PRESCRIPTION - Sayson

Statute of Limitations

- It is a legal term used to describe time limitations or passage of time that produces legal consequences.
- The law prescribing a limitation of actions for the Government and to its citizens; to the Government because
the tax officers would be obliged to act promptly in making of assessment, and to citizens who would have a
sense of security against unscrupulous tax agents who will always find an excuse to search the books. (Republic
vs. Ablaza 108, Phil. 1105)

Construction

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 followed. Moreover, negligence or
oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely
intended to give them peace of mind. For the purposes of safeguarding taxpayers from unreasonable examination,
investigation or assessment, our laws provided a statute of limitations in the collection of taxes. (Commissioner vs. BF
Goodrich Phils.,303 SCRA 546)

Prescriptive Periods under the TAX CODE

Three important prescriptive periods relating to assessment and collection of taxes:

a. Period to assess the tax

b. period to collect the tax

C. period to file criminal action

Period to Make an Assessment

- If there was a tax return filed that is not false or fraudulent, the BIR has three years from the date of filing the
return within which to make an assessment, and if the return was filed before the last day prescribed by law for
filing thereof the three-year period shall be considered as filed on such last day.
- No return, then the BIR has 10 years from the date of discovery of the omission within which to make an
assessment.

Burden of Proof

- It is incumbent upon a taxpayer who wants to avail the benefit of Section 31 of the Tax Code by setting up
prescription as an affirmative defense, to prove he submitted a return. If he fails to do so, the conclusion should
that no such return was filed in which case the Government has 10 years to make an assessment. (Tan Guan vs.
Nable, supra)

Tan Guan vs. Nable

Facts:

The factual background of this additional assessment of P128,800 is as follows: On December 5, 1950, the
Manufacturing Co. — a duly registered manufacturer of cigarettes — asked the Commissioner’s permission to sell 800
bobbins of cigarette paper to Imperial. At the foot of the Manufacturing Co.’s request was a statement, signed by
Imperial’s manager, to the effect that Imperial really wanted to buy said 800 bobbins of cigarette paper. The permit was
forthwith granted. On July 23, 1952, in the course of a routine investigation conducted by the Bureau of Internal
Revenue — hereinafter referred to as the Bureau — a representative of Imperial denied that the latter had received said
800 bobbins of cigarette paper. Thereupon, the Commissioner assessed against the Manufacturing Co. the sum of
P128,800 as specific tax due on the cigarettes that could have been manufactured out of said cigarette paper. The
manufacturing Co. sought a reconsideration of this assessment, and, at the hearing thereon, before the Conference Staff
— notice of which had been served on Tan Guan, who did not appear, despite the subpoena duces tecum issued
therefor — the Manufacturing Co. introduced testimonial and documentary evidence of the delivery of the goods to
Imperial.

Hence, on March 20, 1958, the Commissioner withdrew the assessment against the Manufacturing Co. and, in lieu
thereof, assessed said sum of P128,800, as specific taxes on the cigarettes that Imperial could have manufactured out of
said 800 bobbins of cigarette paper. Tan Guan could not be located, however, until April 30, 1958, when the
corresponding assessment notice was delivered to him. On May 6, 1958, the Commissioner issued a warrant of distraint
against the properties of Tan Guan. The next day, Civil Case No. 4979 of the Court of First Instance of Rizal was filed by
the Government to recover from Tan Guan the aforementioned sums of P72,450 and P128,800, as specific taxes on
cigarettes. About a week later, or on May 15, 1958, Imperial asked the Commissioner a rehearing, but, before this
request could be acted upon, Tan Guan filed a petition for review with the Court of Tax Appeals which, in due course,
rendered the appealed decision in favor of the Government.

The main defense set up by Tan Guan is that of prescription of action. With respect to the assessment for P72,450, he
maintains that the same was made on January 21, 1953, whereas, the aforementioned civil action for the recovery of
said sum and that of P128,800 was filed on May 7, 1958, or beyond the prescriptive period of five (5) years which, Tan
Guan maintains, is applicable thereto. It should be noted, however that the running of said period was interrupted on
February 9, 1953, when Padua, acting on behalf of Imperial, appealed the disputed assessment to the conference staff
and that, on May 8, 1953, the Commissioner reiterated the demand for the payment of said sum of P72,450 (less P1,000
paid on February 20, 1953) in addition to P10,000 as compromise penalty. Accordingly, from May 8, 1953 to May 7,
1958, when the civil action was commenced, less than five (5) years had elapsed.

