Taxation 2 Notes

8/13/2019 Taxation 2 Notes

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1PERSONAL NOTES IN TAXATION 2 MARK ANTHONY N. MANUEL

TAXATION LAW 2

BIR RULINGS

are official position of the Bureau to queries raised by taxpayers and otherstakeholders relative to clarification and interpretation of tax laws. 1

Other Definitions2

Revenue Regulations (RRs)

are issuances signed by the Secretary of Finance, upon recommendationof the ommissioner of !nternal "evenue, that specify, prescribe or definerules and regulations for the effective enforcement of the provisions of the#ational !nternal "evenue ode $#!"% and related statutes

Revenue Memoranum Orers (RMOs)

are issuances that provide directives or instructions& prescribe guidelines&and outline processes, operations, activities, workflows, methods andprocedures necessary in the implementation of stated policies, goals,

ob'ectives, plans and programs of the Bureau in all areas of operations,except auditing.

Revenue Memoranum Rulings (RMRs)

are rulings, opinions and interpretations of the ommissioner of !nternal"evenue with respect to the provisions of the (ax ode and other taxlaws, as applied to a specific set of facts, with or without establishedprecedents, and which the ommissioner may issue from time to time forthe purpose of providing taxpayers guidance on the tax consequences inspecific situations. B!" "ulings, therefore, cannot contravene duly issued")"s& otherwise, the "ulings are null and void ab initio

Revenue Memoranum !ir"ular (RM!s) are issuances that publish pertinent and applicable portions, as well as

amplifications, of laws, rules, regulations and precedents issued by theB!" and other agencies*offices.

Revenue Bulletins (RB)

refer to periodic issuances, notices and official announcements of theommissioner of !nternal "evenue that consolidate the Bureau of !nternal"evenue+s position on certain specific issues of law or administration inrelation to the provisions of the (ax ode, relevant tax laws and otherissuances for the guidance of the public.

RULINGS O# #IRST IM$R%SSION3

"ulings of first impression, according to "evenue dministrative -rder #o. 1/0, refer to rulings, opinions and interpretations of the B!" ommissioner withrespect to the provisions of the (ax ode and other tax laws without establishedprecedent, and which are issued in response to a specific request for a ruling oran opinion filed by a taxpayer with the B!".

1http**www.bir.gov.ph*iss2rul*issuances.htm3http**www.bir.gov.ph*iss2rul*issuances.htm0"evenue dministrative -rder 1/0


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(he same includes reversals, modifications or revocations of any existingrulings.

4nder the (ax ode, the power to issue rulings of first impression or to reverse,revoke or modify any existing ruling of the Bureau is exclusively vested on theommissioner of !nternal "evenue and it cannot be delegated5. (he (ax ode provides

Section 7. Authority of the Commissioner to Delegate Power. - TheCommissioner may delegate the powers vested in him under the pertinent

provisions of this Code to any or such suordinate officials with the ran!e"uivalent to a division chief or higher# su$ect to such limitations and restrictionsas may e imposed under rules and regulations to e promulgated y theSecretary of finance# upon recommendation of the Commissioner% Provided#&owever# That the following powers of the Commissioner shall not e delegated%

'''

() The power to issue rulings of first impression or to reverse# revo!e or modify

any e'isting ruling of the *ureau+

'''

R%&I%W'A$$%AL TO T% S%!R%TAR O# #INAN!%

Section ,. Power of the Commissioner to nterpret Ta' aws and toDecide Ta' Cases. - The power to interpret the provisions of this Codeand other ta' laws shall e under the e'clusive and original $urisdiction ofthe Commissioner# su$ect to review y the Secretary of /inance.

ll rulings and issuances of the ommissioner of !nternal "evenue that pertain tothe implementation and interpretation of the (ax ode of 1667 and other tax laws arevalid. 8owever, the Secretary of Finance has the power to affirm, revise, modify or setaside rulings and issuances of the Bureau of !nternal "evenue $B!"% concerning suchimplementation and application of the provisions of the (ax ode of 1667 and other taxlaws.9

!t is important to note that only the final adverse decision of the ommissionermay be brought to the :epartment of Finance $:-F% for review. (hese rulings, therefore,refer to those issued by the ommissioner, or by the :eputy ommissioner for ;egaland !nspection 5359B!" ?ebsite http**www.bir.gov.ph*lumangweb*leg2dof.html=B!" ?ebsite, supra


