CIR v. AYALA SECURITIES CORP.
CIR v CA & YMCA
FACTS:
 Ayala Securities Corporation, a domestic corporation organized
and existing under the laws of the Philippines, filed its income tax
returns with the office of the petitioner for its fiscal year which
ended on September 30, 1955. Attached to its income tax return
was the audited financial statements of the respondent
corporation as of September 30, 1955, showing a surplus of
P2,758,442.37.
 In 1961, CIR assessed and imposed 25% surtax on Ayala for its
accumulated surplus reflected on its income tax return for the
fiscal year which ended September 30, 1955
 Ayala protested against the assessment on its retained and
accumulated surplus pertaining to the taxable year 1955 and
sought reconsideration thereof for the reason that the said
assessment was issued beyond the five-year prescriptive period.
 The CTA reversed CIR’s decision and held that the assessment
made against Ayala was beyond the 5-yr prescriptive period
ISSUE: Whether or not the right to assess and collect the 25% surtax
has prescribed after five years
HELD: No. There is no such time limit on the right of the
Commissioner to assess the 25% surtax since there is no express
statutory provision limiting such right or providing for its
prescription. Hence, the collection of surtax is imprescriptible. The
underlying purpose of the surtax is to avoid a situation where the
corporation unduly retains its surplus earnings instead of declaring
and paying dividends to its shareholders. SC reverses the ruling of
the CTA.
III. ASSESSMENT
CONCEPT OF ASSESSMENT
Assess means to impose a tax; to charge with a tax; to declare a tax
to be payable; to apportion a tax to be paid or contributed, to fix a
rate; to fix or settle a sum to be paid by way of tax; to set, fix or
charge a certain sum to each taxpayer; to settle determine or fix the
amount of tax to be paid [84 C.J.S 74-750]
An assessment is the notice to the effect that the amount therein
stated is due from a taxpayer as a tax with a demand for payment of
the same within a stated period of time. [Commissioner v. CTA, 27
SCRA 1159]
Requisites for valid assessment:
(1) The taxpayer shall be informed in writing of the law and the facts
on which the assessment is made [Sec. 228, NIRC]
(2) An assessment contains not only a computation of tax liabilities,
but also a demand for payment within a prescribed period [CIR v.
PASCOR]
(3) An assessment must be served on and received by the taxpayer
[CIR v. PASCOR]
A. BASIS OF ASSESSMENT
1. Question of fact
2. Question of law
GR No 124043, October 14, 1998
FACTS:
The Young Men's Christian Association of the Philippines,
Inc. (YMCA) is established as "a welfare, educational and charitable
non-profit corporation." In 1980, YMCA earned an income of
P676,829.80 from leasing out a portion of its premises to small shop
owners, like restaurants and canteen operators, and P44,259.00
from parking fees collected from non-members.
In 1984, the Commissioner of Internal Revenue (CIR) issued an
assessment to YMCA for P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency expanded withholding
taxes on rentals and professional fees and deficiency withholding tax
on wages.
The YMCA protested the assessment but the CIR denied
the protest. The YMCA filed a petition for review with the Court of
Tax Appeals (CTA) which issued a ruling in favor of the YMCA.
The CTA found that the leasing of YMCA's facilities and the operation
of the parking lot are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of YMCA. The
facilities were leased to members and to service the needs of its
members and their guests. The parking was primarily for members
with stickers and they charged P.50 for non-members. The rentals
and parking fees were just enough to cover the costs of operation
and maintenance only. These earnings are channeled to support
YMCA's many activities and attainment of its objectives since the
membership dues are very insufficient to support its program.
The Court of Appeals (CA) initially decided in favor of the CIR.
However it later reconsidered its decision and upheld the CTA
decision in favor of YMCA organizations (such as YMCA) from any of
their properties, real or personal, be subject to the tax imposed by
the same Code. Private respondent is exempt from the payment of
property tax, but nit income tax on rentals from its property.
ISSUE 1: Can the CA depart from the findings of fact of the CTA
which is being supported by substantial evidence.
HELD: Factual findings of the CTA, when supported by substantial
evidence, will not be disturbed on appeal
It is a basic rule in taxation that the factual findings of the
CTA, when supported by substantial evidence, will not be disturbed
on appeal unless it is shown that the said court committed gross
error in the appreciation of facts.
