COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. UNION SHIPPING CORPORATION AND THE COURT OF TAX APPEALS, RESPONDENTS.

Commissioner of Internal Revenue versus Union Shipping Corporation

The Case

This is a petition for review on certiorari brought by the Commissioner of Internal Revenue against Union Shipping Corporation and the Court of Tax Appeals. The Commissioner assessed deficiency income taxes against Yee Fong Hong, Ltd. and, in the alternative, against Union Shipping Corporation as its alleged agent. The Tax Court reversed the Commissioner, and the Commissioner asked the Supreme Court to set that reversal aside. The case matters for two reasons: it fixes the moment when an assessment becomes final and appealable, and it confirms that a husbanding agent who never touches the foreign shipowner's freight income cannot be taxed on it.

Procedural History

The Commissioner issued a letter of assessment against Yee Fong Hong, Ltd. and, in the alternative, against Union Shipping Corporation. Union Shipping protested. Without ruling on the protest, the Commissioner issued a Warrant of Distraint and Levy. Union Shipping asked for reinvestigation and reconsideration. Again without acting, the Commissioner filed a collection suit in the Court of First Instance of Manila. Union Shipping then filed a Petition for Review with the Court of Tax Appeals, which reversed the Commissioner and cancelled the assessment. The Commissioner elevated the matter to the Supreme Court by petition for review on certiorari. The Second Division gave the petition due course, the parties filed their briefs, and the case was submitted for decision.

Facts

On December 27, 1974, the Commissioner of Internal Revenue assessed against Yee Fong Hong, Ltd. and, in the alternative, against Union Shipping Corporation deficiency income taxes for the years 1971 and 1972. The assessment letter was received on January 4, 1975. On January 10, 1975, Union Shipping protested.

The Commissioner did not rule on the protest. Instead, he issued a Warrant of Distraint and Levy, which was served on Union Shipping's counsel on November 25, 1976. On November 27, 1976, Union Shipping reiterated its request for reinvestigation of the assessment and reconsideration of the summary collection. Still without acting on those requests, the Commissioner filed a collection suit before the Court of First Instance of Manila. Summons was issued to Union Shipping on December 28, 1978.

On January 10, 1979, Union Shipping filed with the Court of Tax Appeals a Petition for Review of the assessment, praying that it be declared not liable for the income tax due from the foreign shipowner Yee Fong Hong, Ltd. The Tax Court ruled in favor of Union Shipping and reversed the Commissioner's assessment. The Commissioner then brought this petition.

Issues

• Whether or not the Court of Tax Appeals had jurisdiction over the case, that is, whether or not Union Shipping's appeal was filed within the period allowed by law.
• Whether or not Union Shipping Corporation, acting as a mere husbanding agent of Yee Fong Hong, Ltd., is liable for payment of taxes on the gross receipts or earnings of the latter.

Applicable Provisions

Section 11 of Republic Act Numbered 1125, as amended, governs the period to appeal to the Court of Tax Appeals. The Court refers to it in fixing the running of the appeal period:

Section 11 of Republic Act Numbered 1125 provides that the taxpayer may appeal to the Court of Tax Appeals within thirty days after receipt of the decision of the Commissioner of Internal Revenue.

Section 53 of the Internal Revenue Code governs withholding tax liability. The Court cites it to show that liability attaches only to one in possession, custody, or control of the funds:

Section 53 of the Internal Revenue Code imposes withholding tax liability upon a person in possession, custody, or control of the funds received by a non-resident taxpayer.

Ruling

On the procedural issue, the Court held that the Court of Tax Appeals had jurisdiction. The Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment. The Court quoted its earlier ruling:

We deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by sections 7 and 11 of Republic Act 1125, as amended.

Here, the Commissioner did not rule on the motion for reconsideration and left Union Shipping in the dark as to which action was appealable. The reviewable decision is that contained in the letter of the Commissioner, not the warrant of distraint. Since the Commissioner never clearly signified his final action, the period to appeal never commenced to run. It began only when Union Shipping received the summons in the civil collection suit on December 28, 1978. Counting from that date, the appeal filed on January 10, 1979 consumed only thirteen days, well within the thirty day period.

On the merits, the Court held that Union Shipping was not liable. The Tax Court found that Union Shipping was merely the husbanding agent of the vessel of Yee Fong Hong, Ltd. It neither performed nor transacted any shipping business for the foreign owner, never solicited or procured cargo, never collected freight income, never had possession or control of the funds paid by Philippine shippers, and never remitted any freight income to Yee Fong Hong, Ltd. The freight payments were made directly by the shippers to Yee Fong Hong, Ltd. upon arrival of the goods in foreign ports. The Commissioner of Internal Revenue himself, Misael P. Vera, opined that a mere husbanding agent is not liable for income taxes due from foreign shipowners loading cargoes in the Philippines. Neither could Union Shipping be liable for withholding tax under Section 53, since it was not in possession, custody, or control of the funds received by and remitted to the non-resident taxpayer. The Court also held that the factual findings of the Court of Tax Appeals are binding and will not be disturbed unless clearly shown to be unsupported by substantial evidence.

Doctrine

The Commissioner of Internal Revenue must indicate to the taxpayer in clear and unequivocal language when his action on a disputed assessment constitutes his final determination. Until he does so, the period to appeal to the Court of Tax Appeals does not commence to run. A warrant of distraint and levy is not the final decision appealable to the Tax Court; the reviewable decision is that contained in the Commissioner's letter. A husbanding agent that never takes possession, custody, or control of the foreign shipowner's freight income is not liable for income tax on that income, nor for withholding tax under Section 53 of the Internal Revenue Code. Factual findings of the Court of Tax Appeals are binding on the Supreme Court absent a showing that they are unsupported by substantial evidence.

Disposition

The petition was dismissed and the decision of the Court of Tax Appeals was affirmed.

Remember This

Memorize this line: the Commissioner must state in clear and unequivocal language that his action is his final determination; until then, the appeal period has not begun to run, and a warrant of distraint is not the appealable decision. Examiners use this case to test the timeliness of appeals to the Court of Tax Appeals and the tax liability of a husbanding agent who never holds the foreign shipowner's funds.