LKY PROPERTY HOLDINGS, INC., REPRESENTED BY MR. WILBERT T. LEE, v. HON. KIM HENARES IN HER CAPACITY AS COMMISSIONER OF INTERNAL REVENUE AND ESMERALDA TABULE, IN HER CAPACITY AS REVENUE REGIONAL DIRECTOR OF REVENUE REGION NO.10, LEGAZPI CITY,

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY THIRD DIVISION LKY PROPERTY HOLDINGS, CTA CASE NO. 9066 INC., represented by MR. Members: WILBERT T. LEE, Petitioner, -versus- BAUTISTA, Chairperson HON. KIM HENARES in her FASON-VICTORINO, and capacity as COMMISSIONER RINGPIS-LIBAN, JJ. OF INTERNAL REVENUE, and ESMERALDA TABULE, in her capacity as Revenue Regional Director of Revenue Region Promulgated: No. 10, Legazpi City, Respondents. r:r 11 20,7 x- - - - - - - - - - - - - - - - - - - - - -~ - _'f;_ ~ t �~-' - - - - -x DECISION Fabon-Victorino, J.: In this Petition for Review dated May 14, 2015, petitioner LKY Property Holdings, Inc., prays to reverse the ruling of respondent Commissioner of Internal Revenue (CIR) in the Letter dated April 28, 2015, as well as the denial of its Request for Reconsideration of March 5, 2015 in the Letter dated March 18, 2015, both issued by the other respondent, Regional Director Esmeralda M. Tabule. Petitioner also seeks to nullify the assessment issued against it for deficiency capital gains tax (CGT) and documentary stamp tax (DST) for the year 2007, and the Warrant of Distraint and/or Levy issued for the collection of the said deficiency taxes. /

DECISION CTA Case No. 9066 Petitioner is a domestic corporation with Securities and Exchange Commission {SEC) Registration No. IS095- 000067. Its principal office is located at LKY Central Arcade, Magsaysay Street, Sorsog<Pn City. On the other hand~ respondents Kim Henares and Esmeralda Tabule were, at the time of the filing of the instant case, the Commi~sioner of Internal Revenue (CIR) and the Regional Director Of Revenue Region No. 10, Legazpi City, of the Bureau of Internal Revenue (BIR), the government agency taske~ to assess and collect all national internal revenue taxes, fees and charges. On May 21, 2007, p~titioner and Mayan International Hotel, Inc. (MIHI) executeo a Deed of Absolute Sale1 for the I latter's sale of a hotel f~cility in Legazpi City known as Mayan International Hotel lin favor of petitioner. 2 In the Deed of Ab$olute Sale, MIHI and petitioner stipulated on the payment of taxes, fees and other charges pertinent to the sale and tlransfer of the property sold to the petitioner, in this wise: 2. That LKY PRqPERTY HOLDINGS, INC. shall advance the payment for the corresponding Capital Gains Tax ano Documentary Stamp taxes that may fall due by wirtue of this sale, and which amount shall be d~ducted from the said total purchase price; arjld the expenses of the Registration Fees an~ Transfer Fees shall be for the account of LKY PROPERTY HOLDINGS, INC. ; 3 The Capital Gains Tax (CGT) Return with PNB BTR-BIR Payment Slip4, showing p~yment of CGT in the amount of P1,394,040.00, and DST Declaration/Return with PNB BTR- 1 Exhibits "P-4", "P-4-A", and "P-4-B", do�ket, pp. 352-354. 2 Par. 2, Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), docket, p. 279. 3 Exhibit "P-4-A", docket, p. 353. . 4 Exhibits "P-5" and "P-5-A", docket, pp. 356-358.

