Collector of Internal Revenue vs. Reyes

Summary enforcement by distraint and levy is barred once three years have elapsed from the filing of the income tax return, and the Court of Tax Appeals may enjoin such illegal summary collection without requiring deposit or bond under Section 11 of Republic Act No. 1125.

Aurelio P. Reyes was an individual income taxpayer under the National Internal Revenue Code administered by the Collector of Internal Revenue. Disputed assessments were reviewable by the Court of Tax Appeals under Republic Act No. 1125, whose Section 7 confers exclusive appellate jurisdiction over decisions of the Collector and whose Section 11 governs suspension of collection pending appeal. The governing collection framework included Section 51(d) prescribing a three-year period tied to the return, and Section 305 generally denying injunctions against collection of internal revenue taxes.

Reyes filed his income tax returns for the tax years 1946 to 1950, the last return for 1950 having been filed on April 27, 1951. By letter dated October 13, 1954, the Collector of Internal Revenue demanded payment of alleged deficiency income taxes, surcharges, interests and penalties for those years amounting to P641,470.04 as of October 31, 1954, with suggestion that payment be made either to the Bureau of Internal Revenue or the City Treasurer of Manila. Together with the assessment letter, Reyes received a warrant of distraint and levy on his properties in the event of failure to pay on or before October 31, 1954.

Thereafter, by letter dated November 4, 1954, the City Treasurer of Manila informed Reyes that instruction had been received from the Collector to execute the warrant if the amount demanded was not settled on or before November 10, 1954. Because no settlement followed, Reyes filed with the Court of Tax Appeals on November 15, 1954 a petition for review of the assessment, followed on November 16, 1954 by an urgent petition to restrain execution of the warrant. According to Reyes, collection by summary proceedings had already prescribed under Section 51(d) since the returns had been filed more than three years earlier; distraint and levy would cause injustice or irreparable injury and render any judgment in the main case meaningless; the Section 11 of Republic Act No. 1125 bond or deposit requirement was inapplicable; and most of his assets, consisting of Manila real properties and shares of stock in the Philippine Racing Club, were encumbered so there was no possibility of absconding or concealment. The Collector opposed on November 19, 1954, maintaining lack of authority to restrain, adequacy of pay-and-sue, and non-preclusion under Section 51(d).

The warrant of distraint and levy was issued only on October 13, 1954, or 3 years, 5 months and 16 days after Reyes filed his return for tax year 1950. The Court of Tax Appeals, after hearing, found the summary method improper after the lapse of the three-year limitation period and enjoined its use pending final decision on the merits.

• Authority to Enjoin: Petitioner argued that the Court of Tax Appeals has no authority to restrain execution of the warrant of distraint and levy for collection of deficiency income taxes.
• Adequate Remedy and Prescription: Petitioner maintained that the taxpayer has an adequate remedy at law by paying first and then seeking recovery, and that Section 51(d) does not preclude distraint and levy.
• Statutory Prohibition: Petitioner contended that the restraint disregarded Section 305 of the National Internal Revenue Code, which provides that no court shall have authority to grant an injunction to restrain collection of any internal revenue tax.
• Bond Requirement: Petitioner asserted that even if restraint were permissible under Section 11 of Republic Act No. 1125, the Court erred in issuing the injunction without requiring the taxpayer either to deposit the amount claimed or file a surety bond for not more than double the tax sought to be collected.

• Prescription of Summary Collection: Respondent Reyes alleged that the right to collect by summary proceedings had already prescribed under Section 51(d) of the National Internal Revenue Code, as his 1946 to 1950 returns had been filed more than three years before, the last on April 27, 1951.
• Irreparable Injury: Respondent maintained that distraint and levy would work injustice or irreparable injury and would tend to render any judgment in the main case meaningless and ineffectual.
• Inapplicability of Bond: Respondent argued that the Section 11 of Republic Act No. 1125 requisite of filing a bond or deposit before suspension of distraint and levy is not applicable in this case.
• No Risk of Evasion: Respondent alleged that a greater portion of his assets consists of Manila real properties and shares of stock in the Philippine Racing Club, all encumbered in various financial institutions, so there is no possibility he would abscond with, remove or conceal property.
• Failure to Move for Reconsideration: Respondent raised that no motion for reconsideration was filed below although a notice of appeal dated January 21, 1955 was filed, and that such failure bars certiorari.

