CTA Case No. 2278 (Decision)

�- . ... .. R!tPUBLlC OF THE PHILJPPI:-<&S COURT OF TAX APPEALS ot.:~7.0N CITY ANDREW D. GRUBER, C.T . A. CASE NO . 2278 Petitioner - versus - CO~~ISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - X DECI S I 0 N Sometime in December 1958, petitioner acquired by purchase from Hacienda Benito ten (10) hectare~ of land situated in the vicinity of Antipolo, Cainta, Rizal, at the fair market value of one peso (~1.00) and other valuable considerations 4 the lat ter of which as per disposition is in money, s o that the actual cost, considering the other valuable considerations, in money value, is ~4.00 per square meter ~ as evidenced by a deed of sale dated December 4, 1958, executed by and between petitioner Andrew D. Gruber and said Hacienda Benito. (Pp. 48-49, BIR rec.) On January 15, 1959, petitioner so~d four (4) hectares, out of the said ten hectares of land., covered by T.C.T. No. 63958 - Rizal , to Faith Academy, Inc., a non-profit educational institution

DECISION - CTA CASE NO. 2278 - 2- for a consideration of One Peso and fifty centavos (~1.50) per square meter. (Exh. "C-3", pp . 38-39, 40 and 41, BIR rec. ) Petitioner also executed a deed of conditional sale of five (5) hectares of land, covered by T.C.T. No. 84252 - Rizal, also, out of the said ten (10) hectares of land, for One Hundred Ninety Thousand (Pl90,000.00) Peso s to R~bert o. Philip and Sons Inc. and another deed of absolute sale was executed by and between the petitioner Andrew D. Gruber and Robert 0. Philip and Sons Inc. covering an area of two thousand five hundred (2,500) square meters of land, also a portion of a land covered by T.C.T. No. 77388, office of the Register of Deeds of Rizal~ also at P4,00 per square meters. On the basis of the information submitted by one Jose P. Macalinao of 1524 Alcantara Street, Sampaloc, Manila, and the investigation conducted by special agent J os e de la Pe~a of the Finance Investigation Divis ion, Bureau of Internal Revenue, respondent on December 28, 1970, assessed petitioner and received by the latter on January 25, 1971, finding him liable for deficiency income t.ax in the respective amounts for the years 1959 and 1961 (exclusive), or in the total amount of Pl67,504.00 1 03

- DECISION - CTA CASE NO. 2278 - 3- (Pp. 106-107, BIR rec.), details of which are as follows: 1959 Net income per return - - - - - - ~ 3,986 . 50 Undeclared Income ---- 43 1 600.00 P47,269.25 Net income per i nvestigation Less: Personal Exemption - - - - 3,000.00 Amount subject to tax - - - - - - 1244,269.25 Tax Due thereon ... Pll,78 8 .00 Less: Amount already paid - - - .20.00 Ba lance --- �111,768.00 Add: 50% Surcharge - - - - - - - 5,884.00 4-19-60 to 4-19-62 - - - - 2,118.24 - - - - - - Total Amount Due and Collectible i'll9,776.24 1961 Ne t income per r eturn - - - - P 3,986.50 Undeclared Income - - - - - - - . 193,500.0Q. Net Income per Investigation - - Pl97,486.50 Less: Personal Exemption _�_L_ 000.00 A111ount subject to tax - - - Pl94,486.00 Tax Due thereon - - - - - - P 87,848.00 Less: Amount already Assessed ----"30. 00 Balance - ------ - P 87,818.00 Add : 50% surcharge - - - - - - 43,909.00 1/2% morithly int from 4-17-62 to 4-17-65 - - - 15,807 . 24 Total Amount Due and CoTI.ectible - Pl47,534 . ~4 Petitioner, through counsel, in his letter dated February 28, 1971 and received by respondent on February 23, 1971, disputed the assessment of Pl67,304.48 and asked its cancellation and withdraw ~ on the ground that the right of the government to assess has already prescr~bed as more than five (5) years have elapsed when the assessment was made and 1 0 :1