May the petitioner invoke prescription as a defense?

As regards the assessment for P128,800, it is urged that the sale of 800 bobbins of cigarette paper by the Manufacturing
Co. to Imperial has not been duly established. In this connection, it is not denied that said Manufacturing Co. asked
permission from the Commissioner to sell said goods to Imperial; that this request was supported by a written
statement of Imperial, attesting to its intent to purchase said goods; that the consummation of the sale thereof is
evidenced by invoices of the Manufacturing Co.; and that the latter had issued official receipts for payments made by
Imperial. Moreover, the foregoing documentary evidence were confirmed by affidavits of those who delivered the goods
to Imperial. It is true that no records of Imperial to this effect have been presented. This is due, however, to the fact that
Imperial had kept no records or books of accounts. At any rate, the findings of the Commissioner and those of the Court
of Tax Appeals are borne out by substantial evidence.

Period to Collect Assessed Tax:

Any internal revenue tax which has been assessed within the period of limitation may be collected by distraint or levy by
a court within five years from date of assessment. The limitation to collected is counted from the assessment of the tax,
NOT from the time the income tax return was filed. (Guiterrez vs. Collector, GR. No. L-19537, May 20, 1965)

Guiterrez vs. Collector, GR. No. L-19537, May 20, 1965

Facts:

Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid estate broker's privilege
tax. He filed his income tax returns for the years 1951, 1952, 1953 and 1954.On July 10, 1956 the Commissioner
(formerly Collector) of Internal Revenue assessed against Gutierrez the following defiency income tax P 11,841.00. The
above defiency tax came about by the disallowance of deductions from gross income representing depreciation,
expenses Gutierrez allegedly incurred in carrying on his business, and the addition to gross income of receipts which he
did not report in his income tax returns. The disallowed business expenses which were considered by the Commissioner
either as personal or capital expenditures

The overstatement of purchase price of real estate refers to the sale of two pieces of property in 1953. In 1943 Gutierrez
bought a parcel of land situated along Padre Faura St. in Manila for P35,000.00. Sometime in 1953, he sold the same for
P30,400.00. Expenses of sale amounted to P631.80. In his return he claimed a loss of P5,231.80. 1 However, the
Commissioner, including the said property was bought in Japanese military notes, converting the buying price to its
equivalent in Philippine Commonwealth peso by the use of the Ballantyne Scale of Values. At P1.30 Japanese military
notes per Commonwealth peso, the acquisition cost of P35,000.00 Japanese military notes were valued at P26,923.00
Philippine Commonwealth peso. Accordingly, the Commissioner determined a profit of P3,476.92 after restoring to
Gutierrez' gross income the P5,231.80 deduction for loss. In another transaction, Gutierrez sold a piece of land for
P1,200.00. Alleging the said property was purchased for P1,200.00, he reported no profit hereunder. However, after
verifying the deed of acquisition, the Commissioner discovered the purchase price to be only P800.00. Consequently, he
determined a profit of P400.00 which was added to the gross income for 1953.

The understatement of profit from the sale of real estate may be explained thus: In 1953 and 1954 Gutierrez sold four
other properties upon which he made substantial profits.2Convinced that said properties were capital assets, he
declared only 50% of the profits from their sale. However, treating said properties as ordinary assets (as property held
and used byGutierrez in his business), the Commissioner taxed 100% of the profits from their disposition pursuant to
Section 35 of the Tax Code. Having unsuccessfully questioned the legality and correctness of the aforesaid assessment,
Gutierrez instituted on February 17, 1958, the Commissioner issued a warrant of distraint and levy on one of Gutierrez'
real properties but desisted from enforcing the same when Gutierrez filed a bond to assure payment of his tax liability.

Issues:

The issues are: (1) Are the taxpayer's aforementioned claims for deduction proper and allowable? (2) May the
Ballantyne Scale of Values be applied indetermining the acquisition cost in 1943 of a real property sold in 1953, for
income tax purposes? (3) Are real properties used in the trade or business of the taxpayer capital or ordinary assets? (4)
Has the right of the Commissioner of Internal Revenue to collect the deficiency income tax for the years 1951 and 1952
prescribed? (5) Has the right of the Commissioner of Internal Revenue to collect by distraint and levy the deficiency
income tax for 1953 prescribed? If not, may the taxpayer's rea lproperty be distrained and levied upon without first
exhausting his personal property?