DECISION erA case No. 9066 BIR Payment Slip5, showing payment of DST in the amount of P348,510.00, were filed on October 6, 2008. Subsequently, the B[R, through respondent Regional Director Esmeralda Tabule:, issued a Preliminary Assessment Notice6 (PAN) dated November 6, 2014 with Details of Discrepancies (Assessment No. 067-07-004-201-934), assessing petitioner for deficiency CGT of P9,853,482.21 and DST of P2,473,352.24 or the total amount of P12,326,834.45 for the yeiar 2007. 7 Petitioner received the PAN, with attached Detaills of Discrepancies, on November 29, 2014.8 On December 15, 20149 , petitioner filed its Protest against the assessment thirough a Letter dated December 9, 2014. In a Letter dated January 26, 2015, 10 with attached Formal Letter of Demand (FLD) and Details of Discrepancies11, both date~ December 3, 2014, and received by petitioner on February 28, 2015 12, respondent Tabule denied petitioner's protest against the PAN. On March 10, 2015, petitioner filed a Request for Reconsideration dated March 5, 2015 13 addressed to respondent Tabule, again: praying for the cancellation and setting aside of subject as$essment. On March 27, 2015, Revenue District Office (RDO) No. 67, Legazpi City, issued� a Preliminary Collection Letter14 against petitioner which it subsequently recalled in a Letter15 5 Exhibits "P-6" and "P-6-A", docket, pp. 360-361. 6 Exhibit "P-7", docket, pp. 366-369; Exhibit "R-6", BIR Records, pp. 206-209. 7 Par. 3, Admitted Facts, JSFI, docket, p. 279. 8 Par. 11, Petition for Review, docket, p. 4. 9 Exhibit "P-8", docket, pp. 372-374. 10 Exhibits "P-9" and "P-9-A", docket, pp. 375-376. 11 Exhibits "P-10" and "P-10-A", docket, pp. 377-380; Exhibit "R-8", BIR Records, pp. 313- 316. 12 Par. 13, Petition for Review, docket, p. 6. However, Exhibit "R-8" shows that the Formal Letter of Demand was received by a ce1rtain Agnes E. Pontuguez on February 12, 2015. 13 Exhibits "P-11" to "P-11-F", docket, pp, 381-387. 14 Exhibits "P-12" and "P-12-A", docket, pp. 388-389. 15 Exhibit "P-13", docket, p. 391.

DECISION erA Case No. 9066 dated April 13, 2015, tog~ther with the Warrant of Distraint and/or Levy dated March 27, 2015. On March 31, 20151!1>, petitioner received the assailed Letter17 dated March 1$, 2015 of respondent Tabule, denying its Request for � Reconsideration and demanding anew the payment of the assessed deficiency CGT and DST. On April 21, 2015, pletitioner appealed to respondent CIR the decision of respondent Tabule in a Request for Reconsideration 18 dated April 6, 2015. On May 13, 2015 19, petitioner received a Final Notice Before Seizure20 dated May 12, 2015 issued by RDO No. 67. On even date21 , petitioner :received respondent CIR's Letter22 dated April 28, 2015, dismiissing petitioner's appeal. 23 Hence, the present Petition for Review. In their Answer24, posted on August 20, 2015 and received by the Court on August 28, 2015, respondents maintain that the asses$ment for CGT and DST issued against petitioner is corre�t. While CGT and DST under the law are normally shoulder�d by the seller, such is subject to exceptions and stipulatiorl by the parties, as in this case. When petitioner purchase" the subject hotel from MIHI, the parties stipulated that the CGT and DST would be for the account of petitioner. Hence, petitioner is the proper party to be assessed for any d~ficiency in CGT and DST arising from the said sale transat:tion. This and the other factual and legal bases of the assessment were fully expounded in the Preliminary Assessmerht Notice with attached Details of Discrepancies, as well as in the Formal Letter of Demand with attached Details of Discrepancies issued to petitioner. 16 Par. 15, Petition for Review, docket, p. 15. 17 Exhibits "P-3" to "P-3-E", docket, pp. 346-351. 1s Exhibits "P-14" to "P-14-F", docket, pp . 392-398. 19 Par. 19, Petition for Review, docket, p. 21. 20 Exhibit "P-15", docket, p. 403. 21 Par. 20, Petition for Review, docket, p. 21. 22 Exhibit "P-2", docket, p. 345. 23 Par. 4, Admitted Facts, JSFI, docket, p. 280. 24 Docket, pp. 102-111.