- DECISION - CTA CASE NO. 2278 - 4- which 5-year period is counted from the dates peti- tioner fi led his 1959 and 1961 income tax returns, respectivel y. Petitioner, in his letter, pointed out that respondent \vas in error in imposing the 50% surcharge, when he invoked the application of the ten (10) year prescriptive period under Section 332 within which to assess, .instead of five (5) year prescriptive period, the tax code provided for in Section 331 of the National Internal Revenue Code. Petitioner, likewise, asserted the fact that when a fraud case was filed against him in the Fiscal's Office of the City of Manila (I.S. No. 69-28370) based on alleged underdeclaration or non- declaration of income, the said criminal case was dismissed by the City Fiscal for want of sufficient proof of fraud. (Exh. D-15, p. 212, Deposition, Separate envelope.) Copy of this decision dismissing the case by the City Fiscal's Office had been fur- nished the respondent Commissioner of Internal Revenue. Petitioner is with the view that the five (5) year period within which to issue deficiency income tax assessment pursuant to Section 331 of the Tax Code applies instead of Section 332 which speaks of fraud. Petitioner concludes that the assessment 105

DECISION - CTA CASE NO. 22/8 -5- which was issued on December 28, 1970, was issued beyond the five - year period from the filing of his income tax returns for the years 1959 and 1961, which were on March 8, ;960 and March 8, 1962. (Pp. 25-28; 21-24, BIR rec.). It is urged by peti- tioner that thE:: assessment should be cancelled and withdrawn. (P � . ll2, BIR rec.) In order to enforce collection of the alleged deficiency income tax liabilities which were apparently not paid by petitioner, warrant of dis- traint and levy was served against petitioner on March 3, 1971, Petitioner attacked the validity of the issuance of the warrant as being irregular since this summary method was resorted to without exerting reasonable efforts to collect the assess- ment by ordinary method. {Pp. 124-125, BIR rec.) In a memorandum dated April 1, 1971, Julian Tiongco, Assistant ROH for Operations (Collection) , stated that the seeming haste in the issuance of the warrant of distraint and levy is due to the memorandum issued by Deputy Commissioner of Internal Revenue Conrado Diaz dated November 11, 1970, and addressed to the Chief, Prosecution Division, sta- ting therein that "in view of the confidential in- formation reaching this (his) office,Mr. Andrew D. Gruber is retiring from business and intends to 1 0G

- DECISION - CTA CASE NO. 2278 - 6- leave the Ph ilippines and has been disposing his properties. And that the Revenue Seizure Agent assigned to served and execute the warrants has been instructed to proceed unless the order to the contrary be subsequently received by him. (p. 127, BIR rec.). It is also stated in the said memo- randtoo that counsel for petitioner alleged that an initiated action for criminal fraud by the Bureau of Internal Revenue filed with the City Fiscal's Office was dismissed, and if true, the contention of the petitioner that this case does not fall under Section 332 of the National Internal Revenue Code and that the assessment h~s prescribed may be tenable. On April 23, 1971, petitioner f iled the ins- tant petition for review. After filing by r e spondent on Septemb er 1, 1971 of his answer to the petition for rev iew, the case was set for trial on the merits. However, the trial was postponed no less than seven (7) times since the original setting on July 12, 1971 upon request of counsel for petitioner, and based on a variety of grounds. On August 1 , 1965, Atty. Grace Rivera, counsel for petitioner, moved to withdraw as counsel as the client-counsel relati onship ceased at the time of the death of Andrew D8 Gruber, petitioner herein. (p. 50, CTA rec.). In a resolution dated September ~,.. . . '1 0 7

- DECISION - CTA CASE NO. 2278 - 7- 5, 1977, the motion and manifestation of Atty. Grace Rivera, withdrawing as counsel of the deceased pe-- titioner was granted. (p. 63, CTA rec.) Again, on June 28, 1978, a motion to reset the case for hearing,by the new counsel for petitioner, counsel/administrator Crisanto Cornejo, was filed with this Court. After the appearance of the new counsel, the hearing of this case was postponed no less than five (5) times. And at the hearing of this case on March 16, 1979, due to the - failure of counsel/administrator to appear 1 respondent sub- mitted the case for decision. (Minutes of the Hearing, March 16, 1979, p. 87, CTA rec.) This Court, however, in fairness to the petitioner, issued the following resolution: In the interest of justice and it appearing that there is a pending written offer of petitioner's exhibits which has not yet been acted upon, the verbal order given in open court on March 16, 1979, submitting the case for decision is hereby set aside. Upon the Court's own motion, this case is hereby reopened and the parties ordered to appear before the court on September 15, 1980 1 at 9:00 AvM. for further proceedings. (p. 88, CTA rec.). Meanwhile, during the proceedings of this case netitioner, on July 3, 1975 submitted to the court a written offer of exhibits (pp. 43-44-45, 46-47-48 10 S

