Taxation I

Case Digest Compilation

spouses which is a prerequisite to the filing of a criminal
BIR vs. Sps. Manly case for tax evasion.
2014
Ruling of the Court of Appeals
[SECOND DIVISION] Although it disagreed that an assessment is a condition sine
qua non in filing a criminal case for tax evasion, the CA,
Facts: Antonio Villan Manly (Antonio) is a stockholder and nevertheless, ruled that there was no probable cause to
the Executive Vice-President of Standard Realty charge respondent spouses as petitioner allegedly failed to
Corporation, a family-owned corporation. He is also state their exact tax liability and to show sufficient proof of
engaged in rental business. His spouse, respondent Ruby their likely source of income. The CA further said that
Ong Manly, is a housewife. Petitioner Bureau of Internal before one could be prosecuted for tax evasion, the fact
Revenue (BIR) issued Letter of Authority No. 2001 that a tax is due must first be proved.
000123878 authorizing its revenue officers to investigate
respondent spouses’ internal revenue tax liabilities for Petitioner contends that in filing a criminal case for tax
taxable year 2003 and prior years. Petitioner issued a letter evasion, a prior computation or assessment of tax is not
to respondent spouses requiring them to submit required because the crime is complete when the violator
documentary evidence to substantiate the source of their knowingly and willfully filed a fraudulent return with intent
cash purchase of a 256-square meter log cabin in Tagaytay to evade a part or all of the tax. In this case, an analysis of
City worth ₱17,511,010.00. Respondent spouses, however, respondent spouses’ income and expenditure shows that
failed to comply with the letter. their cash expenditure is grossly disproportionate to their
reported or declared income, leading petitioner to believe
The revenue officers executed a Joint Affidavit11 alleging that they under declared their income. In computing the
that respondent Antonio’s reported or declared annual unreported or undeclared income, which was likely sourced
income for the taxable years 1998-2003 and that despite from respondent Antonio’s rental business, petitioner used
his modestincome for the said years, respondent spouses the expenditure method of reconstructing income, a method
were able to purchase properties. used to determine a taxpayer’s income tax liability when his
records are inadequate or inaccurate. And since respondent
Filing of criminal case spouses failed to explain the alleged unreported or
The revenue officers recommended the filing of criminal undeclared income, petitioner asserts that criminal charges
cases against respondent spouses for failing to supply for tax evasion should be filed against them.
correct and accurate information in their ITRs for the years
2000, 2001, and 2003, punishable under Sections 25420 For Respondent spouses, maintain that petitioner
and 25521 in relation to Section 248(B) of Republic Act No. miserably failed to prove that a tax is actually due. Neither
8424 or the "Tax Reform Act of 1997," hereinafter referred was it able to show the source of the alleged unreported or
to as the National Internal Revenue Code (NIRC). undeclared income as required by Revenue Memorandum
Order No. 15-95, Guidelines and Investigative Procedures in
Spouses’ Counter- Addifavit the Development of Tax Fraud Cases for Internal Revenue
They denied the accusations hurled against them and Officers.56 As to the method used by petitioner, they claim
alleged that they used their accumulated savings from their that it completely ignored their lifetime savings because it
earnings for the past24 years in purchasing the properties. was limited to the years 1998-2003.
They also contended that the criminal complaint should be
dismissed because petitioner failed to issue a deficiency Issue: Whether or not there is probable cause to indict
assessment against them. respondent spouses for tax evasion. YES

State prosecutor recommended that [respondent] Held: SEC. 254. Attempt to Evade or Defeat Tax. – Any
spouses ANTONIO VILLAN MANLY and RUBY ONG MANLY be person who willfully attempts in any manner to evade or
charged [with] the following: defeat any tax imposed under this Code or the payment
thereof shall, in addition to other penalties provided by law,
1) Three (3) counts of Violation of Section 254 – Attempt upon conviction thereof, be punished by a fine of not less
to Evade or Defeat Tax of the NIRC for taxable years than Thirty thousand pesos (₱30,000.00) but not more than
2000, 2001, and 2003; One hundred thousand pesos (₱100,000.00) and suffer
imprisonment of not less than two (2) years but not more
(2) Three (3) counts for Violation of Section 255 of the than four (4) years: Provided, That the conviction or
NIRC – Failure to Supply Correct and Accurate Information acquittal obtained under this Section shall not be a bar to
for taxable years 2000, 2001 and 2003; the filing of a civil suit for the collection of taxes.

