EUGENIO PEREZ, PETITIONER AND APPELLANT, VS. THE COURT OF TAX APPEALS AND THE COLLECTOR OF INTERNAL REVENUE, RESPONDENTS AND APPELLEES.

REYES, J.B.L., J.:

This is an appeal by certiorari to review the decision of the Court of Tax Appeals in the case of Eugenio Perez vs.
J.Antonio Araneta as acting Collector of Internal Revenue (B.T.A.
189), whereby the petitioner was ordered to pay the sum of P41, 547.77
as deficiency income taxes and surcharges corresponding to the years
1947, 1943, 1949 and 1950, more particularly as follows:

For 1946	–	none
” 1947	–	P 5,110.47
” 1948	–	9,360.45
” 1949	–	2,053.38
” 1950	–	25,023.00

This amount was arrived at by the Court of Tax Appeals on the basis of petitioner-appellant’s increase in net worth.

It appears from the records that petitioner filed
his income tax returns for 1947, 1948, 1949 and 1950 on March 1, 1943,
May 10, 1949, February 23, 1950 and February 23, 1951 respectively, and
paid taxes thereon as follows:

Year	Net Income	Income Tax Paid
1947	P 9,012.10	P 361.57
1948	6,921.01	145.26
1949	6,396.24	113.77
1950	7,643.51	167.00

On September 3, 1952, respondent Collector of
Internal Revenue assessed against the petitioner the sum of P369,708.27
as deficiency income taxes and 50% surcharge from 1945 to 1950, but
which amount was later reduced to P186,170.43, upon petitioner’s
request for reconsideration. Subsequently, however, the said amount was
increased to P197,179.85 in a letter of the said respondent, dated
November 6, 1953. Upon his (Collector of Internal Revenue) refusal to
consider further requests for reinvestigation and reexamination of the
case, the petitioner appealed to the then Board of Tax Appeals by
filing a petition for review, as amended March 23, 1954. An answer to
this petition was filed by the respondent Collector of Internal Revenue
on April 13, 1954. This case was later transferred to the Court of Tax
Appeals by virtue of Republic Act No. 1125.

In making the deficiency assessments, the Collector
employed what is known as the “net worth” technique and started by
determining the opening net worth of petitioner at the start of the
year 1947 which he fixed at P936.72, as follows:

1946

Assets

Lot No. 1, Block 35, Quezon City—— P 66.67
Lot No. 2, Block 32, Quezon City—— 1,349.08
Lot No. 4, Block 32, Quezon City —– 2,240.00
Furniture & Fixtures——————– 5,000.00
Initial subscription in the Far
		Eastern Construction Corporation– 2,500.00
Current account deposit balance
		with Phil. National Bank ———– 5,000.00
Back pay received from
	U.S. Army——–P 1,013.33
Back pay received from
		Phil. Congress — P 7,200.00
Back pay received from
		Phil. Congress — 15,557.14
		23,770.47

Total Assets ——— P44,707.19

Deduct adjustment of back pay:
		From U. S. Army P 1,013.33
		From Phil. Congress 7,200.00
		From Phil. Congress 15.557.34
		23,770.47
		Total adjusted assets – P23.770.47

Liabilities

Salary loan with the Phil. Na-
	tional Bank———————- P 20.000.00
		Net worth as of end of 1946 – P 936.72
		======

Thereafter, the increases in the taxpayer’s net worth were determined:

1947

Assets

Lot No. 1, Block 35, Quezon City —— P 66.67
Lot No. 2, Block 32, Quezon City —— 1,849.08
Lot No. 4, Block 32, Quezon City —– 2,240.00
Residential Building & Improve-
	ments—————————– 35,210.00
Furniture and fixtures ——————- 5,000.00
Current account deposit balance with
	the Philippine National Bank —– 22.165.18
		Total assets —– P 66,530.97
	Deduct adjustment of back pay:

	Cost of residential
	improvements from
	back pay -P3 5,210.00
	Unexpended balance of
	back pay——– P2,327.96
		37,537.96
	Total adjusted assets	P 28,992.97

Liabilities

Salary loan with the Phil. Na-
	tional Bank———————– P 2,653.71
		Net worth as of end of 1946 — P26,339.26
Deduct: Net worth as of be-
	ginning of 1947 —————— P 936.81(x)
	Increase in net worth in 1947—–P25,402.54
	(x)(Note) This amount of P936.72 is
		the net worth of the petitioner-
		appellant on December 31, 1946.

