PERSONAL NOTES IN TAXATION 2

MARK ANTHONY N. MANUEL

TAXATION LAW 2
BIR RULINGS are official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws. 1 Other Definitions2 Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the ommissioner of !nternal "evenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the #ational !nternal "evenue ode $#!" % and related statutes Revenue Memoran um Or ers (RMOs) are issuances that provide directives or instructions& prescribe guidelines& and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, ob'ectives, plans and programs of the Bureau in all areas of operations, except auditing. Revenue Memoran um Rulings (RMRs) are rulings, opinions and interpretations of the ommissioner of !nternal "evenue with respect to the provisions of the (ax ode and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the ommissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. B!" "ulings, therefore, cannot contravene duly issued ")"s& otherwise, the "ulings are null and void ab initio Revenue Memoran um !ir"ular (RM!s) are issuances that publish pertinent and applicable portions, as well as amplifications, of laws, rules, regulations and precedents issued by the B!" and other agencies*offices. Revenue Bulletins (RB) refer to periodic issuances, notices and official announcements of the ommissioner of !nternal "evenue that consolidate the Bureau of !nternal "evenue+s position on certain specific issues of law or administration in relation to the provisions of the (ax ode, relevant tax laws and other issuances for the guidance of the public. RULINGS O# #IRST IM$R%SSION 3 "ulings of first impression, according to "evenue ,dministrative -rder #o. .1/ .0, refer to rulings, opinions and interpretations of the B!" ommissioner with respect to the provisions of the (ax ode and other tax laws without established precedent, and which are issued in response to a specific request for a ruling or an opinion filed by a taxpayer with the B!".
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http1**www.bir.gov.ph*iss2rul*issuances.htm http1**www.bir.gov.ph*iss2rul*issuances.htm 0 "evenue ,dministrative -rder .1/.0

PERSONAL NOTES IN TAXATION 2

MARK ANTHONY N. MANUEL

(he same includes reversals, modifications or revocations of any existing rulings. 4nder the (ax ode, the power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau is exclusively vested on the ommissioner of !nternal "evenue and it cannot be delegated5. (he (ax ode provides1 Section 7. Authority of the Commissioner to Delegate Power. - The Commissioner may delegate the powers vested in him under the pertinent provisions of this Code to any or such su ordinate officials with the ran! e"uivalent to a division chief or higher# su $ect to such limitations and restrictions as may e imposed under rules and regulations to e promulgated y the Secretary of finance# upon recommendation of the Commissioner% Provided# &owever# That the following powers of the Commissioner shall not e delegated% ''' ( ) The power to issue rulings of first impression or to reverse# revo!e or modify any e'isting ruling of the *ureau+ ''' R%&I%W'A$$%AL TO T(% S%!R%TAR) O# #INAN!% Section ,. Power of the Commissioner to -nterpret Ta' .aws and to Decide Ta' Cases. - The power to interpret the provisions of this Code and other ta' laws shall e under the e'clusive and original $urisdiction of the Commissioner# su $ect to review y the Secretary of /inance. ,ll rulings and issuances of the ommissioner of !nternal "evenue that pertain to the implementation and interpretation of the (ax ode of 1667 and other tax laws are valid. 8owever, the Secretary of Finance has the power to affirm, revise, modify or set aside rulings and issuances of the Bureau of !nternal "evenue $B!"% concerning such implementation and application of the provisions of the (ax ode of 1667 and other tax laws.9 !t is important to note that only the final adverse decision of the ommissioner may be brought to the :epartment of Finance $:-F% for review. (hese rulings, therefore, refer to those issued by the ommissioner, or by the :eputy ommissioner for ;egal and !nspection <roup, ,ssistant ommissioner for ;egal Service, or by the "egional :irectors, as may be appropriate according to each one+s delegated authority under pertinent issuances.= Moto Proprio Review of the Finance Secretary

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Section 7$B%, ", >535 B!" ?ebsite http1**www.bir.gov.ph*lumangweb*leg2dof.html = B!" ?ebsite, supra

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MARK ANTHONY N. MANUEL

(he Secretary of Finance may review motu proprio the rulings and issuances of the Bureau of !nternal "evenue concerning such implementation and application of the provisions of the (ax ode of 1667 and other tax laws.7 Procedures and Compliance Requirements , taxpayer who receives an adverse ruling from the ommissioner may, within 0. days from the date of receipt of such ruling, seek its review by the Secretary of Finance, either by himself*itself or through his*its duly accredited tax agent or representative. (he request for review shall be in writing and under oath, and must comply with the conditions stated in "evenue ,dministrative -rder #o. 0/3..1 dated -ctober 33, 3..1. ?ithin 0. days from receipt of an adverse ruling by the ommissioner, the taxpayer may seek the :-F Secretary+s review. ,dministrative remedies must be exhausted in the case of rulings by delegates, e.g., adverse rulings of "egional :irector are sub'ect to review by the ,ssistant ommissioner $, !"% for ;egal Service and by the :eputy ommissioner $: !"% for ;egal and !nspection <roup. > NON*R%TROA!TI&IT) O# RULINGS Section 35=. #on/ "etroactivity of "ulings. / ,ny revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the ommissioner shall not be given retroactive application if the revocation, modification or reversal will be pre'udicial to the taxpayers, except in the following cases1 $a% ?here the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of !nternal "evenue& $b% ?here the facts subsequently gathered by the Bureau of !nternal "evenue are materially different from the facts on which the ruling is based& or $c% ?here the taxpayer acted in bad faith.