(3) Three counts of Violation ofSection 255 of the NIRC – SEC. 255. Failure to File Return, Supply Correct and
Failure to Pay, as a consequence of [respondent spouses’] Accurate Information, Pay Tax, Withhold and Remit Tax and
failure to supply correct and accurate information on their Refund Excess Taxes Withheld on Compensation. – Any
tax returns for taxable years 2000, 2001, and 2003. person required under this Code or by rules and regulations
promulgated thereunder to pay any tax, make a return,
Ruling of the Secretary of Justice keep any record, or supply correct and accurate
On appeal to the Secretary of Justice via a Petition for information, who willfully fails to pay such tax, make such
Review,34 Acting Justice Secretary Agnes VST Devanadera return, keep such record, or supply such correct and
(Devanadera) reversed the Resolution of the State accurate information, or withhold or remit taxes withheld,
Prosecutor. She found no willful failure to pay or attempt to or refund excess taxes withheld on compensation at the
evade or defeat the tax on the part of respondent spouses time or times required by law or rules and regulations shall,
as petitioner allegedly failed to specify the amount of tax in addition to other penalties provided by law, upon
due and the likely source of income from which the same conviction thereof, be punished by a fine of not less than
was based.35 She also pointed out petitioner’s failure to Ten thousand pesos (₱10,000.00) and suffer imprisonment
issue a deficiency tax assessment against respondent of not less than one (1) year but not more than ten (10)
years.
1
Based on the syllabus of Atty. Kriska Marna A. Buena
Ateneo De Davao University S.Y. 2020-2021
Digested by: Ampatuan, Ballos, Mahusay, Malicay, Nono, Paclibar, Picot, Teng
 Taxation I
Case Digest Compilation
First Php500,000.00 125,000. 125,000 125,000.
In Ungab v. Judge Cusi, Jr., we ruled that tax evasion is 00 .00 00
deemed complete when the violator has knowingly and
willfully filed a fraudulent return with intent to evade and In excess of Php500,000.00 4,913,52 42,388. 205,608.
defeat a part or all of the tax. Corollarily, an assessment of 2.87 06 14
the tax deficiency is not required in a criminal prosecution Total income tax due (net tax 4,973,76 93,719. 281,879.
for tax evasion. However, in Commissioner of Internal paid) 5.66 06 14
Revenue v. Court of Appeals, we clarified that although a
deficiency assessment is not necessary , the fact that a Add: 50% Surcharge 2,486,88 46,859. 165,304.
tax is due must first be proved before one can be 2.83 53 07
prosecuted for tax evasion.
20% Interest (up to 5/31/2005) - 4,104,37 77,337. 272,751.
825 6.29 43 72
In the case of income, for it to be taxable, there must be a
gain realized or received by the taxpayer, which is not
excluded by law or treaty from taxation. The government is
[P]
allowed to resort to all evidence or resources available to Total Tax Due inclusive of [P]11,565 [P]217,
655,369. 76

determine a taxpayer’s income and to use methods to Increments ,024.79 916.02

01
reconstruct his income. A method commonly used by the
government isthe expenditure method, which is a method
of reconstructing a taxpayer’s income by deducting the
aggregate yearly expenditures from the declared yearly On the contention of CA that, that petitioner failed to
income. The theory of this method is that when the amount make "a categorical finding of the exact amount of tax due
of the money that a taxpayer spends during a given year from [respondent spouses]" and "to show sufficient proof of
exceeds his reported or declared income and the source of a likely source of [respondent spouses’] income that
such money is unexplained, it may be inferred that such enabled them to purchase the real and personal properties
expenditures represent unreported or undeclared income. adverted to.

In the case at bar, petitioner used this method to determine

respondent spouses’ tax liability.1âwphi1 Petitioner The amount of tax due from respondent spouses
deducted respondent spouses’ major cash acquisitions from was specifically alleged in the Complaint-Affidavit.79 The
their available funds. And since the under declaration is computation, as well as the method used in
more than 30%of respondent spouses’ reported or declared determining the tax liability, was also clearly
income, which under Section 248(B) of the NIRC constitutes explained. The revenue officers likewise showed
as prima facie evidence of false or fraudulent return, that the under declaration exceeded 30% of the
petitioner recommended the filing of criminal cases against reported or declared income.
respondent spouses under Sections 254 and 255, in relation The revenue officers also identified the likely
to Section 248(B) of the NIRC. source of the unreported or undeclared income in
their Reply-Affidavit. The pertinent portion reads:
Cash Loans Withdr Funds Major Unexplai 7. x x x x
(busin awal available Acquisit ned
ess) of ions Sources
[Respondent spouses] are into rental business and
Capita of Funds the net profit for six (6) years before tax summed
l only to ₱1,238,938.32 (an average of more or less
Php200,000.00 annually). We asked respondent
199 P 900,00 130,6 1,300,25 [Antonio] if we can proceed to his rented property
8 269,613 0.00 38.98 2.44 to [appraise] the earning capacity of the building
.46
[for] lease/ rent, but he declined our proposition.
199 324,258 (400,0 39,28 1,263,79 Due to such refusal made by the respondent,
9 .28 00.00) 1.87 2.59 [petitioner], thru its examiners, took pictures of
the subject property and came up with the findings
200 290,433 - 102,0 1,656,25 17,511, (15,854, that indeed the unexplained funds sought to have
0 .46 24.97 1.02 010.00 758.98) been used in acquiring the valuable property in
200 311,227 - 406,3 717,537. 1,350,0 (632,462 Tagaytay x x x came from the under declaration of
1 .62 09.70 32 00.00 .68) rental income.

