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CIR v.

filiinvest
COMMISSIONER OF INTERNAL REVENUE VS. FILINVEST DEVELOPMENT
CORPORATION- Theoretical Interest
Filinvest Development Corporation extended advances in favor of its affiliates and
supported the same with instructional letters and cash and journal vouchers. The
BIR assessed Filinvest for deficiency income tax by imputing an arms length
interest rate on its advances to affiliates. Filinvest disputed this by saying that the
CIR lacks the authority to impute theoretical interest and that the rule is that
interests cannot be demanded in the absence of a stipulation to the effect.
ISSUE:
Can the CIR impute theoretical interest on the advances made by Filinvest to its
affiliates?
HELD:
NO. Despite the seemingly broad power of the CIR to distribute, apportion and
allocate gross income under (now) Section 50 of the Tax Code, the same does not
include the power to impute theoretical interests even with regard to controlled
taxpayers transactions. This is true even if the CIR is able to prove that interest
expense (on its own loans) was in fact claimed by the lending entity. The term in the
definition of gross income that even those income from whatever source derived
is covered still requires that there must be actual or at least probable receipt or
realization of the item of gross income sought to be apportioned, distributed, or
allocated. Finally, the rule under the Civil Code that no interest shall be due unless
expressly stipulated in writing was also applied in this case.
The Court also ruled that the instructional letters, cash and journal vouchers qualify
as loan agreements that are subject to DST.
National Internal Revenue Code; income tax; advances to affiliates; ; imputation of
interest income; power of Commissioner of Internal Revenue. Section 43 [now
Section 50] of the 1993 National Internal Revenue Code (NIRC) provides that. (i)n
case of two or more organizations, trades or businesses (whether or not
incorporated and whether or not organized in the Philippines) owned or controlled
directly or indirectly by the same interests, the Commissioner of Internal Revenue
[(CIR)] is authorized to distribute, apportion or allocate gross income or deductions
between or among such organization, trade of business, if he determines that such
distribution, apportionment or allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any such organization, trade or business,
Section 179 of Revenue Regulations No. 2 provides in part that (i)n determining the
true net income of a controlled taxpayer, the [CIR] is not restricted to the case of
improper accounting, to the case of a fraudulent, colorable, or sham transaction, or
to the case of a device designed to reduce of avoid tax by shifting or distorting
income or deductions. The authority to determine true net income extends to any
case in which either by inadvertence or design the taxable net income in whole or in
part, of a controlled taxpayer, is other than it would have been had the taxpayer in

the conduct of his affairs been an uncontrolled taxpayer dealing at arms length
with another uncontrolled taxpayer. Despite the broad parameters provided,
however, the CIRs power of distribution, apportionment or allocation of gross
income and deductions under the NIRC and Revenue Regulations No. 2 do not
include the power to impute theoretical interests to the taxpayers transactions.
Pursuant to Section 28 [now Section 32] of the NIRC, the term gross income is
understood to mean all income from whatever source derived, including, but not
limited to certain items. While it has been held that the phrase from whatever
source derived indicates a legislative policy to include all income not expressly
exempted within the class of taxable income under Philippine laws, the term
income has been variously interpreted to mean cash received or its equivalent,
the amount of money coming to a person within a specific time or something
distinct from principal or capital. Otherwise stated, there must be proof of the
actual or, at the very least, 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 this case, there is no evidence of actual or possible showing
that the advances taxpayer extended to its affiliates had resulted to interests
subsequently assessed by the CIR. Even if the Court were to accord credulity to the
CIRs assertion that taxpayer had deducted substantial interest expense from its
gross income, there would still be no factual basis for the imputation of theoretical
interests on the subject advances and assess deficiency income taxes thereon.
Further, pursuant to Article 1959 of the Civil Code of the Philippines, no interest
shall be due unless it has been expressly stipulated in writing. Commissioner of
Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19,
2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation,
G.R. No. 167689, July 19, 2011.

National Internal Revenue Code; documentary stamp tax; advances to affiliates.


