Delpher Trades Corp. vs IAC
The Delpher Trades Corporation is a
Doctrine: Estate planning is a legal manner to minimize taxes.
Facts:
The petitioners question the decision of the
Intermediate Appellate Court which sustained the private
respondent’s contention that the deed of exchange whereby Delfin
Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher
Trades Corporation in exchange for 2,500 shares of stock was
actually a deed of sale which violated a right of first refusal under a
lease contract.
Delfin Pacheco and his sister, Pelagia Pacheco, were
owners of parcels of lands in the province of Bulacan (now Metro
Manila). They leased the property to Construction Components
International, Inc. (CCI), and provided that during the existence or
after the term of this lease the lessor should he decide to sell the
property leased shall first offer the same to the lessee and the
letter has the priority to buy under similar conditions.
CCI assigned its rights and obligations in favor of Hydro
Pipes Philippines, Inc. with the signed conformity and consent of
lessors Delfin Pacheco and Pelagia Pacheco.
A deed of exchange was executed between lessors
Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation, whereby the Pachecos conveyed to defendant
Delpher Trades the leased property together with another parcel
of land also located in Malinta Estate, Valenzuela, Metro Manila.
Since Hydro Pipes were not given the first option to buy
the leased property pursuant to the lease agreement, it filed a
complaint for reconveyance of the property.
Petitioners: There was actually no transfer of ownership of the
subject parcel of land since the Pachecos remained in control of the
property. Witness Eduardo Neria, CPA & son-in-law of late Pelagia
Pacheco testified that Delpher Trades Corporation is a family
corporation. The leased property was transferred to the
corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired shares
of stock, equivalent to a 55% majority in the corporation. In the
petitioners’ motion for reconsideration, they refer to this scheme
as “estate planning.” In reality, petitioner corporation is a mere
alter ego or conduit of the Pacheco co- owners; hence the
corporation and the co-owners should be deemed to be the same,
there being in substance and in effect an identity of interest.”
Hence, such transfer is not within the letter, or even spirit of the
contract.
Private respondent: Delpher Trades Corporation is a corporate
entity separate and distinct from the Pachecos. Thus, it contends
that it cannot be said that Delpher Trades Corporation is the
Pacheco’s same alter ego or conduit. It maintains that there was
actual transfer of ownership interests over the leased property
when the same was transferred to Delpher Trades Corporation in
exchange for the latter’s shares of stock.
Issue: Whether or not the “Deed of Exchange” of the properties
executed by the Pachecos on the one hand and the Delpher
Trades Corporation on the other was meant to be a contract of
sale which, in effect, prejudiced the private respondent’s right of
first refusal over the leased property included in the “deed of
exchange.”
Ruling:
In favor of petitioners. In the case at bar, in exchange for their
properties, the Pachecos acquired 2,500 original unissued no par
value shares of stocks of the Delpher Trades Corporation.
Consequently, the Pachecos became stockholders of the
corporation by subscription.
business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing Delpher
Trades Corporation to take control of their properties and at the
same time save on inheritance taxes. “The legal right of a taxpayer
to decrease the amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits, cannot be
doubted.”
The “Deed of Exchange” of property between the
Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership
interests by the Pachecos to a third party. The Pacheco family
merely changed their ownership from one form to another. The
ownership remained in the same hands. Hence, the private
respondent has no basis for its claim of a right of first refusal under
the lease contract.
CIR vs Estate of Benigno P. Toda
Facts:
The petitioner seeks the reversal of the Decision of the
Court of Appeals affirming CTA’s decision which held that the
respondent Estate of Benigno P. Toda, Jr. is not liable for the
deficiency income tax of Cibeles Insurance Corporation (CIC) in the
amount of P79,099,999.22 for the year 1989, and ordered the
cancellation and setting aside of the assessment issued by
Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9
January 1995.
CIC authorized Benigno P. Toda, Jr., President, to sell the
Cibeles Building and the two parcels of land on which the building
stands for an amount of not less than P90 million. Toda purportedly
sold the property for P100 million to Rafael A. Altonaga, who, in
turn, sold the same property on the same day to Royal Match, Inc.
(RMI) for P200 million, as evidenced by Deeds of Absolute Sale
notarized on the same day by the same notary public. For the sale
of the property to RMI, Altonaga paid capital gains tax in the
amount of P10 million. CIC filed its corporate annual income tax
return for the year 1989, declaring its gain from the sale of real
property. A Notice of Assessment was sent to CIC by the
Commissioner of Internal Revenue for deficiency in income tax
arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land
on Ayala Avenue, Makati City.
