Bañas, Jr. vs. Court of Appeals

Filing a tax amnesty return does not ipso facto shield a taxpayer from prosecution; the taxpayer must voluntarily disclose previously untaxed income and pay the correct tax due, and the terms of a tax amnesty are construed strictly against the taxpayer. Discounting the promissory note covering future installments on the same day as the sale is a taxable disposition, making the income reportable in the year of discounting.

Bañas was a taxpayer who dealt with Ayala Investment Corporation (AYALA) in a land sale; Larin was the BIR Regional Director of Manila Region IV-A, while Tuazon and Talon were BIR tax examiners. The legal setting involved the NIRC’s installment-sale provisions and the tax amnesties granted under P.D. Nos. 1740 and 1840. The dispute also required the SC to pass on the damages awarded to a public official sued for acts connected with his official functions.

On February 20, 1976, Bibiano V. Bañas, Jr. sold to Ayala Investment Corporation (AYALA) 128,265 square meters of land located at Bayanan, Muntinlupa, for P2,308,770.00. The Deed of Sale provided that upon signing AYALA would pay P461,754.00, while the balance of P1,847,016.00 would be paid in four equal consecutive annual installments with 12% interest per annum on the outstanding balance; AYALA issued one promissory note covering the four equal annual installments, with each periodic payment of P461,754.00 payable starting February 20, 1977, and every year thereafter until February 20, 1980. On the same day, Bañas discounted the promissory note with AYALA for its face value of P1,847,016.00, evidenced by a Deed of Assignment signed by Bañas and AYALA, and AYALA issued nine checks to Bañas, all dated February 20, 1976, drawn against the Bank of the Philippine Islands, each for P205,224.00.

In his 1976 Income Tax Return, Bañas reported the P461,754.00 initial payment as income from disposition of a capital asset, showing the selling price of P2,308,770.00 less the initial payment of P461,754.00 as unrealized gain of P1,847,016.00; he declared the initial payment of P461,754.00 less cost of land and other incidental expenses of P76,547.90 as income of P385,206.10, and income subject to tax at 50% as P192,603.65. In the succeeding years until 1979, he reported a uniform income of P230,877.00 as gain from sale of capital asset, and in his 1980 income tax amnesty return he also reported the same P230,877.00 as the realized gain on disposition of capital asset for the year.

On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners Rodolfo Tuazon and Procopio Talon to examine Bañas’s books and records for 1976. They discovered that Bañas had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and that the entire profit should have been taxable in 1976 since the income was wholly derived in 1976; they filed an audit report declaring a discrepancy of P2,095,915.00 in Bañas’s 1976 net income and recommended a deficiency tax assessment of P2,473,673.00. Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A and, after reviewing the examiners’ report, directed the revision of the audit report with instruction to consider the land as a capital asset, so that the tax due was only 50% of the total gain from sale of property held beyond twelve months under Section 34 of the 1977 National Internal Revenue Code; the deficiency tax assessment was reduced to P936,598.50, inclusive of surcharges and penalties for 1976.

On June 27, 1980, Larin sent Bañas a letter informing him of the income tax deficiency that must be settled immediately. On September 26, 1980, Bañas acknowledged receipt of the letter but insisted that the sale of his land to AYALA was on installment. On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National Office of the BIR, and the Chief of the Tax Fraud Unit recommended prosecution for conspiring to file false and fraudulent returns, in violation of Section 51 of the Tax Code, against Bañas and his accountants Andres P. Alejandre and Conrado Bañas. On June 17, 1981, Larin filed a criminal complaint for tax evasion against Bañas.

On July 1, 1981, news items appeared in the Evening Express with the headline “BIR Charges Realtor” and in the Evening Post with “BIR raps Realtor, 2 accountants”; another news item appeared in the July 2, 1981 issue of the Bulletin Today entitled “3-face P1-M tax evasion raps,” and all the news items mentioned Bañas’s false income tax return concerning the sale of land to AYALA. On July 2, 1981, Bañas filed an Amnesty Tax Return under P.D. No. 1740 and paid P41,729.81; on November 2, 1981, he again filed an Amnesty Tax Return under P.D. No. 1840 and paid an additional P1,525.62, but in both he did not recognize that his sale of land to AYALA was on a cash basis. Reacting to the complaint for tax evasion and the news reports, Bañas filed with the RTC of Manila an action for damages against Larin, Tuazon, and Talon for extortion and malicious publication of the BIR’s tax audit report, claiming that the filing of criminal complaints against him for violation of tax laws was improper because he had already availed of P.D. Nos. 1740 and 1840.

