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082 CIR vs.

Procter & Gamble

G.R. No. L-66838, Dec. 2, 1991

FACTS : Procter and Gamble Philippines declared dividends payable to its parent company and sole
stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax
to the BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal
Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal
Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the
dividends remitted was only 15%.
ISSUE : Whether or not P&G Philippines is entitled to the refund or tax credit.
HELD : YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to
non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he
country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax
credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary
country by the foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the
difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA
“shall allow” P&G USA a tax credit for ”taxes deemed paid in the Philippines” applicable against the US
taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met.

085 CIR v. Estate of Benigno Toda Jr.

G.R. No. 147188 Sept. 14, 2004

FACTS: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and Owner of 99.991% of
outstanding capital stock, to sell the Cibeles Building and 2 other parcels of land, which he sold to Rafael
A. Altonaga, who then sold it on the same day to Royal Match Inc. CIC included gains from sale of real
property in its annual income tax return while Altonaga paid a 5% capital gains tax.
Toda sold his shares to Le Hun T. Choa evidenced by a deed of sale of shares of stock which provides
that the buyer is free from all income tax liabilities for 1987 to 1989. Toda Jr. died 3 years later.
BIR sent an assessment notice and demand letter to CIC and to the Estate of Toda for deficiency of
income tax. The Estate filed a protest which was dismissed on the ground of the fraudulent sale to
evade the 35% corporate income tax. The prescription period for fraud is 10 years from the discovery as
prescribed under Sec. 223 (a) of the NIRC.
The CTA ruled that there was no proof of fraudulent transaction so the applicable period is 3 years after
the last day prescribed by law for filing the return.

ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax avoidance so the period for
assessment has not prescribed.

RULING: YES. Estate shall be liable since prescription has not run.
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arm’s length. Tax evasion, on the other hand, is a
scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due,
or the non-payment of tax when it is shown that a tax is due
(2) an accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate and
not accidental; and
(3) a course of action or failure of action which is unlawful.
All are present in this case.
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax.
Generally, a sale of or exchange of assets will have an income tax incidence only when it is
consummated but such tax incidence depends upon the substance of the transaction rather them mere

087 Delpher Trades Co v IAC

gr no L-69259 January 1988

Facts: Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of real estate in Municipality of
Polo. The co-owners leased to Construction Components International Inc. the same property with the
provision of lessee’s preferential right to acquire the subject property. Construction Components
International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes
Philippines, Inc. with the signed conformity and consent of lessors. Two years later, a deed of exchange
was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation
whereby the former conveyed to the latter the leased property together with another parcel of land for
2,500 shares of stock of defendant corporation. Hydro Pipes Philippines, Inc., filed an amended complaint
for reconveyance claiming it was not given the first option to buy the leased property. Court of First
Instance of Bulacan ruled in favor of the plaintiff, which was affirmed on appeal by the Intermediate
Appellate Court. The defendants-appellants, now the petitioners, filed a petition for certiorari to review
the appellate court's decision.
Eduardo Neria, son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a
family corporation, who owned in common the leased land in order to perpetuate their control over the
property through the corporation and to avoid taxes and to accomplish this end, two pieces of real estate
transferred to the corporation; that the leased property was transferred to the corporation by virtue of a
deed of exchange of property. In the petitioners’; motion for reconsideration, they refer to this scheme as
“estate planning.” The petitioners contend that there was no transfer of ownership of the subject parcel of
land since the Pachecos remained in control of the property.
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity
separate and distinct from the Pachecos

Issue: Whether there no transfer of ownership by virtue of “estate planning”?

Held: YES. After incorporation, one becomes a stockholder of a corporation by subscription or by

purchasing stock directly from the corporation or from individual owners thereof. In the case at bar, in
exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks
of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation
by subscription. It is significant that the Pachecos took no par value shares in exchange for their
properties. Moreover, there was no attempt to state the true or current market value of the real estate. In
effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership from unincorporated to incorporated form
by organizing Delpher Trades Corporation to take control of their properties and at the same time save on
inheritance taxes.
The records do not point to anything wrong or objectionable about this “estate planning” scheme resorted
to by the Pachecos. “The legal right of a taxpayer to decrease the amount of what otherwise could be his
taxes or altogether avoid them, by means which the law permits, cannot be doubted.”