Repu Blic O F Tli& Ptli Ljppintts Couf"'T of Tax Appeals Ot:Lt?Ol"T City - /Carlos Yshael vs. The Commiss Io~, et al.

DECISION -

- 5 - the amou n t of P27 5, 75 3 .92 inc lusive of 5 0% sur- char g e t o r fr a ud , ~% mon t hly defici e ncy interes t and c ompromise penalty, f o r the year 1955; 9.

That the bas is of t he tax involved in this case vas never the subject matter of a prior deficiency assessment;

10.

That the mere fac t that petitioner h a d been 9reviously i nve st igated and assessed for deficienc y inc ome t a for 1955 on the basis of the findings i n said i nvestigatio n does not preclude further invest i ga t i o n of his income tax liabili ty for 1955 and the a sses s ment o f additional defi- clency income tax f o r the same year on a different ba~is and finding s of add i tional undeclared i ncome; 11.

7hat the previous assessmen t of defi- ciency income tax fo r 1955 was no t settled by compromise;

12.

That the de fe nse o f res adjud i cata is not tenabl~ in t his c ase;

13.

That the gover nment i s not estopped by the mistakes of its agents (Genato Comme rcial Corporation vs. Court of Ta x Appeals, et al., G.R. No. L-11727, Septembe r 29, 1958); 14.

That petit i oner did not dec lare a sub- stantial amou n t o f his inc ome for 1955 for which reason the 50% surcharge has been imposed pursuant 'i ~) '1

- 6 - to Sect on 72 of t he Nationa l ~ ~t er nal Revenue Code (Antigua vs . Collector of I a1t ernal Revenue, CTA Case No. 579, November 2,

1959~ Marguerite

Walfson vs. Collector of I nternal Revenue, CTA Case No. 273, July 16, 1958; William Li Yao vs. Collector of I nte rnal Revenue, CTA Case No. 30, July 31, 1956) while the ~% i nterest was imposed pursuant to Section Sl( d) .of the Tax Code as amended by Republic Act No. 2343 which took effect i n 1959;

15.

Tha t in case o f a false or fraudulent return with i ntent to evade tax or failure to file a re turn , the tax may be assessed, or a p roceed ins in court for the collection of such tax may be beg un without assessment, at anytime within e n (10) years after the discovery of the falsity, fraud, or omi ssion (Section 332 of the Natio1al Internal Revenue Code; Balter, Fra ~ d under Federal Income Tax Law, p. 226) ;_ 16.

That the ·efic i ency income ~ax a ssess- ment in the amount of ~275,753.92 issued agains t petitioner is in accordance with law; and 17.

That the assessment in t hi s case had already become final 1 executory and demandable and, therefore , th i s Court has no jurisd iction

- 7 - to take cognizance of the petition for review filed in the instant c ase .

It is not disputed tha t under an agreement dated September 10 1 1955 1 petitioner exchanged his unspecified inherited sha re from the estate of the late Magda l ena Hashim de Hemady worth ~259 1 22 8. 73 for c ontr a c ts receivable val ued at Ii5 27 1 562.49 (Exh .

11 P" , pp . 23-32, BIR records);_ and unde r a deed o f a ssignmen t dated December 31, 1955 1 petitioner assig ned his contracts receivable to the Carmel Corpor ation f or shares of stock (Exhs .

11 1 '. and 11 2" 1 pp. 25- 35 & 36-42 1 BIR records). The gain realize d by petitioner from such tran- saction was Ii268,333 . 26.

(£XhS •

11 3 11 and 11 4 11

I

pp. 10-14, BI R re ~ords.)

When petitioner filed his income t a x retu r n for 19 55 on May 2, 1956 1 he did not declare such gai n as part o f n is gross income for s a id taxab l e yea r . Re spondent came to know only of fuis s ubstantial u ~ d erdecla- ration on August 3 ~ , 1963 through the legal counsel of the Ca r mel Corpor~tion of which petitioner is a majority s t ock holder i n connec tion with the inve stigatio n of the inc ome tax case for the year 1955 of the sa i d corporation. (Exh.

11 3 11 1 pp. 10-13 1 BIR rec ords ; Exhs . u4" and 11 5

- 8 - Appropriate t state here is that previous to this discovery, petitioner had already been issued a deficiency income tax assessment dated July 30, 1958 for taxable years 1951, 1952, 1954 and 1955.