The CA observed that the only evidence to establish the alleged extortion attempt by the defendants was Bañas’s self-serving declarations and that, as found by the trial court, the attempt was known to Bañas’s son-in-law and counsel on record, yet counsel did not take the witness stand to corroborate Bañas’s testimony. The CA also noted that Larin was promoted despite the pendency of the case and that the records contained no statement of the amount of actual damages sustained by Larin.

• Extortion: Petitioner argued that the CA erred in not finding an attempt by private respondents to extort money from him; he claimed the filing of criminal complaints for tax evasion was improper.
• Tax Amnesty Immunity: Petitioner maintained that P.D. Nos. 1740 and 1840 granted him immunity from criminal prosecution for tax offenses because he had availed of two tax amnesty decrees.
• Installment Sale: Petitioner argued that the sale to AYALA was on installment as specified in the Deed of Sale; under Section 43 of the NIRC and Section 175 of Revenue Regulation No. 2, the initial payment did not include the promissory notes covering future installments, and the subsequent discounting of the bill should not affect the original agreement.
• Damages: Petitioner questioned the award of actual, moral, and exemplary damages to Larin, arguing that the CA erred in awarding them.

• Substance over Form / Tax Avoidance: Respondents asserted that taxation is a matter of substance and not of form; returns are scrutinized to determine if transactions are what they are and not declared to evade taxes. They argued that spreading income over installment payments lowers taxable income and tax due, while lump-sum payment proportionately increases tax for the year, so declaring an installment sale diminishes government taxes for the year of initial installment compared with a cash sale.
• Damages: Larin claimed that the extortion cases filed against him hampered his immediate promotion and caused him strong anxiety and social humiliation.

• Extortion: Whether the CA erred in ruling that there was no extortion attempt by BIR officials.
• Tax Amnesty Immunity: Whether P.D. Nos. 1740 and 1840 granted petitioner immunity from tax suits and prosecution.
• Installment Sale / Taxable Year: Whether petitioner’s income from the 1976 sale of land to AYALA should be declared as a cash transaction in his 1976 tax return because the buyer discounted the promissory note on the same day of the sale.
• Damages: Whether the CA erred in awarding actual, moral, and exemplary damages and attorney’s fees to respondent Larin.

• Extortion: No. The CA’s finding that no extortion was proved was a factual finding supported by evidence and binding on the SC; the only evidence was Bañas’s self-serving declarations.
• Tax Amnesty Immunity: No. Filing tax amnesty returns under P.D. Nos. 1740 and 1840 did not ipso facto grant immunity; Bañas did not voluntarily disclose the untaxed income from the AYALA sale or pay the correct tax due.
• Installment Sale / Taxable Year: No. The sale was not to be treated as an installment sale for 1976; discounting the promissory note with AYALA on the same day was a taxable disposition, so the gain was reportable in 1976.
• Damages: Partly. The SC deleted actual damages for lack of proof, reduced moral damages to P75,000.00 and exemplary damages to P25,000.00, and set attorney’s fees at P50,000.00; moral and exemplary damages were supported by the baseless charges against Larin.

• Extortion: The SC treated the first issue as one of fact. The CA observed that the only evidence of the alleged extortion attempt was Bañas’s self-serving declarations; the trial court found that the attempt was known to Bañas’s son-in-law and counsel on record, yet counsel did not testify to corroborate Bañas. Findings of fact by the CA, especially when they affirm the trial court’s factual findings, will not be disturbed unless not supported by evidence; likewise, a finding that an allegation is not supported by evidence on record should not be disturbed. The SC therefore agreed that private respondents could not be held liable for extortion on the evidence.

