G.R. No. 223767 - Commissioner of Internal Revenue vs. South Entertainment Gallery, Inc.

Case Summary (G.R. No. 223767)

Key Dates and Procedural Milestones

FLD‑DDAN issued December 9, 2009 (alleged receipt January 13, 2010); Final Notice Before Seizure (FNBS) dated May 28, 2010 (SEGI received June 16, 2010); Warrant for Distraint and/or Levy (WDL) dated September 1, 2010; SEGI’s letter requesting WDL cancellation dated September 24, 2010; OIC‑RDO’s letter reiterating collection dated March 28, 2011 (received April 13, 2011); SEGI filed petition for review with CTA on May 11, 2011. CTA Division initially rendered decision April 15, 2014 (partly granting petition), then on motion amended and reversed in favor of SEGI on July 7, 2014. CTA En Banc denied CIR’s petition for review on October 28, 2015 and denied reconsideration on March 22, 2016. The Supreme Court resolved the CIR’s petition for certiorari and affirmed the CTA En Banc decision.

Governing Legal Framework and Constitutional Basis

Primary statutory and regulatory sources: Section 228 of the 1997 National Internal Revenue Code (NIRC) (protesting of assessments); Revenue Regulations No. 12‑99 (RR No. 12‑99) implementing Section 228 (in force at the time of the FLD‑DDAN); later RR No. 18‑2013 (amendatory, but not yet in effect when the FLD‑DDAN was issued); Rules of Court (presumption of receipt of mail); RA No. 1125 and its amendments (jurisdiction and periods for CTA appeals). Constitutional underpinning: the due process guarantee under the 1987 Constitution governs the issuance and service of a formal tax assessment because a valid assessment is a prerequisite to depriving a taxpayer of property; strict compliance with procedural requirements is required to protect the taxpayer’s right to be informed and to contest the assessment.

Facts: Assessments, Notices and SEGI’s Position

BIR assessed SEGI for alleged deficiency income tax and VAT for taxable year 2007 (aggregate amounts alleged in various notices ranged in the tens of millions of pesos). SEGI asserted tax‑exempt status as a PAGCOR grantee and invoked legal opinions to that effect. Following issuance of a PAN and the FLD‑DDAN, the BIR issued FNBS and WDL. SEGI sought withdrawal/cancellation of the WDL, and ultimately filed a petition for review with the CTA seeking annulment of the FLD‑DDAN, FNBS and WDL insofar as they concerned the 2007 assessments.

Procedural History at the CTA

CTA Division (April 15, 2014) partly granted SEGI’s petition (cancelled VAT assessment-related writs but sustained income tax liability). SEGI moved for partial reconsideration; CTA Division issued an Amended Decision on July 7, 2014 reversing and setting aside the FLD‑DDAN, FNBS and WDL in their entirety insofar as they pertained to the assessments. CTA En Banc (October 28, 2015) denied CIR’s petition for review and affirmed the Amended Decision, finding that the FLD‑DDAN was delivered to the mall’s administrative office rather than to SEGI and that the BIR could have personally served SEGI at its accessible 3rd‑floor office. CIR’s motion for reconsideration was denied March 22, 2016. CIR elevated the matter to the Supreme Court.

Core Issues Framed on Review

Whether the CTA had jurisdiction to entertain SEGI’s petition for review (i.e., whether SEGI’s appeal was timely). 2) Whether the CIR proved valid service of the FLD‑DDAN by registered mail or by any other mode authorized under RR No. 12‑99. 3) Whether the CTA En Banc erred in its application of Section 228 NIRC and related rules regarding the commencement of the reglementary period for appeal.

Supreme Court’s Resolution: Overview and Holding

The Supreme Court denied the CIR’s petition for certiorari and affirmed the CTA En Banc. The Court held that the FLD‑DDAN was not properly served on SEGI under the requirements then in force (RR No. 12‑99), that the resulting formal assessment was void for violation of due process, and that SEGI’s petition for review was timely when reckoned from the denial/ reiteration letter of March 28, 2011 (receipt April 13, 2011). Because the assessment was void, subsequent collection notices (FNBS, WDL) derived from a void assessment and could not be used to start the period to appeal.

Reasoning on Service: Statutory/Regulatory Requirements (RR No. 12‑99)

Under RR No. 12‑99 (applicable in December 2009) the FLD/FAN must be sent to the taxpayer only by personal delivery or by registered mail. Personal delivery requires acknowledgment by the taxpayer or duly authorized representative. Constructive service by registered mail has two express requisites under Sec. 3.1.7 of RR No. 12‑99: (1) the notice must be left in the premises of the taxpayer, and (2) the fact of such service must be attested to, witnessed and signed by at least two revenue officers other than the revenue officer who constructively served the notice, with a written report. These requirements were mandatory because the issuance and service of a formal assessment implicate the taxpayer’s right to due process.