- -- DECISION - CTA CASE NO. 2278 - 8- & 4 9 ~ CTA rec.) for admission, which the court nmv admits as there was, in the records, no objection on the part of respondent. In the meantime, the case was set for trial on the merits on September 15, 1980. Again, on that date counsel for petitioner failed to appear, which prompted counsel for respondent, in open court, t.o again request for the dismissal of the case citing lack of interest on the part of the petitioner to prosecute its appeal. At the ad- journment of the hearing, a representative of the pe�t itioner arrived and filed with this Court a motion to reset the scheduled hearing. The Court denied the respondent's motion for dismissal. At this coint the hearing was set for October 21, lqRO, with both oarties notified in open court. On that scheduled date of hearing, petitioner prayed for a thirty (30 ) day period wherein to file a memorandum, or to present additional wit- nesses before he will submit the case for decision. And if after that period, he is unable to submit his memorandum or to present his witnesses, the case \...,rill be deemed submitted for decision. (Mi- nutes of the hearing, October 21, 1980 1 p. 93, CTA rec.) 10 9

-- DECISION - C~A CASE NO. 2278 - 9- Finally, for petitioner's failure to file his memorandum, t.he Court i.ssued an order and received by petitioner on December 12, 1980 (p. 94, CTA rec.) considering the case submitted for decision. ~he decisive questions are whether or not: 1. The right of the government to assess deficiency income tax against the estate of Andrew D. Gruber for the years 1959 and 1961 has pres- c ribed; and 2. .Z\ssuminq that the government has the right to assess the deficiency income tax, whether or not the estate of petitioner is liable for Cleficiency income tax for said years. At the outset, it must be stated that tax assessments are presumed to be correct, unless the contrary is shown, and the burden of proof to show othen.,rise or to overcome the presumption of correctness rests upon the taxpayer. As a matter of fact, the burden of the taxp2yer con- testjng the validity or correctness of an assess- ment is to prove not only that the Commi�ioner of Internal Revenue is wrong, but that the taxpayer is right. (Lino Gutierrez vs. Collector of Internal 11 0

-- - D:8C ISION - CTA CASE NO. 2278 - 10 - Revenue, CTA Case No. 504, J anuar y 28, 1962 ; Esso Standard ~ertilizer and Agricultural Chemical r:o., Tnc. (Philipnine s) v. Comm i ~Sione r of Internal Revenue, CTA Cases Nos. 1862, 1?79, 1888, .1892 & 18q6, May 30, 1980; Augusto L. Guanzon v. Efren I. Plana, eommissioner of Internal Revenue, CTA ~se No. 2821, August 27, 1980; Tan Guan v. Court of Tax Appeals, I. - 23676, April 27, 1967, 19 SCRA 903.) We shall now consider the fi r st issue. The provisions of lav.r involved in this case are Sections 318 and 319 of the National Internal Revenue Code, which we quote for ready reference, to wit: s BC. 318. � �pe-r-i�o�d �or Li"mi�t �a�t �i�on � 1Jpo�n� �As�s�e�s�s�me�n�t� �a�n�d Co"lTe�ct�i�on - Except as provided in t he succeeding Sections; internal revenue taxes shall be assessed within five years after the return was filed , and no proceedi ng in court with- out assessment for the collection of such taxes shall be begun after the ex- piration of such period . For the pur- pose o f this section a return filed before the last day prescribed by the law for the filing thereof shall be considered as f i led on such last day: � "Provi�ded, That this limitation shall not apply to cases alrea dy investigated prior t o the approval of this Code. (331). SBC. 319. � "F.Kc�e�ot�io�n� As� �t �o� Perj,�od "o"f" �Li.mi�ta�t �i �on� "o"f� As�s �e�s�sn1eh�"c �a�n�d Colle�c�tion � �o�f� "Ta"Xe s . - (a) I l). t he case of a f alse and f r a udulent returns with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court f o r theccollection of such tax may be begun wi thout ass e ssment, at any 1 1 1.

