Gaw, Jr. vs. Commissioner of Internal Revenue

The civil action to question a Final Decision on Disputed Assessment is not deemed instituted in a criminal case for tax evasion; the tax obligation is created by law and does not arise from the offense. Nonpayment of docket fees at the time of filing does not automatically cause dismissal where the taxpayer acted in good faith and relied on the CTA’s zero-filing-fee assessment; the CTA should assess the correct fees and allow payment within a reasonable period.

Macario Lim Gaw, Jr. was the taxpayer whose deficiency income tax and VAT assessments for 2007 and 2008 were disputed before the CTA, while the Commissioner of Internal Revenue pursued tax-evasion charges under Sections 254 and 255 of the NIRC. The statutory backdrop is the distinction between the tax obligation, which is created by law, and criminal liability for tax evasion, plus the CTA’s exclusive appellate jurisdiction over disputed assessments under R.A. No. 9282 and the RRCTA.

Sometime in November 2007, Macario Lim Gaw, Jr. acquired six parcels of land. To finance the acquisition, he applied for and was granted a Short Term Loan Facility from Banco De Oro in the amount of P2,021,154,060.00. From April to June 2008, he acquired four more parcels of land, again financing the acquisition through an STL Facility from BDO in the amount of P2,732,666,785.00.

Petitioner entered into an Agreement to Sell with Azure Corporation for the sale and transfer of real properties to a joint venture company that was still to be formed and incorporated. On July 11, 2008, petitioner conveyed the 10 parcels of land to Eagle I Landholdings, Inc., the joint venture company referred to in the Agreement to Sell. In compliance with Revenue Memorandum Order No. 15-2003, petitioner requested the BIR-RDO No. 52 for the respective computations of the tax liabilities due on the sale of the 10 parcels of land to Eagle I. In accordance with the One Time Transactions Computation sheets, petitioner paid Capital Gains Tax amounting to P505,177,213.81 and Documentary Stamp Tax amounting to P330,390.00. On July 23, 2008, the BIR-RDO No. 52 issued the corresponding Certificates Authorizing Registration and Tax Clearance Certificates.

Two years later, the Commissioner of Internal Revenue opined that petitioner was not liable for the 6% capital gains tax but for the 32% regular income tax and 12% value added tax, on the theory that the properties petitioner sold were ordinary assets and not capital assets. The CIR further found petitioner to have misdeclared his income, misclassified the properties, and used multiple tax identification numbers to avoid being assessed the correct amount of taxes. The CIR reasoned that the sole purpose of petitioner in acquiring the lots was to make a profit; that the buying and selling of the lots all occurred within eight months; and that the transactions involved a ready buyer.

On August 25, 2010, respondent issued a Letter of Authority to commence investigation on petitioner’s tax account. The next day, respondent filed before the DOJ a Joint Complaint Affidavit for tax evasion against petitioner for violation of Sections 254 and 255 of the NIRC. The DOJ then filed two criminal informations for tax evasion against petitioner, docketed as CTA Criminal Case Nos. O-206 and O-207. At the time the Informations were filed, respondent had not issued a final decision on the deficiency assessment against petitioner. Halfway through the trial, respondent issued a Final Decision on Disputed Assessment against petitioner, assessing him for deficiency income tax and VAT covering taxable years 2007 and 2008.

With respect to the deficiency assessment for 2007, petitioner filed a petition for review with the CTA, docketed as CTA Case No. 8502; the clerk of court assessed petitioner for filing fees, which he promptly paid. With respect to the deficiency assessment for 2008, the same involved the same tax liabilities being recovered in the pending criminal cases. Petitioner was confused as to whether he had to separately file an appeal with the CTA and pay the corresponding filing fees, considering that the civil action for recovery of the civil liability for taxes and penalties was deemed instituted in the criminal case. Petitioner filed before the CTA a motion to clarify whether he had to file a separate petition to question the deficiency assessment for 2008.

On June 6, 2012, the CTA issued a Resolution granting petitioner’s motion and held that the recovery of the civil liabilities for taxable year 2008 was deemed instituted with the consolidated criminal cases. The same Resolution granted the prosecution’s Motion for Leave of Court to Amend Information and Admit Attached Amended Information, admitted the Amended Information for CTA Crim. No. O-206, and set re-arraignment on June 13, 2012. It also stated that the civil action for recovery of the civil liabilities of petitioner for taxable year 2008 stated in the FDDA dated May 18, 2012 was deemed instituted with the consolidated criminal cases, without prejudice to petitioner’s right to avail of whatever additional legal remedy he may have to prevent the FDDA from becoming final and executory for taxable year 2008, and that petitioner was not precluded from instituting a Petition for Review to assail the assessments for taxable year 2007.

