REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLEE, VS. MARSMAN DEVELOPMENT COMPANY AND/OR F.H. BURGESS, IN HIS CAPACITY AS LIQUIDATOR OF THE MARSMAN DEVELOPMENT COMPANY, DEFENDANT…

Republic versus Marsman Development Company

The Case

This is a collection suit brought by the Republic of the Philippines against Marsman Development Company, a timber licensee, and against F.H. Burgess in his capacity as liquidator of that corporation, to recover deficiency sales taxes and forest charges, together with surcharges and penalties. The Government sued to enforce three assessments made by the Bureau of Internal Revenue. The case matters because it gathers in one decision four recurring bar topics: when a tax assessment becomes final and executory, the prescriptive periods for assessment and collection, the effect of an amended complaint on prescription, and the liability of a corporate liquidator for the debts of a dissolved corporation.

Procedural History

The Republic filed its original complaint for collection in the Court of First Instance of Manila, praying for a smaller sum. It later filed an amended complaint demanding the full amount of the three assessments, and the trial court admitted that amended complaint. After trial, the Court of First Instance of Manila, presided over by Judge Conrado M. Vasquez, rendered judgment sentencing the defendants to pay the assessed amounts with legal interest, surcharges, and penalties. The defendants appealed directly to the Supreme Court, assigning four errors.

Facts

Marsman Development Company held a timber license with concessions in Camarines Norte. After an investigation of its operations, the Bureau of Internal Revenue made three demands. On October 15, 1953, the Deputy Collector of Internal Revenue demanded 13,136 pesos in forest charges and a surcharge. On September 13, 1954, a second assessment of 45,541 pesos and 66 centavos was sent for deficiency sales tax, forest charges, surcharges, and penalties. On November 8, 1954, a third assessment of 456 pesos and 12 centavos was made as a surcharge for discharging lumber without permit. The three assessments totalled 59,133 pesos and 78 centavos.

On December 28, 1954, the corporation, through counsel, acknowledged receipt of the assessments and asked for a reinvestigation before the Conference Staff. The Bureau replied that no reinvestigation would be given due course unless the corporation complied with Department Order No. 213, which required a written request under oath, stating the grounds and supporting documents, with payment of one-half of the assessments and a bond for the balance. The corporation asked to be exempted; the request was denied, with the warning that otherwise the assessment would be considered final. Follow-up letters in June and November 1955 repeated the warning that the case would be considered abandoned and immediate collection enforced. The corporation complied with nothing.

On April 27, 1956, the Bureau issued final tax notices. The corporation merely reiterated its protests and requests for specification. A warrant of distraint and levy followed on July 3, 1956. On July 30, 1959, the Commissioner made a final extrajudicial demand, and when no payment came, the Republic filed suit. Meanwhile, the corporation had been extrajudicially dissolved on April 23, 1954, and Burgess continued as liquidator.

Issues

• Whether or not the final tax notices of April 27, 1956 were the assessments that became final and executory.
• Whether or not the Government's right to assess the taxes for the years 1947 to September 23, 1949 had prescribed.
• Whether or not the Government's right to collect the sum of 45,541 pesos and 66 centavos had prescribed.
• Whether or not the suit against F.H. Burgess as liquidator had prescribed under the three-year period of the Corporation Law.

Applicable Provisions

Section 332, paragraph a, of the Revenue Code, as quoted by the trial court, provides:

In case of a false or fraudulent return or a failure to file a return, the tax may be assessed at any time within ten years after the discovery of the falsity, fraud or omission.

This is the provision the Court applies to the question of prescription, because the corporation filed no returns for the taxes in question.

Section 77 of the Corporation Law provides:

Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established.

This fixes the three-year period invoked by the appellants against the suit on the assessments.

Section 78 of the Corporation Law provides:

At any time during said three years said corporation is authorized and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors, and others interested. From and after any such conveyance by the corporation of its property in trust for the benefit of its members, stockholders, creditors, and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustee, and the beneficial interest in the members, stockholders, creditors, or other persons in interest.

This makes the liquidator a trustee of the corporate assets for creditors, including the Government.

Ruling

On the first issue, the Court held that the assessments had long become final and executory. The corporation acknowledged them in December 1954, requested reinvestigation, and then failed to comply with every requirement, despite repeated warnings that the assessment would be considered final and the case abandoned. The Court stressed that a taxpayer cannot delay collection by the mere expedient of asking for clarification or reconsideration without complying with the statutory and reglementary requirements, and that the mere filing of such a motion does not suspend the running of the period for collection.

On the second issue, the Court held that prescription had not set in. Since no return was shown to have been filed, the ten-year period of Section 332, paragraph a, applied, and the assessments were all made within that period. Even if a return had been filed, it must be substantially complete to start the period, and the appellants failed to show that.

On the third issue, the Court held that the collection action was timely. For purposes of prescription, an amended complaint is deemed filed on the date it is actually filed with the court, not on the date it is formally admitted, and the admission retroacts to the date of actual filing.

On the fourth issue, the Court held that the suit against the liquidator was not barred. The assessments were made before and shortly after dissolution, so the Government became a creditor before liquidation was completed, and the liquidator became trustee of the assets for creditors. The Court noted that an extrajudicial dissolution is permitted only when it does not affect the rights of any creditor.

Doctrine

An assessment becomes final and executory when the taxpayer fails to comply with the requirements for reinvestigation despite notice; a request for reconsideration does not suspend the period for collection. Where no return is filed, the tax may be assessed within ten years from discovery under Section 332, paragraph a. For prescription purposes, an amended complaint is deemed filed on the date of its actual filing. The three-year period under Section 77 does not bar an action against the liquidator for corporate debts assessed within that period, because under Section 78 the liquidator holds the assets in trust for creditors.

Disposition

The Supreme Court affirmed the judgment of the trial court, with costs against the appellants.

Remember This

The one line to memorize: a taxpayer cannot delay the collection of taxes by merely asking for reconsideration without complying with the requirements of law. Examiners use this case on the finality of assessments, the ten-year prescriptive period for failure to file a return, and the liability of a liquidator beyond the three-year corporate winding-up period.