As we start 2024, we look back at key tax cases decided by the Supreme Court in 2023.
These cases answer the following intriguing questions:
Is the Tax Reform for Acceleration and Inclusion (TRAIN) Act constitutional?
Can a Formal Assessment Notice (FAN) against a corporate taxpayer be validly served on its security guard?
In a criminal tax case, is the final decision of the CIR on a disputed assessment still required for the BIR to collect delinquent tax in the same criminal case?
With Republic Act No. 11576, how does one resolve the conflict between the jurisdictional amounts for the Court of Tax Appeals and regular courts?
What qualifies as a “false return” to extend the prescriptive period to assess to ten years?
Is the TRAIN Act constitutional?
It is, according to ACT Teachers v. Duterte (G.R. No. 236118, 24 January 2023).
One of the interesting challenges to the TRAIN Act was the alleged lack of quorum in the House during the ratification of the then tax bill. Note that the Constitution requires a majority of each House to constitute a quorum to do business. To prove the lack of quorum, the petitioners presented a video uploaded to the Youtube channel of the House and a photograph showing a near-empty session hall during the ratification of the TRAIN Bicameral Conference Committee Report.
Unfortunately for the petitioners, the journal of the proceedings did not mention any infirmities in the passage of the TRAIN Act. In fact, the journal explicitly stated that there was indeed a quorum. And as any Constitutional law student will know, the contents of the journal is binding, as the journal is mandated by none other than the Constitution. Hence, between a video recording and photograph and the journal, the latter will win—as it did in this case.
The other challenges to the TRAIN Act revolved around due process arguments, particularly on the law’s impact on the poor. The Supreme Court dispensed with these arguments, stating the time-old reason that it will respect the wisdom of Congress.
On the challenge based on the alleged regressivity of TRAIN’s excise taxes, the Supreme Court repeated its pronouncements from previous cases—that the Constitution merely mandates the States to evolve a progressive system of taxation and does not prohibit the imposition of regressive taxes.
2. Can a Formal Assessment Notice (FAN) against a corporate taxpayer be validly served on a security guard?
No. According to Mannasoft Technology Corporation v. CIR (G.R. No. 244202, 10 July 2023), such service invalidates the FAN.
In this case, the Notice of Informal Conference and Preliminary Assessment Notice (PAN) were personally served to the taxpayer’s “Client Service Assistant.” The ensuing FAN was personally served to reliever security guard of the taxpayer.
The Supreme Court ruled that before the tax authorities can assess the proper taxes against a taxpayer, the taxpayer must be properly notified of its findings. Due process requires the personal service of the FAN to the taxpayer or his or her duly authorized representative.
The Court found that the “client service assistant” and the reliever security guard were not duly authorized representatives, rendering the NIC, PAN, and FAN void.
Interestingly, the Court declared the invalidity of the FAN, despite the taxpayer actually receiving the FAN and filing a protest. The Court ruled that this was beside the point, as the BIR must strictly comply with due process requirements.
3. In a criminal tax case, is the final decision of the CIR on a disputed assessment still required for the BIR to collect delinquent tax in the same criminal case?
It is a time-honored tax doctrine that a final assessment is not required for the filing of criminal cases such as tax evasion. However, People v. Mendez (G.R. No. 208310-11, 28 March 2023) answered another question: during the criminal case, is the final decision of the CIR on a disputed assessment still required for the BIR to collect delinquent tax in the same criminal case?
The Supreme Court said that the court need not wait for the CIR as it may determine the civil liability for unpaid taxes during the criminal case.
The Court also gave helpful guidelines for the prosecution of criminal tax law violations and the corresponding civil liability for unpaid taxes:
A final assessment is not a precondition to collect delinquent taxes in a pending criminal tax case. The criminal action is deemed a collection case. The government must prove both 1) the guilt of the accused by proof beyond reasonable doubt and 2) the accused’s civil liability for taxes by competent evidence.
