Commissioner of Internal Revenue vs Kudos Metal Corporation

Gr. No. 178087 May 5, 2010

Topic: The prescriptive period on when to assess taxes benefits both the government and the
taxpayer. Exceptions extending the period to assess must, therefore, be strictly construed.

Facts:
On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income Tax
Return (ITR) for the taxable year 1998. On September 7, 1999, the Bureau of Internal Revenue
(BIR) served upon respondent three Notices of Presentation of Records. Respondent failed to
comply with these notices, hence, the BIR issued a Subpeona Duces Tecum dated September 21,
2006.
On December 10, 2001, Nelia Pasco (Pasco), respondents accountant, executed a Waiver
of the Defense of Prescription, followed by a second Waiver of Defense of Prescription, also
executed by Pasco.
In September 26, 2003 – more than three years from the filing of KMC of its ITR,
a Formal Letter of Demand with Assessment Notices for taxable year was issued by the
Commissioner of Internal Revenue (CIR) demanding KMC to pay P25,624,048.76 in taxes.
Respondent challenged the assessments by filing its Protest on Various Tax Assessments on
December 3, 2003
Ruling of the Court of Tax Appeals, Second Division

Believing that the governments right to assess taxes had prescribed, respondent filed
on August 27, 2004 a Petition for Review with the CTA. The CTA Second Division issued a
Resolution canceling the assessment notices issued against respondent for having been issued
beyond the prescriptive period. It found the first Waiver of the Statute of Limitations incomplete
and defective for failure to comply with the provisions of Revenue Memorandum Order (RMO)
No. 20-90. The waiver failed to indicate the date of acceptance. Such date of acceptance is
necessary to determine whether the acceptance was made within the prescriptive period; the fact of
receipt by the taxpayer of his file copy was not indicated on the original copy. The requirement to
furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the
document but also of the acceptance by the BIR and the perfection of the agreement.
The subject waiver is therefore incomplete and defective. As such, the three-year
prescriptive period was not tolled or extended and continued to run.
Petitioner moved for reconsideration but the CTA Second Division denied the motion.
Ruling of the Court of Tax Appeals, En Banc
On appeal, the CTA En Banc affirmed the cancellation of the assessment notices. It found that the
first waiver was still invalid based on the grounds stated by the CTA Second Division.
 Assuming arguendo that the first waiver is valid, the second waiver is invalid for violating Section
222(b) of the 1997 Tax Code which mandates that the period agreed upon in a waiver of the statute
can still be extended by subsequent written agreement, provided that it is executed prior to the
expiration of the first period agreed upon. As previously discussed, the exceptions to the law on
prescription must be strictly construed. In the case at bar, the period agreed upon in the subject first
waiver expired on December 31, 2002. The second waiver in the instant case which was supposed
to extend the period to assess to December 31, 2003 was executed on February 18, 2003 and was
notarized on February 19, 2003. Clearly, the second waiver was executed after the expiration of the
first period agreed upon. Consequently, the same could not have tolled the 3-year prescriptive
period to assess.
Petitioner sought reconsideration but the same was unavailing.
Issue
WHETHER OR NOT THE COURT OF TAX APPEALS EN BANC ERRED IN RULING
THAT THE GOVERNMENTS RIGHT TO ASSESS UNPAID TAXES OF RESPONDENT
PRESCRIBED.
Held:
The petition is bereft of merit.
Section 203 of the National Internal Revenue Code of 1997 (NIRC) mandates the
government to assess internal revenue taxes within three years from the last day prescribed by law
for the filing of the tax return or the actual date of filing of such return, whichever comes
later. Hence, an assessment notice issued after the three-year prescriptive period is no longer valid
and effective. Exceptions however are provided under Section 222 of the NIRC.
Petitioner does not deny that the assessment notices were issued beyond the three-year
prescriptive period, but claims that the period was extended by the two waivers executed by
respondents accountant. We do not agree.
Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only
be extended upon a written agreement between the CIR and the taxpayer executed before the
expiration of the three-year period. RMO 20-90 and RDAO 05-01 lay down the procedure for the
proper execution of the waiver, to wit;

(PWEDE TO ALISIN. NILAGAY KO LANG FOR READING PURPOSES)

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase but not after ______
19 ___, which indicates the expiry date of the period agreed upon to assess/collect the tax after the
regular three-year period of prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case
of a corporation, the waiver must be signed by any of its responsible officials. In case the authority
is delegated by the taxpayer to a representative, such delegation should be in writing and duly
notarized.
3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has
accepted and agreed to the waiver. The date of such acceptance by the BIR should be
indicated. However, before signing the waiver, the CIR or the revenue official authorized by him
must make sure that the waiver is in the prescribed form, duly notarized, and executed by the
taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before
the expiration of the period of prescription or before the lapse of the period agreed upon in case a
subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the
case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The
fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show
that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement.