ILLUSTRATI&% !AS%S+ !IR vs, $-il, (ealt-"are $rovi ers

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B!" ?ebsite, supra B!" ?ebsite, supra

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MARK ANTHONY N. MANUEL

<.". #o. 1=>136, ,pril 35, 3..7 Sandoval-Gutierrez, J. #A!TS+ (he @hilippine 8ealth are @roviders, !nc. is a corporation organiAed and existing under the laws of @hilippines with its primary purpose as B(o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organiAation to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organiAation.B -n Culy 39, 16>7, @resident oraAon . ,quino issued Dxecutive -rder $D.-.% #o. 370, amending the #ational !nternal "evenue ode of 1677 $@residential :ecree #o. 119>% by imposing Ealue/,dded (ax $E,(% on the sale of goods and services. (his D.-. took effect on Canuary 1, 16>>. Before the effectivity of D.-. #o. 370, or on :ecember 1., 16>7, respondent wrote the ommissioner of !nternal "evenue $ !"%, petitioner, inquiring whether the services it provides to the participants in its health care program are exempt from the payment of the E,(. -n Cune >, 16>>, petitioner !", through the E,( "eview ommittee of the Bureau of !nternal "evenue $B!"%, issued E,( "uling #o. 301/>> stating that respondent, as a provider of medical services, is exempt from the E,( coverage. (his "uling was subsequently confirmed by "egional :irector -smundo <. 4mali of "evenue "egion #o. > in a letter dated ,pril 33, 1665. )eanwhile, on Canuary 1, 166=, "epublic ,ct $".,.% #o. 771= $Dxpanded E,( or D/E,( ;aw% took effect, amending further the #ational !nternal "evenue ode of 1677. (hen on Canuary 1, 166>, ".,. #o. >535 $#ational !nternal "evenue ode of 1667% became effective. (his new (ax ode substantially adopted and reproduced the provisions of D.-. #o. 370 on E,( and ".,. #o. 771= on D/E,(. !n the interim, on -ctober 1, 1666, the B!" sent respondent a @reliminary ,ssessment #otice for deficiency in its payment of the E,( and documentary stamp taxes $:S(% for taxable years 166= and 1667. -n -ctober 3., 1666, respondent filed a protest with the B!". -n Canuary 37, 3..., petitioner !" sent respondent a letter demanding payment of Bdeficiency E,(B in the amount of @1..,9.9,.0..3= and :S( in the amount of @135,16=,=1..63, or a total of @335,7.3,=51.1> for taxable years 166= and 1667. ISSU%+ ?hether or not ", 771= may be applied retroactively to @hilippine 8ealthcare provided on the ground that it acted in bad faith.

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MARK ANTHONY N. MANUEL

(%L.+ #o. "espondent acted in good faith. !ts failure to describe itself as a Bhealth maintenance organiAation,B which is sub'ect to E,(, is not tantamount to bad faith. ?e note that the term Bhealth maintenance organiAationB was first recorded in the @hilippine statute books only upon the passage of B(he #ational 8ealth !nsurance ,ct of 1669B $"epublic ,ct #o. 7>79%. Section 5 $o% $0% thereof defines a health maintenance organiAation as Ban entity that provides, offers, or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium.B 4nder this law, a health maintenance organiAation is one of the classes of a Bhealth care provider.B !t is thus apparent that when E,( "uling #o. 301/>> was issued in respondent+s favor, the term Bhealth maintenance organiAationB was yet unknown or had no significance for taxation purposes. "espondent, therefore, believed in good faith that it was E,( exempt for the taxable years 166= and 1667 on the basis of E,( "uling #o. 301/>>.

$-ili//ine Ban0 o1 !ommuni"ations vs, !ommissioner o1 Internal Revenue <.". #o. 113.35, Canuary 3>, 1666 Quisumbing, J. #A!TS+ @B om filed on ,ugust 7, 16>7 a petition for refund or tax credits representing the overpayment of taxes in the first and second quarters of 16>9. !t relied on the applicability of "evenue )emorandum ircular #o. 7/>9 issued on ,pril 1, 16>9. (he circular states that overpaid income taxes are not covered by the two/year prescriptive period under the tax ode and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the B!" within ten $1.% years under ,rticle 1155 of the ivil ode. (he !" denied the petition on the ground that such is already barred by prescription. !t said that the two/year prescriptive period for filing tax cases in court concerning income tax payments of orporations is reckoned from the date of filing the Final ,d'usted !ncome (ax "eturn, which is generally done on ,pril 19 following the close of the calendar year. @B om argued that the government is barred from asserting a position contrary to its declared circular if it would result to in'ustice to taxpayers. ISSU%+ ?hether or not @B om may request for tax refund or tax credits relying on ") #o. 7/>9, changing the prescriptive period of two years to ten years.

