COMMISSIONER OF INTERNAL REVENUE, Petitioner, v.

LIQUIGAZ PHILIPPINES
CORPORATION, Respondent.

When may a Final Decision on Disputed Assessment ( FDDA) be declared void, and in the event
that the FDD A is found void, what would be its effect on the tax assessment?

Liquigaz Philippines Corporation ( Liquigaz) received a copy of Letter of Authority (LOA) No.
00067824, dated July 4, 2006, issued by the Commissioner of Internal Revenue ( CIR),
authorizing the investigation of all internal revenue taxes for taxable year 2005.

On April 9, 2008, Liquigaz received an undated letter purporting to be a Notice of Informal

Thereafter, on June 25, 2008, it received a Formal Letter of Demand7 (FLD)/Formal Assessment
Notice (FAN), together with its attached details of discrepancies, for the calendar year ending
December 31, 2005.

On July 25, 2008, Liquigaz filed its protest against the FLD/FAN and subsequently submitted its
supporting documents on September 23, 2008.

As reflected in the FDDA, the CIR still found Liquigaz liable for deficiency withholding tax
liabilities, inclusive of interest.

Consequently, on July 29, 2010, Liquigaz filed its Petition for Review before the CTA Division
assailing the validity of the FDDA issued by the CIR.

The CTA Division Ruling

In its November 22, 2012 Decision, the CTA Division partially granted Liquigaz's petition
cancelling the EWT and FBT assessments but affirmed with modification the WTC assessment. It
ruled that the portion of the FDDA relating to the EWT and the FBT assessment was void
pursuant to Section 228 of the National Internal Revenue Code (NIRC) of 1997, as implemented
by Revenue Regulations (RR) No. 12-99.

The CTA Division noted that unlike the PAN and the FLD/FAN, the FDDA issued did not provide
the details thereof, hence, Liquigaz had no way of knowing what items were considered by the
CIR in arriving at the deficiency assessments. This was especially true because the FDDA
reflected a different amount from what was stated in the FLD/FAN. The CTA Division explained
that though the legal bases for the EWT and FBT assessment were stated in the FDDA, the
taxpayer was not notified of the factual bases thereof, as required in Section 228 of the NIRC.

In its May 22, 2014 Decision, the CTA En Banc affirmed the assailed decision of the CTA Division.
It reiterated its pronouncement that the requirement that the taxpayer should be informed in
writing of the law and the facts on which the assessment was made applies to the FDDA—
otherwise the assessment would be void. The CTA En Bane explained that the FDDA determined
the final tax liability of the taxpayer, which may be the subject of an appeal before the CTA.The
CTA En Banc echoed the findings of the CTA Division that while the FDDA indicated the legal
provisions relied upon for the assessment, the source of the amounts from which the
assessments arose were not shown. It emphasized the need for stating the factual bases as the
FDDA reflected different amounts than that contained in the FLD/FAN.

When may a Final Decision on Disputed Assessment (FDDA) be declared void, and in the event
that the FDD A is found void, what would be its effect on the tax assessment?

Ruling:

A void FDDA does not ipso facto render the assessment void

The FDDA must state the facts and law on which it is based to provide the taxpayer the
opportunity to file an intelligent appeal

Principles:

Under Section 228 of the NIRC, a taxpayer shall be informed in writing of the law and the facts
on which the assessment is made, otherwise, the assessment shall be void. In implementing
Section 228 of the NIRC, RR No. 12-99 reiterates the requirement that a taxpayer must be
informed in writing of the law and the facts on which his tax liability was based.

The importance of providing the taxpayer of adequate written notice of his tax liability is
undeniable. Section 228 of the NIRC declares that an assessment is void if the taxpayer is not
notified in writing of the facts and law on which it is made. Again, Section 3.1.4 of RR No. 12-99
requires that the FLD must state the facts and law on which it is based, otherwise, the FLD/FAN
itself shall be void. Meanwhile, Section 3.1.6 of RR No. 12-99 specifically requires that the
decision of the CIR or his duly authorized representative on a disputed assessment shall state the
facts, law and rules and regulations, or jurisprudence on which the decision is based. Failure to
do so would invalidate the FDDA

The use of the word "shall" in Section 228 of the NIRC and in RR No. 12-99 indicates that the
requirement of informing the taxpayer of the legal and factual bases of the assessment and the
decision made against him is mandatory.[13] The requirement of providing the taxpayer with
written notice of the factual and legal bases applies both to the FLD/FAN and the FDDA

Section 228 of the NIRC should not be read restrictively as to limit the written notice'only to the
assessment itself. As implemented by RR No. 12-99, the written notice requirement for both the
FLD and the FAN is in observance of due process—to afford the taxpayer adequate opportunity to
file a protest on the assessment and thereafter file an appeal in case of an adverse decision.

