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COMMISSIONEROFINTERNALREVENUE, petitioner,
vs.THEESTATEOFBENIGNOP.TODA,JR.,represented
by Special Coadministrators Lorna Kapunan and Mario
LuzaBautista,respondents.
_______________
* FIRSTDIVISION.
291
VOL.438,SEPTEMBER14,2004 291
Commissioner of Internal Revenue vs. Estate of Benigno P. Toda,
Jr.
PETITIONforreviewoncertiorariofadecisionoftheCourt
ofAppeals.
ThefactsarestatedintheopinionoftheCourt.
Bunag & Associates for The Estate of Benigno P.
Toda,Jr.
292
292 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
DAVIDE,JR.,C.J.:
ThisCourtiscalledupontodetermineinthiscasewhether
the tax planning scheme adopted by a corporation
constitutestaxevasionthatwouldjustifyanassessmentof
deficiencyincometax. 1
The petitioner seeks the reversal of the Decision of the
Court of Appeals of 31 January 2001 in CAG.R.
2
SP No.
57799affirmingthe3January2000Decision oftheCourt
3
ofTaxAppeals(CTA)inC.T.A.CaseNo.5328, whichheld
that the respondent Estate of Benigno P. Toda, Jr. is not
liable for the deficiency income tax of Cibeles Insurance
Corporation(CIC)intheamountofP79,099,999.22forthe
year1989,andorderedthecancellationandsettingasideof
the assessment issued by Commissioner of Internal
RevenueLiwaywayVinzonsChatoon9January1995.
The case at bar stemmed from a Notice of Assessment
sent to CIC by the Commissioner of Internal Revenue for
deficiencyincometaxarisingfromanallegedsimulatedsale
of a 16storey commercial building known as Cibeles
Building,situatedontwoparcelsoflandonAyalaAvenue,
MakatiCity.
On2March1989,CICauthorizedBenignoP.Toda,Jr.,
President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and
thetwoparcelsoflandonwhichthebuildingstandsforan
4
amountofnotlessthanP90million.
_______________
293
VOL.438,SEPTEMBER14,2004 293
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
On30August1989,Todapurportedlysoldthepropertyfor
P100 million to Rafael A. Altonaga, who, in turn, sold the
samepropertyonthesamedaytoRoyalMatch,Inc.(RMI)
forP200million.Thesetwotransactionswereevidencedby
Deeds of Absolute Sale
5
notarized on the same day by the
samenotarypublic.
ForthesaleofthepropertytoRMI,Altonagapaidcapital
6
gainstaxintheamountofP10million.
On16April1990,CICfileditscorporateannualincome
tax return7 for the year 1989, declaring, among other
things,itsgainfromthesaleofrealpropertyintheamount
of P75,728.021. After crediting 8
withholding taxes of
P254,497.00,itpaidP26,341,207 foritsnettaxableincome
ofP75,987,725.
On12July1990,Todasoldhisentiresharesofstocksin
CICtoLeHunT.ChoaforP12.5million,asevidencedbya
9
Deed of Sale of Shares of Stocks. Three and a half years
later,oron16January1994,Todadied.
On 29 March 1994, the Bureau 10
of Internal Revenue
(BIR)sentanassessmentnotice anddemandlettertothe
CIC for deficiency income tax for the year 1989 in the
amountofP79,099,999.22.
ThenewCICaskedforareconsideration,assertingthat
theassessmentshouldbedirectedagainsttheoldCIC,and
not against the new CIC, which is owned by an entirely
different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the
CIC free
11
from all tax liabilities for the fiscal years 1987
1989.
_______________
5CARollo,pp.7478;8892.
6Exh.E,CTARecords,p.306.
7Exh.L,CTARecords,p.340.
8Exhs.M,M1,NandN1,CTARecords,pp.316317.
9Exh.P,CTARecords,pp.357365.
10BIRRecords,pp.448449.
11Id.,atpp.446447.
