Spouses Emmanuel D. Pacquiao and Jinkee J. Pacquiao vs.

CTA and CIR

G.R. No. 213394, April 6, 2016
Ponente: Mendoza, J.
FACTS:
Prior to their election as public officers, the petitioners relied heavily on
Emmanuel Manny Pacquiao's claim to fame as a world-class professional boxer. His
success able to amass income from both the Philippines and the United States of
America (US). His income from the US came primarily from the purses he received
for the boxing matches he took part under Top Rank, Inc. On the other hand, his
income from the Philippines consisted of talent fees received from various Philippine
corporations for product endorsements, advertising commercials and television
appearances. In compliance with his duty to his home country, Pacquiao filed his
2008 income tax return on April 15, 2009 reporting his Philippine-sourced income
and was subsequently amended to include his US-sourced income.
The controversy began on March 25, 2010, when Pacquiao received a Letter of
Authority (March LA) from the Regional District Office No. 43 (RDO) of the Bureau
of Internal Revenue (BIR) for the examination of his books of accounts and other
accounting records for the period covering January 1, 2008 to December 31, 2008.
On April 15, 2010, Pacquiao filed his 2009 income tax return, which although
reflecting his Philippines-sourced income, failed to include his income derived from
his earnings in the US. He also failed to file his Value Added Tax (VAT) returns for
the years 2008 and 2009.
To determine his tax liabilities, CIR issued a July LA, authorizing BIRs
National Investigating Division to examine the books of accounts and other
accounting records of both Pacquiao and Jinkee for the last 15 years, from 1995 to
2009. On September 21, 2010 and September 22, 2010, the CIR replaced the July LA
by issuing to both Pacquiao and Jinkee separate electronic versions of the July LA
pursuant to Revenue Memorandum Circular (RMC) No. 56-2010.
Petitioner, through counsel, wrote a letter questioning the propriety of the CIR
Investigation. According to the petitioners, they were already subjected to an earlier
investigation by the BIR for the years prior to 2007, and no fraud was ever found to
have been committed. They added that pursuant to the March LA issued by the RDO,
they were already being investigated for the year 2008. NID informed the counsel of
the petitioners that the July LA issued by the CIR had effectively cancelled and
superseded the March LA issued by its RDO and it stated: Although fraud had been
established in the instant case as determined by the Commissioner, your clients would
still be given the opportunity to present documents as part of their procedural rights
to due process with regard to the civil aspect thereof. Moreover, any tax credits
and/or payments from the taxable year 2007 & prior years will be properly considered
and credited in the current investigation.
The CIR informed the petitioners that its reinvestigation of years prior to 2007
was justified because the assessment thereof was pursuant to a "fraud investigation"
against the petitioners under the "Run After Tax Evaders" (RATE) program of the
BIR.
On January 5 and 21, 2011, the petitioners submitted various income tax
related documents for the years 2007-2009. As for the years 1995 to 2006, the
petitioners explained that they could not furnish the bureau with the books of
accounts and other, tax related documents as they had already been disposed in
accordance with Section 235 of the Tax Code.
On June 21; 2011 petitioners made their last compliance in submitting their
tax-related documents.
CIR made its initial assessment finding that the petitioners were unable to fully
settle their tax liabilities. Thus, the CIR issued its Notice of Initial Assessment-
Informal Conference (NIC), dated January 31, 2012, directly addressed to the
petitioners, informing them that based on the best evidence obtainable, they were
liable for deficiency income taxes in the amount of P714,061,116.30 for 2008 and
P1,446,245,864.33 for 2009, inclusive of interests and surcharges.
On February 20, 2012, the CIR issued the Preliminary Assessment Notice
(PAN), informing the petitioners that based on third-party information allowed under
Section 5(B) and 6 of the NIRC, petitioners liable not only for deficiency income
taxes in the amount of P714,061,116.30 for 2008 and P1,446;245,864.33 for 2009, but
aiso for their non-payment of their VAT liabilities in the amount P4,104,360.01 for
2008 and P 24,901,276.77 for 2009.
 The petitioners filed their protest against the PAN.
After denying the protest, the BIR issued its Formal Letter Demand(FLD),
dated May 2, 2012, finding the petitioners liable for deficiency income tax and VAT
amounting to P766,899,530.62 for taxable years 2008 and P1,433,421,214.61 for 2009,
inclusive of interests and surcharges. Again, the petitioners questioned the findings of
the CIR.
On May 14, 2013, the BIR issued its Final Decision on Disputed
Assessment (FDDA) addressed to Pacquiao only, informing him that the CIR found
him liable for deficiency income tax and VAT for taxable years 2008 and 2009 which,
inclusive of interests and surcharges, amounted to a total of P2,261,217,439.92. The
Accounts Receivable Monitoring Division of the BIR (BIR-ARMD), issued the
Preliminary Collection Letter (PCL) dated July 19, 2013, demanding that both
Pacquiao and Jinkee pay the said amount.
On August 7, 2013, the BIR-ARMD sent Pacquiao and Jinkee the Final Notice
Before Seizure (FNBS), informing the petitioners of their last opportunity to make the
necessary settlement of deficiency income and VAT liabilities before the bureau
would proceed against their property.
Although they no longer questioned the BIR's assessment of their deficiency
VAT liability, the petitioners requested that they be allowed to pay the same in four
(4) quarterly installments. Eventually, through a series of installments, Pacquiao and
Jinkee paid a total P32,196,534.40 in satisfaction of their liability for deficiency VAT.
The petitioners filed a petition for review with the CTA, contending that the
assessment were defective as it is based on allegations that they were guilty of fraud.
They also questioned the validity of the attempt by the CIR to collect deficiency taxes
from Jinkee, arguing that she was denied due process, alleging that although all
correspondence were addressed to both of them, the FDDA was void for it was only
addressed to Manny Pacquiao. Consequently, PCL and FNBS should also be declared
void as it was based on the FDDA. Pacquiao contended that the CIR assessment was
only based on their best possible sources and that the same did not consider the taxes
paid by Pacquiao to the US authorities for his fights, but also deduction claimed by
him for his expenses.
 Pending the CTA resolution, petitioners sought the suspension of the issuance
of warrants of distraint and/or levy and warrants of garnishment.
On October 14, 2013, the BIR-ARMD informed the petitioners that they were
denying their request to defer the collection enforcement action for lack of legal basis.
The same letter also informed the petitioners that despite their initial payment, the
amount to be collected from both of them still amounted to P3,259,643,792.24,
for deficiency income tax for taxable years 2008 and 2009, and P46,920,235.74
for deficiency VAT for the same period. A warrant of distraint and/or levy against
Pacquiao and Jinkee was included in the letter.
Petitioners filed the subject Urgent Motion for the CTA to lift the warrants of
distraint, levy and garnishments issued by the CIR against their .assets and to enjoin
the CIR from collecting the assessed deficiency taxes pending the resolution of their
appeal.
On April 22, 2014, the CTA issued the first assailed resolution granting the
petitioner's Urgent Motion, ordering the CIR to desist from collecting on the
deficiency tax assessments against the petitioners.
CTA noted that the amount sought to be collected was way beyond the
petitioners' net worth, which, based on Pacquiao's Statement of Assets, Liabilities and
Net Worth (SALN), only amounted to P1,185,984,697.00. Considering that the
petitioners still needed to cover the costs of their daily subsistence, the CTA opined
that the collection of the total amount of P3,298,514,894.35 from the petitioners
would be highly prejudicial to their interests and should, thus, be suspended pursuant
to Section 11 of R.A. No. 1125, as amended.
The CTA, however, saw no justification that the petitioners should deposit less
than the disputed amount. They were, thus, required to deposit the amount of
P3,298,514,894.35 or post a bond in the amount of P4,947,772,341.53. The
petitioners sought partial reconsideration of the April 22, 2014 CTA resolution,
praying for the reduction of the amount of the bond required or an extension of 30
days to file the same.
On July 11, 2014, the CTA issued the second assailed resolution denying the
petitioner's motion to reduce the required cash deposit or bond, but allowed them an
extension of thirty (30) days within which to file the same. Hence, this petition.
ISSUES:

