Claim of right doctrine or doctrine of ownership, command or control- In this case, Javier is not liable for fraud penalty because the “income” he received is not yet a taxable gain since it is still under litigation.
FACTS:
• 1977: Victoria Javier, wife of Javier-respondent, received $999k from Prudential Bank remitted by her sister Dolores through Mellon Bank in US.
• Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal against Javier claiming that its remittance of $1M was a clerical error and should have been $1k only and praying that the excess be returned on the ground that the Javiers are just trustees of an implied trust for the benefit of Mellon Bank.
• CFI charged Javier with estafa alleging that they misappropriated and converted it to their own personal use.
• A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote that “the taxpayer was recipient of some money received abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation”
• The Commissioner of Internal Revenue wrote a letter to Javier demanding him to pay taxes for the deficiency, due to the remittance.
• Javier replied to the Commissioner and said that he will pay the deficiency but denied that he had any undeclared income for 1977 and requested that the assessment of 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return.
• Commissioner replied that “the amount of Mellon Bank’s erroneous remittance which you were able to dispose is definitely taxable” and the Commissioner imposed a 50% fraud penalty on Javier.
ISSUE: Whether or not Javier is liable for the 50% penalty.
HELD: No.
• The court held that there was no actual and intentional fraud through willful and deliberate misleading of the BIR in the case. Javier even noted that “the taxpayer was recipient of some money received abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation”
• (the ff are not expressly written in the case, in fact the doctrine I just found it elsewhere but this is relevant to the topic rather than the issue in the case)
o Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite and unconditional obligation to return or repay.
o In this case, the remittance was not a taxable gain, since it is still under litigation and there is a chance that Javier might have the obligation to return it. It will only become taxable once the case has been settled because by then whatever amount that will be rewarded, Javier has a claim of right over it.