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MARK ANTHONY N. MANUEL

(%L.+ #o. ?hen the ,cting ommissioner of !nternal "evenue issued ") 7/>9, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 30. of 1677 #!" . !n so doing, the B!" did not simply interpret the law& rather it legislated guidelines contrary to the statute passed by ongress. !t bears repeating that "evenue memorandum/circulars are considered administrative rulings $in the sense of more specific and less general interpretations of tax laws% which are issued from time to time by the ommissioner of !nternal "evenue. !t is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. #evertheless, such interpretation is not conclusive and will be ignored if 'udicially found to be erroneous. (hus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement.

!ommissioner o1 Internal Revenue vs, !A an Al-am2ra in ustries <.". #o. 1176>3, February =, 1667 Bellosillo, J. #A!TS+ ,lhambra is engaged in the marketing and sale of cigars. (he present dispute arose from the discrepancy in the taxable base on which the excise tax is to apply on account of two incongruous B!" "ulings1 $1% B!" "uling 570/>> dated 5 -ctober 16>> which excluded the E,( from the tax base in computing the fifteen percent $19F% excise tax due& and, $3% B!" "uling .17/61 dated 11 February 1661 which included back the E,( in computing the tax base for purposes of the fifteen percent $19F% ad valorem tax. ,lhambra relied on B!" "uling 570/>>. 8owever, upon knowledge of the effectivity of B!" "uling #o. .17/61, it immediately implemented the method of computation mandated therein by restoring the E,( in computing the tax base for purposes of the 19F ad valorem tax. ISSU%+ ?hether or not B!" "uling .17/61 can be applied retroactively to ,lhambra on the ground that it acted in bad faith in applying B!" "uling 570/61. (%L.+ #o. 8owever, well/entrenched is the rule that rulings and circulars, rules and regulations promulgated by the ommissioner of !nternal "evenue would have no retroactive application if to so apply them would be pre'udicial to the taxpayers.

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?ithout doubt, private respondent would be pre'udiced by the retroactive application of the revocation as it would be assessed deficiency excise tax. ?hat is left to be resolved is petitioner+s claim that private respondent falls under the third exception in Sec. 35=, i.e., that the taxpayer has acted in bad faith. Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud; a breach of a known duty through some motive of interest or ill will.

(he Supreme ourt found no convincing evidence that private respondent+s implementation of the computation mandated by B!" "uling 570/>> was ill/motivated or attended with a dishonest purpose. (o the contrary, as a sign of good faith, private respondent immediately reverted to the computation mandated by B!" "uling .17/61 upon knowledge of its issuance on 11 February 1661. ,s regards petitioner+s argument that private respondent should have made consultations with it before private respondent used the computation mandated by B!" "uling 570/>>, suffice it to state that the aforesaid B!" "uling was clear and categorical thus leaving no room for interpretation. (he failure of private respondent to consult petitioner does not imply bad faith on the part of the former. ,dmittedly the government is not estopped from collecting taxes legally due because of mistakes or errors of its agents. But like other principles of law, this admits of exceptions in the interest of 'ustice and fair play, as where in'ustice will result to the taxpayer.

!ommissioner o1 Internal Revenue vs, Burmeister an Wain S"an inavian !ontra"tor Min anao3 In", <.". #o. 1903.9, Canuary 33, 3..7 Carpio, J.

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>

#A!TS+ Burmeister and ?ain Scandinavia, a foreign consortium, entered into a contract with the #ational @ower orporation $#,@- -"% for the operation and maintenance of the latterGs two power barges. !n order to ascertain the tax implications of its transaction, the consortium sought a ruling from the B!" which responded with B!" "uling #o. .30/69 dated February 15, 1669, declaring therein that if HrespondentI chooses to register as a E,( person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng @ilipinas, the aforesaid services shall be sub'ect to E,( at Aero/rate. (he consortium sought tax refund of its excess output tax, relying on E,( "uling #o. ..0/66, which reconfirmed B!" "uling #o. .30/69 Binsofar as it held that the services being rendered by B?S )! is sub'ect to E,( at Aero percent $.F%.B ISSU%+ ?hether or not the onsortium is entitled to the refund of @=,665,=96.=7 as erroneously paid output E,( for the year 166= on the ground that it relied on B!" "uling #o. .30/69. (%L.+ ommissionerGs filing of his ,nswer before the (, challenging BurmeisterGs and ?ainGs claim for refund effectively serves as a revocation of E,( "uling #o. ..0/66 and B!" "uling #o. .30/69. 8owever, such revocation cannot be given retroactive effect since it will pre'udice respondent. hanging respondentGs status will deprive respondent of a refund of a substantial amount representing excess output tax. Section 35= of the (ax ode provides that any revocation of a ruling by the ommissioner of !nternal "evenue shall not be given retroactive application if the revocation will pre'udice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section 35= of the (ax ode for the retroactive application of such revocation.