A perusal of the waivers executed by respondents accountant reveals the following infirmities:

1. The waivers were executed without the notarized written authority of Pasco to sign the
waiver in behalf of respondent.

2. The waivers failed to indicate the date of acceptance.

3. The fact of receipt by the respondent of its file copy was not indicated in the original copies
of the waivers.

Due to the defects in the waivers, the period to assess or collect taxes was not
extended. Consequently, the assessments were issued by the BIR beyond the three-year period and
are void.
We find no merit in petitioners claim that respondent is now estopped from claiming
prescription since by executing the waivers, it was the one which asked for additional time to
submit the required documents. The doctrine of estoppel cannot be applied in this case as an
exception to the statute of limitations on the assessment of taxes considering that there is a detailed
procedure for the proper execution of the waiver, which the BIR must strictly follow. The doctrine
of estoppel cannot give validity to an act that is prohibited by law or one that is against public
policy. It should be resorted to solely as a means of preventing injustice and should not be permitted
to defeat the administration of the law, or to accomplish a wrong or secure an undue advantage, or
to extend beyond them requirements of the transactions in which they originate.
 Having caused the defects in the waivers, the BIR must bear the consequence. It cannot
shift the blame to the taxpayer. To stress, a waiver of the statute of limitations, being a derogation
of the taxpayers right to security against prolonged and unscrupulous investigations, must be
carefully and strictly construed.

WHEREFORE, the petition is DENIED. The assailed Decision dated March 30,
2007 and Resolution dated May 18, 2007 of the Court of Tax Appeals are hereby AFFIRMED.
 ARTURO M. TOLENTINO
vs
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE

G.R. No. 115455 August 25, 1994

Facts:
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross
selling price or gross value in money of goods or properties sold, bartered or exchanged or
of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks
to widen the tax base of the existing VAT system and enhance its administration by
amending the National Internal Revenue Code.

The petitioner claims that VAT is regressive and that it violates the requirement
that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve a
progressive system of taxation.” It also argues that the law contravenes the mandate of
Congress to provide for a progressive system of taxation because the law imposes a flat
rate of 10% and thus places the tax burden on all taxpayers without regard to their ability
to pay. Petitioners contend that as a result of the uniform 10% VAT, the tax on consumption
goods of those who are in the higher-income bracket, which before were taxed at a rate
higher than 10%, has been reduced, while basic commodities, which before were taxed at
rates ranging from 3% to 5%, are now taxed at a higher rate.

The respondents contends that in fact it distributes the tax burden to as many goods
and services as possible particularly to those which are within the reach of higher-income
groups, even as the law exempts basic goods and services. It is thus equitable. The goods
and properties subject to the VAT are those used or consumed by higher-income groups.
These include real properties held primarily for sale to customers or held for lease in the
ordinary course of business, the right or privilege to use industrial, commercial or scientific
equipment, hotels, restaurants and similar places, tourist buses, and the like. On the other
hand, small business establishments, with annual gross sales of less than P500,000, are
exempted.
Issue:
Whether RA 7166 violates the principle of progressive system of taxation as provided for
in Article VI 28(1) of the Constitution.
Held:
The Constitution does not really prohibit the imposition of indirect taxes which,
like the VAT, are regressive. Regressivity is not a negative standard for courts to enforce.
What Congress is required by the Constitution to do is to "evolve a progressive system of
taxation." This is a directive to Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity and the reduction of social,
economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to
"quality education" (Art. XIV, § 1). These provisions are put in the Constitution as moral
incentives to legislation, not as judicially enforceable rights.
Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects
of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, §3,
amending §102 (b) of the NIRC), while granting exemptions to other transactions.
 FRANCISCO I. CHAVEZ vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ,
REALTY OWNERS ASSOCIATION OF THE PHILIPPINES, INC.

