CommissionerofInternalRevenuevFilinvestDevelopmentCorporation Petitioner:CommissionerofInternalRevenue Respondent:FilinvestDevelopmentCorporation July19,2011 EmergencyRecit:FDCowns80%oftheoutstandingsharesofFAIand67.42%ofFLI.FDCandFAIenteredintoa DeedofExchangewithFLIwheretheformerwilltransferparcelsoflandtothelatterandinexchange,sharesofstock ofFLIwereissuedtoFDCandFAI.BIRassessedbothFDCandFAIfordeficiencytaxes.Oneofthebasesforthe assessmentisthecashadvancesFDCextendedinfavorofitsaffiliates.TheCIRarguedthattheywereinterestfree despitetheinterestbearingloansitobtainedfrombankinginstitutions. I: (seeissue1) R: CIR'spowertodistribute, apportionorallocategrossincomeordeductionsbetweenoramongcontrolledtaxpayersmaybeexercisedaslongas thecontrolledtaxpayer'staxableincomeisnotreflectiveofthatwhichitwouldhaverealizedhaditbeendealingatarm's lengthwithanuncontrolledtaxpayer,theCIRcanmakethenecessaryrectificationsinordertopreventevasionoftaxes. However,thetopowertoimpute"theoreticalinterests"isnotincludedinthebroadparametersofCIR.
IR.Thereisno evidenceofactualorpossibleshowingthattheadvancesFDCextendedtoitsaffiliateshadresultedtotheinterests subsequentlyassessedbytheCIR. Facts:(Youllreadthiscaseagainunderadifferenttopic)
Theownerof80%oftheoutstandingsharesofrespondentFilinvestAlabang,Inc.(FAI),respondentFilinvest DevelopmentCorporation(FDC)isaholdingcompanywhichalsoowned67.42%oftheoutstandingsharesof FilinvestLand,Inc.(FLI). FDCandFAIenteredintoaDeedofExchangewithFLIwherebytheformerbothtransferredinfavorofthe latterparcelsofland.Inexchange,463,094,301sharesofstockofFLIwereissuedtoFDCandFAI.Asaresult oftheexchange,FLIsownershipstructurewaschanged. FLIrequestedarulingfromBIRtotheeffectthatnogainorlossshouldberecognizedintheaforesaidtransfer ofrealproperties.Actingontherequest,theBIRissuedaruling,findingthattheexchangeisamongthose contemplatedunderSec34(c)(2)oftheoldNIRCwhichprovidesthat(n)ogainorlossshallberecognizedif propertyistransferredtoacorporationbyapersoninexchangeforastockinsuchcorporationofwhichasa resultofsuchexchangesaidperson,aloneortogetherwithothers,notexceedingfour(4)persons,gains controlofsaidcorporation." FDCreceivedfromtheBIRaFormalNoticeofDemandtopaydeficiencyincomeanddocumentarystamp taxes,plus interests and compromise penalties. The deficiency taxeswere assessed on the taxable gain supposedlyrealizedbyFDCfromtheDeedofExchangeitexecutedwithFAIandFLI,onthedilutionresulting fromtheShareholdersAgreementFDCexecutedwithRHPLaswellasthearmslengthinterestrateand documentarystamptaxesimposableontheadvancesFDCextendedtoitsaffiliates.
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FAIsimilarlyreceivedfromtheBIRaFormalLetterofDemandfordeficiencyincometaxes.
BothFDCandFAIfiledtheirrespectiverequestsforreconsideration/protest.TheCIRfailedtoresolvetheir requestthus,FDCandFAIfiledapetitionforreviewwiththeCTApursuanttoSec228ofthe1997NIRC. TheyallegethatnotaxablegainshouldhavebeenassessedfromthesubjectDeedofExchange sinceFDCandFAIcollectivelygainedfurthercontrolofFLIasaconsequenceoftheexchange;that correlativetotheCIR'slackofauthoritytoimputetheoreticalinterestsonthecashadvancesFDC extendedinfavorofitsaffiliates,theruleissettledthatinterestscannotbedemandedintheabsence of a stipulation to the effect; that not being promissory notes or certificates of obligations, the instructionallettersaswellasthecashandjournalvouchersevidencingsaidcashadvanceswere not subject to documentary stamp taxes; and, that no income tax may be imposed on the prospectivegainfromthesupposedappreciationofFDC'sshareholdingsinFAC.Theyprayedthat thesubjectassessmentsbecancelledandannulled.
CIR fileditsanswer,claiming thatthe transfershould notbeconsidered taxfreesince,withthe resultant diminutionofitssharesinFLI,FDCdidnotgainfurthercontrolofsaidcorporation. Also,thecashadvances FDCextendedtoitsaffiliateswereinterestfreedespitetheinterestbearingloansitobtainedfrombanking institutions,theCIRinvokedSec43oftheoldNIRCwhich,asimplementedbyRR2,Sec179(b)and(c), gavehim: "the power to allocate, distribute or apportion income or deductions between or among such organizations,tradesorbusinessinordertopreventevasionoftaxes." TheCIRjustifiedtheimpositionofdocumentarystamptaxesontheinstructionallettersaswellascashand journalvouchersforsaidcashadvancesonthestrengthofSec180oftheNIRCandRRs994whichprovide thatloantransactionsaresubjecttosaidtaxirrespectiveofwhetherornottheyareevidencedbyaformal agreementorbymereofficememo.TheCIRalsoarguedthatFDCrealizedtaxablegainarisingfromthe dilutionofitssharesinFACasaresultofitsShareholders'AgreementwithRHPL.
