The Court of Tax Appeals (CTA) has granted the petition of former Chief Justice Maria Lourdes P.A. Sereno against her alleged P6.9 million deficiency income taxes, surcharges, and interests for taxable years 2011 to 2016.
In a decision promulgated last May 14 by its special second division, the CTA ruled: "Wherefore, in light of the foregoing considerations, the instant Petition for Review is granted."
"Accordingly, the undated FDDA (Final Decision on Disputed Assessment) TFS-11-16-22-002 and the FLD/FANs dated Nov. 5, 2018 issued by respondent CIR (Commissioner of Internal Revenue) against petitioner Justice Maria Lourdes P.A. Sereno for deficiency income taxes, surcharges and interests covering taxable years 2011 to 2016, are cancelled and set aside," the CTA also ruled.
"Further, respondent is enjoined and prohibited from enforcing the collection of the subject deficiency taxes during the pendency of this case," the court added.
Rulings of the CTA in divisions can be appealed to the CTA as a full court and thereafter before the Supreme Court (SC).
The case stemmed from the investigation conducted by revenue officers (ROs) on Feb. 7, 2018 against Sereno for possible violations of the National Internal Revenue Code (NIRC) "as mandated by the House of Representatives Justice Committee in relation to the [then] ongoing impeachment hearings."
Sereno received the Bureau of Internal Revenue's (BIR) Preliminary Assessment Notice (PAN) with Details of Discrepancies on Sept. 27, 2018. She was found to have deficiency income taxes of P6,965,856.84 for 2011 to 2016.
Sereno filed a reply to the PAN on Oct. 12, 2018, requesting that the deficiency income tax assessments be withdrawn considering that her income during those years were received solely from the government.
Even assuming there was a deficiency, Sereno said that assessment notice should be issued to the officers responsible for withholding and remitting the correct amount to the BIR.
The BIR then served on Nov. 20, 2018 its Formal Letter of Demand (FLD) with accompanying Audit Result / Assessment Notices (FANs). While Sereno filed a Request for Reconsideration of the FLD, the BIR issued its FDDA on Jan. 28, 2022.
Sereno then filed a Petition for Review before the CTA on Feb. 28, 2022. She said that she was an Associate Justice for the Supreme Court (SC) from 2011 up to August 2012 before she was appointed as Chief Justice from 2012 to 2016.
During those years, Sereno said she was solely employed by the SC, and it was the SC that determined, prepared, withheld, and remitted her income taxes. In addition to the taxes withheld and paid by the SC, Sereno paid additional income taxes for the years 2012, 2014, and 2015.
Prior to 2018, she did not receive any assessment from the BIR for deficiency income taxes, and she maintained that she is not liable for any alleged income tax deficiencies.
In her petition, Sereno argued that her constitutional right to equal protection of the laws was violated as there was "illegal discrimination," since the BIR itself admitted that the audit investigation was "politically motivated" since it was "mandated by the House of Representatives Justice Committee in relation to the ongoing impeachment hearings."
The targeted audit made against her, Sereno said, constitutes grave abuse of discretion amounting to lack or excess of jurisdiction. She added that her right to due process was violated when the BIR issued its final assessment without any consideration of the factual and legal arguments and evidence contained in her reply.
On the other hand, the BIR maintained the validity of its assessment and said that it observed equal protection and due process.
However, the COA ruled that the FLD and FAN were "void" because they were in violation of Sereno's right to due process. "It is expressly required that the taxpayer be informed in writing of the law and of the facts with which the assessment is made; otherwise, the assessment shall be void," the court ruled.
The CTA explained that the issuance of a PAN is part of due process, as it gives both taxpayer and the BIR to settle the case at the earliest possible time without the need for issuance of a FAN.
"The failure of the BIR to give due consideration to the said explanations or arguments is a deplorable transgression of the taxpayer's right to due process, and that the disregard by the BIR of the standards and rules renders the deficiency tax assessment null and void," the CTA said.
The CTA added that the period to assess Sereno of deficiency income taxes from 2011 to 2014 has already lapsed, as the proper period to assess cases of fraudulent or false returns is 10 years.
In turn, the period to collect the assessed deficiency income taxes for 2015 to 2016, as well as the prior years 2011 to 2014, has also prescribed. "Indeed, when the BIR validly issues the assessment within the prescribed three-year period, it has another three years to collect the tax due by distraint, levy, or court proceeding," the decision stated.
Since the BIR issued the FLDs/FANs on Nov. 5, 2018, it had another three years or until Nov. 5, 2021 to enforce the collection of the said deficiency taxes. However, the BIR only initiated the collection enforcement effort in this case on May 10, 2022.
"Thus, even if the assessment for 2015 to 2016 has not yet prescribed, the Commissioner of Internal Revenue can no longer collect from petitioner the assessed deficiency income taxes for the period as he was already barred by prescription," the CTA said.
"The Court ought to reiterate that while taxes are the lifeblood of the nation, the Court cannot allow tax authorities to indefinite and infinite periods to assess and collect alleged unpaid taxes. Certainly, it is an injustice to leave taxpayers in perpetual uncertainty whether they will be made liable for deficiency or delinquent taxes," it added.
The 45-page decision was written by Associate Justice Lanee S. Cui-David with the concurrence of Associate Justice Jean Marie A. Bacorro-Villena.