TAX II BELLO 3D 2020

MERALCO SECURITIES CORP. V. SAVELLANO, 117 SCRA 804 (1982) DOCTRINE:

The informer’s reward is 25% of whatever deficiency taxes are assessed and
FACTS: collected. If there is no deficiency then naturally there is no reward either.
1. Maniago submitted a confidential report to the Commissioner of Internal
Revenue (Commissioner) that MERALCO only paid taxes on 25% of its
dividends.
2. The Commissioner found that the law said that resident corporations like
MERALCO was only liable for the 25% anyway.
a. Also rejected Maniago’s contention that MERALCO doesn’t fall
under that chapter anyway.
3. Maniago filed a petition for mandamus with the CFI of Manila to direct
Commissioner to investigate.
a. Naturally Maniago (now his heirs) wanted the 25% informer’s
reward too.
4. In response the Commissioner filed a motion to dismiss as mandamus does
not lie since the investigative power is discretionary and not ministerial, and
that BIR is an executive office.
5. RTC ruled in favor of Maniago and ordered Commissioner to investigate.
6. Commissioner and MERALCO are assailing the decision saying that first of
all CFI didn’t have jurisdiction and mandamus was not proper.

ISSUES:
1. WON the CFI had jurisdiction in the first place? NO. The Court of Tax
Appeals has the exclusive appellate jurisdiction over decisions of the
Commissioner.
2. WON mandamus was proper? NO. The power to enforce tax laws and
determine whether investigation is proper is discretionary not ministerial. If
the Commissioner had to investigate every report it would be bogged with
more workload than needed.
3. WON Maniago is entitled to the informer’s fee? NO. Since ultimately no
taxes were assessed or collected Maniago is not entitled to a reward.
<This is the s.282 issue and is the relevant one to the outline>

RATIO:
The informer’s reward is 25% of whatever unpaid taxes are assessed and collected
following the investigation. Naturally this means that this reward is contingent on
there actually being a collection. 25% of Php0 is still 0.

Since the CFI had no jurisdiction in the first place, and even then mandamus was not
the proper petition then the Commissioner’s decision that no tax liability stands. Said
decision basically says no need to investigate and assess since MERALCO is paid up
anyway.

DISPOSITION:
WHEREFORE, the petitions are hereby granted and the questioned decision of
respondent judge dated January 10, 1973 and order dated April 6, 1973 are hereby
reversed and set aside. With costs against private respondents.

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FITNESS BY DESIGN, INC. V. CIR, G.R. NO. 177982, OCT. 17, 2008 petitioner had prescribed and whether petitioner’s tax return was false or
fraudulent.
FACTS: 4. Besides, as the CTA held, the subpoenas and answers to the written
1. The Commissioner on Internal Revenue assessed Fitness by Design, Inc. interrogatories would violate Section 2 of Republic Act No. 2338 as
for deficiency income taxes for the tax year 1995. implemented by Section 12 of Finance Department Order No. 46-66.
a. Petitioner protested the assessment on the ground that it was 5. Petitioner claims, however, that it only intended to elicit information on the
issued beyond the three-year prescriptive period under Section 203 whereabouts of the documents it needs in order to refute the assessment,
of the Tax Code. and not to disclose the identity of the informer.
b. Respondent issued a warrant of distraint and/or levy against a. Petitioner’s position does not persuade.
petitioner drawing petitioner to file a Petition for Review before the b. The interrogatories addressed to Sablan and the revenue officers
Court of Tax Appeals (CTA) before which it reiterated its defense of show that they were intended to confirm petitioner’s belief that
prescription. Sablan was the informer.
2. At the preliminary hearing on the issue of prescription before the CTA,  
Petitioner’s former bookkeeper attested that a former colleague – certified
public accountant Leonardo Sablan (Sablan) – illegally took custody of
petitioner’s accounting records, invoices, and official receipts and turned
them over to the BIR.
3. Petitioner requested for the issuance of a subpoena ad testificandum to
Sablan and of subpoena duces tecum to the chief of the National
Investigation Division of the BIR for the production of the Affidavit of the
Informer bearing on the assessment in question.
a. In a related move, petitioner submitted written interrogatories
addressed to Sablan and to Henry Sarmiento and Marinella
German, revenue officers of the National Investigation Division of
the BIR.
4. The CTA denied petitioner’s Motion for Issuance of Subpoenas and
disallowed the submission by petitioner of written interrogatories to Sablan
and the revenue officers.
5. The CTA found that to require Sablan to testify would violate Section 2 of
Republic Act No. 2338, as implemented by Section 12 of Finance
Department Order No. 46-66, proscribing the revelation of identities of
informers of violations of internal revenue laws, except when the information
is proven to be malicious or false.

ISSUE: Whether or not the CTA committed grave abuse of discretion in not issuing
the subpoenas requested.

RULING + RATIO: The CTA did not commit grave abuse of discretion.
1. The fact that Sablan was not a party to the case aside, the testimonies,
documents, and admissions sought by petitioner are not indeed relevant to
the issue before the CTA.
2. For in requesting the issuance of the subpoenas and the submission of
written interrogatories, petitioner sought to establish that its accounting
records and related documents, invoices, and receipts that were the bases
of the assessment against it were illegally obtained.
3. The only issues, however, which surfaced during the preliminary hearing
before the CTA, were whether respondent’s issuance of assessment against