DECISION CTA Case No. 9066 Further, as the in$tant case involves a false or fraudulent return, respondents had ten (10) years to assess petitioner for any deficienqy, making the subject assessment timely issued. Finally, with the presumption of correctness in favor of the assessment, it is incumbent upon petitioner to prove its allegations. On February 23, 20!16, the Court issued a Pre-Trial Order25 after the parties flied their Joint Stipulation of Facts and Issues26 thereby termiinating the Pre-Trial Conference. In support of its case, petitioner presented its President and CEO and lone witness/ Wilbert T. Lee. 27 He testified that petitioner and MIHI entered into a contract of sale involving ~ hotel facility in Legazpi City with petitioner as the buyer arhd MIHI as the seller. While the parties in the contract stipulated that MIHI shall shoulder the payment of CGT and DpT, nonetheless as part of the consideration for the purchase, petitioner would pay in advance to the seller the �amount for the payment of CGT and DST. MIHI ther~after made the corresponding declaration, and paid the CGT and DST. He further declared tttlat on November 29, 2014, or five (5) years after the payments of CGT and DST by MIHI, respondent Tabule issued a PAN assessing petitioner for deficiency CGT and DST. �Petitioner protested the PAN in a Letter dated December 9, 2014 but it was denied by respondent Tabule in her Letter dated January 26, 2015, received on February 28, 2015. 2s Docket, pp. 287-292. 26 Docket, pp. 279-281. 27 Minutes of the Hearing dated March 28,, 2016, docket, p. 325; Exhibit P-16 (Judicial Affidavit of Mr. Wilbert T. Lee dated October, 12, 2015), docket, pp. 404-413 and Exhibit P-17 (Supplemental Judicial Affidavit of Mr. Wilbert T. Lee dated February 24, 2016), docket, pp. 414-418; with cross examination, TSN ~ated March 28, 2016.

DECISION CfA Case No. 9066 Petitioner filed another protest denominated as a Request for Reconsideration, however, it was likewise denied by respondent Tabule. Before petitioner coulld appeal the denial of its protest, it received from ROO No. 67 of Legazpi City a Preliminary Collection Letter (PCL) witlh Warrant of Distraint and/or Levy (WDL) which was later recc~lled. After the recall of the PCL and WDL, petitioner appealed the denial of its Request flor Reconsideration by respondent Tabule to respondent CIR, The said appeal was denied by the latter in her Letter dated April 28, 2015. On the same day ilt received the letter of denial, petitioner received a flinal Notice Before Seizure in connection with the subject assessment prompting petitioner to elevate the matter to this Court. After petitioner rested, respondents presented Revenue Officer D'loanna M. Dia...,ante of the BIR Revenue Region No. 10, Assessment Division in Legazpi City, as their lone witness. 28 She testified that she reviewed the audit conducted in this case by another revenue officer and she found petitioner liable for deficiency CGT and DST on its purchase of a hotel facility from MIHI. Her review revealed that the actual zonal value of the property sold, per BIR wetbsite, was P5,250.00 per square meter, or P72,564,250.00 �and not PSO,OOO,OOO.OO, the tax base used in the comput~tion of the CGT and DST by the taxpayer. She is however not aware of the reason for the use of the PSO,OOO,OOO.O() in the computation of the CGT and DST nor its details. She further testified that the zonal valuation of P72,564,2SO.d0, should have been the tax base 28 Minutes of the Hearing dated August 15, 2016, docket, p. 459; Exhibit R-10 (Judicial Affidavit of Revenue Officer D'Joanna M. Diamante dated June 15, 2016), docket, pp. 443- 448; with cross examination, TSN dated August 15, 2016.

DECISION CTA Case No. 9066 for purposes of computing the taxes due on the transaction as it was higher than tthe property's selling price of 20 million and its fair market value of P33,234,000.00. The witness opined that it is the seller, like MIHI, who generally shoulders the QGT and DST as in fact, per BIR Record, it was MIHI who' filed the DST Declaration Return with the BIR. However, evident from Deed of Sale executed by the parties that petitioner assumed the payment of the CGT and DST. These fact~ were written in the Memorandum dated May 19, 2009 which she prepared together with computation sheet. On November 6, 2014, she issued a Preliminary Assessment Notice (PAN) 'with Assessment Notice No. 067- 07-004-201-934, copies off which were sent to the registered addresses of petitioner r~flected in the BIR database, i.e. Sorsogon City and Greenhillls, San Juan. There being no prot$st filed by petitioner against the PAN, she prepared a Forrmal Letter of Demand (FLD) dated December 3, 2014 and s~nt it to the registered address of petitioner in Greenhills, San Juan. However, it was returned by the post office uns~rved. This prompted her to personally serve another qopy of the same FLD at the other registered address of petitioner in Sorsogon City on February 12, 2015. It wa$ received by Agnes E. Pontuquez, who was authorized to rleceive it in behalf of petitioner. Another copy of the FLD ~as sent by registered mail under Registry Receipt No. 15-161 to the Sorsogon City address of petitioner and it was received on February 25, 2015 also by Agnes E. Pontuquez. Respondents formally offered all its exhibits which were admitted in the Resolution*9 dated October 14, 2016. The case was submitted for decision on December 14, 2016. 30 29 Docket, pp. 482-483. 30 Resolution dated December 14, 2016, dlocket, p. 520.

