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We’re still on administrative remedies that may be availed of by the government. You have to memorize those cases under which the Commissioner of the BIR can resort to the so-called Constructive Distraint (Revenue Memorandum Circular 5- 2001).

Section 206 has been implemented by Revenue Memorandum Circular 5-2001.

COMPROMISE

Let’s focus on the provision on Compromise (Section 204; pages 166 – 174 of Dimaampao Book).

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The Commissioner may -

(A) Compromise the Payment of any Internal Revenue Tax, when:

(1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or

(2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

The compromise settlement of any tax liability shall be subject to the following minimum amounts:

• For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and • For other cases, a minimum compromise rate equivalent to forty

percent (40%) of the basic assessed tax.

Where the basic tax involved exceeds One million pesos (P1,000.000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners.

(B) Abate or Cancel a Tax Liability, when:

(1) The tax or any portion thereof appears to be unjustly or excessively assessed; or

(2) The administration and collection costs involved do not justify the collection of the amount due.

All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud.

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

A Tax Credit Certificate validly issued under the provisions of this Code may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable. Any request for conversion into refund of unutilized tax credits may be allowed, subject to the provisions of Section

230 of this Code: Provided, That the original copy of the Tax Credit Certificate showing a creditable balance is surrendered to the appropriate revenue officer for verification and cancellation: Provided, further, That in no case shall a tax refund be given resulting from availment of incentives granted pursuant to special laws for which no actual payment was made.

The Commissioner shall submit to the Chairmen of the Committee on Ways and Means of both the Senate and House of Representatives, every six (6) months, a report on the exercise of his powers under this Section, stating therein the following facts and information, among others: names and addresses of taxpayers whose cases have been the subject of abatement or compromise; amount involved; amount compromised or abated; and reasons for the exercise of power: Provided, That the said report shall be presented to the Oversight Committee in Congress that shall be constituted to determine that said powers are reasonably exercised and that the government is not unduly deprived of revenues.

It’s very clear now that the BIR Commissioner has the authority to compromise tax liabilities. You will note that it covers not only civil liability but also criminal liability. You can easily recall the grounds:

1. doubtful validity; 2. financial incapacity.

You have to know this because as amended, the compromise rate insofar as these grounds regarding financial incapacity is 10%, minimum compromise rate, 40% for doubtful validity cases.

How do you apply that?

The word is minimum. It must not be lower than 10% or 40%.

More than 10% is within the bounds of the law.

What is not allowed is to lower that to 9, 8, 7%. So 12% is within the limitation. Three revenue regulations clarified this provision.

Regarding this doubtful validity cases, there are now 7 situations covered by the particular ground. Financial incapacity cases, there are 5. According to Revenue Regulations 7-2001 as amended by Revenue Regulations 30- 2002. I want you to mark, master and memorize the meaning of Jeopardy assessment.

Sec. 3. Basis for acceptance of Compromise Settlement. – The Commissioner may compromise the payment of any internal revenue tax on the following grounds:

(1) Doubtful validity of the assessment. – the offer to compromise a delinquent account of disputed assessment under these Regulations on the ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that:

(a) The delinquent account or disputed assessment is one resulting from a jeopardy assessment.

Jeopardy assessment – a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be

jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return.

(b) The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis

(c) The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment or preliminary assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis

(d) The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis

(e) The taxpayer failed to elevate to the CTA an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis

(f) The assessment were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities prescribed under sec. 228 of the Tax code.

(g) Assessment made based on the Best Evidence Obtainable Rule and there is reason to believe that the same can be disputed by sufficient and competent evidence

(h) The Assessment was issued within the prescriptive period of assessment as extended by the taxpayer’s execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic

(i) The Assessment is based on an issue where a court of competent jurisdiction made an adverse decision against the bureau, but for which the Supreme Court has not decided upon with finality

(2) Financial Incapacity – the offer to compromise based on financial incapacity may be accepted upon showing that:

(a) The corporation ceased operation or is already dissolved

(b) The taxpayer is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%

(c) The taxpayer is suffering from networth deficit computed by deducting total liabilities (net of deferred credits) from total assets (net of prepaid expenses, deferred charges, pre- operating expenses, as well as appraisal increases in fixed assets), taken from the latest audited financial statements

(d) The taxpayer is a compensation income earner with no other source of income and the family’s gross monthly compensation income does not exceed the levels of compensation income provided for under sec 4.1.1 of these regulations, and it appears that the taxpayers possesses no

other leviable/distrainable assets, other than his family home

(e) The taxpayer has been granted by the Securities and Exchange Commission or by any competent tribunal a moratorium or suspension of payments to creditors, or otherwise declared bankrupt or insolvent

The Commissioner shall not consider any offer for compromise settlement by reason of financial incapacity unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits under Republic Act. No. 1405 or under other general or special laws, and such waiver shall constitute as the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

For purposes of these Regulations, the term “assessment” includes the preliminary assessment notice (PAN) issued as of June 30, 2001 by the appropriate “Review Office.” In fine, it does not include the post reporting notice issued by the head of the investigating unit.

Jeopardy assessment is an example of doubtful validity case.

