Tax Digest: CIR v. Estate of Benigno Toda Jr. (2004)

CIR v. Estate of Benigno Toda Jr.
G.R. No. 147188. September 14, 2004
DAVIDE, JR., C.J.

Lessons Applicable:  Tax evasion v. Tax avoidance

Laws Applicable:

FACTS:

• March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and Owner of 99.991% of outstanding capital stock, to sell the Cibeles Building and 2 parcels of land which he sold to Rafael A. Altonaga on August 30, 1987 for P 100M who then sold it on the same day to Royal Match Inc. for P 200M.
• CIC included gains from sale of real property of P 75,728.021 in its annual income tax return while Altonaga paid a 5% capital gains tax of P 10M
• July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a deed of ale of shares of stock which provides that the buyer is free from all income tax liabilities for 1987, 1988 and 1989.  
• Toda Jr. died 3 years later.  
• March 29, 1994: BIR sent an assessment notice and demand letter to CIC for deficiency of income tax of P 79,099, 999.22 
• January 27, 1995: BIR sent the same to the estate of Toda Jr. 
• Estate filed a protest which was dismissed - fraudulent sale to evade the 35% corporate income tax for the additional gain of P 100M and that there is in fact only 1 sale.
• Since it is falsity or fraud, the prescription period is 10 years from the discovery of the falsity or fraud as prescribed under Sec. 223 (a) of the NIRC
• CTA: No proof of fraudulent transaction so the applicable period is 3 years after the last day prescribed by law for filing the return 
• CA: affirmed 
• CIR appealed

ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax avoidance so the period for assessment has not prescribed.

HELD: YES.  Estate shall be liable since NOT yet prescribed.

• Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. ax 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 lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
• Tax evasion connotes the integration of three factors: 
• (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) a course of action or failure of action which is unlawful.
• All are present in this case.  The trial balance showed that RMI debited P 40M as "other-inv. Cibeles Building" that indicates RMI Paid CIC (NOT Altonaga)
• Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all 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 advantage is taken of another. 
• 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 subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. 
• Generally, a sale of or exchange of assets will have an income tax incidence only when it is consummated but such tax incidence depends upon the substance of the transaction rather them mere formalities.