REPUBLIC OF THE PHILIPPI NES

COURT OF TAX APPEALS

QUEZON CITY

ENBANC

COMMISSIONER OF INTERNAL CTA EB No. 1664

REVENUE, (CTA Case No. 8866)
Petitioner,
Present:
DEL ROSARIO, P.J.,
-versus- CASTANEDA, JR.,
UY,
FABON-VICTORINO,
NORTHERN TOBACCO MINDARO-GRULLA,
REDRYING CO., INC., RINGPIS-LIBAN, and
Respondent. MANAHAN, JJ.

Promulgated:
IAN 3 1 2019
x-------------------------------------------------~-~~!~~.
DECISION

MINDARO- GRULLA, J .:

Submitted for decision of this Court En Bane is a

Petition for Review filed by the Commissioner of Internal
Revenue under Section 3(b), Rule 8 of the 2005 Revised
Rules of the Court of Tax Appeals 1 , as amended, seeking the
reversal of the Decision dated 23 February 2017 2 and the
Resolution 3 dated 18 May 2017 rendered by the Third

1 RULE 8, Sec 3. Who may appeal; period to file petition. - x x x

(b) A party adversely affected by a decision or resolution of a Division of

the Court on a motion for reconsideration or new trial may appeal to the
Court by fil ing before it a petition for review within fifteen days from
receipt of a copy of the questioned decision or resolution. Upon proper
motion and the payment of the full amount of the docket and other lawful
fees and deposit for costs before the expiration of the reg lementary period
herein fixed, the Court may grant an additional period not exceeding
fifteen days from the expiration of the original period within which to file
the petition for review . (Rules of Court, Rule 42, sec. la)

2 Penned by Associate Justice Lovell R. Bautista, concurred in by Associate Justice Esperanza

R. Fabon-victorino and Associate Justice Ma. Belen M. Ringpis-Liban, En Bane Docket, pp. 22 -
57
3Id., pp. 59-63
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 2 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

Division of this Court, the dispositive portions of which,

respectively, read as follows:

Decision dated February 23, 2017:

"In view of the foregoing, the present Petition

for Review is hereby PARTIALLY GRANTED.
Petitioner is hereby ORDERED TO PAY deficiency
IT, WTC and EWT in the reduced amount of
Php199,415.80, inclusive of the twenty five percent
(25°/o) surcharge imposed under Section 248(A)(3)
of the 1997 NIRC, computed as follows:

TAX TYPE BASIC 25°/o SURCHARGE TOTAL

IT Php 157,663.18 Php 39,415.80 Php 197 078.98
WTC 782.39 195.60 977.99
EWT 1,087.07 271.77 1,358.84
TOTAL Php 159,532.64 Php 391883.16 Ph_R 199,415.80

In addition, petitioner is also ORDERED TO

PAY:

1. Deficiency interest at the rate of twenty

percent (20°/o) per annum on the basic
deficiency IT, WTC and EWT computed from
the dates indicated below until full payment
thereof, pursuant to Section 249(8) of the
NIRC; and
TAX TYPE BASIC DEFICIENCY INTEREST
COMPUTED FROM
IT Php 157,663.18 April 15, 2011
WTC 782.39 January_ 15_L 2011
EWT 1,087.07 January 15, 2011

2. Delinquency interest at the rate of twenty

percent (20°/o) per annum on the amount
Php 199,415.80, representing the basic
deficiency IT, WTC and EWT and the
corresponding twenty five percent (25°/o)
surcharge, and on the twenty percent (20°/o)
deficiency interest which have accrued as
aforestated in item (1), computed from
December 16, 2013 until full payment
thereof, pursuant to Section 249(C) of the
NIRC.
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 3 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

SO ORDERED."

Resolution dated May 18, 2017:

"WHEREFORE, respondent's Motion for Partial

Reconsideration (Re: Decision Promulgated 23
February 2017) is hereby DENIED for lack of merit.

SO ORDERED."

The following facts of the case as recited by the Third

Division in its Decision and as established by evidence on
record 4 , are as follows:

"On February 25, 2010, petitioner (now

respondent), (as transferor) and Fortune
Landequities and Resources Inc. ("FLRI"), a
domestic corporation, (as transferee) entered into a
Deed of Transfer5 whereby petitioner agreed to
transfer ownership over certain parcels of land
located in Vigan, Ilocos Norte to FLRI in exchange
for a total of 5, 722 ( 4,292 additional subscription
and 1,430 unpaid original subscription) common
shares in FLRI.

On June 7, 2010, FLRI filed its Request for Tax-

Free Exchange Ruling of Transfer of Land in
Exchange for Shares of Stock6 with the BIR Law
Division. On even date, an Application and Joint
Certification 7 (BIR Form No. 1927) was likewise
filed.

On July 19, 2011, petitioner received Letter of

Authority ("LOA") No. 124-2011-00000048 dated
July 19, 2011, authorizing Revenue Officers ("RO")
Nicanor San Juan, Ponciano Garma, Lamberto
Vasquez, and Group Supervisor ("GS") Ronalda
Camba to examine petitioner's books of accounts
and accounting records for all internal revenue
taxes for the period running from January 1, 2010
to December 31,2010.
4 Division Docket, Joint Stipulation of Facts, pp. 610-617.
5 Id., Exhibit "P-8", pp.376-378.
6 Id., Exhibit "9", pp. 380-392.
7 Id., Exhibit "P-9-C", pp. 716-725.
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 4 of 20
CTA EB No. 1664 {CTA Case No. 8866)
DECISION

On March 11, 2013, a Memorandum of

Assignment was issued by OIC-Chief, Excise LT
Audit Div II Lindagrace B. Sagun ("OIC Chief
Sagun") to ROs Romualdo I. Plocios, Melinda M.
Rugayan, and Lolita G. Sabado, and GS Samuel C.
Reyes, to continue the audit or investigation
against petitioner, replacing the previously-
assigned RO Roque Doloiras, Jr.

