CIR V. ISABELA CULTURAL CORP.

(515 SCRA 556)

Facts:
When the Bureau of Internal Revenue disallowed Isabela Cultural
Corporations claimed deductions for the years 1984-1986 in their
1986 taxes for expense deductions, to wit:
(1) Expenses for auditing services for the year ending 31 December
1985;
(2) Expenses for legal services for the years 1984 and 1985; and
(3) Expense for security services for the months of April and May
1986.

As such, the former charged the latter for deficiency income taxes.
Isabela Cultural Corporation contests the assessment.
Issues and Ruling:
1. For a taxpayer using the accrual method, when do the facts present
themselves in such a manner that the taxpayer must recognize income
or expense?

The accrual of income and expense is permitted when the all-events
test has been met. This test requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability. The test does not demand
that the amount of income or liability be known absolutely, only that
a taxpayer has at his disposal the information necessary to compute
the amount with reasonable accuracy. The all-events test is satisfied
where computation remains uncertain, if its basis is unchangeable;
the test is satisfied where a computation may be unknown, but is not
as much as unknowable, within the taxable year.
2. W/N the deductions were properly claimed by Isabela Cultural
Corporation.

The deductions for expenses for professional fees consisting of
expenses for legal and auditing services are NOT allowable.
However, the deductions for expenses for security services were
properly claimed by Isabela Cultural Corporation. For the legal and
auditing services, Isabela Cultural Corporation could have reasonably
known the fees of those firms that it hired, thus satisfying the all-
events test. As such, per Revenue Audit Memorandum Order No. 1-
2000, they cannot validly be deducted from its gross income for the
said year and were therefore properly disallowed by the BIR. As for
the security services, because they were incurred in 1986, they could
be properly claimed as deductions for the said year.
Notes:
The requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and
auditing services, are:
a. The expense must be ordinary and necessary;
b. It must have been paid or incurred during the taxable year;
c. It must have been paid or incurred in carrying on the trade or
business of the taxpayer; and
d. It must be supported by receipts, records, or other pertinent papers.

Revenue Audit Memorandum Order No. 1-2000, provides that under
the accrual method of accounting, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year.
Thus, a taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed to do so
cannot deduct the same for the next year.

COMMISSIONER OF INTERNAL REVENUE vs. UNION
SHIPPING CORPORATION and THE COURT OF TAX APPEALS
G.R. No. L-66160 May 21, 1990

FACTS: In a letter dated December 27, 1974 petitioner assessed
against Yee Fong Hong, Ltd. and/or herein private respondent
UnionShipping Corporation for deficiency income taxes due for the
years 1971 and 1972. Private respondent protested the assessment.

Petitioner, without ruling on the protest, issued a Warrant of Distraint
and Levy. In a letter, private respondent reiterated its request for
reinvestigation. Petitioner, again, without acting on the request for
reinvestigation and reconsideration of the Warrant of Distraint and
Levy, filed a collection suit against private respondent.

In 1979, private respondent filed with respondent court a Petition for
Review. The CTA ruled in favor of private respondent. Hence, this is
apetition for review on certiorari


ISSUE: Whether or not the issuance of a warrant of distraint and levy
is proof of the finality of an assessment and is tantamount to an
outright denial of a motion for reconsideration of an assessment.


HELD: The Supreme Court had already laid down the dictum that
the Commissioner should always indicate to the taxpayer in clear and
unequivocal language what constitutes his final determination of the
disputed assessment.

There appears to be no dispute that petitioner did not rule on private
respondent's motion for reconsideration but contrary to the above
ruling of this Court, left private respondent in the dark as to which
action of the Commissioner is the decision appealable to the
Court ofTax Appeals. Had he categorically stated that he denies
private respondent's motion for reconsideration and that his action
constitutes his final determination on the disputed assessment, private
respondent without needless difficulty would have been able to
determine when his right to appeal accrues and the resulting
confusion would have been avoided.

