CIR v. Enron Subic Power

Enron Subic Power Corporation, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport enterprise, filed its 1996 income tax return on April 12, 1997, declaring a net loss of P7,684,948. Through a preliminary five-day letter, the BIR informed it of a proposed deficiency income tax assessment of P2,880,817.25. Enron protested. On May 26, 1999 it received a formal assessment notice demanding the same amount for 1996, and it protested again. When the protest went unresolved for 180 days, Enron petitioned the Court of Tax Appeals. It argued that the assessment did not state its legal and factual bases, as Section 228 of the NIRC and Section 3.1.4 of RR No. 12-99 require. The CTA cancelled the assessment. The Court of Appeals affirmed, holding that the audit working papers did not substantially comply because they did not show how the cited law applied to the facts. The Commissioner argued that Enron had been told of the bases through an advice to its representative, the preliminary five-day letter, and a copy of the audit working papers.

1. 1Whether the formal assessment notice complied with the requirement that the taxpayer be informed in writing of the law and the facts on which the assessment is based.

No. The assessment was void. Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made, or the assessment is void. Section 3.1.4 of RR No. 12-99 likewise requires the formal letter of demand to "state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based". The word "shall" makes these requirements mandatory. The Court adopted the findings of the CTA, as affirmed by the CA. The notice only stated the tax, surcharge, interest and compromise penalty. It itemized the disallowed deductions and applied the 5% preferential rate to some cost items, but gave neither legal nor factual bases and cited no provision Enron had violated. The advice to Enron's employee and the preliminary five-day letter were "mere perfunctory discharges" of the Commissioner's duties, not substitutes for the mandatory written notice. Issuing notices in the order the law requires is different from satisfying what those notices must contain. The bases must be stated in the formal letter of demand and assessment notice. They cannot be presumed from pre-assessment communications or audit working papers, or Section 228 would be rendered nugatory. The Court noted that the 1998 amendment requiring disclosure of both law and facts reflects the due process guarantee. Taxes are the lifeblood of the government, but collection must follow the law. The petition was denied and the CA decision affirmed.