200 276,025 (100,0 184,0 360,117. Apparently, the revenue officers considered respondent
2 .62 00.00) 92.03 65 Antonio’s rental business to be the likely source of their
unreported or undeclared income due to his unjustified
200 252,188 - 245,1 857,474. 2,000,0 (1,142,5
3 .93 67.97 55 00.00 25.45) refusal to allow the revenue officers to inspect the building.

[Tot ₱1,723, 20,861, (17,629, 75

On spouses defense that they have sufficient savings to
al:] 747.37 010.00 747.11) purchase the properties
2000 2001 2003
The defense that they had sufficient savings to
Unexplained funds – under [P]15,854 [P]632, [P] purchase the properties remains self-serving at
declaration ,758.98 462.68 1,142,52 this point since they have not yet presented any
5.45 evidence to support this. And since there is no
evidence yet to suggest that the money they used
Taxable income [P]15,854 [P]632, [P]
to buy the properties was from an existing fund, it
,758.98 462.68 1,142,52
5.45 is safe to assume that that money is income or a
flow of wealth other than a mere return on capital.
Income Tax due thereon: It is a basic concept in taxation that income
denotes a flow of wealth during a definite period of
2
Based on the syllabus of Atty. Kriska Marna A. Buena
Ateneo De Davao University S.Y. 2020-2021
Digested by: Ampatuan, Ballos, Mahusay, Malicay, Nono, Paclibar, Picot, Teng
 Taxation I
Case Digest Compilation
time, while capital is a fund or property existing at 3 0 3 3
one distinct point in time.

Moreover, by just looking at the tables presented by

[Tot ₱865,633. ₱1,238,93 ₱2,104,57 ₱380,824
petitioner, there is a manifest showing that respondent al] 26 8.32 1.58 .21 ₱1,723,747
spouses had under declared their income. The huge .3712
disparity between respondent Antonio’s reported or
declared annual income for the past several years and
respondent spouses’ cash acquisitions for the years 2000,
2001, and 2003 cannot be ignored. Infact, it makes Respondent spouses were able to purchase in cash the following
uswonder how they were able to purchase the properties in properties:
cash given respondent Antonio’s meager income.
1) a luxurious vacation house in Tagaytay City valuedat
In view of the foregoing, we are convinced that there is ₱17,511,010.0013 in the year 2000, evidenced by a Deed of
probable cause to indict respondent spouses for tax evasion Absolute Sale14 dated October 24, 2000;
as petitioner was able to show that a tax is due from them.
PROBABLE CAUSE, for purposes of filing a criminal
2) a Toyota RAV4 for ₱1,350,000.00 in the year 2001,
information, is defined as such facts that are
evidenced by a Sales Invoice15 dated June 28, 2001; and
sufficient to engender a well-founded belief that a
crime has been committed, that the accusedis
probably guilty thereof, and that he should be held 3) a Toyota Prado for ₱2,000,000.00 in 2003, evidenced by a
for trial. It bears stressing that the determination of Deed of Sale16 dated July 9, 2003.17
probable cause does not require actual or absolute
certainty, nor clear and convincing evidence of guilt;
it only requires reasonable belief or probability that
more likely than not a crime has been committed by
the accused.

We must make it clear, however, that we are only here to

determine probable cause. As to whether respondent
spouses are guilty of tax evasion is an issue that must be
resolved during the trial of the criminal case, where the
quantum of proof required is proof beyond reasonable
doubt. Before we close, we must stress that our ruling in
this case should not be interpreted as an unbridled license
for our tax officials to engage in fishing expeditions and
witch-hunting. They should not abuse their investigative
powers, instead they should exercise the same within the
bounds of the law. They must properly observe the
guidelines in making assessments and investigative
procedures to ensure that the constitutional rights of the
taxpayers are well protected as we cannot allow the
floodgates to be opened for frivolous and malicious tax
suits.

Antonio’s reported or declared annual income for the

taxable years 1998-2003 are as follows:
Net Profit
Rental
Business
Taxable
(1169-73 Total
Compens Tax
  G. sources CASH
ation Due/paid
Masangka of Funds
Income
y St.,
Tondo,
Manila

199 [P]133,53 [P] [P] [P]55,834 [P]

8 2.36 191,915.1 325,447.4 .00< 269,613.46
0 6

199 142,550.5 260,961.7 403,512.2 79,254.00 324,258.28

9 0 8 8

200 141,450.0 213,740.6 355,190.6 64,757.21 290,433.46

0 0 7 7

200 151,500.0 233,396.6 384,896.6 73,669.00 311,227.62

1 0 2 2

200 148,500.0 186,106.6 334,606.6 58,581.00 276,025.62

2 0 2 2

200 148,100.0 152,817.5 300.917.9 48,729.00 252,188.93

3
Based on the syllabus of Atty. Kriska Marna A. Buena
Ateneo De Davao University S.Y. 2020-2021
Digested by: Ampatuan, Ballos, Mahusay, Malicay, Nono, Paclibar, Picot, Teng