ELPIDIO YABES AND SEVERINO YABES, PETITIONERS, VS. THE HON. NAPOLEON FLOJO, IN HIS CAPACITY AS PRESIDING JUDGE OF BRANCH II, COURT OF FIRST INSTANCE OF CAGAYAN AND THE REPUBLIC …

Yabes versus Flojo

The Case

This is a petition for certiorari and prohibition filed by Elpidio Yabes and Severino Yabes, the children and heirs of the deceased taxpayer Doroteo Yabes, against Judge Napoleon Flojo in his capacity as presiding judge of the Court of First Instance of Cagayan, and against the Republic of the Philippines. The heirs ask the Supreme Court to annul three orders of the trial court refusing to dismiss a tax collection suit, and to restrain that court from trying the case. The case matters because it draws the dividing line between the Court of First Instance and the Court of Tax Appeals: a collection suit in the ordinary court can proceed only if the Commissioner's assessment has already become final, executory and incontestable; if the assessment is still contested, exclusive jurisdiction lies with the Court of Tax Appeals.

Procedural History

The Commissioner of Internal Revenue sued the heirs of Doroteo Yabes for collection of deficiency commercial broker's taxes in the Court of First Instance of Cagayan. The heirs moved to dismiss on the grounds of lack of jurisdiction and the pendency of another action, but the trial court denied the motion in an order dated June 22, 1971. The trial was later held in abeyance upon the joint motion of the parties. When the case was eventually set for trial, the heirs moved for reconsideration of the 1971 denial; the respondent judge denied the motion on June 7, 1977, and denied leave to file a second motion for reconsideration on July 21, 1977. The heirs then came to the Supreme Court by petition for certiorari and prohibition. The Court issued a temporary restraining order and, after the Solicitor General commented in favor of the petition, granted due course and decided the case.

Facts

Doroteo Yabes of Cagayan was for some time an exclusive dealer of the products of International Harvester Macleod, Incorporated. On or about May 1, 1962, he received a letter from the Commissioner of Internal Revenue dated March 27, 1962, demanding payment of 15,976 pesos and 81 centavos as commercial broker's fixed and percentage taxes plus surcharges, and 2,530 pesos as compromise penalty, for the years 1956 to 1960. Yabes protested, insisting that his agreements with the company were of purchase and sale and not of agency, so that he was not a commercial broker. Correspondence followed. The Commissioner denied the protest, but later wrote that the administrative appeal would be held in abeyance pending the resolution of a similar case, the Constantino case. To give the Commissioner time, Yabes filed a tax waiver extending the prescriptive period to December 31, 1967.

Doroteo Yabes died on March 13, 1963, and no estate proceedings were instituted; his widow also died during the pendency of the case. In 1967 the Commissioner asked the heirs to waive anew the statute of limitations, confirming that the protest was still being held in abeyance pending the Supreme Court's decision in the Constantino case, and the heirs filed a revised waiver extending the period to December 31, 1970. The Supreme Court decided the Constantino case in favor of the Commissioner in February 1970. Then, after more than three years of silence, the heirs received on January 20, 1971 the summons and complaint in the collection suit filed by the Commissioner in December 1970.

Treating the complaint as the final decision of the Commissioner, the heirs filed on February 12, 1971 a petition for review with the Court of Tax Appeals, and on the same day filed their answer in the collection suit invoking lack of jurisdiction and the pendency of the tax court case. The Commissioner moved to dismiss the tax court case, arguing that the assessment had long become final, but the Court of Tax Appeals denied the motion, and the case proceeded there.

Issues

• Whether or not the assessment made by the Commissioner of Internal Revenue against the deceased taxpayer had become final, executory and incontestable, such that the Court of First Instance could lawfully acquire jurisdiction over the collection suit.
• Whether or not the Court of Tax Appeals has exclusive jurisdiction over the disputed assessment, the petition for review having been filed within the thirty-day period.
• Whether or not the trial court should merely hold its proceedings in abeyance pending the decision of the Court of Tax Appeals, as the Solicitor General recommended.

Applicable Provisions

Section 11 of Republic Act Numbered 1125, the law creating the Court of Tax Appeals, provides:

Any person adversely affected by any decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, or the Collector of Internal Revenue, as the case may be, may appeal to the Court of Tax Appeals within thirty days after the receipt of such decision, ruling or inaction.

This is the thirty-day prescriptive period the Court applies in holding that the heirs' petition for review was filed on time, counting from the filing of the collection complaint as the final decision of the Commissioner.

Ruling

On the first issue, the Court held that the assessment had not become final, executory and incontestable. It agreed with the Court of Tax Appeals that the thirty-day period should not be counted from the Commissioner's earlier denial of the protest, because the Commissioner himself had repeatedly informed the taxpayer that the resolution of the protest was being held in abeyance pending the decision in a similar case. What may be considered the final decision of the Commissioner was the filing of the complaint for collection, the summons of which was served on the heirs on January 20, 1971.

On the second issue, the Court held that the Court of Tax Appeals has exclusive appellate jurisdiction to review on appeal any decision of the Collector of Internal Revenue in cases involving disputed assessments and other matters arising under the National Internal Revenue Code. Since the heirs filed their petition for review on February 12, 1971, well within the thirty-day period, the tax court acquired jurisdiction. The Court of First Instance can acquire jurisdiction over a collection suit against the heirs only if the assessment had become final and incontestable; since it had not, the trial court should have dismissed the complaint for want of jurisdiction.

On the third issue, the Court rejected the recommendation to merely hold the proceedings in abeyance, reasoning that jurisdiction over an action includes jurisdiction over all interlocutory matters incidental to the case, and absent jurisdiction over the case, it would be improper for the trial court to act upon interlocutory matters as well. To avoid multiplicity of suits and to expedite the settlement of the controversy, the Court ordered the complaint treated not only as a final notice of assessment but also as a counterclaim in the tax court case, since the two cases involve the same parties, the same subject matter, and the same issue.

Doctrine

A Court of First Instance acquires jurisdiction over a suit to collect a tax assessment against a taxpayer or his heirs only if the assessment has already become final, executory and incontestable. Where the assessment is still disputed, exclusive appellate jurisdiction belongs to the Court of Tax Appeals under Section 11 of Republic Act Numbered 1125, and the petition for review must be filed within thirty days from receipt of the decision of the Commissioner. The Commissioner cannot claim finality of an assessment while he himself has held its resolution in abeyance pending a test case; the filing of a collection suit may then be treated as the final decision from which the thirty-day period runs. Absent jurisdiction over the case, the trial court cannot act even on interlocutory matters, and the proper remedy is dismissal of the complaint, which may be transferred to the tax court and considered as a counterclaim to avoid multiplicity of suits.

Disposition

The petition was granted; the three questioned orders were annulled and set aside, the complaint in the collection suit was dismissed and transferred to the Court of Tax Appeals to be considered as a counterclaim in the pending tax case, and the temporary restraining order was made permanent, without costs.

Remember This

Memorize the rule that the ordinary courts acquire jurisdiction over a tax collection suit only when the assessment has become final and incontestable; otherwise, the Court of Tax Appeals has exclusive jurisdiction. Examiners use this case on the finality of tax assessments, the reckoning of the thirty-day appeal period, and the jurisdiction of the Court of Tax Appeals over disputed assessments.