Reyes v. Commissioner of Internal Revenue

EIGHTH DIVISION [CA-G.R. SP No. 71392. August 8, 2003.] AZUCENA T. REYES , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N CRUZ , J p : On July 8, 1993, Maria C. Tancinco (or "decedent") died, leaving a 1,292 square-meter residential lot and an old house thereon (or "subject property") located at 4931 Pasay Road, Dasmarias Village, Makati City. On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain Raymond Abad (or "Abad"), Revenue District Office No. 50 (South Makati) conducted an investigation on the decedent's estate (or "estate"). Subsequently, it issued a Return Verification Order. But without the required preliminary findings being submitted, it issued Letter of Authority No. 132963 for the regular investigation of the estate tax case. Azucena T. Reyes (or "petitioner"), one of the decedent's heirs, received the Letter of Authority on March 14, 1997. ISCaDH On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or "BIR"), issued a preliminary assessment notice against the estate in the amount of P14,580,618.67. On May 10, 1998, the heirs of the decedent (or "heirs") received a final estate tax assessment notice and a demand letter, both dated April 22, 1998, for the amount of P14,912,205.47, inclusive of surcharge and interest. On June 1, 1998, a certain Felix M. Sumbillo (or "Sumbillo") protested the assessment in behalf of the heirs on the ground that the subject property had already been sold by the decedent sometime in 1990. On November 12, 1998, the Commissioner of Internal Revenue (or "respondent") issued a preliminary collection letter to petitioner, followed by a Final Notice Before Seizure dated December 4, 1998. On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate, followed on February 11, 1999 by Notices of Levy on Real Property and Tax Lien against it. On March 2, 1999, petitioner protested the notice of levy. However, on March 11, 1999, the heirs proposed a compromise settlement of P1,000,000.00. In a letter to respondent dated January 27, 2000, petitioner proposed to pay 50% of the basic tax due, citing the heirs' inability to pay the tax assessment. On March 20, 2000, respondent rejected petitioner's offer, pointing out that since the estate tax is a charge on the estate and not on the heirs, the latter's financial incapacity is immaterial as, in fact, the gross value of the estate amounting to P32,420,360.00 is more than sufficient to settle the tax liability. Thus, respondent demanded payment of the amount of P18,034,382.13 on or before April 15, 2000, otherwise, the notice of sale of the subject property would be published. On April 11, 2000, petitioner again wrote to respondent, this time proposing to pay 100% of the basic tax due in the amount of P5,313,891.00. She reiterated the proposal in a letter dated May 18, 2000. As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief, Collection Enforcement Division, BIR, notified petitioner on June 6, 2000 that the subject property would be sold at public auction on August 8, 2000. On June 13, 2000, petitioner filed a protest with the BIR Appellate Division. Assailing the scheduled auction sale, she asserted that the auction sale is illegal because the assessment, letter of demand and the whole tax proceedings against the estate are void ab initio . She offered to file the correspondent estate tax return and pay the correct amount of tax without surcharge and interest. Without acting on petitioner's protest and offer, respondent instructed the Collection Enforcement Division to proceed with the August 8, 2000 auction sale. Consequently, on June 28, 2000, petitioner filed a petition for review with the Court of Tax Appeals (or "CTA"), docketed as CTA Case No. 6124. On July 17, 2000, petitioner filed a Motion for the Issuance of a Writ of Preliminary Injunction or Status Quo Order, which was granted by the CTA on July 26, 2000. Upon petitioner's filing of a surety bond in the amount of P27,000,000.00, the CTA issued a resolution dated August 16, 2000 ordering respondent to desist and refrain from proceeding with the auction sale of the subject property or from issuing a warrant of distraint or garnishment of bank account pending determination of the case and/or unless a contrary order is issued. Respondent filed a motion to dismiss the petition on the grounds (i) that the CTA no longer has jurisdiction over the case because the assessment against the estate is already final and executory; and (ii) that the petition was filed out of time. In a resolution dated November 23, 2000, the CTA denied respondent's motion. During the pendency of the petition for review with the CTA, however, the BIR issued Revenue Regulation (or "RR") No. 6-2000 and Revenue Memorandum Order (or "RMO") No. 42-2000 offering certain taxpayers with delinquent accounts and disputed assessments an opportunity to compromise their tax liability. On November 25, 2000, petitioner filed an application with the BIR for the compromise settlement (or "compromise") of the assessment against the estate