42.

CIR v Raul Gonzales (the case is quite long)

FACTS: Pursuant to Letter of Authority (LA) No. 00009361, Tax Fraud Division (TFD) conducted a fraud
investigation for all internal revenue taxes to ascertain/determine the tax liabilities of L. M. Camus
Engineering Corporation (LMCEC) for the taxable years 1997, 1998 and 1999. For failure to comply with
the subpoena duces tecum issued in connection with the tax fraud investigation, a criminal complaint was
instituted by the BIR against LMCEC for violation of Section 266 of the NIRC. Based on data obtained from
an informer and various clients of LMCEC, it was discovered that LMCEC filed fraudulent tax returns with
substantial underdeclarations of taxable income for the said years. Petitioner thus assessed the company
of total deficiency taxes amounting to P430,958,005.90. Since the company and its representatives
refused to receive the notices and demand letter, the revenue officers resorted to constructive service.

Then Commissioner Parayno, referred to the Sec of Justice for preliminary investigation the complaint
against LMCEC, Camus and Mendoza, sued in their capacities as President and Comptroller,
respectively. It was alleged that despite the receipt of the final assessment notice and formal demand
letter on October 1, 2002, LMCEC failed and refused to pay the deficiency tax assessment in the total
amount of P630,164,631.61, inclusive of increments, which had become final and executory as a result of
the said taxpayers failure to file a protest thereon within the thirty (30)-day reglementary period.

Camus and Mendoza alleged that LMCEC cannot be held liable considering at the complaint and its
annexes all showed that the suit is a simple civil action for collection and not a tax evasion case, the DOJ
is not the proper forum for BIRs complaint. LMCEC further averred that it had availed of the Bureaus Tax
Amnesty Programs (Economic Recovery Assistance Payment [ERAP] Program and the Voluntary
Assessment Program [VAP]) for 1998 and 1999 and for 1997, its tax liability was terminated and closed
under Letter of Termination dated June 1, 1999. LMCEC argued that petitioner is now estopped. LMCEC
maintained that unless there is a prior determination of fraud supported by documents not yet
incorporated in the docket of the case, petitioner cannot just issue LAs without first terminating those
previously issued. After preliminary investigation, the case was dismissed for lack of probable cause.

In its reply, petitioner points out that LMCEC and its officers Camus and Mendoza were being charged for
the criminal offenses defined and penalized under Sections 254 (Attempt to Evade or Defeat Tax) and
255 (Willful Failure to Pay Tax) of the NIRC. This finds support in Section 205 of the same Code which
provides for administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action)
remedies in order to enforce collection of taxes. Both remedies may be pursued either independently or
simultaneously. In this case, the BIR decided to simultaneously pursue both remedies and thus aside
from this criminal action, the Bureau also initiated administrative proceedings against LMCEC. Petitioner
further asserted that for 1998, LMCEC failed to state that its availment of ERAP is not a grant of absolute
immunity from audit and investigation, aside from the fact that said program was only for income tax and
did not cover VAT and withholding tax for the taxable year 1998. As to the VAP in 1999, the company
failed to state that it covers only income tax and VAT, and did not include withholding tax. As to the
principle of estoppel invoked by LMCEC, estoppel clearly does not lie against the BIR as this involved the
exercise of an inherent power by the government to collect taxes.

On September 22, 2003, the Chief State Prosecutor issued a Resolution finding no sufficient evidence to
establish probable cause against respondents LMCEC, Camus and Mendoza. On the required prior
determination of fraud, the Chief State Prosecutor declared that the Office of the City Prosecutor in I.S.
No. 00-956 has already squarely ruled that (1) there was no prior determination of fraud, (2) there was
indiscriminate issuance of LAs, and (3) the complaint was more of harassment. In view of such findings,
any ensuing LA is thus defective and allowing the collection on the assailed assessment notices would
already be in the context of a fishing expedition or witch-hunting. Petitioner filed an MR but was denied. It
appealed to the Sec of Justice but was also denied. In its certiorari petition before the CA, the CA denied
the petition and concurred with the Sec of Justice.

ISSUE: whether LMCEC and its corporate officers may be prosecuted for violation of Sections 254
(Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and Accurate Information and
Pay Tax).

RULING: Petition granted. Prior to the filing of the complaint with the DOJ, the report on the tax fraud
investigation conducted on LMCEC disclosed that it made substantial underdeclarations in its income tax
returns for 1997, 1998 and 1999. Pursuant to RR No. 12-99, a PAN (Preliminary Assessment Notice) was
sent to and received by LMCEC wherein it was notified of the proposed assessment of deficiency taxes.
However, the revenue officers were not given the opportunity to examine LMCECs books of accounts and
other accounting records because its officers failed to comply with the subpoena duces tecum earlier
issued.