In the present case, the Court of Appeals (in its initial
decision reversing the CTA) did not alter any fact or evidence. It
merely resolved the issue but the fact that it did so in a manner
different from that of the CTA did not necessarily imply a reversal of
factual findings. What the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA.
The distinction between a question of law and a question
of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the
doubt or difference arises as to what the law is on a certain state of
facts; there is a question of fact when the doubt or difference arises
as to the truth or falsehood of alleged facts. In the present case, the
CA did not doubt, much less change, the facts narrated by the CTA. It
merely applied the law to the facts. That its interpretation or
conclusion is different from that of the CTA is not irregular or
abnormal.
ISSUE 2: Is the rental income of the YMCA taxable?
HELD: Yes. The exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Sec. 27
of the NIRC:
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit,
regardless of the disposition made of such income, shall be subject to
the tax imposed under this Code.
;court is duty-bound to abide strictly by its literal meaning and to
refrain from resorting to any convoluted attempt at construction.
The said provision mandates that the income of exempt
organizations (such as YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Private
respondent is exempt from the payment of property tax, but nit
income tax on rentals from its property.
CYANAMID PHILIPPINES, INC. v. CA, CTA AND CIR
G.R. No. 108067 January 20, 2000
FACTS: Facts:
Petitioner is a corporation organized under Philippine laws and is a
wholly owned subsidiary of American Cyanamid Co. based in Maine,
USA. It is engaged in the manufacture of pharmaceutical products
and chemicals, a wholesaler of imported finished goods and an
imported/indentor. In 1985 the CIR assessed on petitioner a
deficiency income tax of P119,817) for the year 1981. Cyanamid
protested the assessments particularly the 25% surtax for undue
accumulation of earnings. It claimed that said profits were retained
to increase petitioner’s working capital and it would be used for
reasonable business needs of the company. The CIR refused to allow
the cancellation of the assessments, petitioner appealed to the CTA.
It claimed that there was not legal basis for the assessment because
1) it accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of
indebtedness 2) it is a wholly owned subsidiary of American
Cyanamid Company, a foreign corporation, and its shares are listed
and traded in the NY Stock Exchange. The CTA denied the petition
stating that the law permits corporations to set aside a portion of its
retained earnings for specified purposes under Sec. 43 of the
Corporation Code but that petitioner’s purpose did not fall within
such purposes. It found that there was no need to set aside such
retained earnings as working capital as it had considerable liquid
funds. Those corporations exempted from the accumulated earnings
tax are found under Sec. 25 of the NIRC, and that the petitioner is
not among those exempted. The CA affirmed the CTA’s decision.
ISSUE: Whether or not the accumulation of income was justified.
HELD: In order to determine whether profits are accumulated for
the reasonable needs of the business to avoid the surtax upon the
shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts. The
accumulated profits must be used within reasonable time after the
close of the taxable year. In the instant case, petitioner did not
establish by clear and convincing evidence that such accumulated
was for the immediate needs of the business.
To determine the reasonable needs of the business, the United
States Courts have invented the “Immediacy Test” which construed
the words “reasonable needs of the business” to mean the
immediate needs of the business, and it is held that if the
corporation did not prove an immediate need for the accumulation
of earnings and profits such was not for reasonable needs of the
business and the penalty tax would apply. (Law of Federal Income
Taxation Vol 7) The working capital needs of a business depend on
the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable,
the collection rate, the availability of credit and other similar factors.
The Tax Court opted to determine the working capital sufficiency by
using the ration between the current assets to current liabilities.
Unless, rebutted, the presumption is that the assessment is correct.
With the petitioner’s failure to prove the CIR incorrect, clearly and
conclusively, the Tax Court’s ruling is upheld.
B. ASSESSMENT PROCESS
1. Revenue Regulations No. 12-99 as amended by Revenue
Regulations No. 18-2013
a) Revenue Memorandum Order No. 26-2016
b) Revenue Memorandum Order No. 40-2019
2. Kinds of Assessment:
a) Voluntary Assessment or Self-Assessment
Under the self-assessment system, the taxpayer
calculates the tax by himself, (or through an accountant)
fills up his tax return, files it with the proper tax office, and
pays the tax due thereon, upon filing.