pursuant to Sec. 204(A) of the Tax Code, as implemented by RR No. 6-2000 and RMO No. 42-2000. On December 26, 2000, petitioner filed an Ex-Parte Motion for Postponement of the hearing before the CTA scheduled on January 9, 2001, citing her pending application for compromise with the BIR. The motion was granted and the hearing was reset to February 6, 2001. On January 29, 2001, petitioner moved for postponement of the hearing set on February 6, 2001, this time on the ground that she had already paid the compromise amount of P1,062,778.20 but was still awaiting approval of the National Evaluation Board (or "NEB"). The CTA granted the motion and reset the hearing to February 27, 2001. On February 19, 2001, petitioner filed a Motion to Declare Application for the Settlement of Disputed Assessment as a Perfected Compromise. In said motion, she alleged that respondent had not yet signed the compromise because of procedural red tape requiring the initials of four Deputy Commissioners on relevant documents before the compromise is signed by the Commissioner. Petitioner posited that the absence of the requisite initials and signature on said documents does not vitiate the perfected compromise. Commenting on the motion, respondent countered that without the approval of the NEB, petitioner's application for compromise with the BIR cannot be considered a perfected or consummated compromise. On March 9, 2001, the CTA denied petitioner's motion, prompting her to file a Motion for Reconsideration Ad Cautelam . In a resolution dated April 10, 2001, the CTA denied the motion for reconsideration, with the suggestion that for an orderly presentation of her case and to prevent piecemeal resolutions of different issues, petitioner should file a supplemental petition for review setting forth the new issue of whether there was already a perfected compromise. On May 2, 2001, petitioner filed a Supplemental Petition for Review with the CTA, followed on June 4, 2001 by its Amplificatory Arguments (for the Supplemental Petition for Review), raising the following issues: "1. Whether or not an offer to compromise by the Commissioner of Internal Revenue, with the acquiescence by the Secretary of Finance, of a tax liability pending in court, that was accepted and paid by the taxpayer, is a perfected and consummated compromise. 2. Whether this compromise is covered by the provisions of Section 204 of the Tax Code (CTRP) that requires approval by the BIR National Evaluation Board." Answering the Supplemental Petition, respondent averred that an application for compromise of a tax liability under RR No. 6-2000 and RMO No. 42-2000 requires the evaluation and approval of either the NEB or the Regional Evaluation Board (or "REB"), as the case may be. On June 14, 2001, petitioner filed a Motion for Judgment on the Pleadings; the motion was granted on July 11, 2001. After submission of memoranda, the case was submitted for decision. On June 19, 2001, the CTA rendered a decision, the decretal portion of which pertinently reads: "WHEREFORE, in view of all the foregoing, the instant petition for review is hereby DENIED. Accordingly, petitioner is hereby ORDERED to PAY deficiency estate tax in the amount of Nineteen Million Five Hundred Twenty Four Thousand Nine Hundred Nine and 78/100 (P19,527,909.78), computed as follows: xxx xxx xxx Petitioner is likewise ORDERED to PAY 20% delinquency interest on deficiency estate tax due of P17,934,382.13 from January 11, 2001 until full payment thereof pursuant to Section 249(c) of the Tax Code, as amended." In arriving at its decision, the CTA ratiocinated that there can only be a perfected and consummated compromise of the estate's tax liability if the NEB has approved petitioner's application for compromise in accordance with RR No. 6-2000, as implemented by RMO No. 42-2000. ICHDca Anent the validity of the assessment notice and letter of demand against the estate, the CTA stated that "at the time the questioned assessment notice and letter of demand were issued, the heirs knew very well the law and the facts on which the same were based". It also observed that the petition was not filed within the 30-day reglementary period provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code. Aggrieved, petitioner elevated her case to this Court for review, raising the following issues: "I. WHETHER THE ASSESSMENT IN THIS CASE IS VOID BECAUSE a) IT DOES NOT CONTAIN THE FACTS AND THE LAWS PERTINENT THERETO, AS REQUIRED BY SECTION 228(e) SECOND PARAGRAPH OF TAX CODE; and/or b) OF ACTS COMMITTED IN VIOLATION OF REPUBLIC ACT NO. 2338, A MANDATORY AND PROHIBITORY LAW ON INFORMATION-FOR-REWARD; and II. WHETHER THE COMPROMISE SETTLEMENT IN THIS CASE IS ALREADY PERFECTED AND CONSUMMATED, EVEN IN THE ABSENCE OF THE APPROVAL BY THE EVALUATION BOARD." Petitioner asserts that the assessment against the estate is void ab initio because (i) the assessment notice and demand letter did not state the facts and the law on which they were based, thereby depriving her of due process; and (ii) the proceedings arising from