Loan agreements and promissory notes are taxed under Section 180 of the 1993
National Internal Revenue Code (NIRC) [they are now taxed under Section 179 as
evidence of indebtedness]. When read in conjunction with Section 173 of the NIRC,
Section 180 concededly applies to [a]ll loan agreements, whether made or signed
in the Philippines, or abroad when the obligation or right arises from Philippine
sources or the property or object of the contract is located or used in the
Philippines. Section 3 (b) of Revenue Regulations No. 9-94 provides in part that the
term loan agreement shall include credit facilities, which may be evidenced by
credit memo, advice or drawings. Section 6 of the same revenue regulations
further provides that [i]n cases where no formal agreements or promissory notes
have been executed to cover credit facilities, the documentary stamp tax shall be
based on the amount of drawings or availment of the facilities, which may be
evidenced by credit/debit memo, advice or drawings by any form of check or
withdrawal slip Applying the foregoing to the case, the instructional letters as
well as the journal and cash vouchers evidencing the advances taxpayer extended
to its affiliates in 1996 and 1997 qualified as loan agreements upon which

documentary stamp taxes may be imposed. Commissioner of Internal Revenue vs.


Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of
Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19,
2011.

National Internal Revenue Code; non-retroactivity of modification of rulings,


circulars, rules and regulations; who is entitled to the benefit of such rule. Any
revocation, modification or reversal of a Bureau of Internal Revenue (BIR) ruling
shall not be applied retroactively if to so apply it would be prejudicial to the
taxpayer. 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 BIR;
(b) where the facts subsequently gathered by the BIR are materially different from
the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith.
The foregoing principle of non-retroactivity of BIR may be invoked by the taxpayer
who, in the first place, sought the ruling from the Commissioner of Internal
Revenue. Commissioner of Internal Revenue vs. Filinvest Development Corporation,
G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest
Development Corporation, G.R. No. 167689, July 19, 2011.

National Internal Revenue Code; income tax; tax-free exchange; acquisition of


control. The requisites for the non-recognition of gain or loss under section 34 (c) (2)
[now Section 40 (c) (2)] of the 1993 National Internal Revenue Code (NIRC) are the
following: (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. [Prior to the exchange, transferor already had a
controlling interest in the transferee. The taxpayer, together with another affiliate
which was not an existing stockholder of the transferor prior to the exchange,
exchanged property for shares of stock in the transferee. The taxpayers controlling
interest went down from 67.42% prior to the exchange to 61.03% after the
exchange. The affiliate acquired 9.96% of the transferee as a result of the
exchange.]The Commissioner of Internal Revenue (CIR) argues that taxable gain
should be recognized for the exchange considering that the taxpayers controlling
interest in the transferee was decreased as a result of the transfer while the affiliate
acquired only 9.96% of the transferee. Rather than isolating the same as proposed
by the CIR, the taxpayers 61.03% control of transferee should be appreciated in
combination with the 9.96% which as issued to its affiliate. Since, the term control
is clearly defined as ownership of stocks in a corporation possessing at least fiftyone percent of the total voting power of classes of stock entitled to vote, the
exchange of property for stocks between taxpayer, the affiliate and the transferee
clearly qualify as a tax free exchange under the NIRC. Commissioner of Internal
Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011;

Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No.


167689, July 19, 2011.

National Internal Revenue Code; income tax; gross income. No deficiency tax can be
assessed on the gain on the supposed dilution and/or increase in the value of
taxpayers shareholdings in the transferee which the Commissioner of Internal
Revenue (CIR), at any rate, failed to establish. Bearing in mind the meaning of
gross income, it cannot be gainsaid that a mere increase or appreciation in the
value of the shares cannot be considered income for taxation purposes. Since a
mere advance in the value of the property of a person or corporation in no sense
constitute the income specified in the revenue law, it has been held in the early
case of Fisher vs. Trinidad that it constitutes and can be treated merely as an
increase of capital. Hence, the CIR has no factual and legal basis in assessing
income tax on the increase in the value of the taxpayers shareholdings in the
transferee until the same is actually sold. Commissioner of Internal Revenue vs.
Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of
Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19,
2011.