1948

Assets

Lot No. 1, Block 35, Quezon City——- P 66.67
Lot No. 2, Block 32, Quezon City—— 1,849.08
Lot No. 4, Block 32, Quezon City —– 2,240.00
Residential building & improve-
	ments—————————— 35,210.00
Furniture and fixtures ——————- 5,000.00
365 shares of stock of the Hind
	Sugar Co., Inc.——————– 49,640.00
Current account deposit balance
	with the Phil. National Bank——— 6.046.73
		Total assets——— P100,052.48
Deduct adjustment of back pay:
	Cost of residential
	building and improve-
	ments from back pay
	funds———— P35,210.00
	Unexpended balance of
	back pay———- 2.327.96
		37.537.96
		Total adjusted assets- P62,514.52

		Liabilities	None
	Net worth as of the end of 1948		P62,514.52
Deduct: Net worth as of beginning of
	1948—————————-		26.339.26
Increase in net worth in 1948 —			P36.175.26

1949

Assets

Lot No. 1, Block 35, Quezon City——— 66.67
Lot No. 2, Block 32, Quezon City—— 1,849.08
Lot No. 4, Block 32, Quezon City —– 2,240.00
Lot No. 1, Block 227-A, Quezon City 30,000.00
Lot No. 11, Block 264, Quezon City- – 9,163.86
Lot No. 13, Block 264, Quezon City— 5,220.02
Lot No. 15, Block 141, Quezon City— 1,545.20
Lot No. 41-c-2-a-1, San Mateo, Rizal
		Province ————– 27,114.00
Residential building and improvements- 35,210.00
Furniture and fixtures ——————-5,000.00
Automobile-station wagon————– 6,260.00
365 shares of stock of the Hind
	Sugar Co., Inc——————- P49,640.00
Investment in the Freedom Magazine
	Publications————————- 9,000.00
Subscription in the Congressional
	Club——————————– 1,293.06
Current account deposit with P. N. B. – 5,311.52
		Total assets ——- P147,147.35
Deduct adjustment of backpay:
	Cost of residential building
	and improvements—- P35,210.00
Unexpended balance of back
	pay——————– 2,327.96
		37.537.96
		Total adjusted assets P109,609.39

Liabilities

Salary loan with the Phil. National
	Bank ——————————– 542.10
Mortgage loan with the China Bank
	Corporation (Mrs. Perez)——— 30.000.00
		P33.548.10
	Net worth as of the end of 1949 P 76,061.79
	Net worth as of the beginning
	of the year———————— 62.514.52

Increase in net worth in 1949

P13.547.27

1950

Assets

Lot No. 1, Block 35, Quezon City——— 66.67
Lot No. 2, Block 32, Quezon City—— 1,849.08
Lot No. 4, Block 32, Quezon City —– 2,240.00
Lot No. 1, Block 227-A, Quezon City 30,000.00
Lot No. 11, Block 264, Quezon City- – 9,163.86
Lot No. 13, Block 264, Quezon City— 5,220.02
Lot No. 15, Block 141, Quezon City— 1,545.20
Lot No. 41-c-2-a-1, San Mateo, Rizal
		Province ————– 27,114.00
Lot No. 2, Block 310, Quezon City — 4,074.90
Residential building and improvements- 45,210.00
Furniture and fixtures ——————-5,000.00
Automobile-station wagon————– 7,492.00
365 shares of stock of the Hind
	Sugar Co., Inc——————- P49,640.00
Investment in the Freedom Magazine
	Publications————————- 9,000.00
Subsciption in the Congressional
	Club——————————– 1,293.06
Current account deposit with P. N. B. – 5,311.52
		Total assets ——– P204,200.31
Deduct adjustment of backpay:
	Cost of residential building
	and improvements—- P35,210.00
Unexpended balance of back
	pay——————– 2,327.96
		37.537.96
		Total adjusted assets P166,682.31

