MEMORANDUM TO: 123 CORPORATION

FOR: Atty. Quiroz

FROM: Block 2 Associates
SUBJECT: Re: Preliminary Assessment Notice (PAN) and Formal Demand Letter (FLD)
Issued by Bureau of Internal Revenue (BIR) Revenue Region No. 8B South NCR.
DATE: 19 MAY 2021

FACTS

BIR issued Letter of Authority (LOA) NO. eLA347111829 which authorized Revenue Officer Karl
Perez and Group Supervisor Marcus Santos to examine 123 Corporation's books of accounts
and other accounting records. Thereafter, 123 Corporation submitted necessary documents to
RO Perez and GS Santos, until the two were replaced by RO Vanessa Carlos and GS Eden
Chesa. After the Notice of Discrepancy was served on December 1, 2020, the Preliminary Notice
of Assessment (PAN) was then received by the corporation on February 15, 2021. A Formal
Letter of Demand (FLD) and Final Assessment Notice (FAN) was also issued on February 1,
2021 and was received on March 26, 2021 by 123 Corporation, but only through the security
guard of the building where the corporation is located.

ISSUES PRESENTED
1. Whether or not Revenue Officer Vanessa Carlos and Group Supervisor Eden Chesa
are vested with authority to conduct the examination of the books of accounts and
other accounting records of 123 Corporation.
2. Whether or not the 15-day period to file a reply to PAN was observed.
3. Whether or not there is a substantial compliance with Section 228 of the NIRC
regarding the contents of FAN.
4. Whether or not the assessment is valid despite failure of the Formal letter of Demand
to state a definite time for the payment of the supposed tax liabilities
5. Whether or not there is a valid assessment notice received by 123 Corporation.

BRIEF ANSWER

1. No, Revenue Officer Vanessa Carlos and Group Supervisor Eden Chesa do not
have the authority to conduct the examination of the books of accounts and
other accounting records of 123 Corporation because there was no issuance of
a new LOA authorizing them to do so as required by RMO 43-90.
2. No,the 15-day period to reply was violated when the BIR issued the FAN on
February 1 when the PAN was only received by the 123 Corporation on February
15.
3. No, there is no substantial compliance with section 228 of the National Internal
Revenue Code (NIRC) regarding the content of FAN/FLD.
4. No, the assessment is void for failure to state a definite time for the payment of the
supposed tax liabilities
 5. No, there was no valid assessment received since the documents were not
received by the proper authorized representatives.

REASONING AND DISCUSSION

Revenue Officer Vanessa Carlos and Group Supervisor Eden Chesa are not vested
with authority to conduct the examination of the books of accounts and other
accounting records of 123 Corporation

As a general rule, the CIR is vested with the power to authorize the examination of a
taxpayer and the assessment of the correct amount of tax. Based on the case of CIR v.
Sony Philippines Inc., there must be a grant of authority upon the revenue officers in order
for them to conduct an assessment or examination; otherwise, such assessment or
examination is a nullity. Equally important is that the revenue officer so authorized must not
go beyond the authority given.1 Further, RMO 43-1990 provides that, if there are transfer of
cases to another RO(s), issuance of a new LOA, with the corresponding notation thereto,
including the previous LOA number and date of issue of said LOAs shall be required.

In this case, the tax audit of 123 Corporation was reassigned to Revenue Officer Vanessa
Carlos and Group Supervisor Eden Chesa after Revenue Officer Karl Perez and Group
Supervisor Marcus Santos were reassigned to other BIR Offices. Also, there was no
issuance of new LOAs to Revenue Officer Vanessa Carlos and Group Supervisor Eden
Chesa after the reassignment from Revenue Karl Perez and Group Supervisor Marcus
Santos. Hence, they do not have authority to conduct the examination of the books of
accounts and other accounting records of 123 Corporation.

Hence, the assessment made by the revenue officers is void for failure to observe the said
15-day period.

The 15-day period to reply to the PAN was not observed.

Under Section 228 of the Tax Code, a taxpayer who receives the Preliminary Assessment
Notice (PAN) is given 15 days from receipt of the PAN to file its reply to the PAN. If the 15-
day period lapses without any response from the taxpayer, the taxpayer shall be considered
in default, and a Formal Letter of Demand (FLD) and Final Assessment Notice (FAN) shall
be issued.2

According to the case of CIR vs. Apex3 as decided by the CTA, the non-observance of the
15-day period to protest the PAN and the issuance of the FANs prior to the taxpayer's
receipt of the PAN violates its right to due process.