DECISION CTA Case No. 9066 STATEMIENT OF ISSUES The parties submitted the following issues31 for the determination of the Court. Main Issue: Whether petitiolfler is liable to the amount of P12,462,256.53 representing deficiency Capital Gains Tax and Ddcumentary Stamp Tax for taxable year 2007, glus 50�/o surcharge and 20�/o deficiency and delinquency interest for late payment until fully pcjtid. Corollary Issues: 1. Whether the period to assess has prescribed, taking intto consideration that the case involves fraud assessment under Sec. 222 (a) of the Tax Code. 2. Whether the. buyer may be held liable for Transfer Taxes, in thlis case the Capital Gains Tax and Documentary Stamp Tax, in a contract of sale of real property. DISCU$SION/RULING In her Letter32 date)d January 26, 2015 and Letter33 dated March 18, 2015, tespondent Tabule held petitioner liable for deficiency CGT: and DST in the total amount of P12,462,256. 5334 on the basis of the parties' agreement in the Deed of Absolute Sale dated May 21, 2007, particularly, item number 2 of the. "OTHER OBLIGATIONS" portion thereof stating that petitioner, as the buyer, "shall advance the payment for the cortesponding Capital Gains Tax and Documentary Stamp taxe$ that may fall due by virtue of this sale". 31 Issues to be Tried or Resolved, JSFI, docket, p. 280. 32 Exhibits "P-9" and "P-9-A", docket, pp,. 375-376. 33 Exhibits "P-3-B" to "P-3-C", docket, p~. 348-349. 34 Exhibit "P-10", docket, pp. 377-378; E!xhibit "R-8", BIR Records, pp. 315-316.

DECISION CTA Case No. 9066 To back-up her stanc~, respondent Tabule cites (1) BIR Ruling {DA-(FIT-005)096~ dated June 16, 2010, which states that: "in cases of ~ale, exchange or disposition by a corporation of lands and)or buildings classified as capital assets/ordinary assets, th$ burden of paying the 6�/o capital gains tax/creditable witihholding tax rests upon the seller/transferor because the latter is the one who realized the capital gains tax/ordinary income subject to tax unless there is a stipulation to the contrary". Respondent Tabule likewise invokes the principle allegedly laid down in the case of Tomas K. Chua vs. Cpurt of Appeals and Encarnacion Valdez-Choy (G.R. No. 119255, April 9, 2003), that "the buyer can retain the amount for the capital gains tax and pay it upon authority of the seller, or the seller can pay the tax, depending on the agreement of the parties". In rejecting the foregoing arguments, petitioner states that as the buyer/transferee, it is not liable to pay the CGT and DST in relation to its purchase of a hotel facility from 1 MIHI. The burden of payimg the 6�/o CGT as well as the DST rests upon the MIHI, th� seller/transferor, in accordance with law, in the case of CGir, and the terms and conditions in the Deed of Absolute Sale they executed on May 21, 2007, in the case of DST. According to petitioner, the assessment issued against it by respondent Tabule is premised on her erroneous interpretation of the stiRulation in the subject Deed of Absolute Sale stating that .it "shall advance the payment for the corresponding Capital Gains Tax and Documentary Stamp taxes that may fall pue by virtue of this sale." Petitioner denies tHat it agreed to shoulder the payment of CGT and DST. According to petitioner, the stipulation was for it to advance to MIHI the amount to cover such taxes but MIHI would still be responsible for the same. Allegedly, it only agreed to shoulder the expenses for transfer and registration of the hotel facility in its name35 � 35 Exhibit "P-4-A", docket, p. 353. ,/