Abad's information-for-reward were tainted by irregularities which were even noted in the CTA's decision. Petitioner further maintains that RR No. 6-2000 and RMO NO. 42-2000 are not covered by Sec. 204 of the Tax Code which requires the NEB's approval of compromises where the amount of the basic tax due exceeds P1 Million. She argues that since Sec. 204, id ., applies only to taxpayer-initiated compromise offers, the NEB's approval is not required in a compromise offer made by the taxpayer with the acquiescence of the Secretary of Finance under RR No. 6-2000 and RMO No. 42-2000. She concludes that since she has fully complied with the requirements under RR No. 6-2000 and RMO No. 42-2000 and paid the 20% compromise amount, the compromise should now be deemed perfected and consummated. On the other hand, respondent echoes the CTA's ruling that as of the issuance of the assessment notice and demand letter, petitioner knew very well the facts and the law on which the same were based; that irregularity in the proceedings arising from the information-for-reward did not render the resulting assessment against the estate invalid because the procedural requirements on sworn information are directed to internal revenue officers and intended only for the internal administration of the BIR; and that violations of said rules may result in administrative sanctions against erring officials but their error will not estop the Government from collecting legitimates taxes. Respondent also maintains that while the initiative towards the compromise came from the government, it was the taxpayer who made the offer and that he (respondent) is not bound to approve every offer unless it meets the conditions set forth in the implementing issuances. Respondent further argues that there is no conflict between RR No. 6-2000 and RMO No. 42-2000 on the hand, and Sec. 204 of the Tax Code, on the other, as the former merely implement the latter. The petition is partially impressed with merit. Sec. 228 of the Tax Code pertinently provides: "Sec. 228. Protesting of Assessment . When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: . . . xxx xxx xxx The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void ." (Emphasis supplied) The abovementioned provision is implemented by Sec. 3 of RR No. 12-99, which reads in part: "Sec. 3. Due process requirement in the issuance of a deficiency tax assessment . xxx xxx xxx 3.1.4 Formal Letter of Demand and Assessment Notice . The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void." (Emphasis supplied) Sec. 228 of the Tax Code, as implemented by Sec. 3 of RR No. 12-99, is unequivocal in requiring that the assessment notice and demand letter should state the facts and the law on which they are based, otherwise, such assessment and demand "shall be void". The reason for such requirement is obvious: to ensure that taxpayers are duly apprised of the basis of the tax assessments against them. This is in keeping with the settled doctrine that before a person can be deprived of his property, he should first be informed of the claim against him and the theory on which such claim is premised ( Ang Ping vs. Court of Appeals, 310 SCRA 343 ). The CTA, in ruling against petitioner, ratiocinated that "the heirs knew very well the law and the facts on which the (assessment notice and letter of demand) where based." Such circumstances, even if true, does not justify non-compliance with the requirement that the assessment notice and demand letter should state the factual and legal bases thereof. Indeed, the wordings of Sec. 228, id ., and RR No. 12-99 leave no doubt as to their mandatory nature. This is as it should be because the due process requirement is part of a person's basic rights. It is not a mere formality which can be dispensed with or performed perfunctorily ( People vs. Bernas, 306 SCRA 135 ). While administrative agencies, like the BIR, are not bound by procedural requirements, they are still required by law and equity to observe the fundamental requirements of due process ( National Power Corporation vs. NLRC, 272 SCRA 704 ). The requirement of stating the facts and law, which are the basis of the tax assessment, is not merely a procedural pre-requisite. It is a substantive requirement which determines the taxpayer's ability to effectively protest the assessment against him. To belabor the point, in administrative proceedings, the essence of due process is simply an opportunity to explain one's side or opportunity to seek a reconsideration of the action or ruling complained of (Audion Electric Co., Inc. vs. NLRC, 308 SCRA 340). But if a taxpayer is not duly apprised of the basis of the imposition against him, he will have no way of defending himself against such claim. As the Supreme Court has ruled, while "taxes are the lifeblood of the government and should be collected without unnecessary hindrance . . ., such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself" ( Marcos II vs. Court of Appeals, 273 SCRA 47 ). Since the assessment notice and demand letter in question