Commissioner of Internal Revenue v.

Melchor Javier

GR 78953, July 31, 1991

Taxation Law

Facts:

Javiers wife received from Prudential Bank an amount of about $ 1M remitted by her sister abroad
through a US bank. It turned out that the amount of $ 1M was a clerical error and should have been $1K
only. The US bank sued the Javiers, one of which is estafa for failing to return what was not theirs.
Meanwhile, Javier filed his income tax return for that taxable year of 1977, stating his usual gross and
net income. Concerning the excess income, he added a footnote in his return stating that: Taxpayer
was recipient of some money received from abroad which he presumed to be a gift but turned out to be
an error and is now subject of litigation.

The BIR, however, assessed him for deficiency income and demanded that the tax for the amount
mistakenly received and which he was able to dispose be paid. A 50% fraud penalty for filing a fraudulent
return was likewise imposed.

Issue 1: W/N the remittance or income received by error and subject to litigation is taxable

Ruling:

Issue 2: W/N Javier is liable for 50% fraud penalty for merely stating in a footnote in his return an
income as erroneously received and not declaring it as his income

Ruling: No. Javier is not liable for the 50% fraud penalty because he did not conceal the fact that he
received an income although it was subject of litigation. Fraud must be actual and constructive. This
means that there must be an intentional wrongdoing in order to evade taxes. Not declaring a certain
income but indicating it in a footnote for the BIR to investigate and determine if it is taxable is clearly
not fraudulent.