The process by which the tax is computed and
determined is what we call the "self-assessment" method,
and the resulting tax a "self-assessed" tax. The act of
tendering the payment of this self-assessed tax, on the
other hand, is referred to as "voluntary payment" or
"voluntary compliance."
b) Jeopardy Assessment
A tax assessment made by an authorized
Revenue Officer (RO) without the benefit of complete or
partial audit, in light of the RO’s belief that the assessment
and collection of the deficiency tax will be jeopardized by
delay caused by the taxpayer’s failure to: i) comply with
audit and investigation requirements to present his books
of accounts and/or pertinent records or ii.) Substantiate all
or any of the deductions, exemptions or credits claimed in
his return.
It is usually issued when statutory prescriptive
periods for the assessment or collection of taxes are about
to lapse due principally to the taxpayer’s fault.
c) Deficiency Assessment
Deficiency - amount still due and collectible from a
taxpayer upon audit or investigation. A deficiency tax has
to go through the process of filing the protest against the
assessment by the by the taxpayer and denial of such
protest by the BIR. [Mamalateo, 2008]
3. Taxpayer’s Part:
a) Self-Assessment
b) Filing of tax return
c) Payment of tax
4. Government’s Part:
a) Letter of Authority
**See Section C of Revenue Memorandum Order No. 43-
90 (Sep. 20, 1990) prescribing revised guidelines for
Examination of Returns and Issuance of Letters of
Authority to Audit. di ko mahanap to! 
CIR v. Sony Philippines, Inc.,
635 SCRA 234, G.R. No. 178697. November 17, 2010
Facts:
On November 24, 1998, the CIR issued Letter of Authority
No. 000019734 (LOA 19734) authorizing certain revenue officers to
examine Sony’s books of accounts and other accounting records
regarding revenue taxes for “the period 1997 and unverified prior
years.”
After the examination of said books, the CIR found out,
among others, that Sony Philippines is liable for deficiency taxes and
penalties for value added tax amounting to P11,141,014.41.
Sony Philippines contested such finding as it argued that the basis
used by the CIR to assess said deficiency were the records covering
the period of January 1998 through March 1998 which was a period
not covered by the letter of authority so issued. The CIR countered
that the LOA phrase “the period 1997 and unverified prior years”
should be understood to mean the fiscal year ending on March 31,
1998.
Eventually the case reached the Court of Tax Appeals and
the CTA decided agreed with Sony Philippines on this one. So did the
CTA en banc.
Issue: Whether or not the deficiency assessments against Sony
Philippines are valid?
Held: No. The LOA issued is clear on which period is covered by the
examination to be conducted. It’s only meant to cover the year
“1997 and unverified prior years” not the year 1998. The revenue
officers who examined the records covering the period of January to
March 1998 had exceeded the jurisdiction granted to them by the
LOA.
Further, the LOA which covered “1997 and unverified prior
years” is in violation of the principle that a Letter of Authority should
cover a taxable period not exceeding one taxable year. If the audit of
a taxpayer shall include more than one taxable period, the other
periods or years shall be specifically indicated in the LOA (as
embodied in Section C of Revenue Memorandum Order No. 43-90
dated September 20, 1990): A Letter of Authority should cover a
taxable period not exceeding one taxable year. The practice of
issuing L/As covering audit of "unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one
taxable period, the other periods or years shall be specifically
indicated in the L/A.
CIR v. DE LA SALLE UNIVERSITY INC.
G.R. No. 196596, November 09, 2016
FACTS:
• BIR issued to DLSU Letter of Authority (LOA) No. 2794
authorizing its revenue officers to examine the latter's books
of accounts and other accounting records for all internal
revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years
• May 19, 2004, BIR issued a Preliminary Assessment Notice
(PAN) to DLSU.
• August 18, 2004, the BIR through a Formal Letter of Demand
assessed DLSU the following deficiency taxes: (1) income tax
on rental earnings from restaurants/canteens and bookstores
operating within the campus;
(2) value-added tax (VAT) on business income; and
(3) documentary stamp tax (DST) on loans and lease contracts.