With regard to the issue of the prescription of the Commissioner's right to collect deficiency tax for 1951 and 1952,
Gutierrez claims that the counting of the 5-year period to collect income tax should start from the time the income tax
returns were filed. He, therefore, urges us to declare the Commissioner's right to collect the deficiency tax for 1951 and
1952 to have prescribed, the income tax returns for 1951 and 1952 having been filed in March 1952 and on February 28,
1953, respectively, and the action to collect the tax having been instituted on March 5, 1958 when the Commissioner
filed his answer to the petition for review in C.T.A. Case No. 504. On the other hand, the Commissioner argues that the
running of the prescriptive period to collect commences from the time of assessment. Inasmuch as the tax for 1951 and
1952 were assessed only on July 10, 1956, less than five years lapsed when he filed his answer on March 5, 1958.

The period of limitation to collect income tax is counted from the assessment of the tax as provided for in paragraph (c)
of Section 332 quoted below:

SEC. 332(c). Where the assessment of any internal revenue tax has been made within the period of limitation above
prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if begun (1) within five
years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by
the Collector of Internal Revenue and the taxpayer before the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed
upon.

Inasmuch as the assessment for deficiency income tax was made on July 10, 1956 which is 7 months and 25 days prior to
the action for collection, the right of the Commissioner to collect such tax has not prescribed.

Clear and Convincing Evidence:

For the 10 year period of the statute of limitation of assessment of taxes under Section 332 [now section 222 (a)] of the
Tax Code to apply, it is not enough that fraud is alleged in the complaint; it must be established and proved by clear and
convincing proof (Republic vs. Lim de Yu, 10 SCRA 737).

PERIOD TO COLLECT THE ASSESSED TAX

- Any internal revenue tax which has been assessed within the period of limitation may be collected by distraint
or levy or by a proceeding in court within five years from the date of the assessment. The period of limitation
to collect is counted from the assessment of the tax, NOT from the time the income tax return was filed.
- Where a withholding agent fails to file a withholding tax return, “a proceeding in a court for the collection of
such tax may be begun without assessment, at any time within ten years after the discovery of the omission.”

In the case at bar, the failure to file a return was discovered in 1949. Judicial suit was initiated on January 16, 1953 when
the Jai Alai Corporation was included as party defendant in the amended complaint. As only four (4) years had elapsed
from the time of discovery of the omission to file a return to the filing of a judicial action, the right to collect the
withholding tax through assets has not yet prescribed.

Republic vs. Razon and Jai Alai Corporation

Facts:

The original complaint was filed with the Court of First Instance of Manila on January 8, 1952 solely against defendant
Jose Razon. On January 16, 1953, the plaintiff amended its complaint, including the Jai-Alai Corporation as party
defendant, and asserting two (2) causes of action. Under the first cause of action, the plaintiff seeks to recover from
defendant Jose Razon as attorney-in-fact of Haig Assadourian, the amount of P73,522.62 as the latter’s income tax
liability for the year 1946, computed as of December 31, 1951

; and, under the second cause of action the plaintiff seeks to recover jointly and severally from defendants Jose Razon
and Jai-Alai Corporation as withholding agents, the 12% withholding tax amounting to P30,080.00, exclusive of penalties,
surcharges and interests, due on the income received by Haig Assadourian for the years 1947 and 1948 pursuant to the
provisions of Section 53 (b) and (c) of the National Internal Revenue Code. In addition, defendant Jose Razon is sought to
be held liable for the payment of the said sum of P30,080.00 for being the attorney-in-fact of Haig Assadourian.

Issue: Has the period to collect prescribed?

In connection with the defense of defendant Jai-Alai Corporation that the right to collect the tax has already prescribed,
the record shows that it failed to file a withholding tax return for the amount of P80,000.00 paid to Haig Assadourian in
1947. For its omission to file a withholding tax return,

Section 332 © of the Tax Code, which provides that ‘a proceeding in court for the collection of such tax may be begun
without assessment, at any time within ten years after the discovery of the . . . omission,’ should be applied. The failure
to file a return was discovered in 1949, during the investigation conducted by BIR examiner Narciso Rosales. The judicial
suit was initiated on January 16, 1953 when the Jai-Alai Corporation was included as party defendant in the amended
complaint. Only four (4) years elapsed from the time of the discovery of the omission to file a return to the filing of a
judicial action against the Jai-Alai Corporation consequently, the right to judicially collect the withholding tax has not
prescribed.