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(he Secretary of Finance may review motu propriothe rulings and issuances ofthe Bureau of !nternal "evenue concerning such implementation and application of theprovisions of the (ax ode of 1667 and other tax laws.7

Procedures and Compliance Requirements

taxpayer who receives an adverse ruling from the ommissioner may, within

0 days from the date of receipt of such ruling, seek its review by the Secretary ofFinance, either by himself*itself or through his*its duly accredited tax agent orrepresentative. (he request for review shall be in writing and under oath, and mustcomply with the conditions stated in "evenue dministrative -rder #o. 0/31 dated-ctober 33, 31.

?ithin 0 days from receipt of an adverse ruling by the ommissioner, thetaxpayer may seek the :-F Secretary+s review. dministrative remedies must beexhausted in the case of rulings by delegates, e.g., adverse rulings of "egional :irectorare sub'ect to review by the ssistant ommissioner $!"% for ;egal Service and by the:eputy ommissioner $:!"% for ;egal and !nspection

NON*R%TROA!TI&IT O# RULINGS

Section 35=. #on/ "etroactivity of "ulings. / ny revocation, modification orreversal of any of the rules and regulations promulgated in accordance with thepreceding Sections or any of the rulings or circulars promulgated by theommissioner shall not be given retroactive application if the revocation,modification or reversal will be pre'udicial to the taxpayers, except in the followingcases

$a% ?here the taxpayer deliberately misstates or omits material facts from hisreturn or any document required of him by the Bureau of !nternal "evenue&

$b% ?here the facts subsequently gathered by the Bureau of !nternal "evenueare materially different from the facts on which the ruling is based& or

$c% ?here the taxpayer acted in bad faith.

ILLUSTRATI&% !AS%S+

!IR vs, $-il, ealt-"are $roviers

7B!" ?ebsite, supra>B!" ?ebsite, supra


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% by imposing Ealue/dded (ax $E(% onthe sale of goods and services. (his D.-. took effect on Canuary 1, 16>>.

Before the effectivity of D.-. #o. 370, or on :ecember 1, 16>7,respondent wrote the ommissioner of !nternal "evenue $!"%, petitioner,

inquiring whether the services it provides to the participants in its healthcare program are exempt from the payment of the E(.

-n Cune >, 16>>, petitioner !", through the E( "eview ommittee ofthe Bureau of !nternal "evenue $B!"%, issued E( "uling #o. 301/>>stating that respondent, as a provider of medical services, is exempt fromthe E( coverage. (his "uling was subsequently confirmed by "egional:irector -smundo in a letter datedpril 33, 1665.

)eanwhile, on Canuary 1, 166=, "epublic ct $"..% #o. 771= $DxpandedE( or D/E( ;aw% took effect, amending further the #ational !nternal

"evenue ode of 1677. (hen on Canuary 1, 166>, ".. #o. >535$#ational !nternal "evenue ode of 1667% became effective. (his new(ax ode substantially adopted and reproduced the provisions of D.-.#o. 370 on E( and ".. #o. 771= on D/E(.

!n the interim, on -ctober 1, 1666, the B!" sent respondent a @reliminaryssessment #otice for deficiency in its payment of the E( anddocumentary stamp taxes $:S(% for taxable years 166= and 1667.

-n -ctober 3, 1666, respondent filed a protest with the B!".

-n Canuary 37, 3, petitioner !" sent respondent a letter demanding

payment of deficiency E( in the amount of @1,99,0.3= and :S(in the amount of @135,16=,=1.63, or a total of @335,73,=51.1> fortaxable years 166= and 1667.

ISSU%+ ?hether or not " 771= may be applied retroactively to@hilippine 8ealthcare provided on the ground that it acted in bad faith.


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%L.+#o. "espondent acted in good faith. !ts failure to describe itselfas a health maintenance organiAation, which is sub'ect to E(, is nottantamount to bad faith. ?e note that the term health maintenanceorganiAation was first recorded in the @hilippine statute books only uponthe passage of (he #ational 8ealth !nsurance ct of 1669 $"epublic ct#o. 7>79%. Section 5 $o% $0% thereof defines a health maintenance

organiAation as an entity that provides, offers, or arranges for coverageof designated health services needed by plan members for a fixedprepaid premium. 4nder this law, a health maintenance organiAation isone of the classes of a health care provider.

