#5.
COMMISSIONER OF INTERNAL
REVENUE, Petitioner, v. FILINVEST
DEVELOPMENT CORPORATION,
Respondent. G. R. No. 163653
And
COMMISSIONER OF INTERNAL
REVENUE, Petitioner, v. FILINVEST
DEVELOPMENT CORPORATION,
Respondent. G. R. No. 167689
Facts:
Filinvest Development Corp (FDC) is the owner of
outstanding shares of both Filinvest Alabang, Inc.
(FAI) and Filinvest Land, Inc. (FLI) with 80% and
67.42%, respectively. Sometime in 1996, FDC and
FAI entered into a Deed of Exchange with FLI
where both transferred parcels of land in exchange
for shares of stocks of FLI. As a result, the
ownership structure of FLI changed whereby FDC’s
ownership decreased from 67.42% to 61.03%
meanwhile FAI now owned 9.96% of shares of FLI.
FLI then requested from the BIR a ruling to the
effect that no gain or loss should be recognized on
said transfer and BIR issued Ruling No. S-34-046-
97 finding the exchange falling within Sec. 34 (c)
(2) (now Sec. 40 (c)(2)) of the NIRC.
FDC extended advances in favor of its affiliates
during 1996 and 1997 duly evidenced by
instructional letters as well as cash and journal
vouchers. Moreover, FDC also entered into a
shareholder’s agreement with Reco-Herrera PTE
ltd. (RHPL) for the formation of a Singapore-based
joint venture company called Filinvest Asia Corp.
(FAC). The equity participation of FDC was pegged
at 60% subscribing to P500.7M worth of shares of
FAC.
On Jan 3, 2000, FDC received assessment notices
for deficiency income tax and deficiency stamp
taxes. The foregoing deficiency taxes were assessed
on the taxable gain realized by FDC on the taxable
gain supposedly realized by FDC from the Deed of
Exchange it executed with FAI and FLI, on the
dilution resulting from the shareholder’s agreement
FDC executed with RHPL and with the interest rate
and documentary stamp taxes imposable on the
advances executed by FDC.
FAI also received similar assessment on deficiency
income tax relating to the deed of exchange. Both
FDC and FAI protested and after having failed to
act on their protest they docketed their case with the
CTA. They raised the issue that pursuant to BIR
Ruling No. S-34-046-97, no taxable gain should
have been assessed from the deed of exchange and
that the BIR cannot impute theoretical interests on
the cash advances of FDC in the absence of
stipulation and that not being promissory notes such
are not subject to documentary stamp taxes.
CIR, for its part, raised the following:
-that the said transfer of property resulted to a
diminution of ownership by FDC of FLI rather than
gaining further control and as such should not be tax
free.
-it invoked Sec. 43 (now Sec. 50) of NIRC as
implemented by RR No. 2, the CIR is given the "the
power to allocate, distribute or apportion income or
deductions between or among such organizations,
trades or business in order to prevent evasion of
taxes."
-it justified the imposition of documentary stamp
taxes on the instructional letters citing Sec. 180 of
the NIRC and RR No. 9-94 which provide that loan
transactions are subject to tax irrespective of
whether or not they are evidenced by a formal
agreement or by mere office memo.
-it reiterated that there was dilution of its shares as a
result of its shareholder’s agreement with RHPL.
CTA decided in favor of FDC with the exception on
the deficiency income tax on the interest income
from the income it supposedly realized from the
advances to its affiliates, the rest of the assessment
were cancelled. The CTA opined that CIR was
justified in assessing undeclared interests on the
same cash advances pursuant to his authority under
Section 43 of the NIRC in order to forestall tax
evasion.
Dissatisfied, FDC filed a petition for review with
the Court of Appeals claiming that the cash
advances it extended to its affiliates were interest-
free in the absence of express stipulation. Moreover,
it claimed that under Sec. 43 (now Sec. 50) the
CIR’s authority does not include the power to
impute imaginary interests, directed only to
controlled corp and not to holding company and can
be invoked only on cases of understatement of
taxable income or evident tax evasion.
The CA rendered a decision in favor of FDC
cancelling said assessment.
The CIR filed a petition for review with the CA
which subsequently denied for lack of merit. The
CA has the following conclusions:
1. The deed of exchange resulted in a combined
control of more than 51% of FLI , hence, no taxable
gain;
2. The instructional letters do not partake the nature
of loan agreements;
3. Although subsequently modified by BIR Ruling
No. 108-99 to the effect that documentary stamp tax
are now imposable on interoffice memos, to give a
retroactive application would be prejudicial to the
taxpayer.;
4. FDC’s alleged gain from the increase of its
shareholding in FAC are mere unrealized increase in
capital unless converted thru sale are not taxable.
Hence, this petition for review on certiorari.
1
Issues:
(1) Whether or not FDC is liable for theoretical
interest on said advances extended by it to
its affiliates.
(2) Whether or not FDC met all the
requirements for non-recognition of taxable
gain under Sec. 34 (c) (2) (now Sec. 40 (C)
(2) of the NIRC and therefore, is not
taxable.
(3) WON the letters of instructions or cash
vouchers are deemed loan agreements
subject to documentary stamp tax.
(4) WON the dilution as a result of increase of
FDC’s shareholding in FAC is taxable.
Held:
(1) No. Sec. 43 (now Sec. 50) of the NIRC does
not include the power to impute theoretical interest
to the CIR’s powers of distribution, apportionment
or allocation of gross income and deductions. There
must be proof of actual or probable receipt or
realization by the controlled taxpayer of the item of
gross income sought to be distributed, apportioned
or allocated by the CIR. In the case at bar, records
do not show that there was evidence that the
advances extended yielded interests. Even if FDC
deducted substantial interest expenses from its gross
income, there would still be no basis for the
imputation of theoretical interests on the subject
advances. Under Art. 1956 of the Civil Code, no
interest shall be due unless it has been expressly
stipulated in writing. Moreover, taxes being burdens
are not to be presumed and that tax statutes must be
construed strictly against the government and
liberally in favor of the taxpayer.
(2) Yes. It was admitted in the stipulation of
facts that the following are the requisites: (a) the
transferee is a corporation; (b) the transferee
exchanges its shares of stock for property/ies of the
transferor; (c) the transfer is made by a person,
acting alone or together with others, not exceeding
four persons; and, (d) as a result of the exchange the
transferor, alone or together with others, not
exceeding four, gains control of the transferee.
Moreover, it is not taxable because the exchange did
not result to a decrease of the ownership of FDC in
FLI rather combining the interests of FDC and FAI
result to 70.99% of FLI’s outstanding shares. Since
the term "control" is clearly defined as "ownership
of stocks in a corporation possessing at least fifty-
one percent (51%) of the total voting power of
classes of stocks entitled to one vote” then the said
exchange clearly qualify as a tax-free transaction.
Therefore, both FDC and FAI cannot be held liable
for deficiency income tax on said transfer.
2
(3) Yes. In its appeal before the CA, the CIR
argued that the foregoing ruling was later modified
in BIR Ruling No. 108-99 dated 15 July 1999,
which opined that inter-office memos evidencing
lendings or borrowings extended by a corporation to
its affiliates are akin to promissory notes, hence,
subject to documentary stamp taxes. In brushing
aside the foregoing argument, however, the CA
applied Section 246 of the 1993 NIRC from which
proceeds the settled principle that rulings, circulars,
rules and regulations promulgated by the BIR have
no retroactive application if to so apply them would
be prejudicial to the taxpayers. Admittedly, this rule
does not apply: (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. Not being the taxpayer who, in the first
instance, sought a ruling from the CIR, however,
FDC cannot invoke the foregoing principle on non-
retroactivity of BIR rulings.
(4) No. the CIR has no factual and legal basis in
assessing income tax on the increase in the value of
FDC's shareholdings in FAC until the same is
actually sold at a profit. A mere increase or
appreciation in the value of said shares cannot be
considered income for taxation purposes. Besides,
tax revenues should be strictly construed and that
rulings of the CTA should be accorded with respect
and upheld by the Court absent any reversible
errors.