It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present. For the
crime of tax evasion in particular, compliance by the taxpayer with such subpoena, if any had been
issued, is irrelevant. As we held in Ungab v. Cusi, Jr., the crime is complete when the [taxpayer] has x x x
knowingly and willfully filed [a] fraudulent [return] with intent to evade and defeat x x x the tax.  Thus,
respondent Secretary erred in holding that petitioner committed forum shopping when it filed the present
criminal complaint during the pendency of its appeal from the City Prosecutors dismissal of I.S. No. 00-
956.

On the issue of obtaining information from third party: Since revenue officers were not given the
opportunity to examine LMCECs books of accounts, accounting records and other documents, said
revenue officers gathered information from third parties. Such procedure is authorized under Section 5 of
the NIRC, which authorizes the Commissioner to Obtain Information, and to Summon, Examine, and
Take Testimony of Persons in ascertaining the correctness of any return, or in making a return when none
has been made, or in determining the liability of any person for any internal revenue tax, or in collecting
any such liability, or in evaluating tax compliance x x x. The lack of consent of the taxpayer under
investigation does not imply that the BIR obtained the information from third parties illegally or that the
information received is false or malicious. In the same vein, herein private respondents cannot be allowed
to escape criminal prosecution by mere imputation of a fictitious or disqualified informant under Section
282 simply because other than disclosure of the official registry number of the third party informer, the
Bureau insisted on maintaining the confidentiality of the identity and personal circumstances of said
informer.

Regarding the issue on the assessment notice: the formality of a control number in the assessment
notice is not a requirement for its validity but rather the contents thereof which should inform the taxpayer
of the declaration of deficiency tax against said taxpayer. Both the formal letter of demand and the notice
of assessment shall be void if the former failed to state the fact, the law, rules and regulations or
jurisprudence on which the assessment is based, which is a mandatory requirement under Section 228 of
the NIRC. The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of
LMCECs tax deficiencies but also details of the specified discrepancies, explaining the legal and factual
bases of the assessment.

On the alleged settlement of the assessed tax deficiencies: The program named as ERAP granted
immunity from audit and investigation of income tax, VAT and percentage tax returns for 1998. It
expressly excluded withholding tax returns (whether for income, VAT, or percentage tax purposes).  Since
such immunity from audit and investigation does not preclude the collection of revenues generated from
audit and enforcement activities, it follows that the Bureau is likewise not barred from collecting any tax
deficiency discovered as a result of tax fraud investigations. The availment by LMCEC of VAP did not
amount to settlement of its assessed tax deficiencies for the period 1997 to 1999, nor immunity from
prosecution for filing fraudulent return and attempt to evade or defeat tax. As correctly asserted by
petitioner, LMCEC is not qualified to avail of the VAP granting taxpayers the privilege of last priority in the
audit and investigation of all internal revenue taxes for the taxable year 2000 and all prior years under
certain conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it was
the subject of investigation as a result of verified information filed by a Tax Informer under Section 282 of
the NIRC duly recorded in the BIR Official Registry as Confidential Information (CI) No. 29-2000 [53]even
prior to the issuance of the PAN. Moreover, private respondents cannot invoke LMCECs availment of
VAP to foreclose any subsequent audit of its account books and other accounting records in view of the
strong finding of underdeclaration in LMCECs payment of correct income tax liability by more than 30%
as supported by the written report of the TFD detailing the facts and the law on which such finding is
based, pursuant to the tax fraud investigation authorized by petitioner under LA No. 00009361. This
conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001.

On the issue of estoppels: It is axiomatic that the State can never be in estoppel, and this is particularly
true in matters involving taxation. The errors of certain administrative officers should never be allowed to
jeopardize the governments financial position. the discovery of substantial underdeclarations of income by
LMCEC for taxable years 1997, 1998 and 1999 upon verified information provided by an informer under
Section 282 of the NIRC, as well as the necessity of obtaining information from third parties to ascertain
the correctness of the return filed or evaluation of tax compliance in collecting taxes (as a result of the
disobedience to the summons issued by the Bureau against the private respondents), are circumstances
warranting exception from the general rule in Section 235 (GR: which allows the examination and
inspection of taxpayers books of accounts and other accounting records only once in a taxable year).

Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions
are in favor of the correctness of a tax assessment unless proven otherwise.

RATIO: WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution