Commissioner of Internal Revenue v. Filinvest Development Corp.

FOURTEENTH DIVISION [CA-G.R. SP No. 74510. January 26, 2005.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . FILINVEST DEVELOPMENT CORPORATION and FILINVEST ALABANG, INCORPORATED , respondents . D E C I S I O N DACUDAO , J p : Appeal by way of petition for Review from the decision dated September 10, 2002 of the Court of Tax Appeals in CTA Case No. 6182, entitled " Filinvest Development Corporation and Filinvest Alabang, Inc. v. Commissioner of Internal Revenue ." The dispositive portion thereof reads: "WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on FDC for taxable year 1996. Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamps tax on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET ASIDE. However, petitioner is hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997. In addition, petitioner is also ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full payment thereof pursuant to Section 249(c)(3) of the Tax Code. "SO ORDERED. tax2005 "(SGD.) ERNESTO D. ACOSTA "Presiding Judge "WE CONCUR: (SGD.) JUANITO C. CASTAEDA, JR. "Associate Judge" 1 The facts, as stated in the decision of the Tax Court, are as follows: Re: The Deed of Exchange "1.02 On November 29, 1996, petitioner Filinvest Development Corporation (FDC), petitioner Filinvest Alabang, Inc. (FAI) and Filinvest Land Incorporated (FLI) entered into a Deed of Exchange whereby FDC and FAI agreed to transfer to FLI certain parcels of land, with a total appraised value of P4,806,777.00, in exchange for 463,094,301 shares of stock of FLI (pars. 1.01 and 3.00, Petition; Pars. 1 & 2, Answer). "1.03 The properties transferred by FDC and FAI to FLI pursuant to the Deed of Exchange are suitable and intended for medium rise residential and commercial building development. FDC is an investment holding company with substantial investments in real estate companies principally FLI and FAI, and is not directly engaged in the business of holding title to, developing and selling commercial, industrial or residential properties. On the other hand, among the companies of the Filinvest Group, FLI, being directly engaged in real property development, has the experience, resources and expertise required to successfully undertake such intended development of the properties subject of the exchange. The execution of the Deed of Exchange was premised on legitimate business reasons (par. 3.01, Petition; par. 2, Answer). "1.04 The comparative stock ownership structure of FLI prior to and after the exchange is, as follows: "Prior to the exchange, the ownership structure of FLI was, as follows: "Stockholder No. of Shares held Ownership % "FDC 2,537,358,000 67.42% "FAI NONE 0% "Others 1,226,177,000 32.58% "Total 3,763,535,000 100% "Outstanding FLI shares After the exchange, new shares of stock of FLI were issued to FDC and FAI in exchange for the properties conveyed by FDC and FAI to FLI. As a result, the ownership structure of FLI was changed, as follows. "Stockholder No. of Shares Additional Total No. % of owned Shares issued of shares Ownership "FDC 2,537,358,000 42,217,000 2,597,575,000 61,03% "FAI NONE 420,877,000 9.96% "Others 1,226,177,000 1,226,177,000 "29.01% Total 3,763,535,000 443,094,000 4,226,629,000 100.00% "1.05 The reduction of FDC's proportionate equity interest in FLI resulted from an increase in the total number of outstanding shares of FLI brought about by the issuance of additional shares necessitated by the exchange. As of the date of the Deed of Exchange and up to the present FDC directly owned 80% of the outstanding shares of FAI, the remaining 20% being held by FLI. Through its 80% ownership of FAI, FDC's ownership interest in FLI increased through FAI's acquisition of 9.96% of the outstanding shares of FLI after the exchange as shown below. HIACEa "% of FLI shares directly % of FLI Shares held FCD's Total % "owned by indirectly through Ownership after "FDC FAI the Exchange (80% of FAI's % ownership) "61.03% 7.968% 68.998% "1.06 On January 13, 1997, FLI wrote to the BIR requesting for a ruling that no gain or loss would be recognized in the transfer of the real properties subject of the Deed of Exchange by FDC and FAI to FLI, in accordance with BIR Revenue Memorandum Order No. 26-92 and Section 34, paragraphs (c) (2) and (6) (c), of the old NIRC. "1.07 The Bureau of Internal Revenue (BIR) ruled on February 3, 1997 (Ruling No. S-34-046-97) that the exchange fell squarely among the transactions contemplated under Section 34(c)(2) of the National Internal Revenue Code (NIRC), which provides that [n]o gain or less shall be recognized if property is transferred to corporation by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation" (pars. 3.03 and 5.05. Petition; pars 4 and 9, Answer). "1.08 Upon request for clarification by FLI on February 10, 1997, the BIR reiterated its above ruling stressing that the transferors FDC and FAI clearly gained control of FLI (pars. 3.04 and 5.06, Petition pars 4 and 9, Answers) "1.09 