CTA Case No. 3237 (Decision)

REPUB LIC Of THI P HILI P PIMIB COURT OF TAX APPEALS QUEZOM CITY B.F. GOODRICH PHILIPPINES, INC., (now SIME DARBY INTERNATIONAL TIRE CO., INC.), Petiti one r, - versus - C.T.A. CASE NO. 3237 THE COMMISSIONER OF INTERNAL REVENUE, Res pond e nt. -� --- K x�---- DEC a CJ N A case arising from an asses!lment i s sued by respondent against petitioner for deficiency donor' s tax for the taxable period 1974 in the sum o f P1,0 20 ~850.40 i s before us f o r re v ie w. The par ties ha ve entered in t o a s tipulation of fact s and we have f ound the foll o wing relevant a mong othe r s : 1. Tha t petitioner, for mer ly kn own as B. F. Goo d r�ich Phili p pi n es , I n c ., was , prior to J ul y 3, 1974~ an America n owned a nd contr o l l e d corporation; 2 . That as a condition for approving petiti oner ' s request to manufacture tires and other rubber products in the Philippines, tha Central Bank imposed the requirement that petitioner develop rubber plantationJ 3. That in compliance with the aforementioned r e quirement, sometime in 1961, petiti oner bought from the Go ve rnment under t he Public Land Act a nd

DECISION CTA CASE NO. 3237 - 2- the Pa~ity Amendment to the 1935 Constitution, ce~tain pa~cels of land in Tumajubong, Basilan, fo~ a conside~ation of P30,000.00 on which petitioner established its rubber plantation; 4. That during the pe~iod f~om 1972 to 1975, Tumajubong, Basilan, whe~ein the parcels of land acquired by petitioner� are located, was heavily infiltrated by rebels and the Government Armed Fo~ces could not guaranty the peace and order condition of the area; 5. That because of the unsettled peace and order condition in Tumaj ubong, Basilan, sometime in February 1973, residents, inc lud .ing plantation worker s , evacuated the area, hence, ther�e I!Xisted no genuine commercial competition ther�ein; they subsequently ~eturned only after the Armed Forces of the Government succeeded in driving the rebels off the plantation; 6. That the land in question is in the interior portion of Basi lan and not read .il y accessi b 1e to transportation~ i t being 16 kilomete~s from the Poblacion and 9 kms. fr�om the sea; it is, therefore, far from the center of trade, public ~oads and ths sea; 7. That during that aforesaid pe~iod from 1972 to 1975, the petitioner was operating its Tumaj Ltbong plantation on voluntary basis, that is, its employees therein were not compelled to work regularly, but rather, they, especially the rubber tapper, reported for work voluntarily without observing regular work hours� 8. That in view of the opinion of the Secretary of Justice the petitioner had to sell the land in question, containing an area of 995 hectares, more or less, to Siltown Realty Corporation, a Filipino owned and controlled realty corporation for a consideration of

DECISION CTA CASE NO. 3237 - 3- P500,000 payable on installment and subject to such ter-�ms and conditions as provided in tha t Deed of Sale hereto att a ched as Ann e:< "A" a nd made an integral part hereof; 9. That in accordance with the aforesaid Deed of Sale, the petitioner has leased from Siltown Realty Corp. the a �forementioned l a nd, for a period of 2~ years, subject to an extension thereof of another 25 year-s at its option, for an annual rental provided in the said Deed of Sale (Annex "A"): Petitioner assigns these issues for resoluticm: a) Whether the assessment dated October 12, 1980 and erroneously reiterated in a different amount on March 16, 1981 proceeded from invalid ta>< investigations; b) Whether the sale by B.F. Goodrich of its Basilan property in 1974 was a transfer for insufficient consideration; and c) Whether the government's right to assess B .F . Goodrich had alr~ady prescribed considering the absence of fraud. d) Whether the Honorable Court has jurisdiction over the instant case. Respondent, for his part, fai 1ed to file his memorandum and we note that it is very dissatisfying for respondent to fail in this regard despite the several extension periods asked and granted to him by the court. Considering th� priority and importance given to tax cases, and with the duty imposed by law upon respondent to

DECISION CTA CASE NO. 3237 - 4- administer and enforce internal revenue laws, it is unworthy of the respondent to be remiss of his duty in this aspect. Nevertheless, the lack of memorandum did not prevent us from finding in favor of the respondent based on the BIR Record and other evidence submitted. (see Formal Offer of Exhibits) The issue of jurisdiction is best settled first so that doubts as to the propriety or validity of this adjudication is taken care of. It was that after answer was filed by respondent, an "Urgent Ex-Parte Motion to Withdraw BIR Records" was also submitted by him. Subsequently, "Supplemental Petition for Review" was filed and it was here that petitioner referred to the letter of February 7, 1983 of respondent adverting once again to the protest agains t the assessment, as if only then making a final decision on the case .. of petitioner. The letter states, in part: "In reply~ I have the honor to inform you that after a careful review of the facts of the case, as well as the law and Jurisprudence app 1icab le thereto. this Office c annot draw aside from the amount of P 2,460,647.00 which appears in the Basilan City Assessor's Office as the market value of the land your client sold in 1974 as the basis for the donor's tax assessment pursuant to the explicit provision of Section 91 (par. 2) of the 1974 Tax Code."