The deficiency income tax for the year 1955 arose from undeclared salaries, separation pay, bonus, commission earned and paid, and addi t ional income; as well as di sallowed com- miss ion expense, representation expense, trans- portation expense and salaries expense, all for being personal , re s ~ l ti ng in a deficiency income tax llibil it y of :etit i oner in the amount of ~201,861.00, e xclusive of surcharge, for the year 19 55.

This deficiency income tax assess- ment dated July 30, 1958 was appealed by peti- lioner to this Court on December 2, 19 58 in CTA Case No . 602, e ntitled "Carlos Ysmael v;:,. _\1elecio R. Domingo, as Act ing Comm i ~ sioner of Internal Revenue," AftE:.r the defic lE. ::cy income tax liabili ties o f pe ti tioner for the years 1954 and 19 55 were r educ ed by respondent, after reinvest- igation f on May 16, 1960, CTA Case No. 602 was withdrawn on accoun t of a compromise settlement of the tax liabilities of petitioner involved ther e in.

It is to be str e ssed, however, tha t the - , .....

I J.

~ !

- 9 - basis of the def i c i e n c~ income tax assessmc i nvolved in the i nstant cas r·, ' +; ich is the un- reported gain of P2 68 , 333.7 6 ; -·· ,,.--_ --1 , f rom the exchange of petitioner's Ul specified inheri t ance for contracts receivable, was not the same subject matter as, or included in, the subj ect matter of the deficiency assessment covered in CTA Case No . 602.

It s eems clear beyond doubt therefore that: 1 .

Petitioner did no t declare the income de ri v ~ d by him from t he exchange of inherited property wor t h P25 9 ,228.73 with contracts receivabie wor th P527,362.49 which were late r assigned to t he Carmel Corporation for s hare s of stock, t hus real izi ng a profit of P268,333.76; 2.

As a resu lt of such exchange, petitioner was asse s sed a def iciency income tax in t he amount of P275,753.9 2 inclJsive of 50% surcnarg e fo r fraud , !i% month l y defic i. -.::1cy interest ,,nd com- promise penalty, f or the year 1955; and 3.

The basi s of the' t ax involved in t h is case was never the subject ma tter of a prior deficiency ussessment.

In assailing respondent's right to i mpose and collect the deficiency income tax l iability • f' '1 • ) '

DECIS ION -

C~A CAS~ NO . 1967 - 10 - a f oresaid, petitioner invokes prescri p : · o f the a ssessmen t and/ o r comprom i se wh i ch has t he effect of~ jud ic a t a.

However, since responl,, 'r:L raise the issue o f jurisd iction , we shall first proceed t o inquire w e t her or not this Court has jurisdic t ion to entertain the insta1t appeal on the grou nd tha t the assessmen t in this case had already become final , executor y and demandable. It s eems well - s~ttl e d tha t if a taxpaye r fi le s a request fo r r e consid~ration or reinvest- igat ion o f a n assessmen t made by the Commissioner of Internal Revenue, bu t the latter without categor ically deciding the reque st for reconsider- ation o r re investigation instead seeks to enforce collection of the tax assessed by him against the taxpayer by means of distra in t and l e vy, such ' action of the Commissione r is equivalent to a denial of the t axpayer 's request for r econsider- ation or reinvestiga t ' on which the taxJ a yer must appeal therefrom to this Court within the thirty- day period provided for in Section 11 of Re public Ac t No. 1125.

(Philippine Planters Investmen t Co. vs. Commissioner of I nternal Re venue , CTA Case No. 1266, November 11, 1962 ~ Hilado vs. Commissioner of Inte r nal Revenue, CTA Case No . 1256, October 20, 1962; Alg ue Inc. vs. Commissioner

e. (

L _(

I '

- 11 - of Internal Revenue , CTA Case No. 1620, January 16, 1968~ Fredcrich L. Hahn vs. Commissioner of Internal Revenue, CTA Case No. 1937, April 20,

1969~ Gepte

vs. Commissioner of Internal Revenue, CTA Case No. 1151, October 29, 197 0, Certiorari denied in G.R . No. L-33674, June 29,

1971~ Advertising

Associates, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 3017, June 17 , 1981.)

A

wa rant o f distr an t and levy , which is the most drastic action of all medi a of enforcing the collection of t ax an d renders hopeless a request for recons i deration or reinvestigation , is tanta- mount to an ou tr i ght denial thereof, and makes the said request deemed rejected. (Hilado vs.

