COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. INSULAR LUMBER COMPANY AND COURT OF TAX APPEALS, RESPONDENTS.

Insular Lumber versus Commissioner of Internal Revenue

The Case

This is a petition brought by the Commissioner of Internal Revenue against Insular Lumber Company, a New York corporation licensed to do business in the Philippines, and against the Court of Tax Appeals. The Commissioner asks the Supreme Court to reverse the tax court's judgment ordering him to refund a portion of the specific tax paid on oils and fuels used in the company's logging operations. The case matters because it settles a question every tax practitioner must know: when a tax is legally collected but later becomes refundable because of a supervening event, when does the two-year prescriptive period for claiming the refund begin to run, and do the refund provisions of the Tax Code reach a refund granted by a special law?

Procedural History

Insular Lumber Company filed its claim for refund with the Commissioner of Internal Revenue, who denied it on the ground that it was filed beyond the two-year period. The company's motion for reconsideration was likewise denied, so it appealed to the Court of Tax Appeals. The Court of Tax Appeals reversed the Commissioner and ordered him to refund the amount claimed. The Commissioner then appealed to the Supreme Court, which reversed the tax court and dismissed the claim.

Facts

Insular Lumber Company, a New York corporation licensed to do business in the Philippines, was engaged in logging operations in Fabrica, Sagay, Negros Occidental. In 1958 it purchased from Standard-Vacuum Oil Company 292,274.76 liters of refined and manufactured oils and fuels, which it used during the same year in its logging operations. The specific tax imposed on those oils under Section 142 of the Tax Code, amounting to 21,452.42 pesos, was duly paid by Standard-Vacuum Oil Company before the oils were removed from the distillery.

On February 23, 1961, about three years later, Insular Lumber Company filed a claim with the Commissioner of Internal Revenue for the refund of 5,363.22 pesos, representing twenty-five per cent of the specific tax paid. The claim rested on a proviso in Section 5 of Republic Act 1435, which grants forest concessionaires a refund of twenty-five per cent of the specific tax on oils used in their operations.

The Commissioner denied the claim on September 28, 1961, for having been filed beyond the two-year period of Section 306 of the Tax Code. After its motion for reconsideration was denied, the company appealed to the Court of Tax Appeals, which ruled in its favor. The Commissioner then brought the matter to the Supreme Court.

Issues

• Whether or not the right to file the claim for refund had prescribed under the two-year period of the Tax Code.
• Whether or not Sections 306 and 309 of the Tax Code govern a refund of specific tax that was legally collected but later became refundable because of a supervening cause.

Applicable Provisions

Section 306 of the Tax Code provides:

No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty.

This is the provision whose two-year period the Commissioner invoked, and which the Court held applicable to the claim.

Section 309 of the Tax Code provides:

The authority of the Commissioner of Internal Revenue to credit or refund taxes or penalties under this section can only be exercised if the claim for credit or refund is made in writing and filed with him within two years after the payment of the tax or penalty.

This fixes the same two-year limit on the Commissioner's power to refund, and the Court read it together with Section 306.

The proviso of Section 5 of Republic Act 1435, on which the claim was based, provides:

Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated in sub-paragraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue Code.

This is the special law granting the refund, and the question was whether its silence on prescription freed it from the Tax Code's two-year limit.

Ruling

On the first issue, the Court held that the right to claim the refund had prescribed. Sections 306 and 309 were intended to govern all kinds of refunds of internal revenue taxes, and the Court described Section 306 as mandatory and not subject to qualification, applying regardless of the conditions under which payment was made. To hold that a refund of specific tax under Section 142 falls outside those sections would thwart the intention and spirit behind them.

On the second issue, the Court held that the two-year period still applies even where the tax was legally collected. The Court noted that the Tax Code contains several instances where a tax is initially collected legally but later becomes refundable through a supervening cause, and that in some of these the law expressly subjects the refund to Section 309 while in others, such as the case at bar, it is silent. That silence notwithstanding, the intention is clear that refunds of internal revenue taxes are generally governed by Sections 306 and 309. The Court then laid down the rule:

Since in those cases the tax sought to be refunded was collected legally, the running of the two-year prescriptive period provided for in Section 306 should commence, not from the date the tax was paid, but from the happening of the supervening cause which entitled the taxpayer to a tax refund.

Here, it was the use of the oils and fuels in 1958 that gave rise to the right to refund. The claim was filed with the Commissioner on February 23, 1961, and the petition for review in the Court of Tax Appeals on February 17, 1962, both more than two years after 1958. The right had therefore prescribed.

The Court also rejected the tax court's approach, which would have subjected the claim to the ten-year period of Article 1144 of the Civil Code. Since the taxpayer is required to keep his books for only five years under Section 337 of the Tax Code, the Commissioner could not verify a claim filed after the fifth year, and the legislators did not intend to handicap him for whose benefit the period of limitations was devised. Public policy demands that tax adjustments be made as early and expeditiously as possible, and lengthening the period from two to ten years would be adverse to that policy. Finally, when the internal revenue laws were codified in 1939, the intent was to concentrate national tax matters in the Tax Code. The Court accordingly modified its earlier ruling in Muller and Phipps.

Doctrine

Three rules must be retained. First, Sections 306 and 309 of the Tax Code govern all refunds of internal revenue taxes, including a refund of specific tax granted by a special law that is silent on prescription. Second, when the tax is illegally or erroneously collected, the two-year prescriptive period runs from the date the tax was paid. Third, when the tax is legally collected but later becomes refundable because of a supervening cause, the two-year period runs from the date of that supervening cause, and both the claim with the Commissioner and the appeal to the Court of Tax Appeals must be filed within that period.

Disposition

The Supreme Court reversed the decision of the Court of Tax Appeals and dismissed the petition for refund on the ground of prescription, with no costs.

Remember This

Memorize the dividing line: illegal or erroneous collection, count two years from payment; legal collection with a later supervening cause, count two years from that cause. Examiners use this case to test prescription on tax refunds and whether a special refund law escapes the Tax Code's two-year limit, and the answer is that it does not.