2021JD

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 BIR’s 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cancelled and superseded the March LA issued by its RDO and it stated: “Although fraud had been established in the instant case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.