Liabilities

Mortgage loan with the China Bank
	Corporation (Mrs. Perez) ———25,000.00
Balance of mortgage with the R. F. C.
	(Mrs. Perez)———————— 9.360.00
		Total liabilities——- P34,360.10
Net worth as of the end of 1950— P 132,322.25
Deduct: Net worth as of the be-
	ginning of the year————— P 76.061,79
	Increase in net worth in 1950 — P 56.260.46
	=========

The
Court of Tax Appeals declared the “net worth” method of deter raining
understated income to have been validly and properly applied; found
that the consistent underdeclaration of income, unexplained acquisition
of properties, and the fact of petitioner’s having claimed fictitious
losses evidenced fraudulent intent, and ordered him to pay deficiency
income taxes and surcharges in the sum of P241,547.77, summarized as
follows:

		50%
Year	Deficiency	Surcharge	Total
1946	None
1947	P 3,406.98	P 1,703.49	P5,110.47
1948	6,240.30	3,120.15	9,360.45
1949	1,369.23	648.62	2,053.85
1950	16,682.00		8,341.00
			25,023.00

and to pay the costs. Against the decision of the
Court of Tax Appeals, the petitioner applied for a review by this
Supreme Court, and his petition was given due course.

The three major issues in this appeal, as stated by
the petitioner’s counsel in his written memorandum filed with this
Court on June 8, 1957, are: (1) whether the appellee Collector of
Internal Revenue is empowered by law to investigate appellant’s
(petitioner) income tax returns for 1947, 1948, and 1949 and to enforce
collection of the alleged deficiency income taxes for said years by
summary proceedings of distraint and levy more than three years after
the income tax returns covering them were filed; (2) whether the use of
the “net worth” method by the respondent in computing appellant’s net
income is valid; and (3) whether the 50% surcharge imposed upon the
appellant is legal and justified.

In view, however, of the rulings of this Court, particularly in the cases of Collector of Internal Revenue vs. A. P. Reyes (G.R. No. L-86S5, Jan. 31, 1957) and Collector of Internal Revenue vs. Jose
Avelino (G. R. L-9202, November 15, 1956), reiterating a long line of
decisions to the effect that the three-year prescriptive period under
section 51 (d) of the National Internal Revenue Code constituted a
limitation to the right of the government to enforce the collection of
income taxes by summary proceedings of distraint and levy, though, it
could proceed to recover the taxes due by the institution of the
corresponding civil action (Philippine Sugar Estate Development Co.,
Inc. vs. Juan Posadas, 68 Phil.216; Collector of Internal Revenue vs. Villegas, 56 Phil. 554; Juan; de la Vina vs.
El Gobierno de las Filipinas, G. R. 42669, January 29, 193&), the
Collector in his Reply Memorandum (in lieu of oral argument) concedes
that the summary distraint and levy to collect the deficiency income
taxes assessed against appellant Perez, for the years 1947, 1948 and
1949,should be declared invalid. Nevertheless, the appeal of the
taxpayer vested jurisdiction on the Court of Tax Appeals to review and
determine his tax liability for the aforesaid period.

On the second question, regarding the validity of
the application of the “net worth” method in this jurisdiction, the
respondent Collector of Internal Revenue bases his alleged right on
sections 15 and 38 of the National Internal Revenue Code which provide:

“SEC. 15. ten a report required by
law as a basis for the assessment of any national internal revenue tax
shall not be forthcoming within the time fixed by law or regulation, or
when there is reason to believe that any such report is false,
incomplete, or erroneous, the Collector of Internal Revenue shall
assess the proper tax on the best evidence obtainable”. (Emphasis supplied)

“SEC. 38. General rule.—The
net income shall be computed upon the basis of the taxpayer’s annual
accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping
the books of such taxpayer; but if no such method of accounting has
been so employed, or if the method does not clearly reflect the income,
the computation shall be made in accordance with such method as in
the opinion of the Collector of Internal Revenue does clearly reflect
the income.” (Emphasis supplied)