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CIR V. AQUAFRESH SEAFOODS, INC., G.R. NO. 170389, OCT. 20, 2010
FACTS:
1. Aquafresh Seafoods Inc sold to Philips Seafoods Inc 2 parcels of land plus
improvements thereon for 3 million
2. Aquafresh then filed a Capital Gains Tax Return/Application for Certification
Authorizing Registration and paid 180K as capital gains tax plus 46k as
documentary stamp tax and was issued a certificate authorizing registration
3. BIR then received a report that the lands sold were undervalued for tax
purposes and an investigation occurred
a. An ocular inspection was done and discovered that the lands had a
zonal value of 2K per square meter
4. Aquafresh protested the assessment but protest was denied
5. Aquafresh then filed a petition for review with Court of Tax Appeals claiming
that the zonal value was only 650 per square meter and were classified as
residential not commercial and that a predefined zonal value for properties
was already present giving BIR no business in reclassifying the properties to
commercial
6. CTA ruled in favor of Aquafresh
a. The existing revised zonal values in City of Roxas shall prevail for
purposes of determining tax liabilities
b. The first sentence of Section 6(E) sets the limitation or condition in
the exercise of such power by requiring respondent to consult with
competent appraisers both from private and public sectors. As
there was no re-evaluation and no revision of the zonal values of
the subject properties in Roxas City at the time of the sale,
respondent cannot unilaterally determine the zonal values of the
subject properties by invoking his powers of obtaining information
and making assessments under Sections 5 and 6 of the NIRC.
7. CTA en banc agreed with CTA ruling
ISSUE:
W/N requirement of consultation with competent appraisers both from private and
public sectors is required to determine the fair market value of the subject lots? YES
W/N CTA is correct in applying the fair market value based on zonal valuation of a
residential land as a tax base in computing capital gains tax and documentary stamp
tax deficiencies of Aquafresh? YES
HELD:
1. Under Section 27(D)(5) of the NIRC of 1997, a CGT of six (6%) percent is
imposed on the gains presumed to have been realized in the sale, exchange
or disposition of lands and/or buildings which are not actively used in the
business of a corporation and which are treated as capital assets based on
the gross selling price or fair market value as determined in accordance with
Section 6(E) of the NIRC, whichever is higher
2. Under Section 196 of the NIRC, DST is based on the consideration
contracted to be paid or on its fair market value determined in accordance
with Section 6(E) of the NIRC, whichever is higher.
3. The determining value of CGT and DST is either based on the consideration
paid for found in the contract or the fair market value based on sec 6(E) of
the NIRC which ever is higher
a. First sentence of sec 6 (E)- Authority of the Commissioner to
Prescribe Real Property Values. The Commissioner is hereby
authorized to divide the Philippines into different zones or area and
shall, upon consultation with competent appraisers both from
the private and public sectors, determine the fair market value of
real properties located in each zone or area.
4. CIR has the power to prescribe real property values but it must be done
upon consultation with competent appraisers from both public and private
sectors
5. At the time of the sale the properties were classified as residential. CIR
cannot unilaterally change its classification without following section 6 (E)
6. Changing residential to commercial is tantamount to reclassification or
revision of the zonal values
7. CIR then claims that the act of classifying the properties based on actual use
was in accordance with guidelines 1-b and 2 found under Zonal Valuation
Guidelines
a. Sec 1-b does not apply because 1-b only applies when no zonal
value has been prescribed. In this case, City of Roxas already has
a prescribed zonal value
b. Sec 2 also does not apply since the rule on predominant use of
property (basta if the use of the street/barangay zone is
predominantly commercial, properties shall be classified as
commercial regardless of actual use), only applies again when
properties are not yet classified and zonal values have not yet been
determined. But again, there is already a zonal value at the time of
the sale of the the lots
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CIR v. PASCOR REALTY AND DEV. CORP 309 SCRA 402 (1999)
[Commissioner of Internal Revenue v. Pascor Realty and Development Corporation,
Rogelio A. Dio and Virginia S. Dio]
FACTS:
1. BIR Commissioner authorized Revenue Officers to examine the books of
accounts and other accounting records of Pascor Realty and Development
Corporation. (PRDC) for the years 1986, 1987 and 1988.
2. THE examination resulted in a recommendation for the issuance of an
assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the
years 1986 and 1987, respectively.
3. On March 1, 1995, the Commissioner of Internal Revenue filed a criminal
complaint before the Department of Justice against the PRDC, its President
Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in
the total amount of P10,513,671.00.
4. Private respondents PRDC, et. al. filed an Urgent Request for
Reconsideration/Reinvestigation disputing the tax assessment and tax
liability.
5. CIR denied the urgent request for reconsideration/reinvestigation of the
private respondents on the ground that no formal assessment has as yet
been issued by the Commissioner.
6. Private respondents then elevated the Decision of the CIR dated May 17,
1995 to the Court of Tax Appeals on a petition for review.
7. CIR filed MTD on ground that CTA has no jurisdiction over the subject
matter as there was no formal assessment issued.
8. CTA denied MTD and ordered CIR to file answer within 30 days from receipt
of resolution. The CIR received the resolution on January 31, 1996 but did
not file an answer nor did she move to reconsider the resolution.
9. CIR elevated to CA. CA affirmed denial of CTA. Hence, this petition.
ISSUE/S:
1. WON the filing of a criminal complaint for tax evasion field by the CIR
constituted an assessment of the tax due? NO
c. In the present case, the revenue officers' Affidavit merely contained a
computation of respondents' tax liability. It did not state a demand or a
period for payment. Worse, it was addressed to the justice secretary, not to
the taxpayers.
d. That the BIR examiners' Joint Affidavit attached to the Criminal Complaint
contained some details of the tax liabilities of private respondents does not
ipso facto make it an assessment. The purpose of the Joint Affidavit was
merely to support and substantiate the Criminal Complaint for tax evasion.
Clearly, it was not meant to be a notice of the tax due and a demand to the
private respondents for payment thereof.
e. What private respondents received was a notice from the DOJ that a
criminal case for tax evasion had been filed against them, not a notice that
the Bureau of Internal Revenue had made an assessment.
f. Private respondents maintain that the filing of a criminal complaint must be
preceded by an assessment. This is incorrect, because Section 222 of the
NIRC specifically states that in cases where a false or fraudulent return is
submitted or in cases of failure to file a return such as this case, proceedings
in court may be commenced without an assessment. Furthermore, Section
205 of the same Code clearly mandates that the civil and criminal aspects of
the case may be pursued simultaneously.
DISPOSITION:
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is
REVERSED and SET ASIDE.
DOCTRINE:
An assessment informs the taxpayer that he or she has tax liabilities. But not all
documents coming from the BIR containing a computation of the tax liability can be
deemed assessments. A criminal complaint for tax evasion containing the tax
liabilities of a taxpayer cannot be considered as an assessment.

RULING + RATIO:

a. Neither the NIRC nor the revenue regulations governing the protest of
assessments provide a specific definition or form of an assessment.
However, the NIRC defines the specific functions and effects of an
assessment. To consider the affidavit attached to the Complaint as a proper
assessment is to subvert the nature of an assessment and to set a bad
precedent that will prejudice innocent taxpayers.
b. True, as pointed out by the private respondents, an assessment informs the
taxpayer that he or she has tax liabilities. But not all documents coming from
the BIR containing a computation of the tax liability can be deemed
assessments.