294
294 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
On 27 January 1995, the Estate of Benigno P. Toda, Jr.,
represented by special coadministrators Lorna Kapunan 12
andMarioLuzaBautista,receivedaNoticeofAssessment
dated 9 January 1995 from the Commissioner of Internal
Revenuefordeficiencyincometaxfortheyear1989inthe
amountofP79,099,999.22,computedasfollows:
IncomeTax1989
NetIncomeperreturn P75,987,725.00
Add:Additionalgainon
saleofrealproperty
taxableunderordinary
corporateincomebutwere
substitutedwith
individualcapitalgains
(P200M100M) 100,000,000.00
TotalNetTaxableIncome P175,987,725.00
perinvestigation
TaxDuethereofat35% P61,595,703.75
Less:Paymentalready
made
1.Perreturn P26,595,704.00
2.ThruCapitalGainsTax
madebyR.A.
Altonaga 10,000,000.00 36,595,704.00
Balanceoftaxdue P24,999,999.75
Add:50%Surcharge 12,499,999.88
25%Surcharge 6,249,999.94
Total P43,749,999.57
Add:Interest20%from 35,349,999.65
4/16/904/30/94(.808)
TOTALAMT.DUE&
COLLECTIBLE P79,099,999.22
_______________
12Id.,atpp.474475.
295
VOL.438,SEPTEMBER14,2004 295
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
13
TheEstatethereafterfiledaletterofprotest.
14
Intheletterdated19October1995, theCommissioner
dismissedtheprotest,statingthatafraudulentschemewas
deliberately perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional gain of
P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of
land and the building thereon to an individual capital
gains,thusevadingthehighercorporateincometaxrateof
35%.
On 1515 February 1996, the Estate filed a petition for
review withtheCTAallegingthattheCommissionererred
inholdingtheEstateliableforincometaxdeficiency;that
the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the
CommissionertoassessCIChadalreadyprescribed.
16 17
In his Answer and Amended Answer, the
Commissioner argued that the two transactions actually
constitutedasinglesaleofthepropertybyCICtoRMI,and
that Altonaga was neither the buyer of the property from
CIC nor the seller of the same property to RMI. The
additionalgainofP100million(thedifferencebetweenthe
second simulated sale for P200 million and the first
simulatedsaleforP100million)realizedbyCICwastaxed
at the rate of only 5% purportedly as capital gains tax of
Altonaga,insteadofattherateof35%ascorporateincome
tax of CIC. The income tax return filed by CIC for 1989
with intent to evade payment of the tax was thus false or
fraudulent.Sincesuchfalsityorfraudwasdiscoveredbythe
BIR only on 8 March 1991, the assessment issued on 9
January 1995 was well within the prescriptive period
prescribedbySection223(a)oftheNationalInternal
_______________
13Exh.H,CTARecords,pp.314315.
14Exh.G,CTARecords,pp.311312.
15CTARecords,pp.115.
16CTARecords,pp.104111.
17Id.,atpp.121128.
296
296 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
_______________
18CTARecords535540.
19Id.,pp.534,539.
297
VOL.438,SEPTEMBER14,2004 297
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
andaclosebusinessassociateoftheformer,havingheldhis
office in a property owned by CIC and derived his salary
from a foreign corporation (Aerobin, Inc.) duly owned by
Toda 20for representation services rendered. The CTA
denied the motion for reconsideration, 21
prompting the
Commissionertofileapetitionforreview withtheCourtof
Appeals.
InitschallengedDecisionof31January2001,theCourt
ofAppealsaffirmedthedecisionoftheCTA,reasoningthat
the CTA, being more advantageously situated and having
the necessary expertise in matters of taxation, is better
situated to determine the correctness, propriety, and
legalityoftheincometaxassessmentsassailedbytheToda
22
Estate.
UnsatisfiedwiththedecisionoftheCourtofAppeals,the
Commissioner filed the present petition invoking the
followinggrounds:
I. THECOURTOFAPPEALSERREDINHOLDING
THAT RESPONDENT COMMITTED NO FRAUD
WITH INTENT TO EVADE THE TAX ON THE
SALE OF THE PROPERTIES OF CIBELES
INSURANCECORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT
DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE
CORPORATION.