The implementing requirements imposed by BIR Ruling No. S-34-046-97, declaring that the exchange in question fell among the transactions contemplated under Section 34 (c) (2) of the old NIRC where no gain shall be recognized, which requirements had to be observed in order that the taxpayers may avail of the non-recognition of gain as provided for in said section, were all complied with by FDC, FAI and FLI. Re: The Inter-company advances "1.10 On various dates during the years ended December 31, 1996 and December 31, 1997, FDC extended to its affiliates various advances. Re: The Joint Venture Company "1.11 On November 15, 1996, FDC entered into a Shareholders' Agreement ('SA') with Reco Herrera Pte Ltd (RHPL') for the formation of a joint venture company named Filinvest Asia Corporation ('FAC'), which is based in Singapore (pars. 1.01 and 6.11, petition; pars. 1 and 7, Answer). "1.12 FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and manage the 50% ownership interest of FDC in its PBCom Office Tower Project ('Project') with the Philippine Bank of Communications (par. 6.12, Petition; par. 7, Answer). "1.13 Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL in FAC was 60% and 40%, respectively. "1.14 In accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares of stock representing 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of stock of FAC representing a 40% equity participation in FAC. "1.15 In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring FAC a portion of FDC's rights and interests in the Project to the extent of P500.7 million. "1.16 FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996." 2 On January 3, 2000, respondent FDC received from petitioner BIR a formal Notice of Demand 3 with accompanying four (4) Assessment Notices 4 , all dated January 3, 2000, informing respondent FDC that after investigation, there was found due from respondent FDC a deficiency income tax of P150,074,066.27 for 1996, a deficiency documentary stamp tax of P10,425,487.06 for the same year, a deficiency income tax of P5,716,972.03 for 1997, and a deficiency documentary stamp tax of P5,796,699.40 also for 1997. Respondent FAI, on the same date, likewise received from petitioner BIR a Formal Notice of Demand 5 with its accompanying Assessment Notice, 6 all dated January 3, 2000, informing respondent FAI that after investigation, there was found due from this respondent a deficiency income tax of P1,447,494,638.23 for 1997. Thus, on January 26, 2000, or within the reglementary period of thirty (30) days, both respondent FDC and respondent FAI filed with the petitioner BIR their respective Request for Reconsideration/Protest of the assessments against them. On March 24, 2000, in compliance with the letter dated January 31, 2000 of the Appellate Division of the BIR, to which the aforesaid Request for Reconsideration/Protests were referred, and within the reglementary period of sixty (60) days from filing of the protests, respondents submitted to the Appellate Division all relevant supporting documents. On September 11, 2000, respondents filed with the BIR Appellate Division a letter dated September 11, 2000, informing the latter that the one hundred eighty-day period within which the BIR had to act on their Requests for Reconsideration/Protests under the last paragraph of Section 228 of the NIRC of 1997 was to expire on September 20, 2000, and requesting for an early resolution of said requests for Reconsideration/protests. HTASIa Due to the failure of the Commissioner of Internal Revenue to resolve the said Request for Reconsideration, respondents FDC and FAI, on October 17, 2000, filed a petition for review with the Court of Tax Appeals. The petition was filed pursuant to the last paragraph of Section 228 of the 1997 NIRC, which provides that if the protest is not acted upon within one hundred eighty (180) days from submission of the relevant supporting documents, the taxpayer adversely affected by the inaction may appeal to this Honorable Court within thirty (30) days from the lapse of the 180-day period. In this case, respondents FDC and FAI had until October 20, 2000 to file a petition for review. On November 28, 2000, petitioner BIR filed an Answer to the Petition for Review, interposing the following Special and Affirmative Defenses, to wit: "14. The transfer of the properties of Filinvest Development Corporation (FDC) and Filinvest Alabang, Inc. (FAI) in exchange for shares of stock of Filinvest Land, Inc. (FLI) should not be considered as a tax-free exchange under Section 34(c)(2) of the Tax Code; FDC's interest in FLI was, in fact, eroded after the exchange. The transfer leading to the corporate reorganization did not result in further control for FDC. Neither did FAI gain control. Hence, said transaction gave rise to a taxable gain on the part of the petitioners. "15. FDC realized gain in dilution arising from its Shareholders' Agreement with Reco Herrera PTE Ltd. for the formation of a joint venture company, Filinvest