Case Digest: Republic v. Patanao, G.R. No. L-22356, July 21, 1967

Taxation | Basis of Taxation

Facts: 

• Republic of the Philippines, alleged that the Pedro B. Patanao failed to file accurate income tax returns for the years 1951-1955, resulting in a deficiency in income taxes and additional residence taxes amounting to P79,892.75.
• Despite demands, Patanao refused to pay the assessed taxes, which were deemed final, executory, and demandable.
• Patanao filed a motion to dismiss the complaint citing that:
1. the action was barred by prior judgment due to his acquittal in criminal cases related to non-filing and non-payment of income taxes for 1953 and 1954; and
2. that the action has prescribed.

CFI-Agusan: Dismissed the complaint regarding taxes for years 1951, 1953, and 1954, but allowed for further proceedings regarding taxes for 1955 and residence taxes for 1953-1955.

Issue: Whether the present action is barred by prior judgment. 

Held:

In applying the principle underlying the civil liability of an offender under the Penal Code to a case involving the collection of taxes, the court a quo fell into error. 

The two cases are circumscribed by factual premises which are diametrically opposed to each either, and are founded on entirely different philosophies. 

Under the Penal Code the civil liability is incurred by reason of the offender's criminal act. Stated differently, the criminal liability gives birth to the civil obligation such that generally, if one is not criminally liable under the Penal Code, he cannot become civilly liable thereunder. The situation under the income tax law is the exact opposite. 

Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him. The criminal liability arises upon failure of the debtor to satisfy his civil obligation. The incongruity of the factual premises and foundation principles of the two cases is one of the reasons for not imposing civil indemnity on the criminal infractor of the income tax law. 

Another reason, of course, is found in the fact that while section 73 of the National Internal Revenue Code has provided the imposition of the penalty of imprisonment or fine, or both, for refusal or neglect to pay income tax or to make a return thereof, it failed to provide the collection of said tax in criminal proceedings. The only civil remedies provided, for the collection of income tax, in Chapters I and II, Title IX of the Code and section 316 thereof, are distraint of goods, chattels, etc. or by judicial action, which remedies are generally exclusive in the absence of a contrary intent from the legislator. 

Considering that the Government cannot seek satisfaction of the taxpayer's civil liability in a criminal proceeding under the tax law or, otherwise stated, since the said civil liability is not deemed included in the criminal action, acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration from his liability to pay the taxes.

It is error to hold, as the lower court has held, that the judgment in the criminal cases Nos. 2089 and 2090 bars the action in the present case. The acquittal in the said criminal cases cannot operate to discharge defendant appellee from the duty of paying the taxes which the law requires to be paid, since that duty is imposed by statute prior to and independently of any attempts by the taxpayer to evade payment. Said obligation is not a consequence of the felonious acts charged in the criminal proceeding, nor is it a mere civil liability arising from crime that could be wiped out by the judicial declaration of non-existence of the criminal acts charged. 

Regarding prescription of action, the lower court held that the cause of action on the deficiency income tax and residence tax for 1951 is barred because appellee's income tax return for 1951 was assessed by the Bureau of Internal Revenue only on February 14, 1958, or beyond the five year period of limitation for assessment as provided in section 331 of the National Internal Revenue Code. Appellant contends that the applicable law is section 332 (a) of the same Code under which a proceeding in court for the collection of the tax may be commenced without assessment at any time within 10 years from the discovery of the falsity, fraud or omission.

The complaint filed on December 7, 1962, alleges that the fraud in the appellee's income tax return for 1951, was discovered on February 14, 1958. By filing a motion to dismiss, appellee hypothetically admitted this allegation as all the other averments in the complaint were so admitted. Hence, section 332 (a) and not section 331 of the National Internal Revenue Code should determine whether or not the cause of action of deficiency income tax and residence tax for 1951 has prescribed. Applying the provision of section 332 (a), the appellant's action instituted in court on December 7, 1962 has not prescribed.

Wherefore, the order appealed from is hereby set aside. Let the records of this case be remanded to the court of origin for further proceedings. No pronouncement as to costs.