On March 14, 2013, petitioner, through Debbie

Ting-Aicantara ("Ms. Alcantara"), received a letterS,
with attached List of Requirements 9 , from OIC Chief
Sagun dated March 13, 2013, informing petitioner
of the change of ROs and GS authorized to conduct
audit.

On July 22, 2013, a Final Report was submitted

by ROs Plocios, Rugayan, Sabado, Lilia G. Pascual
and GS Reyes to OIC-Assistant Commissioner LTS
Alfredo V. Misajon, recommending the issuance of a
Notice for Informal Conference ("NIC") against
petitioner.

On August 30, 2013, petitioner received an NIC

issued by OIC-Assistant Commissioner LTS Misajon.

On October 21, 2013, ROs Plocios, Rugayan,

Sabado, Pascual and GS Reyes submitted a
Memorandum to OIC-Assistant Commissioner LTS
Misajon, recommending the issuance of a
Preliminary Assessment Notice ("PAN") against
petitioner.

On November 22, 2013, petitioner, through Ms.

Alcantara received a PAN, with an assessment for
deficiency IT, VAT, WTC, EWT, DST and IAET in the
total amount of Php86,613, 710.78, inclusive of
surcharges, interest, and compromise penalties.

On December 4, 2013, ROs Plocios, Rugayan,

Sabado, Pascual and GS Reyes submitted a
Memorandum to OIC-Assistant Commissioner LTS

8 Id., Exhibit "R-2", p.216.

9 Id., Exhibit "R-3", pp.214-215.

L
 CIR vs. Northern Tobacco Redrying, Co., Inc. Page 5 of 20
CTA EB No. 1664 {CTA Case No. 8866)
DECISION

Misajon, recommending the issuance of a Formal

Assessment Notice ("FAN") against petitioner for
failure to file a protest to the PAN.

On December 16, 2013, petitioner, likewise

through Ms. Alcantara, received a Formal Letter of
Demand ("FLD") with an assessment for deficiency
IT, VAT, WTC, EWT, DST and IAET in the total
amount of Php89,823,645.18, inclusive of
surcharges, interest, and compromise penalties,
along with the Final Assessment Notices ("FANs")
issued on December 11, 2013, detailed as follows:
KIND BASIC TAX SURCHARGE INTEREST COMPROMISE TOTAL·-
OF TAX PENALTY
IT Php 9,636,748.11 Php - Php 5,227,605.82 Php 50,000.00 Php 14,914,353.93
VAT 6,608,093.99 - 3,892,438.93 50,000.00 10,550,532.92
WTC 215,300.47 - 127,410.69 16,000.00 358,711.16
EWT 5,349.32 - 3,165.62 1,500.00 10,014.94
DST 1,280,140.00 320,035.00 764,576.77 25,000.00 2,389,751.77
IAET 37,489,949.72 9,372,487.43 4,687,843.31 50,000.00 61,600.280.46
TOTAL PHP 55,235,581.61 9,692,522.43 24,703,041.14 192,500.00 89,823,645.18

On January 15, 2014, petitioner filed an

administrative protest with the Large Taxpayers
Service, requesting for a reconsideration of the FLD
and the FANs.

There being no action on its protest, petitioner

filed the present Petition for Review on August 12,
2014.

On October 13, 2014, respondent filed his

Answer by registered mail, interposing Special and
Affirmative Defenses, in sum: (1) that the period to
assess has not prescribed; and (2) that petitioner is
liable to pay deficiency IT, VAT, WTC, EWT, DST
and IAET.

Respondent and petitioner filed their respective

Pre-trial Briefs on February 20,2015 and March 12,
2015.

On April 6, 2015, the parties filed their Joint

Stipulation of Facts and Issues ("JSFI"); thus, a
Pre-Trial Order was issued on April 20, 2015.
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 6 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

Petitioner presented the following witnesses:

(1) Ms. Melody Grace 0. Ngo, its Accounting
Officer; and (2) Mr. Prudencio F. Tatunay, the
Court-appointed Independent Certified Public
Accountant ("!CPA").

On October 14, 2015, Formal Offer of Evidence

for the Petitioner was filed, offering Exhibits "P-1"
to "P-9," "P-9-A" to "P-9-J," "P-10," "P-10-A," "P-
11" to "P-13," "P-15," "P-15-A" to "P-15-D,""P-15-
D-1 I " "P-16 I " "P-16-A I " "P-17 I " and "P-18 • " This
was resolved by the Court in its Resolution dated
November 16, 2015, admitting all of petitioner's
evidence, save for Exhibit "P-18" for not being
properly marked.

Respondent presented its sole witnesses, RO

Plocios, one of the ROs assigned to petitioner's
case.

On February 26, 2016, Respondent's Formal

Offer of Evidence was filed, offering Exhibits "R-1"
to "R-9," "R-9-a" to "R-9-f," "R-10," and "R-10-a."

In its April 11, 2016 Resolution, the Court

admitted all of respondent's offered exhibits, and
ordered the parties to file their respective
memoranda within thirty (30) days from receipt
thereof.

After both parties were granted extension/s,

petitioner and respondent then filed their
Memoranda on June 1, 2016, and June 14, 2016,
respectively.

On June 14, 2016, the Court promulgated a

Resolution submitting the case for decision."

The Third Division of this Court rendered the assailed

Decision dated February 23, 2017, which ruled that the
transfer of land is a tax-free exchange transaction, and that
the assessment for respondent Northern Tobacco Redrying
Co., Inc's (NTRCI) VAT (1st to 3rd quarters), EWT (January to
November) and WTC (January to November) has already
prescribed, thereby reducing its tax liability.

{
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 7 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

Aggrieved, the CIR filed a motion for reconsideration

therefrom, which was denied by the Third Division on May
18, 2017 for lack of merit. Hence, this Petition for Review
was filed.

We rule to DENY the Petition.

At the outset, the arguments raised by the CIR in his

Petition for Review are a mere rehash of his previous
arguments raised before the Court in Division, which have
been duly considered and exhaustively discussed by the
Court in the assailed Decision. Nonetheless, the Court shall
pass upon the arguments to fully settle the issues in this
case.

In the instant petition, the CIR insists that NTRCI is

liable to pay deficiency IT, WTC, EWT, VAT, and DST. He
further avers that NTRCI, not having secured the tax-free
exchange ruling, should have initially treated the transaction
as taxable and reported it to the BIR. Compliance with
Revenue Regulation (RR) No. 18-2001 is an indispensable
requirement.

The CIR likewise claims that the period of prescription

is within ten (10) years after the discovery of the falsity
pursuant to Section 222(a) of the NIRC of 1997, as
amended.

The arguments raised are without merit. An in-depth

examination of the transaction involved in this case shows
that there was no gain derived from the transaction. The
Court revisits Section 40(C)(2) of the 1997 NIRC, as
amended, which provides as follows:

"SEC. 40. Determination of Amount and

Recognition of Gain or Loss. -

XXX XXX XXX

(C) Exchange of Property. -

(1) General Rule. Except as herein

provided, upon the sale or exchange of property,
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 8 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

the entire amount of the gain or loss, as the case

may be, shall be recognized.

(2) Exception. - No gain or loss shall be

recognized if in pursuance of a plan of merger or
consolidation -

(a) A corporation, which is a party to a merger

or consolidation, exchanged property solely for
stock in a corporation, which is a party to the
merger or consolidation; or

(b) A shareholder exchanges stock in a

corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or

(c) A security holder of a corporation, which is

a party to the merger or consolidation,
exchanges his securities in such a corporation,
solely for stock or securities in another
corporation, a party to the merger or
consolidation.

No gain or loss shall also be recognized if

property is transferred to a corporation by a
person in exchange for stock or unit of
participation in such corporation of which as a
result of such exchange said person, alone or
together with others. not exceeding four C4 l
persons. gains control of said corporation:
Provided, That stocks issued for services shall not
be considered as issued in return for property."
(Emphasis supplied)

Accordingly, several revenue issuances were

promulgated by the CIR relevant to Section 40(C)(2),
foremost of which was Revenue Regulations No. (RR) 18-
2001 dated November 13, 2001. RR 18-2001 was
promulgated for the purpose of providing guidelines to
monitor the basis of the properties transferred and shares
received in a tax-free exchange under Section 40(C)(2),
thus:
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 9 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

"SUBJECT: Guidelines on the Monitoring of the

Basis of Property Transferred and Shares Received,
Pursuant to a Tax-Free Exchange of Property for
Shares under Section 40(C)(2) of the National
Internal Revenue Code of 1997, Prescribing the
Penalties for Failure to Comply with such
Guidelines, and Authorizing the Imposition of Fees
for the Monitoring Thereof.

XXX XXX XXX

SECTION 1. Scope. - Pursuant to Section 244, in

relation to Sections 40(C)(2), 58(E), 269, and 275
of the National Internal Revenue Code of 1997 (Tax
Code of 1997), these Regulations are hereby
promulgated for the purpose of providing the
guidelines in the proper monitoring of the
basis of properties transferred, and shares
received, pursuant to a tax-free exchange
under Section 40CClC2l of the Tax Code of
1997, and to establish the policies governing
the imposition of fees for the monitoring
thereof." (Emphasis supplied)

On November 29, 2001, CIR Rene G. Banez issued

Revenue Memorandum Ruling No. (RMR) 01-2001 which
clarified and harmonized the existing guidelines on the tax
consequences of property for shares exchanges under
Sections 40(C)(2). The relevant provision states:

"SUBJECT: Tax Consequences of Tax-Free

Exchange of Property for Shares of Stock of a
Controlled Corporation Pursuant to Section
40(C)(2) of the National Internal Revenue Code of
1997

TO: All Internal Revenue Officers and Others

Concerned

Pursuant to Section 4, in relation to Sections

40(C)(2),(4),(5),(6),175,176,and196, and pertinent
provisions of Titles II, IV and VII of the National
Internal Revenue Code of 1997 (Tax Code of 1997),
this Revenue Memorandum Ruling is issued to
consolidate, provide, clarify and harmonize
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 10 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

the existing guidelines on the tax

consequences of a non recognition transaction
consisting of a tax-free exchange of property
for shares of stock under Section 40CClC2l of
the Tax Code of 1997. This Revenue
Memorandum Ruling shall apply solely and
exclusively to, and may be relied upon only in
situations in which the facts are substantially
similar to the facts stated below, but subject to the
principles of substance over form.

I. FACTS

1. A domestic corporation (the "Transferor") owns

certain property, consisting, for example, of the
following:

2. X Corporation (the "Transferee") is a domestic

corporation.

XXX XXX XXX

3. The Transferor transfers the property to the

Transferee. In exchange, the Transferee issues
shares to the Transferor out of the unissued
portion of its existing authorized capital stock,
or, if such existing authorized capital stock is
insufficient, out of shares from an increase in the
Transferee's authorized capital stock. The
Transferor does not receive any money or
property other than the afore mentioned shares
of the transferee.

XXX XXX XXX

7. As a result of the above-mentioned transfer, the

Transferor acquires at least 51 °/o of the total
outstanding capital stock of the Transferee entitled
to vote.

II. TAX CONSEQUENCES

1. Income tax. The Transferor shall not recognize

any gain or loss on the transfer of the property to
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 11 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

the Transferee. Consequently, the Transferor will

not be subject to capital gains tax, income tax, or
to creditable withholding tax on the transfer of such
property to the Transferee. Neither may the
transferor recognize a loss, if any, incurred on the
transfer. The last paragraph of Section 40(C)(2)
and (6)(c) of the Tax Code of 1997 state:

'No gain or loss shall also be recognized if

property is transferred to a corporation by
a person in exchange for stock or unit of
participation in such corporation of which as
a result of such exchange said person,
alone or together with others, not
exceeding four ( 4) persons, gains control of
said corporation: Provided, That stocks
issued for services shall not be considered
as issued in return for property.'

'(c) The term 'control', when used in this

Section, shall mean ownership of stocks in
a corporation possessing at least fifty-one
percent (51 °/o) of the total voting power of
all classes of stocks entitled to vote.'

XXX XXX XXX

III. ADDITIONAL FACTS AND VARIATIONS NOT

AFFECTING TAX CONSEQUENCES

The following additional facts or variations will not

affect the tax consequences of the transaction, as
described above:

1. In no. 1 of "1. Facts" stated above, if the total

number of Transferors does not exceed five
persons, whether such persons are natural
persons or juridical persons.

2. In no. 7 of "1. Facts" stated above, the tax

consequences are not affected by whether the
Transferor is/was a shareholder prior to the
transaction, or that, prior to the transaction, the
Transferor already possessed control of the
Transferee by owning 51 °/o or more of the total
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 12 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

outstanding capital stock of the Transferee

entitled to vote. In such a case, the Transferor is
deemed to have acquired 'further control' of the
Transferee, which places the transaction within
the purview of Section 40(C)(2) of the Tax Code
of 1997.

XXX XXX xxx"

Relative thereto, in 2011, the Supreme Court En Bane,

in Commissioner of Internal Revenue v. Filinvest
10
Development Corporation , upheld the CTA's cancellation of
the income tax assessment on the alleged gain recognized
from the transfer of parcels of land by FDC. The Supreme
Court decided in favor of FDC and stated that the properties-
for-shares transfer qualified as a tax-free exchange under
then Section 34(C)(2) of the NIRC, now Sections 40(C)(2).
The decision reads in pertinent part:

"Sec. 34. Determination of amount of and

recognition of gain or loss. -
XXX XXX XXX

(c) Exception - x x x

No gain or loss shall also be recognized if

property is transferred to a corporation by a person
in exchange for shares of stock in such corporation
of which as a result of such exchange said person,
alone or together with others, not exceeding four
persons, gains control of said corporation,·
Provided, That stocks issued for services shall not
be considered as issued in return of property.

As even admitted in the 14 February 2001

Stipulation of Facts submitted by the parties, the
requisites for the non-recognition of gain or loss
under the foregoing provision are as follows: (a)
the transferee is a corporation; (b) the transferee
exchanges its shares of stock for property lies 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
1
°Consolidated cases of G.R. No. 163653 and G.R. No. 167689, July 19,2011.
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 13 of 20
CTA EB No. 1664 {CTA Case No. 8866)
DECISION

others, not exceeding four, gains control of the

transferee. Acting on the 13 January 1997 request
filed by FLI, the BIR had, in fact, acknowledged the
concurrence of the foregoing requisites in the Deed
of Exchange the former executed with FDC and FLI
by issuing BIR Ruling No. S-34-046-97. With the
SIR's reiteration of said ruling upon the request for
clarification filed by FLI, there is also no dispute
that said transferee and transferors subsequently
complied with the requirements provided for the
non-recognition of gain or loss from the exchange
of property for tax, as provided under Section 34
(c) (2) of the 1993 NIRC.

Then as now, the CIR argues that taxable gain

should be recognized for the exchange considering
that FDC's controlling interest in FLI was actually
decreased as a result thereof. For said purpose, the
CIR calls attention to the fact that, prior to the
exchange, FDC owned 2,537,358,000 or 67.42°/o of
FLI's 3, 763,535,000 outstanding capital stock.
Upon the issuance of 443,094,000 additional FLI
shares as a consequence of the exchange and with
only 42,217,000 thereof accruing in favor of FDC
for a total of 2,579,575,000 shares, said
corporation's controlling interest was supposedly
reduced to 61.03°/o when reckoned from the
transferee's aggregate 4,226,629,000 outstanding
shares. Without owning a share from FLI's initial
3, 763,535,000 outstanding shares, on the other
hand, FAI's acquisition of 420,877,000 FLI shares
as a result of the exchange purportedly resulted in
its control of only 9.96°/o of said transferee
corporation's 4,226,629,000 outstanding shares.
On the principle that the transaction did not qualify
as a tax-free exchange under Section 34 ( c)(2) of
the 1993 NIRC, the CIR asseverates that taxable
gain in the sum of P263,386,921.00 should be
recognized on the part of FDC and in the sum of
P3,088,711,367.00 on the part of FAI.