The Court of Tax Appeals fully explained this me
this of proving unreported income in its decision: “The net worth
technique for determining income may be expressed in the following
formula: Increase in Net Worth plus Non-Deductible Expenditures minus
Non-Taxable Receipts equals Taxable Net Income (Samuel Byer, ‘Net Worth
Technique for Determining Income1, Proc. NYU 13th Ann. Inst. on
Federal; Taxation 1058, 1955). The net worth expenditures method is
based on the accounting formula that an increase in net worth plus
non-deductible disbursements, minus non-receipts equals taxable net
income (Aviakan, ‘The Net Worth Method of Establishing Fraud’, Proc.
NYU 11th Ann. Inst. on Federal Taxation, 707)”.(p. 5, B.T.A. 189)

In the recent case of Marion L. Holland vs. U.S., decided in 1954 (348 U.S. 121, 99 L. Ed. 127), the Supreme Court of the United States gave this brief exposition:

“In a typical net worth prosecution,
the Government, having concluded that the taxpayer’s records are
inadequate as a basis for determining the income tax liability,
attempts to establish an ‘opening net worth’ or total net value of the
taxpayer’s assets at the beginning of a given year. It then proves
increases in the taxpayer’s net worth for each succeeding year, during
the period under examination and calculates the difference between the
adjusted net values of the taxpayer’s assets at the beginning and end
of each of the years involved. The taxpayer’s non-deductible
expenditures, including living expenses, are added to these increases,
and if the resulting figure for any year is substantially greater than
the taxable income reported by the taxpayer for that year, the
Government claims the excess representing unreported taxable income
(Spies vs. United States, 317 U.S. 492; 63 S. Ct. 364).”

This method of proving unreported income, according
to the Court of Tax Appeals, is based upon the general theory that
money and other assets in excess of liabilities of a taxpayer (after an
accurate and proper adjustment of non-deductible items) not accounted
for by his income tax returns, leads to the inference that part of his
income has not been reported (p. 6, B.T.A. 189).

There is no question that the application of the
“net worth” method of determining the taxable income of a taxpayer has
been an accepted practice under the United States Internal Revenue Code
(Harris vs. Com’r., 174 F (2d) 70; Louis Halle , 7 TC 245,
aff’d. 175 F (2d) 500; Federal Income, Gift, & Estate Taxation by
Rabkin & Johnson, sec. 12.02, 1217 (a); United States vs.
Johnson, 63 S. Gt. 1233). It is however, contended by the petitioner,
that the application of the “net worth” method in the United States is
based not under section 41 of the United States Internal Revenue Code
(which is an exact copy of section 3$ of our National Internal Revenue
Code), but on section 57 thereof:

“SEC. 57.—As soon as practicable
after the return is filed, the Commissioner shall examine it and shall
determine the correct amount of the tax.”

which has no counterpart in
our Code. Moreover, he insists, section 38 of the Code does not
authorize the Collector of Internal Revenue to change the method of
accounting employed by the taxpayer unless such method does not clearly
reflect the income .

The Supreme Court of the United States, in an opinion by Justice Clark in the aforecited case of Holland vs. United States (supra, affirming its former decision in the case of United States vs. Johnson, 319 U.S. 503, supra),
although recognizing the danger to a taxpayer where the government
seeks to prove tax evasion by the use of the net worth theory, and
declaring that such danger requires that each net worth case be given
close judicial scrutiny, unanimously affirmed its use. Referring to
section 41 of the U. S. Internal Revenue Code, the court said that this
section, expressly limiting the authority of the government to deviate
from the taxpayer’s method of accounting, had reference to true
accounting methods and did not forbid the use of the net worth
technique, which was not an accounting method at all, but merely an
evidence of income (See also, Estate of Bartley, 22 U.S. Tax Ct.
Reports 1230; Hurley, 22 U.S. Tax Ct. Reports 1264).

“The proposition that the
commissioner’s authority to use the ‘net worth1 method in determining
income, is rooted in or stems from section 41 of the Internal Revenue
of 1939 his been supported by the courts so frequently that the mere
mention of the indirect technique for determining income calls forth a
recitation of the I provisions of that section”. (Samuel Byer, “The Net
Worth Technique for Determining Income”) This seems to be the consensus
obtaining in the United States (Baiter, Fraud Under Fed. Tax Law, sec.
224; p. 6, B.T.A. 139; Vol. 2, 1951 CCH 366.011), aid no cogent reason
is shown for deviating from it.

The petitioner further contends that, conceding arguendo
that the “net worth” method of proving taxable income is valid under
section 38 of the National Internal Revenue Code, the requirements for
its application in the instant case have not been fully complied with,
i.e., that there is no sufficient basis upon which to establish an
unreported income. An examination of the records of this case will
disclose that this issue was not raised in the lower court. As a matter
of fact, as the Court of Tax Appeals found, the petitioner was deemed
to have impliedly waived this issue, for he made use himself of this
net worth method in computing his taxable income , in the event that
the lower court should finally find the validity of this method in this
jurisdiction under section 33 of the Code. It is well to note that
while the issue was raised on whether or not section 38 sanctions the
indirect method of proving unreported income, it was not questioned
that the method would be justified under the present circumstances,
should it be ultimately resolved that the aforesaid section authorizes
the use of this method in tills country. it is well settled that issues
not raised in the lower court cannot be raised for the first time on
appeal (Spencer, Kellogg & Sons, Inc. vs. Celino, G. R. No. 46271, Oct. 13, 1939; Tiacho vs.Tan Si Kiok, 45 O.G. (6) 2466; Comments on the Rules of Court, Moran, Vol. I, p. 952, 52 Ed.).

However, assuming argeuendo that this issue
was properly raised in the lower court, the decisions of the Supreme
Court of the United States, in the recent cases of Holland vs. U.S., 343 U.S. 121; David Friedberg vs. U.S., 207 F. 2d 777; Daniel Smith vs. U.S., 210 F. 2d 496; and U.S. vs.
Edward Calderon, 207 F. 2d 377, all decided December 6, 1954, establish
the following requisites for the use of the Inventory (or Net Worth)
Method:

First, the establishment, with reasonable
certainty, of an opening net worth to serve as a starting point, from
which to calculate future increases in the taxpayer’s assets (see also,
Byer, “The Net Worth Technique for Determining Income”, supra).
The Court of Tax Appeals fixed as the total assets of the petitioner as
of 1947 the amount of P66,530.93, based on the Amended Stipulation of
Facts of the parties. This opening net worth is not disputed by. them
in this appeal.

Second, the net worth increases must be attributable to taxable income.

Petitioner claims that no evidence was introduced to
prove that he was engaged in an income producing business to which his
increases in net worth may be attributed. Respondent, on the other
hand, states that the petitioner failed to show that his bank balances,
acquisition of assets and investments in various enterprises came from
non-taxable income. It is easily discernible that the settlement of
this question hinges, ultimately on who has the burden of proof to show
that the net worth increases was derived from taxable income or
non-taxable income. More concretely said, “Is the government required
to show the specific sources of the alleged unreported income”?

In the decisions of the United States Supreme Court, among them the Holland vs. U.S. case, supra, direct proof of the source of the income was held rot essential;

“But petitioners claim the
Government failed to adduce adequate proof because it did not negative
all possible nontaxable sources of the alleged net worth increases
—gifts, loans, inheritances, etc. We cannot agree. The Government’s
proof, in our view carries with it the negations the petitioners’ urge.
Increases in net worth, standing alone, cannot be assumed to be
attributable to a currently taxable income. But proof of a likely
source, from which the jury could reasonably find that the, net worth
increases sprang, is sufficient. In the Johnson case, where there was
no direct evidence of the sources of the taxpayer’s income, this
court’s conclusion that the taxpayer ‘had large unreported income was
reinforced by proof…that for certain years his private expenditures
exceeded the available declared resources’… This was sufficient to
support the ‘finding that he had some unreported income, which was
properly attributable to his earnings’. There the taxpayer was the
owner of an undisclosed business capable of producing taxable income.”

