Investigation of Taxpayers Subject to the Graduated Fixed Annual Tax (C-13) who are Applying for Retirement

January 18, 1978 REVENUE MEMORANDUM ORDER NO. 04-78 SUBJECT : Investigation of Taxpayers Subject to the Graduated Fixed Annual Tax (C-13) who are Applying for Retirement TO : All Internal Revenue Officers and Others Concerned Information reaching this Office indicate that some taxpayers engaged in business subject to graduated fixed annual tax (C-13) intend to circumvent the payment of new rates provided in Section 192(2) of the National Internal Revenue Code of 1977 by resorting to the scheme of retiring from the business and thereafter resuming or continuing the same by securing a new privilege tax receipt in the initial amount of P20.00, on the pretext that the business is newly started. In order to ascertain this scheme of tax evasion, the following guidelines should be strictly enforced: 1. During the investigation of taxpayers retiring from business subject to the graduated fixed annual tax (C-13) pursuant to Revenue Regulations No. V-1, otherwise known as the Bookkeeping Regulations, the investigating officer should pay special attention to the disposition of the inventory, if any, of the retiring taxpayer to establish the identity of the buyer or transferee and to determine whether it is existing firm or business or a newly established one or a possible dummy of the seller. If in the disposal of the inventory, there appears to be a tie-up between the retiring taxpayer and the buyer or transferee, a separate report should be immediately submitted to the Revenue District Officer. The Revenue District Officer shall evaluate the report. As the circumstances may warrant, he shall initiate a more thorough investigation of both the retiring taxpayer and the buyer or transferee to determine whether the retirement was resorted to in order to circumvent the payment of the correct tax due. A copy of the report as evaluated shall be furnished the Regional Director for his immediate attention. This report and similar reports like these shall be consolidated at regional level to form part of the data bank of the region. The simultaneous investigation of retiring taxpayer and the newly established business shall be directly under the supervision and control of the Revenue District Officer who has jurisdiction over the case. 2. The following circumstances shall be considered as indications of a scheme or a tie-up or combination for the purpose of evading the payment of the correct tax due under Section 192(2) of the National Internal Revenue Code of 1977: (a) Whenever the inventory and/or assets of a taxpayer's business subject to the privilege tax of C-13, who was retired or retiring from business during the period from July 1, 1977 to January 31, 1978, are/were sold, transferred or conveyed to newly-established business which is ascertained to be a mere continuation of the retiring taxpayer's business; (b) Whenever, the newly-established business is located near or in the same address as the retired business; (c) Whenever, the persons, principal officer, manager of the retiring business is/are also the same persons who administer or own the newly-established business; or (d) Whenever, the transfer of inventory and/or assets from the retiring business to the newly-established business involves persons who are related by affinity or consanguinity within the third civil degree. In all such cases, the newly-established business shall be deemed to be a mere continuation of the retired business, in which case the graduated fixed annual tax to be imposed shall be based on the annual gross receipts of the retired business in accordance with Section 192(2) of the National Internal Revenue Code of 1977. The newly-established business shall be required to pay the corresponding tax without the imposition of any compromise penalty in order that the government may not be precluded from prosecuting the case criminally . Reports of investigation of cases where there are indications of fraud shall immediately be transmitted to the Commissioner of Internal Revenue, Attention: Chief, Tax Fraud Division, who in turn shall evaluate the case for possible criminal prosecution. cdt This Order takes effect immediately. EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-P4519-F2828-A-8