The paucity of merit in the CIR's position is,

however, evident from the categorical language of
Section 34 (c)(2) of the 1993 NIRC which provides
that gain or loss will not be recognized in case the

L
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 14 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

exchange of property for stocks results in the

control of the transferee by the transferor, alone or
with other transferors not exceeding four persons.
Rather than isolating the same as proposed by the
CIR, FDC's 2,579,575,000 shares or 61.03°/o
control of FLI's 4,226,629,000 outstanding shares
should, therefore, be appreciated in combination
with the 420,877,000 new shares issued to FAI
which represents 9. 96°/o control of said transferee
corporation. Together FDC's 2,579,575,000 shares
(61.03°/o) and FAI's 420,877,000 shares (9.96°/o)
clearly add up to 3,000,452,000 shares or 70.99°/o
of FLI's 4,226,629,000 shares. Since the term
'control' is clearly defined as 'ownership of stocks in
a corporation possessing at least fifty-one percent
of the total voting power of classes of stocks
entitled to one vote' under Section 34 (c) (6) [c] of
the 1993 NIRC, the exchange of property for stocks
between FDC F AI and FLI clearly qualify as a tax-
free transaction under paragraph 34 (c) (2) of the
same provision.

Against the clear tenor of Section 34 (c) (2) of

the 1993 NIRC, the CIR cites then Supreme Court
Justice Jose Vitug and CTA Justice Ernesto D.
Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be
inapplicable if control is already vested in the
exchange or prior to exchange. Aside from the fact
that the 10 September 2002 Decision in CTA Case
No. 6182 upholding the tax-exempt status of the
exchange between FDC, FAI and FLI was penned by
no less than Justice Acosta himself, FDC and FAI
significantly point out that said authors have
acknowledged that the position taken by the BIR is
to the effect that 'the law would apply even when
the exchanger already has control of the
corporation at the time of the exchange.' This was
confirmed when, apprised in FLI' s request for
clarification about the change of percentage of
ownership of its outstanding capital stock, the BIR
opined as follows: x x x"

In sum, the requisites for the non-recognition of gain

under or loss under Section 40(C)(2) of the 1997 NIRC are
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 15 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

as follows: (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 ( 4)
persons; and, (4) as a result of the exchange the transferor,
alone or together with others not exceeding four (4), gains
control of the transferee.

Section 40(C)(2) speaks of control being acquired

'alone or together with others, not exceeding four persons.'
The control requirement is sufficiently met when after the
transfer, the transferors, not more than five, collectively
become the owners of at least 51 °/o of the equity of the
transferee, or if already owning 51 °/o, increase their equity
further in the transferee corporation. It is not required that
each of the several transferors individually gains control or
individually increases his/her interest. What is important is
that each of the transferors, numbering not more than five,
collectively increases their equity in the transferee
corporation by 51 °/o or more.

Based on the foregoing, the Court En Bane agrees with

the Court in Division that NTRCI's exchange transaction with
FLRI has satisfied all of the above-mentioned requisites.

Records reveal that NTRCI, together with Fortune

Tobacco Corporation (FTC), Dominium Realty and
Construction Co. (DRCC), Parity Packaging Corporation
(PPC), and Orecla Realty Inc., (ORI), transferred several
parcels of land in exchange for FLRI's shares of stocks.
Consequently, the combined ownership increased their
ownership up to 99°/o resulting in gaining control over FLRI.

After the exchange, the capital structure of FLRI is as

follows:

SUBSRCIBER NO. OF SHARES PERCENTAGE

FTC 334 295 34.82240%
PPC 29,522 3.07521%
DRCC 14,459 1.50615%
NTRCI 5 722 0.59604%
ORI 575,997 59.99969
TOTAL 99.999480/o
Harry C. Tan 1 0.00010%
Lucio K. Tan 1 0.00010%
Christopher Nelson 1 0.00010%
Varinia Elero 1 0.00010%

t.
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 16 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

1 0.00010%
960 000 100.000000/o

Anent the CIR's claim that a tax-free exchange ruling

must be secured as required under RR No. 18-01 before
petitioner can avail of the tax exemption under Section
40(C)(2) of the NIRC of 1997, as amended, the Court finds
no basis for such requirement.

In Commissioner of Internal Revenue v. Dakudao & Sons

Incorporated 11 , this Court affirmed the refund claim of
Dakudao, a domestic corporation, for the VAT paid on its
assignment of two parcels of land to Metro South Davao
Property Corporation (MSDPC), a domestic corporation, in
exchange for MSDPC shares. In the case, it was stated that
as a result of the exchange, Dakudao gained 75°/o control of
the MSDPC. This Court then held that a prior confirmatory
ruling from the BIR under RR 18-2001 is not a condition sine
qua non for the tax exemption of the property-for-share
transaction:

"Furthermore, RR No. 18-2001 which petitioner

relies on for the denial of the claim for refund by
respondent merely provides for guidelines in the
monitoring of the properties as well as shares of
stocks, which are involved in a tax-free exchange
under Section 40(C)(2) of the NIRC. The Revenue
Regulations does not deal with a requirement to
apply for a ruling as a prerequisite for the
entitlement of the exemption. RR No. 18-2001
shows nothing therein explicitly requiring a
party, in exchanging property for shares of
stocks, to first secure a BIR confirmatory
certification or tax ruling before it can avail
itself of tax exemption or tax refund.

Such can be readily seen from the RR itself.

'Subject: Guidelines on the Monitoring of

the Basis of Property Transferred and
Shares Received, Pursuant to a Tax-Free
Exchange of Property for Shares under
Section 40(C)(2) of the National Internal
Revenue Code of 1997, Prescribing the

11 CTA EB No. 1150, May 12, 2015, CTA Case No. 8501.

{
CIR vs. Northern Tobacco Redrying, Co., Inc. Page 17 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

Penalties for Failure to Comply with such

Guidelines, and Authorizing the Imposition
of Fees for the Monitoring Thereof.

