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SAMAR-I ELECTRIC COOPERATIVE v. CIR

FACTS:

SAMELCO-I, a power distribution cooperative, received assessments on withholding tax on compensation for the years 1997 and 1998 on September 15, 2002. The assessments were made by the Commissioner of Internal Revenue (CIR) and were outside the three-year prescriptive period provided by law. SAMELCO-I argued that the assessments have prescribed because a waiver of the defense of prescription, which was valid until March 29, 2002, had been executed by the parties. SAMELCO-I also claimed that it filed its withholding tax returns in good faith, in consultation with BIR personnel, and without any findings of false returns. SAMELCO-I further argued that there was no substantial under remittance of the 1998 withholding tax, indicating that it did not file a false return. SAMELCO-I also contended that the formal letter of demand and assessment notice were void because they did not comply with the requirements under RR 12-99. The Court in Division held that the assessments have not prescribed, that the CIR can assess within the ten-year prescriptive period even without explicitly invoking Section 222 (a) of the Tax Code, and that SAMELCO-I is exempted from paying the Minimum Corporate Income Tax (MCIT). SAMELCO-I moved for reconsideration but was denied by the CTA EB. Hence, SAMELCO-I filed a petition with the Supreme Court, raising issues related to due process, the missing Annex "A-1", the validity of the waiver, the belated assertion of false returns, and the validity of the 1997 deficiency withholding tax assessment based on RR 2-98.

The petitioner argues that the tax assessments issued by the respondent were beyond the three-year prescriptive period under Section 203 of the NIRC of 1997. The petitioner filed its Annual Information Return of Income Tax Withheld on Compensation, Expanded and Final Withholding Taxes on February 17, 1998, for the taxable year 1997, and on February 1, 1999, for the taxable year 1998. According to the petitioner, if the three-year prescriptive period under Section 203 is followed, the assessments for the taxable years 1997 and 1998 should have been issued on or before February 16, 2001, and January 31, 2002, respectively. The respondent contends that the exceptions in Section 222 of the NIRC of 1997 are applicable, which provide for a ten-year period for assessment and collection in cases of false or fraudulent returns or failure to file a return with intent to evade tax.

ISSUES:

  1. Whether the subject deficiency tax assessments were issued beyond the three-year prescriptive period.

  2. Whether the discovery of the falsity in the subject returns allows the assessment of tax within ten years.

  3. Whether the ten-year prescriptive period under Section 332(a) of the National Internal Revenue Code (NIRC) applies to assess the petitioner's tax liability.

  4. Whether the petitioner's tax returns were false and constituted a substantial underdeclaration of withholding taxes.

  5. Whether the Final Demand Letter and Assessment Notices (FAN) issued to the petitioner provided the necessary information on the nature, factual, and legal bases of the assessments.

  6. Whether the advice of tax deficiency, preliminary five-day letter, and audit working paper provided by the Commissioner of Internal Revenue (CIR) to Enron Subic Power Corporation (Enron) were sufficient to inform Enron of the legal and factual bases of the deficiency tax assessment.

  7. Whether Enron was properly apprised of its tax deficiency through the exchange of correspondence and documents between the parties.

  8. Whether the requirement of Section 228 was substantially complied with.

  9. Whether respondent fully informed petitioner in writing of the factual and legal bases of the deficiency taxes assessment.

  10. Whether petitioner's right to due process was violated.

RULING:

  1. The subject deficiency tax assessments were not issued beyond the three-year prescriptive period. Section 203 of the National Internal Revenue Code (NIRC) of 1997 sets the three-year prescriptive period to assess. However, Section 222(a) of the NIRC provides exceptions to this prescriptive period, allowing for assessment within ten years after the discovery of the falsity, fraud, or omission in the return.

  2. The discovery of the falsity in the subject returns allows the assessment of tax within ten years. The substantial underdeclaration of withholding taxes amounted to falsity in the returns, which gives the respondent the benefit of the ten-year period under Section 222(a) of the NIRC to assess the correct amount of tax.