• Restraint of Prescribed Summary Collection: Whether the Court of Tax Appeals could restrain the Collector of Internal Revenue from enforcing collection of income tax deficiency by summary proceedings after expiration of the three-year period provided in Section 51(d) of the National Internal Revenue Code.
• Bond as Condition for Injunction: Whether the Court of Tax Appeals had power to grant an injunction without requiring the filing of a bond or making a deposit as prescribed by Section 11 of Republic Act No. 1125.

• Restraint of Prescribed Summary Collection: Yes. Collection by distraint and levy after three years from filing of the return is without legal authority and was properly enjoined, the Government being left to judicial action.
• Bond as Condition for Injunction: Yes. No deposit or bond was required because the bond condition applies only where summary collection is lawful, not where the method itself violates the three-year limitation and jeopardizes the taxpayer.

• Restraint of Prescribed Summary Collection: Section 51(d) requires the Collector, upon discovery of refusal, neglect, or erroneous, false or fraudulent returns, to act at any time within three years after the return is due or has been made. Construed in a long line of cases, the three-year period limits enforcement by the summary proceedings of distraint and levy, though recovery by civil action remains available. Applied here, the returns for 1946 to 1950 were filed, the last on April 27, 1951, while assessment and warrant issued only on October 13, 1954, beyond three years; hence the warrants and related sale steps were issued without authority of law. Section 305 did not bar relief because Section 11 of Republic Act No. 1125, with its repealing clause in Section 21, must be deemed to have modified Section 305 to allow suspension when collection may jeopardize the Government and/or taxpayer interest.
• Bond as Condition for Injunction: Section 11 provides that no appeal shall suspend payment, levy, distraint and/or sale, provided however that when in the opinion of the Court collection may jeopardize the interest of the Government and/or taxpayer, the Court at any stage may suspend collection and require deposit or surety bond for not more than double the amount. That requirement presupposes summary proceedings carried out in consonance with law; what was suspended here was the use of a method evidently illegal after the three-year period. To declare the method violative of law yet require a bond as prerequisite would be absurd, for refusal to post bond could not oblige authorization of an illegal collection. The injunction was a lawful exercise of exclusive appellate jurisdiction under Section 7 over disputed assessments and other matters arising under the National Internal Revenue Code. Certiorari was additionally barred by failure to file a motion for reconsideration below to afford correction of alleged errors.

• Three-year limit on summary collection — Where returns have been filed, the Collector's right to collect income taxes by the summary methods of distraint and levy must be exercised within three years from filing; after that period, collection can be enforced only by judicial action. Applied to bar the October 13, 1954 warrant issued 3 years, 5 months and 16 days after the April 27, 1951 return.
• Modification of injunction ban by Republic Act No. 1125 — Section 11 of Republic Act No. 1125, allowing the Court of Tax Appeals to suspend collection when in its opinion collection may jeopardize the Government and/or taxpayer, modified Section 305 of the National Internal Revenue Code prohibiting injunctions against tax collection, in view of the repealing clause in Section 21. Applied to uphold the restraint power despite Section 305.
• Bond requirement conditioned on lawful summary process — The Section 11 requirement of deposit or surety bond for not more than double the amount as condition to suspending collection applies only when the summary process is in accordance with law, not when the method itself is illegal for violating the three-year limitation and jeopardizing the taxpayer. Applied to excuse Reyes from posting bond.
• Court of Tax Appeals jurisdiction over collection methods — Under Section 7 of Republic Act No. 1125, the Court of Tax Appeals exercises exclusive appellate jurisdiction over disputed assessments and other matters arising under the National Internal Revenue Code, including the legality of the collection method after hearing. Applied to sustain the finding that distraint and levy were improper.
• Motion for reconsideration as prerequisite to certiorari — Attention of the lower court must first be called to its supposed error with opportunity to correct on motion for reconsideration before certiorari will lie. Applied as an additional ground to deny the writ where no motion for reconsideration was filed, citing Herrera vs. Barretto, Uy Chua vs. Imperial, Manila Post Publishing Co. vs. Sanchez, Alvarez vs. Ibañez, and Valeriano Nicolas et al. vs. Hon. Modesto Castillo et al.

