effectively tolled or extended the period within which the assessment can be made. In
disputing the conclusion of the CTA that the waivers are invalid, petitioner claims that
respondent is estopped from adopting a position contrary to what it has previously
taken. Petitioner insists that by acquiescing to the audit during the period specified in
the waivers, respondent led the government to believe that the "delay" in the process
would not be utilized against it. Thus, respondent may no longer repudiate the validity of
the waivers and raise the issue of prescription.
Respondents Arguments
Respondent maintains that prescription had set in due to the invalidity of the waivers
executed by Pasco, who executed the same without any written authority from it, in
clear violation of RDAO No. 5-01. As to the doctrine of estoppel by acquiescence relied
upon by petitioner, respondent counters that the principle of equity comes into play only
when the law is doubtful, which is not present in the instant case.
Our Ruling
The petition is bereft of merit.
Section 20315 of the National Internal Revenue Code of 1997 (NIRC) mandates the
government to assess internal revenue taxes within three years from the last day
prescribed by law for the filing of the tax return or the actual date of filing of such return,
whichever comes later. Hence, an assessment notice issued after the three-year
prescriptive period is no longer valid and effective. Exceptions however are provided
under Section 22216 of the NIRC.
The waivers executed by respondents accountant did not extend the period within
which the assessment can be made
Petitioner does not deny that the assessment notices were issued beyond the three-
year prescriptive period, but claims that the period was extended by the two waivers
executed by respondents accountant.
We do not agree.
Section 222 (b) of the NIRC provides that the period to assess and collect taxes may
only be extended upon a written agreement between the CIR and the taxpayer
executed before the expiration of the three-year period. RMO 20-9017 issued on April 4,
1990 and RDAO 05-0118 issued on August 2, 2001 lay down the procedure for the
proper execution of the waiver, to wit:
1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but
not after ______ 19 ___", which indicates the expiry date of the period agreed upon to
assess/collect the tax after the regular three-year period of prescription, should be filled
up.
2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of its
responsible officials. In case the authority is delegated by the taxpayer to a
representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver indicating that
the BIR has accepted and agreed to the waiver. The date of such acceptance by the
BIR should be indicated. However, before signing the waiver, the CIR or the revenue
official authorized by him must make sure that the waiver is in the prescribed form, duly
notarized, and executed by the taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the Bureau
should be before the expiration of the period of prescription or before the lapse of the
period agreed upon in case a subsequent agreement is executed.
6. The waiver must be executed in three copies, the original copy to be attached to the
docket of the case, the second copy for the taxpayer and the third copy for the Office
accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be
indicated in the original copy to show that the taxpayer was notified of the acceptance of
the BIR and the perfection of the agreement.19
A perusal of the waivers executed by respondents accountant reveals the following
infirmities:
1. The waivers were executed without the notarized written authority of Pasco to sign
the waiver in behalf of respondent.
2. The waivers failed to indicate the date of acceptance.
3. The fact of receipt by the respondent of its file copy was not indicated in the original
copies of the waivers.
Due to the defects in the waivers, the period to assess or collect taxes was not
extended. Consequently, the assessments were issued by the BIR beyond the three-
year period and are void.
Estoppel does not apply in this case
We find no merit in petitioners claim that respondent is now estopped from claiming
prescription since by executing the waivers, it was the one which asked for additional
time to submit the required documents.
In Collector of Internal Revenue v. Suyoc Consolidated Mining Company, 20 the doctrine
of estoppel prevented the taxpayer from raising the defense of prescription against the
efforts of the government to collect the assessed tax. However, it must be stressed that
in the said case, estoppel was applied as an exception to the statute of limitations on
collection of taxes and not on the assessment of taxes, as the BIR was able to make an
assessment within the prescribed period. More important, there was a finding that the
taxpayer made several requests or positive acts to convince the government to
postpone the collection of taxes, viz:
It appears that the first assessment made against respondent based on its second final
return filed on November 28, 1946 was made on February 11, 1947. Upon receipt of
this assessment respondent requested for at least one year within which to pay the
amount assessed although it reserved its right to question the correctness of the
assessment before actual payment. Petitioner granted an extension of only three
months. When it failed to pay the tax within the period extended, petitioner sent
respondent a letter on November 28, 1950 demanding payment of the tax as assessed,
and upon receipt of the letter respondent asked for a reinvestigation and
reconsideration of the assessment. When this request was denied, respondent again
requested for a reconsideration on April 25, 1952, which was denied on May 6, 1953,
which denial was appealed to the Conference Staff. The appeal was heard by the
Conference Staff from September 2, 1953 to July 16, 1955, and as a result of these
various negotiations, the assessment was finally reduced on July 26, 1955. This is the
ruling which is now being questioned after a protracted negotiation on the ground that
the collection of the tax has already prescribed.