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FORT BONIFACIO DEV. CORP. V. CIR, CTA CASE NO. 5665, AUG. 11, 2000
FACTS:
1. Fort Bonifacio Dev. Corp (FBDC) is engaged in the development and sale of
real property. It is the owner of, and is developing and selling, parcels of land
within the Fort Bonifacio Global City.
2. On January 1996, RA 7716 took effect. While prior to R.A. No. 7716 real
estate transactions were not subject to VAT, they became subject to VAT
upon the effectivity of R.A. No. 7716.
3. FBDC requested to use of its presumptive input tax on its land in partial
payment of its output VAT for 4th quarter of 1996. The BIR, however,
recommended that the presumptive input tax on land inventory be
disallowed and assessment be issued for deficiency VAT equivalent to the
disallowed amount.
4. A Pre-Assessment Notice dated December 23, 1997 for deficiency VAT
for the 4th quarter of 1996 was issued by the BIR.
5. On March 5, 1998, FBDC received an undated letter from CIR wherein the
latter disallowed the presumptive input tax claimed by FBDC "arising from
land inventory" on the ground that the basis of the 8% presumptive input tax
of real estate dealers is limited to the "book value of the improvement", in
addition to its inventory of supplies and materials for use in its business. It
further directed FBDC to pay VAT equivalent to the disallowed presumptive
input tax on land inventor plus surcharges, interest and penalties by the
Chief Assessment Division, subject to audit verification.
a. Basis of disallowance: Transitory provision of Rev. Reg 7-95 stating
that in the case of real estate dealers, the basis of the presumptive
input tax shall be the improvements, such as buildings, roads
drainage systems, and other similar structures, constructed on or
after the effectivity of EO 273 (January 1, 1988).
6. By letter dated March 11, 1998 to CIR, which was received by the latter on
March 16, 1998, FBDC requested for the computation of the surcharges,
interest and penalties,and issuance of the required assessment notice, thus
making a protest of assessment.
7. Based on the undated letter of CIR, the Assessment Division sent a letter
dated May 4, 1998 to petitioner, whereby the former informed the latter that
upon computation, there has been found due from petitioner. Petitioner
received it on June 4, 1998.
8. On July 2, 1998, petitioner filed with CIR a request for reconsideration/protes
to the letter/assessment notice dated May 4, 1998.
9. On a letter dated July 15, 1998, which was received by petitioner on August
10, 1998, Regional Director ruled that the request for reconsideration/protest
filed by petitioner was barred by the statute of limitations because it was filed
more than thirty (30) days from March 5, 1998, when petitioner received the
undated letter of the CIR wherein the latter disallowed the presumptive input
tax claimed by it.
a. Regional Director computed the thirty-day period provided for by
Sec. 228 of the NIRC from March 5, 1998, the date petitioner
received the undated letter from CIR.
10. Respondent posits that the undated letter received by Petitioner on March 5,
1998, is an assessment in itself inasmuch as it specifies the amount and
kind of tax due and the taxable period covered
a. Respondent relied upon SC Resolution in Pascor Realty case
where SC ruled that the amount and kind of tax due, and the period
covered, are sufficient details needed for 'assessments’
b. Respondent further asserts that computation of surcharges, interest
and penalties is merely administerial function on the part of the
Chief Assessment Division and that an assessment notice is just a
matter of form which does not make the letter to which it is attached
the assessment itself
ISSUE:
Whether petitioner's request for reconsideration/protest of
the assessment sent by the Assessment Division of BIR was barred by the statute of
limitations - NO
Whether the undated letter of CIR may be treated as an assessment that may be
protested administratively under Sec. 228 of NIRC - NO
Whether the assessment for deficiency VAT for the fourth quarter of 1996 in the total
has become final - NO
RATIO:
1. The Court did not agree to argument of respondent (see 10.a).
a. Although Respondent adopts the definition that "an assessment is a
written notice and demand made by the Bureau of Internal
Revenue on the taxpayer for the settlement of a due tax liability that
is there definitely set and fixed,” ironically, respondent contradicts
himself when he says that the undated letter is already an
assessment against Petitioner. Such letter will unerringly reveal that
Petitioner's tax liability was not yet definite and final considering
that the same was still subject to audit verification. Nor was a
payment demanded from Petitioner within a prescribed period.
b. SC reversed the Pascor ruling in the resolution and said that:
i. Not all documents coming from the BIR containing a
computation of the tax liability can be deemed
assessments, and
ii. Taxpayer must be certain that a specific document
constitutes an assessment. Otherwise, confusion would
arise regarding the period within which to make an
assessment or to protest the same, or whether interest
and penalty may accrue thereon
2. That the assessment notice which the Commissioner usually sends to
taxpayers is in a particular form is a matter administratively facilitated for
expediency and convenience. But this does not mean that said assessment
notice is a mere formal paper.
3. Consequently, it is the letter dated May 4, 1998, with concomitant
assessment notice, which constitutes the assessment contemplated in
Section 228. This letter was received by herein Petitioner on June 4, 1998.
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Hence, it is only from this date that the thirty-day period shall commence to
run. In other words, the filing by Petitioner of a request for
reconsideration/protest on July 2, 1998 with the Commissioner of Internal
Revenue was timely. This goes without saying therefore that the assessment
against Petitioner for deficiency VAT covering the fourth quarter of 1996 plus
surcharge, interest and penalties, has not become final.

DISPOSITION:
Petitioner is ordered to pay the assessed amount of P45, 188,708.08 to
CIR plus 20% delinquency interest per annum from June 1, 1998.

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REPUBLIC V. COURT OF APPEALS, 149 SCRA 351 (1987)

FACTS:
1. Commissioner of Internal Revenue sent a demand letter on July 16, 1955
assessing Nielson & Company Inc deficiency taxes for the years 1949 to
1952 worth P14,449.
2. Nielson & Company did not contest the assessment in the CTA, so Republic
of the Philippines filed a complaint for collection.
3. Complaint was dismissed without prejudice for failure to serve summons
4. The dismissal became final after failing to serve summons again.
5. Complaint for collection was refiled on November 15, 1962 but was
erroneously docketed and without correcting this error, another complaint
was filed on November 26, 1963.
6. CFI rendered a decision against Nielson but the CA reversed.

ISSUES:
1. WON the demand letter sent to Nielson & Company on July 16, 1955
was considered a proper Assessment
HELD:
1. NO. Under Section 8, Rule 13 and Section 5, paragraphs m &v, Rule 131 of
the Revised Rules of Court, if the service is made by ordinary mail, unless
the actual date of receipt is shown, service is deemed complete and
effective upon the expiration of 5 days after mailing. However, it is merely a
disputable presumption subject to controversion and a direct denial of the
receipt shifts the burden upon the party favored by the presumption (sender)
to prove that the mailed letter was indeed received by the addressee.
a. Notwithstanding the denial, the records show that Republic wrote
Nielson a follow-up letter dated September 19, 1956, reiterating its
demand for payment of deficiency taxes in its letter dated July 16,
1955. This follow-up letter is considered a notice of assessment in
itself which was duly received by Nielson in accordance with its
own admission.
b. Under Section 7 of RA 1125, the assessment is appealable to the
CTA within 30 days from receipt of the letter.
i. The taxpayer’s failure to appeal in due time makes the
assessment final, executory, and demandable. Thus,
Nielson is now barred from disputing the correctness of
the assessment or from invoking any defense that would
reopen the question of its liability on the merits.

DISPOSITION: ACCORDINGLY, the appealed decision is hereby reversed. The

decision of the Court a quo is hereby reinstated. No costs.

DOCTRINE: A follow-up letter regarding a collection of a tax deficiency may be

considered as an assessment of taxes as long as the addressee acknowledges the
receipt thereof.