Asia Corporation. Such gain is taxable. "16. The various loans obtained by FDC from banks were interest-bearing but when the same were re-lent to its affiliates, these were non-interest bearing. Section 43, now Section 50 of the 1997 Tax Code, gives the Commissioner of Internal Revenue the power to allocate, distribute or apportion income or deductions between or among such organization, trades or business in order to prevent evasion of taxes. "This was implemented under Revenue Regulations No. 2, Section 179(b) and (c), which clarified that indeed, the Commissioner can intervene by making distribution, allocation or apportionment as he may deem necessary on any item affecting net income between or among controlled taxpayers in order to place a controlled taxpayer on a tax party with an uncontrolled taxpayer. "17. The imposition of documentary stamp tax on inter-company loans and advances covered by an inter-office memo, check vouchers and written instruction for fund transfers is anchored on the provisions of Section 180 of the Tax Code and Revenue Regulations No. 9-94, which provide that loan transactions, such as those entered into by FDC with its affiliates, whether or not evidenced by a formal agreement or by mere office memo, shall be subject to DST. "18. The assessments were issued in accordance with law and regulations. "19. All presumptions are in favor of the correctness of tax assessments ( CIR vs. Construction Resources Asia, Inc ., 145 SCRA 671), and the burden to prove otherwise is upon the petitioner. (Respondents' Answer, Item Nos. 14-19, CTA docket pp. 172-174." 7 On September 10, 2002, the Court of Tax Appeals gave judgment finding the petition partly meritorious. Dissatisfied therewith, the petitioner BIR filed a partial motion for reconsideration, 8 but this motion was by that Court denied in a Resolution dated December 11, 2002. 9 The Court of Tax Appeals stood pat on its ruling that: "We stand firm in our view that the letters of instructions evidencing some advances made by petitioner to its affiliates are not loan agreements, hence they are not subject to documentary stamp tax pursuant to Section 180 of the Tax Code. We would like to point out that we never expressly nor impliedly recognized that the 'advances' referred to in this case are inter-company loans for the term 'advances' does not necessarily imply a loan (p. 510, Words and Phrases, Vol. 2, citing Nelson vs. American business Bureau , 241 III. Apll. 432, thus: 'The word advances in contracts has no such meaning that the court can determine the sense in which it is used by the parties without examining the contract as an entirety and seeking the aid of the surrounding circumstances and the practical construction of the contract by the parties themselves ( Ibid., Sumitomo bank of Hawaii vs. Hawaii Nosan Shokwai , 25 Haw. 691)'. "As can be gleaned from the documents submitted by the petitioner, the instructional letters as well as the cash and journal vouchers which bear the advances extended by FDC to its affiliates leave us in quandary as to the real purpose and intention of the parties. Thus, we could not presume that they are loan agreements. Although advances may mean loan of money, its expansive concept may also refer to other transactions such as 'to furnish as a part of a stock or fund, to pay money before it is due, to furnish money for a specific purpose understood between the parties, the money or sum equivalent to be returned . . . (Ibid., citing In re Altamn's Will, Sur., 6 NYS 2d 972, 975). In the case at bar, respondent miserably failed to persuade this court that the instructional letters unilaterally prepared by FDC are real loan agreements in the strict sense. For all we know, it may mean advances for a particular purpose as simply agreed upon between FDC itself and its affiliates. It may be worth reiterating that nothing on the face of the letters of instructions and cash/journal vouchers partakes of the nature of a loan agreement as defined by law. Thus, these advances, which were merely evidenced by letters of instructions and cash/journal vouchers, are not subject to documentary stamp tax as provided in Section 180 of the Tax Code. HECaTD "As to the second ground, this court would like to point out that the matter involving tax-free exchanges has already been exhaustively discussed in our decision and we find no need to dwell on the same issue for the second time. "And lastly, with reference to the non-recognition of gain in the increase of value of FDC's shareholding, our stand on the issue remains. As correctly pointed out by petitioner on its opposition, respondent has failed to present evidence that would established the gain component earned by FDC on the increase in the value of its shareholdings to FAC. It is significant to emphasize anew that no taxable gain could be recognized by the mere increase in the value of a property without disposal or alienation of the said property. The BIR cannot make an assessment on the basis of a prospective gain brought about by the mere appreciation of the value of the property. In order to be considered a taxable gain, there must be a showing that an income from the said property is actually earned and realized through sale, conversion and the like. Otherwise, it would impress upon us that the assessment on the gain on dilution is nothing but a mere speculations and conjectures devoid of any basis in fact and in law." 10 Hence, this petition for review. 