It is obvious from the foregoing that petitioner refrained from collecting the tax by
distraint or levy or by proceeding in court within the 5-year period from the filing of the
second amended final return due to the several requests of respondent for extension to
which petitioner yielded to give it every opportunity to prove its claim regarding the
correctness of the assessment. Because of such requests, several reinvestigations
were made and a hearing was even held by the Conference Staff organized in the
collection office to consider claims of such nature which, as the record shows, lasted for
several months. After inducing petitioner to delay collection as he in fact did, it is most
unfair for respondent to now take advantage of such desistance to elude his deficiency
income tax liability to the prejudice of the Government invoking the technical ground of
prescription.
While we may agree with the Court of Tax Appeals that a mere request for
reexamination or reinvestigation may not have the effect of suspending the running of
the period of limitation for in such case there is need of a written agreement to extend
the period between the Collector and the taxpayer, there are cases however where a
taxpayer may be prevented from setting up the defense of prescription even if he has
not previously waived it in writing as when by his repeated requests or positive acts the
Government has been, for good reasons, persuaded to postpone collection to make him
feel that the demand was not unreasonable or that no harassment or injustice is meant
by the Government. And when such situation comes to pass there are authorities that
hold, based on weighty reasons, that such an attitude or behavior should not be
countenanced if only to protect the interest of the Government.
This case has no precedent in this jurisdiction for it is the first time that such has risen,
but there are several precedents that may be invoked in American jurisprudence. As Mr.
Justice Cardozo has said: "The applicable principle is fundamental and unquestioned.
He who prevents a thing from being done may not avail himself of the nonperformance
which he has himself occasioned, for the law says to him in effect "this is your own act,
and therefore you are not damnified." "(R. H. Stearns Co. vs. U.S., 78 L. ed., 647). Or,
as was aptly said, "The tax could have been collected, but the government withheld
action at the specific request of the plaintiff. The plaintiff is now estopped and should not
be permitted to raise the defense of the Statute of Limitations." [Newport Co. vs. U.S.,
(DC-WIS), 34 F. Supp. 588].21
Conversely, in this case, the assessments were issued beyond the prescribed period.
Also, there is no showing that respondent made any request to persuade the BIR to
postpone the issuance of the assessments.
The doctrine of estoppel cannot be applied in this case as an exception to the statute of
limitations on the assessment of taxes considering that there is a detailed procedure for
the proper execution of the waiver, which the BIR must strictly follow. As we have often
said, the doctrine of estoppel is predicated on, and has its origin in, equity which,
broadly defined, is justice according to natural law and right.22 As such, the doctrine of
estoppel cannot give validity to an act that is prohibited by law or one that is against
public policy.23 It should be resorted to solely as a means of preventing injustice and
should not be permitted to defeat the administration of the law, or to accomplish a
wrong or secure an undue advantage, or to extend beyond them requirements of the
transactions in which they originate.24 Simply put, the doctrine of estoppel must be
sparingly applied.
Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to
comply with RMO 20-90 and RDAO 05-01, which the BIR itself issued. As stated earlier,
the BIR failed to verify whether a notarized written authority was given by the
respondent to its accountant, and to indicate the date of acceptance and the receipt by
the respondent of the waivers. Having caused the defects in the waivers, the BIR must
bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of
the statute of limitations, being a derogation of the taxpayers right to security against
prolonged and unscrupulous investigations, must be carefully and strictly construed. 25
As to the alleged delay of the respondent to furnish the BIR of the required documents,
this cannot be taken against respondent. Neither can the BIR use this as an excuse for
issuing the assessments beyond the three-year period because with or without the
required documents, the CIR has the power to make assessments based on the best
evidence obtainable.26
WHEREFORE, the petition is DENIED. The assailed Decision dated March 30, 2007
and Resolution dated May 18, 2007 of the Court of Tax Appeals are hereby
AFFIRMED.
SO ORDERED.