CTADecision:withtheexceptionofthedeficiencyincometaxontheinterestincomeFDCsupposedlyrealized fromtheadvancesitextendedinfavorofitsaffiliates,therestofdeficiencyincomeanddocumentarystamp taxesassessedagainstFDCandFAIarecancelled.
Issues/Held:
FDCfiledapetitionforreviewbeforetheCA.CAreversedthedecisionoftheCTA.
1.
(MAIN)
W/Ntheadvancesextendedbyrespondenttoitsaffiliatesaresubjecttoincometax NO.
2. 3. 4.
W/Nthe exchangeofsharesofstockforpropertyamongFDC,FAIandFLImetallthe requirementsforthenonrecognitionoftaxablegainundersec34(c)(2)oftheoldNIRC(nowsec40 (c)(2)(c)oftheNIRC)YES. W/NthelettersofinstructionorcashvouchersextendedbyFDCtoitsaffiliatesaredeemed loanagreementssubjecttoDSTundersec180oftheNIRCYES. W/NthegainondilutionasaresultoftheincreaseinthevalueofFDCsshareholdingsis taxableNO. Ratio: TheoreticalInterestRates(fortheadvancesextended)
Sec43ofthe1993NIRCprovidesthat,
(i)n any case of 2 or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the CIR is authorized to distribute, apportion or allocate gross incomeordeductionsbetweenoramongsuchorganization,tradeorbusiness,ifhedeterminesthat suchdistribution,apportionmentorallocationisnecessaryinordertopreventevasionoftaxesor clearlytoreflecttheincomeofanysuchorganization,tradeorbusiness.
ItmayalsobeseenthattheCIR'spowertodistribute,apportionorallocategrossincomeor deductionsbetweenoramongcontrolledtaxpayersmaybelikewiseexercisedwhetherornotfraud inheresinthetransaction/sunderscrutiny.Foraslongasthecontrolledtaxpayer'staxableincomeis not reflective of that which it would have realized had it been dealing at arm's length with an uncontrolledtaxpayer,theCIRcanmakethenecessaryrectificationsinordertopreventevasionof taxes.
Despitethebroadparametersprovided,thepowertoimpute"theoreticalinterests"tothe controlledtaxpayer'stransactionsisnotincluded.Theremustbeproofoftheactualor,atthevery least,probablereceiptorrealizationbythecontrolledtaxpayeroftheitemofgrossincomesoughtto bedistributed,apportionedorallocatedbytheCIR. ThereisnoevidenceofactualorpossibleshowingthattheadvancesFDCextendedtoits affiliateshadresultedtotheinterestssubsequentlyassessedbytheCIR. RegardingtheDeedofExchange
Sec34(c)(2)ofthe1993NIRC:
o Sec.34.Determinationofamountofandrecognitionofgainorloss . (c)ExceptionxxxxNogainorlossshallalsoberecognizedifpropertyistransferredtoa corporationbyapersoninexchangeforsharesofstockinsuchcorporationofwhichas aresultofsuchexchangesaidperson,aloneortogetherwithothers,notexceedingfour persons, gains control of said corporation;Provided,That stocks issued for services shallnotbeconsideredasissuedinreturnofproperty.
Since the term "control" is clearly defined as "ownership of stocks in a corporation possessingatleastfiftyonepercentofthetotalvotingpowerofclassesofstocksentitledtoone vote"underSec34(c)(6)[c]ofthe1993NIRC,theexchangeofpropertyforstocksbetweenFDC FAIandFLIclearlyqualifyasataxfreetransactionunderpar34(c)(2)ofthesameprovision.
InasmuchasthecombinedownershipofFDCandFAIofFLI'soutstandingcapitalstock addsuptoatotalof70.99%,itstandstoreasonthatneitherofsaidtransferorscanbeheldliablefor deficiencyincometaxestheCIRassessedonthesupposedgainwhichresultedfromthesubject transfer. DocumentaryStampTaxes
TheinstructionallettersaswellasthejournalandcashvouchersevidencingtheadvancesFDCextendedto itsaffiliatesqualifiedasloanagreementsuponwhichDSTmaybeimposed.
We find that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiencyDST.
DilutionofShares
Noreversibleerrorcan,finally,beimputedagainstboththeCTAandtheCAforinvalidatingthedeficiency incometaxesFDCissupposedtohaveincurredasaconsequenceofthedilutionofitssharesinFAC. Absentshowingofsucherrorhere,wefindnostrongandcogentreasonstodepartfromsaidrulewithrespect totheCTA'sfindingthatnodeficiencyincometaxcanbeassessedonthegainonthesupposeddilution and/orincreaseinthevalueofFDC'sshareholdingsinFACwhichtheCIRfailedtoestablish.