R%M%.I%S A&AILABL% TO T(% GO&%RNM%NT A, $R%S!RI$TI&% $%RIO. TO !OLL%!T

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MARK ANTHONY N. MANUEL

Section 222. !ceptions as to Period of "imitation of #ssessment and Collection of $a!es. (a) -n the case of a false or fraudulent return with intent to evade ta' or of failure to file a return# the ta' may e assessed# or a preceeding in court for the collection of such ta' may e filed without assessment# at any time within ten (01) years after the discovery of the falsity# fraud or omission% Provided# That in a fraud assessment which has ecome final and e'ecutory# the fact of fraud shall e $udicially ta!en cogni2ance of in the civil or criminal action for the collection thereof. ( ) -f efore the e'piration of the time prescri ed in Section 313 for the assessment of the ta'# oth the Commissioner and the ta'payer have agreed in writing to its assessment after such time# the ta' may e assessed within the period agreed upon. The period so agreed upon may e e'tended y su se"uent written agreement made efore the e'piration of the period previously agreed upon. %c& #ny internal revenue ta! which has 'een assessed within the period of limitation as prescri'ed in para(raph %a& hereof may 'e collected 'y distraint or levy or 'y a proceedin( in court within five %)& years followin( the assessment of the ta!. %d& #ny internal revenue ta!* which has 'een assessed within the period a(reed upon as provided in para(raph %'& hereina'ove* may 'e collected 'y distraint or levy or 'y a proceedin( in court within the period a(reed upon in writin( 'efore the e!piration of the five %)& +year period. $he period so a(reed upon may 'e e!tended 'y su'sequent written a(reements made 'efore the e!piration of the period previously a(reed upon. (e) Provided# however# That nothing in the immediately preceding and paragraph (a) hereof shall e construed to authori2e the e'amination and investigation or in"uiry into any ta' return filed in accordance with the provisions of any ta' amnesty law or decree.

ILLUSTRATI&% !AS%S Re/u2li" o1 t-e $-ili//ines vs, (i4on <.". #o. 10.50., :ecember 10, 1666 Mendoza, J. #A!TS+

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,uly -.* -/.0 J B!" issued to respondent Salud E. 8iAon a deficiency income tax assessment of @1,110,096.=> covering the fiscal year 16>1/ 16>3. ,anuary -2* -/./ J "espondent not having contested the assessment, petitioner served warrants of distraint and levy to collect the tax deficiency. 8owever, for reasons not known, it did not proceed to dispose of the attached properties. 1ovem'er 2* -//2 J )ore than three years later, respondent wrote the B!" requesting a reconsideration of her tax deficiency assessment. #u(ust --* -//3 J (he B!", in a letter, denied the request. ,anuary -* -//4 J B!" filed a case with the "egional (rial ourt, Branch 55, San Fernando, @ampanga to collect the tax deficiency.

o o o

(%L.+ ?ith regard to the issue that the case filed by petitioner for the collection of respondent+s tax deficiency is barred by prescription, K330$c% of the #!" provides1 ,ny internal revenue tax which has been assessed within the period of limitation above/prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax. (he running of the three/year prescriptive period is suspended L for the period during which the Commissioner is prohi ited from ma!ing the assessment or eginning distraint or levy or a proceeding in court and for si'ty days thereafter+ when the ta'payer re"uests for a reinvestigation which is granted y the Commissioner+ when the ta'payer cannot e located in the address given y him in the return filed upon which the ta' is eing assessed or collected+ provided# that# if the ta'payer informs the Commissioner of any change in address# the running of the statute of limitations will not e suspended+ when the warrant of distraint or levy is duly served upon the ta'payer# his authori2ed representative or a mem er of his household with sufficient discretion# and no property could e located+ and when the ta'payer is out of the Philippines. @etitioner argues that, in accordance with this provision, respondent+s request for reinvestigation of her tax deficiency assessment on #ovember 0, 1663 effectively suspended the running of the period of prescription such that the government could still file a case for tax collection. (he contention has no merit.

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Sec. 229 of the Code mandates that a request for reconsideration must be made within ! days from the ta"payer#s receipt of the ta" deficiency assessment$ otherwise the assessment becomes final$ unappealable and$ therefore$ demandable. (he notice of assessment for respondent+s tax deficiency was issued by petitioner on Culy 1>, 16>=. -n the other hand, respondent made her request for reconsideration thereof only on #ovember 0, 1663, without stating when she received the notice of tax assessment. She explained that she was constrained to ask for a reconsideration in order to avoid the harassment of B!" collectors. !n all likelihood, she must have been referring to the distraint and levy of her properties by petitioner+s agents which took place on Canuary 13, 16>6. Dven assuming that she first learned of the deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she made it more than 0. days thereafter. 8ence, her request for reconsideration did not suspend the running of the prescriptive period provided under K330$c%. ,lthough the ommissioner acted on her request by eventually denying it on ,ugust 11, 1665, this is of no moment and does not detract from the fact that the assessment had long become demandable. !ommissioner o1 Internal Revenue vs, (am2re"-t 5 6uist $-ili//ines3 In", <.". #o. 1=6339, #ovember 17, 3.1. Leonardo-De Castro, J. #A!TS+ (he alleged deficiency income tax assessment apparently resulted from an ad'ustment made to respondentGs taxable income for the year 16>6, on account of the disallowance of certain items of expense, namely, professional fees paid, donations, repairs and maintenance, salaries and wages, and management fees. (he latter item of expense, the management fees, made up the bulk of the disallowance, the examiner alleging, among others, that petitioner failed to withhold the appropriate tax thereon. (his is also the same basis for the imposition of the deficiency withholding tax assessment on the management fees. "evenue "egulations #o. =/>9 $D?( "egulations% does not impose or prescribe D?( on management fees paid to a non/resident. -n #ovember 7, 3..1, nearly eight $>% years later, respondentGs external auditors received a letter from herein petitioner ommissioner of !nternal "evenue dated -ctober 37, 3..1. (he letter advised the respondent that petitioner had rendered a final decision denying its protest on the ground that the protest against the disputed tax assessment was allegedly filed beyond the 0./day reglementary period prescribed in then Section 336 of the #ational !nternal "evenue ode. (%L.+ (he !" insists that its right to collect the tax deficiency it assessed on respondent is not barred by prescription since the prescriptive period thereof was allegedly suspended by respondentGs request for reinvestigation. (he contention has no basis.

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Section 33,. Suspension of running of statute. 4 The running of the statute of limitations provided in Sections 313 and 333 on the ma!ing of assessment and the eginning of distraint or levy or a proceeding in court for collection# in respect of any deficiency# shall e suspended for the period during which the Commissioner is prohi ited from ma!ing the assessment or eginning distraint or levy or a proceeding in court and for si'ty days thereafter5 when the ta!payer requests for a re+ investi(ation which is (ranted 'y the Commissioner+ when the ta'payer cannot e located in the address given y him in the return filed upon which a ta' is eing assessed or collected% Provided# That# if the ta'payer informs the Commissioner of any change in address# the statute will not e suspended+ when the warrant of distraint and levy is duly served upon the ta'payer# his authori2ed representative# or a mem er of his household with sufficient discretion# and no property could e located+ and when the ta'payer is out of the Philippines. $Dmphasis supplied.% (he plain and unambiguous wording of the said provision dictates that two requisites must concur before the period to enforce collection may be suspended1 $a% that the taxpayer requests for reinvestigation, and $b% that petitioner grants such request. -n this point, we have previously held that1 (he above section is plainly worded. !n order to suspend the running of the prescriptive periods for assessment and collection, t-e re7uest 1or reinvestigation must 2e grante 28 t-e !IR.

,:)!#!S(",(!ED "D)D:!DS*S4)),"M "D)D:!DS Secs. 3.9 to 3.7 1. :istraint of @ersonal @roperty 3. ;evy of "eal @roperty 0. Forfeiture

!astro vs, !ommissioner o1 Internal Revenue <.". #o. ;/13175, ,pril 3=, 16=3 Reyes, J.B.L., J. #A!TS+ , criminal case before the !" was filed against )aria astro for violation of Section 5 of the war (ax ;aw for allegedly defrauding the "epublic of the @hilippines of @1,.5>,=>7.7=. (he criminal action, was filed at the instance of

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respondent and simultaneous with the filing of said action, the petitioner received for the first time the notice of assessment dated #ovember 16, 1657 by registered mail from the ollector of !nternal "evenue. B!" later found out upon a detailed investigation that no war profits tax was due from the accused in connection with the present case. Finding the petition for dismissal to be well taken, the !" dismissed the case. 8owever, in another report submitted by the same Supervising Dxaminer Felipe ,quino to his superiors he changed his previous stand taken before the !". Following insistent requests of petitioner for reinvestigation of her case, the then Secretary of Finance @io @edrosa created a committee $known as @edrosa ommittee% on ,pril 11, 169. to review or re/examine the assessment for war profits tax issued against the petitioner. (he @edrosa ommittee submitted its report, recommending the collection of the amount of @0,960,69..7> as war profits tax due from petitioner inclusive of surcharge and interests. !n order to enforce the assessment, caused to be advertised the sale at public auction of various real properties of petitioner to satisfy the war profits tax assessed against her. For lack of bidders on the scheduled dates of sale, the properties were forfeited to the <overnment under Section 03> of the (ax ode. (he petitioner has not exercised her right of legal redemption with respect to all these real properties which were sold at public auction by the respondent and forfeited in favor of the <overnment for lack of bidders. ISSU%+ ?hether or not the sale and forfeiture to the government $due to lack of bidders% of the properties of petitioner in )anila, Balintawak, @asay, )akati, (arlac, (agaytay and aloocan which had been levied upon by the respondent ollector of !nternal "evenue and advertised for sale in 169. and 1695, constitutes a full discharge of petitioner+s tax liabilities. (%L.+ #o. astro contends that in the provision to the effect that in the absence of bidders, the property is to be Bforfeited to the <overnment in satisfaction of the claim in questionB, the term BsatisfactionB signifies nothing but full discharge of the taxes, penalties, and costs claimed by the state. arried to its logical conclusion, this theory would permit a clever taxpayer, who is able to conceal most or the more valuable part of his property from the revenue officers, to escape payment of his tax liability by sacrificing an insignificant portion of his holdings& and we can not agree that in providing that the forfeiture of the taxpayer+s distrained or levied property, for lack of adequate bids, should operate in satisfaction of the total tax claims even beyond the value of the property forfeited. (hat the satisfaction prescribed in section 03> of the "evenue ode was intended to mean only a discharge pro tanto is confirmed by the provisions of section 00. of the "evenue ode to the effect that Bremedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due including all expenses, is collectedB. (his section makes no distinction between forfeitures to the <overnment and sales to third persons, and we are satisfied that no distinction was intended and that none is warranted.