Advertising Associates, Inc. v. Court of Appeals (fulltext)
This case is about the liability of Advertising Associates, lnc. for
P382,700.16 as 3% contractor's percentage tax on its rental income
from the lease of neon signs and billboards imposed by section 191 of
the Tax Code.
The Commissioner required Advertising Associates to pay
P297,927.06 and P84,773.10 as contractor's tax for 1967-1971 and
1972, respectively, including 25% surcharge (the latter amount
includes interest) on its income from billboards and neon signs.
The basis of the assessment is the fact that the taxpayer's articles of
incorporation provide that its primary purpose is to engage in general
advertising business. Its income tax returns indicate that its business
was advertising
Advertising Associates contested the assessments in its 'letters of
June 25, 1973 (for the 1967-71 deficiency taxes) and March 7, 1974
(for the 1972 deficiency). The Commissioner reiterated the
assessments in his letters of July 12 and September 16,1974.
The taxpayer requested the cancellation of the assessments in its
letters of September 13 and November 21, 1974 (p. 3, Rollo).
Inexplicably, for about four years there was no movement in the case.
Then, on March 31, 1978, the Commissioner resorted to the summary
remedy of issuing two warrants of distraint, directing the collection
enforcement division to levy on the taxpayer's personal properties as
would be sufficient to satisfy the deficiency taxes (pp. 4, 29 and 30,
Rollo). The warrants were served upon the taxpayer on April 18 and
May 25, 1978.
More than a year later, Acting Commissioner Efren I. Plana wrote a
letter dated May 23, 1979 in answer to the requests of the taxpayer
for the cancellation of the assessments and the withdrawal of the
warrants of distraint.
He justified the assessments by stating that the rental income of
Advertising Associates from billboards and neon signs constituted
fees or compensation for its advertising services. He requested the
taxpayer to pay the deficiency taxes within ten days from receipt of
the demand; otherwise, the Bureau would enforce the warrants of
distraint. He closed his demand letter with this paragraph:
This constitutes our final decision on the matter. If you are not
agreeable, you may appeal to the Court of Tax Appeals within 30
days from receipt of this letter.
Advertising Associates received that letter on June 18, 1979.
Nineteen days later or on July 7, it filed its petition for review. In its
resolution of August 28, 1979, the Tax Court enjoined the
enforcement of the warrants of distraint.
The Tax Court did not resolve the case on the merits. It ruled that the
warrants of distraint were the Commissioner's appealable decisions.
Since Advertising Associates appealed from the decision of May 23,
1979, the petition for review was filed out of time. It was dismissed.
The taxpayer appealed to this Court.
We hold that the petition for review was filed on time. The
reviewable decision is that contained in Commissioner Plana's letter
of May 23, 1979 and not the warrants of distraint.
No amount of quibbling or sophistry can blink the fact that said letter,
as its tenor shows, embodies the Commissioner's final decision
within the meaning of section 7 of Republic Act No. 1125. The
Commissioner said so. He even directed the taxpayer to appeal it to
the Tax Court. That was the same situation in St. Stephen's
Association and St. Stephen's Chinese Girl's School vs. Collector of
Internal Revenue, 104 Phil. 314, 317-318.
The directive is in consonance with this Court's dictum that the
Commissioner should always indicate to the taxpayer in clear and
unequivocal language what constitutes his final determination of the
disputed assessment. That procedure is demanded by the pressing
need for fair play, regularity and orderliness in administrative action
(Surigao Electric Co., Inc. vs. Court of Tax Appeals, L-25289, June
28, 1974, 57 SCRA 523).
On the merits of the case, the petitioner relies on the Collector's
rulings dated September 12, 1960 and June 20, 1967 that it is neither
an independent contractor nor a business agent (Exh. G and H).
As already stated, it considers itself a media company, like a
newspaper or a radio broadcasting company, but not an advertising
agency in spite of the purpose stated in its articles of incorporation. It
argues that its act of leasing its neon signs and billboards does not
make it a business agent or an independent contractor. It stresses that
it is a mere lessor of neon signs and billboards and does not perform
advertising services.
But the undeniable fact is that neon signs and billboards are primarily
designed for advertising. We hold that the petitioner is a business
agent and an independent contractor as contemplated in sections 191
and 194(v).
However, in view of the prior rulings that the taxpayer is not a
business agent nor an independent contractor and in view of the
controversial nature of the deficiency assessments, the 25% surcharge
should be eliminated (C. M. Hoskins & Co., Inc. vs. CIR , L-28383,
June 22, 1976, 71 SCRA 511, 519; Imus Electric Co., Inc. vs. CIR ,
125 Phil. 1084).
Petitioner's last contention is that the collection of the tax had already
prescribed. Section 332 of the 1939 Tax Code, now section 319 of the
1977 Tax Code, Presidential Decree No. 1158, effective on June 3,
1977, provides that the tax may be collected by distraint or levy or by
a judicial proceeding begun 'within five years after the assessment of
the tax".
The taxpayer received on June 18, 1973 and March 5, 1974 the
deficiency assessments herein. The warrants of distraint were served
upon it on April 18 and may 25,1978 or within five years after the
assessment of the tax. Obviously, the warrants were issued to
interrupt the five-year prescriptive period. Its enforcement was not
implemented because of the pending protests of the taxpayer and its
requests for withdrawal of the warrants which were eventually
resolved in Commissioner Plana's letter of May 23, 1979.
It should be noted that the Commissioner did not institute any judicial
proceeding to collect the tax. He relied on the warrants of distraint to
interrupt the running of the statute of limitations. He gave the
taxpayer ample opportunity to contest the assessments but at the same
time safeguarded the Government's interest by means of the warrants
of distraint.
WHEREFORE, the judgment of the Tax Court is reversed and set
aside. The Commissioner's deficiency assessments are modified by
requiring the petitioner to pay the tax proper and eliminating the 25%
surcharge, interest and penalty. In case of non-payment, the warrants
of distrant should be implemented. The preliminary injunction issued
by the Tax Court on August 28, 1979 restraining the enforcement of
said warrants is lifted. No costs.

CIR v. Metro Star Superama, Inc., G.R. No. 185371, December 8,
2010
On January 26, 2001, the Regional Director of Revenue of Legazpi
City, issued letter of Authority to examine Metro Stars books of
accounts and other accounting records for income tax and other
internal revenue taxes for the taxable year 1999.
For Metro Stars failure to comply with several requests for the
presentation of records and Subpoena Duces Tecum, BIR of Legazpi
City proceeded with the investigation based on the best evidence
obtainable preparatory to the issuance of assessment notice.
On April 11, 2002, Metro Star received a Formal Letter of Demand
dated April 3, 2002 from Revenue District No. 67, Legazpi City,
assessing petitioner the amount of P292,874.16.) for deficiency
value-added and withholding taxes for the taxable year 1999.
Subsequently, Revenue District Office No. 67 sent a copy of the
Final Notice of Seizure dated May 12, 2003, which petitioner
received on May 15, 2003, giving the latter last opportunity to settle
its deficiency tax liabilities within ten (10) [days] from receipt
thereof, otherwise respondent BIR shall be constrained to serve and
execute the Warrants of Distraint and/or Levy and Garnishment to
enforce collection.
On February 6, 2004, petitioner received from Revenue District
Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23
dated May 12, 2003 demanding payment of deficiency value-added
tax and withholding tax payment in the amount of P292,874.16.
On July 30, 2004, petitioner filed with the Office of respondent
Commissioner a Motion for Reconsideration pursuant to Section
3.1.5 of Revenue Regulations No. 12-99.
On February 8, 2005, respondent Commissioner, through its
authorized representative, Revenue Regional Director of Revenue
Region 10, Legaspi City, issued a Decision denying petitioners
Motion for Reconsideration. Petitioner, through counsel received said
Decision on February 18, 2005.
Denying that it received a Preliminary Assessment Notice (PAN) and
claiming that it was not accorded due process, Metro Star filed a
petition for review[4] with the CTA.
The CTA-Second Division found merit in the petition of Metro Star
and, on March 21, 2007, rendered a decision, granting the petition
and ordering CIR from collecting the subject taxes. It opined that
[w]hile there [is] a disputable presumption that a mailed letter [is]
deemed received by the addressee in the ordinary course of mail, a
direct denial of the receipt of mail shifts the burden upon the party
favored by the presumption to prove that the mailed letter was indeed
received by the addressee.[5] It also found that there was no clear
showing that Metro Star actually received the alleged PAN, dated
January 16, 2002. It, accordingly, ruled that the Formal Letter of
Demand dated April 3, 2002, as well as the Warrant of Distraint
and/or Levy dated May 12, 2003 were void, as Metro Star was denied
due process.[6]
The CIR sought reconsideration[7] but the motion was denied. CIR
filed a petition for review[9] with the CTA-En Banc, but the petition
was dismissed after a determination that no new matters were raised.
The motion for reconsideration[10] filed by the CIR was likewise
denied by the CTA-En Banc in its November 18,
2008Resolution.[11]
Hence this petition.
ISSUES & HELD:
1. Whether or not Metro Star was denied due process? YES.
The Court agrees with the CTA that the CIR failed to discharge its
duty and present any evidence to show that Metro Star indeed
received the PAN dated January 16, 2002. It could have simply
presented the registry receipt or the certification from the postmaster
that it mailed the PAN, but failed. Neither did it offer any explanation
on why it failed to comply with the requirement of service of the
PAN. It merely accepted the letter of Metro Stars chairman dated
April 29, 2002, that stated that he had received theFAN dated April 3,
2002, but not the PAN; that he was willing to pay the tax as
computed by the CIR; and that he just wanted to clarify some matters
with the hope of lessening its tax liability.
2. Is the failure to strictly comply with notice requirements
tantamount to a denial of due process?
Section 228 of the Tax Code clearly requires that the taxpayer must
first be informed that he is liable for deficiency taxes through the
sending of a PAN. He must be informed of the facts and the law upon
which the assessment is made. The law imposes a substantive, not
merely a formal, requirement. To proceed heedlessly with tax
collection without first establishing a valid assessment is evidently
violative of the cardinal principle in administrative investigations -
that taxpayers should be able to present their case and adduce
supporting evidence.[14]
It is clear that the sending of a PAN to taxpayer to inform him of the
assessment made is but part of the due process requirement in the
issuance of a deficiency tax assessment, the absence of which
renders nugatory any assessment made by the tax authorities. The use
of the word shall in subsection 3.1.2describes the mandatory
nature of the service of a PAN. The persuasiveness of the right to due
process reaches both substantial and procedural rights and the failure
of the CIR to strictly comply with the requirements laid down by law
and its own rules is a denial of Metro Stars right to due process.[15]
Thus, for its failure to send the PAN stating the facts and the law on
which the assessment was made as required by Section 228 of R.A.
No. 8424, the assessment made by the CIR is void.
The case of CIR v. Menguito[16] cited by the CIR in support of its
argument that only the non-service of the FAN is fatal to the validity
of an assessment, cannot apply to this case because the issue therein
was the non-compliance with the provisions of R. R. No. 12-85
which sought to interpret Section 229 of the old tax law. RA No.
8424 has already amended the provision of Section 229 on protesting
an assessment. The old requirement of merely notifying the taxpayer
of the CIRs findings was changed in 1998 to informing the taxpayer
of not only the law, but also of the facts on which an assessment
would be made. Otherwise, the assessment itself would be
invalid.[17] The regulation then, on the other hand, simply provided
that a notice be sent to the respondent in the form prescribed, and that
no consequence would ensue for failure to comply with that form.
The Court need not belabor to discuss the matter of Metro Stars
failure to file its protest, for it is well-settled that a void assessment
bears no fruit.