The new CIC asked for a reconsideration, asserting that
the assessment should be directed against the old CIC, 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 from all tax liabilities for the fiscal
years 1987-1989. Estate of Toda received a Notice of Assessment
from CIR for the deficiency income tax for the year 1989 in the
amount of Php 79,099,999.22, which they protested.
CIR dismissed the protest, stating CIC deliberately
perpetuated a fraudulent scheme controlled by Toda to cover up
the Php100Million additional gain, which resulted in the change in
the income structure of the proceeds of the sale of the two parcels
of land and the building, evading higher corporate income tax rate
of 35%. The two transactions actually constituted a single sale of
the property by CIC to RMI, and that Altonaga was neither the
buyer from CIC nor the seller to RMI. The additional gain of P100
million (the difference between the second simulated sale for P200
million and the first simulated sale for P100 million) was taxed at
only 5% as capital gains tax of Altonaga, instead of 35% as corporate
income tax of CIC. Toda, being the registered owner of the 99.991%
shares of stock of CIC, should be held liable for the deficiency
income tax, especially because the gains realized from the sale
were withdrawn by him as cash advances or paid to him as cash
dividends. Since he is already dead, his estate shall answer for his
liability.
Issue: Is this a case of tax evasion or tax avoidance?
Ruling:
YES. 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, used by the
taxpayer in good faith and at arm’s length. Tax evasion, however,
is a scheme used outside of lawful means and subjects the taxpayer
to further or additional civil or criminal liabilities. Tax evasion
connotes the integration of three factors: (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) state of mind which is described as being “evil,” in
“bad faith,” “willfull,” or “deliberate and not accidental”; and (3) a
course of action or failure of action which is unlawful. All these
factors are present in the instant case.
Prior to the purported sale by CIC to Altonaga, CIC received P40
million from RMI, and not from Altonaga. Another P40 million was
debited and reflected in RMI’s trial balance as “other inv.—Cibeles
Bldg.” This would show that the real buyer of the properties was
RMI, and not the intermediary Altonaga. Investigation by the BIR
disclosed that Altonaga was a close business associate and one of
the many trusted corporate executives of Toda.
The scheme resorted to by CIC in making it appear that
there were two sales of the subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud. The
objective of the sale to Altonaga was to reduce the amount of tax
to be paid especially that the transfer from him to RMI would then
subject the income to only 5% individual capital gains tax, and not
the 35% corporate income tax. Altonaga’s sole purpose was to
create a tax shelter. Altonaga never controlled the property. The
sale to him was merely a tax ploy, a sham, and without business
purpose and economic substance. The intermediary transaction,
i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes
constitutes one of tax evasion.
People vs Kintanar
Willful blindness doctrine: a taxpayer can no longer raise the
defense that the errors on their tax returns are not their
responsibility or that it is the fault of the accountants they hired
Facts:
Petitioner Gloria V. Kintanar filed a petition for review from CTA’s
decision, finding her guilty for violation of Section 255 of RA 8424,
otherwise known as Tax Reform Act of 1997.
Gloria Kintanar is engaged in business and earning income as
distributor of Forever Living Products Philippines, Inc. (FLPPI); and
failed to file her Income Tax Return for the years 2000 and 2001.
Prosecution presented testimonies from 7 witnesses, and
documentary evidence.
Revenue District Officer issued a Certification, stating that spouses
Kintanar have no record or file for the years 1999 to 2001. Initial
investigation also found that spouses Kintanar were able to
generate a large amount of income, as distributors or independent
contractors of FLLPI.
BIR authorized the investigating team to examine the books of
accounts for taxable years 1999-2002 of spouses Kintanar. Spuses
Kintanar, however, failed to submit the required documents even
after several requests.
Husband Kintanar alleged that they filed the ITR for the years 2000
and 2001 through their hired accountant Marina Mendoza and
they had no knowledge of the amount and address stated therein
and where their ITRs were filed.
Issue: Whether the Second Division of the CTA erred in finding the
accused guilty of violation of Section 255 of the 1997 National
Internal Revenue Code?