TAX RETURN

- Tax return refers to the form prescribed by the BIR showing basic information about the taxpayer and the
computation of his tax liability, which is required to be filed within the period prescribed by law and used as the
basis for the payment of taxes by the taxpayer. The BIR prescribes a separate form for each tax.

TWO TYPES:

1. Original return

2. Amended return

To be considered as a tax return, it is not always required that the prescribed BIR forms be used and filed by the
taxpayer. A document containing all necessary information that would allow the BIR to compute and to assess the tax
liability is considered as a tax return. There was no omission to file a tax return on the part of the taxpapyer where it
failed to include certain items and the non-inclusion of these items is not due to the willful omission or fraud.

Not tax returns:

1. Transcript sheets

2. Income tax return for percentage tax return

Effect of Filing an Amended Return

- The prescriptive period for assessment starts to run from the filing of the original return, if the same is
sufficiently complete to enable the Commissioner to intelligently determine the proper amount of tax to be
assessed. The fact that amended return were filed later neither starts anew the running of the statute of
limitations nor extends the prescriptive period.

Substantial Difference

- However, where the amended return is substantially different from the original return, the right of the BIR to
assess the tax is counted from the filing of the amended return.

Amendment is allowed if:

1. the amendment shall be made within three years from the filing of the original return, statement or
declaration

2. no notice of auditor investigation of such return, statement or declaration has in the meantime, been actually
served upon the taxpayer.
False or Fraudulent Tax Return

- In the case of false or fraudulent return with intent to evade tax or failure to file a return, the taxes may be
assessed or a proceeding in court for the collection of such tax may be filed without assessment in any time
within 10 years after the discovery of the falsity fraud or omission ( Sec. 222[a], NIRC)

Proper and Reasonable Interpretation:

Three different cases: FALSE, FRAUD AND OMISSION

1. False Return

2. Fraudulent return with the intent to evade tax

3. failure to file

Distinguish a false return from a fraudulent return

- The distinction between a false return and a fraudulent return is that the first merely implies a deviation from
the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the sole aim of
evading the payment of the correct tax due.

What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50% surcharge on
the deficiency tax due from a taxpayer?

- There is a prima facie evidence of fraud when the taxpayer substantially under-declared his taxable sales,
receipts or income or substantially overstated his deduction.

What constitutes prima facie evidence of a false or fraudulent return?

There is prima facie evidence of a false or fraudulent return when the taxpayer has willfully and knowingly filed it with
the intent to evade a part of the tax or all of all the tax legally due from him. There must a ppear a design to deceive on
the part of the taxpayer, or atleast culpable negligence. A mistake is not a false return.

Cases of Fraud
1. deliberate intent
2. simple statement does not disprove the existence of fraud
3. Substantial under declaration for six years
4. Fictitious expenses

Cases where there is no fraud

1. mere understatement
2. Sale of real property less than the market value
3. Fraud must be alleged and proven in court
4. Fraud is never implied
5. Frequent mistakes of revenue officers is not fraud

Failure to prove fraud:

The Commissioner’s failure to prove fraud is fatal to the assessment as when the tax liability is assessed beyond the
usual three year assessment period. The fact that the Commissioner did not include the fraud penalty in his deficiency
assessment which is issued after filing is an indication that the Commissioner himself did not believe there was fraud.

When should prescription be raised?

1. Administrative level
2. Invalidity of waiver may be raised in the CTA

Waiver of the defense of prescription

1. The waiver is in form RMO 20-90 . The form should be reproduced by the Office concerned but there should be no
deviation of forms, the phrase, “but not after ______, 20__” should be filled up

2. Soon after the waiver is signed by the taxpayer, the CIR or the revenue officer authorized by him shall sign the waiver,
BIR indicates that it has received and the date of acceptance shall be stated.
The waiver must be executed in 3 copies; the second copy is for the taxpayer. The date of the receipt by the taxpayer
must be indicated in the original copy. Without the date, it cannot be determined if the waiver was accepted.

Waiver as a derogation:

The waiver of the Statute of Limitations is a derogation of the taxpayer’s right to security against prolonged and
unscrupulous investigations and must therefore be carefully and strictly construed against the government. The waiver
of the Statute is not a waiver of the statute of limitations is not a waiver of the right to invoke prescription but is an
agreement between the taxpayer and the BIR.