CIR vs. Filinvest Devt Corp.

G.R. 163653 ; July 19, 2011

Facts: Filinvest Development Corp (FDC) is the owner of outstanding shares of both Filinvest Alabang,
Inc. (FAI) and Filinvest Land, Inc. (FLI) with 80% and 67.42%, respectively. Sometime in 1996, FDC and FAI
entered into a Deed of Exchange with FLI where both transferred parcels of land in exchange for shares
of stocks of FLI. As a result, the ownership structure of FLI changed whereby FDCs ownership decreased
from 67.42% to 61.03% meanwhile FAI now owned 9.96% of shares of FLI. FLI then requested from the
BIR a ruling to the effect that no gain or loss should be recognized on said transfer and BIR issued Ruling
No. S-34-046-97 finding the exchange falling within Sec. 34 (c) (2) (now Sec. 40 (c)(2)) of the NIRC.
Furthermore, FDC extended advances in favor of its affiliates during 1996 and 1997 duly evidenced by
instructional letters as well as cash and journal vouchers. Moreover, FDC also entered into a
shareholders agreement with Reco-Herrera PTE ltd. (RHPL) for the formation of a Singapore-based joint
venture company called Filinvest Asia Corp. (FAC). The equity participation of FDC was pegged at 60%
subscribing to P500.7M worth of shares of FAC.
On Jan 3, 2000, FDC received assessment notices for deficiency income tax and deficiency stamp
taxes. The foregoing deficiency taxes were assessed on the taxable gain realized by FDC on the taxable
gain supposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution
resulting from the shareholders agreement FDC executed with RHPL and with the interest rate and
documentary stamp taxes imposable on the advances executed by FDC. FAI also received similar
assessment on deficiency income tax relating to the deed of exchange. Both FDC and FAI protested and
after having failed to act on their protest they docketed their case with the CTA. They raised the issue
that pursuant to BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from the deed
of exchange and that the BIR cannot impute theoretical interests on the cash advances of FDC in the
absence of stipulation and that not being promissory notes such are not subject to documentary stamp
taxes. CIR, for its part, raised that the said transfer of property resulted to a diminution of ownership by
FDC of FLI rather than gaining further control and as such should not be tax free. Furthermore, CIR
invoked Sec. 43 (now Sec. 50) of NIRC as implemented by RR No. 2, the CIR is given the "the power to
allocate, distribute or apportion income or deductions between or among such organizations, trades or
business in order to prevent evasion of taxes." Also the CIR justified the imposition of documentary
stamp taxes on the instructional letters citing Sec. 180 of the NIRC and RR No. 9-94 which provide that
loan transactions are subject to tax irrespective of whether or not they are evidenced by a formal
agreement or by mere office memo. Lastly, it reiterated that there was dilution of its shares as a result
of its shareholders agreement with RHPL. CTA decided in favor of FDC with the exception on the
deficiency income tax on the interest income from the income it supposedly realized from the advances
to its affiliates, the rest of the assessment were cancelled. The CTA opined that CIR was justified in
assessing undeclared interests on the same cash advances pursuant to his authority under Section 43 of
the NIRC in order to forestall tax evasion. Dissatisfied, FDC filed a petition for review with the Court of
Appeals claiming that the cash advances it extended to its affiliates were interest-free in the absence of

express stipulation. Moreover, it claimed that under Sec. 43 (now Sec. 50) the CIRs authority does not
include the power to impute imaginary interests, directed only to controlled corp and not to holding
company and can be invoked only on cases of understatement of taxable income or evident tax evasion.
The CA rendered a decision in favor of FDC cancelling said assessment. The CIR filed a petition for review
with the CA which subsequently denied for lack of merit. The CA has the following conclusions: 1. The
deed of exchange resulted in a combined control of more than 51% of FLI , hance no taxable gain; 2. The
instructional letters do not partake the nature of loan agreements; 3. Although subsequently modified
by BIR Ruling No. 108-99 to the effect that documentary stamp tax are now imposable on interoffice
memos, to give a retroactive application would be prejudicial to the taxpayer.; 4. FDCs alleged gain
from the increase of its shareholding in FAC are mere unrealized increase in capital unless converted
thru sale are not taxable. Hence, this petition for review on certiorari.
Issue: (1) Whether or not FDC is liable for theoretical interest on said advances extended by it to its
affiliates.
(2) Whether or not FDC met all the requirements for non-recognition of taxable gain under Sec. 34 (c)
(2) (now Sec. 40 (C) (2) of the NIRC and therefore, is not taxable.
(3) WON the letters of instructions or cash vouchers are deemed loan agreements subject to
documentary stamp tax.
(4) WON the dilution as a result of increase of FDCs shareholding in FAC is taxable.
Held:
(1) No. Sec. 43 (now Sec. 50) of the NIRC does not include the power to impute theoretical interest
to the CIRs powers of distribution, apportionment or allocation of gross income and deductions.
There must be proof of actual or probable receipt or realization by the controlled taxpayer of
the item of gross income sought to be distributed, apportioned or allocated by the CIR. In the
case at bar, records do not show that there was evidence that the advances extended yielded
interests. Even if FDC deducted substantial interest expenses from its gross income, there would
still be no basis for the imputation of theoretical interests on the subject advances. Under Art.
1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing.
Moreover, taxes being burdens are not to be presumed and that tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer.
(2) Yes. It was admitted in the stipulation of facts that the following are the requisites: (a) the
transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of
the transferor; (c) the transfer is made by a person, acting alone or together with others, not
exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together
with others, not exceeding four, gains control of the transferee. Moreover, it is not taxable
because the exchange did not result to a decrease of the ownership of FDC in FLI rather
combining the interests of FDC and FAI result to 70.99% of FLIs outstanding shares. Since the
term "control" is clearly defined as "ownership of stocks in a corporation possessing at least
fifty-one percent (51%) of the total voting power of classes of stocks entitled to one vote then

the said exchange clearly qualify as a tax-free transaction. Therefore, both FDC and FAI cannot
be held liable for deficiency income tax on said transfer.
(3) Yes. The instructional letters as well as the journal and cash vouchers evidencing the advances
FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which
documentary stamp taxes may be imposed. apply them would be prejudicial to the taxpayers.
This rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts
from his return or in any document required of him by the Bureau of Internal Revenue; (b)
where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad
faith. The principle of non-retroactivity of BIR rulings does not apply in favor of FDR because it is
not the taxpayer who in the first place, sought the said BIR ruling from the CIR.
(4) No. the CIR has no factual and legal basis in assessing income tax on the increase in the value of
FDC's shareholdings in FAC until the same is actually sold at a profit. A mere increase or
appreciation in the value of said shares cannot be considered income for taxation purposes.
Besides, tax revenues should be strictly construed and that rulings of the CTA should be
accorded with respect and upheld by the Court absent any reversible errors.