• The BIR demanded the payment of P17,303,001.12, inclusive of
surcharge, interest and penalty for taxable years 2001, 2002
and 2003.
• DLSU protested the assessment. The Commissioner failed to act
on the protest; thus, DLSU filed petition for review with the
CTA Division
CTA Division and CTA En Banc: DST assessment on the loan
transactions but retained other deficiency taxes. CTA En Banc ruled
the ff:
Tax on rental income
DLSU was able to prove that a portion of the assessed rental income
was used actually, directly and exclusively for educational purposes;
hence, exempt from tax. Rental income had indeed been used to pay
the loan it obtained to build the university's Physical Education -
Sports Complex.
However, other unsubstantiated claim for exemption must be
subjected to income tax and VAT.
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU proved its
remittance of the DST due on its loan and mortgage documents,
evidenced by the stamp on the documents made by a DST imprinting
machine.
Admissibility of DLSU's supplemental evidence
Supplemental pieces of documentary evidence were admissible even
if DLSU formally offered them upon MR. Law creating the CTA
provides that proceedings before it shall not be governed strictly by
the technical rules of evidence. (Affirmed by SC)
On the validity of the Letter of Authority
LOA should cover only one taxable period and that the practice of
issuing a LOA covering audit of unverified prior years is prohibited. If
the audit includes more than one taxable period, the other periods
or years shall be specifically indicated in the LOA.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending
2003 and Unverified Prior Years. Hence, the assessments for
deficiency income tax, VAT and DST for taxable years 2001 and 2002
are void, but the assessment for taxable year 2003 is valid.
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of DLSU's
evidence. It held that while DLSU successfully proved that a portion
of its rental income was transmitted and used to pay the loan
obtained to fund the construction of the Sports Complex, the rental
income from other sources were not shown to have been actually,
directly and exclusively used for educational purposes. (Affirmed by
SC)
ISSUE: Whether the entire assessment should be voided because of
the defective LOA
DLSU’s Argument:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any
indication of unverified prior years. An assessment issued based on
such defective LOA must also be void.
CIR’s Argument:
Commissioner submits that DLSU is estopped from questioning the
LOA's validity because it failed to raise this issue in both the
administrative and judicial proceedings.
HELD: The LOA issued to DLSU is not entirely void. The assessment
for taxable year 2003 is valid.
A LOA is the authority given to the appropriate revenue officer to
examine the books of account and other accounting records of the
taxpayer in order to determine the taxpayer's correct internal
revenue liabilities and for the purpose of collecting the correct
amount of tax, in accordance with Section 5 of the Tax Code, which
gives the CIR the power to obtain information, to summon/examine,
and take testimony of persons. The LOA commences the audit
process and informs the taxpayer that it is under audit for possible
deficiency tax assessment.
What this provision clearly prohibits is the practice of issuing LOAs
covering audit of unverified prior years. RMO 43-90 does not say
that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period,
the other periods or years must be specified.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending
2003 and Unverified Prior Years. The LOA does not strictly comply
with RMO 43-90 because it includes unverified prior years. This does
not mean, however, that the entire LOA is void. As the CTA correctly
held, the assessment for taxable year 2003 is valid because this
taxable period is specified in the LOA. DLSU was fully apprised that it
was being audited for taxable year 2003. Corollarily, the
assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-
90.
Wherefore, SC denied the petition of CIR and affirmed the ruling of
CTA En Banc.
b) Letter Notice
MEDICARD PHILIPPINES, INC. v. CIR
G.R. No. 222743 April 5, 2017
FACTS: MEDICARD is a health maintenance organization (HMO) that
provides prepaid health and medical insurance coverage to its
clients.
Finding some discrepancies between MEDICARD's Income
Tax Returns (ITR) and VAT Returns, the CIR informed MEDICARD and
issued a Letter Notice (LN). A PAN was issued against MEDICARD for
deficiency VAT. A FAN was received by MEDICARD on January 4,
2008 for alleged deficiency VAT for taxable year 2006 in the total
amount of Pl 96,614,476.69,10 inclusive of penalties.