What must be the reason? Jeopardy Assessment vs Ordinary Assessment

It is different from ordinary assessment. In ordinary assessment, there is that tax audit. Here (in jeopardy assessment), there is no audit to doubtful question. That makes it a doubtful assessment. If it is justified by demand that such delay in submitting this documents by the taxpayer will jeopardize the collection of such tax. You should know how that word jeopardize is being used in such definition. If it is that delay that may bring by such assessment.

You should also underscore this item G, the application of the Best Evidence Obtainable Rule. You refer to section 6(B) of the Tax Code, there you will find this provision regarding Best Evidence Obtainable Rule.

(g). Assessment made based on the Best Evidence Obtainable Rule and there is reason to believe that the same can be disputed by sufficient and competent evidence

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax Administration and Enforcement. –

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(B) Failure to Submit Required Returns, Statements, Reports and other Documents. - When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.

In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.

59 (C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presumptive Gross Sales and Receipts. - The Commissioner may, at any time during the taxable year, order inventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or may place the business operations of any person, natural or juridical, under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sales or receipts for internal revenue tax purposes. The findings may be used as the basis for assessing the taxes for the other months or quarters of the same or different taxable years and such assessment shall be deemed prima facie correct.

When it is found that a person has failed to issue receipts and invoices in violation of the requirements of Sections 113 and 237 of this Code, or when there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of this Code, the Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar businesses under similar situations or circumstances or after considering other relevant information may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person.

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It is one of those doubtful validity cases because as explained by the Supreme Court in the case of COMMISSIONER VS. HANTEX TRADING CO., INC., G.R. NO. 136975, March 31, 2005, 454 SCRA 301, this is a departure from such observance of the technical rules of procedure. Here, best evidence may be covered by this as this might come from third persons.

COMMISSIONER VS. HANTEX TRADING CO

the general rule is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose to give weight or disregard such evidence, depending on its trustworthiness.

The "best evidence" envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales.67 Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission.

The law allows the BIR access to all relevant or material records and data in the person of the

taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer’s records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business.68 In this era of developing information- storage technology, there is no valid reason to immunize companies with computer-based, record- keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayer’s return. What may be used by the BIR is the information that may be gotten from taxpayers who engage in the same business.

You should also read Section 6(C) which is really an amplification of that.

If a taxpayer failed to maintain books of accounts, the BIR can resort to other information. Just to search the gross sales or receipts of these taxpayers. The Best Evidence Obtainable Rule requires information may be gotten from persons who engage in the same or similar business.

The new provision there is the last item, item I, but there is such an adverse decision, adverse to the BIR.

i. The Assessment is based on an issue where a court of competent jurisdiction made an adverse decision against the bureau, but for which the Supreme Court has not decided upon with finality

If you go over those cases that fall under the financial incapacity, you will notice that these grounds are justifiable.

For instance, if a corporation ceased to commence its business, has been dissolved, financial incapacity may be invoked as a ground. It files a petition for suspension of payments, insolvency, it is but just and fair to invoke this as a ground for compromise.

As you can see under section 204, the BIR Commissioner can compromise criminal liability. Here, you should group those cases which can be compromised, cases which cannot be compromised. There are 6 cases, according to Rev. Reg. 5- 2001, which can be compromised. On the other hand, there are 7 cases which cannot be compromised.

Sec. 2 Cases which may be Compromised - the following cases may, upon taxpayer’s compliance with the basis set forth under Section 3 of these Regulations, be the subject matter of compromise settlement

1. Delinquent accounts

2. Cases under administrative protest pending in the Regional Offices, Revenue District Offices, Legal Service, large Taxpayer

Service (LTS), Collection Service, Enforcement Service, and other offices in the National office\

3. Civil tax cases being disputed before the courts, e.g., MTC, RTC, CTA, CA, SC

4. Collection case filed in courts

5. Criminal Violations other than those already filed in court or those involving criminal tax fraud

6. Cases covered by pre-assessment notices but taxpayer is not agreeable to the findings of the audit office as confirmed by the review office

Cases which cannot be compromised

1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligations to withhold

2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative

3. Criminal violation already filed in court

4. Delinquent accounts with duly approved schedule of installment payments

5. Cases where final reports of revinvestigation or reconsiderations have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board or the National Evaluation Board on a case to case basis

6. Cases which become final and executor after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment

7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer

Cases which cannot be compromised, it used to be 5. Rev. Reg. 20-2002 added 2 grounds. The 2 grounds:

1. When such judgment has become final, this has been qualified, that is if the ground is a doubtful validity – if the request for compromise is grounded on doubtful validity.

2. Estate tax cases. Take note of the qualification that is if the request for compromise is based on financial incapacity. You should read this in relation to that section we discussed regarding Estate tax particularly sections 90 and 91. There you will find this 5-year, 2-year period. These are the periods that may be counted for such extension of time to pay estate tax.

The trouble with this rev. reg. is that it failed to give the reason, read section 91, by allowing the granting of 2 or 5 year period extension, the law has given ample time for the

executor or administrator or the heirs to pay such tax, they cannot thereafter invoke the same as ground. That must be, I