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#or do we see that the petitioner has any ground for complaining that the properties forfeited were undervalued $Drror NE%. (he relation between assessed value and market price being variable, it is not a matter of notice. 8owever, the ourt of (ax ,ppeals appraised the forfeited properties at double their assessed evaluation, and thereby credited her with a part payment on account of her tax liability in the amount of @1,71=,>>..... (here is no adequate evidence that they were worth more, petitioner+s own estimates of value being obviously unreliable, due to her direct interest in the matter under investigation. Since the burden of proof lay evidently on the taxpayer, she is not in a position to complain in this regard. -# S4" <8,"<D1 (he acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax, since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade payment. (he obligation to pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil liability derived from crime that would be wiped out by the 'udicial declaration that the criminal acts charged did not exist. ,s to the 9.F surcharge, the very 4nited States Supreme ourt that rendered the offey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions, provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayer+s fraud $8elvering vs. )itchell, 0.0 4.S. 06., >3 ;. Dd. 617& Spies vs. 4.S. 017 4.S. 563%. (his is made plain by the fact that such surcharges are enforceable, like the primary tax itself, by distraint or civil suit, and that they are provided in a section of ".,. #o. 99 $section 9% that is separate and distinct from that providing for criminal prosecution $section 7%. ?e conclude that the defense of 'eopardy and estoppel by reason of the petitioner+s acquittal is untenable and without merit. ?hether or not there was fraud committed by the taxpayer 'ustifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances& and the finding of its existence by the (ax ourt is conclusive upon us. $<utierreA v. ollector, <.". #o. ;/6771, )ay 01, 1691 & @ereA vs. ollector, supra%. Re/u2li" vs, %nri7ue4 <.". #o. 7>061, -ctober 31, 16>> Padilla, J. -n 3> Canuary 16>9, the ommissioner of !nternal "evenue served a ?arrant of :istraint of @ersonal @roperty on the )aritime ompany of the. @hilippines to satisfy various deficiency taxes of said company in the total amount of @17,3>5,>>3.59, pursuant to unappealed and final tax assessments. -n 11 Cune 16>=, Sheriff "amon DnriqueA levied on two $3% barges of the )aritime ompany of the @hilippines, pursuant to a writ of execution issued on 16 February 16>= by the "( /)anila in ivil ase #o. >9/0.105, entitled B<enstar ontainer orporation vs. )aritime ompany of the @hilippinesB, in favor of the plaintiff therein. "espondent sheriff scheduled a public auction sale,

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of the levied barges on 30 Cune 16>=. (he barges, particularly Barge ) @/1 and Barge ) @/5, were among the aforementioned properties distrained and seiAed by petitioner, through the ommissioner of !nternal "evenue. -n 1> Cune 16>=, the !" wrote DnriqueA informing him that Barge ) @/1 and Barge ) @/5 were no longer owned by the )aritime ompany of the @hilippines as said barges had been distrained and seiAed by the B!" in satisfaction of various deficiency taxes of )aritime ompany of the @hilippines, thereby registering its adverse claim over said barges. -n 30 Cune 16>=, respondent deputy sheriff sold at public auction the two $3% barges, ) @/1 and ) @/5, and issued the corresponding sheriffs certificate of sale on the same date to the highest bidder which was the levying creditor. -n 35 Culy 16>=, petitioner filed before the ourt of ,ppeals the aforementioned petition for prohibition with preliminary in'unction, alleging that respondent sheriff, "amon <. DnriqueA, acted in excess of his authority or with grave abuse of discretion when he levied on execution and subsequently auctioned the abovesaid two $3% barges which were the sub'ect of a warrant of distraint and notice of seiAure by the ommissioner of !nternal "evenue. ISSU%+ ?hether or not the B!" warrant of distraint and notice of seiAure of personal property is superior over the writ of execution issued by the "( and the levy on execution and auction sale of the barges in question. (%L.+ Mes. !t is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a 'udgment. (he tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. Besides, the distraint on the sub'ect properties of )aritime ompany of the @hilippines as well as the notice of their seiAure were made by petitioner, through the ommissioner of !nternal "evenue, long before the writ of execution was issued by the "egional (rial ourt of )anila, Branch 01. (here is no question then that at the time the writ of execution was issued, the two $3% barges, ) @/1 and ) @/5, were no longer properties of the )aritime ompany of the @hilippines. (he power of the court in execution of 'udgments extends only to properties unquestionably belonging to the 'udgment debtor. Dxecution sales affect the rights of the 'udgment debtor only, and the purchaser in an auction sale acquires only such right as the 'udgment debtor had at the time of sale. !t is also well/settled that the sheriff is not authoriAed to attach or levy on property not belonging to the 'udgment debtor.