1
CIR v. Sony Philippines Inc. G.R. No. 178697. November 17, 2010.
2
Freelife Philippines Distribution, Inc. Philippine branch vs. Hon. Kim S. Jacinto-Henares in her capacity as CIR,
CTA Case No. 8838, April 27, 2017
3
CIR v. Apex Chemical Corporation, CTA EB Case No. 1382, October 14, 2016
It can be said that 123 Corporation was, indeed, deprived of its right to be heard with
respect to the PAN when the FAN was issued before the lapse of the 15-day period to
protest the PAN. The CIR had no reasonable opportunity to consider Apex' protest to the
PAN. Not only did the CIR fail to observe the 15-day period to file a protest against PAN, the
CIR even Issued FAN before 123 Corporation could receive the PAN. In effect, CIR already
prejudged that 123 Corporation is liable to pay the subject deficiency taxes, which further
violates 123 Corporation's right to due process.

Further, in the case of Freelife Philippines vs Jacinto-Henares, the CTA stated that
procedural due process is not satisfied with the mere issuance of a PAN, without giving the
taxpayer an opportunity to respond to the PAN. It also cited the case of Pilipinas Shell
Petroleum Corporation vs CIR where the Supreme Court said that non-compliance with
statutory and procedural due process renders the FAN null and void.4

Here, prior to the lapse of the 15-day period within which the taxpayer could respond to the
PAN, it received the FLD and Assessment Notices dated February 1, 2021 on March 26,
2021. Notably, the BIR did not even wait for the taxpayer to reply to the PAN before issuing
the FLD and the Assessment Notices.

Thus, the FLD and Assessment Notice is null and void.

There is no substantial compliance with Section 228 of the NIRC regarding the
contents of FAN/FLD.

In the case of CIR v. United Salvage and Towage (Phils.), Inc., the High Court made a
statement that the requirements laid down in Sec. 228 of the Tax Code have a mandatory
nature. Indeed, Section 228 of the Tax Code provides that the taxpayer “shall” be informed
in writing of the law and the facts on which the assessment is made. Otherwise, the
assessment is void. The use of the word "shall" in these legal provisions indicates the
mandatory nature of the requirements laid down therein. The law requires that the legal and
factual bases of the assessment be stated in the formal letter of demand and assessment
notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of
the Tax Code would be rendered nugatory. The Court also added that when assessments
disregard the provisions of Sec. 228 of the Tax Code by not providing the legal and factual
bases of the assessment, the formal letter of demand and the notice of assessment issued
relative thereto are void.

The Court of Tax Appeals En Banc discussed the elements of a valid assessment in the
case of CIR v. Mindanao Sanitarium and Hospital, Inc., (CTA EB No. 1147). They are the
following: (1) a computation of tax liabilities; (2) a demand for payment within the prescribed
period; and (3) a statement of the legal and factual basis/bases used. CTA EB further
ratiocinated that there is no valid assessment for failure to issue the required FAN to the
taxpayer because due process requires service and receipt thereof by the taxpayer.

Citing also the case of Samar-I Electric Cooperative v. CIR5:

4
Freelife Philippines Distribution, Inc. Philippine branch, ibid.
5
G.R. No. 193100, December 10, 2014 - SAMAR-I ELECTRIC COOPERATIVE, Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE
Section 228. Protesting of Assessment. – x x x

The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made: otherwise, the assessment shall be void.

The said section clearly requires the written details on the nature, factual and legal
bases of the subject deficiency tax assessments. The reason for the mandatory
nature of this requirement is that 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.
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.”

Here, the formal letter of demand and final assessment notice sent to 123
Corporation did not provide nor explain in detail the particular provision in law and
revenue regulation violated by the said corporation. Absent the mandatory
requirement of stating the legal and factual basis in the formal letter of demand and
final assessment notice, 123 Corporation was not fully informed of the factual and
legal bases of the deficiency taxes assessed against it thereby violating its right to
due process.

Furthermore, the said formal letter of demand and final assessment notice did not
provide for the details on BIR’s interpretation of the law as their legal basis for the
computation of the deficiency tax assessments against 123 Corporation.

