CASE DIGEST: CIR vs. Estate of Toda, Jr. (G.R. No. 147188; September 14, 2004)

CASE DIGEST: COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents. (G.R. No. 147188; September 14, 2004)

The CIR wants to assail the decision of the CTA holding the Estate of Toda not liable for the deficiency IT of Cibeles Insurance Corporation (CIC) in the amount of 79 million pesos for 1989, and ordered the cancellation and setting aside of the CIR's assessment.

The case at bar stemmed from a NOA sent to CIC 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. It is undisputed that CIC authorized Toda, Jr., President and owner of 99.991% of CIC, 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 sold it to Altonaga for 100 million pesos who then sold it on the same day to Royal Match Inc. (RMI) for 200 million. All these transactions are evidenced by notarized deeds of sale.

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million. CIC paid 26 million pesos for its gains from the sale of said property.

3 years before Toda died, he had sold his entire shares of stocks in CIC to Choa for 12.5 million pesos.

The BIR issued the 79-million NOA and demand letter against CIC. CIC moved to reconsider because it has a new set of stockholders which it called "new CIC." It also pointed out Toda's undertaking to keep CIC and its stockholdings free from all tax liabilities during the period within which the realty was sold.

The issued a NOA against the Estate of Toda. The Estate filed a protest but the BIR rejected arguing that a fraudulent scheme was 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, thus evading the higher corporate income tax rate of 35%

ISSUES:

[1] Is this a case of tax evasion or tax avoidance?

[2] Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

[3] Can respondent Estate be held liable for the deficiency IT of CIC for the year 1989, if any?

HELD:

[1] Yes, there is tax evasion in this case.

Tax evasion connotes the integration of three factors: (1) payment of tax less than legally due; (2) a state of mind being evil, in bad faith, willful,or deliberate and not accidental; and (3) unlawful course of action.

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.

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title.

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.

[2] No, the period has not prescribed.

According to the Tax Code, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

In this case, the false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991. The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.

[3] Yes, the Estate of Toda can be held liable for the deficiency IT of CIC.

Generally, a corporation has a juridical personality distinct and separate from the persons owning or composing it. However, certain instances in which personal liability may arise.

[1] He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;

[2] He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

[3] He agrees to hold himself personally and solidarily liable with the corporation; or

[4] He is made, by specific provision of law, to personally answer for his corporate action.

Here, when the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock.