290 SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P.

Toda, Jr.
*
G.R.No.147188.September14,2004.

COMMISSIONEROFINTERNALREVENUE, petitioner,
vs.THEESTATEOFBENIGNOP.TODA,JR.,represented
by Special Coadministrators Lorna Kapunan and Mario
LuzaBautista,respondents.

Taxation; Tax Avoidance Distinguished from Tax Evasion.

Tax avoidanceandtax evasionarethetwomostcommonwaysused
by taxpayers in escaping from taxation. Tax avoidance is the tax
saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length.
Tax evasion, on the other hand, is a scheme used outside of those
lawfulmeansandwhenavailedof,itusuallysubjectsthetaxpayer
tofurtheroradditionalcivilorcriminalliabilities.
Same; Same; Factors to Determine Tax Evasion.Tax evasion
connotestheintegrationofthreefactors:(1)theendtobeachieved,
i.e., the payment of less than that known by the taxpayer to be
legallydue,orthenonpaymentoftaxwhenitisshownthatatax
is due; (2) an accompanying state of mind which is described as
being evil, in bad faith, willfull, or deliberate and not
accidental; and (3) a course of action or failure of action which is
unlawful.

_______________

* FIRSTDIVISION.

291

VOL.438,SEPTEMBER14,2004 291
 Commissioner of Internal Revenue vs. Estate of Benigno P. Toda,
Jr.

Same; Same; Fraud; Meaning of.Fraud in its general sense,

isdeemedtocompriseanythingcalculatedtodeceive,includingall
acts, omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an undue and unconscionable
advantageistakenofanother.
Same; Same; Same; The intermediary transaction in this case
constitutes one of tax evasion.In a nutshell, the intermediary
transaction,i.e.,thesaleofAltonaga,whichwaspromptedmoreon
themitigationoftaxliabilitiesthanforlegitimatebusinesspurposes
constitutesoneoftaxevasion.
Same; Prescriptions; The period within which to assess tax in
cases of fraudulent returns, false returns and failure to file a return
is ten years from discovery of the fraud, falsification or
omission.Put differently, in cases of (1) fraudulent returns; (2)
false returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years from
discoveryofthefraud,falsificationoromission,asthecasemaybe.

Same; Same; The issuance of the correct assessment for

deficiency income tax was well within the prescriptive period.As
stated above, the prescriptive period to assess the correct taxes in
case of false returns is ten years from the discovery of the falsity.
Thefalsereturnwasfiledon15April1990,andthefalsitythereof
was claimed to have been discovered only on 8 March 1991. The
assessmentforthe1989deficiencyincometaxofCICwasissuedon
9January1995.Clearly,theissuanceofthecorrectassessmentfor
deficiencyincometaxwaswellwithintheprescriptiveperiod.

PETITIONforreviewoncertiorariofadecisionoftheCourt
ofAppeals.

ThefactsarestatedintheopinionoftheCourt.
Bunag & Associates for The Estate of Benigno P.
Toda,Jr.

292

292 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
DAVIDE,JR.,C.J.:

ThisCourtiscalledupontodetermineinthiscasewhether
the tax planning scheme adopted by a corporation
constitutestaxevasionthatwouldjustifyanassessmentof
deficiencyincometax. 1
The petitioner seeks the reversal of the Decision of the
Court of Appeals of 31 January 2001 in CAG.R.
2
SP No.
57799affirmingthe3January2000Decision oftheCourt
3
ofTaxAppeals(CTA)inC.T.A.CaseNo.5328, whichheld
that the respondent Estate of Benigno P. Toda, Jr. is not
liable for the deficiency income tax of Cibeles Insurance
Corporation(CIC)intheamountofP79,099,999.22forthe
year1989,andorderedthecancellationandsettingasideof
the assessment issued by Commissioner of Internal
RevenueLiwaywayVinzonsChatoon9January1995.
The case at bar stemmed from a Notice of Assessment
sent to CIC by the Commissioner of Internal Revenue for
deficiencyincometaxarisingfromanallegedsimulatedsale
of a 16storey commercial building known as Cibeles
Building,situatedontwoparcelsoflandonAyalaAvenue,
MakatiCity.
On2March1989,CICauthorizedBenignoP.Toda,Jr.,
President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and
thetwoparcelsoflandonwhichthebuildingstandsforan
4
amountofnotlessthanP90million.

