BIR Ruling No. 019-62

January 25, 1962 BIR RULING NO. 019-62 1st Indorsement Respectfully returned to the Regional Director, Regional District No. 8, Iloilo City, the within papers consisting of 99 pages, relative to the donor's and donee's gift taxes assessed by the Provincial Revenue Office at Bacolod City against Dr. Antonio A. Lizares and Dr. Antonio A. Lizares & Company, Inc., in the amount of P829,219.43, for the year 1950. A ruling is requested as to whether or not the transfer of the properties of Dr. Antonio A. Lizares to the corporation bearing his name in exchange for shares of stock constitute a taxable transfer by way or gift, hence, subject to the donor's and donee's gift taxes. It is also urged that the corporation be disregarded as a separate and distinct entity from that of its stockholders for purposes of the income tax, in order that the income of the corporation may be taxed directly to Mr. Lizares, the individual. The facts as established by the records are as follows: 1. On May 12, 1949, a corporation was organized, with Dr. and Mrs. Antonio A. Lizares and their nine (9) children as stockholders. Dr. Lizares is the principal stockholder of the corporation which incidentally bears his name. The records do not show the capitalization of the company, the number of shares of stock into which its capital has been divided and the par value of each share of stock. A copy of the articles of incorporation has not been attached to the records on the case. 2. The corporation was organized, according to its counsel, for the avowed purpose of preserving intact the properties of Dr. Lizares which consisted mainly of agricultural lands, certain parcels of which had been converted into subdivisions, and shares of stock in certain corporations. These pieces of property were sold to the corporation for a total sum of P572,850.00, which were paid for in shares of stock of the vendee corporation. The records, however, do not show the number of shares of stock issued in exchange for the property sold. 3. Before the corporation was organized and incorporated in accordance with our laws, advice was sought from the Philippine National Bank as most of the properties involved in the transfer were mortgaged to the said banking institution for the sum of P383,483.68. Dr. Lizares wanted to know if it would be acceptable to the bank to transfer his liability to the corporation. The bank had no objection. 4. In 1950, the Provincial Revenue Office sought to tax the transfer of the properties to the corporation for donor's and donee's gift taxes in the belief that the transfers were not bona fide and that the transfers were made for "less than an adequate and full consideration." The investigating examiners considered the fair market value of the properties to be over P5,000,000.00. This was subsequently reduced to P1,574,959.03 and donor's and donee's gift taxes were assessed in the total sum of P829,219.43, inclusive of surcharges, interest and penalties. OPINION The investment of the donor's and donee's gift taxes was prompted by the provision of Section 111 of the Tax Code, which states: "SEC. 111. Transfer for less than adequate and full consideration . Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceed the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year." Under this provision of law a presumption is established that where the transaction involved is between relatives by blood, the amount by which the value of the property exceeds the value of the consideration is deemed a gift. However, when the transaction involved is between persons who are not so related, this presumption does not obtain. Paul in his FEDERAL ESTATE AND GIFT TAXATION, Vol. 11, par. 16.14, page 1111 states: "The purpose of this specific provision is to make certain that the tax reaches 'all transfers to the extent that they are donative , and to exclude any consideration not reducible to money or money's worth.'" "However," he states further, "a sale, exchange, or other transfer of property made in the ordinary courses of business (a transaction which is bona fide , at arms length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth." The question that nags for resolution is: Is the sale by Dr. Lizares of his properties to the corporation a transaction in the ordinary courses of business or one between him and his children as contended by the examiners? Let us analyze the facts. The seller is Dr. Lizares, the principal stockholder of the vendee-corporation and who practically owns the corporations. The consideration is shares of stock of the corporation. The Investigating examiners contend that the sale was actually a donation to the children. Yet the assessment for donee's tax was made against the corporation. One can readily see the inconsistency of the stand taken by the investigators. If the transaction was a gift to the children, the donee's tax should have been imposed against the children. To assume, however, that the transaction was a gift to the children, is to disregard the separate legal existence of the corporation an existence that is manifestly inferred in section 2 of Act No. 1459, as amended, which provides: "SEC. 2. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence." "If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the nation of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. (FLEECHER CYCLOPDDA OF CORPORATIONS, Vol. 2, par. 41, pp. 135-136, citing: U. S. v. Milwaukee Refrigerator Transit Co. 142 Fed. 247, 255.) There was nothing illegal in the transaction involved. Besides, the sale was properly recorded in the books of the corporation. The children did not receive any benefit from said transaction. If there was any benefit received, the corporation as a separate legal entity received said benefit. Such benefits, nevertheless, did not amount to a gift. At most it only enhanced the value of the shares of stock. To tax the corporation for donee's tax is to assume that the transaction was a gift to the said entity. This assumption, however, has never borne out by the facts established. Donative intent in this instance cannot be presumed. The transaction was bona fide and at arms length. The records in the books of the corporation will bear this out. There is only one inference that can be drawn: And that is that there was full and adequate consideration. To construe the transaction otherwise, would put undue strain to transactions similar in nature to the one under consideration. Practically all sales transactions under this jurisdiction will not escape the provisions of section 111 of the Tax Code, including auction and sheriff's sale. The case of FRANK B. THOMPSON, 42 B.T.A. 121, cited by the investigators in not in point. This case involved a voluntary contribution of property to the corporation. There was no material consideration whatsoever that passed between the contributor-stockholder and the recipient-corporation. In the case under consideration there was an actual sale. In the case of ROBERT R. SCANLON, 42 B.T.A. 997, cited by counsel for the taxpayer, the same fact obtained, yet the Board said: "We think it clear that there was full and satisfactory compensation to petitioner, through the corresponding enhancement in the value of the shares, even though it be conceded that this was a transfer by one person to another. aisadc In view of the foregoing, we find the assessment of donor's and donee's gift taxes as without basis in fact and in law. With regards to the question of disregarding the corporated entity of Dr. Lizares & Co., Inc., the facts as shown by the enclosed records of the case do not warrant such a course of action. MELECIO R. DOMINGO Commissioner of Internal Revenue