11 Petitioner BIR now contends that: 1. The Tax Court erred in canceling the assessment with regard to income tax on property swap because the swap did not qualify as a tax-free exchange, hence, subject to tax. 2. The Tax Court erred in canceling the assessment with regard to documentary stamp tax (DST) on letters of instruction because the letters of instruction are loan agreements which are subject to DST. 3. The Tax Court erred in canceling the assessment with regard to the gain on dilution as a result of the increase in the value of FDC's shareholdings because the said gain is taxable. 12 We shall first discuss whether the exchange of shares of stock for property among FDC, FAI and FLI met all the requirements for the non-recognition of taxable gain under Section 34(c)(2) of the old NIRC. Petitioner BIR argues that respondents FDC and FAI failed to comply with all the requirements for the non-recognition of taxable gain under Section 34(c)(2) of the old NIRC in view of the fact that, as a result of the exchange transaction, respondent FDC's stockholdings on FLI had been eroded from 67.42% to 61.03% of the total number of shares of FLI, while respondent FAI had not acquired the necessary number of shares to gain control of FLI as it acquired only 9.96%. Upon this score, the Court of Tax Appeals found "In order to determine whether FDC and FAI gained control of FLI as a result of the exchange, we deem it appropriate to examine the comparative stock ownership structure of FLI prior to and after the exchange, thus: "Prior to the exchange, the ownership structure of FLI was, as follows: "Stockholder No. of shares held Ownership% "FDC 2,537,358,000 67.42% "FAI NONE 0% "Others 1,226,177,000 32.58% "Total Outstanding FLI shares 3,763,535,000 100% "After the exchange, new shares of stock of FLI were issued to FDC and FAI in exchange for the properties conveyed by FDC and FAI to FLI. As a result, the ownership structure of FLI was changed, as follows: "Stockholder Number of Additional Total Number % of Shares owned Shares issued of shares Ownership ''FDC 2,537,358,000 42,217,000 2,579,575,000 61.03% "FAI NONE 420,877,000 9.96% "Others 1,226,177,000 1,226,177,000 "29.01% "Total 3,763,535,000 443,094,000 4,226,629,000 100.00% "It is significant to note that prior to the exchange FDC held 67.42% of the total voting stocks of FLI while FAI, initially, did not hold any stock at all. After the exchange, new shares of stock were issued and as a result, FDC owned 61.03% and FAI had 9.96% of stockholdings. Evidently, the exchange of properties between FDC and FAI with FLI resulted in the further control of FDC and FAI as far as stock ownership in FLI is concerned. "The seeming reduction of the number of shares owned by FDC after the exchange does not affect the so-called control requirement. As correctly pointed out by the petitioners, it is incorrect to isolate the effect of exchange on FDC's equity in FLI from that of FAI. The transaction of FDC and FAI with FLI should not be treated separate and distinct from each other, but instead they must be viewed together. Section 34(c)(2), as above-quoted, speaks of control being acquired 'alone or together with others, not exceeding four persons'. Clearly the control requirement is sufficiently met when after the transfer, the transferors, not more than four, collectively become the owners of at least 51% of the equity of the transferee, or if already owning 51%, increase their equity further in the transferee corporation. It is not required that each of the several transferors individually gains control or individually increases their interest. What is important is that each of the transferor, numbering not more than four, collectively increases his equity in the transferee corporation by 51% or more. "Numerous BIR rulings were even issued which categorically confirmed the non-recognition of any taxable gain or loss if the exchange resulted in the further control of the transferors in the transferee's stockholdings (BIR Ruling No. 132-95, August 29,1995; BIR Ruling No. 109-94, May 31, 1994; BIR Ruling No. 244-82, September 7, 1983; BIR Ruling No. 506-93, December 22, 1993; BIR Ruling No. 06-93, January 14, 1993; and BIR Ruling No. 149-94, September 29, 1994). All these rulings involved situations where the transferors were more than one but not more than four and gained control of the transferee by collectively owning at least 51% of the latter's capital stock. While it is true that rulings, which merely embody administrative opinions on queries, do not have the force and