G.R. No. 210238 - Sze vs. Bureau of Internal Revenue

Case Summary (G.R. No. 210238)

Factual Background

The Bureau of Internal Revenue issued Revenue Regulation 8-2001, creating the Voluntary Assessment Program (VAP) that allowed taxpayers a privilege of last priority in audit for taxable year December 31, 2000 and prior years under conditions. Chiat Sing Cardboard Corporation availed itself of the VAP and obtained a certificate of qualification for 1999 and 2000. On March 25, 2003 the BIR issued a Letter of Authority to examine Chiat Corp.'s books for 1999 and 2000; the LOA was received by Chiat Corp.'s master payroll, Beth Tugade, but the requested records were not produced despite subsequent notices.

Investigation and Assessment

Because Chiat Corp. refused to present its accounting records, the BIR conducted an investigation and concluded that Chiat Corp. had underdeclared sales of P160,588,321.63 and P113,578,182.69 and underdeclared income of P10,663,130.96 and P5,678,909.13 for 1999 and 2000 respectively; derived income from undeclared importation of raw materials; failed to subject underdeclared amounts to VAT and income tax; willfully misdeclared taxable bases to evade payment; failed to withhold taxes on claimed labor costs amounting to P427,010,000.00; failed to rectify returns; and understated tax liabilities by more than thirty percent. The BIR issued a Notice of Informal Conference, Preliminary Assessment Notice, Formal Letter of Demand, and Final Assessment Notice. Chiat Corp. did not file a protest, and the BIR’s assessment for deficiency taxes totaling P33,847,574.18 became final, executory, and demandable.

Criminal Charges and Early Proceedings

On May 19, 2005 the BIR filed criminal charges alleging tax evasion and/or tax fraud against corporate officers Imelda T. Sze, Sze Kou For, and Teresita A. Ng for violations of the NIRC provisions expressly indicated in the record. The petitioners denied responsibility, challenged the factual and legal basis of the charges, asserted denial of due process, claimed nonreceipt of notices, denied involvement in preparation or filing of returns, and raised other defenses including the alleged insolvency of Chiat Corp. and its purported termination of business in December 2004.

State Prosecutor, DOJ, and Petition to the Court of Appeals

The State Prosecutor dismissed the complaint on July 12, 2006. The BIR’s motion for reconsideration was denied on November 29, 2006. The BIR filed a petition for review before the Department of Justice, which denied the petition in a resolution dated April 27, 2007, and later denied a motion for reconsideration on June 17, 2010. The BIR then filed a petition for certiorari with the Court of Appeals.

Court of Appeals Decision

In a May 31, 2012 decision the Court of Appeals gave due course to the BIR’s petition, found the records to show sufficient evidence of probable cause for tax evasion and for violation of the NIRC, and concluded that Chiat Corp. failed to present countervailing evidence to rebut importation records and other documents from government agencies. The CA held that the DOJ abused its discretion in failing to consider documents from the Department of Trade and Industry, the BIR’s Audit Information Tax Exemption Incentive Division, and the Bureau of Customs. The CA also observed that Chiat Corp.’s application for retirement of business shortly after applying for VAP was suspicious and indicative of bad faith. The CA ordered the DOJ to file the corresponding information, and denied Chiat Corp.’s motion for reconsideration in a November 26, 2013 resolution.

Issue Presented

The single issue the petition presented to the Supreme Court was whether the Court of Appeals erred in finding that probable cause existed for violation of the NIRC.

Subsequent Proceedings in the Court of Tax Appeals

While the petition to the Supreme Court was pending, the petitioners advised that pursuant to the CA decision the Department of Justice filed an Amended Information in Criminal Case Nos. O-385 to O-392 in the Court of Tax Appeals. The petitioners moved to quash the Amended Information on grounds of prescription and double jeopardy. On July 8, 2015 the Court of Tax Appeals issued a resolution dismissing all cases on the ground of prescription; that resolution became final and an entry of judgment was issued.