  3. The ten-year prescriptive period under Section 332(a) of the NIRC applies to assess the petitioner's tax liability. The Court affirms the conclusion of the respondent Court of Tax Appeals (CTA) that the assessment was made within the prescriptive period.

  4. The petitioner's tax returns were false and constituted a substantial underdeclaration of withholding taxes. The Court upholds the finding of the CTA First Division that the petitioner failed to refute the finding that it failed to withhold taxes from its employees' 13th-month pay and other benefits exceeding P30,000, resulting in the filing of false returns.

  5. The Final Demand Letter and Assessment Notices (FAN) issued to the petitioner provided the necessary information on the nature, factual, and legal bases of the assessments. Both Section 228 of the NIRC of 1997 and Section 3.1.4 of Revenue Regulations (RR) No. 12-99 require written details on the basis of deficiency tax assessments. The Court upholds the validity of the assessments issued to the petitioner.

  6. The advice of tax deficiency, preliminary five-day letter, and audit working paper provided by the CIR to Enron were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere perfunctory discharges of the CIR's duties in correctly assessing a taxpayer. The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage, and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax assessment was made.

  7. In this case, Enron was sufficiently apprised of the nature, factual and legal bases, as well as how the deficiency taxes being assessed against it were computed. Enron was informed of the results and findings of the investigations made by the CIR, and was duly furnished with a copy of the summary report containing an explanation of Findings of Investigation stating the legal and factual bases for the deficiency assessment. Furthermore, Enron requested and received a detailed explanation and computation of the deficiency withholding taxes and deficiency income taxes. The exchange of correspondence and documents between the parties enabled Enron to protest the Notice of Assessment (FAN) by questioning the CIR's interpretation of the laws cited as the legal basis for the computation of the deficiency withholding taxes and assessment of minimum corporate income tax.

  8. The Court held that the requirement of Section 228 was substantially complied with as respondent had fully informed petitioner in writing of the factual and legal bases of the deficiency taxes assessment. Therefore, petitioner's right to due process was not violated. The petition was denied, and the assailed Decision and Resolution of the Court of Tax Appeals were affirmed and upheld.

PRINCIPLES:

  • Section 203 of the NIRC sets the three-year prescriptive period to assess tax liabilities.

  • Section 222 of the NIRC provides exceptions to the three-year prescriptive period, allowing assessment within ten years after the discovery of the falsity, fraud, or omission in the return.

  • Falsity in a return refers to a deviation from the truth, whether intentional or not, while a fraudulent return implies intentional or deceitful entry to evade the taxes due.

  • The ordinary period of prescription of five years under Section 331 of the NIRC applies to normal circumstances, but the ten-year period under Section 332(a) of the NIRC applies when the government is placed at a disadvantage due to false returns, fraudulent returns with intent to evade tax, or failure to file returns.

  • Courts generally respect and accord finality to the findings of quasi-judicial agencies as long as they are supported by substantial evidence.

  • Assessment of taxes should be made in accordance with law, and arbitrariness will negate the very reason for the government.

  • A valid assessment should provide the necessary information on the nature, factual, and legal bases. Failure to comply with this requirement renders the assessment void.

  • The legal and factual bases of a deficiency tax assessment must be stated in the formal letter of demand and assessment notice. Mere advice of tax deficiency, preliminary letters, and audit working papers do not suffice.

  • The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is different from the requirement of what such notice must contain.

  • A taxpayer must be sufficiently apprised of the nature, factual and legal bases, as well as how the deficiency taxes being assessed against it were computed. The exchange of correspondence and documents between the CIR and the taxpayer can fulfill this requirement.

  • The requirement of Section 228 of the National Internal Revenue Code (NIRC), which mandates the prior issuance of a deficiency tax assessment, must be substantially complied with.

  • The taxpayer's right to due process is not violated when the taxpayer is fully informed in writing of the factual and legal bases of the deficiency taxes assessment, enabling the taxpayer to file an effective protest.