In civil cases, as the one at bar, it has
been held that the application of the net worth method does not require
identification of the sources of the alleged unreported income and that
the determination of the tax deficiency by the Government is prima facie correct. Such was the holding of the United States Court of Appeals in the case of Thomas vs. Commissioner, 223 F. 2d S3, decided on June 14, 1955:

“The petitioners contend that the Commissioner was
unwarranted in using the net worth method of computing their income
because they did keep certain records of their various business
activities, because their income tax returns for the years in question
accurately reflected the cash register tapes and other business records
turned over to the accounting firm by Joseph Thomas, and because the
Commissioner failed to prove any additional source of income.These
contentions are not enough. The fact that the taxpayers’ books and
other records were consistent with their income tax returns proves
nothing more than that they were consistent; it does not establish that
they were truthful. Similarly, the failure of the Government to find
any source of the alleged unreported income does not necessarily
establish anything more than that the source was well-hidden. Nor
does the fact that books and records were kept prevent the Commissioner
from resorting to the net worth method if he properly determined that
the books and records did not accurately reflect the taxpayer’s true
income. That was expressly decided in Holland vs. U. S. * *
*. There is no reason why use of the net worth method should be more
circumscribed in the case of a deficiency determination, involving
neither criminal nor even civil fraud penalties.”

This was reiterated in the subsequent case of Laughinghouse vs.
Commissioner, 227 F. 2d 477, November 16, 1955, in affirming the ruling
of the Tax Court of the United States, which sustained a deficiency
determination in income taxes with the use of the net worth method:

“Obviously, the petitioner’s
contention are based upon a misconception of the net worth plus
expenditures method of proof employed in this case, which method is not
a direct, but an indirect method of proving the receipt of unreported
income. The theory of this method is that during the tax period, the
aggregate nondeductible expenditures, plus any increase in net worth
unaccounted for by gifts, or inheritances, constitutes the taxable
income. If the sum thus derived is greater than the income reported,
then the taxpayer has failed to return all of his taxable income. This
indirect method of proving the receipt of unreported income clearly
involves additional data and an accounting approach substantially
different from the specific receipts and disbursements method
customarily used by taxpayers. Moreover, the net worth plus
expenditures method does not identify the sources of the total net
income thus calculated, and the burden of disproving the net worth
determination of taxable income is upon-the taxpayer.” (Emphasis supplied)

Considering that, normally, acquisitions of property
are made from accumulations of taxable income, and where not so made,
it lies within the peculiar province of the taxpayer to explain how
such acquisitions were made with non-taxable resources, and that no such explanations were made, we see no error in the conclusion that appellant’s increase in net worth was due to undeclared taxable income.

The last issue is the legality of the action taken
by the Collector of Internal Revenue in imposing upon the petitioner
the 50% surcharge provided under section 72 of the National Internal
Revenue Code. This section authorizes the Collector to impose a
surcharge of 50% of the amount of the tax or deficiency tax in a case
of a false or fraudulent return. Appellant contends that no fraud has
been shown by the Government to warrant the surcharge. In sustaining
the Collector, the Court of Tax Appeals expressed the view; that the
substantial under-declaration of income in the income tax returns of
the appellant for four consecutive years, coupled with his intentional
overstatement of deductions, made the imposition of the fraud penalty
proper. Certainly, these findings of large;, unreported income of the
petitioner as found by the tax court, and as substantiated by the
expenses and investments shown in the Amended Stipulation of Facts
(Rec. p. 225), together with appellant’s declaration of substantial and
Unspecified “losses” (none of which were explained, since the appellant
failed to testify more than suffices to sustain the findings of fraud,
and do not warrant a reversal from us. At any rate, we have already
ruled that —

“The question of fraud is a question
of fact which frequently requires a nicely balanced judgment to answer
(Mertens, Fed. Income Taxation,chapter 55) x x x. In passing upon
petitions to review decisions of the Court of Tax Appeals, we have to
confine ourselves to questions 1957). (Gutierrez vs. Collector, G. R. No. L-9771, May 31,

“On
the matter of fraud, although it is fundamental that this is a fact
which the Commissioner is required to prove by clear and convincing
evidence, it. like other findings of fact, will not be upset unless
clearly erroneous. Boyett vs. Commissioner, 204 F. 2d
205. The Tax Court, in concluding that the tax deficiencies were due to
fraud, expressed the view that consistent substantial understatements
of income for a period of four years, together with a clear pattern of
reporting deductions with accuracy in detail while being deliberately
evasive in the matter of income, made it impossible to believe the
understatements were due to inadvertence, negligence or honest errors.
Circumstances such as these are competent upon which to base a finding
of fraud. Cf. Bryan vs. Commissioner, 5 dr., 1954, 209 F. 2d 322, 828.” (Archer vs. Commissioner, 227 F. 2d., 270, 274) (Emphasis supplied)