Prescription Analysis by the Court of Tax Appeals

The CTA relied on Revenue Memorandum Circular 101-90, which provides that an offense under the tax code is considered discovered only after the manner of commission and the nature and extent of fraud have been definitely ascertained, which occurs when the BIR renders its final decision and requires payment. The CTA found that the Formal Letter of Demand and Final Assessment Notice for taxable years 1999 and 2000 were served on Chiat Corp. on February 7, 2005. Because Chiat Corp. did not file a protest, the assessment became final and demandable. Counting thirty days from service, the CTA considered the violations discovered on March 9, 2005. The BIR’s revenue officers filed their joint affidavit for preliminary investigation on May 26, 2005, but the original information was not filed in court until April 23, 2014, which exceeded the five-year prescriptive period prescribed by Sec. 281, Republic Act 8424, and thus the CTA concluded that the action had prescribed.

Parties’ Positions on Mootness Before the Supreme Court

The petitioners argued that the CTA’s dismissal on the ground of prescription rendered the Supreme Court petition challenging the CA’s finding of probable cause moot and academic because the CTA resolution became final and executable and there was no longer any practical relief to be obtained. The BIR confirmed that the DOJ had filed the Information and that the CTA subsequently dismissed the criminal cases due to prescription.

Supreme Court Reasoning on Justiciability and Dismissal

The Supreme Court observed that the Public Prosecutor did not appeal or move for reconsideration of the CTA’s dismissal, rendering that decis

Case Syllabus (G.R. No. 210238)

Parties and Procedural Posture

Imelda Sze, Sze Kou For, & Teresita Ng, Petitioners were officers of Chiat Sing Cardboard Corporation (Chiat Corp.) who were criminally charged in connection with Chiat Corp.'s tax liabilities.
Bureau of Internal Revenue, represented by the Commissioner of Internal Revenue, Respondents initiated administrative assessment and sought criminal prosecution for alleged tax evasion and tax fraud.
The petition before the Court was a petition for review on certiorari assailing the Court of Appeals' grant of relief directing the filing of criminal information.

Key Factual Allegations

Revenue Regulation 8-2001 established the Voluntary Assessment Program (VAP) which Chiat Corp. availed for taxable years 1999 and 2000, and the BIR cautioned that VAP did not shield fraud.
A Letter of Authority for taxable years 1999 and 2000 was issued on March 25, 2003, but Chiat Corp. repeatedly failed to present accounting books and records upon demand.
The BIR's investigation alleged underdeclared sales of P160,588,321.63 for 1999 and P113,578,182.69 for 2000, and underdeclared income of P10,663,130.96 for 1999 and P5,678,909.13 for 2000.
The BIR alleged undeclared importation of raw materials, failure to subject underdeclared sales and income to VAT and income tax, willful misdeclaration to evade taxes, failure to withhold taxes on claimed labor costs of P427,010,000.00, and understatement of tax liabilities by over thirty percent.
The BIR issued NIC, PAN, FLD, and FAN, and the assessment for deficiency taxes of P33,847,574.18 became final and demandable after Chiat Corp. did not file a protest.

Statutory Framework

The criminal charges were grounded on provisions of the National Internal Revenue Code of 1997 (NIRC) cited in the complaint as Sections 27(A), 31, 32, 56(A)(l), 79(A)(B), 80(A), 81, 106, ll4(A)(B), in relation to Sections 251, 253(d), 254, 255, and 256 of the NIRC.
Section 281 of the Tax Reform Act of 1997 (Republic Act 8424) prescribes a five-year prescriptive period for violations of the Code and provides rules on the commencement and interruption of prescription.

Charges and Investigation

On May 19, 2005, the BIR charged the corporate officers, petitioners, with tax evasion and/or tax fraud pursuant to the NIRC provisions listed in the complaint.
The State Prosecutor initially dismissed the complaint on July 12, 2006, and the BIR's motions were denied by the State Prosecutor and later by the Department of Justice in resolutions dated April 27, 2007, and June 17, 2010.
The BIR sought certiorari relief from the Court of Appeals to compel the filing of information.

Procedural History

The Court of Appe