• Tax Amnesty Immunity: The SC examined P.D. No. 1740, which allows voluntary disclosure of correct taxable income for 1974 to 1979 and grants immunity from civil or criminal penalties under the NIRC to an individual who voluntarily files a return and pays the income tax due, except where the net taxable income declared is understated by 25% or more of the correct net taxable income. It also examined P.D. No. 1840, which covers voluntary disclosure of previously untaxed income and/or wealth realized in 1974 to 1980 and condones assessment and collection of internal revenue taxes and civil, criminal, or administrative liabilities, provided the taxpayer files an amnesty return on or before November 30, 1981, fully pays the tax due, pays at least P1,000.00 per taxable year, and files a statement of assets, liabilities, and net worth as of December 31, 1980. Bañas discounted the promissory note on the same day as the sale, and the discounting was questionable because the buyer, not a bank or financial institution, did the discounting; he availed of P.D. No. 1740 on July 2, 1981, two weeks after Larin filed the tax evasion complaint, and filed his amended return in Valenzuela, Bulacan instead of Manila where his principal office was located; he again availed of P.D. No. 1840, but his disclosure did not include the income from the sale to AYALA on a cash basis, he insisted the sale was on installment, he did not amend his income tax return, and he did not pay the tax considerably increased by the income from the discounting. He thus failed the twin requirements of declaration of untaxed income and full payment of tax due. The mere filing of a tax amnesty return does not ipso facto shield a taxpayer from prosecution; tax amnesty is a general pardon to taxpayers who want to start a clean tax slate and gives the government a chance to collect uncollected tax without the tedious process of a tax case, but to avail of it and be immune from suit the taxpayer must voluntarily disclose previously untaxed income and pay the corresponding tax. A tax amnesty, like a tax exemption, is never favored nor presumed in law and must be construed strictly against the taxpayer and liberally in favor of the taxing authority. Bañas’s claim of immunity was therefore untenable.

• Installment Sale / Taxable Year: The SC stated the general rule that the whole profit from a sale of property is taxable as income in the year the sale is made, but if not all of the sale price is received during that year and a statute provides that income shall be taxable in the year it is “received,” the profit from an installment sale is apportioned among the years in which the installments are paid and received. Section 43 of the NIRC and Section 175 of Revenue Regulation No. 2 allow a seller of real property who disposes of it on installment to use the installment method if the initial payment does not exceed 25% of the selling price. Initial payment means the payment received in cash or property, excluding evidences of indebtedness due and payable in subsequent years, such as promissory notes or mortgages, given by the purchaser during the taxable year of sale; it does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price and due and payable in subsequent years. Such disposition or discounting of the receivable is material only to the computation of the initial payment: if the initial payment is within 25% of the total contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale; otherwise it is a deferred sale. Although the proceeds of a discounted promissory note are not considered part of the initial payment, they are still taxable income for the year converted into cash, and the subsequent payments or liquidation of certificates of indebtedness are reported using the installment method in computing the proportionate income to be returned during the respective year realized. Non-dealer sales of real or personal property may be reported under the installment method provided the obligation is still outstanding at the close of that year; if the seller disposes of the entire installment obligation by discounting the bill or promissory note, he must report the balance of the income from the discounting, not only the income from the initial installment payment. Where an installment obligation is discounted at a bank or finance company, a taxable disposition results even if the seller guarantees payment, continues to collect on the obligation, or handles repossession of merchandise in case of default; this rule prevails in the United States, and because Philippine income tax laws are of American origin, American interpretations of parallel tax laws have persuasive effect. By analogy, all the more would a taxable disposition result when the seller himself discounts the promissory note: the buyer’s indebtedness is discharged while the seller acquires money for the settlement of his receivables, and the income should be reported at the time of the actual gain. Bañas had the promissory notes covering the succeeding installment payments issued by AYALA discounted by AYALA itself on the same day of the sale; he thus lost entitlement to report the sale as an installment sale because a taxable disposition resulted and he was required by law to report in his returns the income derived from the discounting. What he did was tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for 1976.