_______________

1 Rollo, pp. 2231. Per Associate Justice Rodrigo V. Cosico, with

AssociateJusticesRamonA.BarcelonaandAliciaJ.Santosconcurring.
2 Id., pp. 3241; CTA Records, 524533. Per Presiding Judge Ernesto

D. Acosta, with Associate Judges Ramon O. De Veyra and Amancio Q.

Sagaconcurring.
3EntitledThe Estate of Benigno P. Toda, Jr., represented by Special
CoAdministrators Lorna PatajoKapunan and Mario Luza Bautista
versus Commissioner of Internal Revenue.
4CARollo,p.73.

293

VOL.438,SEPTEMBER14,2004 293
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
On30August1989,Todapurportedlysoldthepropertyfor
P100 million to Rafael A. Altonaga, who, in turn, sold the
samepropertyonthesamedaytoRoyalMatch,Inc.(RMI)
forP200million.Thesetwotransactionswereevidencedby
Deeds of Absolute Sale
5
notarized on the same day by the
samenotarypublic.
ForthesaleofthepropertytoRMI,Altonagapaidcapital
6
gainstaxintheamountofP10million.
On16April1990,CICfileditscorporateannualincome
tax return7 for the year 1989, declaring, among other
things,itsgainfromthesaleofrealpropertyintheamount
of P75,728.021. After crediting 8
withholding taxes of
P254,497.00,itpaidP26,341,207 foritsnettaxableincome
ofP75,987,725.
On12July1990,Todasoldhisentiresharesofstocksin
CICtoLeHunT.ChoaforP12.5million,asevidencedbya
9
Deed of Sale of Shares of Stocks. Three and a half years
later,oron16January1994,Todadied.
On 29 March 1994, the Bureau 10
of Internal Revenue
(BIR)sentanassessmentnotice anddemandlettertothe
CIC for deficiency income tax for the year 1989 in the
amountofP79,099,999.22.
ThenewCICaskedforareconsideration,assertingthat
theassessmentshouldbedirectedagainsttheoldCIC,and
not against the new CIC, which is owned by an entirely
different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the
CIC free
11
from all tax liabilities for the fiscal years 1987
1989.

_______________

5CARollo,pp.7478;8892.

6Exh.E,CTARecords,p.306.

7Exh.L,CTARecords,p.340.

8Exhs.M,M1,NandN1,CTARecords,pp.316317.

9Exh.P,CTARecords,pp.357365.

10BIRRecords,pp.448449.

11Id.,atpp.446447.

294

294 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
On 27 January 1995, the Estate of Benigno P. Toda, Jr.,
represented by special coadministrators Lorna Kapunan 12
andMarioLuzaBautista,receivedaNoticeofAssessment
dated 9 January 1995 from the Commissioner of Internal
Revenuefordeficiencyincometaxfortheyear1989inthe
amountofP79,099,999.22,computedasfollows:

IncomeTax1989

NetIncomeperreturn P75,987,725.00
Add:Additionalgainon
saleofrealproperty
taxableunderordinary
corporateincomebutwere
substitutedwith
individualcapitalgains
(P200M100M) 100,000,000.00
TotalNetTaxableIncome P175,987,725.00
perinvestigation
TaxDuethereofat35% P61,595,703.75
Less:Paymentalready
made
1.Perreturn P26,595,704.00
2.ThruCapitalGainsTax
madebyR.A.
Altonaga 10,000,000.00 36,595,704.00
Balanceoftaxdue P24,999,999.75
Add:50%Surcharge 12,499,999.88
25%Surcharge 6,249,999.94
Total P43,749,999.57
Add:Interest20%from 35,349,999.65
4/16/904/30/94(.808)

