Collector of Internal Revenue vs. Servando de los Angeles

The five-year prescriptive period in section 332(c) of the National Internal Revenue Code for collecting an assessed internal revenue tax by distraint or levy is not qualified by the proviso in section 331 exempting from limitation cases already investigated prior to the Code’s approval; that proviso is confined to the limitation established in section 331.

Respondent Servando de los Angeles was one of four cousins who inherited real and personal properties from Marta Dizon, who died in 1928. The dispute concerns the collection of inheritance tax from her estate. The National Internal Revenue Code, approved in 1939, fixed the periods for assessment and collection of internal revenue taxes in sections 331 and 332.

Marta Dizon died in 1928, leaving real and personal properties to four cousins, one of whom was respondent Servando de los Angeles. In March 1935, the administrator of the estate of the deceased filed a return showing that the heirs had an inheritance tax liability of P185.94 each. Sometime in August 1935, the Collector of Internal Revenue sent an assessment notice to each heir requiring payment of that amount on or before the 25th of that month. All the heirs paid except respondent, who refused the demand on the grounds that he had not yet received his share of the inheritance and that there were still questions pending in court relative to the distribution of the estate.

Subsequent attempts to make respondent pay proved futile. Instructions repeatedly sent to the deputy provincial treasurer of Rizal to have the tax collected through distraint and levy were apparently ignored. On January 28, 1955, some 20 years after the assessment, a warrant of distraint and levy was issued and sent to the deputy provincial treasurer of Rizal for execution.

Served with the warrant, respondent taxpayer, without disputing the legality of the assessment, protested the distraint and levy on the ground of prescription and then petitioned the Court of Tax Appeals to declare the warrant illegal and enjoin its enforcement. The Court of Tax Appeals, after trial, upheld the taxpayer's contention. The Collector of Internal Revenue and the provincial and municipal treasurers concerned brought the case to the Supreme Court for review. The question for determination was whether an internal revenue tax that was assessed in 1935 could, some 20 years thereafter, still be collected by distraint and levy.

• Applicability of Section 331 Proviso: Petitioners contended that the prescriptive period of five years fixed in subdivision (c) of section 332 cannot be applied to the present case because of the proviso to section 331, which says that the limitation provided in that section shall not apply to cases already investigated prior to the approval of the Code.

• Prescription: Respondent taxpayer protested the distraint and levy on the ground of prescription and petitioned the Court of Tax Appeals to declare the warrant illegal and enjoin its enforcement.
• Non-Receipt of Inheritance and Pending Distribution: Respondent refused the 1935 demand on the grounds that he had not yet received his share of the inheritance and that there were still questions pending in court relative to the distribution of the estate.
• Legality of Assessment Not Disputed: Respondent did not dispute the legality of the assessment; he challenged the collection by distraint and levy.

• Prescription of Collection: Whether an internal revenue tax that was assessed in 1935 could, some 20 years thereafter, still be collected by distraint and levy.
• Scope of Section 331 Proviso: Whether the proviso in section 331, stating that the limitation provided in that section shall not apply to cases already investigated prior to the approval of the Code, applies to the five-year period for collection by distraint or levy under section 332(c).

• Prescription of Collection: No. The tax, having been assessed within the period fixed by law, could be collected by distraint or levy only if the proceeding was begun within five years after assessment; collection after that period was without authority of law.
• Scope of Section 331 Proviso: No. The proviso in section 331 is confined to the limitation established in that section and does not restrict or qualify section 332(c); taxing acts are construed liberally in favor of the taxpayer.

• Prescription of Collection: Section 331 limits assessment to five years after the return was filed and bars a court proceeding without assessment after that period. Section 332(c) provides that where an internal revenue tax has been assessed within the period of limitation, it may be collected by distraint or levy or by a proceeding in court, but only if begun within five years after the assessment or prior to the expiration of any period for collection agreed upon in writing by the Collector and the taxpayer before the expiration of the five-year period. The tax in question was assessed within five years after the return, so section 332(c) applied. The warrant of distraint and levy, however, was issued on January 28, 1955, some 20 years after the 1935 assessment; under section 332(c), collection by distraint or levy had to be begun within five years after assessment unless a written agreement provided otherwise, and the collection was time-barred. Collection by distraint and levy after the five-year period was therefore without authority of law, and the Court of Tax Appeals correctly upheld the taxpayer's contention.
• Scope of Section 331 Proviso: The contention that the proviso to section 331 exempts the present case because it was already investigated prior to the approval of the Code is untenable. The "limitation" mentioned in the proviso refers only to the limitation established in section 331, not to the limitation of period prescribed in section 332(c). A proviso to a statute or section restricts or qualifies the provisions immediately preceding it and is confined to that to which it is appended unless the legislature clearly intended a wider scope. Had Congress intended the proviso in section 331 to restrict or qualify section 332, it would have embodied that intention in section 332 or inserted words to make it clear. Taxing acts, including provisions on limitations on assessment and collection, are construed liberally in favor of the taxpayer. The proviso thus did not authorize the 1955 collection.