Petitioner still filed a Petition for Review Ad Cautelam, with a Motion for Consolidation with CTA Criminal Case Nos. O-206 and O-207. Upon filing, the clerk of court of the CTA assessed petitioner with zero filing fees. The CTA later acquitted petitioner in Criminal Case Nos. O-206 and O-207 and directed the litigation of the civil aspect in CTA Case No. 8503 in its Resolution dated January 3, 2013. Thereafter, respondent filed a Motion to Dismiss the Petition for Review Ad Cautelam on the ground that the CTA First Division lacked jurisdiction to resolve the case due to petitioner’s nonpayment of the filing fees. On March 1, 2013, the CTA First Division granted the Motion to Dismiss. Petitioner’s motion for reconsideration was denied, and he elevated the case to the CTA En Banc, which affirmed the dismissal in its Decision dated December 22, 2014. Petitioner’s motion for reconsideration was likewise denied by the CTA En Banc in its Resolution dated February 2, 2016.

• Deemed Institution of Civil Action: Petitioner argued that because the FDDA for 2008 was also the subject of the tax-evasion cases, the civil action for recovery of civil liability for taxes and penalties was deemed instituted in the consolidated criminal cases as a matter of law; hence, the State, not the taxpayer, files the Information and pays the filing fee, and no law or rule requires petitioner to pay filing fees for the CTA to rule on the civil aspect of the consolidated criminal cases.
• Zero Filing Fee Assessment: Petitioner maintained that the clerk of court’s zero filing fee assessment when he filed the Petition for Review Ad Cautelam confirmed that the civil action for recovery of taxes was deemed instituted in the criminal actions, so the CTA had acquired jurisdiction over the civil aspect and erred in dismissing the case for nonpayment.
• Due Process / Opportunity to Pay: Petitioner argued that he was deprived of due process when his petition was dismissed without first being given a fair opportunity to pay properly assessed filing fees.
• Invalid and Improper Assessments: Petitioner asserted that Letter of Authority No. 2009-00044669, which covered “unverified prior years,” was invalid under Section C of Revenue Memorandum Order No. 43-90; that the Formal Letter of Demand dated April 8, 2011 and Final Decision on Disputed Assessment No. 2012-0001 dated May 18, 2012 were improperly served; that respondent disregarded his protest letter dated June 7, 2011 and additional submissions; and that the deficiency assessments for 2008 had no factual and legal bases.
• Persecution: Petitioner claimed the proceedings were persecution rather than prosecution, warranting not only acquittal but also dismissal of the civil aspect of CTA Criminal Case Nos. O-206 and O-207.
• Resolution on the Merits: Petitioner asked the SC, in the interest of expeditious justice and because the records were sufficient, to resolve the civil aspect of CTA Criminal Case Nos. O-206 and O-207 on the merits.

• Separate Civil Remedy: Respondent argued that the tax-evasion cases were instituted under Sections 254 and 255 of the NIRC; in all criminal cases before the CTA, the civil aspect for recovery of taxes and penalties relative to the criminal action is not subject to reservation for a separate civil action, while the civil remedy to contest the correctness or validity of a disputed tax assessment is covered by Section 9 of R.A. No. 9282. The difference between the criminal case for tax evasion and the Petition for Review to question the FDDA is apparent; the mere appearance of “civil action” does not mean all civil remedies pertain to the same reliefs, and petitioner cannot simultaneously claim that the petition for review is the civil action deemed instituted with the criminal action and avail of the separate taxpayer’s remedy to contest the FDDA.
• Rule 45 / Factual Issues: Respondent countered that ruling on the merits of the Petition for Review Ad Cautelam would make the SC a trier of facts, which is improper in a Rule 45 petition.
• Proper Remedy: Respondent argued that assuming the CTA En Banc erred in affirming the dismissal for nonpayment of docket fees, the correct remedy is to remand the case and order the CTA to compute the required docket fees and reinstate the case upon payment.

• Deemed Institution of Civil Action: Whether the civil action to question the FDDA for taxable year 2008 is deemed instituted in the criminal cases for tax evasion.
• Dismissal for Nonpayment of Docket Fees: Whether the CTA erred in dismissing CTA Case No. 8503 for petitioner’s failure to pay docket fees.
• SC Ruling on the Merits: Whether the SC may rule on the merits of the tax deficiencies in the first instance.
• Tax Liability / Asset Classification: Whether petitioner is liable for the assessed tax deficiencies, specifically whether the 10 parcels of land are capital assets or ordinary assets.

