Commissioner of Internal Revenue vs. Marily Development Corporation

The CTA may rule on an issue not raised by the parties only when the issue is necessary to achieve an orderly disposition of the case and its resolution requires no additional evidence and rests solely on matters already in the record; an unpleaded Letter of Authority issue that requires evidence cannot be resolved by the CTA on that basis. Prescription is a matter of defense, and the taxpayer bears the burden of proving that the full period of limitation has expired.

The Commissioner of Internal Revenue (CIR) is the government official vested with the power to assess and collect internal revenue taxes, while Marily Development Corporation (MDC) is the taxpayer assessed for deficiency taxes for calendar year 2006. Under the Tax Code, the CIR may authorize the examination of a taxpayer through a Letter of Authority (LoA), and assessments are generally subject to a three-year prescriptive period under Section 203, with a ten-year period under Section 222 for false or fraudulent returns or failure to file a return. The case also implicates the CTA's authority to pass upon issues not raised by the parties, a procedural question governed by the conditions set in Prime Steel Mill, Inc. vs. Commissioner of Internal Revenue.

On June 8, 2011, the Commissioner of Internal Revenue (CIR) issued a Formal Assessment Notice (FAN) assessing Marily Development Corporation (MDC) for deficiency income tax, Value-Added Tax (VAT), Expanded Withholding Tax (EWT), and Withholding Tax on Compensation (WTC) for calendar year 2006 in the total amount of PHP 8,104,781.30. The assessment consisted of an income tax deficiency of PHP 2,474,878.35, a VAT deficiency of PHP 4,690,771.55, an EWT deficiency of PHP 108,879.88, and a WTC deficiency of PHP 830,251.52. MDC protested the assessment. On December 29, 2017, MDC received a Preliminary Collection Letter on the alleged deficiency taxes. On January 25, 2018, MDC filed a Petition for Review with the Court of Tax Appeals (CTA). During trial, the CIR manifested that it would not present any evidence or witnesses in the case.

The CTA Second Division cancelled the assessment after finding no evidence that the examination of MDC's books was authorized through a Letter of Authority (LoA). The revenue officers who examined MDC's books and accounting records were not presented in court. The CTA further found that even assuming a valid LoA existed, MDC received the FAN only on June 10, 2011, and the CIR had not adduced evidence of fraud on the part of MDC.

The CIR filed a Motion for Reconsideration and/or New Trial, arguing that the issuance of the LoA was never raised as an issue during trial. It attached LOA No. 2000-000158676, which was received by MDC on July 12, 2007, and prayed that the case be reopened to allow presentation of the LoA. The CTA Second Division denied the motion, holding that the CIR had waived its right to present evidence, that the LoA was not identified by a witness or incorporated in the case records, and that there was no compelling reason to reopen the case. The CIR then elevated the matter to the CTA En Banc, arguing that the FAN and Preliminary Collection Letter referred to LOA No. 158676 dated July 5, 2007, and that BIR records confirmed its issuance with proof of receipt by MDC's representative, Lourdes Pantola, on July 12, 2007.

The CTA En Banc affirmed the CTA Division. It found that the presumption of regularity and correctness of assessments did not materialize because there was no proof of a valid LoA and of the revenue officer's authority to audit MDC's books. On prescription, the CTA En Banc found that the CIR could not equate MDC's failure to present its tax returns with evidence that no returns were filed. MDC did not offer in evidence its 2006 Annual Income Tax Return and VAT returns; the EWT returns for February, June, August, October, November, and December 2006 and the WTC returns for February, March, May, June, September, October, November, and December 2006 showed unreadable filing dates. Presiding Justice Roman G. del Rosario dissented. The CIR sought reconsideration, but the CTA En Banc denied it.

