REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLANT, VS. MANUEL LEDESMA, DEFENDANT-APPELLEE.

Republic versus Ledesma

The Case

This is the Republic of the Philippines against Manuel Ledesma, a civil action for the collection of a deficiency income tax for the year 1951, including a fifty percent surcharge. The Republic sued to recover sixteen thousand two hundred twelve pesos. Ledesma resisted on two grounds: that the sugar on which the tax was principally levied had already been declared and taxed in the hands of his son-in-law, Raul Poblador, and that the Government's claim had already prescribed. The case matters because it fixes the boundary between the summary remedy of distraint and levy and the ordinary judicial action for collection, and because it teaches what happens to a taxpayer who receives an assessment and then simply lets it lapse into finality.

Procedural History

The Republic filed its complaint in the Court of First Instance of Iloilo. The trial court dismissed the complaint upon the plea of prescription alone, without reaching the merits. The Republic appealed directly to the Supreme Court, and the Supreme Court reversed the judgment below and ordered Ledesma to pay.

Facts

The last day for filing the income tax return for the year 1951 was March 1, 1952. The Bureau of Internal Revenue released the assessment for the deficiency on February 25, 1957, comfortably within five years of that last day. Ledesma received the assessment and, through counsel, wrote a letter dated May 10, 1957, asking for a reinvestigation so that he could show he had no delinquency at all.

The Regional Director for Iloilo replied, asking counsel to specify under oath the grounds of the protest, to pay one half of the amount assessed, and to put up a bond for the balance, pursuant to a circular of the Bureau, so that a reinvestigation could be granted. No further communication was ever received from Ledesma. The Government then filed its civil action for collection in the Court of First Instance of Iloilo on July 21, 1958.

The assessment itself rested largely on items other than the sugar. It added undeclared sales, the additional undeclared value of three thousand piculs of sugar, the value of laborers' quarters, other expenses, and additional income on the sale of capital assets, producing a deficiency income tax of ten thousand eight hundred eight pesos, plus a fifty percent surcharge of five thousand four hundred four pesos, for a total of sixteen thousand two hundred twelve pesos.

Issues

• Whether or not the action for collection of the deficiency income tax was filed within the statutory prescriptive period.
• Whether or not the taxpayer's failure to dispute the assessment in the manner prescribed by law barred him from raising his defenses in the collection suit.
• Whether or not the defense of payment, that the tax on the sugar had already been paid by Raul Poblador, is supported by the evidence.

Applicable Provisions

Section 331 of the Internal Revenue Code provides:

Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purposes of this section a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.

This fixes the outer limit for assessment and, absent assessment, for judicial collection, and the assessment here fell within it.

Section 332 of the Internal Revenue Code provides:

Where the assessment of any internal revenue tax has been made within the period of limitation above prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if begun within five years after the assessment of the tax.

This is the provision that saves the Government, because a timely assessment buys it an additional five years within which to sue.

Section 51(d) of the Internal Revenue Code, prior to its amendment, provided:

In cases of refusal or neglect to make a return and in cases of erroneous, false, or fraudulent returns, the Collector of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, or has been made, make a return upon information obtained as provided for in this code or by existing law, or require the necessary corrections to be made, and the assessment made by the Collector of Internal Revenue thereon shall be paid by such person or corporation immediately upon notification of the amount of such assessment.

Ledesma relied on its three year period, but the Court confined it to the summary remedy of distraint and levy.

Ruling

On the first issue, the Court held that the action was filed within the prescriptive period. Under Section 331, taxes are assessed within five years after the last day prescribed by law for filing the return, and if there is no assessment a court proceeding for collection must be commenced within the same period. Under Section 332, where an assessment is made, the court proceeding must be filed within five years thereafter. As long as there is a timely assessment, the Government has an additional five years within which to bring an action for collection. The assessment notice was issued on February 25, 1957, before the lapse of five years from March 1, 1952, and the action was filed a little over one year later.

The Court rejected the argument that Section 51(d) governed. That provision referred merely to the summary remedy of distraint and levy, which must be effected within three years, and a warrant issued beyond that period was void. It prescribed no limitation on judicial action for collection, which is governed by Sections 331 and 332 by suppletory application. The Court quoted its earlier ruling that Section 331 is general in character and may be considered suppletory with regard to matters not covered by the title covering income tax.

On the second issue, the Court held that Ledesma failed to dispute the assessment effectively, so that it became final and properly collectible by ordinary action. Had he complied with the conditions required in the letter of June 14, 1957, or even challenged the validity of those conditions, the assessment would have been a disputed one which the Collector would have had to decide, with recourse to the Court of Tax Appeals. His failure to dispute the assessment in the manner prescribed by law barred his right to do so in the present case.

On the third issue, the Court held that the defense of payment was neither material nor decisive, and in any event had no evidence to sustain it. Neither Manuel Ledesma nor Raul Poblador testified. The alleged verbal lease was testified to only by counsel, which is hearsay. Poblador's return contained nothing to show that the crops sold were the very crops from the hacienda. And the assessment itself referred to the three thousand piculs as having been the subject of Ledesma's own return, at a lower value, which did not sit well with his claim that another person had declared and paid the tax on that same sugar.

Doctrine

The three year period in Section 51(d) of the Internal Revenue Code limits only the summary remedy of distraint and levy; it does not bar assessment as a step preliminary to collection by judicial action. Judicial collection of internal revenue taxes is governed by Sections 331 and 332, applied suppletorily: the tax must be assessed within five years after the return was filed, and once a timely assessment is made the Government has five years from the assessment within which to sue. A taxpayer who receives an assessment and fails to dispute it in the manner prescribed by law, by complying with the Bureau's conditions or by challenging them and seeking review by the Court of Tax Appeals, allows the assessment to become final and cannot raise his objections for the first time in the collection suit.

Disposition

The judgment appealed from was reversed, and Manuel Ledesma was ordered to pay the Republic sixteen thousand two hundred twelve pesos as deficiency income tax for 1951, plus surcharges and interests accrued in accordance with law, and costs.

Remember This

Memorize the two-step arithmetic: five years from the filing of the return to assess, then five more years from the assessment to sue, because the three year period in Section 51(d) reaches only distraint and levy. Examiners use this case to test prescription in tax collection and the rule that an undisputed assessment becomes final and cannot be litigated for the first time in the collection suit.