• Deemed Institution of Civil Action: No. The civil action to question the FDDA is not deemed instituted in the criminal tax-evasion case; the tax obligation is created by law and does not arise from the offense charged.
• Dismissal for Nonpayment of Docket Fees: Yes, the CTA erred. Nonpayment of docket fees at filing does not automatically cause dismissal where petitioner acted in good faith and relied on the CTA’s zero-filing-fee assessment; the CTA should assess the correct fees and allow payment within a reasonable period.
• SC Ruling on the Merits: No. The CTA has exclusive appellate jurisdiction over disputed assessments, and a Rule 45 petition is limited to questions of law; the SC is not a trier of facts.
• Tax Liability / Asset Classification: Not resolved by the SC; remanded. The CTA First Division must conduct a full-blown trial to determine whether the 10 parcels are capital or ordinary assets and whether petitioner is liable for the assessed deficiencies.

• Deemed Institution of Civil Action: Rule 9, Section 11 of the RRCTA provides that in cases within the CTA’s jurisdiction, the criminal action and the corresponding civil action for recovery of civil liability for taxes and penalties shall be deemed jointly instituted in the same proceeding, and no reservation of the civil action is allowed. But Rule 111, Section 1(a) of the Rules of Court limits what is deemed instituted to the civil action for recovery of civil liability arising from the offense charged. The taxpayer’s obligation to pay tax is created by law and does not arise from the offense of tax evasion; thus, it is not deemed instituted in the criminal case. Republic vs. Patanao held that civil liability to pay taxes arises from engaging in business, not from a criminal act, and acquittal in the criminal case does not exonerate the taxpayer from the tax liability. Proton Pilipinas Corp. vs. Republic followed the same rule for customs duties and taxes. The Petition for Review Ad Cautelam is not the civil action for recovery of civil liability for taxes and penalties that is deemed instituted with the criminal action. Under Sections 254 and 255 of the NIRC, a tax-evasion prosecution may be filed without a prior deficiency assessment; meanwhile, the BIR may issue an FDDA, and Section 9 of R.A. No. 9282 allows the taxpayer to file a Petition for Review within 30 days to prevent the assessment from becoming final. The criminal case aims to impose criminal liability; the Petition for Review aims to question the FDDA. The CTA’s June 6, 2012 Resolution itself recognized this distinction: what was deemed instituted was only the government’s recovery of taxes and penalties relative to the criminal case, without prejudice to petitioner’s remedy to prevent the FDDA from becoming final. To hold otherwise would render nugatory the procedure for assailing a tax deficiency assessment.
• Dismissal for Nonpayment of Docket Fees: Rule 6, Section 3 of the RRCTA requires the Clerk of Court not to receive a petition for review unless the petitioner submits proof of payment of docket fees; payment is mandatory and jurisdictional, and the court acquires jurisdiction only upon payment. But under Camaso vs. TSM Shipping (Phils.), Inc., nonpayment at the time of filing does not automatically cause dismissal so long as the docket fees are paid within a reasonable period and the party had no intention to defraud the government. The records show no intent to defraud: petitioner promptly paid docket fees when he appealed the FDDA for 2007. Confusion arose because the FDDA also covered 2008, which was the subject of the consolidated criminal cases; petitioner sought the CTA First Division’s guidance, and the June 6, 2012 Resolution stated that the civil action for recovery of civil liabilities for 2008 was deemed instituted in the consolidated criminal cases. Pursuant to that Resolution, the Clerk of Court issued a zero filing fee assessment when petitioner filed the Petition for Review Ad Cautelam. Petitioner relied in good faith on the CTA First Division’s pronouncements. The CTA therefore cannot simply dismiss the case for nonpayment; it should have directed the Clerk of Court to assess the correct docket fees and ordered petitioner to pay within a reasonable period. Technical rules of procedure must sometimes give way to resolve the case on the merits and prevent a miscarriage of justice.
• SC Ruling on the Merits: Rule 4, Section 3(a), paragraph 1 of the RRCTA gives the CTA First Division exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR. No other court can exercise that jurisdiction; the CTA is a specialized court dedicated to tax problems. The SC has no jurisdiction to review tax cases at first instance without first letting the CTA study and resolve them. Under Rule 16, Section 1 of the RRCTA, the SC’s review of a CTA En Banc decision is limited to determining whether there is grave abuse of discretion. A Rule 45 petition is limited to questions of law, and delving into factual issues is not proper. Here, petitioner insists that the 10 parcels of idle land sold on July 11, 2008 in a single transaction to Eagle I are capital assets subject to capital gains tax and documentary stamp tax, while the CIR argues they are ordinary assets subject to regular income tax and VAT because the sole purpose was profit, the buying and selling occurred within eight months, and the transactions involved a ready buyer. Section 39(A)(1) of the NIRC defines capital assets negatively, and Revenue Regulations No. 7-2003 defines capital and ordinary assets. Whether the transaction was isolated or whether the 10 parcels are capital or ordinary assets should properly be resolved by the CTA. It is more prudent to remand for a full-blown trial where both parties may present evidence; the SC is not a trier of facts.
• Tax Liability / Asset Classification: The SC did not resolve petitioner’s liability for the assessed deficiencies because the classification of the 10 parcels as capital or ordinary assets is a factual question requiring evidence. The statutory definition of capital assets is negative in nature: if the property is not among the exceptions, it is a capital asset; assets falling within the exceptions are ordinary assets. The CTA must determine whether the transaction was an isolated transaction and whether the properties were held primarily for sale to customers in the ordinary course of trade or business, among the other ordinary-asset exceptions. The case was remanded to the CTA First Division for further proceedings in CTA Case No. 8503.

