CASE: COMMISSIONER OF INTERNAL REVENUE V.

MELCHOR JAVIER
G.R. No. 78953
July 31, 1991

FACTS:
Javier’s 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:
Whether or not the remittance or income received by error and subject to litigation is
taxable.

HELD:
In this case, such issue was only an academic one since Javier himself volunteered to pay
the deficiency income tax. He was self-convinced and acted as the beneficial owner of the
erroneously received amount so he is liable for it.

Nonetheless, one out of three judges of the CTA opined that the amount in question is not
taxable. Thus, even without the footnote, failing to declare the mistaken remittance is not
fraudulent.

The issue was of first impression in Philippine jurisdiction (the case was decided by SC in
1991). In US courts, they use the“claim of right doctrine” to make taxpayers liable for every
income received, erroneously or not, and regardless of any contingent or absolute obligation to
repay them. As long as the taxpayer has control or unrestricted disposition of the income, he will
be liable for income tax in the taxable year he received it even if he might have to return it later.

Issue 2:
Whether or not 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.

HELD:
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.