!t is thus apparent that when E( "uling #o. 301/>> was issued inrespondent+s favor, the term health maintenance organiAation was yetunknown or had no significance for taxation purposes. "espondent,therefore, believed in good faith that it was E( exempt for the taxableyears 166= and 1667 on the basis of E( "uling #o. 301/>>.

$-ili//ine Ban0 o1 !ommuni"ations vs, !ommissioner o1 InternalRevenue

9 issued on pril 1, 16>9. (he circular states thatoverpaid income taxes are not covered by the two/year prescriptive

period under the tax ode and that taxpayers may claim refund or taxcredits for the excess quarterly income tax with the B!" within ten $1%years under rticle 1155 of the ivil ode.

(he !" denied the petition on the ground that such is already barred byprescription. !t said that the two/year prescriptive period for filing taxcases in court concerning income tax payments of orporations isreckoned from the date of filing the Final d'usted !ncome (ax "eturn,

which is generally done on pril 19 following the close of the calendaryear.

@Bom argued that the government is barred from asserting a position

contrary to its declared circular if it would result to in'ustice to taxpayers.

ISSU%+?hether or not @Bom may request for tax refund or tax creditsrelying on ") #o. 7/>9, changing the prescriptive period of two years toten years.


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=PERSONAL NOTES IN TAXATION 2 MARK ANTHONY N. MANUEL

%L.+#o. ?hen the cting ommissioner of !nternal "evenue issued") 7/>9, changing the prescriptive period of two years to ten years onclaims of excess quarterly income tax payments, such circular created aclear inconsistency with the provision of Sec. 30 of 1677 #!". !n sodoing, the B!" did not simply interpret the law& rather it legislatedguidelines contrary to the statute passed by ongress.

!t bears repeating that "evenue memorandum/circulars are consideredadministrative rulings $in the sense of more specific and less generalinterpretations of tax laws% which are issued from time to time by theommissioner of !nternal "evenue. !t is widely accepted that theinterpretation placed upon a statute by the executive officers, whose dutyis to enforce it, is entitled to great respect by the courts. #evertheless,such interpretation is not conclusive and will be ignored if 'udicially foundto be erroneous. (hus, courts will not countenance administrativeissuances that override, instead of remaining consistent and in harmony

with the law they seek to apply and implement.

!ommissioner o1 Internal Revenue vs, !A an Al-amra inustries


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?ithout doubt, private respondent would be pre'udiced by the retroactiveapplication of the revocation as it would be assessed deficiency excisetax.

?hat is left to be resolved is petitioner+s claim that private respondentfalls under the third exception in Sec. 35=, i.e., that the taxpayer has

acted in bad faith.

Bad faith imports a dishonest purpose or some moralobliquity and conscious doing of wrong. It partakes of thenature of fraud; a breach of a known duty through some

motive of interest or ill will.

(he Supreme ourt found no convincing evidence that private

respondent+s implementation of the computation mandated by B!" "uling570/>> was ill/motivated or attended with a dishonest purpose. (o thecontrary, as a sign of good faith, private respondent immediately revertedto the computation mandated by B!" "uling 17/61 upon knowledge of itsissuance on 11 February 1661.

s regards petitioner+s argument that private respondent should havemade consultations with it before private respondent used thecomputation mandated by B!" "uling 570/>>, suffice it to state that theaforesaid B!" "uling was clear and categorical thus leaving no room forinterpretation. (he failure of private respondent to consult petitioner doesnot imply bad faith on the part of the former.

dmittedly the government is not estopped from collecting taxes legallydue because of mistakes or errors of its agents. But like other principlesof law, this admits of exceptions in the interest of 'ustice and fair play, as

where in'ustice will result to the taxpayer.

!ommissioner o1 Internal Revenue vs,Burmeister an Wain S"aninavian !ontra"tor Minanao3 In",


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>PERSONAL NOTES IN TAXATION 2 MARK ANTHONY N. MANUEL

#A!TS+Burmeister and ?ain Scandinavia, a foreign consortium, entered into acontract with the #ational @ower orporation $#@--"% for the operation andmaintenance of the latterGs two power barges.