- - DECISION CTA CASE ~0. 2278 - 11 - time within ten years after the dis- covery of the falsity , fraud, or omission: � "PJ::"'oVided, That in fraud assessment which has become final and executory, the fact of fraud shall be individually taken cogni- zance of in a civil or crimiDal action for the collection thereof. XXX XXX XXX XXX XXX XXX The records show that petieioner thru his agent filed his income tax returns for 1959 on March 8, 1960; and petitioner personally filed his income tax return for 1961 on March 8, 1962. ~he assessment was issued on March 28, 1970, and was received by the petitioner on January 25, 1971. (Petition ~or Review, ~- 1, CTA rec.) Since respondent had only up to March 8, 1964 and March P, 1 qr; 7, \vi thin v.,rhich to issue the deficiency . assessment for the years 195? and 1961, respect- :ively, it is obviously clear that without the existence of fraud the assessment in question was issued beyond the five year period Prescribed in the aforeauoted provisions of law. Resnondent "however alleges in his answer to the Petition for review that petitioner deliberately failed to declare his true and correct income in his return, an~ , conseauentJ.y, said returns were false and fraudulent, and invoY:es the 10-year period

-- - DECISION - CTA CASE NO. 2278 - 12 - of limitation within which to assess as provided in Section 332 (now Sec. 319) of the Revenue Code. We cannot subscribed to the position taken by the respondent. It is a cardinal rule in taxation that fraud is a question of fact and the circums- tances constituting it must be alleged and proVed. Fraud is a serious charge and to be sustained, it must be supported by clear and convincing proof which is lacking in this case. (The Collector of Customs "now Commissioner" vs. Alberto D. Benipayo, G.R. No. L-13656, January 31, 1962, 4 SCRA, 182.) 1'!hether the taxpayer has been guilty of fraud with intent to evade tax the burden of proof with respect to such issue shall be upon the Co~nissioner of Internal Revenue (Jacob Mertens Jr.,� �La\�! �of� Te�-a-e-r-al / � -_rn�come� �Taxa�ti'ol)_, Vol. 10, Chapter55.18, 1958 Ed., pp. 71-72.) In the case at bar, the existence of fraud with intent to evade the payment of tax has not been clearly shown by respondent. It is only alleged by respondent that oetitioner deliberately intended to defraud the government by failing to report his true and correct income in his income tax return. To Us this is not enough. Hhere a taxpayer honestly believed that the method employed by him in determining his tax liability 113

- DECISION - CTA CASE NO. 2278 - 13 - is correct, he does not incur fraud. It is then incumbent upon the Commissioner of Internal Revenue to show the specific act or omission which pictures fraud, the absence of which no fraud penalty attaches under Section 72 of the National Internal :Revenue Code. (Yutivo & Sons Hardware Co. vs. Commissioner of Internal Revenue, G.R. No. L-13203, January 28, 1961, 110 Phil. 751, cited in the case of Conunissioner of Internal Revenue vs. Vi sayan F.lectric Co. and the CTA, G.R. No. L-22611 , May 2 7 I 19 6 8 , /. 3 SCRA' 715 � ) From the evidence of record in the case at bar, it appears that petitioner acquired from Hacienda Benito ten (10) hectares of land at an acquisition cost of ~1.00 and other valuable con- siderati ons per square meter. Petitioner had tes- tified that in this transaction, he had acquired the said Hacienda, per his deposition, and paid ~4 . 00 per square meter to Julien Wilson who was authorized to receive the payment. Petitioner had sold four (4) hectares, out of the said oortion of land, t .o Faith Academy Inc. a non - profit educational and protestant insti �t ution, for ~1.50 per square meter. Petitioner also executed two (2) deeds of sale, one covering an . 11 :j

-- ' DECISION CTA CASE NO. 2278 - 14 - area of 47,500 square meters to Robert Q. Philipps, and sold at ~ 4 .00 per square meter. Petitioner had succinctly testified in his depos ition that the selling price merely equalled the acquisition cost. Petitioner, in answer to the query of counsel for petitioner , regarding the meaning of �"�o�ther acquisition cost of the Hacienda, petitioner, tes- tifying in his own behalf stated that the phrase "other goods and valuable considerations" was actually to make the consideration at P4.00 per sauare meter for the \�:hole 10 hectares of land be- longing to Hacienda Benito . According to the peti- tioner, Hacienda Benito had an arrangement with certain Julien Wilson wherein Hacienda Benito agreed to give Julien Wilson, two (2) pieces of land con- taining an area of 100,000 square meters each. But in this arrangement, however, Andrew Gruber was never mentioned. Petitioner in his testimony also stated that , on December 8, 1958 8 he paid Julien l-Hlson the amount of fl4. 00 per square meter for the other piece of land with an area of 100,000 square meters, and he further stated that Julien Wilson dre\v up the deed of sale which caused Hacienda Benito to finally transfer the 10 hectares of land to

- - DECISION - CTA CASE NO. 2278 - 15 - petitioner. (Petitioner's testimony, pp. 44-53, Depo- s ition, Exh. B.) l''hile it is true that the acquisition cost ap9earinq in the deed of sale, executed by and bet- ween Hacienda Benito and petitioner Andrew D. Gruber, was at Pl.OO and other goods and valuable considera- tions, the actual amoun�t involved \vas i34. 00 per sauare meter as testified and explained by peti - tioner in his deposition. Petitioner had testif i ed that he oaj d the amount of P4. 00 to Julien ''Tilson ancl r,ot to Hacienda Reni to, as appearing in '�the 'deed of sale. (Pp. 52-53, Deposition.) There being no counter availing evidence pre-- sented by the government to refute the testimony of the petitioner that the actual acquisition cost of the 10 hectares of land, which was P4.00 paid to Julien Wil s on in 1958, a nd there be inq no showing that the oetitioner was induced with malice or his tes- timony being merely an a fterth o ught or his testi- mony destroyed by cross-examination, this court will accent the testimony of petitioner as true. It is worth mentioning that petitioner, at the time of his deposition, was suffering from arteries- clerotic heart disease; myocardial infraction, arte- riolateral vessel; congestive heart railure; diabetis musitus. (P. 153, Petitioner's Deposition) This ~- 11 G

r - DECISION - CTA CASF. NO. /.278 - 16 - ohysical debility of petitioner may certainly negate any notion that he will speak falsehead and to turn his back on the truth. Consequently, we strongly think that respondent failed to refute the validity of the petitioner's claim. The reliance by respondent on the single information furnished by one Jose R. Macalinao, did not overcome the ge nuineness and validity o f the three (3) deeds of sale (Exh. "D 11 , "F", and "G", neoosition.). ~he testimonial evidence of petitioner which established the fact that he did not realize, in his honest belief, any profit or income from the sales made, d e stroyed the claim of respondent of non-recosmition of income in petitioner's income tax returns for lq59 and 1961. There being no evidence on the part of the respondent to prove that oetitioner's income tax returns were false and fraudulent by the apparent failure of petitioner to include incomes of the sales of his land during those years with intent to avoid payment of income t ax, the issuance of the ar3sessment beyond the period of five (S) years from the filing of the returns makes the assessment null and void under the provisions of Section 331 (now Sec. 319) of the National Internal Revenue Cone. I N VIE\�1 OF TPE FOHEGOING, \�te find that Sec�tion 332 (now 319) of the Internal Revenue Code is not applicable in the instant case. The right of 117

... ... - - ..... ....., DECISION - CTA CASE NO . 2278 - 17- respondent to assess deficiency income tax for the years 1960 and 1961 having prescribed under Section 331 of the National Internal Revenue Code, we hold the def i ciency assessment of 1959 and 1961 against petitioner null and void and with no legal force and e f fect and hereby declared as set aside. The consideration of the second issue there- fore becomes moot and academic. SO ORDERED. Quezon City, March 5, 1982. I CONCUR: � ROAQUIN /~ssociate Judge / { Presidin 7(�e t._ ILl) J{J~tt'/r., I ALEX z. REY~~ / Associate Judge 11 8