TOTALAMT.DUE&
COLLECTIBLE P79,099,999.22

_______________

12Id.,atpp.474475.
 295

VOL.438,SEPTEMBER14,2004 295
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
13
TheEstatethereafterfiledaletterofprotest.
14
Intheletterdated19October1995, theCommissioner
dismissedtheprotest,statingthatafraudulentschemewas
deliberately perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional gain of
P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of
land and the building thereon to an individual capital
gains,thusevadingthehighercorporateincometaxrateof
35%.
On 1515 February 1996, the Estate filed a petition for
review withtheCTAallegingthattheCommissionererred
inholdingtheEstateliableforincometaxdeficiency;that
the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the
CommissionertoassessCIChadalreadyprescribed.
16 17
In his Answer and Amended Answer, the
Commissioner argued that the two transactions actually
constitutedasinglesaleofthepropertybyCICtoRMI,and
that Altonaga was neither the buyer of the property from
CIC nor the seller of the same property to RMI. The
additionalgainofP100million(thedifferencebetweenthe
second simulated sale for P200 million and the first
simulatedsaleforP100million)realizedbyCICwastaxed
at the rate of only 5% purportedly as capital gains tax of
Altonaga,insteadofattherateof35%ascorporateincome
tax of CIC. The income tax return filed by CIC for 1989
with intent to evade payment of the tax was thus false or
fraudulent.Sincesuchfalsityorfraudwasdiscoveredbythe
BIR only on 8 March 1991, the assessment issued on 9
January 1995 was well within the prescriptive period
prescribedbySection223(a)oftheNationalInternal

_______________

13Exh.H,CTARecords,pp.314315.

14Exh.G,CTARecords,pp.311312.

15CTARecords,pp.115.

16CTARecords,pp.104111.
 17Id.,atpp.121128.

296

296 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

Revenue Code of 1986, which provides that tax may be

assessedwithintenyearsfromthediscoveryofthefalsityor
fraud.Withthesalebeingtaintedwithfraud,theseparate
corporate personality of CIC should be disregarded. Toda,
beingtheregisteredownerofthe99.991%sharesofstockof
CIC and the beneficial owner of the remaining 0.009%
sharesregisteredinthenameoftheindividualdirectorsof
CIC, should be held liable for the deficiency income tax,
especially because the gains realized from the sale were
withdrawnbyhimascashadvancesorpaidtohimascash
dividends.Sinceheisalreadydead,hisestateshallanswer
forhisliability. 18
Initsdecision of3January2000,theCTAheldthatthe
CommissionerfailedtoprovethatCICcommittedfraudto
deprive the government of the taxes due it. It ruled that
evenassumingthatapreconceivedschemewasadoptedby
CIC,thesameconstitutedmeretaxavoidance,andnottax
evasion.Therebeingnoproofoffraudulenttransaction,the
applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is
threeyearsafterthelastdayprescribedbylawforthefiling
of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9
January1995was,therefore,nolongervalid.TheCTAalso
ruled that the mere ownership by Toda of 99.991% of the
capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence,
theCTAdeclaredthattheEstateisnotliablefordeficiency
income tax of P79,099,999.22 and, accordingly, cancelled
andsetasidetheassessmentissuedbytheCommissioneron
9January1995. 19
In its motion for reconsideration, the Commissioner
insistedthatthesaleofthepropertyownedbyCICwasthe
result of the connivance between Toda and Altonaga. She
furtherallegedthatthelatterwasarepresentative,dummy,

_______________
 18CTARecords535540.

19Id.,pp.534,539.