!n order to ascertain the tax implications of its transaction, the consortium soughta ruling from the B!" which responded with B!" "uling #o. 30/69 datedFebruary 15, 1669, declaring therein that if HrespondentI chooses to register as aE( person and the consideration for its services is paid for in acceptable foreigncurrency and accounted for in accordance with the rules and regulations of theBangko Sentral ng @ilipinas, the aforesaid services shall be sub'ect to E( atAero/rate.

(he consortium sought tax refund of its excess output tax, relying on E( "uling#o. 0/66, which reconfirmed B!" "uling #o. 30/69 insofar as it held that theservices being rendered by B?S)! is sub'ect to E( at Aero percent $%.

ISSU%+?hether or not the onsortium is entitled to the refund of @=,665,=96.=7as erroneously paid output E( for the year 166= on the ground that it relied onB!" "uling #o. 30/69.

%L.+ ommissionerGs filing of his nswer before the ( challengingBurmeisterGs and ?ainGs claim for refund effectively serves as a revocation ofE( "uling #o. 0/66 and B!" "uling #o. 30/69. 8owever, such revocationcannot be given retroactive effect since it will pre'udice respondent. hangingrespondentGs status will deprive respondent of a refund of a substantial amountrepresenting excess output tax. Section 35= of the (ax ode provides that any

revocation of a ruling by the ommissioner of !nternal "evenue shall not begiven retroactive application if the revocation will pre'udice the taxpayer. Further,there is no showing of the existence of any of the exceptions enumerated inSection 35= of the (ax ode for the retroactive application of such revocation.

R%M%.I%S A&AILABL% TO T% GO&%RNM%NT

A, $R%S!RI$TI&% $%RIO. TO !OLL%!T


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Section 222. !ceptions as to Period of "imitation of #ssessment andCollection of $a!es.

(a) n the case of a false or fraudulent return with intent to evade ta' or offailure to file a return# the ta' may e assessed# or a preceeding in courtfor the collection of such ta' may e filed without assessment# at any time

within ten (01) years after the discovery of the falsity# fraud or omission%Provided# That in a fraud assessment which has ecome final ande'ecutory# the fact of fraud shall e $udicially ta!en cogni2ance of in thecivil or criminal action for the collection thereof.

() f efore the e'piration of the time prescried in Section 13 for theassessment of the ta'# oth the Commissioner and the ta'payer haveagreed in writing to its assessment after such time# the ta' may eassessed within the period agreed upon. The period so agreed upon maye e'tended y suse"uent written agreement made efore thee'piration of the period previously agreed upon.

%c& #ny internal revenue ta! which has 'een assessed within theperiod of limitation as prescri'ed in para(raph %a& hereof may 'ecollected 'y distraint or levy or 'y a proceedin( in court within five%)& years followin( the assessment of the ta!.

%d& #ny internal revenue ta!* which has 'een assessed within theperiod a(reed upon as provided in para(raph %'& hereina'ove* may'e collected 'y distraint or levy or 'y a proceedin( in court withinthe period a(reed upon in writin( 'efore the e!piration of the five %)&+year period. $he period so a(reed upon may 'e e!tended 'ysu'sequent written a(reements made 'efore the e!piration of the

period previously a(reed upon.

(e) Provided# however# That nothing in the immediately preceding andparagraph (a) hereof shall e construed to authori2e the e'amination andinvestigation or in"uiry into any ta' return filed in accordance with the

provisions of any ta' amnesty law or decree.

ILLUSTRATI&% !AS%S

Re/uli" o1 t-e $-ili//ines vs, i4on


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o ,uly -* -/0J B!" issued to respondent Salud E. 8iAon a deficiency

income tax assessment of @1,110,096.=> covering the fiscal year 16>1/16>3.

o ,anuary -2* -//J "espondent not having contested the assessment,

petitioner served warrants of distraint and levy to collect the tax

deficiency. 8owever, for reasons not known, it did not proceed to disposeof the attached properties.

o 1ovem'er * -//2J )ore than three years later, respondent wrote the

B!" requesting a reconsideration of her tax deficiency assessment.

o #u(ust --* -//3J (he B!", in a letter, denied the request.

o ,anuary -* -//4J B!" filed a case with the "egional (rial ourt, Branch

55, San Fernando, @ampanga to collect the tax deficiency.

%L.+?ith regard to the issue that the case filed by petitioner for the collectionof respondent+s tax deficiency is barred by prescription, K330$c% of the #!"provides

ny internal revenue tax which has been assessed within the period of limitationabove/prescribed may be collected by distraint or levy or by a proceeding in court

within three years following the assessment of the tax.

(he running of the three/year prescriptive period is suspended L

for the period during which the Commissioner is prohiited from ma!ing

the assessment or eginning distraint or levy or a proceeding in court andfor si'ty days thereafter+ when the ta'payer re"uests for a reinvestigationwhich is granted y the Commissioner+ when the ta'payer cannot elocated in the address given y him in the return filed upon which the ta'is eing assessed or collected+ provided# that# if the ta'payer informs theCommissioner of any change in address# the running of the statute oflimitations will not e suspended+ when the warrant of distraint or levy isduly served upon the ta'payer# his authori2ed representative or amemer of his household with sufficient discretion# and no property coulde located+ and when the ta'payer is out of the Philippines.

@etitioner argues that, in accordance with this provision, respondent+s request for

reinvestigation of her tax deficiency assessment on #ovember 0, 1663 effectivelysuspended the running of the period of prescription such that the governmentcould still file a case for tax collection.

(he contention has no merit.


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Sec. 229 of the Code mandates that a request for reconsideration mustbe made within ! days from the ta"payer#s receipt of the ta" deficiencyassessment$ otherwise the assessment becomes final$ unappealable and$therefore$ demandable.

(he notice of assessment for respondent+s tax deficiency was issued bypetitioner on Culy 1>, 16>=. -n the other hand, respondent made her request forreconsideration thereof only on #ovember 0, 1663, without stating when shereceived the notice of tax assessment. She explained that she was constrainedto ask for a reconsideration in order to avoid the harassment of B!" collectors. !nall likelihood, she must have been referring to the distraint and levy of herproperties by petitioner+s agents which took place on Canuary 13, 16>6.

Dven assuming that she first learned of the deficiency assessment on this date,her request for reconsideration was nonetheless filed late since she made it morethan 0 days thereafter. 8ence, her request for reconsideration did not suspendthe running of the prescriptive period provided under K330$c%. lthough the

ommissioner acted on her request by eventually denying it on ugust 11, 1665,this is of no moment and does not detract from the fact that the assessment hadlong become demandable.

!ommissioner o1 Internal Revenue vs, amre"-t 5 6uist $-ili//ines3 In",% years later, respondentGs external auditorsreceived a letter from herein petitioner ommissioner of !nternal "evenue dated-ctober 37, 31. (he letter advised the respondent that petitioner had rendered

a final decision denying its protest on the ground that the protest against thedisputed tax assessment was allegedly filed beyond the 0/day reglementaryperiod prescribed in then Section 336 of the #ational !nternal "evenue ode.

%L.+(he !" insists that its right to collect the tax deficiency it assessed onrespondent is not barred by prescription since the prescriptive period thereof wasallegedly suspended by respondentGs request for reinvestigation. (he contentionhas no basis.


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Section ,. Suspension of running of statute. 4 The running of thestatute of limitations provided in Sections 13 and 3 on the ma!ing ofassessment and the eginning of distraint or levy or a proceeding in courtfor collection# in respect of any deficiency# shall e suspended for the

period during which the Commissioner is prohiited from ma!ing the

assessment or eginning distraint or levy or a proceeding in court and forsi'ty days thereafter5 when the ta!payer requests for a re+investi(ation which is (ranted 'y the Commissioner+ when theta'payer cannot e located in the address given y him in the return filedupon which a ta' is eing assessed or collected% Provided# That# if theta'payer informs the Commissioner of any change in address# the statutewill not e suspended+ when the warrant of distraint and levy is dulyserved upon the ta'payer# his authori2ed representative# or a memer ofhis household with sufficient discretion# and no property could e located+and when the ta'payer is out of the Philippines.$Dmphasis supplied.%

(he plain and unambiguous wording of the said provision dictates that two

requisites must concur before the period to enforce collection may besuspended

$a% that the taxpayer requests for reinvestigation, and$b% that petitioner grants such request.

