Bureau of Internal Revenue

-Us e of Networth Method

Li Yao vs. CIR

G.R. No. L-11875

December 28, 1963

Facts:

Li Yao organized the Li Yao & Company and made himself managing partner from 1948 to February 1955
he was president of, and owned shares in, the Li Chay Too & Sons, Inc.; and in 1950 he organized a
corporation known as the Far East Realty & Investment Co. (known as FERIN for short) of which he was
also stockholder and president. Petitioner filed his income tax returns for the years 1945 to 1951. In
1948 a verification of his income tax returns for the years 1945 to 1947 was made and a deficiency
income tax was assessed against him, which he paid. CIR, believing that petitioner had not reported his
true incomes for the previous years, appointed a team to examine his books and an additional
assessment was made against him for the years 1945 to 1951. Later, a second team of investigators was
appointed and recommended a deficiency income tax assessment. This team employed what is known
as the net worth or inventory method. A third team was appointed, headed by BIR Examiner Quesa-da.
This team recommended an assessment against petitioner; the inventory method was also used in
making this assessment. Demand was made for the collection of said assessment, so petitioner herein
presented a petition with CTA for the review of the said assessment. CTA rendered a decision in which it
found that the amount of the income tax deficiency due from petitioner. Petitioner Li Yao sought to
reconsider the decision and the assessment invoking doctrine of equitable recoupment.

Issue:
Whether the inventory method used in assessing the income taxes due from petitioner is proper.

Held:

Yes. The use of the inventory method is authorized under Section 15 of the NIRC ), as amended, which
authorizes the CIR to assess taxes due a taxpayer from any other available fact or evidence. If a taxpayer
commits a violation of the law, hiding his income to evade payment of taxes, the Government must be
per mitted to resort to all evidence or sources available to determine his said income, so that the tax
may be collected for public purposes. There is and there should be a presumption of regularity accorded
this action of the CIR in assessing the tax on the best evidence obtainable, otherwise it would be
impossible to assess taxes due from a dishonest taxpayer. In the case at bar the existence of assets or
properties appearing in the name of the taxpayer or in the name of his dummies or friends, without the
taxpayer being able to give a definite reasonable explanation for their existence, justifies the CTA and
this Court to resort to the inventory method of assessment, such being necessary and at the same time
just and equitable.