Facts:

Section 21 of Presidential Decree No. 464 provides that every five years starting
calendar year 1978, there shall be a provincial or city general revision of real property
assessments. The revised assessment shall be the basis for the computation of real property
taxes for the five succeeding years. However, Executive Order No. 1019 was issued,
which deferred the collection of real property taxes based on the 1984 values to January 1,
1988 instead of January 1, 1985.
On November 25, 1986, President Corazon Aquino issued Executive order No. 73.
It states that beginning January 1, 1987, the 1984 assessments shall be the basis of the real
property collection. Thus, it effectively repealed Executive Order No. 1019

The petitioner, Francisco I. Chavez, is a taxpayer and an owner of three parcels of

land. He alleges the following: that Executive Order No. 73 accelerated the application of
the general revision of assessments to January 1, 1987 thereby mandating an excessive
increase in real property taxes by 100% to 400% on improvements, and up to 100% on
land; that any increase in the value of real property brought about by the revision of real
property values and assessments would necessarily lead to a proportionate increase in real
property taxes; that sheer oppression is the result of increasing real property taxes at a
period of time when harsh economic conditions prevail; and that the increase in the market
values of real property as reflected in the schedule of values was brought about only by
inflation and economic recession.

The Office of the Solicitor General argues against the petition. Petitioner questions
the constitutionality of Executive Order No. 73 insofar as the revision of the assessments
and the effectivity thereof are concerned.

Issue:

Whether or not Executive Order No. 73 is unconstitutional.

Held:

We agree with the Office of the Solicitor General that the attack on Executive Order
No. 73 has no legal basis as the general revision of assessments is a continuing process
mandated by Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree
No. 464 which should be challenged as constitutionally infirm. However, Chavez failed to
raise any objection against said decree.

Without Executive Order No. 73, the basis for collection of real property taxes will
still be the 1978 revision of property values. Certainly, to continue collecting real property
taxes based on valuations arrived at several years ago, in disregard of the increases in the
value of real properties that have occurred since then, is not in consonance with a sound
tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system,
requires that sources of revenues must be adequate to meet government expenditures and
their variations.
 TAGANITO MINING CORPORATION VS. COMMISSIONER OF INTERNAL
REVENUE
CTA Case No. 4702 April 28, 1995

Facts:
Taganito Mining Corporation (TMC) is a domestic corporation expressly granted a
permit by the government via an operating contract to explore, develop and utilize mineral
deposits found in a specified portion of a mineral reservation area located in Surigao del
Norte and owned by the government. In exchange, TMC is obliged to pay royalty to the
government over and above other taxes.

During July to December 1989, TMC removed, shipped and sold substantial
quantities of Beneficiated Nickel Silicate ore and chromite ore and paid excise taxes in the
amount of Php6,277,993.65 in compliance with Sec.151(3) of the Tax Code. The 5% excise
tax was based on the amount and weight shown in the provisional invoice issued by TMC.
The metallic minerals are then shipped abroad to Japanese buyers where the minerals were
analyzed allegedly by independent surveyors upon unloading at its port of destination.
Analysis abroad would oftentimes reveal a different value for the metallic minerals from
that indicated in the temporary/provisional invoice submitted by TMC. Variance is in the
“market values” in the provisional invoice and that indicated in the final calculation sheet
presented by the buyers.

Variances occur in the weight of the shipment or the price of the metallic minerals
per kilogram and sometimes in their metallic content resulting in discrepancies in the total
selling price. It is always the price indicated in the final invoice that is determinative of the
amount that the buyers will eventually pay TMC. TMC had no quarrel with the price they
would receive from the clients for the metallic minerals sold, but claims that there has been
overpayment of excise taxes already paid to the government declaring that the 5% excise
tax were based on the amount indicated in the provisional invoice, and if the excise tax
would be based on the final invoice, they would be paying less.

The petitioner claims that it is entitled to a refund of excise taxes in the amount of
P362,628.82 because the actual market value that should be made the basis of the taxes is
the amount specified in the independent surveyor abroad after analysis of the products and
indicated in the final calculation sheet.

Respondent in her answer presented as defenses the following: (1) claim for refund
is subject pending administrative investigation; (2) tax was collected in accordance with
law; (3) burden of proof is upon the taxpayer to establish the right to refund;(4) mere
allegations of refundability do not ipso facto merit refund claimed; (5) claims for refund of
taxes are construed strictly against claimant, it being in the nature of an exemption;

Issue:
Whether or not the actual market value that should be used should be the market value after
the assessment abroad was conducted or the market value of the minerals at the time these
minerals were moved away from the position it occupied.