DECISION CTA case No. 9066 It has been ruled that a contract must be interpreted from the language of the contract itself, according to its plain and ordinary meanif1g. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the lilteral meaning of the stipulations shall control 36 � Following the foregoing tenet, it is clear from the Deed of Absolute Sale of May 2~, 2007 executed by and between MIHI, as seller, and petitidner, as buyer, that petitioner shall merely advance the amouht for the payment of the CGT and DST to MIHI who shall s~ill bear the burden of paying the said taxes. The amount1 advanced by petitioner shall be deducted from the total pwrchase price that petitioner would pay to MIHI. By no stretch of the imagination could such stipulation be construed to shift the liability to pay the corresponding CGT and DST from the sale transaction from MIHI to petitioner. Hence, by agreemen~ of the parties, MIHI, as the seller, shall bear the burden cj)f paying the CGT and DST in connection with its sale of a hotel facility in favor of petitioner, the buyer, only that the latter shall advance the amount necessary for such payment37 � In any event, the pa1rties' agreement is in accord with Section 27(D)(S) of the National Internal Revenue Code of 1997, as amended, which !provides, as follows: SEC. 27. Rates of Income Tax on Domestic Corporations. - XXX XXX XXX (D) Rates of Tax on Certain Passive Incomes. 36 Licomcen Incorporated vs. Foundation !specialists, Inc., G.R. No. 167022, April 04, 2011 and Foundation Specialists, Inc., Vs. Licomceh Incorporated, G.R. NO. 169678. 37 Article 1306 of the Civil Code of the Pihilippines provides that "The contracting parties may establish such stipulations, clauses, t�rms and conditions as they may deem convenient, provided they are not contrary to law, inorals, good customs, public order, or public policy."

DECISION CfA case No. 9066 XXX XXX XXX (5) Capital Ga11ns Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of siix percent (6�/o) is hereby imposed on the galin presumed to have been realized on the sale, exchange or disposition of lands and/or buildingls which are not actually used in the business of a qorporation and are treated as capital assets, based! on the gross selling price or fair market value als determined in accordance with Section 6(E) bf this Code, whichever is higher, of such lands and/or buildings. The foregoing proviSion defines CGT is a tax imposed on the gains presumed to have been realized by the seller/transferor from the sale, exchange, or disposition of lands and/or buildings treated as capital assets. Thus, the party liable to pay the CGT is the seller or the person who is presumed to have realiz�d a gain or profit from the sale, exchange or disposition df the land and/or building treated as capital assets. In the case of Tomas K. Chua vs. Court of Appeals and Encarnacion Valdes-Choy3,8 cited by respondents themselves, it was held that as far as the government is concerned, the CGT remains a liability of the seller since it is a tax on the seller's gain from the sale of the real estate. It therefore follow$ that the burden to pay any deficiency CGT arising trom the Deed of Absolute Sale executed by the parties in this case falls on MIHI as the seller, who is presumed t~ have realized gains or profit from the sale and not on petitioner, the buyer of the hotel facility. DST, on the other hand is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. A DST is actually an 3BG.R. No. 119255, April 9, 2003.

DECISION erA Case No. 9066 excise tax as it is imposed on the transaction rather than on the document. It is also levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specifi~ legal relationships through the execution of specific instrulments.39 Section 173 of the NIRC of 1997, as amended, expressly provides that l:PST shall be paid by the person making, signing, issuing accepting or transferring the , 1 obligation, right or proper~y, to wit: SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instrument$ and Papers. - Upon documents, instruments, loan agre~ments and papers, and upon acceptances, assignme~ts, sales and transfers of the obligation, right or prop~rty incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so ! had or accomplished, the corresponding docum~ntary stamp taxes prescribed in the following Secti~ns of this Title, by the person making, signing, issu~ng, accepting, or transferring the same wherever the document is made, signed, issued, accepted or trajnsferred when the obligation or right arises from Philippine sources or the property is situated in the Philippin~s, and the same time such act is done or transaction ha~: Provided, That whenever one party to the taxable doq.Jment enjoys exemption from the tax herein imposed, th~ other party who is not exempt shall be the one directly liable for the tax. (Emphasis supplied) Per the above prov1s1on, DST may be levied and collected from and paid by any person making, signing, issuing, accepting, or transferring obligation, right or property. A fortiori, the burden of tax could either be upon the buyer or the seller. Corollary to the foregoing is Revenue Regulations (RR) No. 9-200040, which specify the persons liable for DST, and 39 Philippine Banking Corporation (no!M Global Business Bank, Inc.) vs. Commissioner of Internal Revenue, G.R. No. 170574, J~nuary 30, 2009. 40 Mode of Payment and/or Remittance iof the Documentary Stamp Tax (DST) Under Certain Conditions. /

DECISION CTA Case No. 9066 who, under certain condi~ions, shall be responsible for the payment/remittance therebf to the BIR, thus: SECTION 2. Nature of the Documentary Stamp Tax and Persons Liable for the Tax. - (a) In General. - The documentary stamp taxes under Title VII df the Code is a tax on certain transactions. I~ is imposed against "the person making,. signing, issuing, accepting, or transferring'' the document or facility evidencing the aforesaid transactions. Thus, in general, it may be imposed on the transaction its~lf or upon the document underlying sucH act. Any of the parties thereto shall : be liable for the full amount of ~he tax due: Provided, however, thatl as between themselves, the said partie!s may agree on who shall be liable or hqw they may share on the cost of the tax~ (b) Exception. - Whenever one of the parties to the taxable trarJlsaction is exempt from the tax imposed un~er Title VII of the Code, the other party the~eto who is not exempt shall be the one directly liable for the tax. (Emphasis suppMed) As earlier stated and pursuant to the foregoing provision, any of the parti�s to a taxable transaction may be liable for DST. Therefore,! the BIR may levy and collect DST from any of the parties to: a taxable transaction. But again, the parties may agree as: to who shall take the burden of paying the DST or any pdrtion thereof and such agreement shall be binding upon thertn, subject to the exception that if one of the parties is exempt from the tax imposed, the other party not covered by such exemption shall be directly liable for the tax. /

DECISION erA Case No. 9066 Note that in the ,present case, the parties had stipulated that the DST shall be for the account of MIHI only, that the amount for the payment of such tax shall be advanced by petitioner deductible from the total purchase price. The agreement beting binding upon the parties, the obligation to pay DST rests upon the shoulder of MIHI. Assuming for the sake of argument that no such agreement exists, before', petitioner may be held liable for any deficiency DST, the requisites of due process must first be complied with. Under Section 228 of the Tax Code, the taxpayer must be informed in writing of the law and the facts on which the assessment is made, lest, the assessment is void. x x x It is clear from the foregoing ijhat a taxpayer must be informed in writing of the legal and flactual bases of the tax assessment made against him. The use of the word "shall" in the legal provision indicates the m~ndatory nature of the requirements laid down therein. 41 Thus, it is elementary under the due process requirement that the taxpayer must b$ informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the assessment is void. 42 Undeniably, a PAN43 was issued in this case. Section 3.1.1 of RR No. 12-99, as amended by RR No. 18-2013, provides that "[I]f the taxpayer fails to respond within fifteen (15) days frbm date of receipt of the PAN, he shall be considered in defqult, in which case, a Formal Letter of Demand and Final Ass~ssment Notice (FLO/FAN) shall be issued calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties." 41 Commissioner of Internal Revenue vs, United Salvage and Towage (Phils.), Inc., G.R. No. 197515, July 02, 2014. 42 Commissioner of Internal Revenue vs. Reyes, G.R. No. 159694, January 27, 2006. 43 Exhibit P-7, docket pp. 366-369.

DECISION CTA Case No. 9066 By virtue of the above prov1s1on and the requirements of due process in Sectibn 228 of the National Internal Revenue Code (NIRC), as amended, it is mandatory that a final assessment notice (FAN) be issued after the issuance of the PAN. While the FLD, witl1 Details of Discrepancies44, was issued on December 3, 2Q14 and received by petitioner, no FAN was ever received by :petitioner. Thus, in the absence of a FAN, the subject assessment for CGT and DST against petitioner is void. It may be argued that the FLD issued and received by petitioner may be deenjled as the final assessment in compliance with the due. process requirements of Section 228 of the NIRC, as am~nded. However, in the case of Commissioner of Interna~ Revenue vs. Fitness By Design, Inc., 45 the Supreme CoU!rt elucidated on what a formal I assessment notice must c<J>ntain, to wit: The formal letter �>f demand and assessment notice shall state the facts, jur1isprudence, and law on which the assessment was based; ~therwise, these shall be void. xxx II The word "shall" in Section 228 of the National Internal Revenue Code bnd Revenue Regulations No. 12- 99 means the act of informing the taxpayer of both the legal and factual bases ,of the assessment is mandatory. The law requires that th~ bases be reflected in the formal letter of demand and apsessment notice. This cannot be presumed. Otherwise, t~e express mandate of Section 228 and Revenue Regulations No. 12-99 would be nugatory. The requirement enables the taxpayer to make an effective protest or appeal of the ~ssessment or decision. XXX XXX XXX 44 Exhibits "P-10" and "P-10-A", docket, pp. 377-380; Exhibit "R-8", BIR Records, pp. 313- 316. 45 G.R. No. 215957, November 9, 2016.

