COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. LILIA YUSAY GONZALES AND THE COURT OF TAX APPEALS, RESPONDENTS.

Commissioner of Internal Revenue versus Gonzales

The Case

This is a petition brought by the Commissioner of Internal Revenue against Lilia Yusay Gonzales, an acknowledged natural child of the late Matias Yusay, and against the Court of Tax Appeals. The Commissioner assails the decision of the Court of Tax Appeals, which had declared that his right to assess estate and inheritance taxes against the estate of Matias Yusay had already prescribed. The case matters because it fixes two enduring rules: when the thirty-day period to appeal a disputed assessment to the Court of Tax Appeals begins to run, and what kind of return is sufficient to start the five-year prescriptive period under the Tax Code. It teaches that a return so deficient that it prevents the Commissioner from computing the tax is no return at all, and that the longer ten-year period then applies.

Procedural History

Matias Yusay died intestate, and settlement proceedings were instituted in the Court of First Instance of Iloilo, which appointed Jose S. Yusay as administrator. The Commissioner later filed a proof of claim and a motion for allowance of claim and for payment of taxes in that settlement court. Lilia Yusay disputed the assessment of February 13, 1958, and when the Commissioner rejected her protest, she filed a petition for review in the Court of Tax Appeals. That Court, after hearing, reversed the assessment and held that the Commissioner's right to assess had prescribed. The Commissioner then appealed to the Supreme Court, which rendered the decision now before us.

Facts

Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs: Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural child. Jose was appointed administrator of the estate. On May 11, 1949, Jose filed an estate and inheritance tax return declaring personal properties of 7,444 pesos and real properties assessed at 179,760 pesos, for a total gross estate of 187,204 pesos. The return mentioned no heir at all.

Upon investigation, the Bureau of Internal Revenue found more properties than were declared, and on October 29, 1953, assessed estate and inheritance taxes. On January 25, 1955, it increased the assessment and demanded payment. Jose requested an extension and posted a surety bond, but the Commissioner denied the request and issued a warrant of distraint and levy, which was not enforced because the personal properties were in Iloilo City. On May 30, 1956, the commissioner appointed by the settlement court submitted a re-amended project of partition listing far more properties than the return had declared. On July 12, 1957, a Bureau agent informed the Commissioner of this project, and the estate was reinvestigated.

On February 13, 1958, the Commissioner issued a new assessment: 16,246 pesos and four centavos as estate tax, and 39,178 pesos and twelve centavos as inheritance tax, plus surcharges, delinquency interest, and compromise penalties. Because Jose had died, the assessment was sent to his widow, Plorencia Piccio Vda. de Yusay, who succeeded him as administrator. No payment was made despite demands, so the Commissioner filed a proof of claim in the settlement court invoking priority of lien. Lilia Yusay disputed the assessment, claiming prescription because more than five years had elapsed since the return was filed. The Commissioner rejected her protest, and she elevated the matter to the Court of Tax Appeals.

Issues

• Whether or not the petition for review was filed in the Court of Tax Appeals within the thirty-day period provided by law.
• Whether or not the Court of Tax Appeals could take cognizance of Lilia Yusay's appeal despite the pendency of the Commissioner's proof of claim and motion for payment of taxes in the settlement court.
• Whether or not the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes had prescribed.

Applicable Provisions

Section 93, paragraph (a), of the Tax Code, quoted by the Court, lists the requirements of a valid return:

(a) Requirements. - In all cases of inheritance or transfers subject to either the estate tax or the inheritance tax, or both, or where, though exempt from both taxes, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or anyone of the heirs, as the case may be, shall file a return under oath in duplicate, setting forth (1) the value of the gross estate of the decedent at the time of his death, or, in case of a nonresident not a citizen of the Philippines, or that part of his gross estate situated in the Philippine; (2) the deductions allowed from gross estate in determining net estate as defined in section eighty-nine; (3) such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.

This provision defines what a return must contain, and the Court uses it to measure whether the return filed by Jose Yusay was sufficient to start the running of the prescriptive period.

Section 332, paragraph (a), of the Tax Code, also quoted by the Court, states the exception to the ordinary period:

SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. - (a) In the case of a false or fraudulent return with Intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission.

This provision supplies the ten-year period that the Court applies once it concludes that the return was no return at all.

Ruling

On the first issue, the Court held that the appeal was timely. The thirty-day period begins to run from the date the taxpayer receives the decision of the Commissioner on the disputed assessment, not from the date the assessment was issued. Lilia received the decision on March 14, 1960, and filed her petition on April 13, 1960, exactly thirty days later.

On the second issue, the Court held that the Court of Tax Appeals properly took cognizance of the appeal. An action involving a disputed assessment for internal revenue taxes falls within the exclusive appellate jurisdiction of the Court of Tax Appeals, and it is in that forum, to the exclusion of the Court of First Instance, that the taxpayer may ventilate her defenses. The settlement court is of limited jurisdiction, relating only to the settlement of estates and probate of wills, and has no authority to adjudicate the validity of the assessment.

On the third issue, the Court held that prescription did not bar the assessment, but not for the reason the Commissioner gave. The Court rejected the plea of fraud, because fraud is a question of fact that must be alleged and proved, and the Commissioner raised it only in his memorandum after resting his case. The Court also rejected the finding that the return was sufficient to start the five-year period. The return was substantially defective: it was incomplete, declaring only ninety-three parcels of land and leaving out ninety-two parcels, and it mentioned no heir, so that no inheritance tax could be assessed. The Court held that the return was so deficient that it prevented the Commissioner from computing the taxes due, and was as though no return was made. It was therefore no return at all under Section 93. Since there was a failure to file a return, Section 332, paragraph (a), applied, giving the Commissioner ten years from discovery. The Commissioner learned of the underdeclaration on July 12, 1957, and issued the assessment on February 13, 1958, well within ten years. The Court also held that Lilia was not estopped from raising prescription, since the settlement court was not the proper tribunal to pass upon that defense, and her willingness to pay the tax was no waiver of defenses against its legality.

Doctrine

A return need not be complete in all particulars; substantial compliance suffices. There is substantial compliance when the return is made in good faith and is not false or fraudulent, when it covers the entire period involved, and when it contains information as to the various items with such definiteness as to permit the computation and assessment of the tax. A return so deficient that it prevents the Commissioner from computing the taxes due is no return at all under Section 93 of the Tax Code. In that case, the ten-year period under Section 332, paragraph (a), counted from discovery, applies instead of the five-year period. Fraud is a question of fact that must be alleged and proved; it cannot be raised for the first time in a memorandum after the case is rested. The thirty-day period to appeal a disputed assessment to the Court of Tax Appeals runs from receipt of the Commissioner's decision on the protest, not from the date of the assessment. A disputed assessment falls within the exclusive appellate jurisdiction of the Court of Tax Appeals, not the settlement court.

Disposition

The Commissioner won. The judgment of the Court of Tax Appeals was set aside, and the assessment of February 13, 1958 was affirmed, with Lilia Yusay Gonzales, as administratrix, ordered to pay the estate and inheritance taxes plus interest and surcharge, without prejudice to reimbursement from her co-administratrix.

Remember This

Memorize this line: a return so deficient that it prevents the Commissioner from computing the tax is no return at all, so the ten-year period from discovery applies. Examiners use this case to test the distinction between the five-year and ten-year prescriptive periods, and the rule that the thirty-day appeal period runs from receipt of the Commissioner's decision on the disputed assessment.