(1) Whether or not petitioners appeal to CTA will suspend

the collection of tax
(2) Whether or not petitioners case falls within the exception
provided under Section 11, RA 1125
(3) Whether or not the Court can make a preliminary
determination on whether the CIR used methods not
sanctioned by law
(4) Whether or not the case should be remanded to the CTA
for the conduct of preliminary hearing
RULING:

The Petition is PARTIALLY GRANTED. The Writ of Preliminary is issued to

enjoin CTA from implementing its April 22, 2014 and July 11, 2014 Resolution. The
petitioners were ordered to deposit a cash bond in the amount of P3,298,514,894.35
or post a bond of P4,947,772,341.53, as a condition to restrain the collection of the
deficiency taxes assessed against them. The case is REMANDED to the CTA which
is ordered to conduct preliminary hearings to determine whether the dispensation or
reduction of the required cash deposit or bond provided under Section 11, Republic
Act No. 1125 is proper to restrain the collection of deficiency taxes assessed against
the petitioners. CTA shall compute the amount of the bond in accordance with A.M.
No. 15-02-01-CTA and should also take into account the amounts already paid by the
petitioners.

On the first issue:

Section 11 of R.A. No. 1125, as amended by R.A. No. 9282, embodies the rule
that an appeal to the CTA from the decision of the CIR will not suspend the payment,
levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his
tax liability as provided by existing law. When, in the view of the CTA, the collection
may jeopardize the interest of the Government and/or the taxpayer, it may suspend
the said collection and require the taxpayer either to deposit the amount claimed or to
file a surety bond.
 The application of the exception to the rule is the crux of the subject
controversy. Specifically, Section 11 provides:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of

Appeal. - Any party adversely affected by a decision, ruling or
inaction of the Commissioner of Internal Revenue, the
Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture
or the Central Board of Assessment Appeals or the Regional
Trial Courts may file an appeal with the CTA within thirty (30)
days after the receipt of such decision or ruling or after the
expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein.
xxxx

No appeal taken to the CTA from the decision of the

Commissioner of Internal Revenue or the Commissioner of
Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the Secretary of
Trade and Industry and Secretary of Agriculture, as the case
may be shall suspend the payment, levy, distraint, and/or sale
of any property of the taxpayer for the satisfaction of his tax
liability as provided by existing law:

Provided, however, That when in the opinion of the Court

the collection by the aforementioned government agencies
may jeopardize the interest of the Government and/or the
taxpayer, the Court at any stage of the proceeding may
suspend the said collection and require the taxpayer either
to deposit the amount claimed or to file a surety bond for
not more than double the amount with the Court.
 The Court said, Section 11 of Republic Act No. 1125 is therefore premised on
the assumption that the collection by summary proceedings is by itself in accordance
with existing laws; and then what is suspended is the act of collecting, whereas, in the
case at bar what the respondent Court suspended was the use of the method
employed to verify the collection which was evidently illegal after the lapse of the
three-year limitation period. The respondent Court issued the injunction in question
on the basis of its findings that the means intended to be used by petitioner in the
collection of the alleged deficiency taxes were in violation of law. It would certainly
be an absurdity on the part of the Court of Tax Appeals to declare that the
collection by the summary methods of distraint and levy was violative of the
law, and then, on the same breath require the petitioner to deposit or file a
bond as a prerequisite of the issuance of a writ of injunction. Let us suppose, for
the sake of argument, that the Court a quo would have required the petitioner to post
the bond in question and that the taxpayer would refuse or fail to furnish said bond,
would the Court a quo be obliged to authorize or allow the Collector of Internal
Revenue to proceed with the collection from the petitioner of the taxes due by a
means it previously declared to be contrary to law?
Thus, despite the amendments to the law, the Court still holds that the CTA
has ample authority to issue injunctive writs to restrain the collection of tax and to
even dispense with the deposit of the amount claimed or the filing of the required
bond, whenever the method employed by the CIR in the collection of. tax jeopardizes
the interests of a taxpayer for being patently in violation of the law. Such authority
emanates from the jurisdiction conferred to it not only by Section 11 of R.A. No.
1125, but also by Section 7 of the same law, which provides:

Sec. 7. Jurisdiction. - The Court of Tax Appeals shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
l. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the National Internal
 Revenue or other laws administered by the Bureau of Internal
Revenue;
xxxx
[Emphasis Supplied]
From all the foregoing, it is clear that the authority of the
courts to issue injunctive writs to restrain the collection of tax
and to dispense with the deposit of the amount claimed or the
filing of the required bond is not simply confined to cases
where prescription has set in. As explained by the Court in
those cases, whenever it is determined by the courts that the
method employed by the Collector of Internal Revenue in the
collection of tax is not sanctioned by law, the bond requirement
under Section 11 of R.A. No. 1125 should be dispensed with.
The purpose of the rule is not only to prevent jeopardizing the
interest of the taxpayer, but more importantly, to prevent the
absurd situation wherein the court would declare "that the
collection by the summary methods of distraint and levy was
violative of law, and then, in the same breath require the
petitioner to deposit or file a bond as a prerequisite for the
issuance of a writ of injunction.
On the second issue:

Court finds no sufficient basis in the records for the Court to determine
whether the dispensation of the required cash deposit or bond provided under
Section 11, R.A No. 1125 is appropriate.

It should first be highlighted that in rendering the assailed resolution, the CTA,
without stating the facts and law, made a determination that the illegality of the
methods employed by the CIR to effect the collection of tax was not patent.
Though it may be true that it would have been premature for the CTA to
immediately determine whether the assessment made against the petitioners was valid
or whether the warrants were properly issued and served, still, it behooved upon the
CTA to properly determine, at least preliminarily, whether the CIR, in its assessment
of the tax liability of the petitioners, and its effort of collecting the same, complied
with the law and the pertinent issuances of the BIR itself. The CTA should have
conducted a preliminary hearing and received evidence so it could have properly
determined whether the requirement of providing the required security under Section
11, R.A. No. 1125 could be reduced or dispensed with pendente lite.
On the third issue:
Absent any evidence and preliminary determination by the CTA, the Court
cannot make any factual finding and settle the issue of whether the petitioners should
comply with the security requirement under Section 11, R.A. No. 1125. The
determination of whether the methods, employed by the CIR in its assessment,
jeopardized the interests of a taxpayer for being patently in violation of the law is a
question of fact that calls for the reception of evidence which would serve as basis. In
this regard, the CTA is in a better position to initiate this given its time and resources.
The remand of the "case to the CTA on this question is, therefore, more sensible and
proper. For the Court to make any finding of fact on this point would be premature.

On the fourth issue:

As the CTA is in a better, position to make such a preliminary determination, a
remand to the CTA is in order. To resolve the issue of whether the petitioners should
be required to post the security bond under Section 11 of R.A. No. 1125, and, if so, in
what, amount, the CTA must take into account, among others, the following:

First. Whether the requirement of a Notice of Informal

Conference was complied with;
Second. Whether the 15-year period subject of the CIR's
investigation is arbitrary and excessive;
Third. Whether fraud was duly established;
Fourth. Whether the FLD issued against the petitioners was
irregular;
 Fifth. Whether the FDDA, the PCL, the FNBS, and the Warrants
of Distraint and/or Levy were validly issued. In its hearing, the
CTA must also determine if the following allegations of the
petitioners have merit:
a. The FDDA and PCL were issued against petitioner Pacquiao
only. The Warrant of Distraint and/or Levy/Garnishment issued
by the CIR, however, were made against the assets of both
petitioners;
b. The warrants of garnishment had been served on the banks of
both petitioners even before the petitioners received the FDDA
and PCL;
c. The Warrant of Distraint and/or Levy/Garnishment against the
petitioners was allegedly made prior to the expiration of the
period allowed for the petitioners to pay the assessed deficiency
taxes;
d. The Warrant of Distraint and/or Levy/Garnishment against
petitioners failed to take into consideration that the deficiency
VAT was already paid in full; and
e. Petitioners were not given a copy of the Warrants. Sections
207[68] and 208[69] of the Tax Code require the Warrant of
Distraint and/or Levy/Garnishment be served upon the taxpayer.
In case the CTA finds that the petitioners should provide the necessary security under
Section 11 of R.A. 1125, a recomputation of the amount thereof is in order. If there
would be a need for a bond or to reduce the same, the CTA should take note that the
Court, in A.M. No. 15-92-01-CTA, resolved to approve the CTA En Banc Resolution
No. 02-2015, where the phrase "amount claimed" stated in Section 11 of R.A. No.
1125 was construed to refer to the principal amount of the deficiency taxes, excluding
penalties, interests and surcharges. Moreover, the CTA should.also consider the claim
of the petitioners that they already paid a total of P32,196,534.40 deficiency VAT
assessed against' them.