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Prescription of the right to assess tax

(Article published in the Aug 16, 2006 issue of Manila Standard Today)

“Read and weep.”  That is what I say when I hand over a copy of the National Internal Revenue Code to some well-meaning lawyer from abroad who, for some perverse reason, wants to learn something about our taxes.

 Almost three hundred sections to read, most of them written in what looks like English but, with portions that are just as understandable as the hieroglyphics.  And a lot to weep about: three major kinds of exactions, one when you do business or exercise a profession, or otherwise earn some income; another when you spend what you earn or not earn; and, finally, a third when you pass on what remains to another.

 But the weeping turns to wailing when, sometimes, the courts, pushing the principle that “taxes are the lifeblood of the government” to the limit, construct corollary rules of presumption that tilt the balance further against the taxpayer.  One such ruling deals with Section 203 of the Tax Code.     

           This section, limits the time, as a general rule, within which the Commissioner of Internal Revenue may issue an assessment for internal revenue taxes to “three (3) years after the last day prescribed by law for the filing of the return.”  If the return is actually filed after the last day fixed by law for its filing, the three (3) year period is counted from the day the return is filed.  If the return is filed before the said last day, it is, for purposes of counting the said period, considered to have been filed on the last day.  After the expiration of that three year period, the right of the Commissioner to collect that specific tax liability lapses.

The crucial question is when the Commissioner should be deemed to have “made” his assessment.  Is the assessment to be deemed “made” when the Commissioner sends out the assessment from his office? Or is it when the taxpayer receives it?

 As early as 1959, the Supreme Court has held, in the case of Collector v. Bautista (105 Phil. 1326), that the assessment is deemed made when the notice of assessment is released, mailed or sent by the Commissioner.  Thus, if the Commissioner sends out his notice of assessment within the three year period, but, because it is sent by snail mail, the notice is received by the taxpayer after the expiration of the period, the Commissioner is nevertheless deemed to have made his assessment within the period. 

Many, including myself, consider it an unfair rule.  The purpose of limiting the right of the Commissioner to make his assessment is to give the taxpayer peace of mind after the lapse of the three (3) year period  for the Commissioner to make his assessment.  But, how can he have peace of mind, if he knows that a notice of assessment can still validly reach him anytime beyond that period provided it was released by the Commissioner within the period?

 Two weeks ago, the Supreme Court, in the case of Barcelon Roxas Securities v. the Commissioner of Internal Revenue, promulgated on 07 August 2006, pushing further the relaxation done in 1966, where it held that an assessment not received cannot be final as to the taxpayer (Republic v. De La Rama, L-21108, November 29, 1966), finally removed the harshness of that rule. 

The two names in the masthead of the taxpayer, if I am not mistaken, are the surnames of its founders, Messrs. Augusto Barcelon and Sixto Roxas, Jr., shinning stars in the banking constellation of a by-gone age of banking, together with Chester Babst, Willy Tecson, Jobo Fernandez, and other greats.  It is engaged in the business of trading securities, mostly then shares of stock. 

 After auditing its income tax return for the year 1987 which it filed one day before the deadline on the 15th day of  April the following year, the Commissioner of Internal Revenue issued an assessment of Php 826,698.31 after disallowing certain expenses such as salaries, bonuses, and allowances paid to its officers and employees.  The reason for the disallowance was that the securities firm did not withhold the applicable withholding taxes.

The BIR’s assessment against Barcelon Roxas was covered by Formal Assessment Notice N. FAN-1-87-91-000647 dated 01 February 1991.  The Commissioner claims, in a litigation that developed regarding the assessment, that he sent the notice to Barcelon Roxas through registered mail on 06 February 1991.  The taxpayer, though, denies having received it. Hence, the Commissioner enforced his assessment administratively by issuing a warrant of distraint and/or levy on 17 March 1992.  The taxpayer went to court.

The securities firm’s last day for filing its income tax return for 1987 is, was, as previously stated, on April 15, 1988.  The BIR collected nearly four years after the return, which though filed on 14 April 1988, was deemed filed on the following day.  But Commissioner claims that he mailed the notice of assessment to Barcelon Roxas within three years after April 15, 1988.  Since the statute talks of the Commissioner “making an assessment”, the question is whether, under the circumstances, the Commissioner had exercised his right to collect within the allowable period.

 The Supreme Court ruled in favor of the securities firm, now known as UBP Securities, Inc. “UBP” is, of course, to signify its new owner, namely Union Bank of the Philippines.

Two significant points, I read, from the ponencia of the high court.  The first is a reiteration of previous jurisprudence that the presumption that the Commissioner did his job within the allowable period arises, as a first condition, only when the fact of sending out, is adequately proven.  In other words, the presumption of having made the assessment cannot arise from the presumption that the BIR did its actual releasing.  The actual release must be proven as a fact and cannot arise from the general presumption, enjoyed by everyone, of regularity in the performance of one’s duties.  A presumption cannot be based on another presumption.

The advance in tax law, however, is that, in addition to complying with the first condition, “the rule does not dispense with the requirement that the taxpayer should actually receive, even beyond the prescriptive period, the assessment notice…”

 Thus, in situations where the taxpayer, as in the case of Barcelon Roxas, denies having received the assessment, it is not sufficient that the BIR  prove with competent evidence that it released the assessment.  It must also prove the fact of the taxpayer’s receipt.

 The Supreme Court ruled in favor of Barcelon Roxas because it denied having received the assessment, and, the BIR “was unable to present substantial evidence that such notice was, indeed, mailed or sent by the respondent [Commissioner of Internal Revenue] before the BIR’s right to assess had prescribed and that said notice was received by the petitioner.” (Bold supplied)

 Sometimes, the Supreme Court takes the side of the taxpayer in its disputes with the government.