!IR vs, NLR! <.". #o. 756=9, #ovember 6, 1665 Mendoza, J. #A!TS+ -n Canuary 13, 16>5 the ommissioner of the !nternal "evenue sent two letters of demand to the respondent )aritime ompany of the @hilippines for

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deficiency common carrier+s tax, fixed tax, =F ommercial Broker+s tax, documentary stamp tax, income tax and withholding taxes in the total amount of @17,3>5,>>3.59. (he assessment became final and executory as private respondent did not contest it. But as private respondent did not pay its tax liability either, the ommissioner of !nternal "evenue issued warrants of distraint of personal property and levy of real property of private respondent. (his circumstance has given rise to the question in this case as it appears that four of the barges placed under constructive distraint were levied upon execution by respondent deputy sheriff of )anila on Culy 3., 16>9 to satisfy a 'udgment for unpaid wages and other benefits of employees of respondent )aritime ompany of the @hilippines. )ore specifically, the question in this case is the validity of the warrant of distraint served by the "evenue SeiAure -fficer against the writ of execution subsequently levied upon the same property by the deputy sheriff of )anila to satisfy the claims of employees in #;" ase #o. # "/13/5300/>5 $:omingo . #iangar, et al. v. )aritime ompany of the @hilippines% for @56.,756.31. ISSU%+ ?hether or not the government+s claim for taxes was preferred under ,rt. 3357, in relation to ,rt. 3351$1% of the ivil ode, on the ground that under this provisions only taxes and fees which are due on specific movables en'oy preference, whereas the taxes claimed by petitioner were not due on the four barges in question (%L.+ Mes. ,rt. 11. of the ;abor ode applies only in case of bankruptcy or 'udicial liquidation of the employer. (his is clear from the text of the law. ,rt. 11.. ?orker preference in case of bankruptcy. L !n the event of bankruptcy or liquidation of an employer+s business, his workers shall en'oy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding. 4npaid wages shall be paid in full before other creditors may establish any claims to a share in the assets of the employer. (his case does not involve the liquidation of the employer+s business. #or is there any merit in the contention of the #;" that taxes are absolutely preferred claims only with respect to movable or immovable properties on which they are due and that since the taxes sought to be collected in this case are not due on the barges in question the government+s claim cannot prevail over the claims of employees of the )aritime ompany of the @hilippines which, pursuant to ,rt. 11. of the ;abor ode, Ben'oy first preference.B ,rticle 11. of the ;abor ode does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer. laims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under ,rticles 3351 and 3353 of the ivil ode, except to the extent that such claims for unpaid wages are already covered by ,rticle 3351, number =1 Bclaims for laborer+s wages, on the goods manufactured or the work done,B or by ,rticle 3353, number 01 Bclaims of laborers and other workers engaged in the

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construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or other works.B (o the extent that claims for unpaid wages fall outside the scope of ,rticle 3351, number = and 3353, number 0, they would come with the ambit of the category of ordinary preferred credits under ,rticle 3355. ,pplying ,rticle 3351, number = to the instant case, the claims of the 4nions for separation pay of their members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and other products produced or manufactured by the !nsolvent, but not to other assets owned by the !nsolvent. ,nd even in respect of such tobacco and tobacco products produced by the !nsolvent, the claims of the 4nions may be given effect only after the Bureau of !nternal "evenue+s claim for unpaid tobacco inspection fees shall have been satisfied out of the products so manufactured by the !nsolvent. ,rticle 3353, number 0, also creates a lien or encumbrance upon a building or other real property of the !nsolvent in favor of workmen who constructed or repaired such building or other real property. ,rticle 3353, number 0, does not however appear relevant in the instant case, since the members of the 4nions to whom separation pay is due rendered services to the !nsolvent not $so far as the record of this case would show% in the construction or repair of buildings or other real property, but rather, in the regular course of the manufacturing operations of the !nsolvent. (he 4nions+ claims do not therefore constitute a lien or encumbrance upon any immovable property owned by the insolvent, but rather, as already indicated, upon the !nsolvent+s existing inventory $if any% of processed tobacco and tobacco products.

(ong 9ong S-ang-ai Ban0 vs, Ra11ert8 <.". #o. ;/101>>, #ovember 19, 161> Malcolm, J. #A!TS+ !n February, 1619, the firm of @u'alte O o., which is engaged in timber business in )indanao, was indebted to the 8ongkong and Shanghai Banking orporation in a large sum of money. Being unable to pay its debt in specie, the company assigned to the bank, among other things, a large quantity of the railroad ties manufactured at its mills. (he bank sold and disposed of these ties at various times until in )ay, 161=, there remained with it some 3,... railroads ties of the lot acquired. (he internal revenue charges on the forest products removed from the public forests of )indanao by @u'alte O o. not having been paid, on )ay 3, 161=, the !" caused delinquency proceedings to be commenced and had issued a distress warrant. ;ater, on )ay 19, 161=, the ollector of !nternal "evenue caused an additional distress levy to be made upon the =,0.9 ties, which had been assigned by @u'alte O o. to the 8SB . @roceeding in accordance with this action, the ollector of !nternal "evenue seiAed the 3,... ties in the possession of the bank. 4ntil the date last mentioned, the bank had no notice of the tax.

