CTA Case No. 1967 (Decision)

-- REPU BLIC O F Tli& Ptli LJPPINttS COUf"'T OF TAX APPEALS Ot:lt?Ol"t CITY /CARLOS YSHAEL, Petitioner, - versus - C. T.A . CASE NO. 1967 THE COMMISS IO~,JER OF IN TERNA L REVEN UE , Respondent . X- - --------X DEC I S I 0 N In a letter 0 a �ed November 29, 1967, respon- dent Commissione r of nternal Revenue advis ed petitioner Carlos Y ~m ael that, upon investigation, there h :1s bee n Cou nd due from him the amount of P2 75 , 75 3 .92 as de "clc nc y income tax for t he year 195 5, deta ils of whJc l are as follow s : (par. 1, me nded peti ti on for review; admitted, par. 2, answer; Ex hi b it "2", p. 16 , CTA records.) Net in(;ome per first investigation ���...... P 91,794.9/ Add: Additional income: Undeclared income from exchange of property, computed as follows : Original unspecified inher i tance from estate of r1agdalena Hashim de Hernady � ������.����� .P259,228.73 This inheritance was ex- changed for contracts receivables valued at �.� P527 , 56 2. 49 P268,333 . 76 Adjusted net income per final investigation �. .i:i360,128.73 Less: Personal and additional exemptions � ... P 5, 400 . 00 Amount subject to tax �.���.�.��.���....����� P354,728.73 Income tax due thereon �� �...�.������� . �����. Pl79,263.00 Less : A!'roun t already assessed ���.� . � . � . �.. . �P 15 , 719. 00 Balance of tax due ���� . �� � � � ���������������� Pl63,544.00 Add: 50% surcharge ������������ � ������������. P 81,772 .00 ~% mo. int . fr . 6-20-59 to 6-20-62 .���� P 29,437.92 Compromise � � e� ������ � �� � ���������������~ 1,000.00 Total amount due and collectible ����� � �� � ���~~�~~�~~=~~ ",l r'~ ')

- DECISICN - .� CTA CASE NO. 1 967 - 2- The 50 % surcharge was impo sed pursuant t o the provisions of Section 72 of the Nat io n al Int e rnal Revenue Code. Petitioner wa~ therefore requested to pay t he afor es aid amou nt to respondent's collection agent conce r ~ ed wi thin the time spe c ified in the enclosed pr ep ar e d a s s essmen~ notice. The above asscssment-let~er was received by p etitioner on or about De c e, J e r 5, 1967. (par. 2, a mended p e tition for review ; Exh . "3" , p. 13, CTA records.) By le t ter dated January 29, 1968, received by resoonde nt on Fe bruary 15, 1 968, petitioner , thru counsel, pro ~ - s ted the " a bove Re-assessment which wa s ma de under date of November 29, 19 67" on the g r ound that the deficiency i ncome tax due for the year 19 ~5 of petitioner had already been "the su b jec t matter of a cass before the Court of Tax Ap peals wh e re in the 1 955 .. n come tax o : my client were (si c) d ly f l XE:.G a nd the same paid as pe r recei p t s in our possession." tExh. " 8", p. 95, BIR r ecords . ) "It is the refore respect- f~ ll y requ ested that a re-inves t igation of the as sessment of Nov e mbe r 29, 196 7 be made to deter- ~ine the bas i s o f the claim of Internal Revenue

- Di:::CISION - CTA CASE NO. 1967 - 3- for taxes which had already been assessed as of Hay 16, 1960 and duly paid." (Ibid .) Instead of rendering a ~ecision on the request for re- investigation, respondent Commiss i oner of I nternal Revenue, on Feb: cary 23, 1968, served on petitioner Ca rlos Ysmael a warrant of distraint and levy dated Februa ry 8, 1968 to enforce collection of the "sum f �27 4,75 3.92 as deficienc y 1ncome tax for the year 1955 , due fr om him under our letter o f demand dated Novembe r 29, 1967, plus increments there t o i '1~ i. de nt to deli nquenc y from December 30, 1967." (E x b s. "9" and "9-A ", p . 89, BIR records . ) Aft er r e spond e nt had inst ructed on June 5, 19 6 3 b.e Re gional Director of Reve nu e Region No. 7 , North Manila, to execute the warrant of distrain t and levy i ssued against the properties of peti- tioner (pp. 106 and 107, BIR records), t he latter in his letter dated August 26, 1968 again r equested for a reinve stigation o f t he case on the ground, jus t l i ke in h is fi r st re ques t for reinv e stigation, tha t the findin_ s o f re sJonde nt as to his 1955 deficiency income tax lia bi l 1ties were the subject matter of a c ase in th e Court of Tax Appeals which was withdrawn by reason of a ompromise settlement of the tax involv '"' 1 1.1e r e in and that the "assess- /.I.. ~("f q .'w

DECIS ION - CTA CASE NO. 196 7 - 4- ment made thereon i n you r let t er dat2d Novembe r 29 , 1967, ha s appa re11tly prescribed, pur s J ant to the pr o vi sio ns of secti on 331 of t he Na tional Inte r na l Revenue Code." (Exh. "W', pp. 1 10 -111, BIR records .) Peti tione r also asked f or the stay of the execution of the warrant of distraint and levy . (Ibid.) In his let ter of September 16, 1 96 8, res pondent however denied petitioner's re q uest for reinvest- igation and informed peti tioner that the e xecution of the issued war r an t of distraint and levy against his properties could not be ~a ye d . (Exh. "5", p . 20, CTA records . ) Hence the pr esent recourse. In his answer to the amended petition for review, re s ponde nt all eges, among others, by way of special a nd af fi rma t i ve defense s: 7 . That i n a reinvestig at ion of the income t ax return of peti tioner fo r t he year 1 955, it was found out that he d i d not decla r e the income from the exchange o f inherited pr oper ty worth ~259~228 . 73 with contracts re ceivable worth ~527,362.49 which were later assigned to t he Carmel Co rporation f o r shares of stock , thus re~lizing a profit of P 268,333.76; 8 . Tha t as a result of :;:1 ; , ,., exch .!"1-::Je p e ti- tioner was a s ses s ed a deficiE=>D C'y i. nc: o we tax in ......

DECISION - CTA CASE NO. 1967 - 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 h ly defi ci e nc y interes t and c ompromise pena lty, 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 petitio ner ha 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 nc o me; 11. 7 hat the previous assessmen t of defi- ciency income tax fo r 1955 was no t settled by compromise; 12. That the de fe n se 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 pet it i o ner did not dec lare a sub- stantial amou n t o f his in c ome for 1955 for which reason the 50% surcharge has been imposed pursuant 'i ~) '1

DECISION - CTA CASE NO. 1967 - 6- to Sect on 72 of t he Natio na l ~ ~t er nal Revenue Code (Antigua vs . Col lector of I a1t ernal Revenue, CTA Case No. 579, November 2, 1959~ Margu erite 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 nt erest was imposed pursuant to Section Sl( d) .of the Tax Code as amended by Re public 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 assessme nt, at anytime within e n (10) years after the discovery of the falsity, fraud, or om i ssion (Section 332 of the Natio1al Internal Revenue Code; Balter, Fra ~ d under Federal Income Tax Law, p. 226) ;_ 16. That the �e fic 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 exe cutory and demandable and, therefore , th i s Court has no jurisd iction

DECISION - CTA CASE NO. 1967 - 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 o nt r a c ts receivable val u ed at Ii5 27 1 562.49 (Exh . 11 P" , pp . 2 3- 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 '. an d 11 2" 1 pp. 25- 3 5 & 36-42 1 BIR records). The gain re alize d by petitioner from such tran- saction was Ii268,333 . 26. (�XhS � 3 11 11 and 4 11 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 spon d ent 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 ti on with the inv e stigati o n of the inc o me tax case for the year 1955 of the sa i d corporation. (Exh. 3 11 11 1 pp. 10-13 1 BIR rec ords ; Exhs . u4" and 5 11 11 pp. 14-15 , 1 BIR records.. )

DECISION - CTA CASE NO. 1 967 - 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 19 55. 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, tra ns - portation expense and salaries expense, all for being perso n al , re s ~ l ti ng in a deficiency income tax llibil it y of :e tit i oner in the amount of ~201,861.00, e x clusive 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;:,. _\1ele cio R. Domingo, as Act ing Comm i ~ sioner of In ternal Revenue," Aft E:.r th e defic lE. ::cy income tax liabi li 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 Cas e No. 602 was withdrawn on accoun t of a compromise settlement of the tax liabilit ies of petitioner involved ther e in. It is to be str e ssed, however, tha t the - ,..... I J. ~ !

DECISION - CTA CASE NO. 1967 - 9- basis of the def i c i e n c~ inc ome tax assess mc i nvolved in the i nstant cas r�, ' +; ich is the un- reported gain of P2 6 8 , 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 c overed 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 wo r t h P25 9 ,228.73 with contracts recei va bie wor th P527,362.49 which were late r assigned to t he Carmel Corporation for s hare s of stock, t hus re al 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. Th e basi s of the ' t ax invo lved in t h is case was ne ver the subject ma tter o f 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 pre scrip : � o f the a ssessmen t and / o r comprom i se wh i ch h as t h e effect of~ jud ic a t a. However, since respo nl,, 'r:L raise the iss ue o f ju ris d 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 fin al , executor y and demandable. It s eems well - s~ttl e d tha t if a taxpay e r fi le s a re q uest fo r r e consid~ration or reinvest- ig at ion o f a n assessmen t made by the Commissioner of Internal Revenue, b u 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 Commission e r is equiva lent 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 peri od pr ovided for in Section 11 of Re publi c Ac t No. 11 25. (Philippine Planters Investmen t Co. vs. Commissioner of I nternal Re venue , CTA Case No. 1266, Nove mber 11, 1962 ~ Hilado vs. Comm issi oner of Inte r n al Revenue, CTA Case No . 1 256, October 20, 1962; Alg ue Inc. vs. Commissioner e. ( L_( I '

DECISION CTA CASE NO. 19 67 - 11 - of Interna l Revenue , CTA Case No. 1620, January 16, 1968~ Fredc ri ch L. Hahn vs. Commissioner of Internal Revenue, CTA Case No. 193 7, April 20, 1969~ Gepte vs. Commissioner of Internal Revenu e, 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 le vy , which is the most drastic action of all media 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 , Jan u ary 16, 1968; Adv erticin g Associates , Inc . vs . C omw - ssione ~ of Intern~l Revenue, C ~A Case No. 30 17 , June ~2, 198 1.) Here i n the case at bar, as stated in the amended petition for review, in a letter-assess- ment dated November 29 , 19 67, 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 deficien c y income tax, surcharge, interest and penalty, for the year 1955. (par. 2, amended petition for revie w . ~ It was disputed by petitioner, through counse l: in a lette r. dat e d 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 decidi ng the request o � petitioner for reinvest- igation , respo ndent .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 ass es s ed by him. (Exh. "9", p. 89, BI:t<. records~) Since such action of responden t i s an impli~d outrig h t denial of petition e r's request for reinvestigat ion , pe tit ioner should have appealed to thi s Court wj tl1 in th ir ;:y days from Fe bruary 23, 1968, p ursua nt t o Secti o n 11 of Repuo - _c Act No. 1125. His L <:~il ur e t o do so within the prescribed ~ criod b2rred his a ppea l a nd r e ndered the disputed I :_ l i.n al, executory an d dem an d ~:: ble . (R e public _ i i ppines vs . Lim Ti an Teng Sons Co., Inc., L-21 ,] ', d a rch 31, 1966, 1 6 SC RA 584; see also Adv e rtising Associates, Inc. vs. Commissioner of Internal Reven ue, sunra.)