are void for non-compliance with Sec. 228, id . and RR No. 12-99, it follows that the proceedings emanating therefrom are likewise void and any order based thereon can never attain finality. Therefore, there is no basis for the CTA's ruling that petitioner belatedly elevated her case to it. On the second issue, however, it is premature to declare the compromise of the estate's tax liability perfected and consummated. Petitioner applied for a compromise of said tax liability pursuant to RR No. 6-2000 and RMO No. 42-2000 which implement Sec. 204 of the Tax Code. Thus, her application is subject to the conditions prescribed for the approval of the compromise as set forth in said law and its implementing rules and regulations. Specifically, Sec. 204(A), id ., provides: "Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes . The Commissioner may (A) Compromise the payment of any internal revenue tax when (1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or (2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The compromise settlement of any tax liability shall be subject to the following minimum amounts: For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax. Where the basic tax involved exceeds One million pesos (P1,000,000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners ." (Emphasis supplied) On the other hand, RR No. 6-2000 pertinently reads: "Sec. 5. CREATION OF THE NATIONAL EVALUATION BOARD AND REGIONAL EVALUATION BOARD. A National Evaluation Board in the National Office and a Regional Evaluation Board in each Revenue Regional all over the country are hereby created to evaluate and approve/disapprove the applications for settlement of each delinquent account/disputed assessment, the composition of such Boards and the cases under their respective jurisdictions are as follows: IEaATD A. National Evaluation Board (NEB) Commissioner of Internal Revenue Chairman Four (4) Deputy Commissioners Members Where the basic assessed tax involved exceeds One million pesos (P1,000,000.00) or where the settlement offered is less than the prescribed minimum rates of 40% (in cases of doubtful validity), . . . the compromise shall be subject to the approval by the NEB ." (Emphasis supplied) while RMO No. 42-2000 provides: "V. POLICIES: xxx xxx xxx 3. It shall be the responsibility of the National Evaluation Board (NEB) . . . to evaluate and approve/disapprove the applications for settlement of each delinquent account/disputed assessment case under this Order . . . . Where the basic assessed tax exceeds One million pesos (P1,000,000.00) or where the settlement offered is less than the minimum rates of forty percent (40%) and ten percent (10%) of the basic tax as prescribed under Section 204(A) of the Tax Code, the compromise shall be subject to the approval of the National Evaluation Board (NEB), notwithstanding the provisions of Paragraph V(1) of this Order ." (Emphasis supplied) From the foregoing, it is clear that the NEB's prior evaluation and approval are conditions sine qua non to the perfection and consummation of any compromise where the basic assessed tax exceeds P1 Million or where the settlement offer is less than the prescribed minimum rates, as in this case. Nevertheless, petitioner submits that the NEB-approval requirement under Sec. 204(A) does not apply to this case because the subject compromise is government-initiated. We are not persuaded. Petitioner admitted that she applied for availment of the benefits under RR No. 6-2000 and RMO No. 42-2000 and complied with the other conditions set forth therein. Since the aforecited issuances merely implement Sec. 204(A) of the Tax Code, this law necessarily applies to the proposed compromise of the estate's tax liability. Moreover, Sec. 204(A), Id ., is of general application; it applies to all compromises between the government and taxpayers. Consequently, We find no cogent reason to distinguish the compromise subject of this case from other compromises. To reiterate a well-entrenched legal principle, where the law does not distinguish, courts should not distinguish ( Gerrero vs. Commission on Elections, 336 SCRA 458 ). Corollarily, when a statute is clear and explicit, there is no need for an extended court ratiocination on the law there is no room for interpretation, vacillation or equivocation, only for application ( Caguioa vs. Lavia, 345 SCRA 49 ). Recapitulating, We hold that respondent's directive to auction the subject property arose from a void assessment notice and demand letter for not stating the facts and the law on which they are based. With respect to the compromise of the estate's tax liability, however, the law requires the evaluation and approval by the NEB before said compromise can be considered perfected and consummated. WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax Appeals is ANNULLED and SET ASIDE without prejudice to the action of the National Evaluation Board on the proposed compromise settlement of the Maria C. Tancinco estate's tax liability. SO ORDERED. Vazquez, Jr . and Tijam, JJ . , concur.