-n this point, we have previously held that

(he above section is plainly worded. !n order to suspend the running of theprescriptive periods for assessment and collection,t-e re7uest 1orreinvestigation must e grante 8 t-e !IR.

:)!#!S("(!ED "D)D:!DS*S4))"M "D)D:!DS

Secs. 39 to 37

1. :istraint of @ersonal @roperty3. ;evy of "eal @roperty0. Forfeiture

!astro vs, !ommissioner o1 Internal Revenue


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respondent and simultaneous with the filing of said action, the petitioner receivedfor the first time the notice of assessment dated #ovember 16, 1657 byregistered mail from the ollector of !nternal "evenue.

B!" later found out upon a detailed investigation that no war profits tax was duefrom the accused in connection with the present case. Finding the petition for

dismissal to be well taken, the !" dismissed the case. 8owever, in anotherreport submitted by the same Supervising Dxaminer Felipe quino to hissuperiors he changed his previous stand taken before the !".

Following insistent requests of petitioner for reinvestigation of her case, the thenSecretary of Finance @io @edrosa created a committee $known as @edrosaommittee% on pril 11, 169 to review or re/examine the assessment for warprofits tax issued against the petitioner. (he @edrosa ommittee submitted itsreport, recommending the collection of the amount of @0,960,69.7> as warprofits tax due from petitioner inclusive of surcharge and interests.

!n order to enforce the assessment, caused to be advertised the sale at public

auction of various real properties of petitioner to satisfy the war profits taxassessed against her. For lack of bidders on the scheduled dates of sale, theproperties were forfeited to the of the (ax ode.(he petitioner has not exercised her right of legal redemption with respect to allthese real properties which were sold at public auction by the respondent andforfeited in favor of the


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of the levied barges on 30 Cune 16>=. (he barges, particularly Barge )@/1 andBarge )@/5, were among the aforementioned properties distrained and seiAedby petitioner, through the ommissioner of !nternal "evenue.

-n 1> Cune 16>=, the !" wrote DnriqueA informing him that Barge )@/1 andBarge )@/5 were no longer owned by the )aritime ompany of the @hilippines

as said barges had been distrained and seiAed by the B!" in satisfaction ofvarious deficiency taxes of )aritime ompany of the @hilippines, therebyregistering its adverse claim over said barges.

-n 30 Cune 16>=, respondent deputy sheriff sold at public auction the two $3%barges, )@/1 and )@/5, and issued the corresponding sheriffs certificate ofsale on the same date to the highest bidder which was the levying creditor. -n35 Culy 16>=, petitioner filed before the ourt of ppeals the aforementionedpetition for prohibition with preliminary in'unction, alleging that respondent sheriff,"amon


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1=PERSONAL NOTES IN TAXATION 2 MARK ANTHONY N. MANUEL

deficiency common carrier+s tax, fixed tax, = ommercial Broker+s tax,documentary stamp tax, income tax and withholding taxes in the total amount of@17,3>5,>>3.59. (he assessment became final and executory as privaterespondent did not contest it. But as private respondent did not pay its tax liabilityeither, the ommissioner of !nternal "evenue issued warrants of distraint ofpersonal property and levy of real property of private respondent.

(his circumstance has given rise to the question in this case as it appears thatfour of the barges placed under constructive distraint were levied upon executionby respondent deputy sheriff of )anila on Culy 3, 16>9 to satisfy a 'udgment forunpaid wages and other benefits of employees of respondent )aritime ompanyof the @hilippines. )ore specifically, the question in this case is the validity of the

warrant of distraint served by the "evenue SeiAure -fficer against the writ ofexecution subsequently levied upon the same property by the deputy sheriff of)anila to satisfy the claims of employees in #;" ase #o. #"/13/5300/>5$:omingo . #iangar, et al. v. )aritime ompany of the @hilippines% for@56,756.31.