• Damages: The SC held that a person seeking actual or compensatory damages has the burden of proving the damages and their amount. Larin claimed that the extortion cases hampered his immediate promotion and caused him strong anxiety and social humiliation, and the trial court awarded P200,000.00 as actual damages. The CA, however, stated that despite the pendency of the case Larin was given a promotion at the BIR; nothing on record, aside from Larin’s statements, showed that he suffered loss of seniority that allegedly barred his promotion, and in fact he was promoted despite the pendency of the case. The records contained no statement of the amount of actual damages sustained by Larin. Actual damages cannot be allowed unless supported by evidence on the record; the court cannot rely on speculation, conjectures, or guesswork as to the fact and amount of damages, and to justify actual or compensatory damages it is necessary to prove with a reasonable degree of certainty the actual amount of loss. Since there was no basis to assess with certainty the actual or compensatory damages counterclaimed by Larin, the award was deleted. Moral damages may be recovered in cases involving acts referred to in Article 21 of the Civil Code. As a rule, a public official may not recover damages for charges of falsehood related to his official conduct unless he proves that the statement was made with actual malice; the SC reiterated the test for actual malice set forth in New York Times vs. Sullivan and adopted in Babst, et al. vs. National Intelligence Board, et al.: knowledge that the statement was false or reckless disregard of whether it was false or not. The SC appreciated Bañas’s claim that he filed his 1976 return in good faith and honestly believed the law allowed him to declare the sale as installment, and that the tax laws needed construction, and it understood that Bañas was offended by headlines alluding to him as a tax evader, but these did not justify what amounted to a baseless prosecution of Larin. Bañas presented no evidence that Larin extorted money from him; he even admitted that he never met nor talked to Larin, and when the tax investigation started Larin was not yet Regional Director of BIR Region IV-A, Manila. On Larin’s instruction, Bañas’s tax assessment was considered one involving a sale of capital asset, with income subjected to only 50% assessment, reducing the original tax assessment by half. These circumstances showed that Larin’s involvement in extortion was not indubitable, yet Bañas filed extortion cases against Larin in different fora; this was where actual malice could attach on Bañas’s part. The trial court did not err in dismissing Bañas’s complaints, a ruling affirmed by the CA. The SC found sufficient basis for moral and exemplary damages in favor of Larin: the CA believed Larin when he said he suffered anxiety and humiliation because of the unfounded charges, Bañas’s actions against Larin were found unwarranted and baseless, and the criminal charges filed against Larin in the Tanodbayan and City Fiscal’s Office were all dismissed. On amount, each case must be governed by its own peculiar circumstances; Del Rosario vs. Court of Appeals cited cases where no actual damages were adjudicated and moral and exemplary damages were reduced for being too excessive, and PNB vs. Court of Appeals quoted RCPI vs. Rodriguez that a P100,000.00 moral damages award was excessive and unconscionable; moral damages must be commensurate with the loss or injury suffered. In PNB vs. Court of Appeals, an exemplary damages award of P1,000,000.00 was found too excessive and reduced to P25,000.00. The parties awarded moral damages in those cases were not public officials; here the award was in favor of a government official in connection with his official function, so the SC affirmed moral damages with caution because it might open the floodgates for government officials counterclaiming damages in suits against them and because it must be careful lest the amounts awarded make citizens hesitate to expose corruption for fear of lawsuits from vindictive government officials. Conformably with the declaration that moral damages are not intended to enrich anyone, the SC reduced moral damages from P200,000.00 to P75,000.00 and set exemplary damages at P25,000.00. The law allows attorney’s fees when exemplary damages are awarded and when the party to a suit was compelled to incur expenses to protect his interest; although government officers are usually represented by the Solicitor General in cases connected with the performance of official functions, Larin was compelled to hire a private lawyer for his defense and the successful pursuit of his counterclaims, so the SC awarded P50,000.00 as reasonable attorney’s fees.

• Installment Sale and Discounting of Installment Obligation — Under Section 43 of the NIRC and Section 175 of Revenue Regulation No. 2, a seller of real property may report income on the installment method only if the initial payment does not exceed 25% of the selling price; initial payment excludes promissory notes or other evidences of indebtedness due in later years. But discounting the entire installment obligation is a taxable disposition, and the proceeds are taxable in the year converted into cash. The SC applied this to Bañas, who discounted the AYALA promissory note on the same day as the sale, so he could not report the sale as an installment sale and had to report the gain in 1976.
• Tax Amnesty Immunity — A tax amnesty is a general pardon that allows taxpayers to start a clean tax slate and gives the government a chance to collect uncollected taxes without a tedious tax case. Mere filing of an amnesty return does not ipso facto shield the taxpayer; to be immune, the taxpayer must voluntarily disclose previously untaxed income and pay the corresponding tax. The SC applied this to deny Bañas immunity because he did not disclose the cash-basis income from the AYALA sale and did not pay the correct tax.
• Strict Construction of Tax Amnesty — A tax amnesty, like a tax exemption, is never favored nor presumed in law; its terms must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The SC applied this against Bañas’s claim under P.D. Nos. 1740 and 1840.
• Proof of Actual or Compensatory Damages — A person seeking actual or compensatory damages must prove both the fact and the amount of the loss with a reasonable degree of certainty; the court cannot rely on speculation, conjecture, or guesswork. The SC applied this to delete the P200,000.00 actual damages awarded to Larin because the records contained no statement of the amount of actual damages.
• Actual Malice for Public Officials in Defamation-Related Damages — A public official may not recover damages for charges of falsehood related to his official conduct unless he proves that the statement was made with actual malice, meaning knowledge that it was false or reckless disregard of whether it was false or not. The SC applied this to find that Bañas’s baseless extortion charges against Larin showed actual malice, supporting moral and exemplary damages.
• Moral Damages Proportionality and Public Official Caution — Moral damages must be commensurate with the loss or injury suffered and are not intended to enrich anyone; where the award is in favor of a government official in connection with official functions, courts must be cautious to avoid opening the floodgates to counterclaims and chilling citizens from exposing corruption. The SC applied this to reduce moral damages to P75,000.00 and exemplary damages to P25,000.00.
• Findings of Fact of the CA — Findings of fact by the CA, especially when they affirm the trial court’s factual findings, will not be disturbed by the SC unless not supported by evidence; the same applies to a finding that an allegation is not supported by evidence on record. The SC applied this to uphold the finding that no extortion was proved.
• Attorney’s Fees — Attorney’s fees are allowed when exemplary damages are awarded and when a party is compelled to incur expenses to protect his interest. The SC applied this to award P50,000.00 to Larin, who had to hire a private lawyer for his defense and counterclaims.

