Adamson vs. Court of Appeals

A criminal action for tax evasion may be commenced without a prior formal assessment when the taxpayer has filed a false or fraudulent return with intent to evade tax, and a communication from the Commissioner to the Secretary of Justice recommending prosecution is not an assessment that can be made the subject of a petition for review before the Court of Tax Appeals.

In 1990, Lucas Adamson and Adamson Management Corporation (AMC) sold two blocks of shares in Adamson and Adamson, Inc. to APAC Holding Limited and APAC Philippines, Inc., paying capital gains taxes on both transactions. A subsequent Bureau of Internal Revenue (BIR) investigation uncovered a substantial disparity between the taxes declared and what the examiners computed as properly due, as well as unpaid value-added tax on the sale of services for the third and fourth quarters of 1990. The Commissioner of Internal Revenue, without issuing a formal assessment, forwarded her affidavit of complaint to the Department of Justice (DOJ) recommending the criminal prosecution of AMC and its responsible officers for filing fraudulent returns and evading taxes.

• Share Transactions and Tax Payments: On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson and Adamson, Inc. (AAI) to APAC Holding Limited for P7,789,995.00, paying capital gains tax of P159,363.21 on June 22, 1990. On October 12, 1990, AMC sold another 229,870 common shares of AAI to APAC Philippines, Inc. for P17,718,360.00, paying P352,242.96 in capital gains tax. The taxpayers also filed VAT returns for the relevant periods.

• BIR Examination and Notice: A BIR investigation revealed a gross discrepancy between the taxes due on the share sales and the amounts declared, as well as a failure to pay VAT on the sale of services for the third and fourth quarters of 1990. On October 15, 1993, the Commissioner issued a “Notice of Taxpayer” to AMC, Lucas G. Adamson, Therese June D. Adamson, and Sara S. de los Reyes, informing them of deficiencies in capital gains tax and VAT and setting a preliminary conference.

• Criminal Complaint and Absence of Formal Assessment: On October 22, 1993, without first issuing a formal assessment, the Commissioner filed an Affidavit of Complaint with the DOJ charging the taxpayers with violating Sections 45(a) and (d), 110 in relation to Section 100, and Section 253, in relation to Sections 252(b) and (d), of the NIRC. The taxpayers filed a letter-request for reinvestigation on December 1, 1993, but the Commissioner took no action on it before the subsequent court filings. The Commissioner maintained throughout that she had not issued a formal assessment of the tax liabilities and that the deficiency figures in her complaint were merely the examiner’s findings intended to support the criminal charges.

• Findings of Fraud: The BIR examiners found badges of fraud in the substantial underdeclaration of the consideration for the share sales, giving rise to the Commissioner’s conclusion that the returns filed were false and fraudulent with intent to evade tax.

• Existence of an Assessment: Whether the Commissioner’s recommendation letter to the Secretary of Justice constitutes a formal or implied assessment of the taxpayers’ tax liability.

• Propriety of Criminal Prosecution Without Prior Assessment: Whether criminal complaints for tax evasion may validly proceed in the absence of a prior formal assessment when the returns filed are alleged to be false or fraudulent.

• Jurisdiction of the Court of Tax Appeals: Whether the CTA has jurisdiction to review the taxpayers’ tax liabilities by petition for review when the Commissioner has not issued any assessment.

• Existence of an Assessment: The recommendation letter did not constitute an assessment, formal or implied. An assessment, as defined in the context of the NIRC, must be a written notice and demand made by the BIR directly on the taxpayer, containing a definite computation of tax liabilities and a demand for payment within a specified period, and must be sent to and received by the taxpayer. The Commissioner’s letter was addressed to the Secretary of Justice, not the taxpayers; it contained no demand for payment or deadline; and it was never served upon the taxpayers. It served merely as the prima facie basis for the criminal complaint. The absence of these essential elements, consistent with the definition in CIR v. Pascor Realty, precluded its classification as an assessment. Consequently, there was no assessment from which an appeal to the CTA could be taken.

• Propriety of Criminal Prosecution Without Prior Assessment: The criminal complaints for tax evasion were properly filed without a prior assessment. Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997) expressly provides that where a false or fraudulent return with intent to evade tax is involved, “a proceeding in court after the collection of such tax may be begun without assessment.” The BIR examiners found gross discrepancies indicative of fraud, and the taxpayer-officers were charged with willfully filing fraudulent returns. Ungab v. Cusi squarely applied: the offense of tax evasion is consummated upon the knowing and willful filing of a fraudulent return; an assessment of the deficiency is not an element of the crime and the government’s failure to issue one is no bar to criminal prosecution. The doctrines in CIR v. Union Shipping and Yabes v. Flojo were inapplicable because in those cases an assessment had already been rendered, unlike here. Section 205 of the NIRC likewise confirms that the civil and criminal aspects may be pursued simultaneously, reinforcing the Commissioner’s discretion to elect a criminal action without first issuing an assessment.

