BIR Ruling

April 6, 1998 MEMORANDUM FOR: The Commissioner Presented before this Office is the internal revenue tax case of the ESTATE OF EMIGDIO S. MERCADO involving the amount of P13,746,868.29 representing deficiency estate tax, covered by Assessment No. C-1-91 Est.-007-94 dated January 13, 1994. STATEMENT OF FACTS Records show that the case came as a result of Confidential Information No. 2557 sworn to before the Chief, Intelligence and Investigation Office, this Bureau. The information was referred to Revenue Region No. 7, Cebu City, for appropriate action. Investigation conducted on the case disclosed that the late Emigdio S. Mercado died intestate on January 12, 1991. The heirs of the decedent failed to file a written notice of death within the two-month period required under then Section 82 of the Tax Code, as amended (now Section 89 of the Tax Code of 1997). On November 6, 1991, Letter of Authority No. 0334954 RR7 authorizing the examination of the estate was issued. On November 13, 1991, the estate tax return was filed and on the belief that the liabilities of the estate far exceeded its assets, the word "EXEMPT" was reflected on the face of said return. Nonetheless, a deficiency estate tax was imposed in the amount of P206,573.14 which was paid by the heirs on December 19, 1991 under C.R. No. B24359012. Thereafter, a series of review was conducted which culminated in the issuance of Assessment Notice No. C-91 Est.-007-94 and a Demand Letter, both dated January 13, 1994, which were allegedly received by the heirs on December 23, 1994. The assessment was duly protested on the following grounds: I. That the transfer of some real properties in exchange of shares of stocks of Mervir Realty Corporation (MRC), a closely held family corporation, was not made in contemplation of death but as part of a long conceived "estate planning". II. That the assessment is already barred by prescription as it was issued long after the expiration of the three (3) year prescriptive period within which to assess, hence, it is no longer binding on the taxpayer. DISCUSSION I. THAT THE TRANSFER OF SOME REAL PROPERTIES IN EXCHANGE OF SHARES OF STOCKS OF MERVIR REALTY CORPORATION, A CLOSELY HELD FAMILY CORPORATION, WAS NOT MADE IN CONTEMPLATION OF DEATH BUT AS PART OF A LONG CONCEIVED "ESTATE PLANNING" . The assessment was based on the belief of the investigating examiner that since the transfer of the real properties to MRC in exchange of its shares of stocks was made two (2) days prior to the decedent's death, the transfer was made in contemplation of death. Resultantly, the book value of the shares of stocks was recomputed based on the fair market value of the real properties assigned to MRC as of January 12, 1991, the date of death of the late Emigdio S. Mercado. Evidence available from the records, however, disclosed that even before the decedent was confined at the Cebu Doctors Hospital in September 1990, he has already signified his intention to assign real properties to MRC. As early as February 1989, the late Emigdio S. Mercado executed documents assigning his real properties to the said corporation, but the actual transfer of the title in favor of MRC was not immediately effected in February 1989 due to some uncomplied statutory requirements. In order that the title may be transferred in the name of MRC, the Securities and Exchange Commission (SEC) required that its Articles of Incorporation should first be amended so as to increase the capital stock of the corporation. The increase in capitalization and/or the Amended Articles of Incorporation was approved by the SEC only on January 2, 1991. Thus, on January 10, 1991, the title to the real properties was Finally transferred in favor of MRC. The intention to transfer the real properties was hatched during the time when the decedent was yet so healthy. It would be so unthinkable to imagine that death was contemplated in 1989 when the late Emigdio S. Mercado was yet so full of life at that time. What must have been in the mind of the decedent when he executed the deed of assignment of his real properties was his business interests and how to make it more profitable, except that his death came two (2) days after the actual transfer of the title to his properties was finally effected. Thus, the investigating examiner considered the said transfer to be in contemplation of death. Nonetheless, we appreciate the mental resourcefulness of the investigating examiner for having thought that the transfer was made in contemplation of death. However, mere thoughts could not be a sound basis for taxation. The actual facts should be considered and based on said facts, this Division believes that the transfer was at arms length, legitimate and motivated by profitable business purposes. II. THAT THE ASSESSMENT IS ALREADY BARRED BY PRESCRIPTION AS IT WAS ISSUED LONG AFTER THE EXPIRATION OF THE THREE (3) YEAR PRESCRIPTIVE PERIOD WITHIN WHICH TO ASSESS, HENCE, IT IS NO LONGER BINDING ON THE TAXPAYER . The taxpayer also invoked the defense that the government's right to assess the deficiency estate tax is already barred by prescription. On this regard, it is worth mentioning that internal revenue taxes shall be assessed within three (3) years after the return was filed and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. Where a return is filed beyond the period prescribed by law, the three (3) year period shall be counted from the day the return was filed. (See Section 203 of the Tax Code). In relation with Section 203 of the Tax Code, Section 90 of the same Code states that the estate tax return shall be filed within six (6) months from the decedent's death. Records show that the taxpayer filed its estate tax return only on November 13, 1991. The assessment notice although dated January 13, 1994 was actually mailed or sent to the taxpayer on December 19, 1994. (See Exhibit "A" and Exhibit "B"). In the case of Basilan Estates vs. Commissioner of Internal Revenue, 21 SCRA 17, the Supreme Court ruled that it is not the date of issue of the demand and/or notice that is the reckoning point in prescription but rather the date when the demand letter or notice of assessment is released, mailed or sent to the taxpayer. Based on the aforecited laws and judicial precedents, the three (3) year prescriptive period in this case shall be counted from November 13, 1991 when the estate tax return was filed by the taxpayer. The assessment by the Commissioner shall then be made within three (3) years from said date or not later than November 12, 1994. As the assessment was actually mailed or sent to the taxpayer only on December 19, 1994, (See Exh. "A" and "B"), the same was made after the prescriptive period had expired, hence, it is no longer binding on the taxpayer. (CIR vs. Ayala Securities Corporation, L-229485, March 31, 1976). It may be hinted that we can allege fraud and avail of the ten-year prescriptive period under Section 222 of the Tax Code, as amended. In fact, fraud was alleged in the first phase of the investigation, but this allegation was not adequately substantiated in the process. The non-inclusion in the tax returns of properties subject to the estate tax will not necessarily imply fraud, more so in this case where the real properties were already disposed of several years prior to the death of the decedent only that the actual transfer of its title was effected two (2) days before said death due to the many requirements set by concerned agencies of the government and the much delayed action taken by its personnel on the transaction. In a long chain of cases, our Courts have time and again emphasized that fraud is never lightly to be presumed because it is a serious charge (Yutivo Sons Hardware Co. vs. CIR and CTA, G.R. No. L-132203, January 28, 1961). The circumstances constituting fraud should not only be alleged but must also be proved for fraud is a question of fact. (CIR vs. Lilia Yusay Gonzales & CTA, G.R. L-19495, November 24, 1966). Taking into consideration all the foregoing facts and the quantum of proof required to prove fraud, this Division believes that it will only be an exercise in futility to impute fraud on herein taxpayer for the most that could be said if ever we have to uphold the examiner is that the taxpayer had assumed an incorrect position in law which is a far cry from being considered fraudulent. CONCLUSION/RECOMMENDATION Based on all the foregoing observations, the Appellate Division finds the protest of the taxpayer to be meritorious. In view thereof, it is recommended that Assessment Notice No. C-1-91 Est. 007-94 issued against the ESTATE OF EMIGDIO S. MERCADO be withdrawn and cancelled and this case considered closed and terminated. Respectfully Submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ESTHER R. IBAEZ OIC, Assistant Commissioner Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue