Taxation – Fraudulent Return – Assessment – Prescriptive Period
In 1989, Gerry Sevilla et al purchased 50,000 shares of stocks of the East Esteban Realty Corporation for a total of P5.9 million. In 1993, Sevilla et al sold the same 50,000 shares of stocks for P62 million. However, in paying the capital gains tax therefor, Sevilla et al declared that they purchased the said stocks for P59 million and so they only earned P3 million (note: these figures are rounded for purposes of this digest). In September 1998, tax examiners were able to determine that there was a deficiency in the tax paid for the sale of said shares of stocks in 1993. In January 1999, the Commissioner of Internal Revenue (CIR) ordered Gerry Sevilla et al to explain. In March 2000, the CIR issued formal assessment notices (FAN) against Sevilla et al ordering them to pay P33 million in deficiency taxes inclusive of penalties, surcharges, and interests.
Sevilla et al assailed the FANs as they alleged that assuming that there was really fraud on their part in the filing of their income tax returns, they can no longer be made liable because the right of the government to make an assessment has already prescribed. They insist that although in fraud cases the government has 10 years from the discovery of fraud to make an assessment (abnormal assessment) such discovery should have been made within three years from the date of the filing of their returns. It is their theory that in order for the ten year period to be applied, the discover should have been made within three years from their filing of their return; that they filed their return in 1993; that as such, that discovery of the fraud in 1998 was already made out of time; that the subsequent assessment in 2000 is likewise out of time. In short, Sevilla et al insist that what’s applicable is still the three year prescriptive period (normal assessment).
ISSUE: Whether or not Sevilla is correct.
HELD: No. There is no legal basis for their contention. Nowhere in the law does it state that the discovery of the fraud (or falsity or omission) should be made within three years from the filing of the return (or last day of filing thereof). In fact the law (Section 222 of the National Internal Revenue Code) is clear that in case of a false or fraudulent return with intent to evade tax, the tax may be assessed at any time within ten years after the discovery of falsity or fraud. It does not say that it should be made within three years from the filing of the return. The fraud was discovered in 1998 hence the making of the assessment by the government in 2000 is well within the prescriptive period. Fraud is duly proven in this case. Sevilla et al deliberately overstated the acquisition price of said shares of stocks in an effort to reduce the capital gains tax. Such is a willful evasion of their tax obligation.
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(Note: This case was affirmed by the CTA en banc on August 7, 2006)
