Facts: The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which were intended to facilitate development of medium- rise residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI. As a result of the exchange, FLI’s ownership structure was changed.
On 13 January 1997, FLI requested a ruling from the BIR to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties. BIR ruled that that the exchange is among those contemplated under Section 34 (c) (2) of the old NIRC which provides that “(n)o gain or loss shall be recognized if property is transferred to a 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 4 persons, gains control of said corporation.” FLI, FDC, and FAI complied with all the requirements imposed in the ruling.
In 1996 and 1997, FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI), duly evidenced by instructional letters as well as cash and journal vouchers, said cash advances.
On 15 November 1996, FDC also entered into a Shareholders’ Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked to develop and manage FDC’s 50% ownership of its PBCom Office Tower Project.
Having paid its subscription by executing a Deed of Assignment transferring to FAC a portion of its rights and interest in the Project, FDC eventually reported a net loss in its Annual Income Tax Return for the taxable year 1996.
On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests and compromise penalties.The foregoing deficiency taxes were assessed 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 Shareholders’ Agreement FDC executed with RHPL as well as the “arm’s-length” interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates. FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes for the year 1997.
Both FDC and FAI filed their respective requests for reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis. They filed a letter requesting an early resolution of their resolution of their request for reconsideration/protest.
CIR failed to resolve the request within the period so FDC and FAI filed a PetRev with the CTA.
CTA ruled that with the exception of the deficiency income tax on the interest income FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997.
FDC filed a PetRev before the CA.
CA upheld FDC’s position.
CIR also filed a PetRev.
The petition was denied due course and dismissed for lack of merit.
Issue: Whether or not CA erred in reversing the decision of the CTA and in holding that the advances extended by respondent to its affiliates are not subject to income tax
Held: Bereft of merit. It would appear that FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash advances to its said affiliates for the purpose of providing them financial assistance for their operational and capital expenditures seemingly indicate that the situation sought to be addressed by the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR’s power to distribute, apportion or allocate gross income or deductions between or among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as the controlled taxpayer’s taxable income is not reflective of that which it would have realized had it been dealing at arm’s length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR’s powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to impute “theoretical interests” to the controlled taxpayer’s transactions. Pursuant to Section 28 of the 1993 NIRC, after all, the term “gross income” is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property”; interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partner’s distributive share of the gross income of general professional partnership. While it has been held that the phrase “from whatever source derived” indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term “income” has been variously interpreted to mean “cash received or its equivalent”, “the amount of money coming to a person within a specific time” or “something distinct from principal or capital.” Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR.
The record yielded no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. the CIR had adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks, Susan Macabelda—FDC’s Funds Management Department Manager who was the sole witness presented before the CTA—clarified that the subject advances were sourced from the corporation’s rights offering in 1995 as well as the sale of its investment in Bonifacio Land in 1997. The advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and, (b) were all temporarily in nature since they were repaid within the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and instructional letters.”
Even if we were, therefore, to accord precipitate credulity to the CIR’s bare assertion that FDC had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing.
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