Lascona Land Co., Inc. v. CIR
On March 27, 1998, the CIR issued Assessment Notice No. 0000047-
93-407 against Lascona Land (Lascona) informing the latter of its
alleged deficiency income tax for the year 1993 in the amount of
P753,266.56.
Consequently, on April 20, 1998, Lascona filed a letter protest, but
was denied., thus:
Anent the 1993 tax case of subject taxpayer, please be informed
that while we agree with the arguments advanced in your letter
protest, we regret, however, that we cannot give due course to your
request to cancel or set aside the assessment notice issued to your
client for the reason that the case was not elevated to the Court of Tax
Appeals as mandated by the provisions of the last paragraph of
Section 228 of the Tax Code. By virtue thereof, the said assessment
notice has become final, executory and demandable. In view of the
foregoing, please advise your client to pay its 1993 deficiency
income tax liability in the amount of P753,266.56.
On April 12, 1999, Lascona appealed the decision before the CTA.
Lascona alleged that the Regional Director erred in ruling that the
failure to appeal to the CTA within 30 days from the lapse of the 180-
day period rendered the assessment final and executory.
The CIR, however, maintained that Lascona's failure to timely file an
appeal with the CTA after the lapse of the 180-day reglementary
period provided under Section 228 of the NIRC resulted to the
finality of the assessment.
CTA, in its Decision,7 nullified the subject assessment. It held that in
cases of inaction by the CIR on the protested assessment, Section 228
of the NIRC provided two options for the taxpayer: (1) appeal to the
CTA within thirty (30) days from the lapse of the one hundred eighty
(180)-day period, or (2) wait until the Commissioner decides on his
protest before he elevates the case.
The CIR moved for reconsideration. It argued that in declaring the
subject assessment as final, executory and demandable, it did so
pursuant to Section 3 (3.1.5) of Revenue Regulations No. 12-99 dated
September 6, 1999 which reads, thus:
If the Commissioner or his duly authorized representative fails to act
on the taxpayer's protest within one hundred eighty (180) days from
date of submission, by the taxpayer, of the required documents in
support of his protest, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from the lapse of the said 180-day
period; otherwise, the assessment shall become final, executory and
demandable.
On March 3, 2000, the CTA denied the CIR's motion for
reconsideration for lack of merit.8 The CTA held that Revenue
Regulations No. 12-99 must conform to Section 228 of the NIRC. It
pointed out that the former spoke of an assessment becoming final,
executory and demandable by reason of the inaction by the
Commissioner, while the latter referred to decisions becoming final,
executory and demandable should the taxpayer adversely affected by
the decision fail to appeal before the CTA within the prescribed
period. Finally, it emphasized that in cases of discrepancy, Section
228 of the NIRC must prevail over the revenue regulations.
HELD:
The Supreme Court declared that Lasconas appeal was timely filed
on April 12, 1999 before the CTA. The appeal was made within 30
days after receipt of the copy of the decision, reckoned from March
12, 1999 when Lascona received the Letter dated March 3, 1999.
In case the CIR failed to act on the disputed assessment within the
180-day period from date of submission of documents, a taxpayer can
either: (1) file a petition for review with the Court of Tax Appeals
within 30 days after the expiration of the 180-day period; or (2) await
the final decision of the Commissioner on the disputed assessments
and appeal such final decision to the Court of Tax Appeals within 30
days after receipt of a copy of such decision. These options are
mutually exclusive and resort to one bars the application of the other.
In arguing that the assessment became final and executory by the sole
reason that petitioner failed to appeal the inaction of the
Commissioner within 30 days after the 180-day reglementary period,
respondent, in effect, limited the remedy of Lascona, as a taxpayer,
under Section 228 of the National Internal Revenue Code to just one,
that is to appeal the inaction of the Commissioner on its protested
assessment after the lapse of the 180-day period. This is incorrect.
The word decisions in paragraph 1, Section 7 of Republic Act No.
1125, has been interpreted to mean the decisions of the CIR on the
protest of the taxpayer against the assessments. Taxpayers cannot be
left in quandary by the Commissioners inaction on the protested
assessment. The taxpayers must be informed informed of its action in
order that the taxpayer should be able to take recourse to the tax court
at the opportune time. Finally, as pointed out by the Court of Tax
Appeals, to adopt the interpretation of the Commissioner will not
only sanction inefficiency, but will likewise condone the Bureau of
Internal Revenues inaction.