Commissioner of In t ernal Revenue, CTA Case No. 1256, October 20, 1956; Algue Inc . vs. Commissioner of Internal Rev cnu ~, CTA Case No. 1620 , January 16, 1968; Adverticing Associates , Inc . vs . C omw - ssione ~ of Intern~l Revenue, C ~A Case No. 30 17 , June ~2, 1981.)

Here i n the case at bar, as stated in the amended petition for review, in a letter-assess- ment dated November 29 , 1967, a nd received by petitioner on or about December 5, 1967, respondent asses sed and demanded from petitioner D[ 1.::: ISION - C~A CASE NO. 1967 - 12 - the payment of ~275 , 7 5 3.92 as deficienc y income tax, surcharge, interest and penalty, for the year 1955.

(par. 2, amended petition for revie w . ~ It was disputed by petitioner, through counsel: in a lette r. dated Januar y 29, 1968, where he questioned the l egality of the assessment and asked that the s ame be reinvestigated.

(EXh • "8

11 1 p . 95 , BIR records . )

Without categorically deciding the request o £ petitioner for reinvest- igation , respondent .inst '-'<:~ d served on February 23, 1968 a warrant of distrain t and levy on petitioner to enforce collect ion of the deficiency income tax assess ed by him.

(Exh. "9", p. 89, BI:t<.

records~) Since such action of responden t i s an impli~d outright denial of petitioner's request for reinvestigat ion , pe tit ioner should have appealed to thi s Court w j tl1 in th ir ;:y days from Fe bruary 23, 1968, pursuant t o Section 11 of Repuo- _c Act No. 1125.

His

L <:~il ur e t o do so within the prescribed

I

~ criod b2rred his appea l a nd r endered the disputed :_ l i.nal, executory and dem an d ~:: ble .

(Republic

_ i i ppines vs . Lim Ti an Teng Sons Co., Inc., L-21 ,] ', da rch 31, 1966, 16 SCRA 584; see also Advertising Associates, Inc. vs. Commissioner of Internal Reven ue, sunra.)

- 1 3 - Petitioner's subsequent request for re- investigation and for sta y o f the execution of the warrant o f distraint a nd levy in his letter of August 26, 1 968 (Exh.

11 M'', p. 110-lll, BIR records) file d with responden t six months the re- after, after t he disputed assessment had become conclusive and b inding on him, did not rev ive his right to a ppe a 1 • Once the r i ght to conte s t the validity of the assessment had been lost by the fa il ure to appeal with in the reglementary pe riod prov i d e d for under Section 11 of Republic Act No. ll25 a nd the a ssessment had r eached the stage of f inality 1n v iew of s uch fa ilu re to appeal, it l og ically fol lows that tile assessment could no longe r be reopened throug h the expedient of an appeal from the denial o f petitioner's subsequent request for the sto~ of t ~ 3 exe cution of the wa r r ant of dis tr c1ir:L and l.ev y pending anothe r r _invescigation of the asse ssment. Otherwise, th e per iod of thi r ty days for appea l to this Court would make l ittle sense.

(See Commissioner

of Internal Rev e n ue vs. Jose Concepcion, L- 23912, Mar ch 15, 1968, 22 SCRA 105 8 .) We cannot have the running of the period of appeal left entirely {' G .-, JI.

~I

'

DECIS I ON -

- 11 - at the discretion of t he taxpayc : 'JU • de l Rosario vs . Court of Ta x Appeals, L- 17991 , October 31, 1972, 6 SCRA 541 ; Dy ; '~ S.· Co. r lnc.

vs . Court of Tax Appeal s & Commi r · i' ,-1er of I nter nal Revenue , L- 31369 , Oc tober 18, 1977 , 70 SCRA 448 ; cited i n Adverti sing Assoc iates, Inc. vs. Commissione r o f Inter na l Revenue , supra.) Clearly , the r efo re, petitioner's fai lu re to appeal to this Cour t in d ue time made the assess- ment in question fin~ , exec utory and demandable. 'l'he li a bilily of peti ione r Carlos Ysmael for the amoun t of ~275t 7 53 . Q2 a s deficiency income tax f or the ye a r 1955, p lus the s u r c harges and interest wh ich have accrued thereon incident to delinquen~y, is thus beyond question . With this conclusion , it would seem unnecessary to pass upon the defense o f petit i oner tha t the ~ ssess- ment had prescribed a nd/or h ~ d been ex c inguished by prior compromi se with the authority and effect of ~ adjudicata.