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SY PO V. CTA, 164 SCRA 524 (1988)
FACTS:
1. Petitioner is the widow of the late Mr. Po Bien Sing
2. In taxable years 1964 to 1972, the deceased Po Bien Sing was the sole
proprietor of Silver Cup Wine Factory, and was engaged in the business of
manufacture and sale of compounded liquors, using alcohol and other
ingredients as raw materials
3. On the basis of a denunciation against Silver Cup allegedly for tax evasion
of 10 million, Sec. of Finance Virata directed the BIR-NBI team to
investigate. A letter and a subpoena duces tecum were issued against Silver
Cup requesting production of accounting records and other documents.
4. Mr. Po Bien Sing did not produce his books as requested. This prompted the
team to enter the factory bodega and seized 1,555 cases of alcohol products
5. Commissioner of Internal Revenue (CIR) assessed Mr. Sing on the basis of
the report a deficiency income tax amounting to 7,154,685.16 and for
deficiency specific tax amounting to 5,595,003.68
6. Petitioner protested the assessments and were referred for reinvestigation.
The report recommended the reiterating of the assessments in view of the
taxpayer’s persistent failure to present the books for examination. CIR
issued warrants of distraint and levy
7. CTA affirmed the decision of CIR in its assessment letters which ordered
the payment for deficiency income tax and deficiency specific tax
c. 50% surcharge imposed pursuant to Sec. 72 and tax ½% monthly
interest pursuant to Sec. 51(d)
3. CIR v Reyes: “where the taxpayer is appealing to the tax court on the ground
that the Collector’s assessment is erroneous, it is incumbent upon him to
prove there what is the correct and just liability by a full and fair disclosure of
all pertinent data in his possession. Otherwise, if the TP confines himself to
proving that the tax assessment is wrong, the tax court proceedings would
settle nothing, and the way would be left open for subsequent assessments
and appeals”
4. Tax assessments by tax examiners are presumed correct and made in good
faith. The taxpayer has the duty to prove otherwise.
a. In the absence of proof of irregularity, an assessment by a BIR
examiner and approved by his superior will not be disturbed.
b. All presumptions are in favor of the correctness of tax
assessments.
5. The fraudulent acts detailed in the decision under review had not been
satisfactorily rebutted by the petitioner
a. After storekeeper leaves, the untaxed alcohol is brought into the
compound and sold and stored
b. Factory personnel manager testified that false entries were entered
in the register book
DISPOSITION: Petition is DENIED.

ISSUES:
DOCTRINE:
1. W/N the assessments have valid and legal bases? YES
Tax assessments by tax examiners are presumed correct and made in good faith.
The taxpayer has the duty to prove otherwise. In the absence of proof of irregularity,
RULING + RATIO:
an assessment by a BIR examiner and approved by his superior will not be disturbed.
1. The rule on the “best evidence obtainable” applies when a tax report
All presumptions are in favor of the correctness of tax assessments.
required by law for the purpose of assessment is not available or when the
tax report is incomplete or fraudulent
a. Sec. 16 of the NIRC: “When a report required by law as a basis for
the assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by law or regulation or when there
is reason to believe that any such report is false, incomplete, or
erroneous, the CIR shall assess the proper tax on the best
evidence obtainable.”
b. The persistent failure of the late Po Bien Sing and petitioner to
present their books of accounts for examination for the taxable
years left the CIR no other legal option except to report to the
power conferred upon him under Sec. 16
2. The tax figures arrived at by the CIR are by no means arbitrary:
a. On the basis of the quantity of bottles of wines seized during the
raid and sworn statements of former employees
b. Utilized and consumed compounded liquors and other products –
20,105 drums of alcohol as raw materials and 81,288,787 proof
liters of alcohol