297

VOL.438,SEPTEMBER14,2004 297
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

andaclosebusinessassociateoftheformer,havingheldhis
office in a property owned by CIC and derived his salary
from a foreign corporation (Aerobin, Inc.) duly owned by
Toda 20for representation services rendered. The CTA
denied the motion for reconsideration, 21
prompting the
Commissionertofileapetitionforreview withtheCourtof
Appeals.
InitschallengedDecisionof31January2001,theCourt
ofAppealsaffirmedthedecisionoftheCTA,reasoningthat
the CTA, being more advantageously situated and having
the necessary expertise in matters of taxation, is better
situated to determine the correctness, propriety, and
legalityoftheincometaxassessmentsassailedbytheToda
22
Estate.
UnsatisfiedwiththedecisionoftheCourtofAppeals,the
Commissioner filed the present petition invoking the
followinggrounds:

I. THECOURTOFAPPEALSERREDINHOLDING
THAT RESPONDENT COMMITTED NO FRAUD
WITH INTENT TO EVADE THE TAX ON THE
SALE OF THE PROPERTIES OF CIBELES
INSURANCECORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT
DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE
CORPORATION.
III. THECOURTOFAPPEALSERREDINHOLDING
THATTHERIGHTOFPETITIONERTOASSESS
RESPONDENTFORDEFICIENCYINCOMETAX
FORTHEYEAR1989HADPRESCRIBED.

TheCommissionerreiteratesherargumentsinherprevious
pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael
Altonaga, who was financially incapable of purchasing it.
Shefurtherpointsoutthatthedocumentsthemselvesprove
thefactof

_______________

20Id.,550;CARollo,p.32.

21CARollo,pp.720.

22Rollo,p.30.

298

298 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

fraudinthat(1)thetwosalesweredonesimultaneouslyon
the same date, 30 August 1989; (2) the Deed of Absolute
SalebetweenAltonagaandRMIwasnotarizedaheadofthe
alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and
thelatter,asDoc.No.92,Page20,BookI,Seriesof1989,of
the same Notary Public; (3) as early as 4 May 1989, CIC
receivedP40millionfromRMI,andnotfromAltonaga.The
saidamountwasdebitedbyRMIinitstrialbalanceasof30
June 1989 as investment in Cibeles Building. The
substantial portion of P40 million was withdrawn by Toda
through the declaration of cash dividends to all its
stockholders.
For its part, respondent Estate asserts that the
Commissioner failed to present the income tax return of
Altonagatoprovethatthelatterisfinanciallyincapableof
purchasingtheCibelesproperty.
ToresolvethegroundsraisedbytheCommissioner,the
followingquestionsarepertinent:

1. Isthisacaseoftaxevasionortaxavoidance?
2. Has the period for assessment of deficiency income tax for
theyear1989prescribed?and
3. Can respondent Estate be held liable for the deficiency
incometaxofCICfortheyear1989,ifany?

Weshalldiscussthesequestionsin seriatim.

Is this a case of tax evasion

or tax avoidance?

Tax avoidance and tax evasion are the two most common
ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the
taxpayeringoodfaithandatarmslength.Taxevasion,on
the other hand, is a scheme used outside of those lawful
meansandwhenavailed
299

VOL.438,SEPTEMBER14,2004 299
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

of,itusuallysubjectsthetaxpayertofurtheroradditional
23
civilorcriminalliabilities.
Taxevasionconnotestheintegrationofthreefactors:(1)
the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non
payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being
evil, in bad faith, willfull, or deliberate and not
accidental; and (3)
24
a course of action or failure of action
whichisunlawful.
All these factors are present in the instant case. It is
significanttonotethatasearlyas4May1989,priortothe
purported sale of the Cibeles property by CIC to Altonaga 25
on 30 August 1989, CIC received P40 million from RMI,
and not from Altonaga. That P40 million 26
was debited by
RMI and reflected in its trial balance as other inv.
CibelesBldg.Also,asof31July1989,anotherP40million
was debited and reflected in RMIs trial balance as other
inv.CibelesBldg.Thiswouldshowthattherealbuyerof
thepropertieswasRMI,andnottheintermediaryAltonaga.
The investigation conducted by the BIR disclosed that
Altonagawasaclosebusinessassociateandoneofthemany
trustedcorporateexecutivesofToda.Thisinformationwas
revealedbyMr.BoyPrieto,theassistantaccountantofCIC
27
andanoldtimerinthecompany. ButMr.Prietodidnot
testifyonthismatter,hence,thatinformationremainstobe
hearsay and is thus inadmissible in evidence. It was not
verified either, since the28letterrequest for investigation of
Altonaga was unserved, Altonaga having left for the
United

_______________

23 Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence

44(2nded.,2000)(hereafterVitug).
24DELEON,FUNDAMENTALS OF TAXATION53(1988ed.),citing
Batter,FraudunderFederalTaxLaw15(1953ed.).
25Exh.3,CTARecords,p.476.

26Exh.6,CTARecords,p.470.

27Exh.1,CTARecords,p.461.

28CTARecords,p.466.

300

300 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

States of America in January 1990. Nevertheless, that

Altonagawasamereconduitfindssupportintheadmission
ofrespondentEstatethatthesaletohimwaspartofthetax
planning scheme of CIC. That admission is borne by the
records.InitsMemorandum,respondentEstatedeclared:

Petitioner,however,claimstherewasachangeofstructureofthe
proceeds of sale. Admitted one hundred percent. But isnt this
preciselythedefinitionoftaxplanning?Changethestructureofthe
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code
exists,allowingtaxfreetransfersofpropertyforstock,changingthe
structureofthepropertyandthetaxtobepaid.Aslongasitisdone
legally, changing the structure of a transaction to achieve a lower
taxisnotagainstthelaw.Itisabsolutelyallowed.
Tax planning is by definition to reduce, if not eliminate
altogether, a tax. Surely petitioner [sic] cannot be faulted for
29
wanting to reduce the tax from 35% to 5%. [Italicssupplied].

The scheme resorted to by CIC in making it appear that

thereweretwosalesofthesubjectproperties,i.e.,fromCIC
to Altonaga, and then from Altonaga to RMI cannot be
considered a legitimate tax planning. Such scheme is
taintedwithfraud.
Fraud in its general sense, is deemed to comprise
anythingcalculatedtodeceive,includingallacts,omissions,
and concealment involving a breach of legal or equitable
duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an 30undue and
unconscionableadvantageistakenofanother.
Here, 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
subjecttheincometoonly5%individualcapitalgainstax,
and not the 35% corporate income tax. Altonagas sole
purposeofacquiringand

_______________

29RespondentsMemorandum,pp.45;Rollo,pp.7879.

30Commissioner of Internal Revenue v. Court of Appeals,327 Phil. 1,

33;257SCRA200,225(1996).

301

VOL.438,SEPTEMBER14,2004 301
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

transferringtitleofthesubjectpropertiesonthesameday
was to create a tax shelter. Altonaga never controlled the
propertyanddidnotenjoythenormalbenefitsandburdens
ofownership.Thesaletohimwasmerelyataxploy,asham,
and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to
mislead the BIR with the end in view of reducing the
consequentincometaxliability.
Inanutshell,theintermediarytransaction,i.e.,thesale
ofAltonaga,whichwaspromptedmoreonthemitigationof
tax liabilities than for legitimate
31
business purposes
constitutesoneoftaxevasion.
Generally, a sale or exchange of assets will have32
an
income tax incidence only when it is consummated. The
incidence of taxation depends upon the substance of a
transaction.Thetaxconsequencesarisingfromgainsfroma
sale of property are not finally to be determined solely by
the means employed to transfer legal title. Rather, the
transactionmustbeviewedasawhole,andeachstepfrom
thecommencementofnegotiationstotheconsummationof
the sale is relevant. A sale by one person cannot be
transformedfortaxpurposesintoasalebyanotherbyusing
thelatterasaconduitthroughwhichtopasstitle.Topermit
the true nature of the transaction to be disguised by mere
formalisms,whichexistsolelytoaltertaxliabilities,would
seriously impair the 33
effective administration of the tax
policiesofCongress.
To allow a taxpayer to deny tax liability on the ground
thatthesalewasmadethroughanotheranddistinctentity
whenitisprovedthatthelatterwasmerelyaconduitisto
sanctionacircumventionofourtaxlaws.Hence,thesaleto
Altonaga

_______________

31 See Commissioner of Internal Revenue v. Norton & Harrison Co.,

120 Phil. 684, 691; 11 SCRA 714 (1964); Commissioner of Internal
Revenue v. Rufino, G.R. No. L3366568, 27 February 1987, 148 SCRA
42.
32VITUG,138.