Nonetheles s , on lhe ~ssumption that this Court can tak e cog n izance o f the defense of pres- cription invoked by petitioner, it is already settled that the o rdinary period of prescription of five (5) years within wh i ch to assess under 1"'"'- r) i} t j . I

- 15 - Section 33 1 (now Sec tio n 313) .of the National Inter na l Revenue Code i s applicable to normal circums t ances, but wheneve r the Govern ~~D~ ,~ p laced a. t a d i sadvantage so a!: u, p rcven t

1. 1...::: lawful agent s fr om proper as c~-- ; : s of tax liabilities due t o false r e turns, l (audulent returns intended to evade payment of tax or failure t o fi l e r e tur n s , the per iod o f ten (10) year s as provided in Sec t 1on 332 (now Section 319 ) of the Code should a ply.

(Aznar vs . Court o f Tax Apve a ls , L- 20569, August 23, 1974 , 58 SCRA 519 .)

Since i n this case petitioner did not declare ~ is gai n of ~268 , 333.76 as part of his gross income fo r taxabl e year 1955, preventing the agents of the Bureau of Internal Revenue from proper a ssessment of his ta x liability f or said year du e to the false , if not fraudu l~ n~ , return fil e d by him, the pe r iod of ten (1 0) .Y ~ars as provided in Section 319 should apply. As stated earlier, respondent came t o know only of this substantial underdeclaration on August 31, 1963 throug h the leg a l couns e l of the Carmel Corporation of which petitioner is a majority stockholder. Considering that the deficiency income tax involved herein was asse s sed o n November 29, 1967, the assessment in question wa s made wel l within the

- 16 - prescribed pe riod of ten (10) years from August 31 , 1963.

Where assessment was made , the tax may be collected within five years from the d ~t~ of assessment.

(Section 332(c), now Section 319(c), National Internal Revenue Code; Collector of Internal Reven ue vs. P ineda , L-1411 , May 31, 1961, 2 SCRA 401 ; Codinera vs. Blaquera, 102 Phil. 1165 . ) Since the warrant of di s traint and levy to enforce collection o f the tax assessed by respondent was served on petitioner o n Fe bruary 23, 1968, which is again well within the five-year period counted from November 29, 1967, respondent's right to collec t pet i t ioner's deficiency i ncome tax l iabi- lity for 1955 has not prescribe d. Finally , the situatio n here presented would not cr e ate res adJudicata.

A jua gment i s res adiudicata if it is on the merits of t ne case . (Manila Electric Co. vs. Artiaga, 50 Pni l. 144; S . Diego vs. Carmona, 70 Phil. 281, 283.) If it is not, it cannot be considered as a conclusive adjudication of Lhe controversy.

The resolution da ted August 7, 1961 in CTA Case No . 602, Carlos Ysmael vs. Melecio R. Dom i ngo, as Acting Commis- sioner of Internal Revenue, granting, without

- 17 - objection of responde nt, the motion of petitioner for the withdrawal of l.' · petition fo r review, canr.ot the refo r e operate c. s res a9j ll~ .-:-:ta on the merits .

Even more, the subject-mal tc r in t he subsequent case must be the same as , or included in, the subject-matter of : l: <l.C tion.

(Tan-

Suyco vs. Javier , 21 Phil. 39. ) Since the subject- matter in th is c ase , i. e . , ~275,753.92 as de fic i~ ncy income tax fo r the year 1955 for failure of peti- tione r c arlos Ysmael t o declare the gain realized by him from the exchange of his unspecified i nheri t ed s hare from the estate of the late Magdalena Hashim de Hemady for contracts r eceivable , is not the same as, or ~ ~ e lu ded j_n, the subj ect-mat ter of CTA Case No. 60 2 , the resolution granting t he withdrawal of said case is not res a d ~u dic a t a against respondent Commissior.e r of I~ L e r n al Revenue 1n the instant case.

On t he ass umption that t his Court can take cognizance of the instant appeal and/or petitioner is not es topped from raising the defenses of prescription and r e s adjudicata, the ne t r esult is that the r i ght of res pondent to assess and collect the deficiency income tax invol ved here i n has not pr escri bed ; and the resolutiun of this

- 1 8 - Court in CTA Cas e No . 602 granting the withdrawal of the pet i tion for review filed in said case does not operate as res adjudicata in the instant case. Accordingly, ~he liability of petitioner Carlos Ysmael for the amount of ~275,753 . 92 as deficiency income tax for the year 1955 , plus the surcharges and interest which have accrued thereon incident to delinquency, must be sustained.

WHEREFORE, the petition for review is hereby dismissed with costs against petitioner.

Presiding

~0V

Associate Judge