XXX XXX XXX

Section 1. Scope. -Pursuant to Section 244,

in relation to Sections 40(C)(2), 58(E),
269, and 275 of the National Internal
Revenue Code of 1997 {Tax Code of 1997),
these Regulations are hereby promulgated
for the purpose of providing the guidelines
in the proper monitoring of the basis of
properties transferred, and shares received,
pursuant to a tax-free exchange under
Section 40(C)(2) of the Tax Code of 1997,
and to establish the policies governing the
imposition of fees for the monitoring
thereof.'

These being considered, the Court is of the

position that securing a BIR ruling under RR No.
18-2001 is not a condition sine qua non for the
availment of tax exemption." (Underscoring
supplied)

Thus, contrary to the position taken by the CIR, RR No.

18-2001 merely provides the guidelines in monitoring tax-
free exchange of property. The BIR ruling required thereon
serves to monitor the tax-free properties in order that in
cases of subsequent sales of said properties, they shall be
taxed accordingly.

Stated differently, the BIR ruling/certification required

under RR No. 18-2001 is for determining gain or loss on a
subsequent sale or disposition of property subject of the tax-
free exchange, and not as a precondition for availment of a
tax exemption.

In view of the foregoing, the Court En Bane finds it no

longer necessary to discuss the issue of prescription
considering that NTRCI is exempt from paying IT, VAT, and
DST on the subject transfer of properties.
 CIR vs. Northern Tobacco Redrying, Co., Inc. Page 18 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

In the same vein, considering that there is no dispute as

to NTRCI's tax liabilities for IT, EWT and WTC, there is no
reason to disturb the findings of the Court in Division.

WHEREFORE, the petition is DENIED. The Decision of

the Third Division of this Court in CTA Case. No. 8866 dated
23 February 2017, and its Resolution dated 18 May 2017,
are AFFIRMED with MODIFICATION in the computation
of the deficiency interest and delinquency interests in view
of the effectivity of Republic Act No. 10963 (TRAIN Law) on
January 1, 2018 and the issuance of Revenue Regulations
No. 21-2018 12 dated September 14, 2018.

Petitioner is hereby ORDERED TO PAY deficiency IT,

WTC and EWT in the total amount of Six Hundred Forty One
Thousand One Hundred Eighty-Five Pesos and 99/100
(Php641,185.99), inclusive of the 25°/o surcharge and
deficiency and delinquency interests imposed under Sections
248(A)(1)(3) and 249(B) and (C) of the NIRC of 1997, as
amended, respectively computed until December 31, 2017
as follows 13 :
IT WTC EWT TOTAL
BASIC Php 157,663.18 Php 782.39 Php 1,087.07 Php 199,415.80
25% 39 415.795 195.5975 271.7675 39 883.16
Deficiency Interest
4/16/11-01/15/14
(157,663.18x20%x2.753yrs) 86,809.3469

01/16/11-01/15/14 87,931.0229
(782.39x20%x3yrs) 469.434

01/16/11-01/15/14
( 1, 087. 07x20%x3yrs) 652.242

Total Amount Due as of Php 283,888.322 Php 1,447.4215 Php 2,011.0795 Php 287,346:823
January 15, 2014

Deficiency Interest
01/16/14-12/31/17 124,837.706
(157,663.18x20%x3.959yrs) 126,317.944

01/16/14-12/31/17 619.496402
(782.39x20%x3.959yrs)

01/16/14-12/31/17 860.742026
{1,087.07x20%x3.959yrs)

Delinguency Interest

12 Regulations Implementing Section 249 (Interest) of the National Internal Revenue Code
(NIRC) of 1997, as amended under Section 75 of the Republic Act (RA) No. 10963 or the "Tax
Reform for Acceleration and Inclusion (TRAIN Law)

13 Section 6 of Revenue Regulations No. 21-2018 dated September 14,2018.

 CIR vs. Northern Tobacco Redrying, Co., Inc. Page 19 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION
01/16/14-12/31/17
(283,888.322x20%x3.959yrs) 224,782.773
227,521.214
01/16/14-12/31/17
{1,447 .4215x20%x3. 959yrs) 1,146.06834

01/16/14-12/31/17
{2,011.0795x20%x3.959yrs) 1,592.37275

Total Amount Due as of Php 633,508.801 Php 3,212.98624 Php 4,464.19428 Php 641,185.99 14
December 31, 2017

In addition, petitioner is liable to pay delinquency

interest at the rate of 12°/o 15 on the total unpaid basic
deficiency tax, surcharge and deficiency interest as of
January 15, 2014 amounting to Php283,888.322 for IT,
Php1,447.4215 for WTC and P2,011.0795 for EWT, or in the
aggregate amount of Php287 ,346.823, computed from
January 1, 2018 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997, as amended by
Republic Act No. 10963, also known as Tax Reform for
Acceleration and Inclusion (TRAIN).

SO ORDERED.

f. • 1 :~ N. M~~ . C~
ffi'UTO N. MINDARO-GRULLA
Associate Justice

WE CONCUR:

(With Concurring and issenting Opinion)

ROMAN G. DEL ROSARIO
Presiding Justice

~~C-~~~.
llfANITO C. CASTANEDA, JR.
Associate Justice
ERL~.UY
Associate Justice

'
. FABON-VICTORINO

14 Rounded off.

15 Section 2 of Revenue Regulations No. 21-2018 dated September 14, 2018.

CIR vs. Northern Tobacco Redrying, Co., Inc. Page 20 of 20
CTA EB No. 1664 (CTA Case No. 8866)
DECISION

~.~A,.~,
MA. BELEN M. RINGPIS LIBAN
Associate Justice

~·1-~
CATHERINE T. MANAHAN
Associate Justice

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it

is hereby certified that the conclusions in the above Decision
were reached in consultation before the case was assigned
to the writer of the opinion of the Court En Bane.