• Jurisdiction of the Court of Tax Appeals: The CTA had no jurisdiction over the petition for review filed by the taxpayers. Under Republic Act No. 1125, as amended by Republic Acts Nos. 8424 and 9282, the CTA’s appellate jurisdiction over decisions of the Commissioner in disputed assessments or over inaction where a specific period is fixed cannot be invoked unless a formal assessment has first been issued or the Commissioner has failed to act within the period prescribed by law. Because the Commissioner had not yet issued any assessment when the taxpayers filed their petition, there was no “decision” to review, and the petition before the CTA was prematurely filed. The CTA’s treatment of the criminal complaint as an implied assessment was therefore erroneous, and its order denying the motion to dismiss was reversed.

• Definition and Requisites of an Assessment — An assessment under the NIRC is a written notice and demand sent by the BIR to the taxpayer that definitely sets and fixes a tax liability and demands payment within a prescribed period. To be valid and effective, the assessment must: (i) contain a definite computation of the tax due; (ii) demand payment within a specific period; (iii) be addressed to the taxpayer; and (iv) be actually released, mailed, or sent to and received by the taxpayer. A mere computation by revenue officers, particularly when attached to a criminal complaint and addressed to the Secretary of Justice, does not satisfy these requisites.

• Criminal Prosecution Without Prior Assessment — Where a false or fraudulent return has been filed with intent to evade tax, Section 222 of the NIRC explicitly authorizes the commencement of a proceeding in court for collection without an assessment. The offense of tax evasion is complete upon the knowing and willful filing of the fraudulent return; an assessment of the deficiency is not an element of the crime. The Commissioner retains discretion to pursue the civil and criminal remedies simultaneously or independently.

• CTA Jurisdiction Requires a Final Assessment or Deemed Denial — The Court of Tax Appeals exercises exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue in disputed assessments or over cases where the Commissioner’s inaction for a statutorily prescribed period is deemed a denial. Absent a formal assessment or an equivalent final decision, the CTA cannot acquire jurisdiction over a petition for review.

• “In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation by a revenue officer of the tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR examiner’s findings is not an assessment since it is yet indefinite.”

• “An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the tax.” (quoting Mertens, Law of Federal Income Taxation, endorsed in Ungab v. Cusi)

• “The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. … Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon.”

• CIR v. Pascor Realty and Development Corporation, G.R. No. 128315, June 29, 1999, 309 SCRA 402 — Controlling precedent; defined the nature and requisites of a valid assessment and held that an affidavit attached to a criminal complaint is not an assessment that can be questioned before the CTA.

• Ungab v. Cusi, G.R. Nos. L-41919-24, May 30, 1980, 97 SCRA 877 — Applied; established that a criminal prosecution for tax evasion does not require a prior assessment and that the filing of fraudulent returns completes the crime.

• CIR v. Union Shipping Corporation, G.R. No. 66160, May 21, 1990, 185 SCRA 547 — Distinguished; in that case an assessment had already been rendered, making it inapplicable to a situation where no assessment existed.

• Yabes v. Flojo, G.R. No. L-46954, July 20, 1982, 115 SCRA 286 — Distinguished; similarly involved a prior assessment, rendering the ruling inapposite.

• Section 222, NIRC (now Section 222, Tax Reform Act of 1997 / Section 269, old NIRC) — Authorizes assessment or court proceeding for collection without assessment at any time within ten years after discovery of a false or fraudulent return. This provision was the statutory basis for allowing the criminal complaints to proceed without a prior formal assessment.

• Section 205, NIRC — Provides that civil and criminal remedies for the collection of delinquent taxes may be pursued simultaneously, reinforcing the Commissioner’s discretion to file criminal charges without first completing an assessment.

• Section 228, NIRC — Governs the protesting of assessments and requires that the taxpayer be informed in writing of the law and facts on which an assessment is based, failing which the assessment is void; the absence of a written notice to the taxpayer in this case meant there was no assessment to protest or appeal.

• Sections 253 and 255, NIRC — Penalize attempts to evade or defeat tax and the failure to file returns or supply correct information; these provisions formed the basis of the criminal charges against the taxpayer-officers.

• Republic Act No. 1125, as amended by R.A. No. 9282, Section 7 — Enumerates the exclusive appellate jurisdiction of the CTA over decisions of the Commissioner in disputed assessments; because no decision or assessment had been issued, the CTA lacked jurisdiction.

Carpio, Corona, Leonardo-De Castro, and Bersamin, JJ., concurred.