effect of laws ( Alexander Howden, & Co., Ltd. vs. Collector of Internal Revenue , 13 SCRA 601, April 14, 1965), courts may uphold the same especially where there is no showing that they are contrary to law ( Commissioner of Internal Revenue vs. Ledesma , L17509, January 30, 1970). SEDICa "It must likewise be noted that FLI requested for a ruling from the BIR with regards to the non-recognition of taxable gain on exchanges of this nature. In response thereto, the BIR issued BIR Ruling 046-97 dated February 3, 1997, which provides, thus: '. . . no gain or loss shall be recognized both to the transferors and the transferee corporation on the transfer by Filinvest Development Corporation and Filinvest Alabang, Inc. of their properties in exchange for shares of stock of the transferee corporation, Filinvest land, Inc., considering that as a consequence of the exchange, the transferors gained control of the transferee corporation by owning 99.89% of its total voting stocks.' "The aforesaid ruling relied upon by the petitioners cannot be modified, reversed or even nullified by the BIR as it would run counter to Section 246 of the NIRC on the non-retroactivity of rulings, to the prejudice of the petitioners, thus: 'Section 246. Non-Retroactivity of Rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required by him by the BIR; (b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith.' "There being no showing that the ruling is contrary to law, then this Court upholds the said BIR ruling on the matter. "As it is, the total number of shares of FDC and FAI, if sum up together is 70.99% which is more than the 51% contemplated by law to have the so-called control in the corporation. With all the elements having been complied with, we conclude that Section 34(c)(2) is on all fours applicable to the subject exchange. Hence, any gain or loss derived thereat is not recognized it being a tax-free exchange." 13 We agree with the Court of Tax Appeals. In BIR Ruling No. 210-91, dated October 18, 1991, then Commissioner Jose U. Ong declared that: ". . . pursuant to Section 34, paragraph (c) (2) (c) of the Tax Code as amended by Republic Act No. 4522 and P.D. Nos. 1705 and 1733, no gain or loss shall be recognized if property is transferred to a corporation, by a person in exchange for stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation. The statutory requirement that 'said person, alone or together with others, not exceeding four persons, gains control of said corporation' shall be understood to mean that any number of persons may exchange property for stocks provided that as a result of the transaction, not more than five transferors would control the corporation. The term 'control' shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received, i.e., subscribed, whether for property or for service, by the transferor or transferors. In determining the 51% stock ownership only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five." In this case, as a result of the exchange transaction, respondents FDC and FAI, together, gained control of the corporation. The fact that respondent FDC's stockholding was eroded and that respondent FAI acquired only 9.96% of the total number of shares is of no moment. The important thing to remember is that, by reason of the exchange transaction, the stockholdings of respondents FDC and FAI when added together, is more than 51% of the total voting power of all classes of stock entitled to vote; thereby giving them (FDC and FAI) control over the corporation. It bears stress that respondents even inquired from the petitioner BIR whether such exchange complied with all of the requirements for the non-recognition of taxable gain under Section 34 (c) (2) of the old NIRC. To this petitioner BIR, by virtue of BIR Ruling S-34-046-97, dated February 3, 1997, 14 answered in the affirmative. Hence, petitioner BIR cannot now adopt a position inconsistent with, or contrary to, the one it previously assumed. Peremptory duty, as much as a high sense of honor, to both of which sentiments it ought not to be a stranger at all, binds it to this posture. Relevant at this point is the case of ABS-CBN Broadcasting Corp. v. Court of Tax Appeals , G.R. No. L-52306, October 12, 1984, "This Court is not unaware of the well-entrenched principle that the Government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. In fact, utmost caution should be taken in this regard. But, like other principles of law, this also admits of exceptions in the interest of justice and fairplay. The insertion of Sec. 338-A into the National Internal Revenue Code, as held in the case of Tuason, Jr. vs. Lingad , is indicative of legislative intention to support the principle of good faith. In fact, in the United States, from where Sec. 24(b) was patterned, it has been held that the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer . 15 Anent the second issue, petitioner BIR contends that the letters of instructions are loan agreements, which are subject to documentary stamp tax. It posits that while Section 180 of the NIRC mentions "loan agreements" and "promissory notes," there is no requirement in the said section that they be in any particular form as a prerequisite to their being subject to the documentary stamp tax. It further avers that inter-office memos covering advances granted by a corporation to its affiliate company is in the nature of a promissory note within the purview of Section 180 of the NIRC citing BIR Ruling 108-99. DCASEc Accordingly, it postulates that the letters of instruction and cash vouchers issued by respondents are loan transactions by their very nature even though they do not strictly conform to the supposed documentation of a loan. To bolster its argument, petitioner BIR quotes Section 3 (b) and Section 6 of Revenue Regulations No. 9-94, to wit: "Section 3. Definition of Terms. For purposes of these Regulations, the following terms shall mean: "(b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings. "The terms 'Loan Agreement' under Section 180 and "Mortgage" under Section 195, both of the Tax Code, as amended, generally refer to distinct and separate instruments. A loan agreement shall be taxed under Section 180, while a deed of mortgage shall be taxed under Section 195.' "Section 6. Stamp on all Loan Agreements . All loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines shall be subject to the documentary stamp tax of thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreements, pursuant to Section 180 in relation to Section 173 of the Tax Code. "In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code, as amended." We are not unaware that BIR Ruling No. 116-98, dated July 30, 1998, 16 had been modified by BIR Ruling 108-99, dated July 15, 1999. 17 However, this BIR Ruling cannot be applied retroactively in the instant case. The deficiency assessments issued by petitioner BIR covered the year 1996-97, During that time, BIR Ruling 116-98, dated July 30, 1998 held sway. It was only on July 15, 1999 that this was modified by BIR Ruling 108-99. As such BIR Ruling 108-99 cannot be applied retroactively to the prejudice of the respondents. Well-entrenched is the rule that rulings and circulars, rules and regulations promulgated by the Commissioner of Internal Revenue cannot be given retroactive application if to do so would be prejudicial to the taxpayers. 18 In fact, Section 246 of the Tax Code, 19 provides only three exceptions to this rule and herein respondents' case does not fall within the ambit of any of these exceptions. In a cognate case, Commissioner of Internal Revenue v. Mega General Mdsg. Corp . G.R. No. L-69136, September 30, 1988, the Supreme Court ruled that: ". . . To make petitioner liable for specific tax after it has made the importations, would surely prejudice petitioner as it would be subject to a tax liability of which the Bureau of Internal Revenue has not made it fully aware. As a result, the rulings of May 8, 1978 and February 15, 1980 having been issued long after the importations on June 21 and August 17, 1977 in question cannot be applied with legal effect in this case because to do so will violate the prohibition against retroactive application of the rulings of executive bodies. Rulings or circulars promulgated by the Commissioner of Internal Revenue, such as the rulings of January 28, 1977 and those of May 8, 1978 and February 15, 1980, can not have any retroactive application, where to do so, as it did in the case at bar, would prejudice the taxpayer. ( ABS-CBN Broadcasting Corp. vs. Court of Tax Appeals & Com. of Int. Revenue , G.R. No. L-52306, October 23, 1981). . ." 20 What is more, the Court of Tax Appeals in deciding the issue at hand cited a recent CTA decision. Although as a general proposition, BIR rulings, which are consistent and in harmony with the law they seek to apply and implement, ordinarily deserve weight and respect by the courts, we cannot do so in the instant case in view of the fact that the Court of Tax Appeals has already ruled on the matter in the case of APC Group, Inc. v. CIR , CTA Case No. 6155, March 11, 2002. Thus, as enunciated by the Supreme Court in the case of Commissioner of Internal Revenue v. Court of Appeals , G.R. No. 104151 and G.R. No. 105563, March 10, 1995: "Although only the decisions of the Supreme Court establish jurisprudence or doctrines in this jurisdiction, nonetheless the decisions of subordinate courts have a persuasive effect and may serve as judicial guides. It is even possible that such a conclusion or pronouncement can be raised to the status of a doctrine if, after it has been subjected to test in the crucible of analysis and revision the Supreme Court should find that it has merits and qualities sufficient for its consecration as a rule of jurisprudence." 