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ISSU%+ ?hether or not the lien follow the property sub'ect to the tax into the hands of a third party when at the time of transfer, no demand for payment had been made and when the purchaser had no notice of the existence of the lien. (%L.+ #o. (he lien does not follow the property sub'ect to the tax into the hands of a third party when at the time of transfer, no demand for payment had been made and when the purchaser then had no notice of the existence of the lien. 4nder the general rule of the ivil law, possession of movables is not necessary to the validity of a lien, whether created by contract or by act of law. Such lien will attach upon movable property even in the hands of a bonafide purchaser without notice. 4nder the law of taxation however, the tax lien does not establish itself upon property which has been transferred to an innocent purchaser prior to demand. , demand is necessary to create and bring the lien into operation. Furthermore, in order that the lien may follow the property into the hands of a third party, it is essential that the latter should have notice, either actual or constructive. (he reason behind this is the benevolence of our onstitution which prohibits the taking of property without due process of law. (he policy of the law is against upholding secret liens and charges against property of innocent purchasers or encumbrances for value. ,t the time 8SB acquired the property there was nothing to show that @u'alte O o. were deliquent taxpayers nor were there any public records that may be consulted to protect it from loss by reason of the existence of a secret lien. )inor issue on the right of 8SB to recover interest from the undue enforcement of the lien1 (he reckoning date for the computation of interest should be the date when the taxpayer lost the income from the funds by payment under protest. !n this case, it is not from the filing of the complaint for collection but on the date 8SB was deprived of the property.

B, :U.I!IAL R%M%.I%S Mam2ulao Lum2er vs, Re/u2li" <". #o. ;/07.=1 September 9, 16>5 Cuevas, J. #A!TS+ (he B!" assessed )ambulao ;umber the amount of @00,969.3= as deficiency sales tax, forest charges and surcharge. -n -ctober 1>, 169>, petitioner requested for a reinvestigation of its tax liability. !n reply thereto, respondent in a letter dated Culy >, 1696, gave petitioner a period of twenty $3.% days from receipt thereof to submit the results of its verification of payments and failure to comply therewith would be construed as abandonment of the request for reinvestigation. @etitioner failed to comply with this requirement. #either did it

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appeal to the ourt of (ax ,ppeals within thirty $0.% days from receipt of the letter dated Culy >, 1696, as prescribed under Section 11 of "epublic ,ct #o. 1139, thus making the assessment final and executory. )ambulao contended that the 'udicial action cannot be enforced because it was the collection was made out of time. ISSU%+ ?hether or not a taxpayer can dispute an assessment which is being enforced by 'udicial actionP (%L.+ #o. !n a suit for collection of internal revenue taxes, as in this case, where the assessment has already become final and executory, the action to collect is akin to an action to enforce a 'udgment. #o inquiry can be made therein as to the merits of the original case or the 'ustness of the 'udgment relied upon. @etitioner is thus already precluded from raising the defense of prescription. ?here the taxpayer did not contest the deficiency income tax assessed against him, the same became final and properly collectible by means of an ordinary court action. (he taxpayer cannot dispute an assessment which is being enforced by 'udicial action, 8e should have disputed it before it was brought to court. #o inquiry can be made therein as to the merits of the original case or the 'ustness of the 'udgment relied upon, other than by evidence of want of 'urisdiction, of collusion between the parties, or of fraud in the party offering the record with respect to the proceedings. (he taxpayer may raise only the question whether or not the ollector of !nternal "evenue had 'urisdiction to do the particular act, and whether any fraud was committed in the doing of that act.

#ernan e4 (ermanos vs, !IR an !TA <.". #o. ;/31991, September 0., 16=6 Teehankee, J. #A!TS+ (he taxpayer, FernandeA 8ermanos, !nc., is a domestic corporation organiAed for the principal purpose of engaging in business as an Binvestment companyB with main office at )anila. 4pon verification of the taxpayer+s income tax returns for the period in question, the ommissioner of !nternal "evenue assessed against the taxpayer the sums of @10,515..., @116,=10..., @11,=6>..., @=,>>7... and @15,591... as alleged deficiency income taxes for the years 169., 1691, 1693, 1690 and 1695, respectively. Said assessments were the result of alleged discrepancies found upon the examination and verification of the taxpayer+s income tax returns for the said years.

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FernandeA 8ermanos contended that the ommissioner+s action to recover its tax liability should be deemed to have prescribed for failure on the part of the ommissioner to file a complaint for collection against it in an appropriate civil action, as contradistinguished from the answer filed by the ommissioner to its petition for review of the questioned assessments in the case a "uo has long been re'ected by this ourt. ISSU%+ ?hether or not !"Gs right to recover tax liability prescribed for failure on the part of the ommissioner to file a complaint for collection against it in an appropriate civil action. (%L.+ #o. % &udicial action for the collection of a ta" is begun by' ()* the filing of a complaint with the proper court of first instance$ or (2* where the assessment is appealed to the Court of +a" %ppeals$ by filing an answer to the ta"payer#s petition for review wherein payment of the ta" is prayed for. (his is but logical for where the taxpayer avails of the right to appeal the tax assessment to the ourt of (ax ,ppeals, the said ourt is vested with the authority to pronounce 'udgment as to the taxpayer+s liability to the exclusion of any other court. !n the present case, regardless of whether the assessments were made on February 35 and 37, 169=, as claimed by the ommissioner, or on :ecember 37, 1699 as claimed by the taxpayer, the government+s right to collect the taxes due has clearly not prescribed, as the taxpayer+s appeal or petition for review was filed with the (ax ourt on )ay 5, 16=., with the ommissioner filing on )ay 3., 16=. his ,nswer with a prayer for payment of the taxes due, long before the expiration of the five/year period to effect collection by 'udicial action counted from the date of assessment.

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