Application of RR No. 12‑99 to the Evidence Presented

CIR’s proof consisted of the registry receipt, a postal certification, and testimony of BIR personnel (who prepared and mailed the envelope) and the postman (who testified delivery was made to an SM City Pampanga administrative officer, Rose Ann Gomez). The postman also testified to the common practice of delivering tenant mail to a central receiving station. The Court found that the evidence established delivery to a mall administrative officer but failed to prove delivery to SEGI or to a person duly authorized by SEGI to receive mail on its behalf. The CIR also failed to comply with the constructive‑service attestation requirement of RR No. 12‑99 (no attestation by two other revenue officers). The absence of testimony from the alleged recipient (Rose Ann Gomez) and the lack of required revenue‑officer attestation left the CIR’s proof insufficient to establish valid service.

On the Presumption of Mail Receipt and Its Rebuttal

While there exists a rebuttable presumption that a properly addressed and mailed letter is received in the regular course of mail, the Court reiterated that such presumption is disputable. SEGI’s denial of receipt shifted the burden to the CIR to prove receipt by the addressee. The CIR’s evidence, limited to delivery to the mall’s administrative office and without proof of authorization to receive on SEGI’s behalf, did not satisfactorily discharge that burden. The Court contrasted a prior case where the central receiving clerk testified and corroborated receipt; such direct corroboration was absent here.

Consequence of Invalid Service: Void Assessment and Fruits Doctrine

Because valid service of the FLD‑DDAN is a due process prerequisite to a final, enforceable assessment, the Court held that the defective service rendered the formal assessment void. As a void assessment cannot support collection notices, the FNBS and WDL that flowed from it were likewise void or fruit of a void assessment. Hence, a taxpayer could not be required to mount an administrative protest against a non‑existent valid assessment; SEGI’s administrative letter requesting cancellation of the WDL sufficed to exhaust remedies in the circumstances.

Commencement of the Reglementary Period for CTA Appeal

Given the FLD‑DDAN was not validly served, the Court rejected CIR’s contention that the 30‑day period to file a CTA petition should begin fro

Case Syllabus (G.R. No. 223767)

Case Citation, Panel and Nature of Proceeding

Supreme Court, First Division; G.R. No. 223767; Decision dated April 24, 2023; penned by Chief Justice Gesmundo.
Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking reversal of the Court of Tax Appeals En Banc Decision dated October 28, 2015 and Resolution dated March 22, 2016 in CTA EB No. 1214 (Commissioner of Internal Revenue vs. South Entertainment Gallery, Inc.).
Parties: Commissioner of Internal Revenue (CIR) as petitioner; South Entertainment Gallery, Inc. (SEGI) as respondent.
Relief sought by CIR: Set aside CTA En Banc denial of CIR’s petition for review, and reinstate assessments, notices and Warrant of Distraint and/or Levy (WDL) relating to alleged deficiency income tax and value-added tax (VAT) for taxable year 2007.

Antecedent and Factual Background

SEGI is a domestic corporation engaged in operating bingo and other games of chance, with office address at 3/F SM City Pampanga, Barangay San Jose, San Fernando City, Pampanga and Barangay Lagundi, Mexico City, Pampanga.
SEGI invoked tax-exempt status as a grantee/franchisee/licensee of the Philippine Amusement and Gaming Corporation (PAGCOR) and asserted liability solely for the 5% franchise tax, citing legal opinions and jurisprudence (including Commissioner of Internal Revenue v. Acesite (Phils.) Hotel Corporation).
BIR activity and notices:
- Notice of Informal Conference dated May 8, 2009; received by SEGI on June 8, 2009; early assessment computations presented for taxable year 2007.
- Preliminary Assessment Notice (PAN) No. 021R-0804084618 dated September 16, 2009; received by SEGI on October 16, 2009; PAN alleged deficiency income tax P8,068,653.80 and VAT P30,529,560.40 for 2007.
- Formal Letter of Demand with attached Details of Discrepancies and Assessment Notice (FLD-DDAN) dated December 9, 2009; allegedly received January 13, 2010.
- Final Notice Before Seizure (FNBS) dated May 28, 2010; received June 16, 2010; demanded payment of aggregate alleged deficiencies; aggregate figure later reflected as P39,788,105.55 (inclusive of surcharges, interests and penalties) for taxable year 2007.
- Warrant of Distraint and/or Levy (WDL) issued September 1, 2010.
SEGI’s administrative responses:
- Letter dated June 9, 2009 invoking tax-exempt status; other letters to Regional Director and BIR officials enclosing legal opinions.
- Letter dated September 24, 2010 requesting withdrawal and cancellation of the WDL as premature for absence of a valid FLD-DDAN and asserting right to submit a written protest.
- Receipt of Letter dated March 28, 2011 from OIC-RDO Amador P. Ducut with attached Memorandum dated February 3, 2011; SEGI received that letter on April 13, 2011.
SEGI filed a Petition for Review with the Court of Tax Appeals on May 11, 2011 seeking cancellation/withdrawal of the WDL and a declaration of non-liability for the alleged deficiency income tax and VAT for 2007.

Assessment Computations and Aggregate Figures as Presented in Record

Initial informal conference assessment (as reflected in BIR notice summarized in record):
- Deficiency Income Tax (2007 taxable income P17,678,360.00 at 35%): basic tax due P6,187,426.00; added surcharge and interest and compromise penalty leading to total still due P7,653,329.00.
- Deficiency VAT (2007 sales P146,753,341.00): VAT due P17,610,400.92; added surcharge/interest/penalty leading to total still due P26,126,960.17.
- Grand total illustrated P33,780,289.17 in that informal computation.
PAN (Sept. 16, 2009) alleged income tax deficiency P8,068,653.80 and VAT deficiency P30,529,560.40 for 2007.
OIC-RDO Memorandum and later letter (March 28, 2011) reiterated collection of deficiency income tax in the amount of P8,378,025.10 and deficiency VAT in the amount of P31,410,080.45 for taxable year 2007; aggregate cited in records as P39,788,105.55.

Procedural History Before the Court of Tax Appeals (CTA), Division and En Banc

SEGI’s Petition for Review filed May 11, 2011 before CTA seeking cancellation/withdrawal of WDL and declaration of non-liability for 2007 deficiencies.
CTA Third Division Decision (April 15, 2014): partly granted petition — cancelled and set aside FLD-DDAN, FNBS and WDL insofar as they covered the alleged deficiency VAT for 2007; ordered payment of deficiency Income Tax P6,187,426.00 plus 25% surcharge P1,546,856.50 = total P7,734,282.50; ordered interest and delinquency penalties computed per NIRC provisions.
Motions for Partial Reconsideration filed by both parties.
CTA Third Division Amended Decision (July 7, 2014): upon SEGI’s Motion for Partial Reconsideration, the April 15, 2014 Decision was reversed and set aside; FLD-DDAN dated December 9, 2009, FNBS dated May 28, 2010 and WDL dated September 1, 2010 were cancelled and set aside in their entirety; CIR’s motion for partial reconsideration was denied.
CIR filed Petition for Review with CTA En Banc.
CTA En Banc Decision (October 28, 2015), affirmed the CTA Third Division Amended Decision and denied CIR’s petition for review; held FLD-DDAN delivered to SM City Pampanga administrative office and not to SEGI, and thus CIR’s notices could not validly support the WDL; observed that personal service to SEGI’s 3rd floor office was practicable and CIR could have personally served SEGI.
CIR’s Motion for Reconsideration denied by CTA En Banc Resolution dated March 22, 2016.
Dissent at CTA En Banc: Presiding Justice Roman G. Del Rosario dissenting, opining that SEGI’s Petition for Review was filed out of time (252 days elapsed before filing).

Issues Raised by the CIR in the Supreme Court Petition

Whether the CTA had jurisdiction to entertain SEGI’s original Petition for Review because the appeal (petition to CTA) was allegedly filed out of time.
Whether the CTA En Banc erred in sustaining the CTA Third Division’s ruling that there was insufficient delivery/service of the Formal Letter of Demand (FLD-DDAN) by the CIR.
Whether the CTA En Banc erred in upholding the CTA Third Division’s Amended Decision which allegedly contradicted provisions of Section 228 of the 1997 NIRC in relation to Section 3(a) of Rule 8 of the Revised Rules of the Court of Tax Appeals (i.e., timeliness and procedural requirements to appeal).

Parties’ Principal Arguments on Service and Timeliness (as presented to the Court)

CIR’s arguments:
- FLD-DDAN was validly served by registered mail to SEGI at its registered address; registry receipt and certification from the Postmaster plus testimony of Postman Emelito Victoria and BIR administrative aide Ronnie SJ Ocampo established mailing and delivery; Ocampo deli
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