Held:

Section 151(3) of the Tax Code provides:

“On all metallic minerals, a tax of five percent (5%) based on the actual
market value of the gross output thereof at the time of removal, in the case
of those locally extracted or produced: or the value used by the Bureau of
Customs in determining tariff and customs duties, net of excise tax and
value-added tax, in case of importation”

The law refers to the actual market value of the minerals at the time these minerals
were moved away from the position it occupied, i.e. Philippine valuation and analysis
because it is in this country where these minerals were extracted, removed and eventually
shipped abroad. To reckon the actual market value at the time of removal is also consistent
with the essence of an excise tax. It is a charge upon the privilege of severing or extracting
minerals from the earth, and is due and payable upon removal of the mineral products from
its bed or mines (Republic Cement vs. Comm, 23 SCRA 967).
The law is clear. It does not speak of actual market value at the time the mineral
products are unloaded at the country of destination neither does it speak of the selling price
as the basis of the excise tax. The law even requires payment of excise taxes upon the
removal of the mineral product or quarry resources from the locality where mined or upon
removal from customs custody in the case of importations (Sec. 151© of the Tax Code). It
would then necessitate an analysis of these metallic minerals upon its removal to be able
to accomplish the payment of excise taxes as required by law.
Furthermore, it would be impossible for one to comply with the date prescribed by
law for payment of excise taxes if one has to wait for the final analysis to be done in the
country where it is to be shipped and certainly impractical. This set-up established by the
petitioner is contrary to the principle of administrative feasibility which is one of the basic
principles of a sound tax system. Tax laws should be capable of convenient, just and
effective administration which is why it fixes a standard or a uniform tax base upon which
taxes should be paid. In the case of excise taxes on mineral and mineral products, the basis
provided by law is the actual market value of these minerals at the time of removal.
 ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA.,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE

G.R. No. L-25043 April 26, 1968

Facts:

Antonio Roxas, Eduardo Roxas and Jose Roxas, inherited from their parents 19,000
hectares, situated in the municipality of Nasugbu, Batangas province. To manage the
property, said children formed a partnership called Roxas y Compania.

The tenants who have all been tilling the lands in Nasugbu for generations
expressed their desire to purchase from Roxas y Cia. The Roxas brothers agreed to sell
13,500 hectares to the Government for distribution to actual occupants for a price of
P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out
however that the Government did not have funds to cover the purchase price, and so a
special arrangement was made for the Rehabilitation Finance Corporation to advance to
Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands
proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the
farmers to buy the lands for the same price but by installment, and contracted with the
Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly
amortizations paid by the farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain
of P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax
purposes as gain on the sale of capital asset held for more than one year pursuant to Section
34 of the Tax Code.

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y
Cia the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00
compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952
plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's
tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the
amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who
derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered
a real estate dealer and is liable to pay the corresponding fixed tax. The Commissioner of
Internal Revenue justified his demand for the fixed tax on dealers of securities against
Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of
securities.
 The deficiency income taxes resulted from the inclusion as income of Roxas y Cia
of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the
Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income
of various business expenses and contributions claimed by Roxas y Cia and the Roxas
brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them
to the farmers on installment, the Commissioner considered the partnership as engaged in
the business of real estate, hence, 100% of the profits derived therefrom was taxed.

The Roxas brothers protested the assessment but inasmuch as said protest was
denied, they instituted an appeal in the Court of Tax Appeals. The Tax Court heard the
appeal and sustained the assessment. Not satisfied, Roxas y Cia. and the Roxas brothers
appealed to this Court. The Commissioner of Internal Revenue did not appeal.

Issue:

Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100%
taxable?

A real estate dealer any person engaged in the business of buying, selling,
exchanging, leasing or renting property on his own account as principal and holding
himself out as a full or part-time dealer in real estate or as an owner of rental property or
properties rented or offered to rent for an aggregate amount of three thousand pesos or
more a year. The fact that there were hundreds of vendees and them being paid for their
respective holdings in installment for a period of ten years, it would nevertheless not make
the vendor Roxas y Cia. a real estate dealer during the 10-year amortization period

It should be borne in mind that the sale of the Nasugbu farm lands to the very
farmers who tilled them for generations was not only in consonance with, but more in
obedience to the request and pursuant to the policy of our Government to allocate lands to
the landless. It was the bounden duty of the Government to pay the agreed compensation
after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide
them among the farmers at very reasonable terms and prices. However, the Government
could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to the farmers in the same
way and under the same terms as would have been the case had the Government done it
itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution
expressing the people's gratitude.

The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a taxpayer.
It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg". And, in order to maintain the general public's trust and confidence in
the Government this power must be used justly and not treacherously. It does not conform
with Our sense of justice in the instant case for the Government to persuade the taxpayer
to lend it a helping hand and later on to penalize him for duly answering the urgent call.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question.
Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital
assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent
of 50%.