• “The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate.” — The SC rejects Bañas’s claim that mere availment of the tax amnesties barred prosecution; the passage states the nature of tax amnesty and the need for more than filing.
• “Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income for the year it was converted into cash.” — The SC distinguishes the treatment of discounted notes for initial-payment computation from their taxability as income when converted into cash.
• “Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default.” — The SC states the discounting rule and then applies it by analogy to Bañas’s discounting of the AYALA note.
• “To avail of a tax amnesty granted by the government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income.” — The SC lays down the twin requirements for tax amnesty immunity that Bañas failed to satisfy.

• Babst, et al. vs. National Intelligence Board, et al., 132 SCRA 316, 330 (1984) — Relied on for the actual malice test in defamation and libel cases, which the SC applied to a public official’s claim for damages.
• New York Times vs. Sullivan, 376 U.S. 254 (1964) — The landmark American case whose actual malice standard the SC adopted and reiterated.
• Del Rosario vs. Court of Appeals, 267 SCRA 158 (1997) — Relied on for reducing moral and exemplary damages that are excessive and for requiring proportionality to the loss or injury suffered.
• Philippine National Bank vs. Court of Appeals, 266 SCRA 136 (1997) — Relied on for the rule that each case must be governed by its own peculiar circumstances and for the proportionality of moral damages.
• People vs. Castañeda, Jr., 165 SCRA 327 (1988) — Cited for the strict construction of tax amnesty against the taxpayer and liberally in favor of the taxing authority.
• Republic vs. Intermediate Appellate Court, 196 SCRA 335 (1991) — Cited for the nature of tax amnesty as a general pardon and the requirements for availing of it.
• Collector of Internal Revenue vs. Binalbogon Estate, Inc., 13 SCRA 1 (1965) — Cited for the rule on discounting installment obligations prevailing in the United States.
• Sumalpong vs. Court of Appeals, 268 SCRA 764 (1997) — Relied on for requiring proof of actual damages with a reasonable degree of certainty.

• Section 43, 1977 National Internal Revenue Code — Installment basis; defines initial payment as payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period of sale; applied to determine whether Bañas’s sale qualified for installment reporting and to hold that discounting the note was a taxable disposition.
• Section 34, 1977 National Internal Revenue Code — Capital gains and losses; 50% of gain taken into account if the capital asset was held for more than twelve months; applied by Larin in reducing the deficiency assessment to P936,598.50.
• Section 175, Revenue Regulation No. 2 — Deferred-payment sales of real property; defines initial payments and excludes evidences of indebtedness due in subsequent years; applied to Bañas’s sale and discounting.
• Section 177, Revenue Regulation No. 2 — Deferred-payment sale of real property not on installment plan; obligations of the purchaser received by the vendor are considered the equivalent of cash; cited as part of the installment-sale rules.
• P.D. No. 1740, Sections 1 and 5 — Tax amnesty for voluntary disclosure of correct taxable income for 1974 to 1979 and immunity from penalties; applied to deny Bañas immunity because he did not voluntarily disclose the untaxed income and pay the correct tax.
• P.D. No. 1840, Sections 1 and 2 — Tax amnesty on untaxed income and/or wealth for 1974 to 1980, with conditions for immunity; applied to deny Bañas immunity because he did not meet the conditions.
• Article 21, Civil Code — Moral damages for acts contrary to morals, good customs, or public policy; applied to support moral damages in favor of Larin.
• Article 2207, Civil Code — Cited by the SC as allowing attorney’s fees when exemplary damages are awarded and when a party is compelled to incur expenses to protect his interest; applied to award P50,000.00 attorney’s fees.