21 Accordingly, as between a BIR Ruling and a decision of the CTA, We are more inclined to pay deferential respect to the latter. For this reason, We are in accord with Court of Tax Appeal's ruling that: "Section 3 (b) of Revenue Regulations No. 9-94 defines a loan agreement as follows: 'It is a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, the term shall include credit facilities, which may be evidenced by credit memo, advice or drawings.' "It can be discerned from the foregoing definition that nothing in the nature of the so called 'instructional letters or vouchers' could we find any direct semblance with the concept of a loan agreement. As clearly worded, a loan agreement is a contract in writing whereby one party delivers to the other party money or other consumable thing subject to repayment. The instructional letters and vouchers that respondent subjected to DST do not contain the necessary elements of a loan agreement. It does not embody an express stipulation between the parties, where one is obligated to deliver and the other to repay. Neither is it a contract in writing. It is merely an internal document, unilaterally prepared by petitioner for the purpose of recording the advances it made to its affiliates to avoid the co-mingling of funds of the corporate affiliates (BIR Ruling 116-98, July 30, 1998). "As we have held in the case of APC Group, Inc. vs. CIR , CTA Case No. 6155, March 11, 2002: "There is nothing in Section 180 that provides that board resolutions, inter-office memoranda, letters of instructions, journal or cash vouchers evidencing lending/borrowings are subject to Documentary Stamp Tax. Clearly, what Section 180 taxes are loan agreements, promissory notes, bill of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities or certificates of deposits drawing interest and others not payable on sight or demand.' HASTCa "It should likewise be stressed that in Section 173 of the Tax Code, documentary stamp tax is essentially a tax upon documents, instruments, loan agreements and papers. The instructional letter and cash/journal vouchers containing petitioner's advances to its affiliates, are not loan agreements within the contemplation of Section 173 in relation to Section 3(b) and Section 6 of Revenue Regulations No. 9-94. At this point, it is worthy to note that even the BIR issued a ruling (BIR Ruling No. DA-666-A-99, dated December 3, 1999), which clearly states that inter-company advances covered only by board resolutions and cash vouchers are not subject to DST under Section 180 of the Tax Code. Such being the case, the imposition of DST on instructional letters or vouchers should necessarily fail." 22 Let us now turn to the issue of whether the Tax Court erred in canceling the assessment with regard to the gain on dilution as a result of the increase in the value of FDC's shareholdings. In November 1996, FDC entered into a Shareholder's Agreement (SA) with Reco Herrera Pte Ltd (RHPL) for the formation of a joint venture company named Filinvest Asia Corporation (FAC). FAC was tasked to manage the 50% ownership interest of FDC in the PBCom Tower project. The equity participation of FDC and RHPL in FAC is 60 40 respectively. Pursuant to the SA, FDC subscribed to the shares of FAC worth P560.7M. In payment of its subscription, FDC assigned to FAC a portion of FDC's rights in the said project together with its interest in its financial contribution in the project to the extent of P500.7M. Petitioner insists that the gain on dilution, in the amount of P60M, as a result of the increase in the value of FDC's shareholdings in FAC is subject to income tax under the Code. It argues that the word 'disposal' has a broad import or connotation, and means 'to exercise control over,' 'to direct or assign for a use', 'to pass over into the control of some one else, 'to alienate, bestow, or part with,' Thus, when petitioner FDC assigned its ownership interest in the PBCom Tower project to FAC, there was, in essence, a disposal because control over the said project was transferred from FDC to FAC. We are not persuaded. The assessment of income tax on the alleged gain on "dilution" is premature as said gain has yet to be realized by FDC. The prospective gain did not result from any alienation of property but represents merely an alleged increase in the value of the shareholdings of FDC in FAC resulting from the assignment of a percentage of its rights in the project to FAC. Such gain becomes taxable only if and when FDC actually realizes the incremental value of its investment should it finally disposes of its shares in FAC. The mere assignment of shares cannot be considered a taxable event. Besides, the definition of 'disposal' used by petitioner is much too broad it is not canalized within the banks that keep it from overflowing. Thus, we adopt the disposition of the Court of Tax Appeals that: "The supposed gain on dilution that resulted from the exchange of FDC's interest on the project for the subscription of the equivalent shares in FAC cannot be considered gain or income within the purview of our Tax Code. It must be pointed out that the increase in the value of shares in FAC owned by the petitioner did not result to any economic advantage on the part