To rule otherwise would tolerate abuse and prejudice. Taxpayers will be unable to file an
intelligent appeal before the CTA as they would be unaware on how the CIR or his' authorized
representative appreciated the defense raised in connection with the assessment. On the other
hand, it raises the possibility that the amounts reflected in the FDDA were arbitrarily made if the
factual and legal bases thereof are not shown

The CIR arid Liquigaz are at odds with regards to the effect of a void FDDA. Liquigaz harps that a
void FDDA will lead to a void assessment because the FDDA ultimately determines the final
tax'liability of a'taxpayer, which may then be appealed before the CTA. On the other hand, the
CIR believes that a void FDDA does not ipso facto result in the nullification of the assessment.In
resolving the issue on the effects of a void FDDA, it is necessary to differentiate an "assessment"
from a "decision." In St. Stephen's Association v. Collector of Internal Revenue,[14] the Court has
long recognized that a "decision"- differs from an "assessment," to wit:In the first place, we
believe the respondent court erred in holding that the assessment in question is the respondent
Collector's decision or ruling appealable to it, and that consequently, the period of thirty days
prescribed by section li of Republic Act No. 1125 within which petitioner should have appealed to
the respondent court must be counted from its receipt of said assessment. Where a taxpayer
questions an assessment and asks the Collector to reconsider or cancel the same because he (the
taxpayer) believes he is not liable therefor, the assessment becomes a "disputed assessment"
that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only
upon receipt of the decision of the Collector on the disputed assessment, in accordance with
paragraph (1) of section 7, Republic Act No. 1125, conferring appellate jurisdiction upon the
Court of Tax Appeals to review "decisions of the Collector of Internal Revenue in cases involving
disputed assessment..."

The difference is likewise readily apparent in Section 7[15] of R.A. 1125,[16] as amended, where
the CTA is conferred with appellate jurisdiction over the decision of the CIR in cases involving
disputed assessments, as well as inaction of the CIR in disputed assessments. From the
foregoing, it is clear that what is appealable to the CTA is the "decision" of the CIR on disputed
assessment and not the assessment itself. An assessment becomes a disputed assessment after
a taxpayer has filed its protest to the assessment in the administrative level. Thereafter, the CIR
either issues a decision on the disputed assessment or fails to act on it and is, therefore,
considered denied. The taxpayer may then appeal the decision on the disputed assessment or
the inaction of the CIR. As such, the FDDA is not the only means that the final tax liability of a
taxpayer is fixed, which may then be appealed by the taxpayer. Under the law, inaction on the
part of the CIR may likewise result in the finality of a taxpayer's tax liability as it is deemed a
denial of the protest filed by the latter, which may also be appealed before the CTA.

Clearly, a decision of the CIR on a disputed assessment differs from the assessment itself. Hence,
the invalidity of one does not necessarily result to the invalidity of the other—unless the law or
regulations otherwise provide.

Section 228 of the NIRC provides that an assessment shall be void if the taxpayer is not informed
in writing of the law and the facts on which it is based. It is, however, silent with regards to a
decision on a disputed assessment by the CIR which fails to state the law and facts on which it is
based. This void is filled by RR No. 12-99 where it is stated that failure of the FDDA to reflect the
facts and law on which it is based will make the decision void. It, however, does not extend to
the nullification of the entire assessment.With the effects of a void FDDA expounded, the next
issue to be addressed is whether the assailed FDDA is void for failure to state the facts and law
on which it was based.

The CIR and Liquigaz are also in disagreement whether the FDDA issued was compliant with the
mandatory requirement of written notice laid out in the law and implementing rules and
regulations. Liquigaz argues that the FDDA is void as it did not contain the factual bases of the
assessment and merely showed the amounts of its alleged tax liabilities.
perusal of the FDDA issued in the case at bench reveals that it merely contained a table of
Liquigaz's supposed tax liabilities, without providing any details. The CIR explains that the FDDA
still complied with the requirements of the law as it was issued in connection with the PAN and
FLD/FAN, which had an attachment of the details of discrepancies. Hence, the CIR concludes that
Liquigaz was sufficiently informed in writing of the factual bases of the assessment.

The reason for requiring that taxpayers be informed in writing of the facts and law on which the
assessment is made is the constitutional guarantee that no person shall be deprived of his
property without due process of law.[17] Merely notifying the taxpayer of its tax liabilities without
elaborating on its details is insufficient. In CIR v. Reyes,[18] the Court further explained:.In the
present case, Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made:. She was merely notified of the findings by the CIR,
who had simply relied upon the provisions of former Section 229 prior to its amendment by
Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act of 1997.First, RA 8424 has
already amended the provision of Section 229 on protesting an assessment. The old
-requirement- of merely notifying the taxpayer of the CIR's findings was changed in 1998 to
informing the taxpayer of not only the law, but also of the facts on which an assessment would
be made; otherwise, the assessment itself would be invalid, xxxAt the time the pre-assessment
notice was issued to Reyes, RA 8424 already stated that the taxpayer must be informed of both
the law and facts on which the assessment was based. Thus, the CIR should have required the
assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the
new law. The old regulation governing the issuance of estate tax assessment notices ran afoul of
the rule that tax regulations — old as they were — should be in harmony with, and not supplant
or modify, the law. xxxFourth, petitioner violated the cardinal rule in administrative law that the
taxpayer be accorded due process. Not only was the law here disregarded, but no valid notice
was sent, either. A void assessment bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax
collection without first establishing a valid assessment is evidently violative of the cardinal
principle in administrative investigations: that taxpayers should be able to present their case and
adduce supporting evidence. In the instant case, respondent has not been informed of the basis
of the estate tax liability. Without complying with the unequivocal mandate of first informing the
taxpayer of the government's claim, there can be no deprivation of property, because no
effective protest can be made. The haphazard shot at slapping an assessment, supposedly based
on estate taxation's general provisions that are expected to be known by the taxpayer, is utter
chicanery.Even a cursory review of the preliminary assessment notice, as well as the demand
letter sent, reveals the lack of basis for — not to mention the insufficiency of — the gross figures
and details of the itemized deductions indicated in the notice and the letter. This Court cannot
countenance an assessment based on estimates that appear to have been arbitrarily or
capriciously arrived at. Although taxes are the lifeblood of the government, their assessment .and
collection "should be made in accordance with law as any arbitrariness will negate the very
reason for government itself."

The Court, however, finds that the CTA erred in concluding that the assessment on EWT and FBT
deficiency was void because the FDDA covering the same was void. The assessment remains
valid notwithstanding the nullity of the FDDA because as discussed above, the assessment itself
differs from a decision on the disputed assessment.

As established, an FDDA that does not inform the taxpayer in writing of the facts and law on
which it is based renders the decision void. Therefore, it is as if there was no decision rendered
by the CIR. It is tantamount to a denial by inaction by the CIR, which may still be appealed
before the CTA and the assessment evaluated on the basis of the available evidence and
documents. The merits of the EWT and FBT assessment should have been discussed and not
merely brushed aside on account of the void FDDA

On the other hand, the Court agrees that the FDDA substantially informed Liquigaz of its tax
liabilities with regard to its WTC assessment. As highlighted by the CTA, the basis for the
assessment was the same for the FLD and the FDDA, where the salaries reflected in the ITR and
the alphalist were compared resulting in a discrepancy of P9,318,255.84. The change in the
amount of assessed deficiency withholding taxes on compensation merely arose from the
modification of the tax rates used— 32% in the FLD and the effective tax rate of 25.40% in the
FDDA. The Court notes it was Liquigaz itself which proposed the rate of 25.40% as a more
appropriate tax rate as it represented the effective tax on compensation paid for taxable year
2005.[22] As such, Liquigaz was effectively informed in writing of the factual bases of its
assessment for WTC because the basis for the FDDA, with regards to the WTC, was identical with
the FAN— which had a detail of discrepancy attached to it.

Further, the Court sees no reason to reverse the decision of the CTA as to the amount of WTC
liability of Liquigaz. It is a time-honored doctrine that the findings and conclusions of the CTA are
accorded the highest respect and will not be lightly set aside because by the very nature of the
CTA, it is dedicated exclusively to the resolution of tax problems and has accordingly developed
an expertise on the subject.[23] The issue of Liquigaz' WTC liability had been thoroughly
discussed in the courts a quo and even the court-appointed independent accountant had found
that Liquigaz was unable to substantiate its claim concerning the discrepancies in its WTC.To
recapitulate, a "decision" differs from an "assessment" and failure of the FDDA to state the facts
and law on which it is based renders the decision void—but not necessarily the assessment. Tax
laws may not be extended by implication beyond the clear import of their language, nor their
operation enlarged so as to embrace matters not specifically provided.[24]WHEREFORE, the May
22, 2014 Decision and the November 26, 2014 Resolution of the Court of Tax Appeals En Banc
are PARTIALLY AFFIRMED in that the assessment on deficiency Withholding Tax in Compensation
is upheld.The case is REMANDED to the Court of Tax Appeals for the assessment on deficiency
Expanded Withholding Tax and Fringe Benefits Tax.