WHEREFORE, premises considered, the CIR's
petition for review on certiorari in G.R. No. 163653
is DENIED for lack of merit and the CAs 16
December 2003 Decision in G.R. No. 72992 is
AFFIRMED in toto. The CIRs petition in G.R. No.
167689 is PARTIALLY GRANTED and the CAs 26
January 2005 Decision in CA-G.R. SP No. 74510 is
MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-
00020-2000 and SP-DST-97-00021-2000 issued for
deficiency documentary stamp taxes due on the
instructional letters as well as journal and cash
vouchers evidencing the advances FDC extended to
its affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-
INC-96-00018-2000, SP-INC-97-00019-2000 and
SP-INC-97-0027-2000 issued for deficiency income
assessed on (a) the arms-length interest from said
advances; (b) the gain from FDCs Deed of
Exchange with FAI and FLI; and (c) income from
the dilution resulting from FDCs Shareholders
Agreement with RHPL is, however, upheld.
SO ORDERED.
# 9 COMMISSION OF INTERNAL REVENUE,
Petitioner, vs. COURT OF TAX APPEALS
(SECOND DIVISION) and PETRON
CORPORATION, Respondents.
Facts:
The CIR asserts that the interpretation of the subject
tax provision, i.e., Section 148 (e) of the NIRC,
embodied in CMC No. 164-2012, is an exercise of
her quasi-legislative function which is reviewable
by the Secretary of Finance, whose decision, in turn,
is appealable to the Office of the President and,
ultimately, to the regular courts, and that only her
quasi judicial functions or the authority to decide
disputed assessments, refunds, penalties and the like
are subject to the exclusive appellate jurisdiction of
the CTA. She likewise contends that the petition
suffers from prematurity due to Petron's failure to
exhaust all available remedies within the
administrative level in accordance with the Tariff
and Customs Code (TCC).
In asserting its jurisdiction over the present case, the
CTA explained that Petron's petition filed before it
"simply puts in question" the propriety or soundness
of the CIR's interpretation and application of
Section 148 (e) of the NIRC (as embodied in CMC
No. 164-2012) "in relation to" the imposition of
excise tax on Petron's importation of alkylate; thus,
the CTA posits that the case should be regarded as
"other matters arising under [the NIRC]" under the
second paragraph of Section 4 of the NIRC,
therefore falling within the CTA's jurisdiction.
Issues:
The core issue to be resolved is whether or not the
CTA properly assumed jurisdiction over the petition
assailing the imposition of excise tax on Petron's
importation of alkylate based on Section 148 (e) of
the NIRC.
Ruling:
The petition is meritorious.
Section 4 of the NIRC confers upon the CIR both:
(a) the power to interpret tax laws in the exercise of
her quasi-legislative function; and (b) the power to
decide tax cases in the exercise of her quasi-judicial
function. It also delineates the jurisdictional
authority to review the validity of the CIR's exercise
of the said powers, thus:
SEC. 4. Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases. - The power to
interpret the provisions of this Code and other tax
laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review
by the Secretary of Finance.
3
The power to decide disputed assessments, refunds
of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other
matters arising under this Code or other laws or
portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals.
The CTA is a court of special jurisdiction, with
power to review by appeal decisions involving tax
disputes rendered by either the CIR or the COC.
Conversely, it has no jurisdiction to determine the
validity of a ruling issued by the CIR or the COC in
the exercise of their quasi-legislative powers to
interpret tax laws. These observations may be
deduced from a reading of Section 7 of RA 1125, as
amended by RA 9282, entitled "An Act Creating the
Court of Tax Appeals," enumerating the cases over
which the CTA may exercise its jurisdiction:
Sec. 7. Jurisdiction. - The CTA shall exercise: a.