of petitioner. The P60M gain merely represents the corresponding increase in the value of the shares purchased, and such increase is not taxable under our tax laws. In an old case entitled Nelly Lopez Magallanes vs. the Commissioner of Internal Revenue , CTA Case No. 2607, April 21, 1982, this Court had the occasion to pass upon a similar issue: "In other words the mere increase in the value from their original net book value . . . to their asserted fair market value . . . is not income but merely unrealized increase in value through the conversion of property which is not fundamentally taxable. (Mertens, Law of Federal income taxation, Vol. I, par 5.05 . . .) "True enough, only upon sale or disposition of the subject shares could the gain be realized as income by FDC. A mere increase in the value of the property is not income but merely an unrealized increase in capital. In the case of Fisher vs. Trinidad , G.R. No. 17518, October 30, 1922, the Supreme Court, citing the case of Gray vs. Darlington (82 US. 63) held that mere advance in value in no sense constitutes the 'income' specified in the revenue law as 'income' of the owner for the year in which the sale of the property was made. Such advance constitutes and can be treated merely as an increase of capital. "Section 38 of Revenue Regulations No. 2 provides that the appreciation in the value of property does not result to an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property. In other words, taxable gain does not accrue to the purchaser of property until he sells or otherwise disposes of it. Thus, the assessment on the alleged deficiency income tax issued by the BIR has no leg to stand on as no income has yet been realized by the petitioner on the increase and appreciation of the value of its shareholdings with FAC." 23 This is as it should be. For as the Supreme Tribunal took pains to stress in Commissioner of Internal Revenue v. Court of Appeals , G.R. No. 115349, April 18, 1997: "The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that '(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. Parenthetically, in answering the question of who is subject to tax statutes, it is basic that 'in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.'" 24 As a final note, we deem it both needful and appropriate to reiterate the pronouncement of the High Court in Commissioner of Internal Revenue, v. Wander Philippines, Inc., G.R. No. L-68375, April 15, 1988, to wit: "Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority ( Reyes vs. Commissioner of Internal Revenue , 24 SCRA 198), which is not present in the instant case." 25 UPON THE VIEW WE TAKE OF THIS CASE, THUS, this petition for review must be, as it hereby, is DENIED DUE COURSE, and consequently DISMISSED, for lack of merit. Without special pronouncement as to costs. SO ORDERED. Sundiam and Dimaampao, JJ ., concur. Footnotes 1. Rollo , p. 60. 2. Rollo , pp. 3942 2. Rollo , p. 211217. 3. Rollo , p. 218221 4. Rollo , pp. 222224 6. Rollo , p. 225. 7. Rollo , pp. 232234. 8. Rollo , pp. 236244. 9. Rollo , pp. 6164. 10. Rollo , pp. 6264. 11. Rollo , pp. 837. 12. Id ., p. 23. 13. Decision dated September 10, 2002, pp. 1114; Rollo , pp. 4851. 14. Rollo , pp. 168174. 15. 108 SCRA 142, 151152 (1981). 16. ". . . "On the matter of whether or not the inter-office memo covering the advances granted by an affiliate company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings/borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by the corporation-affiliate or a certificate of obligation, which are more or less, categorized as 'securities', is not subject to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax Code of 1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only in order to avoid the co-mingling of funds of the corporate affiliates. "(SGD) Beethoven L. Rualo "Commissioner of Internal Revenue" 17. "After a careful restudy of the aforementioned ruling, this office is of the opinion as it hereby holds that inter-office memo covering the advances granted by a corporation affiliate company, i.e. or inter-office memo evidencing lendings/borrowings is in the nature of a promissory note subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997." "This modifies BIR Ruling No. 116-98 dated July 30, 1998 insofar as inter-office memo covering the advances granted by a corporation affiliate company, i.e. inter-office memo evidencing lendings/borrowings is concerned which shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997." "(SGD) Beethoven L. Rualo "Commissioner of Internal Revenue" 18. Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 117982, 267 SCRA 657, 564 (1997). 19. Sec. 246. Non-retroactivity of rulings. Any revocation, modification, or reversal of all rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or c) where the taxpayer acted in bad faith. 20. 166 SCRA 166, 172 (1988). 21. 242 SCRA 289, 303304 (1993). 22. Rollo , pp. 5859. 23. Rollo , pp. 5658. 24. 271 SCRA 605, 613614 (1997). 25. 160 SCRA 573, 579 (1988).