COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. WYETH SUACO LABORATORIES, INC. AND THE COURT OF TAX APPEALS, RESPONDENTS.

Commissioner of Internal Revenue versus Wyeth Suaco Laboratories

The Case

This is a petition for review on certiorari brought by the Commissioner of Internal Revenue against Wyeth Suaco Laboratories, Incorporated, a domestic corporation engaged in the manufacture and sale of pharmaceutical and nutritional products. The Commissioner asks the Supreme Court to reverse the Court of Tax Appeals, which had enjoined him from collecting deficiency withholding tax at source and deficiency sales tax on the ground that his right to collect had already prescribed. The case matters because it fixes two rules every tax practitioner must know: when the five-year prescriptive period for collection is interrupted, and whether withholding tax at source attaches upon accrual or only upon actual payment of the income.

Procedural History

The Commissioner assessed Wyeth Suaco for deficiency taxes in two assessment notices dated December 16 and December 17, 1974, both received on December 19, 1974. Wyeth Suaco protested through its tax consultant. On December 10, 1979, the acting Commissioner rendered a decision reducing the withholding tax assessment to 1,973,112 pesos and 86 centavos, while the deficiency sales tax of 61,155 pesos and 21 centavos remained. Wyeth Suaco then filed a petition for review in the Court of Tax Appeals, praying that the assessments be declared void by reason of prescription and lack of factual and legal basis. The Commissioner issued warrants of distraint and levy, served on March 12, 1980, but the Tax Court enjoined collection. On August 29, 1986, the Court of Tax Appeals reversed the Commissioner, holding that while the assessments were timely made, the right to collect had prescribed under the five-year rule. Hence this petition for review on certiorari before the Supreme Court.

Facts

Wyeth Suaco kept its books on a fiscal year ending October 31 and used the accrual method of accounting. Acting under a Letter of Authority issued in June 1974, a revenue examiner investigated its books and reported that Wyeth Suaco paid royalties to foreign licensors and remuneration for technical services to Wyeth International Laboratories of London, and had declared cash dividends in September 1973, paid in October 1973. The examiner found that Wyeth Suaco failed to remit withholding tax at source for the fourth quarter of 1973 on accrued royalties, technical services, and cash dividends, producing a deficiency of 3,178,994 pesos and 15 centavos. He also found that Wyeth Suaco had deducted the cost of non-deductible raw materials and short-paid advance sales tax on an importation, producing a deficiency sales tax of 60,855 pesos and 21 centavos plus a compromise penalty.

Wyeth Suaco protested, arguing that withholding tax on royalties and dividends becomes due only upon actual remittance abroad, and that Central Bank restrictions prevented full remittance. It admitted a short payment of 1,000 pesos on one importation. It later manifested conformity to a compromise on the basic sales tax but excepted the withholding tax as a purely legal question.

After review by the Bureau's Manufacturing Audit Division, the acting Commissioner issued a final assessment on December 10, 1979, received by Wyeth Suaco on January 2, 1980. The warrants of distraint and levy were served on March 12, 1980. Wyeth Suaco's own officers, in later letters, admitted they were seeking reconsideration and that the matter was undergoing review.

Issues

• Whether or not the Commissioner's right to collect the deficiency withholding tax at source and sales tax was barred by prescription.
• Whether or not Wyeth Suaco's protest letters amounted to requests for reinvestigation or reconsideration that interrupted the five-year prescriptive period.
• Whether or not withholding tax at source on accrued royalties and dividends must be remitted before actual payment of the income.
• Whether or not the examiner's assessment of deficiency sales tax is presumed correct and valid.

Applicable Provisions

Section 318 of the National Internal Revenue Code of 1977, now Section 203 of the 1986 Code, provides:

Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

This fixes the period for assessment, which the Tax Court found was met, leaving collection as the contested step.

Section 319, paragraph (c), of the same Code, now Section 224 of the 1986 Code, provides:

Where the assessment of any internal revenue tax has been made within the period of limitation above-prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if begun (1) within five years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Commissioner and the taxpayer before the expiration of such five-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

This is the five-year collection period whose interruption is the heart of the case.

Section 54, paragraph (a), of the Tax Code, now Section 51, paragraph (a), provides:

The Commissioner of Internal Revenue may, with the approval of the Secretary of Finance, require the withholding agents to pay or deposit the taxes deducted and withheld at more frequent intervals when necessary to protect the interest of the government. The return shall be filed and the payment made within 25 days from the close of each calendar quarter.

This supports the rule that withholding tax is remitted on the accrual of the income, not on its actual payment.

Ruling

On the first and second issues, the Court ruled that prescription had not set in. The settled rule is that the prescriptive period for collection is interrupted once the taxpayer requests reinvestigation or reconsideration, and starts to run again when that request is denied. Although the protest letters did not use the words reinvestigation or reconsideration, the Court treated them as such, because the Bureau ordered its Manufacturing Audit Division to review the assessments and because Wyeth Suaco's own officers admitted in later letters that they were seeking reconsideration. The period therefore ran anew only upon receipt of the final assessment on January 2, 1980, and since the warrants were served on March 12, 1980, only about four months of the five-year period had been used.

On the third issue, the Court held that withholding tax at source attaches upon accrual. Wyeth Suaco used the accrual method, recorded the accrued royalties and dividends payable, and recorded the withholding tax payable in its books; having deducted and withheld the tax, it was obligated to remit it. The Court reminded that taxes are the lifeblood of the government and should be collected without unnecessary hindrance.

On the fourth issue, the Court held that tax assessments by examiners are presumed correct and made in good faith, and the taxpayer bears the duty to prove otherwise. Wyeth Suaco failed to submit proof to refute the finding that it deducted non-deductible raw materials not subjected to advance sales tax.

Doctrine

First, the five-year prescriptive period for collection by distraint, levy, or judicial proceeding is interrupted by the taxpayer's request for reinvestigation or reconsideration, and begins to run again upon denial or upon service of the final assessment. Second, the label used in the protest does not control; conduct showing a request for review, and the Bureau's actual reinvestigation, suffice. Third, withholding tax at source on accrued income is due upon accrual under the accrual method, not upon actual payment. Fourth, tax assessments by examiners are presumed correct and made in good faith, and the burden of proof lies on the taxpayer.

Disposition

The petition was granted; Wyeth Suaco was ordered to pay the deficiency withholding tax at source of 1,973,112 pesos and 86 centavos and the deficiency sales tax of 60,855 pesos and 21 centavos, with interest and surcharge in accordance with law, with costs against it.

Remember This

Memorize this line: a taxpayer's request for reinvestigation or reconsideration interrupts the five-year prescriptive period for collection, which resumes only upon denial or final assessment. Examiners use this case to test prescription of tax collection and the accrual basis of withholding tax at source.