• Unpleaded LoA Issue: The CIR emphasized that the existence or non-existence of the LoA was never put in issue; MDC rested its case without questioning the revenue officers' authority, which amounted to an implied admission that a LoA existed.
• Documentary References and Admissions: The CIR pointed to the FAN and Preliminary Collection Letter, both referencing LOA No. 158676 dated July 6, 2007, appended to MDC's petition before the Division; the Joint Stipulation of Facts and Issues allegedly admitted the issuance and receipt of both documents, so the CIR should not be faulted for not submitting the LoA as evidence.
• Presumption of Regularity: The CIR argued that it enjoys the presumption of regularity in the discharge of official functions and the presumption of correctness of tax assessments, and that MDC had the burden to overcome these presumptions with clear and convincing evidence.
• Prescription and 10-Year Period: The CIR reiterated that MDC did not file its Income Tax, VAT, and Withholding Tax Returns for 2006, so the reckoning date of the three-year prescriptive period cannot be determined and the 10-year prescriptive period under Section 222(a) should apply.
• State Not Estopped: Before the CTA En Banc, the CIR argued that the State cannot be put in estoppel and that BIR records confirm LOA No. 158676 with proof of receipt by MDC's representative, Lourdes Pantola, on July 12, 2007.

• CTA Authority over Unpleaded LoA Issue: Whether the CTA erred in ruling on the validity or existence of a Letter of Authority even though the issue was never raised by the parties in their pleadings or during trial.
• Prescription of Tax Assessments: Whether the CTA erred in cancelling the deficiency tax assessments on the ground of prescription, considering that prescription is a matter of defense and the taxpayer bears the burden of proving the filing dates of its returns and the expiration of the prescriptive period.

• CTA Authority over Unpleaded LoA Issue: Yes, the CTA erred. It may resolve unpleaded issues only if necessary for orderly disposition and requiring no additional evidence and resting solely on record facts; the LoA issue was not raised and required evidence, so the CTA should not have ruled on it. The CIR should have been allowed to present the LoA on motion for reconsideration or new trial, subject to MDC's right to examine and object; remand is proper.
• Prescription of Tax Assessments: Partly. Prescription is a matter of defense; MDC failed to prove the filing of its 2006 income tax and VAT returns, so the 10-year period under Section 222 may apply. However, assessments for certain EWT and WTC periods were issued beyond the three-year period under Section 203 and are prescribed.

• CTA Authority over Unpleaded LoA Issue: The CTA's authority to rule on related issues necessary for orderly disposition is not unbridled. Under Prime Steel Mill, Inc. vs. Commissioner of Internal Revenue, two conditions must concur: (1) the issue is necessary to achieve an orderly disposition of the case; and (2) its resolution would not require the presentation of additional evidence and must rely solely on factual bases already matters of record. Here, the parties never raised the existence of the LoA as an issue in their pleadings or during trial. The CTA should not have ruled on it because doing so violated the CIR's right to refute allegations of invalidity and conjured up secondary issues and factual matters requiring evidence. The presumption of correctness of tax assessments and regularity in the performance of official duties therefore stood. The CIR later submitted LOA No. 2000-000158676 in its Motion for Reconsideration and/or New Trial. Rule 30, Section 5 of the Rules of Court permits additional evidence for good reasons and in furtherance of justice; the remedy of reopening a case is meant to prevent a miscarriage of justice. The CTA is not governed strictly by technical rules of evidence, and liberal interpretation may be resorted to under justifiable causes. The CTA Division should have acted on the CIR's motion to allow presentation of the LoA, subject to MDC's right to examine it and raise objections as to validity and authenticity. A remand is proper. The Court also cautioned the CIR for inadequate handling: the power to authorize examination is lodged solely with the CIR; no presumption exists that a revenue officer is authorized to issue assessments; a valid LoA is a jurisdictional requirement and part of due process; absent a valid LoA, the assessment is void and ineffectual. Despite this, the CIR failed to submit the LoA before the tax court and waived evidence, submitting it only after the CTA granted MDC's petition.
• Prescription of Tax Assessments: Under Section 203, the government's right to assess deficiency taxes prescribes in three years from the filing date of the tax return or from the date of actual filing, whichever comes later. Under Section 222, in case of a false return, fraudulent return with intent to evade tax, or failure to file a return, assessment may be made within 10 years from discovery of the falsity, fraud, or omission. The statute of limitations on assessment and collection benefits the taxpayer and protects against unreasonable and protracted investigations; exceptions to prescription are strictly construed. The ordinary three-year period generally applies unless the government proves by clear and convincing evidence that the 10-year period applies. However, prescription is a matter of defense; the burden is on the taxpayer to prove that the full period of limitation has expired, and the taxpayer must positively establish when the period started running and when it was fully accomplished. MDC did not offer in evidence its Annual Income Tax Return and VAT returns for 2006. There is no presumption that the taxpayer duly filed its returns; the only conclusion is that no such returns were filed, giving the BIR 10 years to assess. The EWT returns for February, June, August, October, November, and December 2006 and WTC returns for February, March, May, June, September, October, November, and December 2006 show unreadable filing dates. The assessments for deficiency EWT for January, March, April, May, July, and September 2006 and deficiency WTC for January, April, July, and August 2006 were issued beyond the three-year period to assess. The Court quoted with approbation Presiding Justice del Rosario's observations that the dates of filing are relevant and indispensable, and that without proof of filing dates, the Court cannot simply conclude the returns were filed within the deadline. The Court is precluded from entertaining factual questions in a Rule 45 petition and is not a trier of facts; remand to the CTA is the proper remedy to determine MDC's liability after considering the already prescribed assessments.