MEDICARD raised the issue of lack of Letter of Authority
(LOA) on the part of the revenue officer who conducted the
examination. The CIR, on the other hand, posits that the LN is
enough compliance with the LOA requirement, arguing that the use
of computers to detect discrepancies dispenses with the
requirement of LOA.
Furthermore, the CIR argued that the amounts earmarked
and eventually paid by MEDICARD to medical service providers form
part of gross receipts for VAT purposes. The CTA EB sided with the
CIR.
ISSUE: Can the LN replace the LOA requirement? What is the status
of the assessment?
HELD: No, the LN cannot replace the LOA requirement.
An LOA is the authority given to the appropriate revenue officer
assigned to perform assessment functions. In the absence of such an
authority, the assessment or examination is a nullity.
The LN cannot replace the LOA required under the law even if the
same was issued by the CIR himself. Under RR No. 12-2002, LN is
issued to a person found to have underreported sales/receipts per
data generated under the RELIEF system. Upon receipt of the LN, a
taxpayer may avail of the BIR's Voluntary Assessment and
Abatement Program. If a taxpayer fails or refuses to avail of the said
program, the BIR may avail of administrative and criminal remedies,
particularly closure, criminal action, or audit and investigation. Since
the law specifically requires an LOA and RMO No. 32-2005 requires
the conversion of the previously issued LN to an LOA, the absence
thereof cannot be simply swept under the rug, as the CIR would
have it. In fact, Revenue Memorandum Circular No. 40-2003
considers an LN as a notice of audit or investigation only for the
purpose of disqualifying the taxpayer from amending his returns.
The revenue officers not having authority to examine MEDICARD in
the first place, the assessment issued by the CIR is inescapably void.
c) Persons Authorized to issue Letter of Authority
CIR v. Sony Philippines, Inc.,
635 SCRA 234, G.R. No. 178697. November 17, 2010
***same case lang to kanina
HELD: (Relate sa topic) Based on Section 13 of the Tax Code, a
Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of
a taxpayer for the purpose of collecting the correct amount of
tax.15 The very provision of the Tax Code that the CIR relies on
is unequivocal with regard to its power to grant authority to
examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and
Prescribe Additional Requirements for Tax Administration and
Enforcement. –
(A)Examination of Returns and Determination of tax Due. –
After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer
and the assessment of the correct amount of tax: Provided,
 however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any
taxpayer. x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue
officer can conduct an examination or assessment. Equally
important is that the revenue officer so authorized must not go
beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.
d) Examination of books of accounts and other accounting
records of taxpayers by revenue officers to determine
correct tax liability. [Sections 5B and 6A)
i. Best Evidence Obtainable [Section 6B]
CIR vs. HANTEX TRADING CO., INC.
G.R. No. 136975; March 31, 2005
Facts: Hantex Trading Co is a company organized under the
Philippines. It is engaged in the sale of plastic products, it imports
synthetic resin and other chemicals for the manufacture of its
products. For this purpose, it is required to file an Import Entry and
Internal Revenue Declaration (Consumption Entry) with the Bureau
of Customs under Section 1301 of the Tariff and Customs Code.
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of
Counter-Intelligence Division of the Economic Intelligence and
Investigation Bureau (EIIB), received confidential information that
the respondent had imported synthetic resin amounting to
P115,599,018.00 but only declared P45,538,694.57. Thus, Hantex
receive a subpoena to present its books of account which it failed to
do. The bureau cannot find any original copies of the products
Hentex imported since the originals were eaten by termites. Thus,
the Bureau relied on the certified copies of the respondent’s Profit
and Loss Statement for 1987 and 1988 on file with the SEC, the
machine copies of the Consumption Entries, Series of 1987,
submitted by the informer, as well as excerpts from the entries
certified by Tomas and Danganan. The case was submitted to the
CTA which ruled that Hentex have tax deficiency and is ordered to
pay, per investigation of the Bureau. The CA ruled that the income
and sales tax deficiency assessments issued by the petitioner were
unlawful and baseless since the copies of the import entries relied
upon in computing the deficiency tax of the respondent were not
duly authenticated by the public officer charged with their custody,
nor verified under oath by the EIIB and the BIR investigators.