III. THECOURTOFAPPEALSERREDINHOLDING
THATTHERIGHTOFPETITIONERTOASSESS
RESPONDENTFORDEFICIENCYINCOMETAX
FORTHEYEAR1989HADPRESCRIBED.
TheCommissionerreiteratesherargumentsinherprevious
pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael
Altonaga, who was financially incapable of purchasing it.
Shefurtherpointsoutthatthedocumentsthemselvesprove
thefactof
_______________
20Id.,550;CARollo,p.32.
21CARollo,pp.720.
22Rollo,p.30.
298
298 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
fraudinthat(1)thetwosalesweredonesimultaneouslyon
the same date, 30 August 1989; (2) the Deed of Absolute
SalebetweenAltonagaandRMIwasnotarizedaheadofthe
alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and
thelatter,asDoc.No.92,Page20,BookI,Seriesof1989,of
the same Notary Public; (3) as early as 4 May 1989, CIC
receivedP40millionfromRMI,andnotfromAltonaga.The
saidamountwasdebitedbyRMIinitstrialbalanceasof30
June 1989 as investment in Cibeles Building. The
substantial portion of P40 million was withdrawn by Toda
through the declaration of cash dividends to all its
stockholders.
For its part, respondent Estate asserts that the
Commissioner failed to present the income tax return of
Altonagatoprovethatthelatterisfinanciallyincapableof
purchasingtheCibelesproperty.
ToresolvethegroundsraisedbytheCommissioner,the
followingquestionsarepertinent:
1. Isthisacaseoftaxevasionortaxavoidance?
2. Has the period for assessment of deficiency income tax for
theyear1989prescribed?and
3. Can respondent Estate be held liable for the deficiency
incometaxofCICfortheyear1989,ifany?
Weshalldiscussthesequestionsin seriatim.
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
taxpayeringoodfaithandatarmslength.Taxevasion,on
the other hand, is a scheme used outside of those lawful
meansandwhenavailed
299
VOL.438,SEPTEMBER14,2004 299
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
of,itusuallysubjectsthetaxpayertofurtheroradditional
23
civilorcriminalliabilities.
Taxevasionconnotestheintegrationofthreefactors:(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, willfull, or deliberate and not
accidental; and (3)
24
a course of action or failure of action
whichisunlawful.
All these factors are present in the instant case. It is
significanttonotethatasearlyas4May1989,priortothe
purported sale of the Cibeles property by CIC to Altonaga 25
on 30 August 1989, CIC received P40 million from RMI,
and not from Altonaga. That P40 million 26
was debited by
RMI and reflected in its trial balance as other inv.
CibelesBldg.Also,asof31July1989,anotherP40million
was debited and reflected in RMIs trial balance as other
inv.CibelesBldg.Thiswouldshowthattherealbuyerof
thepropertieswasRMI,andnottheintermediaryAltonaga.
The investigation conducted by the BIR disclosed that
Altonagawasaclosebusinessassociateandoneofthemany
trustedcorporateexecutivesofToda.Thisinformationwas
revealedbyMr.BoyPrieto,theassistantaccountantofCIC
27
andanoldtimerinthecompany. ButMr.Prietodidnot
testifyonthismatter,hence,thatinformationremainstobe
hearsay and is thus inadmissible in evidence. It was not
verified either, since the28letterrequest for investigation of
Altonaga was unserved, Altonaga having left for the
United
_______________
26Exh.6,CTARecords,p.470.
27Exh.1,CTARecords,p.461.
28CTARecords,p.466.
300
300 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
Petitioner,however,claimstherewasachangeofstructureofthe
proceeds of sale. Admitted one hundred percent. But isnt this
preciselythedefinitionoftaxplanning?Changethestructureofthe
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code
exists,allowingtaxfreetransfersofpropertyforstock,changingthe
structureofthepropertyandthetaxtobepaid.Aslongasitisdone
legally, changing the structure of a transaction to achieve a lower
taxisnotagainstthelaw.Itisabsolutelyallowed.