• CTA Authority over Unpleaded Issues — The CTA may consider issues not raised by the parties only if two conditions concur: (1) the issue is related to the principal issue and necessary to achieve an orderly disposition of the case; and (2) its resolution would not require the presentation of additional evidence and must rely solely on factual bases already matters of record. In this case, the LoA issue was never raised and required evidence, so the CTA erred in resolving it.
• Letter of Authority as Jurisdictional Requirement — A valid LoA is a jurisdictional requirement for a BIR audit or investigation and for a valid assessment; it is part of the taxpayer's right to due process. The power to authorize examination is lodged solely with the CIR and is not extended to all BIR personnel; there is no presumption that a revenue officer is authorized to issue assessments. An audit without a valid LoA, or in excess of authority, results in a void and ineffectual assessment. The Court applied this doctrine while cautioning the CIR for failing to submit the LoA before the tax court.
• Prescription as a Matter of Defense — The prescriptive period for assessment and collection is a defense that the taxpayer must plead and prove. The taxpayer bears the burden of proving that the full period of limitation has expired, including the date the period started running and when it was fully accomplished. MDC failed to prove the filing dates of its income tax and VAT returns, so it could not avail of prescription for those taxes.
• Three-Year and Ten-Year Prescriptive Periods — Under Section 203, internal revenue taxes shall be assessed within three years after the last day prescribed by law for filing the return, or from actual filing if filed beyond the prescribed period. Under Section 222, a 10-year period applies for false or fraudulent returns with intent to evade tax or failure to file a return. The ordinary three-year period applies unless the government proves by clear and convincing evidence that the 10-year period applies. The Court applied the three-year period to certain EWT and WTC assessments with proven filing dates, and found no basis to apply prescription to income tax and VAT because MDC did not prove filing.
• Liberal Interpretation of Procedural Rules and Reopening of Cases — Rule 30, Section 5 of the Rules of Court permits additional evidence for good reasons and in furtherance of justice; reopening is meant to prevent a miscarriage of justice. The CTA is not strictly governed by technical rules of evidence, and liberal interpretation may be resorted to under justifiable causes. The CTA Division should have allowed the CIR to present the LoA on motion for reconsideration or new trial, subject to MDC's right to examine and object.

• "The authority of the Court of Tax Appeals (CTA) to rule on issues not raised by the parties either in the petition or during trial but is necessary to achieve the orderly disposition of the case is not unbridled. The resolution of the issue should not require the presentation of additional evidence and must rely solely on factual bases that are already matters of record in the case." — This passage states the controlling two-condition test for the CTA's authority to resolve unpleaded issues, the basis for reversing the CTA's LoA ruling.
• "Moreover, prescription of the statute of limitations for assessment and collection of taxes is a matter of defense. The burden is on the taxpayer to prove that the full period of limitation has expired." — This passage establishes the burden of proof on prescription, which MDC failed to discharge for its income tax and VAT returns.
• "In cases where the BIR conducts an audit without a valid LoA, or in excess of the authority duly provided therefore, the resulting assessment shall be void and ineffectual." — This passage defines the consequence of an invalid LoA and underscores why the LoA is a jurisdictional and due process requirement, even as the Court faulted the CIR for not timely submitting it.
• "In the absence of evidence anent the dates of filing of the tax returns, the Court cannot simply make a sweeping conclusion that the tax returns were filed within the deadline set forth by law and simply reckon from the said deadline the running of the three (3)-year prescriptive period to assess." — This passage, quoted with approbation from the CTA En Banc dissent, explains why MDC's failure to prove filing dates precluded a categorical prescription ruling for income tax and VAT.

