#2 CIR v.

ESTATE OF TODA MERCADO

TOPIC: TAX DOCTRINES
DOCTRINE: Tax evasion is a scheme used outside of
those lawful means and when availed of, it subjects the
taxpayer to further or additional civil or criminal
liabilities.
FACTS:
1. A Notice of Assessment was sent to Cibeles
Insurance Corporation (CIC) by the CIR for
deficiency income tax arising from an alleged
simulated sale of Cibeles Building.
2. CIC authorized Toda, president and owner of
99.991% of its capital stock, to sell Cibeles Building
and the land wherein the building stands (more or
less 90 million).
3. Toda sold the property for 100 million to Altonaga,
who in turn sold the same property on the same to
Royal Match, Inc. (RMI) for 200 million.
4. Deeds of Absolute Sale were issued and notarized
on the same day.
5. For the sale of property to RMI, Altonaga paid
capital gains tax of 10 million.
6. CIC filed its corporate annual income tax return
declaring its gain for the sale of the real property.
7. Then, Toda sold his entire shares of stock in CIC to
Choa.
8. Toda died.
9. BIR sent an assessment notice and demand letter
to CIC for deficiency income tax.
10.The new CIC asked for reconsideration, asserting
that the assessment should be directed to the old
CIC because the new CIC is owned by an entirely
different set of stockholders.

11.Thereafter, the Estate of Toda received a Notice of

Assessment from the CIR for deficiency income tax.
12.Estate filed a letter of protest.
13.CIR dismissed the said protest stating that a
fraudulent scheme was deliberately perpetuated by
the CIC wholly owned and controlled by Toda by
covering up the additional gain of 100 million.
14.This scheme resulted in the change in income
structure of the proceeds of the sale to an
individual capital gains, thus evading the higher
corporate income tax rate of 35%.
15.[Respondents argument] Estate filed a petition for
review with the CTA alleging that the CIR erred in
holding the Estate liable for income tax deficiency,
that the inference of fraud is unreasonable and
unsupported, and that the right of the CIR to assess
CIC had already prescribe.
16.[Petitioners argument] CIR argued that the two
transactions actually constituted a single sale of the
property by CIC to RMI.
17.CTA held that the CIR failed to prove that the CIC
committed fraud and that the governments right to
assess CIC prescribed (3 years after the last day
prescribed by law for the filling of the return).
18.CA affirmed the CTA.
ISSUE: WON respondent CIC committed fraud to evade
the tax on the sale of the property YES.
HELD:
1. CIR reiterates that Altonaga was considered to be a
dummy of the sale because he was financially
incapable of purchasing the property.
2. Furthermore, the documents itself proves fraud in
that the 2 sales were done simultaneously on the
same date, the Deed of Absolute Sale between

3.

4.

5.

6.
7.

8.

Altonaga and RMI was notarized ahead of the

alleged sale between CIC and Altonaga, and that
the CIC received 40 million from RMI and not from
Altonaga.
Estate asserts that the CIR failed to present the
income tax return of Altonaga to prove that the
latter is financially incapable of purchasing the
property.
[Tax doctrines] Tax avoidance is the tax saving
device within the means sanctioned by law while
tax evasion is a scheme used outside of those
lawful means and when availed of, it subjects the
taxpayer to further or additional civil or criminal
liabilities.
Factors of tax evasion: end to be achieved,
accompanying state of mind (evil, bad faith, willful,
deliberate and not accidental), and a course of
action or failure of action which is unlawful.
All are present in the case.
The scheme resorted to by CIC in making it appear
that there were 2 sales of the subject properties
cannot be considered a legitimate tax planning
because it was tainted with fraud.
It is obvious that the objective of the sale to
Altonaga was to reduce the amount of tax to be
paid especially that the transfer from him to RMI

would then subject the income to only 5% individual

capital gains tax, and not to 35% corporate income
tax.
9. Altonaga never controlled the property and did not
enjoy the benefits and burdens of ownership.
10.The execution of the 2 sales was calculated to
mislead the BIR with the end in view of reducing the
consequent income tax liability.
11.The sale of Altonaga constitutes as tax evasion.
12.CIC is therefore liable to pay 35% corporate for its
taxable net income.
Other issues:
1. WON the period of assessment prescribed NO
(prescriptive period is 10 years from discovery of
the falsity)
2. WON respondent Estate is liable for the tax
deficiency income tax of CIC YES (when Toda sold
his shares of stock to Choa, he knowingly and
voluntarily held himself personally liable for all the
tax liabilities of CIC).
DISPOSITIVE: Petitioner CIR won. Decision of CA is
reversed.