If before the criminal action is instituted, there is already a pending civil suit for collection or a petition for review on an assessment in the Court of Tax Appeals, the civil suit for collection or the petition for review shall be suspended until final judgment is rendered in the criminal action. The civil case may also be consolidated in the criminal action—if so, then the judgment in the criminal action shall include a finding of the accused’s civil liability for unpaid taxes relative to the criminal case.
4. With Republic Act No. 11576, how does one resolve the conflict between the jurisdictional amounts for the Court of Tax Appeals (CTA) and regular courts?
Republic Act No. 11576 effective on 21 August 2021, increasing the jurisdictional amounts for cases filed with the regular courts. Claims amounting to more than P2,000,000.00 shall be filed with the RTC. While claims amounting to P2,000,000.00 and below shall be filed with the first-level courts.
This caused confusion as the CTA Law stated that the CTA had exclusive and original jurisdiction over criminal offenses entailing tax claims amounting to P1,000,000.00 or more. With the CTA Law and R.A. 11576 both in effect, everyone was wondering where claims amounting to P1,000,000.00 should be filed—with the CTA? With the regular courts? Where?
People v. Mendez clarified the matter with the following rules:
The CTA retains exclusive original jurisdiction over tax collection cases involving P1,000,000.00 or more;
Those tax collection cases with less than P1,000,000.00 shall be with the proper first-level courts. These cases may be appealed to the relevant RTC;
The CTA retains exclusive original jurisdiction over criminal offenses where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is P1,000,000.00 or more; and
Those criminal cases where the principal amount of taxes and fees is less than P1,000,000.00 shall be with the proper low-level courts, with appeals to the relevant RTC.
Helpful guidelines indeed as we move on to 2024.
5. What constitutes a “false return” in order to extend the prescriptive period to assess to ten years?
The general rule states that the government’s right to assess must be exercised within three years from the day the return was filed or from the last day of filing the return, whichever is later.
The period to assess extends to ten years when there is a:
Failure to file a return, or
A waiver executed by the taxpayer and the BIR.
For the longest time, there had been legal basis to extend the assessment period to ten years when a return was deemed “false” due to mistakes, carelessness, or ignorance on the part of the taxpayer, i.e. false returns in general. That legal basis was the 1974 case of Aznar v. CTA (G.R. No. L-20569).
In McDonald’s Philippines Realty Corporation v. CIR (G.R. No. 247737, 08 August 2023), the Supreme Court has abandoned Aznar. In this case, the Supreme Court laid down the guidelines for the government to avail of the 10-year period for false returns.
For the 10-year period to apply to a false return, the following must be present:
The return contains an error or misstatement, and
Such error or misstatement was deliberate or willful.
False returns in general no longer trigger the 10-year period; the return’s errors or misstatements must have been done deliberately or willfully to do so. The CIR must prove this to use the 10-year period.
However, when there is prima facie evidence of falsity or fraud, then the burden is shifted to the taxpayer to refute the presumption. Prima facie evidence of falsity or fraud occurs when there is a substantial misstatement (via either an underdeclaration of sales or income or an overstatement of expenses or deductions) that exceeds the amounts declared in the return by 30%. If the taxpayer fails to refute the presumption, then the 10-year period applies. If the taxpayer is successful, then the CIR can no longer rely on the presumption.
The Supreme Court also laid down two due process requirements.
For the first due process requirement, the FAN must clearly state:
that the 10-year period is being applied, and
the bases of falsity or fraud, including the computation to determine the 30% misstatement.
For the second due process requirement, the BIR must not have acted in a manner inconsistent with the invocation of the 10-year period or have otherwise misled the taxpayer to believe that the basic 3-year period will be applied. The timing of the service of the FAN and the use of waivers to extend the impending expiration of the 3-year period are examples of actions inconsistent with the invocation of the 10-year period, as was seen in this case.
As we welcome the New Year, we also welcome more tax cases from the Supreme Court to guide us moving forward.
Mickey Ingles is the author of Tax Made Less Taxing. He was also the 2023 Bar Examiner for Tax.