CIR vs. Filinvest Dev’t 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 FDC’s 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 shareholder’s 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 shareholder’s 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 shareholder’s agreement with RHPL.

Issues:
(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 FDC’s 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 CIR’s 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 FLI’s 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.