• Civil liability for taxes is not deemed instituted in a criminal tax-evasion case — Under Rule 111, Section 1(a) of the Rules of Court, only the civil action for recovery of civil liability arising from the offense charged is deemed instituted with the criminal action. The taxpayer’s obligation to pay taxes is created by law and does not arise from the offense of tax evasion. Applied: the Petition for Review Ad Cautelam questioning the FDDA for 2008 was not deemed instituted in CTA Criminal Case Nos. O-206 and O-207; the government’s recovery of taxes and penalties relative to the criminal case was the only civil aspect deemed instituted.
• Tax evasion prosecution and the taxpayer’s separate remedy to contest an assessment — A criminal prosecution for tax evasion under Sections 254 and 255 of the NIRC does not require a prior deficiency assessment. While the criminal case is pending, the BIR may issue an FDDA, and the taxpayer may file a Petition for Review with the CTA under Section 9 of R.A. No. 9282 within 30 days from receipt of the decision or inaction to prevent the assessment from becoming final. Applied: the criminal case and the Petition for Review have different purposes and are not the same civil action.
• Docket fees: mandatory and jurisdictional, but nonpayment does not automatically cause dismissal — The court acquires jurisdiction over a case only upon payment of the prescribed docket fees, and the Clerk of Court shall not receive a petition for review without proof of payment under Rule 6, Section 3 of the RRCTA. However, nonpayment at the time of filing does not automatically cause dismissal if the fees are paid within a reasonable period and the party had no intention to defraud the government. Applied: petitioner relied in good faith on the CTA’s zero-filing-fee assessment; the CTA should have assessed the correct fees and allowed payment instead of dismissing.
• CTA’s exclusive appellate jurisdiction and the SC’s limited review — The CTA First Division has exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments, refunds, fees, penalties, and other matters under the NIRC. The SC’s review of a CTA En Banc decision is limited to grave abuse of discretion, and a Rule 45 petition is limited to questions of law; the SC is not a trier of facts. Applied: the SC declined to rule on the merits of the tax deficiencies and remanded to the CTA for trial.
• Capital assets vs. ordinary assets — Section 39(A)(1) of the NIRC defines capital assets negatively: property held by the taxpayer is a capital asset unless it falls under the exceptions. The ordinary-asset exceptions are (a) stock in trade or property includible in inventory; (b) property held primarily for sale to customers in the ordinary course of trade or business; (c) property used in trade or business subject to depreciation; and (d) real property used in trade or business. Revenue Regulations No. 7-2003 reiterates these definitions. Applied: the classification of the 10 parcels sold to Eagle I required factual determination by the CTA.

• “Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him.” — The SC used this passage from Republic vs. Patanao to distinguish the tax obligation from criminal liability and to support the ruling that the tax liability is not deemed instituted in the criminal case.
• “The tax and the obligation to pay the same are all created by statute; so are its collection and payment governed by statute.” — The SC quoted this from Proton Pilipinas Corp. vs. Republic to emphasize that the tax obligation is statutory in origin and is not a mere civil liability arising from the offense.
• “However, the mere failure to pay the docket fees at the time of the filing of the complaint, or in this case the Petition for Review Ad Cautelam, does not necessarily cause the dismissal of the case.” — This is the SC’s statement of the rule that saved petitioner from outright dismissal despite nonpayment of docket fees at the time of filing.
• “The statutory definition of capital assets is negative in nature. Thus, if the property or asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets.” — The SC used this passage to frame the factual issue of whether the 10 parcels were capital or ordinary assets, which it remanded to the CTA.