• Prime Steel Mill, Inc. vs. Commissioner of Internal Revenue, 929 Phil. 644 (2022) — Controlling precedent; laid down the two conditions for the CTA to consider issues not raised by the parties. The Court applied it to hold that the CTA erred in resolving the unpleaded LoA issue.
• Commissioner of Internal Revenue vs. McDonald's Philippines Realty Corp., 902 Phil. 473 (2021) — Held that a valid LoA is a jurisdictional requirement for assessment and that identifying the authorized revenue officers in the LoA is a jurisdictional requirement of a valid audit or investigation. Cited in the Court's discussion on the importance of the LoA.
• Querol vs. Collector of Internal Revenue, 116 Phil. 615 (1962) — Cited for the rule that prescription is a matter of defense and the burden is on the taxpayer to prove that the full period of limitation has expired. Applied to MDC.
• Commissioner of Internal Revenue vs. BASF Coating + Inks Phils., Inc., 748 Phil. 760 (2014) — Cited for the principle that the statute of limitations on assessment and collection benefits the taxpayer and that exceptions to prescription should be strictly construed. Used in the prescription analysis.
• Republic vs. Sandiganbayan, 678 Phil. 358 (2011) — Cited on the rule that a party who has the burden of proof must introduce all evidence at the first instance, but additional evidence may be allowed for good reasons and in furtherance of justice. Applied to the CIR's motion to present the LoA.
• Commissioner of Internal Revenue vs. Hontex Trading Co., Inc., 494 Phil. 306 (2005) — Cited for the presumption that tax assessments are correct and made in good faith. Applied when the Court held the CTA should not have resolved the unpleaded LoA issue.
• Taligaman Lumber Co., Inc. vs. Collector of Internal Revenue, 114 Phil. 773 (1962) — Cited for the rule that there is no presumption that the taxpayer duly filed its returns. Applied to conclude that MDC's failure to prove filing allowed the 10-year period to apply.
• Commissioner of Internal Revenue vs. Next Mobile, Inc., 774 Phil. 428 (2015) — Cited for the three-year prescriptive period under Section 203. Used in the prescription discussion.

• Section 203, Tax Code — Internal revenue taxes shall be assessed within three years after the last day prescribed by law for filing the return, or from actual filing if filed beyond the prescribed period. The Court applied this to certain EWT and WTC assessments with proven filing dates, holding them prescribed.
• Section 222, Tax Code — In case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed within 10 years after discovery of the falsity, fraud, or omission. The Court held that because MDC did not prove filing of its income tax and VAT returns, the 10-year period could apply.
• Section 6, Tax Code — The Commissioner or duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax. The Court cited this to emphasize that the power to authorize examination is lodged solely with the CIR and that a LoA is required.
• Rule 30, Section 5, Rules of Court — A party may introduce additional evidence for good reasons and in furtherance of justice. The Court applied this to allow the CIR to present the LoA on remand, subject to MDC's right to examine and object.

Leonen, SAJ. (Chairperson), Lazaro-Javier, J. Lopez, and Kho, Jr., JJ., concur.

• Presiding Justice Roman G. del Rosario (CTA En Banc) — He opined that in the absence of evidence to the contrary, the disputable presumption that the BIR regularly performed its duty in issuing deficiency tax assessments, including the issuance of a valid LoA, stands, and all presumptions favor the correctness of tax assessments. On prescription, he observed that MDC did not offer in evidence its 2006 Annual Income Tax Return and VAT returns, so there was no basis to rule that the period to assess for deficiency income tax and VAT had prescribed. Similarly, there was no basis to determine whether the three-year period to assess deficiency EWT for February, June, August, October, November, and December 2006 and deficiency WTC for February, March, May, June, September, October, November, and December 2006 had expired because the filing dates were unreadable. On the other hand, the assessments for deficiency EWT for January, March, April, May, July, and September 2006 and deficiency WTC for January, April, July, and August 2006 are void for having been issued beyond the three-year period to assess. The Supreme Court quoted his prescription observations with approbation.