BIR Ruling No. 299-61

August 7, 1961 BIR RULING NO. 299-61 There is returned to you herewith the entire docket bearing on the internal revenue tax case of Mr. . . . , involving the sum of P . . . as 50% surcharge on his deficiency income taxes for the period covering the years 1950 to 1953. LLjur The records of this case show that subject taxpayer, Mr. . . ., filed with the Bureau of Internal Revenue income tax returns for the years 1950 to 1954. Upon original investigation of his income tax liabilities for the aforesaid years. Examiner Aquilino T. Larin and Agent Augusto Guerrero, using the "net-worth-expenditure" or "inventory" method of examination discovered certain discrepancies and/or undeclared income. Accordingly, on the basis of their report dated November 28, 1955 deficiency income tax assessment notices were issued by the Bureau of Internal Revenue against subject taxpayer, demanding payment of the total amount of P . . . , inclusive of the 50% surcharge for the years 1950 to 1954. Disagreeing with the aforementioned assessment, the taxpayer in a letter of protest dated January 12, 1956, requested for re-investigation of his income tax liabilities. On July 31, 1956, Examiner Larin and Agent Guerrero submitted an amended report on the result of their re-investigation, recommending among other things, the withdrawal and cancellation of the previous assessments issued on December 27, 1955. Finally, revised assessments in the total amount of . . . , inclusive of the 50% surcharge were issued against the said taxpayer. The taxpayer then paid the amount of P. . . which represent only the total deficiency income tax proper, due from him, as per re-investigation but refused to pay the total amount of P . . . or the 50% surcharge on his revised deficiency income tax liabilities. cdta For this reason, therefore, this case is referred to the Law Division for a ruling on the question of whether or not the 50% surcharge is legally due from Mr. . . . . In addition to the deficiency income taxes for 1950 to 1953, this Bureau seeks to collect from subject taxpayer the fraud penalty or 50% surcharge as provided for in Section 72 of the Tax Code. We scanned the records of this case for the purpose of finding out the reason or reasons relied upon by our investigating examiners to justify the imposition of the fraud penalty. In their report dated November 28, 1955 Examiner Larin and Agent Guerrero stated: "On the basic deficiency income taxes shown above as still due, we seek to impose the 50% surcharge as civil fraud penalty. And to support as on that matter, we maintain that the contents of Tee Lam's income tax returns for 1951 and prior years are in themselves false material representation by himself. And when he prepared and signed those returns, it cannot be denied and doubted that at those moments he had full knowledge of those parts thereof which were false. These are the only circumstances which we can rely upon for beyond them, knowledge by the taxpayer is purely subjective. Further, the mere fact that Tee Lam filed officially those returns, he had the fullest intent that the same be acted upon and accepted as truth. And at the time Tee Lam filed his returns, the Bureau had no intimation whatever of the falsity of his representations. As a matter of fact, it is only now that the falsity of the same was brought to light. Lastly, the resultant assessments show the actual, consequent, and proximate injury to the Government." cdll In this connection, we quote hereunder the decision of the Board of Tax Appeals in the case of Perez v. Araneta, BTA Case No. 189, February 13, 1956; G.R. No. L-10507, prom. May 30, 1958: "Among the circumstances generally recognized as justifying the imposition of the fraud penalty are: (1) intentional understatement of income, substantial in amount per se or substantial in relation to the total reported income ; (2) intentional overstatement of deductions, substantial in amount per se or substantial in relation the total reported income; and (3) recurrence of the understatement of income or overstatement of deductions for more than one tax year." (Balter, Fraud Under Federal Tax Law, 2nd ed. 1953, p. 226.) (Emphasis supplied). More understatement of income, however, does not constitute sufficient ground to justify the imposition of the fraud penalty because more important than the amount of the understatement is the requirement that the understatement of income be intentional . prll The rule is well settled that in order that the fraud penalty may be imposed it is essential that a false or fraudulent return be willfully filed, that is, with intent to evade tax . In the case of the fraud penalty, the law requires a condition for its imposition that the taxpayer, in filing a false or incorrect return, intended to evade payment of the tax. The intention to evade payment of the tax must be clearly established. (Erlinda Cortez Brinker vs. Collector of Internal Revenue, CTA Case No. 386, prom. July 17, 1959) Relative to the allegation that the income tax returns of subject taxpayer, particularly for the year 1951 were false with intent to evade the payment of taxes, we find no evidentiary basis therefor to warrant the imposition of the fraud penalty. In fact, our investigating examiners in imposing the 50% surcharge merely relied on their finding that the taxpayer underdeclared his income for the years 1950 to 1954; and on the basis of this understatement of income, they presumed the existence of fraud. Fraud cannot be presumed; it must be alleged and proved, at least satisfactorily, if not conclusively by one who alleges its existence. (De Roda v. Lalk, 48 Phil. 58; Arroyo v. Granada and Centeno, 18 Phil. 484). The rule is founded on public policy to guard against the speculative tendencies of the human mind and its readiness to accept as fact theories that appeal to the imagination. (Hilado v. Assad, G.R. No. L-6397, Aug. 31, 1955; Yulo v. Araneta, CTA No. 84, July 8, 1958) There must be clear and convincing evidence that there was an intent to evade the payment of taxes. In default of such showing, we cannot just impose the fraud penalty of 50%. In view of the foregoing, this Office recommends the cancellation of the assessment calling for the payment of the total amount of P . . . as 50% surcharge on taxpayer's deficiency income tax liabilities for the prior years 1950 to 1953, and this case be considered closed and terminated. LexLib