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CIR V. HANTEX TRADING CO., INC., 454 SCRA 301 (2005)
FACTS
1. Hantex is engaged in the sale of plastic products. It imports synthetic resin
and other chemicals for the manufacture of its products. For this purpose, it
is required to file an Import Entry and Internal Revenue Declaration
(Consumption Entry) with the Bureau of Customs under Section 1301 of the
Tariff and Customs Code.
2. Sometime in October 1989, the Economic Intelligence and Investigation
Bureau (EIIB) Chief received confidential information that the respondent
had imported synthetic resin amounting to P115,599,018.00 but only
declared P45,538,694.57.
3. According to the informer, based on photocopies of 77 Consumption Entries
furnished by another informer, the 1987 importations of the respondent were
understated in its accounting records. EIIB Chief submitted a report to the
EIIB Commissioner recommending that an inventory audit of the respondent
be conducted by the Internal Inquiry and Prosecution Office (IIPO) of the
EIIB.
4. EIIB Commissioner ordered the audit and investigation of the importations of
Hantex for 1987.
5. Hantex president and general manager refused to comply with the
subpoena, contending that its books of accounts and records of importation
of synthetic resin and calcium bicarbonate had been investigated repeatedly
by the Bureau of Internal Revenue (BIR) on prior occasions.
6. IIPO secured certified copies of the Profit and Loss Statements for 1987 filed
by the respondent with the Securities and Exchange Commission (SEC).
However, the IIPO failed to secure certified copies of the respondents 1987
Consumption Entries from the Bureau of Customs since the original copies
had been eaten by termites.
7. IIPO requested the Chief of the Collection Division, Manila International
Container Port, and the Acting Chief of the Collection Division, Port of
Manila, to authenticate the machine copies of the import entries supplied by
the informer.
a. Chief of the Collection Division could not do so because the
Collection Division did not have the original copies of the entries.
b. Chief of the Collection Division of the Bureau of Customs Augusto
S. Danganan could not authenticate the machine copies of the
import entries as well, since the original copies of the said entries
filed with the Bureau of Customs had apparently been eaten by
termites.
8. Investigating officers relied on the certified copies of the respondents Profit
and Loss Statement for 1987 and 1988 on file with the SEC, the machine
copies of the Consumption Entries, Series of 1987, submitted by the
informer, as well as excerpts from the entries certified by chiefs of the
collection divisions.
9. It was found that for 1987, Hantex had importations totaling
P105,716,527.00 (inclusive of advance sales tax). Compared with the
declared sales based on the Profit and Loss Statements filed with the SEC,
the respondent had unreported sales in the amount of P63,032,989.17, and
its corresponding income tax liability was P41,916,937.78, inclusive of
penalty charge and interests. Further investigation revelead that Hantex had
unrecorded importation in the total amount of P70,661,694.00, and that the
amount was not declared in its income tax return for 1987.
10. CIR sent a Letter to Hantex demanding payment of its deficiency income tax
of P13,414,226.40 and deficiency sales tax of P14,752,903.25, inclusive of
surcharge and interest.Appended thereto were the Assessment Notices of
Tax Deficiency.
11. The Chief of the Accounts Receivables/Billing Division of the BIR sent a
letter to Hantex demanding payment of its tax liability due for 1987 within ten
(10) days from notice, on pain of the collection tax due via a warrant of
distraint and levy and/or judicial action. The Warrant of Distraint and/or Levy
was actually served on the respondent on January 21, 1992.
12. During the hearing ithe the CIR, the IIPO representative testified that the
Bureau of Customs failed to furnish the EIIB with certified copies of the
Consumption and Import Entries; hence, the EIIB relied on the machine
copies from their informer.
13. Hantex wrote the BIR Commissioner on July 12, 1993 questioning the
assessment on the ground that the EIIB representative failed to present the
original, or authenticated, or duly certified copies of the Consumption and
Import Entry Accounts, or excerpts thereof if the original copies were not
readily available; or, if the originals were in the official custody of a public
officer, certified copies thereof as provided for in Section 12, Chapter 3,
Book VII, Administrative Procedure, Administrative Order of 1987. It stated
that the only copies of the Consumption Entries submitted to the Hearing
Officer were mere machine copies furnished by an informer of the EIIB.
14. CIR Ruled against Hantex.
15. CTA ruled that Hantex was burdened to prove not only that the assessment
was erroneous, but also to adduce the correct taxes to be paid by it. The
CTA declared that the respondent failed to prove the correct amount of taxes
due to the BIR. It also ruled that the respondent was burdened to adduce in
evidence a certification from the Bureau of Customs that the Consumption
Entries in question did not belong to it.
16. CA held that the income and sales tax deficiency assessments issued by the
petitioner were unlawful and baseless since the copies of the import entries
relied upon in computing the deficiency tax of the respondent were not duly
authenticated by the public officer charged with their custody, nor verified
under oath by the EIIB and the BIR investigators.
17. CIR asserts that since the respondent refused to cooperate and show its
1987 books of account and other accounting records, it was proper to resort
to the best evidence obtainable the photocopies of the import entries in the
Bureau of Customs and the respondents financial statement filed with the
SEC. The import entries were admissible as secondary evidence under the
best evidence obtainable rule, since they were duly authenticated by the
Bureau of Customs officials who processed the documents and released the
cargoes after payment of the duties and taxes due. Under the best evidence
9
TAX II BELLO 3D 2020
obtainable rule, the tax return is not important in computing the tax
deficiency.
18. Hantex maintains that the resort to the best evidence obtainable method was
illegal. In the first place, the respondent argues, the EIIB agents are not duly
authorized to undertake examination of the taxpayers accounting records for
internal revenue tax purposes. Hence, the respondents failure to accede to
their demands to show its books of accounts and other accounting records
cannot justify resort to the use of the best evidence obtainable method.
Secondly, when a taxpayer fails to submit its tax records upon demand by
the BIR officer, the remedy is not to assess him and resort to the best
evidence obtainable rule, but to punish the taxpayer according to the
provisions of the Tax Code; that the photocopies of import entries cannot be
used in making the assessment because they were not properly
authenticated, pursuant to the provisions of Sections 24 and 25 of Rule 132
of the Rules of Court. It avers that while the CTA is not bound by the
technical rules of evidence, it is bound by substantial rules. The respondent
points out that the petitioner did not even secure a certification of the fact of
loss of the original documents from the custodian of the import entries
ISSUES
1. WON hearsay may be considered as best evidence -- YES
2. WON unauthenticated photocopies may be considered as best evidence --
NO
3. WON tax deficiency assessment against the respondent based on the
certified copies of the Profit and Loss Statement submitted by the
respondent to the SEC in 1987 and 1988, as well as certifications of the
chiefs of Collection Divisions, are arbitrary, capricious and illegal -- YES
RATIO
1. Central to the second issue is Section 16 of the NIRC of 1977, as amended,
which provides that the Commissioner of Internal Revenue has the power to
make assessments and prescribe additional requirements for tax
administration and enforcement.
a. “Failure to submit required returns, statements, reports and other
documents. When a report required by law as a basis for the
assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by law or regulation or when there
is reason to believe that any such report is false, incomplete or
erroneous, the Commissioner shall assess the proper tax on the
best evidence obtainable.”
“In case a person fails to file a required return or other document at
the time prescribed by law, or willfully or otherwise files a false or
fraudulent return or other document, the Commissioner shall make
or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which
shall be prima facie correct and sufficient for all legal purposes.”
b. This provision applies when the Commissioner of Internal Revenue
undertakes to perform her administrative duty of assessing the
proper tax against a taxpayer, to make a return in case of a
taxpayers failure to file one, or to amend a return already filed in the
BIR.
c. The petitioner may avail herself of the best evidence or other
information or testimony by exercising her power or authority under
paragraphs (1) to (4) of Section 7 of the NIRC:
i. To examine any book, paper, record or other data which
may be relevant or material to such inquiry;
ii. To obtain information from any office or officer of the
national and local governments, government agencies or
its instrumentalities, including the Central Bank of the
Philippines and government owned or controlled
corporations;
iii. To summon the person liable for tax or required to file a
return, or any officer or employee of such person, or any
person having possession, custody, or care of the books
of accounts and other accounting records containing
entries relating to the business of the person liable for tax,
or any other person, to appear before the Commissioner
or his duly authorized representative at a time and place
specified in the summons and to produce such books,
papers, records, or other data, and to give testimony;
iv. To take such testimony of the person concerned, under
oath, as may be relevant or material to such inquiry;
d. The best evidence envisaged in Section 16 of the 1977 NIRC, as
amended, includes the corporate and accounting records of the
taxpayer who is the subject of the assessment process, the
accounting records of other taxpayers engaged in the same line of
business, including their gross profit and net profit sales. Such
evidence also includes data, record, paper, document or any
evidence gathered by internal revenue officers from other taxpayers
who had personal transactions or from whom the subject taxpayer
received any income; and record, data, document and information
secured from government offices or agencies, such as the SEC, the
Central Bank of the Philippines, the Bureau of Customs, and the
Tariff and Customs Commission.
e. The law allows the BIR access to all relevant or material records
and data in the person of the taxpayer. It places no limit or
condition on the type or form of the medium by which the record
subject to the order of the BIR is kept. The purpose of the law is to
enable the BIR to get at the taxpayers records in whatever form
they may be kept. The standard is not the form of the record but
where it might shed light on the accuracy of the taxpayers return.
f. The best evidence obtainable may consist of hearsay evidence,
such as the testimony of third parties or accounts or other records
of other taxpayers similarly circumstanced as the taxpayer subject
of the investigation, hence, inadmissible in a regular proceeding in
the regular courts. The general rule is that administrative agencies
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TAX II BELLO 3D 2020