Tax planning is by definition to reduce, if not eliminate
altogether, a tax. Surely petitioner [sic] cannot be faulted for
29
wanting to reduce the tax from 35% to 5%. [Italicssupplied].
_______________
29RespondentsMemorandum,pp.45;Rollo,pp.7879.
301
VOL.438,SEPTEMBER14,2004 301
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
transferringtitleofthesubjectpropertiesonthesameday
was to create a tax shelter. Altonaga never controlled the
propertyanddidnotenjoythenormalbenefitsandburdens
ofownership.Thesaletohimwasmerelyataxploy,asham,
and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to
mislead the BIR with the end in view of reducing the
consequentincometaxliability.
Inanutshell,theintermediarytransaction,i.e.,thesale
ofAltonaga,whichwaspromptedmoreonthemitigationof
tax liabilities than for legitimate
31
business purposes
constitutesoneoftaxevasion.
Generally, a sale or exchange of assets will have32
an
income tax incidence only when it is consummated. The
incidence of taxation depends upon the substance of a
transaction.Thetaxconsequencesarisingfromgainsfroma
sale of property are not finally to be determined solely by
the means employed to transfer legal title. Rather, the
transactionmustbeviewedasawhole,andeachstepfrom
thecommencementofnegotiationstotheconsummationof
the sale is relevant. A sale by one person cannot be
transformedfortaxpurposesintoasalebyanotherbyusing
thelatterasaconduitthroughwhichtopasstitle.Topermit
the true nature of the transaction to be disguised by mere
formalisms,whichexistsolelytoaltertaxliabilities,would
seriously impair the 33
effective administration of the tax
policiesofCongress.
To allow a taxpayer to deny tax liability on the ground
thatthesalewasmadethroughanotheranddistinctentity
whenitisprovedthatthelatterwasmerelyaconduitisto
sanctionacircumventionofourtaxlaws.Hence,thesaleto
Altonaga
_______________
302
302 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
34
should be disregarded for income tax purposes. The two
saletransactionsshouldbetreatedasasingledirectsaleby
CICtoRMI.
Accordingly,thetaxliabilityofCICisgovernedbythen
Section24oftheNIRCof1986,asamended(now27(A)of
theTaxReformActof1997),whichstatedasfollows:
_______________
34 See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v.
United States,435U.S.561(1978);Commissioner of Internal Revenue v.
Court of Appeals, 361 Phil. 103, 126; 301 SCRA 152 (1999) citing
Asmussen v. Court of Internal Relations,36B.T.A.(F)878;SeealsoNeff
v. U.S., 301 F2d 330; Cohen v. U.S., 192 F Supp 216; Herman v.
Comm., 283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. v. Pope,
239F2d881;U.S. v. Fewel,255F2d396.
35Sec.34.Capital gains and loses.
...
(h) The provisions of paragraph (b) of this section to the contrary
notwithstanding, sales, exchanges or other dispositions of real property
classified as capital assets, including pactoderetro sales and other forms of
conditionalsale,byindividuals,includingestatesandtrusts,shallbetaxedat
the rate of 5% based on the gross selling price or the fair market value
prevailingatthetimeofsale,whicheverishigher.
303
VOL.438,SEPTEMBER14,2004 303
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
No.Section269oftheNIRCof1986(nowSection222ofthe
TaxReformActof1997)read:
_______________
36Exh.A,CTARecords,p.296.
304
304 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
_______________
37Exh.2,CTARecords,p.464.
305
VOL.438,SEPTEMBER14,2004 305
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
4.Heismade,byspecificprovisionoflaw,topersonallyanswerfor
38
hiscorporateaction.
ItisworthnotingthatwhenthelateTodasoldhissharesof
stocktoLeHunT.Choa,heknowinglyandvoluntarilyheld
himselfpersonallyliableforallthetaxliabilitiesofCICand
thebuyerfortheyears1987,1988,and1989.Paragraphg
oftheDeedofSaleofSharesofStocksspecificallyprovides:
_______________
306
306 SUPREMECOURTREPORTSANNOTATED
Cojuangco, Jr. vs. Palma
o0o