Ruling:
SEC. 255. Failure to File Return, Supply Correct and Accurate
Information, Pay Tax Withhold and Remit Tax and Refund Excess
Taxes Withheld on Compensation. - Any person required under
this Code or by rules and regulations promulgated thereunder to
pay any tax make a return, xxx at the time or times required by
law or rules and regulations xxx
Section 255 of the NIRC of 1997 contemplates four different
situations punishable by law, each of which constitutes failure to
perform in a timely manner, an obligation imposed by the NIRC of
1997, as amended, to wit:
1. To pay any tax
2. To make a return
3. To keep any record
4. To supply correct and accurate information
In the case at bench, petitioner is being charged for failure to make
or return a return. The elements of which are as follows:
1. The accused is a person required to make or file a return
2. The accused failed to make or file the return at the time
required by law
3. That failure to make or file the return was willful
As proven by the prosecution, all the elements are present in this
case.
SEC. 51. Individual Return. -
(1) Except as provided in paragraph (2) of this
Subsection, the following individuals are required to file
an income tax return:
(a) Every Filipino citizen residing in the
Philippines;
xxx
(4) The income tax return shall be filed in
duplicate by the following persons:
(a) A resident citizen - on his income from all
sources;
xxx
(D) Husband and Wife. - Married individuals,
whether citizens, resident or nonresident aliens, who do
not derive income purely from compensation, shall file
a return for the taxable year to include the income of
both spouses, but where it is impracticable for the
spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall
be consolidated by the Bureau for purposes of
verification for the taxable year.
Corollary thereto, Section 74 of NIRC 1997 also provides,
SEC. 74. Declaration of Income Tax for Individuals. -
(A) In General. - xxx every individual subject to
income tax under Sections 24 and 25(A) of this
Title, who is receiving self-employment income,
whether it constitutes the sole source of his
income or in combination with salaries, wages and
other fixed or determinable income, shall make
 and file a declaration of his estimated income for
the current taxable year on or before April 15 of
the same taxable year. In general, 'self-
employment income' consists of the earnings
derived by the individual from the practice of
profession or conduct of trade or business carried
on by him as a sole proprietor or by a partnership
of which he is a member. Xxx
Petitioner testified that she and her husband were engaged in
business in the form of commissions, as distributors and
independent contractors of FLPPI, which was corroborated by
FLPPI’s comptroller. She also admitted receiving the checks issued
by FLPPI, hence she is required to make or file her annual income.

As to the second element, testimonial and documentary evidence

by the prosecution shows that petitioner failed to make her ITRs
for taxable years 2000 and 2001. The 2 ITRs and 2 undated
Certifications presented by petitioner as defense issued by certain
Ernesto T. Kho cannot be given credence for being incomplete;
address is not legal residence of the spouses; Cubao branch has no
jurisdiction over spouses given address; husband admitted that he
did not read the contents of the subject ITRs.

As to the third element, prosecution has sufficiently proven beyond

reasonable doubt that petitioner failed to make or file return.
Willful in the tax crimes statues means voluntary, intentional
violation of a known legal duty, and bad faith need not be shown.
An act or omission is willfully done if done voluntarily and
intentionally and with specific intent to do something the law
forbids, or with specific intent to fail to do something the law
requires to be done.
First, the prosecution has clearly established that under the law,
petitioner and her husband, as manied individuals, who do not
derive income purely from compensation, are obliged to file their
ITRs for taxable years 2000 and 2001 for the income they earned,
as distributors/independent contractors of FLPPI. Thus, petitioner's
sole reliance on her husband to file their ITRs is not a valid reason
to justify her non-filing, considering that she knew from the start
that she and her husband are mandated by law to file their ITRS.
Second, being an experienced businesswoman, and having been an
independent distributor/contractor of FLPPI since 1996, petitioner
ought to know and understand all t the matters concerning her
business. This includes knowledge and awareness of her tax
obligation in connection with her business. Under Rule 131,
Section (3) (d) of the Rules on Evidence, it is presumed that a person
takes ordinary care of his concern.
Hence, the natural presumption is that petitioner knows what are
her tax obligations under the law.
Furthermore, the Court finds no affirmative acts on the part of the
petitioner to make sure that her obligation to file her ITRs had been
fully complied with. Petitioner testified that she does not even
know how much was her tax obligation, nor did she bother to
inquire or determine the facts surrounding the filing of her ITRs.
Such neglect or omission, as aptly found by the Former Second
Division, is tantamount to "deliberate ignorance" or "conscious
avoidance". Several notices were sent to her by the BIR to comply
with her tax obligations, but she opted not to comply.