such as the BIR are not bound by the technical rules of evidence. It in favor of the correctness of tax assessment stands (Sy Po v. CTA,
can accept documents that cannot be admitted in a judicial 164 SCRA 524).
proceeding where the Rules of Court are strictly observed. It can b. The burden of proving the illegality of the assessment lies upon the
choose to give weight or disregard such evidence, depending on its petitioner alleging it to be so. In this case, petitioner miserably failed
trustworthiness. to discharge this duty
2. However, the best evidence obtainable under Section 16 of the 1977 NIRC,
as amended, does not include mere photocopies of records/documents. The DISPOSITION
petitioner, in making a preliminary and final tax deficiency assessment CA decision is SET ASIDE. The records are REMANDED to the Court of Tax Appeals
against a taxpayer, cannot anchor the said assessment on mere machine for further proceedings, conformably with SC decision.
copies of records/documents. Mere photocopies of the Consumption Entries
have no probative weight if offered as proof of the contents thereof. The DOCTRINE
reason for this is that such copies are mere scraps of paper and are of no As a general rule, tax assessments by tax examiners are presumed correct and made
probative value as basis for any deficiency income or business taxes against in good faith. All presumptions are in favor of the correctness of a tax assessment. It
a taxpayer. is to be presumed, however, that such assessment was based on sufficient evidence.
a. As a general rule, tax assessments by tax examiners are presumed
correct and made in good faith. All presumptions are in favor of the
correctness of a tax assessment. It is to be presumed, however,
that such assessment was based on sufficient evidence.
b. Upon the introduction of the assessment in evidence, a prima facie
case of liability on the part of the taxpayer is made. If a taxpayer
files a petition for review in the CTA and assails the assessment,
the prima facie presumption is that the assessment made by the
BIR is correct, and that in preparing the same, the BIR personnel
regularly performed their duties.
c. However, the prima facie correctness of a tax assessment does not
apply upon proof that an assessment is utterly without foundation,
meaning it is arbitrary and capricious. The determination by the
CTA must rest on all the evidence introduced and its ultimate
determination must find support in credible evidence.
3. CIR has failed to rebut the validity or correctness of the aforementioned tax
assessments. It is incongruous for petitioner to prove its cause by simply
drawing an inference unfavorable to the respondent by attacking the source
documents (Consumption Entries) which were the bases of the assessment
and which were certified by the Chiefs of the Collection Division, Manila
International Container Port and the Port of Manila, as having been
processed and released in the name of the petitioner after payment of duties
and taxes and the duly certified copies of Financial Statements secured from
the Securities and Exchange Commission. Any such inference cannot
operate to relieve petitioner from bearing its burden of proof and this Court
has no warrant of absolution. The Court should have been persuaded to
grant the reliefs sought by the petitioner should it have presented any
evidence of relevance and competence required, like that of a certification
from the Bureau of Customs or from any other agencies, attesting to the fact
that those consumption entries did not really belong to them.
a. The burden of proof is on the taxpayer contesting the validity or
correctness of an assessment to prove not only that the
Commissioner of Internal Revenue is wrong but the taxpayer is
right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the presumption
11
TAX II BELLO 3D 2020
PORTILLO V. CIR, 932 F.2D 1128 (1991)
FACTS:
1. Ramon Portillo is a self-employed painting subcontractor who lived and
worked in El Paso, Texas during 1984, the tax year in question.
a. Portillo bid for contracts to paint both residential and commercial
property. According to Portillo, the general contractor he
subcontracted for would pay him weekly, usually by check, for the
work his crew performed. Portillo would then record his total
receipts in the gross receipt portion of a ledger book he kept for his
business.
b. Since Portillo did not have a bank account, he would cash the
contractor's check and then pay his workers in cash. Portillo kept a
separate ledger to record his payroll expenses. Portillo purchases
supplies from the Hanley Paint Store.
2. At the end of the year, Portillo would meet with Mrs. Rosales, a bookkeeper
with Independent Businessman Bookkeeping and Tax Services, Inc., so that
she could prepare his taxes. Portillo would total the gross receipts from his
ledger and give them to Rosales as a basis for his Form 1040 gross income.
Portillo used the Form 1099's from his various employers to confirm the
gross receipts amounts. In 1984, however, Portillo had not received a 1099
from one of the contractors, Mr. Navarro, when Rosales was preparing his
Form 1040. Therefore, Portillo determined his gross receipts from Navarro
solely from his ledger.
a. On his 1984 federal income tax return, Portillo reported gross
receipts in the amount of $142,108.93 and deductions of $30,917
for costs of goods sold.
b. Included in the amount of gross receipts was $10,800 reported as
the amount Navarro paid to Portillo.
c. Sometime in mid-1985, Navarro filed a Form 1099 reporting
payments to Portillo in the amount of $35,305, which was
significantly more than Portillo had reported receiving from him.
3. In January 1987, the I.R.S. audited Portillo's 1984 tax return. At the time of
the audit, Portillo could not produce any records or receipts concerning his
gross receipts for 1984 because his ledger was stolen from his truck in 1985.
In addition, Portillo was unable to produce invoices for materials and
supplies purchased during eighteen weeks in 1984 because he had relied on
Hanley Paint Store to save these for him and they apparently lost a portion
of these invoices.
4. Based on the discrepancy between Navarro's 1099 and Portillo's 1040
forms, I.R.S. Agent Shumate determined that Portillo had not reported
$24,505 in income from Navarro. Although Portillo acknowledged that he
inadvertently neglected to report $3,125 in income from Navarro, Portillo
denied receiving any more than $13,925 from Navarro.
a. Shumate contacted Navarro who could produce copies of checks
paid to Portillo in the amount of $13,925, but could not produce
records justifying the remaining $21,380 he claims he paid Portillo
in cash.
5. The I.R.S. took the position that Navarro's Form 1099 was presumed
correct. Therefore the I.R.S. issued a statutory notice of deficiency for
federal income taxes of $8,473 for the taxable year 1984, plus penalties
assessed
ISSUE:
1. WON the IRS adequately linked Portillo to the alleged deficiency? YES.
2. [RELEVANT] WON the IRS was able to substantiate in any way that
Portillo received unreported income? NO. The notice of deficiency was
arbitrary and erroneous.
RULING + RATIO:
1. Although there is no prescribed form for a deficiency notice, the notice must
at a minimum (1) advise the taxpayer that the I.R.S. has determined that a
deficiency exists for a particular year, and (2) specify the amount of the
deficiency or provide the information necessary to compute the deficiency.
a. The courts which have dealt with this issue have held that a
determination as contemplated by section 6212(a) means "a
thoughtful and considered determination that the United States is
entitled to an amount not yet paid.” By its very definition and
etymology the word 'determination' irresistibly connotes
consideration, resolution, conclusion, and judgment."
b. Portillo argues that in this case the I.R.S. failed to make a
"determination" because the I.R.S. merely matched Navarro's Form
1099 with Portillo's Form 1040 without ever attempting to establish
the reliability of Navarro's 1099 filing. According to Portillo, this
lacked any indicia of a "thoughtful and considered determination"
and therefore was insufficient under section 6212(a).
c. In Scar, one of the few cases finding that the I.R.S. failed to make a
determination, the Ninth Circuit held that the tax court should have
dismissed the action for want of jurisdiction because the purported
notice of deficiency revealed on its face that no determination of tax
deficiency had been made.
d. HOWEVER in contrast to Scar, in this case the I.R.S. did consider
information directly relating to Portillo's income tax return. The
I.R.S. also investigated somewhat whether a deficiency indeed
existed. Therefore, this is not a case where the I.R.S. had no basis
for sending the notice of deficiency; the I.R.S. did adequately link
the deficiency to Portillo.
2. It is a well settled principle that the government's deficiency assessment is
generally afforded a presumption of correctness. Such is a procedural
device that places the burden of producing evidence to rebut the
presumption on the taxpayer. In essence, the taxpayer's burden of proof and
the presumption of correctness are for the most part merely opposite sides
of a single coin; they combine to require the taxpayer to prove by a
preponderance of the evidence that the Commissioner's determination was
erroneous. Justification for the presumption of correctness lies in the
government's strong need to accomplish swift collection of revenues and in
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TAX II BELLO 3D 2020

