Estates Reyes v CIR (CTA)

DOCTRINE: Vanishing Deduction under the NIRC: Property previously taxed (Vanishing Deduction) (Section 86(2) of the NIRC as amended by Republic Act No. 8424) An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received: One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; These deductions shall be allowed only where a donor’s tax or estate tax imposed was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate, and only if in determining the value of the estate of the prior decedent, no Property Previously Taxed or Vanishing Deduction was allowable in respect of the property or properties given in exchange therefor. (Section 6 & 7 of RR 2-2003) FACTS: Petitioners (Estates of Fidel and Teresita Reyes) are represented by Priscilla Reyes-Pacheco, administratrix of the two estates. The estate of Fidel Reyes availed of the Voluntary Assessment Program of the BIR in 1997 by filing an Estate Tax Return in conformance with the law. An amended return was filed the following year.

In 1999, an estate tax return was filed by the estate of Teresita Reyes. Two years later, it too availed of the VAP. In 2002, a preliminary assessment notice (PAN) was issued to the petitioners. A set of formal assessment notices (FANs) were sent out thereafter. Petitioners opposed the FANs in 2003. The investigation of the estate tax liabilities revealed an obligation of P8,814,179.17 as deficiency/ delinquency estate tax, donors' tax, and compromise penalty. This was based firstly on the failure of the estate of the late Fidel Reyes' to declare the decedent's exclusive capital/ conjugal properties. Additionally, there was also a deficiency/ delinquency estate tax for the estate of Teresita Reyes due to some discrepancies found in it which were the result of some conjugal properties belonging to Fidel's estate being reported as part of Teresita's as well as an overstatement of vanishing deductions claimed. ISSUE (relevant to the topic): W/N the CTA erred in ruling that the right of the respondent to assess petitioners of deficiency has not yet prescribed. No. S203 of the NIRC provide that internal revenue taxes shall be assessed within 3 years after the last day prescribed by law for the filing of the return and no proceeding in court without assesment for the collection of such taxes shall be begun after the expiration of such period. Provided, that in a case where a return is filed beyond the period prescribed by law, the 3 year period shall be counted from the day the return was filed. S222 then provides that an exception to this period is when the return filed is false or fraudulent. At which point, the tax may be filed without assessment within 10 years after the discovery of the falsity, fraud, or omission. Petitioners contend that there was no intent to defraud or evade tax and should therefore not be held liable. Respondents maintain their argument that the law makes no distinction W/N intent must exist for the petitioners to be made liable for the discrepancies. The court found that there was a clear substantial overstatement of vanishing deductions. Petitioners claim a total of P10.6M as vanishing deductions when in fact only P663k can be claimed as such in the computation of taxable estate of Teresita Reyes. The glaring difference of P10M is more than 30% off the actual deductions and renders petitioners liable for overstatement of deductions under S248B of the NIRC. The court ruled in favor of the respondents. While the reports filed the petitioners were not fraudulent, they were still false. The law does not require the existence of intent to fraud for them to be liable. It is enough for the reports to be merely false.