67 Corollarily, an assessment of the tax deficiency is not required in a criminal prosecution for tax evasion. 68 However, in Commissioner of Internal Revenue v. Court of Appeals , 69 we clarified that although a deficiency assessment is not necessary, the fact that a tax is due must first be proved before one can be prosecuted for tax evasion. 70 In the case of income, for it to be taxable, there must be a gain realized or received by the taxpayer, which is not excluded by law or treaty from taxation. 71 The government is allowed to resort to all evidence or resources available to determine a taxpayer’s income and to use methods to reconstruct his income. 72 A method commonly used by the government is the expenditure method, which is a method of reconstructing a taxpayer’s income by deducting the aggregate yearly expenditures from the declared yearly income. 73 The theory of this method is that when the amount of the money that a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income. 74
_______________ 66 186 Phil. 604; 97 SCRA 877 (1980). 67 Id. , at pp. 610-611; p. 884. 68 Id. , at p. 610; p. 884. 69 327 Phil. 1; 257 SCRA 200 (1996). 70 Id. , at p. 35; p. 226. 71 Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo , G.R. No. 160756, March 9, 2010, 614 SCRA 605, 627. 72 Li Yao v. Collector of Internal Revenue , 119 Phil. 207, 222; 9 SCRA 888, 901-902 (1963). 73 Collector of Internal Revenue v. Jamir , 114 Phil. 650, 651-652; 4 SCRA 718, 720 (1962). 74 See Annex “A” of Revenue Memorandum Order No. 15-95, Guidelines and Investigative Procedures in the Development of Tax Fraud Cases for Internal Revenue Officers. 552 552 SUPREME COURT REPORTS ANNOTATED Bureau of Internal Revenue vs. Court of Appeals In the case at bar, petitioner used this method to determine respondent spouses’ tax liability. Petitioner deducted respondent spouses’ major cash acquisitions from their available funds. Thus: And since the underdeclaration is more than 30% of respondent spouses’ reported or declared income, which under Section 248(B) of the NIRC constitutes as prima facie evi-
_______________ 75 Rollo , p. 156. 76 Id. , p. 50. 77 Id . 553 VOL. 741, NOVEMBER 24, 2014 553 Bureau of Internal Revenue vs. Court of Appeals dence of false or fraudulent return, petitioner recommended the filing of criminal cases against respondent spouses under Sections 254 and 255, in relation to Section 248(B) of the NIRC. The CA, however, found no probable cause to indict respondent spouses for tax evasion. It agreed with Acting Justice Secretary Devanadera that petitioner failed to make “a categorical finding of the exact amount of tax due from [respondent spouses]” and “to show sufficient proof of a likely source of [respondent spouses’] income that enabled them to purchase the real and personal properties adverted to x x x.” 78 We find otherwise.
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