CIR vs. FilinvestDevt Corp.

G.R. 163653 ; July 19, 2011

Facts: Filinvest Development Corp (FDC) is the owner of outstanding shares of both
FilinvestAlabang, 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 FilinvestAsia
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 inorder 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 transfereeexchanges its
shares of stock for property/ies of the transferor; (c) the transfer ismade 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 acorporation 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 instructionalletters as well as the journal and cash vouchers
evidencing the advances FDCextended to its affiliates in 1996 and 1997
qualified as loan agreements upon whichdocumentary stamp taxes may be
imposed.apply them would be prejudicial to the taxpayers. This rule does
notapply: (a) where the taxpayer deliberately misstates or omits material
facts fromhis 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 arematerially different from the facts on which the ruling is
based; or (c) where the taxpayer acted in bad faith. The principle of nonretroactivity 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 legalbasis in assessing income tax on the
increase in the value of FDC's shareholdings inFAC 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.