DECISION - CTA CASE NO. 1 9 67 - 13 - Petitioner's subsequent request for re- investigation and for stay o f the execution of th e wa rrant o f dist rai nt a nd levy in his let ter of August 26, 1 968 (Exh. 11 M'', p. 110-lll, BIR re cords) 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 a ppeal from the denial o f petitioner's subsequent request for the sto~ of t ~ 3 ex e cution of th e wa r r ant of dis tr c1ir:L and l.e v y pending an oth e r r _invescig ation of the asse ssment. Otherw ise, th e per iod of thi r ty days for appea l to this Court would make l ittle sense. (See Commissioner of Internal Re v 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 - CTA CASE NO. 1967 - 11 - at the discretion of t he taxpayc : ' JU � de l Rosario vs . Court of Ta x Appeals, L- 1799 1 , October 31, 1972, 6 SCRA 5 41 ; 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, 1 9 7 7 , 70 SCRA 4 48 ; cited i n Ad verti si ng 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~ , exe c 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 ur c harges and interest wh ich have accrued thereon incident to delinquen~y, is thus beyo n d question . With this conclusion , it would seem unnecessary to pass upon the defense o f petit i oner th a t th e ~ 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 pet itio ner, it is already settled that the o rdinary period of prescription of five ( 5) years within wh i ch to assess under 1"'"'- r) t i} j . I

DECISION - CTA CASE NO. 1967 - 15 - Section 33 1 (n ow Sec ti o n 313) .of the National Inter na l Re venue 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 turn s, 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) ye ar s as provided in Sec t 1on 332 (now Section 319 ) of the Code should a ply. (Aznar vs . Court o f Tax Ap v e a ls , L- 2 0569, August 23, 1974 , 58 SCRA 519 .) Since i n this case petitioner did not d eclare ~ is g ai 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~ , ret urn 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 Augu st 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 Nov ember 29, 1 967, the assessment in question wa s made wel l wit hin the

DECISION - CTA CASE NO. 1967 - 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), Nation al Internal Revenue Code; Collector of Internal Reven ue vs. P in eda , L-1411 , May 31, 1961, 2 SCRA 401 ; Codi nera v s. 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 we ll 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, 28 3.) If it is not, it cannot be considered as a conclusive adjudication of Lhe controversy. The resolution da ted August 7, 1961 in CTA Cas e No . 602, Carlos Ysmael vs. Melecio R. Dom i ngo, as Acting Commis- sioner of Internal Revenue, granting, without

DECISION - CTA CASE NO. 1967 - 17 - objection of responde nt, the motion of petitioner for the withdrawal of l.' � petition fo r review, canr.ot the refo r e operat e 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. Javi er , 21 Phil. 39. ) Since the subject- matter in th is c as e , i. e . , ~275,753.92 as de fic i~ ncy income ta x fo r the ye ar 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 ha re 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 e ct-ma t ter of CTA Case No. 60 2 , the resolution granting t he withdrawal of s aid case is not res a d ~u dic a t a against responde nt Commissio r. e r of I~ L e r n al Re venue 1n the instant case. On t he ass umption that t his Court can tak e cognizance of the instant appeal and/or petitioner is not es topped from raising the defenses of prescription a nd r e s adju dicata, the ne t r e sult is that the r i ght of res pondent to as se ss and collect the deficiency income tax invol ved here i n has not pr escri bed ; and the resolutiun of this

DECISION - CTA CASE NO. 1967 - 18 - Court in CTA Ca s 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. SO ORDERED. Quezon City , Metro Manila, October 23, 1981. ?La~T. . . . . ~ AMANTE F. Presiding ~'JE CONCU :--..: . ROAQUIN e Judge ~0V Associate Judge