Exclusive appellate jurisdiction to review by appeal,
as herein provided:
Decisions of the Commissioner of Internal Revenue
in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
In this case, Petron's tax liability was premised on
the COC's issuance of CMC No. 164-2012, which
gave effect to the CIR's June 29, 2012 Letter
interpreting Section 148 (e) of the NIRC as to
include alkylate among the articles subject to
customs duties, hence, Petron's petition... before the
CTA ultimately challenging the legality and
constitutionality of the CIR's aforesaid
interpretation of a tax provision. In line with the
foregoing discussion, however, the CIR correctly
argues that the CTA had no jurisdiction to take
cognizance of the petition... as its resolution would
necessarily involve a declaration of the validity or
constitutionality of the CIR's interpretation of
Section 148 (e) of the NIRC, which is subject to the
exclusive review by the Secretary of Finance and
ultimately by the regular courts. In British American
Tobacco v. Camacho, the Court ruled that the CTA's
jurisdiction to resolve tax disputes excludes the
power to rule on the constitutionality or validity of a
law, rule or regulation, to wit:
While the above statute confers on the CTA
jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of
a law or rule is challenged. Where what is assailed
is the validity or constitutionality of a law, or a rule
or... regulation issued by the administrative agency
in the performance of its quasi legislative function,
the regular courts have jurisdiction to pass upon the
same. x x x.
As the CIR aptly pointed out, the phrase "other
matters arising under this Code," as stated in the
second paragraph of Section 4 of the NIRC, should
be understood as pertaining to those matters directly
related to the preceding phrase "disputed
assessments, refunds of internal revenue taxes, fees
or other charges, penalties imposed in relation
thereto" and must therefore not be taken in isolation
to invoke the jurisdiction of the CTA.[27] In other
words, the subject phrase should be used only in
reference to cases that are, to begin with, subject to
the exclusive appellate jurisdiction of the CTA, i.e.,
those controversies over which the CIR had
exercised her quasi-judicial functions or her power
to decide disputed assessments, refunds or internal
revenue taxes, fees or other charges, penalties
imposed in relation thereto, not to those that
involved the CIR's exercise of quasi-legislative
powers.
In Enrile v. Court of Appeals, the Court, applying
the statutory construction principle of ejusdem
generis, explained the import of using the general
clause "other matters arising under the Customs
Law or other law or part of law administered by the
Bureau of Customs" in the enumeration of cases
subject to the exclusive appellate jurisdiction of the
CTA, saying that:
[T]he 'other matters' that may come under the
general clause should be of the same nature as those
that have preceded them applying the rule of
construction known as ejusdem generis.
Petron imports alkylate as a raw material for the
manufacture of motor gasoline. It claims that its
importation of akylate is exempt from excise tax. A
Customs Memorandum Circular (CMC) was issued
stating that Alkylate is subject to excise tax under
Section 148(e) of the NIRC. CIR then issued
assessment to Petron for deficiency tax.
Petron filed before the CTA a petition for review
raising the issue of whether its importation of
alkylate is subject to excise tax as contemplated
under Section 148 (e) of the NIRC.CIR filed a
motion to dismiss on the grounds of lack of
jurisdiction and prematurity.
CTA ruled in favor of Petron, stating that (a) the
controversy was not essentially for the
determination of the constitutionality, legality or
validity of a law, rule or regulation but a question on
the propriety or soundness of the CIR's
interpretation of Section 148 (e) of the NIRC which
falls within the exclusive jurisdiction of the CTA
under Section 4 thereof, particularly under the
phrase "other matters arising under [the NIRC]";
and (b) there are attending circumstances that
exempt the case from the rule on non-exhaustion of
administrative remedies, such as the great
irreparable damage that may be suffered by Petron
from the CIR's final assessment of excise tax on its
importation. CIR is now alleging that the CTA
committed grave abuse of discretion because it does
not have jurisdiction to take cognizance of the case.

Hence, as the CIR's interpretation of a tax provision

involves an exercise of her quasi-legislative
functions, the proper recourse against the subject
tax ruling expressed in CMC No. 164-2012 is a
review by the Secretary of Finance and ultimately
the regular courts. In Commissioner of Customs v.
Hypermix Feeds Corporation, the Court has held
that:

The determination of whether a specific rule or set

of rules issued by an administrative agency
contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the
Constitution vests the power of judicial review or
the power to... declare a law, treaty, international or
executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts,
including the regional trial courts. This is within the
scope of judicial power, which includes the
authority of the courts to determine in an
appropriate action the validity of the acts of the
political departments. x x x.