33Commissioner v. Court Holding Co.,324U.S.334(1945).

302

302 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.
34
should be disregarded for income tax purposes. The two
saletransactionsshouldbetreatedasasingledirectsaleby
CICtoRMI.
Accordingly,thetaxliabilityofCICisgovernedbythen
Section24oftheNIRCof1986,asamended(now27(A)of
theTaxReformActof1997),whichstatedasfollows:

Sec. 24. Rates of tax on corporations.(a) Tax on domestic

corporations.Ataxisherebyimposeduponthetaxablenetincome
received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the
Philippines, and partnerships, no matter how created or organized
but not including general professional partnerships, in accordance
withthefollowing:
Twentyfive percent upon the amount by which the taxable net
incomedoesnotexceedonehundredthousandpesos;and
Thirtyfive percent upon the amount by which the taxable net
incomeexceedsonehundredthousandpesos.

CIC is therefore liable to pay a 35% corporate tax for its

taxablenetincomein1989.The5%individualcapitalgains
35
taxprovidedforinSection34(h)oftheNIRCof1986 (now
6%underSection24(D)(1)oftheTaxReformActof1997)is

_______________

34 See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v.
United States,435U.S.561(1978);Commissioner of Internal Revenue v.
Court of Appeals, 361 Phil. 103, 126; 301 SCRA 152 (1999) citing
Asmussen v. Court of Internal Relations,36B.T.A.(F)878;SeealsoNeff
v. U.S., 301 F2d 330; Cohen v. U.S., 192 F Supp 216; Herman v.
Comm., 283 F2d 227; Kessner v. Comm., 248 F2d 943; Comm. v. Pope,
239F2d881;U.S. v. Fewel,255F2d396.
35Sec.34.Capital gains and loses.

...
(h) The provisions of paragraph (b) of this section to the contrary
notwithstanding, sales, exchanges or other dispositions of real property
classified as capital assets, including pactoderetro sales and other forms of
conditionalsale,byindividuals,includingestatesandtrusts,shallbetaxedat
the rate of 5% based on the gross selling price or the fair market value
prevailingatthetimeofsale,whicheverishigher.

303

VOL.438,SEPTEMBER14,2004 303
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

inapplicable. Hence, the assessment for the deficiency

incometaxissuedbytheBIRmustbeupheld.

Has the period of

assessment prescribed?

No.Section269oftheNIRCof1986(nowSection222ofthe
TaxReformActof1997)read:

Sec. 269. Exceptions as to period of limitation of assessment and

collection of taxes.(a) In the case of a false or fraudulent return
withintenttoevadetaxoroffailuretofileareturn,thetaxmaybe
assessed, or a proceeding in court after the collection of such tax
may be begun without assessment, at any time within ten years
afterthediscoveryofthefalsity,fraudoromission:Provided, That
in a fraud assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in the civil or
criminalactionforcollectionthereof....

Put differently, in cases of (1) fraudulent returns; (2) false

returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years
fromdiscoveryofthefraud,falsificationoromission,asthe
casemaybe.
It is true that in a query dated 24 August 1989,
Altonaga,throughhiscounsel,askedtheOpinionoftheBIR 36
onthetaxconsequenceofthetwosaletransactions. Thus,
theBIRwasamplyinformedofthetransactionsevenprior
to the execution of the necessary documents to effect the
transfer. Subsequently, the two sales were openly made
withtheexecutionofpublicdocumentsandthedeclaration
of taxes for 1989. However, these circumstances do not
negatetheexistenceoffraud.Asearlierdiscussedthosetwo
transactions were tainted with fraud. And even assuming
arguendothattherewasnofraud,wefindthattheincome
tax return filed by CIC for the year 1989 was false. It did
notreflectthetrueorac

_______________

36Exh.A,CTARecords,p.296.

304

304 SUPREMECOURTREPORTSANNOTATED
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

tual amount gained from the sale of the Cibeles property.