In the case of CIR v. Metro Star Superama, Inc.6, a mailed letter is deemed received
by the addressee in the course of mail — is merely a disputable presumption; If the
taxpayer denies ever having received an assessment from the BIR, it is incumbent
upon the latter to prove by competent evidence that such notice was indeed received
by the addressee; PAN is a part of the substantive due process requirement in the
issuance of a deficiency tax assessment, absence of which renders the assessment
void.

In Bloat and Ogle, Inc. vs. CIR7, CTA had the occasion to elucidate that the
assessment must strictly comply with the requirements of the law, otherwise it would
be tantamount to denial of due process.

Furthermore, CTA reiterated the ruling of the Supreme Court, in the case of
Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc. 8,
6
CIR v. Metro Star Superama, Inc., G.R. No. 185371. December 8, 2010.
7
Bloat and Ogle, Inc. vs. CIR. CTA Case No. 8682. September 2, 2016.
8
Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), G.R. No. 197515. July 2, 2014
citing Commissioner of Internal Revenue v. Metro Star Superama 9, where it held that
in balancing the scales between (1) the State's power to tax and the right to
prosecute perceived transgressors of the law, and (2) the constitutional rights of a
citizen to due process of law and the equal protection of the laws, the scales must tilt
in favor of the latter, for a citizen's right is amply protected by the Bill of Rights.

The assessment is void for failure of the Formal letter of Demand to state a definite
time for the payment of the supposed tax liabilities.

An assessment is a written notice and demand by the BIR on the taxpayer for the settlement
of a due tax liability that is definitely set and fixed. Thus, for a tax assessment to stand the
test of validity, it must contain not only a computation of tax liabilities but also a demand for
payment within a prescribed period.

In CIR vs Derek Arthur P. Ramsay, CTA EB 1413 10, the Court of Tax Appeals held that a
Formal Letter of Demand should not only contain the computation of the supposed tax
liabilities of the respondent but there must also be a fixed date when payment should be
made.11

Further, in Petronila C. Tupaz vs. Honorable Benedicta B. Ulep and People of the
Philippines12, the Supreme Court held that "an assessment contains not only a computation
of tax liabilities, but also a demand for payment within a prescribed period. The ultimate
purpose of assessment is to ascertain the amount that each taxpayer is to pay. An
assessment is a notice to the effect that the amount therein stated is due as tax and a
demand for payment thereof."13

Also in Commissioner of Internal Revenue vs. Menguito 14, the Supreme Court ruled that "the
issuance of a valid formal assessment is a substantive prerequisite to tax collection, for it
contains not only a computation of tax liabilities but also a demand for payment within a
prescribed period, thereby signaling the time when penalties and interests begin to accrue
against the taxpayer and enabling the latter to determine his remedies therefor. Due process
requires that it must be served on and received by the taxpayer."15

The Formal Letter of Demand merely states that the payment be made “through the duly
authorized agent bank in which you are enrolled using payment form (BIR. Form No.
0605)”.Such statement does not amount to a valid assessment as it failed to state a definite
time when the supposed tax liabilities were due and demandable.

9
CIR v. Metro Star Superama, Inc., G.R. No. 185371. December 8, 2010
10
CIR vs Derek Arthur P. Ramsay, CTA EB 1413, June 22, 2017
11
CIR vs Derek Arthur P. Ramsay, CTA EB 1413, June 22, 201
12
Petronila C. Tupaz vs. Honorable Benedicta B. Ulep and People of the Philippines. G.R. No. 127777. October 1, 1999.
13
G.R. No. 127777, October 1, 1999,Petronila C. Tupaz vs. Honorable Benedicta B. Ulep and People of the Philippines,
14
Commissioner of Internal Revenue vs. Menguito. G.R. No. 167560
15
Commissioner of Internal Revenue vs. Menguito, G.R. No. 167560, September 17, 2008
There is an invalid assessment notice received by 123 Corporation

According to Revenue Regulation No. 12-99, Section 3.1.4. provides, “Formal Letter
of Demand and Assessment Notice. The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly authorized representative.
The letter of demand calling for payment of the taxpayer's deficiency tax or taxes
shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and assessment notice
shall be void. The same shall be sent to the taxpayer only by registered mail or by
personal delivery. If sent by personal delivery, the taxpayer or his duly authorized
representative shall acknowledge receipt thereof in the duplicate copy of the letter of
demand, showing the following: (a) His name; (b) signature; (c) designation and
authority to act for and in behalf of the taxpayer, if acknowledged received by a
person other than the taxpayer himself; and (d) date of receipt thereof.”