ISSU%+?hether or not the government+s claim for taxes was preferred under rt.3357, in relation to rt. 3351$1% of the ivil ode, on the ground that under thisprovisions only taxes and fees which are due on specific movables en'oypreference, whereas the taxes claimed by petitioner were not due on the fourbarges in question

%L.+Mes. rt. 11 of the ;abor ode applies only in case of bankruptcy or'udicial liquidation of the employer. (his is clear from the text of the law.

rt. 11. ?orker preference in case of bankruptcy. L !n the event of bankruptcyor liquidation of an employer+s business, his workers shall en'oy first preferenceas regards wages due them for services rendered during the period prior to the

bankruptcy or liquidation, any provision of law to the contrary notwithstanding.4npaid wages shall be paid in full before other creditors may establish anyclaims to a share in the assets of the employer.

(his case does not involve the liquidation of the employer+s business.

#or is there any merit in the contention of the #;" that taxes are absolutelypreferred claims only with respect to movable or immovable properties on whichthey are due and that since the taxes sought to be collected in this case are notdue on the barges in question the government+s claim cannot prevail over theclaims of employees of the )aritime ompany of the @hilippines which, pursuantto rt. 11 of the ;abor ode, en'oy first preference.

rticle 11 of the ;abor ode does not purport to create a lien in favor of workersor employees for unpaid wages either upon all of the properties or upon anyparticular property owned by their employer. laims for unpaid wages do nottherefore fall at all within the category of specially preferred claims establishedunder rticles 3351 and 3353 of the ivil ode, except to the extent that suchclaims for unpaid wages are already covered by rticle 3351, number = claimsfor laborer+s wages, on the goods manufactured or the work done, or by rticle3353, number 0 claims of laborers and other workers engaged in the


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construction, reconstruction or repair of buildings, canals and other works, uponsaid buildings, canals or other works. (o the extent that claims for unpaid wagesfall outside the scope of rticle 3351, number = and 3353, number 0, they wouldcome with the ambit of the category of ordinary preferred credits under rticle3355.

pplying rticle 3351, number = to the instant case, the claims of the 4nions forseparation pay of their members constitute liens attaching to the processed leaftobacco, cigars and cigarettes and other products produced or manufactured bythe !nsolvent, but not to other assets owned by the !nsolvent. nd even inrespect of such tobacco and tobacco products produced by the !nsolvent, theclaims of the 4nions may be given effect only after the Bureau of !nternal"evenue+s claim for unpaid tobacco inspection fees shall have been satisfied outof the products so manufactured by the !nsolvent.

rticle 3353, number 0, also creates a lien or encumbrance upon a building orother real property of the !nsolvent in favor of workmen who constructed orrepaired such building or other real property. rticle 3353, number 0, does not

however appear relevant in the instant case, since the members of the 4nions towhom separation pay is due rendered services to the !nsolvent not $so far as therecord of this case would show% in the construction or repair of buildings or otherreal property, but rather, in the regular course of the manufacturing operations ofthe !nsolvent. (he 4nions+ claims do not therefore constitute a lien orencumbrance upon any immovable property owned by the insolvent, but rather,as already indicated, upon the !nsolvent+s existing inventory $if any% of processedtobacco and tobacco products.

ong 9ong S-ang-ai Ban0 vs, Ra11ert8


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1>PERSONAL NOTES IN TAXATION 2 MARK ANTHONY N. MANUEL

ISSU%+?hether or not the lien follow the property sub'ect to the tax into thehands of a third party when at the time of transfer, no demand for payment hadbeen made and when the purchaser had no notice of the existence of the lien.

%L.+#o. (he lien does not follow the property sub'ect to the tax into the handsof a third party when at the time of transfer, no demand for payment had been

made and when the purchaser then had no notice of the existence of the lien.

4nder the general rule of the ivil law, possession of movables is not necessaryto the validity of a lien, whether created by contract or by act of law. Such lien willattach upon movable property even in the hands of a bonafide purchaser withoutnotice. 4nder the law of taxation however, the tax lien does not establish itselfupon property which has been transferred to an innocent purchaser prior todemand. demand is necessary to create and bring the lien into operation.

Furthermore, in order that the lien may follow the property into the hands of athird party, it is essential that the latter should have notice, either actual orconstructive. (he reason behind this is the benevolence of our onstitution which

prohibits the taking of property without due process of law. (he policy of the lawis against upholding secret liens and charges against property of innocentpurchasers or encumbrances for value.

t the time 8SB acquired the property there was nothing to show that @u'alte Oo. were deliquent taxpayers nor were there any public records that may beconsulted to protect it from loss by reason of the existence of a secret lien.

)inor issue on the right of 8SB to recover interest from the undue enforcementof the lien (he reckoning date for the computation of interest should be the date

when the taxpayer lost the income from the funds by payment under protest. !nthis case, it is not from the filing of the complaint for collection but on the date

8SB was deprived of the property.

B, :U.I!IAL R%M%.I%S

Mamulao Lumer vs, Re/uli", 169>,petitioner requested for a reinvestigation of its tax liability. !n reply thereto,respondent in a letter dated Culy >, 1696, gave petitioner a period of twenty $3%days from receipt thereof to submit the results of its verification of payments andfailure to comply therewith would be construed as abandonment of the requestfor reinvestigation. @etitioner failed to comply with this requirement. #either did it


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appeal to the ourt of (ax ppeals within thirty $0% days from receipt of theletter dated Culy >, 1696, as prescribed under Section 11 of "epublic ct #o.1139, thus making the assessment final and executory. )ambulao contendedthat the 'udicial action cannot be enforced because it was the collection wasmade out of time.

ISSU%+?hether or not a taxpayer can dispute an assessment which is beingenforced by 'udicial actionP

%L.+#o. !n a suit for collection of internal revenue taxes, as in this case, wherethe assessment has already become final and executory, the action to collect isakin to an action to enforce a 'udgment. #o inquiry can be made therein as to themerits of the original case or the 'ustness of the 'udgment relied upon. @etitioneris thus already precluded from raising the defense of prescription.

?here the taxpayer did not contest the deficiency income tax assessed against

him, the same became final and properly collectible by means of an ordinarycourt action. (he taxpayer cannot dispute an assessment which is beingenforced by 'udicial action, 8e should have disputed it before it was brought tocourt.

#o inquiry can be made therein as to the merits of the original case or the'ustness of the 'udgment relied upon, other than by evidence of want of'urisdiction, of collusion between the parties, or of fraud in the party offering therecord with respect to the proceedings. (he taxpayer may raise only the question

whether or not the ollector of !nternal "evenue had 'urisdiction to do theparticular act, and whether any fraud was committed in the doing of that act.

#ernane4 ermanos vs, !IR an !TA., @=,>>7. and @15,591. as alleged deficiency income taxes forthe years 169, 1691, 1693, 1690 and 1695, respectively. Said assessments

were the result of alleged discrepancies found upon the examination andverification of the taxpayer+s income tax returns for the said years.


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FernandeA 8ermanos contended that the ommissioner+s action to recover itstax liability should be deemed to have prescribed for failure on the part of theommissioner to file a complaint for collection against it in an appropriate civilaction, as contradistinguished from the answer filed by the ommissioner to itspetition for review of the questioned assessments in the case a "uohas longbeen re'ected by this ourt.

ISSU%+?hether or not !"Gs right to recover tax liability prescribed for failure onthe part of the ommissioner to file a complaint for collection against it in anappropriate civil action.

%L.+ #o.

% &udicial action for the collection of a ta" is begun by'

()* the filing of a complaint with the proper court of first instance$ or(2* where the assessment is appealed to the Court of +a" %ppeals$ by

filing an answer to the ta"payer#s petition for review whereinpayment of the ta" is prayed for.

(his is but logical for where the taxpayer avails of the right to appeal the taxassessment to the ourt of (ax ppeals, the said ourt is vested with theauthority to pronounce 'udgment as to the taxpayer+s liability to the exclusion ofany other court. !n the present case, regardless of whether the assessments

were made on February 35 and 37, 169=, as claimed by the ommissioner, or on:ecember 37, 1699 as claimed by the taxpayer, the government+s right to collect

the taxes due has clearly not prescribed, as the taxpayer+s appeal or petition forreview was filed with the (ax ourt on )ay 5, 16=, with the ommissioner filingon )ay 3, 16= his nswer with a prayer for payment of the taxes due, longbefore the expiration of the five/year period to effect collection by 'udicial actioncounted from the date of assessment.


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Taxation 2 Notes

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