• Proviso Confined to Section Appended — A proviso to a statute or to a section thereof restricts or qualifies the provisions immediately preceding it and is confined to that to which it is appended, unless it clearly appears that the legislature intended it to have a wider scope. In this case, the proviso in section 331 of the National Internal Revenue Code, exempting from limitation cases already investigated prior to the Code's approval, was held to refer only to the limitation established in section 331 and not to the five-year collection period in section 332(c).
• Liberal Construction of Taxing Acts in Favor of Taxpayer — Taxing acts, including provisions as to limitations on assessment and collection of taxes, should be construed liberally in favor of the taxpayer. The Court applied this rule to reject an expansive reading of the section 331 proviso that would have extended it to section 332(c).
• Five-Year Period for Collection by Distraint or Levy After Assessment — Under section 332(c) of the National Internal Revenue Code, where an internal revenue tax has been assessed within the period of limitation, it may be collected by distraint or levy or by a proceeding in court only if begun within five years after the assessment, or 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 the five-year period. The Court applied this rule to hold that a tax assessed in 1935 could not be collected by a warrant of distraint and levy issued in 1955.

• 'Having been assessed within the time fixed by law, the tax in question could, pursuant to subdivision (c) of section 332, be collected by distraint or levy or by court proceeding, but, as specifically provided in that same subdivision, "only if begun (1) within five years after the assessment of the tax." After the expiration of that period of limitation, collection of the tax by any of those methods would be without the authority of law.' — This passage states the ratio decidendi: the tax was timely assessed, but collection by distraint or levy was time-barred after five years from assessment.
• 'As the Court of Tax Appeals says, the "limitation" mentioned in the proviso to section 331 can refer only to the limitation established in that section, and not to the limitation of period prescribed in section 332 (c).' — This passage defines the limited scope of the section 331 proviso and rejects its extension to section 332(c).
• 'This must be so because the natural and appropriate office of a proviso to a statute or to a section thereof is to restrict or qualify the provisions immediately preceding it. Hence, it has been made a rule of construction that a proviso shall be confined to that which it has been appended, unless it clearly appears that the legislature intended it to have a wider scope.' — This passage articulates the rule of statutory construction on provisos relied upon by the Court.
• 'Taxing acts, including provisions as to limitations on assessment and collection of taxes, should be construed liberally in favor of the taxpayer.' — This passage states the canon of construction applied to resolve the limitation issue in favor of the taxpayer.

• Bowers vs. N. Y. & Albany Co., 273 U.S. 346, 1 USTC, Par. 218, cited in Vol. 4 CCH (1954), Par. 1443, 119 — Cited for the rule that taxing acts, including provisions as to limitations on assessment and collection of taxes, should be construed liberally in favor of the taxpayer.

• Section 331, National Internal Revenue Code — Provides that internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for collection shall be begun after that period; a return filed before the last day prescribed by law is considered filed on that last day. Its proviso states that the limitation shall not apply to cases already investigated prior to the approval of the Code. The Court held the proviso confined to section 331 and not applicable to section 332(c).
• Section 332(a), National Internal Revenue Code — Exception for a false or fraudulent return with intent to evade tax or failure to file a return, allowing assessment or court proceeding without assessment within ten years after discovery of the falsity, fraud, or omission. The Court noted this exception was not involved because the case did not involve a false or fraudulent return or failure to file a return.
• Section 332(b), National Internal Revenue Code — Exception where, before expiration of the time prescribed in section 331 for assessment, both the Collector of Internal Revenue and the taxpayer have consented in writing to assessment after such time; the tax may be assessed before the expiration of the agreed period, which may be extended by subsequent written agreements. The Court noted this exception was not involved because no different period for assessment had been consented to by both the Collector and the taxpayer.
• Section 332(c), National Internal Revenue Code — Provides that where an internal revenue tax has been assessed within the period of limitation, it may be collected by distraint or levy or by a proceeding in court, but only if begun within five years after the assessment, or prior to the expiration of any period for collection agreed upon in writing by the Collector and the taxpayer before the expiration of the five-year period. The Court applied this provision to bar the 1955 collection of the 1935 assessment.

Paras, C.J.; Bengzon; Padilla; Montemayor; Bautista Angelo; Labrador; Concepcion; Reyes, J.B.L.; Endencia; and Felix, JJ.