Furthermore, Section 3.1.6 of RR No. 18-201340 provides: "SECTION 3. Due

Process Requirement in the Issuance of a Deficiency Tax Assessment. - 3.1.6
Modes of Service. The notice (PAN/FLD/FAN/FDDA) to the taxpayer herein required
may be served by the Commissioner or his duly authorized representative through
the following modes: (i) The notice shall be served through personal service by
delivering personally a copy thereof to the party at his registered or known address
or wherever he may be found. A known address shall mean a place other than the
registered address where business activities of the party are conducted or his place
of residence."

In the case of Fort 1 Global City Center Inc vs Hon. Caesar R. Dulay 16, it must be
emphasized that personal service requires more stringent rules than service through
registered mail. Moreover, RR No. 12-99 requires that service by personal delivery
should be made upon the taxpayer himself or his authorized representative who shall
acknowledge receipt by signing his name, stating his designation and his authority to
receive the same.17

Also, in the case of Mannasoft Technology Corp. vs Commissioner of Internal

Revenue18, the foregoing documents were received by persons not authorized by the
taxpayer. The Court of Tax Appeals (CTA) ruled that such receipt does not count. As
such, the CTA ruled that since the documents were not received by the proper
authorized representatives, the assessments issued for that audit are deemed void
as well.19

16
CTA Case No. 9490 & 9503
17
Fort 1 Global City Center Inc vs Hon. Caesar R. Dulay, CTA Case No. 9490 & 9503, September 24, 2019
18
CTA Case No. 8745
19
Mannasoft Technology Corp. vs. CIR, CTA Case No. 8745, January 18, 2019
In the case, the Formal Letter and Final Assessment Notice was sent to 123
Corporation through the security guard at the lobby of 50 Acres Building, the service
of the Formal Letter and Final Assessment Notice was not in compliance with the
Revenue Regulation No. 12-99 and decisions of the CTA that the notice by personal
delivery must be received by the taxpayer himself or his authorized representative, in
this case, it was not received by the authorized representative of 123 Corporation but
rather it was received by the security guard who is not an authorized representative
of 123 Corporation. Therefore, the assessments are void.

The Supreme Court held in CIR v. BASF Coating20, an invalid assessment bears no valid
fruit. One of the requirements of a valid assessment notice is that the letter or notice
must be properly addressed. It is not enough that the notice is sent by registered
mail. Here, the formal letter of demand and final assessment notice was through the
security guard at the lobby of 50 Acres Building which does not comply with what the
law imposes as a substantive, not merely a formal, requirement.

In the instant case,123 Corporation has not been properly informed of the basis of its
tax liabilities. 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.

CONCLUSION

With all the foregoing recognized jurisprudence, BIR’s assessments are considered
void and thereby violative of 123 Corporation’s right to due process.

RECOMMENDATION

123 Corporation may file a protest either through a Request for Reconsideration or
Request for Reinvestigation defined as follows:

● Request for reconsideration - refers to a plea of re-evaluation of an

assessment on the basis of existing records without need of additional
evidence. It may involve both a question of fact or of law or bth.
● Request for reinvestigation - refers to a plea of re-evaluation of an
assessment on the basis of newly discovered or additional evidence that a
taxpayer intends to present in the reinvestigation. It may also involve a
question of fact or law or both.
However, we suggest that 123 Corporation opt for a request for reconsideration so that we
can contest the validity of the LOA and the FAN in court with proper jurisdiction.

For your information and disposition.

20
CIR v. BASF Coating, G.R. No. 198677. November 26, 2014
Block 2 Associates Members

1. BACLOR, Angemi Clied Bellosillo

2. CASTRO, Sarah Mei Macalintal
3. CATARBAS, Kate Loren Mendoza
4. Del Castillo, Lester Villanueva
5. DICKINSON, Wayne Jr. David
6. FABELLA, Alexandra Jane Romasoc
7. FLORES, Alexis Dane Bundang
8. GABUYO, Mikaela Elise Mapa
9. JANDUSAY, Jennelie Nebreja
10. MANGILIMAN, Neil Francel Domingo
11. MEDINA, David Salaam Mizona
12. MOREN, Florante Malaluan
13. RENTOY, Julius Ray Enriquez
14. SAMSON, April Retona
15. SAN PEDRO, Natasha Grace Tolentino