Commissioner of Internal Revenue v. Estate of Toda, Jr.

EIGHTH DIVISION [CA-G.R. SP No. 57799. January 31, 2001.] THE 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 . D E C I S I O N COSICO , J p : The Commissioner of Internal Revenue assessed the Estate of the late Benigno P. Toda, Jr. for deficiency income tax due for the year 1989, in the amount of P79,099,999.72. The Estate, represented by Special Co-administrators Lorna Patajo Kapunan and Mario Luza Bautista, protested the assessment, which the Commissioner denied. The Estate elevated its protest to the Court of Tax Appeals, which rendered the decision with the following dispositive portion: "WHEREFORE, in view of all the foregoing, petitioner is not liable for deficiency income tax in the amount of P79,099,999.72 for the year 1989. Accordingly, the assessment issued by respondent on January 9, 1995 is hereby cancelled and set aside." (Annex "A", Petition, pp. 22-31, Rollo ) The Commissioner's motion for reconsideration was denied (Annex "B", Petition, p. 32, Rollo ). Before this Court is this petition for review by the Commissioner of Internal Revenue. The Tax Court is faulted for: a) not holding as fraudulent, the scheme adopted in the sale of the properties of Cibeles Insurance Corporation for the purpose of tax evasion; b) not disregarding the separate personality of Cibeles Insurance Corporation in the computation of the deficiency income tax; and cCaSHA c) holding that petitioner's right to assess income tax for the year 1989 against defendant Estate has already prescribed. The factual premises are not disputed. The late Benigno P. Toda, Jr. died on January 16, 1994. During his lifetime, he was the controlling stockholder of Cibeles Insurance Corporation, which then owned 2 parcels of land in Makati City, with a 16-storey building constructed thereon and covered by TCT No. 338017 (Exh. "I") and TCT No. 338018 (Exh. "J"). By authority of the stockholders of Cibeles under date of March 30, 1989, Toda sold the said properties on August 30, 1989 to Rafael A. Altonaga for P100,000,000.00. On even date, Altonaga sold the same properties to Royal Match Inc. for P200,000,000.00 On April 15, 1990, Cibeles filed its income tax return (Exh. "L") declaring, among other things, a gain from the sale of the properties in question amounting to P75,728,021.00. The tax due for the period was P26,341,207.00, which Cibeles paid on April 16, 1990 (pls. refer to pp. 79, 84, 85,86 and 87, Rollo, all of which were submitted as annexes to the petition of the Toda Estate with the Court of Tax Appeals). For selling the properties of Royal Match, Inc., Altonaga paid capital gains tax in the sum of P10,000,000.00. Before Toda died on January 16, 1994, particularly on July 12, 1990, Toda sold his entire shareholdings in Cibeles to Le Hun Choa for P12,500,000.00. On March 29, 1994, the Bureau of Internal Revenue sent an assessment notice and demanded of Cibeles, thru its new President Rufino H. Ko Pio, as payment for alleged deficiency income tax covering the year 1989. Cibeles demurred, contending that Cibeles is not the proper party to be assessed the liability, which, even if due, should be assessed against the former (older) Cibeles, then headed by Toda, who, during the sale thereof on July 12, 1990, undertook to hold the buyer and Cibeles free from any and all the liabilities for the years 1987, 1988 and 1989. Sometime in January 1995, Cibeles and/or the Estate of Benigno P. Toda, Jr. was assessed deficiency income tax for 1989 in the amount of P79,099,999.72 computed as follows: "INCOME TAX - 1989 Net Income Per Return P75,987,725.00 Add: Additional gain on sale of real property Taxable under ordinary corporate income But were substituted with individual capital Gains (P200M - P100M) 100,000,000.00 Total Net Taxable Income Per Investigation P75,987,725.00 Tax due thereof at 35% P61,595,703.75 Less: Payments already made 1. Per return P26,595,704.00 2. Thru Capital Gains Tax made By R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of Tax Due P24,999,999.75 Add: 50% of Surcharge 12,499,999.88 25% Surcharge 6,249,999.94 Total P43,749,999.57 Add: Interest 20% from 4/6/90 to 4/30/94 (808) 35,349,999.65 TOTAL AMOUNT DUE & COLLECTIBLE P79,099,999.72" The Estate protested the assessment on February 24, 1995. It was denied on October 19, 1995. On February 12, 1996, the Toda Estate elevated its protest to the Court of Tax Appeals docketed as CTA Case No. 5328. Therein respondent, now petitioner Commissioner of Internal Revenue, resisted the Toda Estate's appeal by contending, that 1. the scheme adopted by Cibeles thru Toda, re the sale of its properties constitutes tax evasion and therefore fraudulent; 2. the sale being fraudulent, the separate personality of Cibeles must be disregarded, and 3. the BIR has 10 years after the discovery of the fraud within which to make an assessment. which are now reiterated in this petition by the Commissioner of Internal Revenue. The Commissioner contends that the two sales from Cibeles to Rafael Altonaga, then from Altonaga to Royal Match, Inc., both accomplished on even date of August 30, 1989, were simulated; and that the result was a change of structure of the proceeds and thereby deprived the Commission of the tax due therefor. CcHDSA The Commissioner's theory is to the effect that Cibeles made it appear that there were two sales transaction, albeit there really was a single sale from Cibeles to Royal Match, Inc. and that Altonaga is neither a buyer nor a seller. On the other hand, the Toda Estate insists that the scheme undertaken by Cibeles was a legitimate tax planning and avoidance, consequently not fraudulent. The Court of Tax Appeals sustained the Toda Estate. It made the following disquisition: "As disclosed by the records in this case, the property in question was sold by Cibeles to Altonaga on August 30, 1989 for P100,000,000.00. Altonaga, in turn, sold the same property on the same day, to Royal Match for P200,000,000.00. Cibeles paid the corresponding income tax due on the first sale while Altonaga paid the 5% capital gains tax due on the second sale. Respondent, however, posits that these transactions were simulated which resulted in a change of the income structure of the proceeds of the sale. The additional gain of P100,000,000.00 (P200,000,000.00 in the second sale less P100,000,000.00 in the first sale) realized by Cibeles was taxed at the rate of only 5% capital gains tax instead of 35% ordinary corporate income tax. Accordingly, the income tax return filed by Cibeles for 1989 was fraudulent. The term "fraud" in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in damage to another, or by which an undue or unconscientious advantage is taken of another . . . As Petitioner asserts, the key word is 'deception.' The other party misled willfully and deliberately. In the case at bar, Cibeles wrote the BIR asking for a ruling on the tax consequence of the intended sales (Exh. A.). There was also a follow-up information sent by Cibeles to the BIR (Exh. B.). In this respect, it is crystal clear that full disclosure was made to the BIR. Furthermore, BIR clearance was secured (Exh. E) and new Transfer Certificates of Title were obtained (Exhs. D & D-1, O, R). Cibeles also filed its income tax return for the period and Altonaga paid the 5% capital gains tax. Respondent based his allegations on the belief that Altonaga was a close business associate of the Decedent and that he derived his salary in the USA from Aeroben, Inc., a foreign corporation "believed" to be owned by the Decedent. The allegation that Altonaga was a mere dummy of Cibeles was never proven by the respondent. There was no evidence found to show that he was a regular executive of Cibeles or he was a stockholder or a legal nominee therein. xxx xxx xxx . . fraud cannot be imputed by mere assumptions. The fact that Altonaga's residence at Ayala Alabang Village, Muntinlupa, is ordinary looking or that his salary is modest ($8,400.00 for 1989) does not mean that he could not qualify as a buyer of a hundred million worth of property. Nowhere in the law is it mandated that financial capacity is a requisite before a person can enter into a contract of sale. Article 1489 of the New Ci vil Co de provides that "all persons who are authorized in this Code to obligate themselves, may enter into a contract of sale." . . . By the clear provision of the law, it is sufficient that one obligates himself to deliver a determinate thing and the other party, to pay a price certain in money. It is not necessary that the full price or a portion of the price be paid upon the execution of the contract or upon entering into a transaction. After all, a contract is a private agreement between the parties and is valid as long as it is not contrary to law, morals, good, customs, public order, or public policy (Article 1306, New Civil Code). Respondent also contends that the notarization of the second sale ahead of the first sale only proved that there was no sale at all at Altonaga by Cibeles. We do not subscribe to the respondent's view. In sales, the contract is perfected when the seller obligates himself, for a price certain, to deliver and to transfer ownership of the thing or right to the buyer, over which the latter agrees. (Ang Yu Asuncion vs. Court of Appeals, 238 SCRA 602). The essence of the contract of sale is the transfer of title or agreement to transfer it for a price paid or promised. (Schmid and Oberly, Inc. vs. RJL Martinez Fishing Corporation, 166 SCRA 493). The deed of Sale is a private document evidencing the contract of sale being entered into by the parties. It is valid between the parties. Notarization is what converts private document into a public document which becomes binding to third persons. Therefore, if the second Deed was notarized ahead of the first Deed, it simply means that the former was first converted into a public document. But the fact remains that before the notarization, there existed valid private contracts between the parties. It must be noted that the notarization was done on the same day and documents differed only on the page numbers as recorded in the books of the Notary Public. Respondent avers further that an initial payment of P40,000,00.00 was made by Royal Match to Cibeles as early as May 4, 1989 (Exhs. 3, 6 & 6-a). Thus, bolstering its position that indeed the sale was a direct sale from Cibeles to Royal Match. However, there was no direct proof in the records of Royal Match or Cibeles that the checks issued by Royal Match in favor of Cibeles comprised the consideration of the sale of the property. Respondent arrived at this conclusion from mere presumptions. Fraud must be proved to exist by clear and convincing evidence, amounting to more than mere preponderance, and cannot be justified by mere speculation because fraud is never lightly to be presumed (Philippine Commercial International Bank vs. Commissioner of Internal Revenue, CTA Case No. 5003, February 4, 1997). In sum, respondent failed to prove by clear and convincing evidence that fraud was committed by Cibeles which ultimately deprive the government of the taxes due it. But even assuming that a pre-conceived scheme was adopted by Cibeles, the same constitutes mere tax avoidance and not tax evasion. Tax avoidance is the minimization of tax liability by taking advantage of legally available tax planning opportunities while tax evasion entails the reduction of tax liability by using illegal means. (Black's Law Dictionary, Sixth Ed., p. 1460). Tax avoidance is not forbidden in our jurisdiction. It is worth emphasizing also that even the Revenue Examiners in their Memorandum Report dated March 8, 1991 (Exh. 3) described the schemes of Cibeles as tax avoidance schemes." The CTA likewise disagreed with the Commissioner's proposition that in the wake of the allegedly fraudulent sales transaction, the separate personality of Cibeles should have been pierced. The CTA had this to say: "We disagree. The fact that the Decedent owned 99.99% of the capital stock of Cibeles does not mean that the separate corporate personality of Cibeles may be disregarded. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. (Palay, Inc. vs. Clave, 124 SCRA 638). Along this line, the assessment against the Estate if Benigno Toda was defective from the very beginning. The fact that Benigno Toda undertook to free the buyer and Cibeles from any and all tax liabilities for the fiscal years 1987, 1988 and 1989 should not affect the right of the government to assess and collect taxes. The Deed of Absolute Sale executed by the parties was a private agreement and not binding against the government. As borne by the records in this case, the sale executed by the Decedent was authorized by a resolution of the stockholders (Exh. C). The Decedent therefore, acted within his official capacity when he sold the property. Moreover, he did not act beyond what had been required of him. Yet, respondent insists contrariwise that the proceeds of the sale inured to the personal benefit of the Decedent. He, having personally drawn the initial payment of P40,000,000.00 allegedly made by Royal Match. We already ruled that no clear and convincing evidence was presented to prove that the P40,000,000.00 was paid in consideration of the sale on August 30, 1989. After all, it was issued and drawn as early as May 4, 1989 long before the sale on August 30, 1989. It is worth mentioning further that the personality of Royal Match was never questioned in this case. Consequently, Royal Match was a buyer in good faith. The right of an innocent purchaser must be respected and protected, even if the seller obtained his title through fraud (Veloso vs. Court of Appeals, 260 SCRA 593). Thus, the transaction entered into by it is valid. And since the second sale is valid, even if We pierce the veil of corporate entity of Cibeles and making the petitioner responsible for any liabilities it may have incurred, still, there would only be one questionable transaction and that was the first transaction. In said sale, Cibeles paid the corporate income tax. So such transaction could not give rise to a deficiency tax. Conversely, if We make the first sale null and void, then there can be no basis for the second sale. Altonaga would not become buyer and seller of the property, Royal Match had only direct dealing with Altonaga. Respondent was never able to prove that Cibeles had directly dealt with Royal Match relative to the sale transactions." Respecting the issue of prescription of the right to assess the Toda Estate, the CTA opined: " . . . the applicable period to assess Cibeles and/or petitioner was three (3) years. Section 203, of the Tax Code, as amended, provides, to wit: Sec. 203. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be began after the expiration of the period. . . . As already adverted to, this case involves the period 1989. Cibeles filed its income tax return on April 15, 1990 (Exh. L). The disputed assessment was issued on January 9, 1995. Therefore, four years eight months and seventeen days had already lapsed which was beyond the three-year period allowed by law to assess. It other words, the government's right to assess Cibeles prescribed on April 15, 1993. Considering that the assessment was issued only on January 9, 1995, the same was no longer valid and binding upon Cibeles and/or petitioner. But even assuming, for the sake of argument, that a valid assessment was issued, the Estate, petitioner herein cannot be held accountable for the deficiency income taxes." (pp. 28-29, Rollo, Annex "A", Petition) This Court agrees. The tax assessment involved was for the year 1989. Cibeles filed its income tax return on April 15, 1990. On January 9, 1995, the contested assessment was issued, or after a period of 4 years, 8 months and 25 days, clearly very much beyond the prescribed period. In this connection, We agree and adopt with approval the findings and conclusion of the Court of Tax Appeals, the agency more advantageously situated and which possesses the necessary expertise as to matters and issues laid down before it for resolution. In many a case, the Supreme Court consistently upheld the findings of administrative agencies whose jurisdiction is confined to specific matters at issue (Osias Academy v. Department of Labor and Employment, 192 SCRA 612 [1990]. Undoubtedly, the Court of Tax Appeals is one of those agencies well-versed and is an expert in matters of taxation. It is better situated to determine the correctness, propriety and legality of the income tax assessment assailed by the Toda Estate. Moreover, "Courts will not interfere on matters which are addressed to the sound discretion of government agencies entrusted with the regulation of activities coming under the special technical knowledge and training of such agencies and that findings of administrative agencies are accorded are not only respect but finality, except when there is insufficient or insubstantial evidence on record to support the findings . . . " (Moomba Mining Exploration Company v. Court of Appeals, 317 SCRA 388 [1999]). ACCORDINGLY, the assailed decision of the Court of Tax Appeals is hereby AFFIRMED. SO ORDERED. Barcelona and Santos, JJ . , concur.