G.R. No. L-23676 April 27, 1967
TAN GUAN, petitioner, vs. THE COURT OF TAX APPEALS and THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, respondents.

FACTS

In 1947, Tan Guan and Sia Lin, Chinese nationals, organized the Philippine Surplus Company, a registered general partnership. For 1948, the partners filed separate income tax returns. Tan Guan filed his return on April 18, 1949, reporting a net income of P20,987.14 and paying P2,577.81 in income tax. The partnership itself, being a general partnership, was exempt from income tax but was required to file a return, with profits considered as income of the partners. In 1954, acting on a confidential report, the Bureau of Internal Revenue (BIR) investigated the partnership’s books and disallowed P206,870.00 in claimed business expenses for 1948 as fictitious. The BIR found the expenses unsupported by receipts, with payees’ names erased, and the alleged payees not reporting such sums in their own 1948 returns. Treating half of the disallowed sum (P103,435.00) as Tan Guan’s undeclared income, the BIR assessed a deficiency income tax against him on January 2, 1956, totaling P50,956.57 including a 50% surcharge. The assessment could not be served initially as Tan Guan could not be located. A demand letter was finally sent to his counsel on June 6, 1960. Tan Guan appealed to the Court of Tax Appeals, which affirmed the assessment. His motion for reconsideration was denied, prompting this appeal.

ISSUE

1. Whether the right of the Commissioner of Internal Revenue to assess the deficiency tax had prescribed.
2. Whether the deduction of P206,870.00 claimed by the Philippine Surplus Company as a business expense should be allowed.

RULING

1. No, the right to assess had not prescribed. The Court held that Tan Guan’s income tax return was false and fraudulent. Under Section 332(a) of the Tax Code, in cases of false or fraudulent returns, the Commissioner has ten years from the discovery of the fraud to make an assessment. The fraud was discovered on August 10, 1954, during the BIR investigation. The assessment was issued on January 8, 1957, well within the ten-year period. The Court sustained the finding of fraud based on the partnership’s claim of fictitious expenses to avoid declaring profits taxable to the partners and the erasure of payees’ names in the books, which Tan Guan failed to rebut.
2. No, the deduction should not be allowed. The Court affirmed the finding that the P206,870.00 in expenses were fictitious. Tan Guan’s explanation that supporting receipts could not be produced because the assessment occurred beyond the record-keeping period under Section 337 of the Tax Code was rejected, as the investigation was conducted in 1954, within the five-year period from the filing of the return. Tan Guan presented no evidence to disprove the Commissioner’s finding of fictitious expenses. In tax appeals, the Commissioner’s determination is presumed correct, and the taxpayer has the burden to rebut it, which Tan Guan failed to do. Fictitious expenses are not deductible from gross income.
The decision of the Court of Tax Appeals was affirmed. Costs were imposed on petitioner.