Again, in the case of Lee vs. Commissioner,
227 F. 2d the same U.S. Federal Court of Appeals, in affirming the use
of the net worth method, has this to say on the fraud issue:

“We find ourselves in agreement with
the Commissioner in these contentions. Of the fraud issue, we think it
need only be said that the Tax Court, in its unreported opinion,
correctly placed the burden on the Commissioner, and, marshalling the
evidence and making findings in accordance therewith, correctly, we
think, determined that that burden was carried. It is settled law
that where, as here. there is credible evidence supporting a charge
that an understatement of income by taxpayer was due to fraud with
intent to evade tax, whether the charge has or has not been proved is a
question of fact for the Tax Court to determine. and its finding on
this issue, just as any other issue of fact. is final unless shown to
be clearly erroneous.” (Emphasis supplied)

The same rule applies to the case of the P30,000.00
loans allegedly made by Attorney Juan F. David to the appellant, and
which are claimed to be valid deductions from his net worth
determination. Whether or not such loans were made as claimed is
essentially a question of fact: and the absence of any credible note or
document evidencing the alleged loans and their alleged partial
repayment, leaves the entire issue dependent upon the testimony of the
supposed creditor, whom the Court of Tax Appeals refused credence.
Considering that the creditor is an attorney at law of long practice
and established standing who must have been familiar with legal
requirements and the notorious fallibility of debtor’s memories; the
large amount allegedly loaned; the indetermination of their maturity,
and his passivity at their non-payment, we can not declare that the Tax
Court’s rejection of this item was not supported by substantial
evidence or constituted an abuse of discretion.

Appellant invokes our decision in Knowles vs.
Insular Government, 60 Phil. 461, to the effect that it is incumbent
upon the Collector to establish his claim with certainty. The case is
not applicable, for the items in the Collector’s claim and which
constitute the basis of his determination of the appellant’s net worth
from 1947 to 1950 are practically unconstested. The issue here centered
on the justification for the use of the net worth method as basis for
determining unreported income, and such issue is more of law than of
fact.

In fine. we hold:

That section 38 of our National Internal Revenue
Code authorizes the application of the Net Worth Method in this
jurisdiction (Baiter, Fraud Under Fed.Tax Law, sec. 224; Vol. 2, 1951
CCH 386. Oil, Byer Net Worth Technique for Determining Income, supra: Holland vs. U.S., supra; Estate of Bartley, 22 U.S.Tax Ct. lep. 1230; Hurley, 22 U.S. Tax Ct. Rep. 1264; 8 B.T.A. 189).

That no civil cases, the Government need not prove
the specific source of income (this is reasonable on the basic
assumption that most assets are derived from a taxable source and that
when this is not true the taxpayer is in a position to explain the
discrepancy, (see Holland case, supra);

That the determination of the tax deficiency by the Government has prima facie
validity and the burden rests upon the taxpayer to overcome this
presumption and to show to the satisfaction of the Tax Court that the
determination was not correct (Archer vs. Commissioner, supra; Thomas vs. Commissioner, supra; Laughinghouse vs.
Commissioner, supra: William Lias, 24 T.C. No. 23,May 26, 1955,
Virginia Law Review, 41 p. 7; Halle, 7 T.C. 245, aff’d 175 F. 2d 500,
339 U.S. 949; Byer, “Net Worth Technique for Determining Income”).

And finally, that no sufficient grounds exist to warrant a reversal of the findings of fraud of the lower court as being “clearly erroneous”; on the contrary, we find them supported by reason.

WHEREFORE, the decision appealed from, requiring
appellant to pay the sum of P41,547.77 is affirmed, with the sole
modification that the Collector’s resort to summary distraint to
enforce the taxpayer’s liability for the years 1947, 1943 and 1949 is
hereby declared improper and void. Costs against appellant. So Ordered.

Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, and Felix, JJ., concur.

Chief Justice Ricardo Paras and Justice Sabino Padilla and Alex Reyes took no part.