Issue: Whether or not the final assessment of the petitioner against
the respondent for deficiency income tax and sales tax for the
latter’s 1987 importation of resins and calcium bicarbonate is based
on competent evidence and the law.
Held: Section 16 of the NIRC of 1977, as amended provides that the
Commissioner of Internal Revenue has the power to make
assessments and prescribe additional requirements for tax
administration and enforcement. Among such powers are those
provided in paragraph (b), which provides that “Failure to submit
required returns, statements, reports and other documents. – When
a report required by law as a basis for the assessment of any
national internal revenue tax shall not be forthcoming within the
time fixed by law or regulation or when there is reason to believe
that any such report is false, incomplete or erroneous, the
Commissioner shall assess the proper tax on the best evidence
obtainable.” This provision applies when the Commissioner of
Internal Revenue undertakes to perform her administrative duty of
assessing the proper tax against a taxpayer, to make a return in case
of a taxpayer’s failure to file one, or to amend a return already filed
in the BIR. The “best evidence” envisaged in Section 16 of the 1977
NIRC, as amended, includes the corporate and accounting records of
the taxpayer who is the subject of the assessment process, the
accounting records of other taxpayers engaged in the same line of
business, including their gross profit and net profit sales. Such
evidence also includes data, record, paper, document or any
evidence gathered by internal revenue officers from other taxpayers
who had personal transactions or from whom the subject taxpayer
received any income; and record, data, document and information
secured from government offices or agencies, such as the SEC, the
Central Bank of the Philippines, the Bureau of Customs, and the
Tariff and Customs Commission. However, the best evidence
obtainable under Section 16 of the 1977 NIRC, as amended, does not
include mere photocopies of records/documents. The petitioner, in
making a preliminary and final tax deficiency assessment against a
taxpayer, cannot anchor the said assessment on mere machine
copies of records/documents. Mere photocopies of the
Consumption Entries have no probative weight if offered as proof of
the contents thereof. The reason for this is that such copies are
mere scraps of paper and are of no probative value as basis for any
deficiency income or business taxes against a taxpayer.
ii. Net-worth Method of Investigation
EUGENIO PEREZ v. CTA
R L-10507 – May 30, 1958
FACTS: Eugenio Perez had filed his income tax returns for the years 1946,
1947, 1948, 1949 and 1950. In 1952, after an investigation conducted by an
examiner of the Bureau of Internal Revenue, the respondent Collector
demanded of said taxpayer the payment of P369,708.27, inclusive of
surcharge and compromise, as deficiency income tax for the years 1946 to
1950. The taxpayer then requested that he be given full opportunity to
present his side before the Conference Staff of the BIR, which was granted,
and as a result of which his income tax deficiency, was reduced to
P197,179.85, exclusive of surcharge and interests. Perez assailed the method
of computation of the assessment, which had been made on the basis of his
increase in net worth. The assessment and the method having been upheld
by the CTA, Perez brought an appeal by certiorari to review the decision of
the CTA.
ISSUE: WON the Collector was correct in the use of the Net Worth Method in
the determination of Taxable Income?
HELD: Yes. This method of proving unreported income, according to the
Court of Tax Appeals, is based upon the general theory that money and other
assets in excess of liabilities of a taxpayer (after an accurate and proper
adjustment of non- deductible items) not accounted for by his income tax
returns, leads to the inference that part of his income has not been reported
(p. 6, B.T.A. 189).There is no question that the application of the "net worth"
method of determining the taxable income of a taxpayer has been an
accepted practice.
That section 38 of our National Internal Revenue Code authorizes
the application of the Net Worth Method in this jurisdiction
That on civil cases, the Government need not prove the specific
source of income (this is reasonable on the basic assumption that most
assets are derived from a taxable source and that when this is not true the
taxpayer is in a position to explain the discrepancy;
That the determination of the tax deficiency by the Government
has prima facie validity and the burden rests upon the taxpayer to overcome
this presumption and to show to the satisfaction of the Tax Court that the
determination was not correct
And finally, that no sufficient grounds exist to warrant a reversal
of the findings of fraud of the lower court as being "clearly erroneous"; on
the contrary, we find them supported by reason.