• ". . . after the three years have elapsed from the date to which income tax returns which have been found to be false, fraudulent or erroneous, may have been made, the Collector of Internal Revenue cannot make any summary collection through administrative methods, but must do so through judicial proceedings." — States the controlling prescription rule reiterated from Philippine Sugar Estate Development Co., Inc. vs. Juan Posadas to bar distraint and levy after three years.
• "It therefore appears that when it refers to the Collection of income tax it is mandatory that the right of the Collector of Internal Revenue to collect it by the summary methods of distraint and levy be exercised within the period of three years from the time the income tax return is filed, otherwise the right can only be enforced by judicial action." — Formulates the mandatory three-year limit recently affirmed in Collector of Internal Revenue vs. Jose Avelino et al. and applied to the 1954 warrant.
• "This section (Sec. 11 of Rep. Act No. 1125) must be deemed to have modified section 305 of the National Internal Revenue Code in view of the repeating clause contained in said Act to the effect that "any law or part of law, or any executive order, rule or regulation or part thereof, inconsistent with the provisions of this Act is hereby repealed" (Section 21)." — Establishes why the general injunction ban does not defeat the Court of Tax Appeals' suspension power.
• "No motion for reconsideration was ever filed by petitioners in the court below, calling its attention to the alleged errors and irregularities now raised in this petition, to give it an opportunity to correct such errors and irregularities, if indeed any were committed." — States the procedural default quoted from Valeriano Nicolas et al. vs. Hon. Modesto Castillo et al. as an independent ground to deny certiorari.

• Collector of Internal Revenue vs. Villegas, 56 Phil., 554 — Cited as part of long line construing Section 51(d) to limit Government to summary collection within three years while preserving civil action.
• Collector of Internal Revenue vs. Haygood, 65 Phil., 520 — Cited for same construction that three-year period bars summary distraint and levy but not judicial recovery.
• Juan de la Viña vs. El Gobierno de las Filipinas, G.R. No. 42669, January 29, 1938 — Cited as supporting authority for the three-year limitation on summary enforcement.
• Philippine Sugar Estate Development Co., Inc. vs. Juan Posadas, 68 Phil., 216 — Followed for the rule that after three years the Collector cannot summarily collect but must proceed judicially.
• Collector of Internal Revenue vs. Jose Avelino et al., p. 327, November 19, 1956 — Followed as recent controlling authority that warrants issued after three years are without legal authority and properly enjoined, and that Section 11 modified Section 305.
• Herrera vs. Barretto, 25 Phil., 245; Uy Chua vs. Imperial, 44 Phil., 27; Manila Post Publishing Co. vs. Sanchez, 81 Phil., 614; Alvarez vs. Ibañez, 83 Phil., 104 — Cited as established doctrine requiring motion for reconsideration before seeking certiorari.
• Valeriano Nicolas et al. vs. Hon. Modesto Castillo et al., 97 Phil., 336 — Cited to stress that failure to file motion for reconsideration below is a fatal barrier warranting denial of the writ.

• Section 51(d), National Internal Revenue Code — Provides that in cases of refusal, neglect, or erroneous, false or fraudulent returns, the Collector shall act at any time within three years after the return is due or made; applied as a limitation barring distraint and levy after April 27, 1951 plus three years.
• Section 305, National Internal Revenue Code — Provides that no court shall have authority to grant an injunction to restrain collection of any internal revenue tax; held modified by Republic Act No. 1125 and thus not preventing the restraint.
• Section 11, Republic Act No. 1125 — Provides that appeal does not suspend payment, levy, distraint and/or sale, provided however the Court of Tax Appeals may suspend collection at any stage when in its opinion collection may jeopardize Government and/or taxpayer interest and require deposit or bond up to double the amount; applied to authorize suspension without bond where the summary method was illegal.
• Section 7, Republic Act No. 1125 — Confers on the Court of Tax Appeals exclusive appellate jurisdiction over decisions of the Collector involving disputed assessments and other matters arising under the National Internal Revenue Code; applied to sustain jurisdiction to rule on legality of distraint and levy.
• Section 21, Republic Act No. 1125 — Repealing clause for inconsistent laws, orders, rules or regulations; relied upon to deem Section 11 as modifying Section 305.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador and Endencia, JJ., concur. Reyes, J.B.L., J., concurring in the result, subject to his dissenting opinion in Collector of Internal Revenue vs. Avelino and the Court of Tax Appeals regarding the necessity of the taxpayer's posting a bond or depositing the amount of taxes claimed before tax collection may be suspended.