• Republic of the Philippines vs. Patanao, 127 Phil. 105 (1967) — Controlling precedent; held that civil liability to pay taxes is not deemed included in the criminal action and acquittal does not exonerate the taxpayer from tax liability.
• Proton Pilipinas Corp. vs. Republic of the Phils., 535 Phil. 521 (2006) — Followed; held that the civil case for collection of unpaid customs duties and taxes cannot be simultaneously instituted and determined in the same proceedings as the criminal cases, since the tax obligation is created by statute.
• Camaso vs. TSM Shipping (Phils.), Inc., G.R. No. 223290, November 7, 2016, 807 SCRA 204 — Followed; held that nonpayment of docket fees at the time of filing does not automatically cause dismissal so long as the fees are paid within a reasonable period and there is no intent to defraud the government.
• Gipa vs. Southern Luzon Institute, 736 Phil. 515 (2014) — Cited for the rule that payment of docket and other legal fees is mandatory and jurisdictional, and the court acquires jurisdiction only upon payment.
• Eastern Telecommunications Phils., Inc. vs. Commissioner of Internal Revenue, 757 Phil. 136 (2015) — Cited for the CTA’s specialized expertise and exclusive appellate jurisdiction over tax cases.
• Nenita Quality Foods Corp. vs. Galabo, 702 Phil. 506 (2013) — Cited for the rule that a Rule 45 petition is limited to questions of law and factual issues are not proper.
• Calasanz vs. Commissioner of Internal Revenue, 228 Phil. 638 (1986) — Cited for the negative statutory definition of capital assets and the rule that assets falling within the exceptions are ordinary assets.
• Ungab vs. Judge Cusi, Jr., 186 Phil. 604 (1980) — Cited for the rule that a tax-evasion prosecution does not require a prior deficiency assessment.

• Section 254, National Internal Revenue Code — Punishes willful attempt to evade or defeat any tax; provides that conviction or acquittal is not a bar to a civil suit for collection. Applied: the tax-evasion charge against petitioner did not absorb the separate civil action to question the FDDA.
• Section 255, National Internal Revenue Code — Punishes willful failure to file a return, supply correct information, pay tax, withhold or remit tax, or refund excess withholding. Applied: this was the other basis for the criminal informations in CTA Criminal Case Nos. O-206 and O-207.
• Section 9, R.A. No. 9282 — Allows any party adversely affected by a decision, ruling, or inaction of the Commissioner of Internal Revenue to appeal to the CTA within 30 days by petition for review. Applied: petitioner’s remedy to contest the FDDA was a separate Petition for Review, not the civil aspect of the criminal case.
• Rule 9, Section 11, Revised Rules of the Court of Tax Appeals — Provides that the criminal action and the corresponding civil action for recovery of civil liability for taxes and penalties shall be deemed jointly instituted in the same proceeding, with no reservation allowed. Applied: only the government’s recovery of taxes and penalties relative to the criminal case was deemed instituted, not petitioner’s Petition for Review Ad Cautelam.
• Rule 111, Section 1(a), Rules of Court — Provides that when a criminal action is instituted, the civil action for recovery of civil liability arising from the offense charged is deemed instituted with the criminal action unless waived, reserved, or instituted prior. Applied: the tax obligation is created by law and does not arise from the offense, so it was not deemed instituted.
• Rule 6, Section 3, Revised Rules of the Court of Tax Appeals — Requires the Clerk of Court not to receive a petition for review unless the petitioner submits proof of payment of docket fees. Applied: docket fees are mandatory and jurisdictional, but the CTA should have assessed the correct fees and allowed payment under the good-faith circumstances.
• Rule 4, Section 3(a), paragraph 1, Revised Rules of the Court of Tax Appeals — Gives the CTA First Division exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments, refunds, fees, penalties, and other matters under the NIRC. Applied: the SC could not rule on the tax deficiencies at first instance; remand to the CTA was proper.
• Rule 16, Section 1, Revised Rules of the Court of Tax Appeals — Governs appeal to the SC by petition for review on certiorari and limits review to grave abuse of discretion. Applied: the SC declined to resolve factual issues on the classification of the 10 parcels.
• Section 39(A)(1), National Internal Revenue Code — Defines capital assets negatively and excludes stock in trade, property primarily for sale to customers, depreciable property, and real property used in trade or business. Applied: the capital-versus-ordinary-asset issue required factual determination by the CTA.
• Revenue Regulations No. 7-2003, Section 2(a) and (b) — Defines capital assets and ordinary assets, listing the ordinary-asset exceptions. Applied: the RR guided the classification issue remanded to the CTA.