ROMAN G. DEL OSARIO

Presiding Justice
 REPUBLIC OF THE PHILIPPINES
Court of Tax Appeals
QUEZON CITY

ENBANC

COMMISSIONER OF INTERNAL CTA EB NO. 1664

REVENUE, (CTA Case No. 8866)
Petitioner,
Present:
DEL ROSARIO , PJ,
CASTANEDA, JR.,
UY,
-versus - FABON-VICTORINO ,
MINDARO-GRULLA,
RINGPIS-LIBAN , and
MANAHAN , JJ.

NORTHERN TOBACCO REDRYING Promulgated :

CO., INC.,
Respondent. .JAN 3 1 2019
X- - - - - - - - - - - - -- --- ----- ------ ------ --- ----- -~ ------ X
c;ozy ~··· /7-~· ,__

CONCURRING AND DISSENTING OPINION

DEL ROSARIO, PJ.:

I concur with the ponencia of my learned colleague, the

Honorable Associate Justice Cielito N. Mindaro-Grulla, in so far as it
denies the Petition for Review filed by the Commissioner of Internal
Revenue (CIR) but solely on the ground that the assessments issued
against respondent are void for having been issued without a valid
Letter of Authority (LOA). As a consequence of the assessment being
declared void , I cannot give my assent to the ponencia in so far as it
affirms the assailed Decision and Resolution of the Court in Division
which ordered respondent to pay deficiency income tax, withholding
tax on compensation and expanded withholding tax for taxable year
2010 , albeit with modification on the computation of deficiency and
delinquency interests.

I submit that the assessments issued against respondent are

void. A careful perusal of the records discloses the following :

• Letter of Authority (LOA) No. 124-2011-00000048 dated July 19,

2011 was issued by petitioner, through Assistant Commissione~
CONCURRING AND DISSENTING OPINION
CTA EB No. 1664 (CTA Case No. 8866)
Page 2 of 5

Zenaida G. Garcia, Large Taxpayers Service, which authorized

Revenue Officers (RO) Nicanor San Juan, RO Ponciano Garma,
Lamberto Vasquez and Group Supervisor (GS) Ronaldo Camba,
to examine respondent's books of accounts and other accounting
records for all internal revenue taxes for taxable year 201 0;

• Memorandum of Assignment (MOA) numbered EL T AD 11-2013-

MOA-01 00 dated March 11, 2013 1 was issued to RO Romualdo I.
Plocios, RO Melinda M. Rugayan, RO Lolita G. Sabado, and GS
Samuel C. Reyes for the continuation of the audit or investigation, to
replace the previously assigned RO Roque Doloiras, Jr., who was
transferred to another division.

• There is nothing on record which would show that RO Doloiras,

Jr. was authorized by an LOA.

In Commissioner of Internal Revenue vs. Lancaster

Philippines, lnc., 2 the Supreme Court, citing Section 1, Rule 4 of
A.M. No. 05-11-07- CTA, or the Revised Rules of the Court of Tax
Appeals, declared that the CTA can resolve the issue on the authority
of the ROs to conduct the audit, albeit the same was not raised by the
parties in their pleadings or memoranda. For want of valid LOA, the
Supreme Court ultimately resolved to declare the assessment void.

Moreover, in Medicard Philippines Inc. vs. Commissioner of

Internal Revenue, 3 the Supreme Court emphasized the importance
of an LOA and the authority of ROs who conducted the audit and
examination of the taxpayer. It went on further to declare as void the
subject disputed assessment for lack of an LOA authorizing the
ROs to examine the taxpayer's books of account and other
accounting records.

While respondent failed to raise the issue of lack of an LOA

which authorizes RO Romualdo I. Plocios, RO Melinda M. Rugayan,
RO Lolita G. Sabado and GS Samuel C. Reyes to conduct and
continue the audit, the Court is not precluded from considering this
issue as the absence of a valid LOA renders an assessment
intrinsically void. The importance of the ROs' authority to conduct the
audit cannot be over-emphasized as it goes into the issue of the
validity of the assessment.

An officer of the Bureau of Internal Revenue (BIR) cannot

simply subject a taxpayer to audit without valid authority issued
for that purpose. 4 RMO No. 43-90 specifies the policy guidelines in

'Exhibit R-1, BIR Records, p. 213.

2 G.R. No. 183408, July 12, 2017.
~
·
3 G.R. No. 222743, April 5, 2017.
4 Section 13 of the National Internal Revenue Code of 1997, as amended.
CONCURRING AND DISSENTING OPINION
CTA EB No. 1664 (CTA Case No. 8866)
Page 3 of 5

the issuance of LOAs to audit. It likewise identifies and limits the BIR
Officials who are authorized to issue LOAs, viz.:

"D. Preparation and issuance of LIAs.

XXX

4. For the proper monitoring and coordination of the

issuance of Letter of Authority, the only BIR officials authorized
to issue and sign Letters of Authority are the Regional
Directors, the Deputy Commissioners and the Commissioner.
For the exigencies of the service, other officials may be
authorized to issue and sign Letters of Authority but only upon
prior authorization by the Commissioner himself." (Boldfacing
supplied)

RMO No. 43-90 is explicit that the continuation of audit by a revenue

officer other than the officer named in a previous LOA, requires the
issuance of a new LOA:

"C. Other policies for issuance of LIAs.

1. All audits/investigations, whether field or office

audit, should be conducted under a Letter of Authority.

