Commissioner of Internal Revenue vs.

Filinvest Development Corporation

(G.R. No. 163653, July 19, 2011)

FACTS
Respondent owns 80% of outstanding shares of Filinvest Alabang, Inc. (FAI) and 67.42% of
Filinvest Land, Inc. (FLI). On 1996, FDC and FAI entered into a Deed of Exchange with FLI
wherein both transferred parcels of land in exchange for shares of stocks of FLI. This resulted to
the ownership of FDC to 61.03% while FAI’s ownership is 9.96%. After which, FLI requested
from the BIR a ruling that no gain or loss should be recognized on said transfer. 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.
However, 4 years after, FDC and FAI received assessment notices for deficiency income tax
based on the taxable gain realized by FDC and FAI on the taxable gain supposedly realized by
them from the Deed of Exchange the transaction with FLI and deficiency stamp taxes.
FDC and FAI protested. But for unfavorable decision, they filed a case with the CTA.
CTA ruled in favor of FDC, except as to the deficiency income tax on the interest income from
the income it supposedly realized from the advances to its affiliates.
Aggrieved, FDC filed a petition for review with the Court of Appeals arguing that the cash
advances were interest-free in the absence of express stipulation.
CA ruled in favor of FDC reasoning that the deed of exchange resulted in a combined control of
more than 51% of FLI. Thus, it cannot be taxed.
Hence, CIR filed this present case to the Supreme Court.

ISSUE
Was the exchange of property valid, thus cannot be taxed under under Sec. 34 (c) (2) (now Sec.
40 (C) (2) of the NIRC?

RULING
Yes.

In order for said transaction to be tax-free, the following requisites must be satisfied:

1. the transferee is a corporation;

2. the transferee exchanges its shares of stock for property/ies of the transferor;
 3. the transfer is made by a person, acting alone or together with others, not exceeding four
persons; and
4. as a result of the exchange the transferor, alone or together with others, not exceeding
four, gains control of the transferee.

The Supreme Court held that all the elements were satisfied by respondent. The said transaction
also increased the combined ownership of FDC and FLI’s with FAI to 70.99%. This is within the
control stated by law defined as 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.” Their
ownership is beyond 51% stated in the tax code.

Thus, they cannot be held liable for the said deficiency tax.