G.R. No. L-11875 December 28, 1963
WILLIAM LI YAO, petitioner, vs. COLLECTOR OF INTERNAL REVENUE, respondent.

FACTS

Petitioner William Li Yao, a naturalized Filipino, was a businessman involved in several enterprises. He filed his income tax returns for the years 1945 to 1951. In 1952, the Collector of Internal Revenue, suspecting underreporting, conducted investigations using the net worth method. After multiple assessments, the Court of Tax Appeals (CTA) reviewed the case and determined a total deficiency income tax liability of P424,536.77 for the years 1948 to 1951, inclusive of 50% surcharges for fraud.
The petitioner contested the CTA’s assessment. He argued, among other points, that the “spreading method” should be applied to the unreported income discovered by the BIR. This method would distribute the unreported income evenly over several years (from 1945 to 1951) rather than attributing it to the specific years when the assets were acquired, as determined by the CTA. He claimed this was justified because the assets represented accumulated savings over time.

ISSUE

Whether the “spreading method” should be applied to distribute the petitioner’s unreported income over several years for tax assessment purposes.

RULING

The Supreme Court denied the petition and affirmed the CTA’s decision, rejecting the application of the spreading method. The legal logic is anchored on the statutory requirement for annual income reporting and the presumption of regularity. Section 39 of the National Internal Revenue Code mandates that a taxpayer must report income in the taxable year it is received. The net worth method, as properly applied by the CTA, identified specific increases in net worth corresponding to particular years.
The Court held that adopting the spreading method would contravene the law by allowing a taxpayer to avoid reporting income in the correct year. It would create a perverse incentive for tax evasion, as a taxpayer could conceal income, knowing that if discovered later, the tax liability could be reduced by spreading it over multiple years, potentially lowering the applicable tax brackets and total surcharges. The facts did not support the petitioner’s claim that the assets were from slow, untraceable accumulation; the CTA’s findings specifically linked asset increases to identifiable years. Applying the spreading method would unjustly reduce the petitioner’s assessed tax by approximately half, a result prejudicial to the State and favorable only to a non-compliant taxpayer. The presumption that official duty has been regularly performed supports the CTA’s year-specific assessment.