XXX

5. Any re-assignment/transfer of cases to another

RO(s), and revalidation of LIAs which have already expired, shall
require the issuance of a new LIA, with the corresponding
notation thereto, including the previous LIA number and date
of issue of said LIAs." (Boldfacing supplied)

More specifically, for taxpayers under the Large Taxpayers

Service, RMO No. 29-07 enumerates the BIR Officials who have the
authority to issue and approve LOAs for the conduct of the audit, viz.:

"II. AUDIT POLICIES AND GUIDELINES

1. The Chief, Large Taxpayers Audit & Investigation

Divisions/L TDOs shall draw a list of taxpayers selected for audit
under its current selection criteria. The list shall state the name of
taxpayer selected for audit, the nature of business, the amount of
gross sales/receipts, the selection code, the PSIC code, and the
corresponding amount of tax paid for the period. The said list shall

Sec. 13. Authority of a Revenue Officer. - Subject to the rules and regulations to be pre ribed
by the Secretary of Finance, upon recommendation of the Commissioner, a Revenue fficer
assigned to perform assessment functions in any district may, pursuant to a Letter of
Authority issued by the Revenue Regional Director, examine taxpayers within the jurisdiction
of the district in order to collect the correct amount of tax, or to recommend the assessment
of any deficiency tax due in the same manner that the said acts could have been performed by
the Revenue Regional Director himself." (Boldfacing and underscoring supplied)
CONCURRING AND DISSENTING OPINION
CTA EB No. 1664 (CTA Case No. 8866)
Page 4 of 5

be submitted to the Assistant Commissioner/Head Revenue

Executive Assistant, Large Taxpayers Service for approval, copy
furnished the Commissioner of Internal Revenue.

2. All Letters of Authority (LOAs) shall be issued and

approved by the Assistant Commissioner/Head Revenue
Executive Assistants." (Emphasis supplied)

Had the MOA been accorded the same legal effect as an LOA
itself, then RMO No. 43-90 would not have categorically stated that
"revalidation of UAs ... shall require the issuance of a new UA." The
use of the phrase "shall require the issuance of new UA" emphasizes
the mandatory nature of the said requirement. Needless to say, the
BIR has the duty of exacting compliance therewith as it has the
burden of ensuring that the right of the government to assess and
collect tax deficiencies would not be defeated by its failure to comply
with its own rules.

In the present case, while the MOA cannot be treated as an

LOA as precisely, any re-assignment of cases requires the issuance
of a new LOA, its fatal infirmity is further highlighted by the fact
that it was signed and issued by the OIC-Chief of Excise L T
Audit Div. II and not by the Assistant Commissioner of the Large
Taxpayer Service.

The issuance of LOAs is not just a plain ministerial act but calls
for the exercise of discretion by the Assistant Commissioner of the
Large Taxpayer Service. The authority to issue LOAs, which was
delegated to the Assistant Commissioner by the CIR under RMO No.
29-07, cannot be further delegated to the OIC-Chief of Excise LT
Audit Div. II. Truth to tell, there is nothing on record which shows
that the Assistant Commissioner has the power to further
delegate the duty of issuing LOAs for taxpayers under the Large
Taxpayer Service or to substitute another in his place. On this
point, the pronouncement in NPC Drivers and Mechanics
Association, (NPC DAMA) vs. The National Power Corporation 5
is instructive, viz.:

"We agree with petitioners. In enumerating under Section 48

those who shall compose the National Power Board of Directors,
the legislature has vested upon these persons the power to
exercise their judgment and discretion in running the affairs of the
NPC. Xxx xxx xxx. It is to be presumed that in naming the
respective department heads as members of the board of directors,
the legislature chose these secretaries of the various executive
departments on the basis of their personal qualifications and
acumen which made them eligible to occupy their present positions{)'!

5 G. R. No. 156208, September 26, 2006.

CONCURRING AND DISSENTING OPINION
CTA EB No. 1664 (CTA Case No. 8866)
Page 5 of 5

as department heads. Thus, the department secretaries cannot

delegate their duties as members of the NPB, much less their
power to vote and approve board resolutions, because it is
their personal judgment that must be exercised in the
fulfillment of such responsibility.

Xxx, the rule enunciated in the case of Binamira v.

Garrucho is relevant in the present controversy, to wit:

An officer to whom a discretion is entrusted

cannot delegate it to another, the presumption
being that he was chosen because he was
deemed fit and competent to exercise that
judgment and discretion, and unless the power to
substitute another in his place has been given to
him, he cannot delegate his duties to another.

Xxx." (Citations omitted; Boldfacing supplied)

In fine, there is no denying that no new LOA was issued to RO

Romualdo I. Plocios, RO Melinda M. Rugayan, RO Lolita G. Sabado,
and GS Samuel C. Reyes by the Assistant Commissioner of the
Large Taxpayer Service in relation to their investigation of
respondent's tax liability for taxable year 2010. This procedural lapse,
or the absence of a new LOA, rendered the assessment issued
pursuant thereto void. Being a void assessment, the same bears no
fruit 6 and must be slain at sight.

All told, I VOTE to: i) DENY the Petition for Review filed by the
Commissioner of Internal Revenue; ii) REVERSE the Decision dated
February 23, 2017 and Resolution dated May 18, 2017 of the Court in
Division in CTA Case No. 8866; and, iii) CANCEL and SET ASIDE
the Final Assessment Notices and Formal Letter of Demand, all dated
December 11, 2013, issued against respondent Northern Tobacco
Redrying Co., Inc. for deficiency income tax, value-added tax,
withholding tax on compensation, expanded withholding tax,
documentary stamp tax and improperly accumulated earnings tax for
taxable year 2010.

6 Commissioner of Internal Revenue vs. Metro Star Superama, Inc., G.R. No. 185371, December
8, 2010.