DECISION CTA Case No. 9066 A final assessment! notice provides for the amount of tax due with a demand ifor payment. This is to determine the amount of tax du~ to a taxpayer. However, due process requires that ta?<payers be informed in writing of the facts and law on ~hich the assessment is based in order to aid the taxpayer in making a reasonable protest. To immediately ensue vyith tax collection without initially substantiating a valid assessment contravenes the principle in administratitve investigations "that taxpayers should be able to present their case and adduce supporting evidence." XXX XXX XXX The issuance of !:1 valid formal assessment is a substantive prerequisite for collection of taxes. Neither the National Internal Revbnue Code nor the revenue regulations provide for ~ "specific definition or form of an assessment." However,, the National Internal Revenue Code defines its expliicit functions and effects. An assessment does not lonly include a computation of tax liabilities; it also includes a demand for payment within a period presqribed. Its main purpose is to determine the amounlt that a taxpayer is liable to pay. XXX XXX XXX A final assessm+nt is a notice "to the effect that the amount ther~in stated is due as tax and a demand for paymen~ thereof." This demand for payment signals the tinjle "when penalties and interests begin to accrue agains~ the taxpayer and enabling the latter to determine his r~medies[.]" Thus, it must be "sent to and received by thle taxpayer, and must demand payment of the taxes d~scribed therein within a specific period." The disputed Final Assessment Notice is not a valid assessment. First, it lacks the ~efinite amount of tax liability for which responden~ is accountable. It does not purport to be a dem~nd for payment of tax due, which a final assess"ient notice should supposedly be. An assessment, in tHe context of the National Internal Revenue Code, is a "written notice and demand made by the [Bureau of Internal IR.evenue] on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed." Although th~ disputed notice provides for

DECISION CTA Case No. 9066 the computations of !respondent's tax liability, the amount remains inde~inite. It only provides that the tax due is still subjec~ to modification, depending on the date of payment. lth us: The compl~te details covering the aforementioned i discrepancies established during the investigbtion of this case are shown in the accompanying Annex 1 of this Notice. The 50�/o surchar~e and 20�/o interest have been imposed purlsuant to Sections 248 and 249 (B) of the tNational Internal Revenue Code], as amend~d. Please note, however, that the interest ahd the total amount due will have to be adjuste~ if prior or beyond Apri/15, 2004. (Emphasis S~pplied) Second, there arte no due dates in the Final Assessment Notice. : This negates petitioner's demand for payment.! Petitioner's contention that April 15, 2004 should be rega~ded as the actual due date cannot be accepted. The last p~ragraph of the Final Assessment Notice states that the1 due dates for payment were supposedly reflected m� tlhI e attached assessment: In view theteof, you are requested to pay your aforesaid deficiency internal revenue tax liabilities throu~h the duly authorized agent bank in which you ~are enrolled within the time shown in the enclosed assessment notice. (Emphasis in the otiginal) However, based or!l the findings of the Court of Tax Appeals First Division, t~e enclosed assessment pertained to remained unaccomplished. Contrary to petitiomer's view, April 15, 2004 was the reckoning date of accrual of penalties and surcharges and not the due date for pajyment of tax liabilities. The total amount depended upon iwhen respondent decides to pay. The notice, therefore, di~ not contain a definite and actual demand to pay. Compliance with Section 228 of the National Internal Revenue Code is a sub$tantive requirement. It is not a mere formality. Providin~ the taxpayer with the factual and legal bases for the asses~ment is crucial before proceeding with tax collection. Tax qollection should be premised on a valid assessment, which would allow the taxpayer to

