FIRST DIVISION

[G.R. NO. 166387 - January 19, 2009]

COMMISSIONER OF INTERNAL REVENUE, Petitioners, v. ENRON SUBIC

RESOLUTION

CORONA, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of
Internal Revenue (CIR) assails the November 24, 2004 decision1 of the Court of Appeals (CA) annulling the
formal assessment notice issued by the CIR against respondent Enron Subic Power Corporation (Enron) for
failure to state the legal and factual bases for such assessment.

Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport
enterprise,2 filed its annual income tax return for the year 1996 on April 12, 1997. It indicated a net loss of
P7,684,948. Subsequently, the Bureau of Internal Revenue, through a preliminary five-day letter,3informed
it of a proposed assessment of an alleged P2,880,817.25 deficiency income tax.4 Enron disputed the
proposed deficiency assessment in its first protest letter.5

On May 26, 1999, Enron received from the CIR a formal assessment notice6 requiring it to pay the alleged
deficiency income tax of P2,880,817.25 for the taxable year 1996. Enron protested this deficiency tax
assessment.7

Due to the non-resolution of its protest within the 180-day period, Enron filed a Petition for Review in the
Court of Tax Appeals (CTA). It argued that the deficiency tax assessment disregarded the provisions of
Section 228 of the National Internal Revenue Code (NIRC), as amended,8 and Section 3.1.4 of Revenue
Regulations (RR) No. 12-999 by not providing the legal and factual bases of the assessment. Enron likewise
questioned the substantive validity of the assessment.10

In a decision dated September 12, 2001, the CTA granted Enron's petition and ordered the cancellation of its
deficiency tax assessment for the year 1996. The CTA reasoned that the assessment notice sent to Enron
failed to comply with the requirements of a valid written notice under Section 228 of the NIRC and RR No.
12-99. The CIR's motion for reconsideration of the CTA decision was denied in a resolution dated November
12, 2001.

The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA held that the audit working
papers did not substantially comply with Section 228 of the NIRC and RR No. 12-99 because they failed to
show the applicability of the cited law to the facts of the assessment. The CIR filed a motion for
reconsideration but this was deemed abandoned when he filed a motion for extension to file a Petition for
Review in this Court.

The CIR now argues that respondent was informed of the legal and factual bases of the deficiency
assessment against it.

We adopt in toto the findings of fact of the CTA, as affirmed by the CA. In Compagnie Financiere Sucres et
Denrees v. CIR,11 we held:

We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside
the conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By the very nature of
its function, it has dedicated itself to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority
on its part, which is not present here.
The CIR errs in insisting that the notice of assessment in question complied with the requirements of the
NIRC and RR No. 12-99.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice
(PAN) within the prescribed period of time, or whose reply to the PAN was found to be without merit. The
Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of investigation submitted
by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the
fact, the law, rules and regulations or jurisprudence on which the assessment is based,
otherwise the formal letter of demand and the notice of assessment shall be void. (emphasis
supplied)12

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. Otherwise, the assessment is void. To implement the provisions of Section
228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads:

3.1.4. 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. xxx (emphasis supplied)

It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of
the tax assessment made against him. The use of the word 'shall' in these legal provisions indicates the
mandatory nature of the requirements laid down therein. We note the CTA's findings:

In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax,
surcharge, interest and compromise penalty due thereon. The Revenue Officers of the [the CIR] in the
issuance of the Final Assessment Notice did not provide Enron with the written bases of the law and facts on
which the subject assessment is based. [The CIR] did not bother to explain how it arrived at such an
assessment. Moreso, he failed to mention the specific provision of the Tax Code or rules and regulations
which were not complied with by Enron.13

Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions
disallowed and included these in the gross income. It also imposed the preferential rate of 5% on some
items categorized by Enron as costs. The legal and factual bases were, however, not indicated.

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency.
During the pre-assessment stage, the CIR advised Enron's representative of the tax deficiency, informed it
of the proposed tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy
of the audit working paper14 allegedly showing in detail the legal and factual bases of the assessment. The
CIR argues that these steps sufficed to inform Enron of the laws and facts on which the deficiency tax
assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the
preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and
factual bases of the assessment. These steps were mere perfunctory discharges of the CIR's duties in
correctly assessing a taxpayer.15 The requirement for issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the
requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean
that Enron was informed of the law and facts on which the deficiency tax assessment was made.
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 NIRC and RR No. 12-99 would be rendered nugatory. The alleged 'factual bases' in the advice,
preliminary letter and 'audit working papers' did not suffice. There was no going around the mandate of the
law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand
accompanying the assessment notice.

We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR.
This was changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts
on which the assessment is made.16 Such amendment is in keeping with the constitutional principle that no
person shall be deprived of property without due process.17 In view of the absence of a fair opportunity for
Enron to be informed of the legal and factual bases of the assessment against it, the assessment in question
was void. We reiterate our ruling in Reyes v. Almanzor, et al.:18

Verily, taxes are the lifeblood of the Government and so should be collected without unnecessary hindrance.
However, such collection should be made in accordance with law as any arbitrariness will negate the very
reason for the Government itself.

WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision of the Court of Appeals
isAFFIRMED.

No costs.

SO ORDERED.

Commissioner of Internal Revenue (CIR) vs. Enron Subic Power Corporation - 576 SCRA 212 Case Digest

Nature:
This Petition for Review on Certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) assails the November 24, 2004 decision1 of the Court of Appeals (CA) annulling the formal assessment
notice issued by the CIR against respondent Enron Subic Power Corporation (Enron) for failure to state the legal and
factual bases for such assessment.

FACTS:
In 1997, Enron Subic Power Corporation received a pre-assessment notice from the Bureau of Internal Revenue (BIR).
Enron allegedly had a tax deficiency of P2.8 million for the year 1996. Enron filed a protest. In 1999, Enron received
a final assessment notice (FAN) from the BIR for the same amount of tax deficiency.
Enron however assailed the FAN because according to Enron the FAN is not compliant with Section 228 of the
National Internal Revenue Code (NIRC) which provides that the legal and factual bases of the assessment must be
contained in the FAN. The FAN issued to Enron only contained the computation of its alleged tax liability.
The Commissioner of Internal Revenue (CIR) admitted that the FAN did not contain the legal and factual bases of the
assessment however, the CIR insisted that the same has been substantially complied with already because during the
pre-assessment stage, the representative of Enron has been advised of the said factual and legal bases of the
assessment.

ISSUE: Whether or not there is a valid final assessment notice issued to Enron.

HELD: No. The wording of Section 228 of the NIRC provides:

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN)
within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of
Assessment shall inform the [t]axpayer of this fact, and that the report of investigation submitted by the Revenue
Officer conducting the audit shall be given due course.

In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax, surcharge,
interest and compromise penalty due thereon. The Revenue Officers of the [the CIR] in the issuance of the Final
Assessment Notice did not provide Enron with the written bases of the law and facts on which the subject
assessment is based. [The CIR] did not bother to explain how it arrived at such an assessment. Moreso, he failed to
mention the specific provision of the Tax Code or rules and regulations which were not complied with by Enron.