A PRESUMPTION IS A MERE PRESUMPTION
By: Atty. Mark Anthony Tamayo on July 23,2020.
In tax litigation, assessments from the Bureau of Internal Revenue (BIR) are generally accorded the presumption of correctness and being made in good faith (Marcos II v. Court of Appeals, GR. 120880, June 5, 1997). In the absence of evidence to the contrary, a notice of tax deficiency establishes a prima facie case of liability on the part of the taxpayer.
Aside from the lifeblood theory of taxation, the presumption comes from the principle of presumption of administrative regularity (omnia praesumuntur rite et solemniter esse acta) in the performance of public functions. In other words, a public official enjoys the presumption of regularity in discharging his or her official duties and functions (Gatmaitan v. Gonzales, 525 Phil. 658, 671). Every reasonable intendment will be made in support of this presumption and considerable deference shall be afforded, subject to de novo review by the Tax Court to determine if the tax findings are, indeed, supported by substantial evidence.
It must be emphasized that in a tax assessment, the question that should be decided is not only whether the BIR was wrong, but also whether the taxpayer was right (CRU Concepts Inc. v. CIR, CTA Case 9389, Oct. 19, 2019; CIR v. Hantex Trading Co. Inc., G.R. 136975, Mar. 31, 2005, citing Tan Guan v. Court of Tax Appeals, 19 SCRA 903). In effect, the taxpayer bears the ultimate burden of convincing the court that the deficiency determination is erroneous. This is the logical outgrowth of the presumption in favor of the validity of assessments.
When a taxpayer rebuts the presumption, the burden now shifts to the BIR to demonstrate the correctness of the tax assessment. The determination by the courts would then rest on all the evidence introduced.
Notably, the presumption of correctness rule is not without exceptions.
The principle shall not apply when an assessment is proven to be utterly without foundation
(CIR v. Alpha245 Incorporated, CTA EB 1875, Oct. 1, 2019). An assessment without foundation is considered arbitrary and capricious characterized by abuse of or unwarranted exercise of discretion.
Thus, where the BIR has come out with a “naked assessment,” i.e., without any foundation character (arising from a grossly inadequate or nonexistent audit examination), the determination of the tax due is without rational basis.” (CIR v. Hantex Trading Co. Inc., G.R. 136975, Mar. 31, 2005, citing US v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433).
In the absence of records, the BIR would normally resort to an income reconstruction method. While it has wide latitude in conducting its audit, results that would, in effect, lead to an estimation or approximation must, however, be supported by sufficient evidence (as opposed to inference) so to not be adjudged as arbitrary or capricious.
In First Global BYO Corporation v. CIR, CTA Case 9172, 9212 and 9242, Aug. 6, 2019, the CTA ruled that when the BIR resorts to presumptions by relying, based on suspicion, on the results of the unverified third-party matching in estimating taxpayer’s sales and tax liabilities, the findings of fraud will not be sustained. The mere understatement of tax is not itself proof of fraud for the purpose of tax evasion. While it is true that such underdeclaration constitutes prima facie evidence of a false or fraudulent return, such is only a presumption and the allegation of fraud must be duly proven.
In Ayala Property Management Corp. v. CIR, CTA Case 9298, Jan. 21, 2019, the Tax Court found that the alleged unaccounted income, based on the differences that resulted from the BIR’s matching of the taxpayer’s summary list of sales and the third parties’ summary list of purchases, were not actually verified by the BIR with the each third party. In this case, the Tax Court invalidated the income tax assessment for the failure of the team that conducted the tax audit to verify, validate or confirm the third-party information with externally sourced data to check its correctness.
In Titanium Corporation v. CIR, CTA Case 9515, Oct. 2, 2019, the Tax Court likewise ruled that the assessment issued by the BIR had no factual basis to support the assessment that the alleged unaccounted expenses arising from the excess payments found in the petitioner’s alphalist, as compared to its financial statements and income tax return, translate to undeclared income on its part. In this case, the subject assessment was based merely on the inference that undeclared expenses reflect undeclared sources of income.
In these cases, it is clear that some reasonable foundation for the assessment is necessary to preserve the presumption of correctness. As held in several decisions, the presumption of correctness of assessment being a mere presumption cannot be made to rest on another, no matter how reasonable or logical said presumptions may be (Collector v. Benipayo, G.R. L-13656, Jan.31, 1962; CIR v. Island Garment Manufacturing Corporation, G.R. L-46644, Sept. 11, 1987). Thus, the BIR must present substantive evidence linking the taxpayer to the charged income-generating activity or reflecting unreported income to justify the assessment.
The presumption of correctness is only as strong as its rational underpinnings. Where an assessment lacks a rational basis, the presumption evaporates. While the BIR has the power to assess taxpayers on the best evidence obtainable, such power should not be used arbitrarily and capriciously in computing the taxes due. An assessment must be based on actual, ascertained and credible facts to stand the test of judicial scrutiny.