DECISION CTA Case No. 9066 present his or her dase and produce evidence for substantiation. (Emphasis supplied, citations omitted) As discussed above, a final assessment should contain the law and the facts upqn which the assessment is based, as well as the exact anjlount due and demandable, with demand for payment with~n a prescribed period. In the cited case, the final assessment was invalidated for not containing the definite amount of tax liability for which the taxpayer is accountable, and there is 'no demand for payment of the tax due. Not only was there ~o due date for the payment of the tax, but there was also a !statement that "the tax due is still subject to modification, d$pending on the date of payment," further emphasizing the; lack of due date and that the assessed amount is not final. A careful scrutiny of ,the subject FLD revealed that it is not a valid final assessm�nt as it lacks the definite amount of tax liability for which p�titioner is accountable, and a date certain for payment of �the alleged tax liability by the taxpayer. The subject FLD reaqs as follows: *Please note that ,the interest and the total amount due will have to be adjusted if paid beyond 1-5-2015. Thus, the FLD in thls case lacks a definite amount of I tax liability for which wetitioner is accountable, as the amount due may still be adjusted depending on the date of payment. Without a definite atnount of tax due, the FLD cannot be regarded as a dem~nd for payment, which a final assessment notice sho~ld contain. Although the FLD provides for the computatlion of petitioner's tax liabilities, the amount remains indefinite for it still subject to modification. I

DECISION CTA Case No. 9066 Moreover, the subjectt FLD has no due dates rendering I respondents' alleged demand for payment inutile. The last paragraph of the subject RLD states: In view thereat you are requested to pay your aforesaid deticiency capital gains and documentary stamp tax liabilities through the duly authorized agent barhk in which you are enrolled within the time ::shown in the enclosed assessment notice.1 (Emphasis supplied) Although the subject FLD indicates that the due dates 1 for payment of the ta~es are shown in the enclosed assessment notice, the allluded assessment notice or FAN ! was not served on petitionler. Without a valid final, assessment, the requirements of due process were not complied with, making the subject assessment for CGT and DIST issued against petitioner void. The issuance of a valid formal assessment is a substantive prerequisite to tax collection, for it contains not only a computation of tax liabilities but also a demand for payment within a prescrib$d period, thereby signalling the time when penalties and interests begin to accrue against the taxpayer and enabling thle latter to determine his remedies therefor. Due process requires that it must be served on and received by the taxpayer. 46 Compliance with SeCtion 228 of the National Internal Revenue Code is a substalntive requirement. It is not a mere formality. Providing the ~axpayer with the factual and legal bases for the assessment !is crucial before proceeding with tax collection. Tax collectioh should be premised on a valid assessment, which would allow the taxpayer to present his or her case and produce evid~nce for substantiation.47 46 Commissioner of Internal Revenue vs., Dominador Menguito, G.R. No. 167560, September 17, 2008. 47 Commissioner of Internal Revenue vs. :Fitness By Design, Inc., G.R. No. 215957, November 9, 2016. /

DECISION CTA case No. 9066 Taxes are the lifebl1ood of the government and so should be collected with~ut unnecessary hindrance. But even as we concede the inevitability and indispensability of taxation, it is a requiremelht in all democratic regimes that it I be exercised reasonably! and in accordance with the prescribed procedure.48 WHEREFORE, the Petition for Review dated May 14, 2015 filed by LKY Property Holdings, Inc., is hereby GRANTED. Accordingly, the Formal Letter of Demand dated I December 3, 2014, findirhg petitioner liable for deficiency capital gains tax and do�umentary stamp tax for taxable year 2007 in the total am1ount of P12,462,256. 53, inclusive of surcharge and interest) is CANCELLED for being a void I assessment. Consequent!~, the Warrant of Distrant and/or Levy issued in relation th~reto is likewise void and hereby ordered CANCELLED. SO ORDERED. We Concur: ~. ~ .d' '- , LOVELL~. BAUTISTA MA. BELEN M. RINGPIS-LIBAN Associate Justice Associate Justice 48 Commissioner of Internal Revenue vs~ Algue, Inc., eta/., G.R. No. L-28896, February 17, 1988.

DECISION CTA Case No. 9066 ATltESTATION I attest that the conclusions in the above Decision were reached in consultation belfore the case was assigned to the writer of the opinion of thel Court's Division. LOVEL~. BAUTISTA Associate Justice Chairperson CERtiFICATION Pursuant to Sectioln 13 of Article VIII of the Constitution, and the Divi~ion Chairperson's Attestation, it is hereby certified that the fOnclusions in the above Decision were reached in consulta~ion before the case was assigned to the writer of the opiniorl of the Court's Division. Presiding Justice