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CIR V JAVIER

July 31, 1991


Sarmiento J
Rods
SUMMARY: This is the so called million-dollar case. Javier erroneously received $1million
from the US, and a case was filed against them to return the money. When they filed an
Income Tax Return, CIR wanted to assess 50% penalty for fraud for not reporting such
income. CTA removed the penalty, and SC upheld CTA decision, saying that there was a
footnote which basically showed that Javier spouses did not intend to defraud the
government.

DOCTRINE: Under sec 72 of the tax code, a taxpayer who files a false return is liable to pay the
fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been
made on the basis of return filed before the discovery of the falsity or fraud.
Fraud must amount to intentional wrong doing with the sole object of avoiding tax. Mere
mistake cannot be considered fraudulent.
Implied: Income wrongfully received is still taxable, based on the events in this case.

FACTS:
Victoria Javier, wife of respondent Javier, received from Prudential Bank $999,973.70 remitted by
her sister Mrs. Dolores Ventosa, through banks in the US including Mellon Bank. Mellon filed a case
in CFI Rizal against Javier claiming that the remittance of $1million was a clerical error, and it
should have been $1000 only, praying the excess be returned, since the Javiers were only trustees
of an implied trust for the benefit of Mellon. Sps Javier were charged with estafa for
misappropriating, misapplying, and converting the money to their own personal use.
A year after, Javier filed his Income Tax Return for taxable year 1977 which showed gross income of
P53K, and net income P48K and stating in a footnote 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.

Acting Commissioner of Internal Revenue assessed deficiency taxes P1,615.96 and P9.28million as
deficiency assessments for years 1976, 1977 respectively. Javier agreed to pay 1976 deficiency, but
prayed that the final court decision on the case filed against him be waited. CIR sent a letter protest,
saying that the amount of the erroneous remittance that they disposed were taxable. It imposed
50% fraud penalty against them. CTA deleted the 50% fraud penalty upon appeal, saying that
there was no fraud.
ISSUES: WON there was actual fraud which would justify the 50% penalty
RULING: No, there was no actual fraud
RATIO:

Under sec 72 of the tax code, a taxpayer who files a false return is liable to pay the fraud penalty of
50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of
return filed before the discovery of the falsity or fraud.
The SC agrees with the CTA, quoted the latter: "Taxpayer was the recipient of some money from
abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation
that it was an "error or mistake of fact or law" not constituting fraud, that such notation was
practically an invitation for investigation and that Javier had literally "laid his cards on the table."
In Aznar v CA, it was said that the fraud contemplated by the law is actual, not constructive, and
must be intentional fraud. It must amount to intentional wrong-doing with the sole object of
avoiding tax. Mere mistake cannot be considered fraudulent. Fraud is never imputed and the courts
never sustain findings of fraud upon circumstances which, at
most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the
purpose of tax evasion.
In this case , there was no actual and intentional fraud. The government was not induced to give up
some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper
assessment of tax liabilities because Javier did not conceal anything.