Application of the 10-year Prescriptive Period

July 22, 1959 BIR RULING NO. 353-59 2nd Indorsement Referred to the Chief, Income Tax Division, thru the Revenue Operations Executive (Assessment), the entire record of the gift tax case of the Estate of William J. Shaw and the Wack Wack Golf & Country Club, Inc., donor and donee, respectively, involving a total amount of P1,376,889.73, as deficiency gift tax, surcharge, interest and compromise. The records of the case show that the Estate of William J. Shaw purchased 36 parcels of land on July 26, 1946 in the total amount of P61,810.25. On April 22, 1949, the trustees of the Estate executed a Deed of Donation transferring by way of donation the 26 parcels of land to the Wack Wack Golf & Country Club, Inc. which was duly accepted by the latter. After the execution of the Deed of Donation and Acceptance, the corresponding Donor's and Donee's gift tax returns were made and filed with this Office sometime after March 1, 1950. The sum of P61,810.25, which was the purchase price, was declared as the value of the property for purposes of the gift tax. Based on said returns, this Office issued the donor's and donee's gift tax assessment notice numbered G-A-1062-49. Said assessments were paid on August 31, 1950 but exclusive of surcharges, interests and compromises. On February 23, 1959, after the examination and verification of the returns filed were completed and the fair market value of the donated properties was ascertained at P1,752,904.00, a deficiency gift tax for both donor and donee in the total amount of P1,376,889.73 including surcharges, interests, and compromises was proposed. A notice was sent to the taxpayers on the same date informing them of the proposed assessment and advising them to present their objections thereto at an informal conference. In the conference held on March 31, 1959, taxpayers objected to the proposed deficiency assessment and which objections were subsequently embodied in their letter dated April 14, 1959. Among the important defenses interposed by taxpayers are prescription and the non-taxability of the donation because of the terms and conditions attached to the donation which provide for the reversion of the donated properties to the Estate in case of non-compliance therewith. While it is true that the ordinary prescriptive period of five years had set in, nevertheless, there appears enough proof to warrant the application of the ten-year prescriptive period as provided for in section 332 of the Tax Code. The gross underdeclaration of taxable value of the donated properties is clear indication of fraud. Our Supreme Court, treating on an analogous case, ruled that on overvaluation of the cost of acquisition of said property resulting in the understatement of net gain, indicates an intention to evade tax. (Collector vs. Pedro B. Bautista & Dativa Corrales Tan, G.R. No. L-12250, May 27, 1959) The assessed value of the land donated in 1949 according to the tax rolls was P150,000.00 and the fair market value according to investigation was P1,752,904.00, computed on the basis of P6.47 per square meter, which was the average selling price as determined from a number of coeval sales within the six-month period from April 22, 1949 of the surrounding estate. Furthermore, section 113 of the Tax Code as amended, expressly provides: "If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. Provided , that in case of real property , the assessed value in the year of the gift as shown in tax rolls shall be considered as the fair market value , unless the contrary is shown ." (Emphasis supplied) but in spite of the clear and unequivocal provisions of the law, they purposely declared not the assessed value at the time of the donation but the purchase price thereof which was much lower, obviously with the intention to evade payment of the correct taxes. They sought to justify this act by alleging that the taxable value of the property purchased by the donor for the purpose of the gift tax is the purchase price of the property, citing in support thereof, the case of Frank M. Could Estate, 14 TC 414; Mangaliman p. 390, We are fully in accord with the decision just cited. If the date of the purchase and the date of the donation happened simultaneously or immediately thereafter. In the instant case, the donated properties were purchased on July 26, 1946 and the donation was not made until April 22, 1949, or after a lapse of a period of more than two years. It is of common knowledge that prices of real estate around Manila or its suburbs, rise as time passes, and therefore, it cannot be denied that what was P2.00 per square meter in 1946 may be P6.00 to P10.00 in 1949. To the defense that the gift may not even be taxable because of the possibility of reverter, or if taxable, the fair and reasonable value of the beneficial interest only should be subject to the gift tax considering that what was transferred was not the full or absolute ownership of said properties but only a beneficial interest, we counter that the possibility of reverter in the donor does not render a gift incomplete. (Pauline Wilkens Tidemann, 1 TC 968). At any rate, the possibility of such reverter is remote, considering that such possibility arises only in case of the use of the 3 parcels other than that provided for in the decedent's will. The fact that said three parcels of land now actually comprise the "Shaw Memorial Park" removes altogether the possibility of reverter. However, the three parcels of land used in the completion of the Park should not be included in the donation. He is, therefore, advised to recompute the donor's and donee's taxes due and payable on the basis of the prevailing market value at the time of the donation imposing thereon the 50% fraud penalty, after which, the corresponding letter of demand should be issued. cdta (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue