Pacquiao vs. Court of Tax Appeals

The Court of Tax Appeals has the authority to dispense with or reduce the bond requirement under Section 11 of R.A. No. 1125 when the methods employed by the CIR in tax assessment and collection are patently illegal or not sanctioned by law; however, such determination requires a preliminary hearing and reception of evidence by the CTA to establish the existence of such illegality, which cannot be made by the Supreme Court on a Rule 65 petition without an evidentiary basis.

Emmanuel Pacquiao, a world-class professional boxer, and his spouse Jinkee Pacquiao derived income from both the Philippines and the United States. Prior to becoming public officials, Emmanuel earned substantial income from boxing purses in the US (primarily under Top Rank, Inc.) and from Philippine-sourced talent fees, product endorsements, and television appearances. The dispute arose from the Bureau of Internal Revenue's (BIR) investigation and assessment of deficiency income taxes and Value Added Tax (VAT) for taxable years 2008 and 2009, which the petitioners contested as having been issued in violation of procedural due process and based on unsubstantiated fraud allegations.

• Emmanuel Pacquiao filed his 2008 Income Tax Return (ITR) on April 15, 2009 reporting only Philippine-sourced income, which was subsequently amended to include US-sourced income from boxing purses.
• Pacquiao filed his 2009 ITR on April 15, 2010 reflecting Philippine-sourced income but failed to include US-sourced income and failed to file Value Added Tax (VAT) returns for both 2008 and 2009.
• On March 25, 2010, the BIR Regional District Office No. 43 issued a Letter of Authority (March LA) to examine Pacquiao's books of accounts for the year 2008.
• On July 27, 2010, the CIR issued another Letter of Authority (July LA) authorizing the National Investigation Division (NID) to examine the books of both petitioners for the last 15 years (1995 to 2009), claiming fraud had been established under the "Run After Tax Evaders" (RATE) program.
• The petitioners submitted tax documents for 2007-2009 but explained that records for 1995-2006 had been disposed of in accordance with Section 235 of the Tax Code and were managed by previous counsels who had passed away.
• On January 31, 2012, the CIR issued a Notice of Initial Assessment-Informal Conference (NIC) finding the petitioners liable for deficiency income taxes of P714,061,116.30 for 2008 and P1,446,245,864.33 for 2009.
• On February 20, 2012, the CIR issued a Preliminary Assessment Notice (PAN) based on "third-party information" and "best evidence obtainable" under Sections 5(B) and 6 of the NIRC, adding VAT liabilities.
• On May 2, 2012, the CIR issued a Formal Letter Demand (FLD) finding the petitioners liable for deficiency income tax and VAT amounting to P766,899,530.62 for 2008 and P1,433,421,214.61 for 2009.
• On May 14, 2013, the CIR issued the Final Decision on Disputed Assessment (FDDA) addressed only to Emmanuel Pacquiao (excluding Jinkee) finding liability of P2,261,217,439.92 for both years.
• On July 19, 2013, the BIR Accounts Receivable Monitoring Division issued a Preliminary Collection Letter (PCL) demanding payment from both petitioners, and on August 7, 2013, issued a Final Notice Before Seizure (FNBS).
• The petitioners paid the deficiency VAT assessment in installments totaling P32,196,534.40 but contested the deficiency income tax assessment.
• Warrants of distraint, levy, and garnishment were issued against the assets of both petitioners despite the FDDA having been addressed only to Emmanuel Pacquiao.
• The petitioners' net worth based on Emmanuel Pacquiao's Statement of Assets, Liabilities and Net Worth (SALN) was only P1,185,984,697.00, significantly less than the assessed tax and required bond amounts.

• The CTA committed grave abuse of discretion in requiring the bond because the CIR's assessment was predicated on a mere allegation of fraud without evidentiary support, violating due process.
• The CIR failed to comply with procedural due process requirements: (1) the FDDA was issued only against Emmanuel Pacquiao but collection was pursued against both spouses; (2) summary collection remedies were commenced before the expiration of the period to pay the assessed taxes; (3) warrants of garnishment were served on banks before the petitioners received the FDDA and PCL; (4) the ARMD increased the assessed amount without authority; (5) the CIR refused to recognize that the deficiency VAT had already been paid.
• The assessment was based on "estimates based on best possible sources" rather than actual transaction documents, which is not sanctioned by the Tax Code.
• The bond requirement (P3.3 billion cash or P4.9 billion surety) is an impossible condition given their undisputed net worth of only P1.18 billion, effectively preventing them from prosecuting their appeal.
• Under the doctrine in Collector of Internal Revenue v. Avelino and Collector of Internal Revenue v. Zulueta, the bond requirement should be dispensed with because the CIR's collection methods were patently illegal and violated due process.

• Section 11 of R.A. No. 1125 is mandatory and without exception; a taxpayer must deposit the amount claimed or file a surety bond to suspend tax collection pending appeal.
• The Avelino and Zulueta doctrines apply only when the methods employed by the CIR are clearly null and void and prejudicial to the taxpayer, which the CTA found was not patent or evident in this case.
• The alleged illegality of the methods employed by the CIR can only be determined after a full-blown trial, not in a Rule 65 petition which is confined to issues of jurisdiction and grave abuse of discretion.
• The CTA correctly found that the petitioners failed to show that the collection methods were void on their face, and therefore the bond requirement could not be dispensed with at this stage.