Obviously,suchwasdonewithintenttoevadeorreducetax
liability.
As stated above, the prescriptive period to assess the
correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15
April1990,andthefalsitythereofwasclaimedtohavebeen
37
discoveredonlyon8March1991. Theassessmentforthe
1989deficiencyincometaxofCICwasissuedon9January
1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive
period.

Is respondent Estate liable for

the 1989 deficiency income tax of
Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and

separatefromthepersonsowningorcomposingit.Thus,the
owners or stockholders of a corporation may not generally
be made to answer for the liabilities of a corporation and
vice versa. There are, however, certain instances in which
personalliabilitymayarise.Ithasbeenheldinanumberof
casesthatpersonalliabilityofacorporatedirector,trustee,
orofficeralong,albeitnotnecessarily,withthecorporation
mayvalidlyattachwhen:

1. He assents to the (a) patently unlawful act of the

corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its
stockholders,orotherpersons;
2. Heconsentstotheissuanceofwatereddownstocks
or,havingknowledgethereof,doesnotforthwithfile
with the corporate secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily
liablewiththecorporation;or

_______________

37Exh.2,CTARecords,p.464.

305

VOL.438,SEPTEMBER14,2004 305
Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr.

4.Heismade,byspecificprovisionoflaw,topersonallyanswerfor
38
hiscorporateaction.

ItisworthnotingthatwhenthelateTodasoldhissharesof
stocktoLeHunT.Choa,heknowinglyandvoluntarilyheld
himselfpersonallyliableforallthetaxliabilitiesofCICand
thebuyerfortheyears1987,1988,and1989.Paragraphg
oftheDeedofSaleofSharesofStocksspecificallyprovides:

g. Except for transactions occurring in the ordinary course of

business, Cibeles has no liabilities or obligations, contingent or
otherwise,fortaxes,sumsofmoneyorinsuranceclaimsotherthan
thosereportedinitsauditedfinancialstatementasofDecember31,
1989, attached hereto as Annex B and made a part hereof. The
business of Cibeles has at all times been conducted in full
compliancewithallapplicablelaws,rulesandregulations.SELLER
undertakes and agrees to hold the BUYER and Cibeles free from
any and all income tax liabilities of Cibeles for the fiscal years
39
1987, 1988 and 1989. [ItalicsSupplied].

When the late Toda undertook and agreed to hold the

BUYERandCibelesfreefromanyallincometaxliabilities
of Cibeles for the fiscal years 1987, 1988, and 1989, he
therebyvoluntarilyheldhimselfpersonallyliabletherefor.
Respondentestatecannot,therefore,denyliabilityforCICs
deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation
arosefromTodascontractualundertaking,ascontainedin
theDeed of Sale of Shares of Stock.
WHEREFORE,inviewofalltheforegoing,thepetition
isherebyGRANTED.ThedecisionoftheCourtofAppeals
of 31 January 2001 in CAG.R. SP No. 57799 is
REVERSED and SET ASIDE, and another one is hereby
renderedordering

_______________

38 Atrium Management Corporation v. Court of Appeals, G.R. Nos.

109491 and 121794, 28 February 2001, 353 SCRA 23, 31, citing FCY
Construction Group Inc. v. Court of Appeals, G.R. No. 123358, 1
February2000,324SCRA270.
39CTARecords,pp.200201.

306

306 SUPREMECOURTREPORTSANNOTATED
Cojuangco, Jr. vs. Palma

respondent Estate of Benigno P. Toda, Jr. to pay

P79,099,999.22 as deficiency income tax of Cibeles
InsuranceCorporationfortheyear1989,pluslegalinterest
from1May1994untiltheamountisfullypaid.
Costsagainstrespondent.
SOORDERED.
 Quisumbing, YnaresSantiago, CarpioandAzcuna,
JJ.,
concur.

Petition granted, assailed decision reversed and set aside.

Note.A taxpayer only has thirty (30) days within

whichtoprotestanassessment.(Protectors Services, Inc. vs.
Court of Appeals,330SCRA404[2000])

o0o

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