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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
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the controlled taxpayer of the item of gross income strictly construed and that rulings of the CTA should be
sought to be distributed, apportioned or allocated by accorded with respect and upheld by the Court absent
the CIR. In the case at bar, records do not show that any reversible errors.
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