the need to encourage taxpayer record keeping. The need for tax collection purpose of recalculating the net tax, interest and penalties due from Portillo in
does not serve to excuse the government, however, from providing some accordance with this opinion.
factual foundation for its assessments. "The tax collector's presumption of
correctness has a herculean muscularity of Goliath-like reach, but we strike DOCTRINE: It is a well settled principle that the government's deficiency assessment
an Achilles' heel when we find no muscles, no tendons, no ligaments of is generally afforded a presumption of correctness. Such is a procedural device that
fact.” places the burden of producing evidence to rebut the presumption on the taxpayer. A
a. In this case we find that the notice of deficiency lacks any court need not give effect to the presumption of correctness in a case involving
"ligaments of fact.” unreported income if the Commissioner cannot present some predicate evidence
b. The presumption of correctness does not apply when the supporting its determination.
government's assessment falls within a narrow but important
category of a "naked' assessment without any foundation
whatsoever…."
c. A court need not give effect to the presumption of correctness in a
case involving unreported income if the Commissioner cannot
present some predicate evidence supporting its determination.
d. The Commissioner would merely need to attempt to substantiate
the charge of unreported income by some other means, such as by
showing the taxpayer's net worth, bank deposits, cash
expenditures, or source and application of funds.
e. BUT in this case the Commissioner's determination that Portillo had
received unreported income of $24,505 from Navarro was arbitrary.
The Commissioner's determination was based solely on a Form
1099 Navarro sent to the I.R.S. indicating that he paid Portillo
$24,505 more than Portillo had reported on his return. The
Commissioner merely matched Navarro's Form 1099 with Portillo's
Form 1040 and arbitrarily decided to attribute veracity to Navarro
and assume that Portillo's Form 1040 was false. Navarro, however,
was not able to document $21,380 of cash payments he allegedly
made to Portillo. In a situation like this, the Commissioner had
some duty to investigate Navarro's bald assertion of payment and
determine if Navarro's position was supported by his books,
receipts, or other records.
f. The Commissioner failed to substantiate by any other means, such
as analyzing Portillo's cash expenditures or his source and
application of funds, his charge that Portillo received unreported
income. Instead, the Commissioner merely chose to rely upon the
presumption of correctness.

In summary, we find that the Tax Court had jurisdiction to consider this case because
the Commissioner did issue a valid deficiency notice. However, since the
Commissioner failed to substantiate his charge that Portillo received cash payments
from Navarro, the deficiency determination is clearly arbitrary and erroneous.
Therefore, the judgment below regarding unreported income must be reversed.

DISPOSITION: The portion of the Tax Court's judgment regarding the unreported
income is REVERSED. The portion of the Tax Court's judgment regarding the cost of
goods sold deduction is AFFIRMED. The judgment is REMANDED for the limited

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TAX II BELLO 3D 2020

CIR V. BENIPAYO, 4 SCRA 182 (1962)

DISPOSITION: The appeal is DISMISSED. The previous judgement is AFFIRMED.
FACTS:
1. Benipayo is the owner and operator of the Lucena Theater located in DOCTRINE: Assessments should not be based on mere presumptions no matter how
Lucena, QC. In October 1953, an Internal Revenue Agent investigated reasonable or logical said presumptions may be. In order to stand the test of judicial
respondent's amusement tax liability in connection with the operation of said scrutiny, the assessment must be based on actual facts.
theater from August 1952 to September 1953 and found Benipayo
disproportionately issued tax-free 20-centavo children's tickets. The
agent’s findings during 1949 to 1951 the average ratio of adults and children
patronizing the theater was 3 to 1; that for every three adults entering the
theater, one child was also admitted. During the period in question, the
proportion is reversed - three children to one adult. The agent concluded
that Benipayo must have fraudulently sold two tax-free 20-centavo tickets, in
order to avoid payment of the amusement tax prescribed in S260 of the
NIRC.
2. Based on the average ratio between adult and children attendance in the
past years, the agent recommended a deficiency amusement tax
assessment against respondent in the sum of Php 12,093.45 covering the
aforementioned period.
3. 1954: CIR issued a deficiency amusement tax assessment against Benipayo
demanding the payment. Benipayo protested to the Conference Staff of the
BIR which found that the reports were mere presumptions and
conclusions, devoid of findings of the fact of the alleged fraudulent
acts of Benipayo. The BIR referred the case back to the Provincial
Revenue Agent of QC, which echoed the report of the agents regarding the
deficiency amusement tax assessment during the period and recommended
the issuance of the same.

ISSUE: Whether or not there is sufficient evidence to show that Benipayo during the
period under review, sold and issued tax-free 20-centavo children’s tickets to defraud
the government. NO.