• Procedural Issues:
  • Whether the Supreme Court can make a preliminary determination on the validity of the CIR's tax collection methods without prior evidentiary hearing by the CTA
  • Whether the CTA committed grave abuse of discretion in requiring the bond without first conducting a preliminary hearing on the alleged procedural violations
• Substantive Issues:
  • Whether the CTA may dispense with or reduce the bond requirement under Section 11 of R.A. No. 1125 when the CIR's assessment and collection methods are alleged to be patently illegal
  • Whether the specific procedural violations alleged (failure to issue NIC, FDDA addressed only to one spouse, premature issuance of warrants, etc.) justify dispensing with the bond requirement

• Procedural:
  • The Supreme Court cannot make a preliminary determination on whether the CIR used methods not sanctioned by law absent evidence and preliminary determination by the CTA; such determination is a question of fact requiring reception of evidence.
  • The case is remanded to the CTA First Division to conduct a preliminary hearing to determine whether the dispensation or reduction of the required cash deposit or bond is proper to restrain the collection of deficiency taxes.
• Substantive:
  • The CTA has authority to dispense with or reduce the bond requirement under Section 11 of R.A. No. 1125 when the methods employed by the CIR are patently illegal or not sanctioned by law, following the doctrine in Avelino and Zulueta.
  • The implementation of the April 22, 2014 and July 11, 2014 Resolutions requiring the bond is enjoined until the CTA conducts a preliminary hearing and determines whether the bond is necessary and in what amount.
  • If a bond is required, the CTA must compute it based on the principal amount of deficiency taxes only (excluding penalties, interests, and surcharges per A.M. No. 15-02-01-CTA) and deduct the P32,196,534.40 already paid for deficiency VAT.

• Avelino-Zulueta Doctrine — The requirement of posting a bond to suspend the collection of taxes under Section 11 of R.A. No. 1125 may be dispensed with if the methods employed by the CIR in the tax collection are clearly null and void, prejudicial to the taxpayer, or not sanctioned by law. The Court applied this doctrine to hold that the CTA has authority to dispense with the bond when collection methods are patently illegal, but a preliminary hearing is required to establish such illegality.
• Presumption of Correctness of Assessment — While tax assessments are presumed correct, this presumption cannot rest on another presumption and must be based on actual facts. The Court noted that an assessment based on "estimates based on best possible sources" without actual transaction documents requires scrutiny.
• Due Process in Tax Assessments — Taxpayers must be informed in writing of the law and facts on which the assessment is made, and procedural requirements such as the Notice of Informal Conference must be complied with, otherwise the assessment is void.

• "It would certainly be an absurdity on the part of the Court of Tax Appeals to declare that the collection by the summary methods of distraint and levy was violative of the law, and then, on the same breath require the petitioner to deposit or file a bond as a prerequisite of the issuance of a writ of injunction."
• "The requirement of posting a bond to suspend the collection of taxes could be dispensed with only if the methods employed by the CIR in the tax collection were clearly null and void and prejudicial to the taxpayer."
• "In case of doubt, the tax court must remember that as in all tax cases, such scale should favor the taxpayer, for a citizen's right to due process and equal protection of the law is amply protected by the Bill of Rights under the Constitution."

• Collector of Internal Revenue v. Avelino (100 Phil. 327) — Established precedent that courts may dispense with the bond requirement under Section 11 of R.A. No. 1125 if the collection method employed by the CIR is not sanctioned by law.
• Collector of Internal Revenue v. Zulueta (100 Phil. 872) — Reaffirmed the Avelino doctrine, holding that the bond requirement applies only when collection processes are carried out in consonance with law, not when they are obviously in violation.
• Commissioner of Internal Revenue v. Metro Superama, Inc. (652 Phil. 172) — Cited for the principle that the presumption of correctness of tax assessments cannot rest on another presumption and must be based on facts.
• Transglobe International, Inc. v. Court of Appeals (631 Phil. 727) — Cited for the definition of fraud in tax assessment as intentional deception willfully done to induce another to give up some right.

• Section 11 of Republic Act No. 1125 (as amended by R.A. No. 9282) — Provides that appeal to CTA does not suspend tax collection, but allows CTA to suspend collection and require a bond; the Court interpreted this to allow dispensation of the bond when collection methods are illegal.
• Section 203 of the National Internal Revenue Code — Prescriptive period of three years for assessment of internal revenue taxes.
• Section 222 of the National Internal Revenue Code — Extends prescriptive period to ten years in cases of false, fraudulent, or non-filing of returns.
• Section 207 and 208 of the National Internal Revenue Code — Procedural requirements for summary remedies of distraint, levy, and garnishment.
• Revenue Regulation No. 12-99, Section 3 — Due process requirement in the issuance of deficiency tax assessments, specifically the mandatory service of a Notice of Informal Conference.
• A.M. No. 15-02-01-CTA — Supreme Court approval of CTA En Banc Resolution construing "amount claimed" in Section 11 of R.A. No. 1125 to refer only to the principal amount of deficiency taxes, excluding penalties, interests, and surcharges.

• N/A — No separate concurring opinions were noted; Associate Justices Carpio (Chairperson), Brion, Reyes, and Leonen concurred in the decision penned by Justice Mendoza.

• N/A — No dissenting opinions were recorded in the decision.