RATIO:
1. CTA: there is no factual basis and the decision must be reversed. An
assessment fixes and determines the tax liability of a taxpayer. As soon as it
is served, an obligation arises on the part of the taxpayer concerned to pay
the amount assessed and demanded. Hence, assessments should not be
based on mere presumptions no matter how reasonable or logical said
presumptions may be.
2. Even if the average ratio of adults and children patronizing the theater from
1949 to 1951 was 3 to 1, the same does not infer that the same conditions
existed during 1952 and 1953.
3. In order to stand the test of judicial scrutiny, the assessment must be based
on actual facts. The presumption of correctness of assessment being a mere
presumption cannot be made to rest on another presumption that the
circumstances in 1952 and 1953 are presumed to be the same as those
existing in 1949 to 1951 and July 1955. In the case under consideration
there are no substantial facts to support the assessment in question
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TAX II BELLO 3D 2020

CHEMICAL INDUSTRIES OF THE PHIL., INC. V. Commissioner on Internal
Revenue (CIR), CTA CASE NO. 5257, OCT. 29, 1998
FACTS:
1. Chemical Industries filed a petition seeking for the cancellation of the
deficiency income tax assessment for the year 1982 issued by respondent
CIR amounting to P4,364,539.00.
2. Petitioner claimed an amount of P7,822,898.00 interest expense and bank
charges as deduction from its income. However, the deduction was
disallowed.
3. According to respondent, these interest and bank charges should be
disallowed because the applicable proceeds of the "loans were applied to"
the acquisition of "Investments in Stocks of Affiliated Companies."
4. Petitioner filed a protest and submitted documentary evidence showing
that the proceeds of the loans, which it obtained were not fully applied to the
acquisition of the investments in stocks of affiliated companies. The protest
was denied.
5. Respondent, in disallowing the interest and bank charges claimed by
petitioner as deductions, reasoned out that:
a. The loans obtained by petitioner were primarily applied to
investments in affiliated companies;
b. In obtaining loans, petitioner offered as collaterals the properties of
its affiliates, as such, the loans were in reality loans for the affiliates
and therefore, the interest expenses should have been deducted by
the affiliates, not by petitioner, in the furtherance of their
businesses; Thus, there will be proper matching of income and
expenses;
c. That the loan or the investment of its proceeds does not have any
economic substance to petitioner, except to evade the payment of
the tax due; and
d. Finally, loans from affiliates like Polyphosphates, Inc., is considered
as a sham transaction and, therefore, the same should be treated
as advance capitalization, and interest payments as dividend
payments.
6. The petitioner reiterated that the loans it obtained were not applied to
investments in stocks of affiliated companies and, therefore, may properly be
deducted as expenses. It supported its claims with financial statements,
deed of assignment of land memorandum of agreements, stock swap
agreements and a certificate of filing of merger.
effected spin-off of the manufacturing operations, whereby shares in
the new manufacturing company were traded for the manufacturing
assets, machineries and accounts of the petitioner.
2. Likewise, in the Statement of Changes in Financial Position were mostly
used to pay currently maturing obligations (Exh. H-6) and in 1981, increase
in investments account was associated with the disposal of property and
equipment due to the above-mentioned spin-off.
3. Respondent's allegation that the loans obtained by petitioner were primarily
applied to investments in affiliated companies was based on mere
presumptions. It is well-settled that "(a)ssessments should not be based on
presumptions no matter how logical the presumptions might be. In order to
stand the test of judicial scrutiny the assessment must be based on actual
facts."
4. It also holds true with regard to respondent's allegation that the loans do not
have any economic substance except to evade the payment of the tax due.
Respondent's finding is bereft of any basis that will lead the Court to believe
that the purpose of petitioner's loans was merely for tax evasion.
5. With regard to respondent's allegation that the loans do not have any
economic substance except to evade the payment of the tax due.
Respondent's finding is bereft of any basis that will lead the Court to believe
that the purpose of petitioner's loans was merely for tax evasion.
DISPOSITION: WHEREFORE, in view of all the foregoing, the Court hereby
ORDERS petitioner to PAY deficiency income tax for 1982 amounting to
P1,966,547.20.
DOCTRINE: Assessments should not be based on presumptions no matter how
logical the presumptions might be. In order to stand the test of judicial scrutiny the
assessment must be based on actual facts.

ISSUES:
1. Whether respondent correctly assessed petitioner for its income tax
deficiency. NO.

RULING + RATIO:
1. An analysis of the audited financial statements of the petitioner would
reveal that the increase in investment account was basically due to the
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TAX II BELLO 3D 2020

CIR V. SONY PHILIPPINES, INC., 635 SCRA 234 (2010)
FACTS:
1. Nov 1998: CIR issued a Letter of Authority authorizing certain revenue
officers to examine Sony books of accounts and other accounting records
regarding revenue taxes for the period of 1997 and unverified prior years.
2. Dec 1999: A preliminary assessment for 1997 deficiency taxes (VAT, EWT,
Royalty, Late Remittances) and penalties was issued by the CIR which Sony
protested. CIR then issued final assessment notices, a formal demand letter,
and the details of the discrepancies.
3. Feb 2000: Sony sought re-evaluation of the aforementioned assessment by
filing a protest. Sony submitted relevant docs in support of the protest and
then filed a petition for review before the CTA.
4. CTA disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards the EWT, the CTA-First Division
maintained the deficiency EWT assessment on Sonys motor vehicles and on
professional fees paid to general professional partnerships. It also assessed
the amounts paid to sales agents as commissions with five percent (5%)
EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-
First Division, however, disallowed the EWT assessment on rental expense
since it found that the total rental deposit of P10,523,821.99 was incurred
from January to March 1998 which was again beyond the coverage of LOA
19734. Except for the compromise penalties, the CTA-First Division also
upheld the penalties for the late payment of VAT on royalties, for late
remittance of final withholding tax on royalty as of December 1997 and for
the late remittance of EWT by some of Sonys branches.
5. CTA-First Division partly granted Sonys petition by cancelling the deficiency
VAT assessment but upheld a modified deficiency EWT assessment as well
as the penalties. CIR sought reconsideration. CTA-First Division denied the
MR so the CIR filed a petition for review with CTA-EB.
Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
2. Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the
revenue officer so authorized must not go beyond the authority given. In the
absence of such an authority, the assessment or examination is a nullity.
3. As earlier stated, LOA 19734 covered the period 1997 and unverified prior
years. For said reason, the CIR acting through its revenue officers went
beyond the scope of their authority because the deficiency VAT assessment
they arrived at was based on records from January to March 1998 or using
the fiscal year which ended in March 31, 1998. As pointed out by the CTA-
First Division in its April 28, 2005 Resolution, the CIR knew which period
should be covered by the investigation. Thus, if CIR wanted or intended the
investigation to include the year 1998, it should have done so by including it
in the LOA or issuing another LOA.
DISPOSITION: WHEREFORE, the petition is DENIED.
DOCTRINE: The assessment should not go outside the scope of the letter of
authority. If the assessment is outside the scope of the letter of authority, then the
assessment is void.

ISSUE: W/N the assessment is void?

RATIO:
1. Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the
authority given to the appropriate revenue officer assigned to perform
assessment functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of a taxpayer
for the purpose of collecting the correct amount of tax. The very provision of
the Tax Code that the CIR relies on is unequivocal with regard to its power
to grant authority to examine and assess a taxpayer.
a. SEC. 6. Power of the Commissioner to Make Assessments and
Prescribe Additional Requirements for Tax Administration and
Enforcement.

(A)Examination of Returns and Determination of tax Due. After a return has

been filed as required under the provisions of this Code, the Commissioner
or his duly authorized representative may authorize the examination of
any taxpayer and the assessment of the correct amount of tax:
16