DECISION CTA CASE NO. 3237 - 5- Proceeding from the tone of this letter, respondent's "Answer to Supplemental Petition" contends that this court has no jurisdiction to entertain the original petition for review filed on April 23, 1981 nor jurisdiction on the supplemental petition, since petitioner received respondent's final decision on its protest only on July 10, 1984. This contention is not well-founded. Respondent, at the start, in his answer, failed to contest the jurisdiction of this court on the grounds brought out in his answer to the SLI pp 1emen ta 1 petition for review. Instead, hearings were scheduled even after respondent filed an "Urgent Ex-Parte Motion to Withdr~w BIR Records." After answering the supplemental petition for review respondent participated in ~ the trial~ and, except for his lack of memorandum had offered evidence for his case. Having submitted himself to the jurisdiction of this court, respondent is estopped from qu@stioning the sam�. Furthermore~ with the result of this case ~ny contemplation of this kind should be disregarded by ,respondent. Petitioner's initial thrust questions the alleged lack of authority of the e:�:aminers who came

DECISION CTA CASE NO. 3237 - 6- with the assessment of March 16, 1981 and previous assessment dated October 10, 1980. Both assessments are antedated by another assessment dated April 23, 1975 (Exh. HJH~ p. 130, Record) and petitioner emphasi.zes that it had paid the deficiency income tax in that first assessment. To be sure, the assessments of October 10, 1980 and March 16, 1981 rExh. 9, p. 3, BIR record) were the products of Letters of Authority Nos. 074420 RR and 074421 RR and Memorandu m Authority Reference No. 749157 of June 26, 1980 addressed to Siltown Realty Phi 1ippines, Inc. In fact, it was indeed Siltown Rea 1ty whose income, business and other tax liabilities were investigated on the basis of the letters and memorandum (Exhibit 6~ p. 14, BIR record ) and culminated in the findings discovered by Revenue Examiner Valentin B. Santos (pp. 14: 15, BIR record). This notwithstanding, the examination and investigation of the case of Siltown Realty can not and does not preclude the possibility of yielding sue: h findings pertaining to transactions Siltown has had with othe~ business entities. Surely, these findings can be used to sl!rv� the purposes of the Commissioner of Internal Revenue allowed under the law.

DECISION CTA CASE NO. 3237 - 7- The Comments and Observations of Revenue Examiner Valentin B. Santos has to say: "In view of the foregoing facts and circumstances, the primary purpose for which Letters of Authority Nos~ 074420 RR and 074421 RR, both dated November 29, 1977, to investigate and examine the tax liabilities of SILTOWN REALTY PHILIPPINES~ INC. for the taxable year 1975, becomes secondary and subsidiary to the determination of the transfer tax liabilities of B.F. GOODRICH PHILIPPINES, INC.~ as a consequence of its execution of the Deed of Sale transferring its ownership of the subject parcels of land to Siltown Realty Philippines, Inc. for the principal sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) The facts and circumstances, alluded to by Examiner Santos whi c h consequently led to th~ second assessment of March 16~ 1981 are telling as he found that: 1. SILTOWN REALTY PHILIPPIN~S, INC., B.F. Goodr.ich bldg., corner Ay a la and Buendia Avenues~ Makati, Metro Manila was incorporated on May 20, 1974 and duly registered with the Securities and Exchange Commission under Registration Certificate No. ~6186 dated May, 29, 1974; 2. It is also registered with the Board of Investment under ' Registration Certificate No. 492 dated June 20, 1974. The certificate issued authorized subject taxpayer to engage in the realty business, primarily, to hold and acquire the land of B.F. Goodrich Philippines, Inc., subject, however, to the conditions that:

DECISION - CTA CASE NO. 3237 - 8- a ) .it wi ll l .i m.it its landholding to the land e xc lud i ng improvements thereon prese nt 1y owned by B. F. Goodrich Philippines, Inc., and b) it shall submit an annual report of its business ac t i vi t.ies on or- before Mar-ch 31 of each yeC\r, in accor-dance with the pr-ovisions of R.A. 5455. The Board of Investment cer-tificat~ further qualified that thf! author-ity is limited to the right to hold the above- mentioned land. 3. Pr-ior to the ta xa ble year- under r-eview, a Deed of Sale was executed on June 21, 1974 by and between B. F. Goodrich Philippines, Inc. and Siltown Rea 1 ty Phi 1 ippines, Inc. whereby parcels of land situated in Tumajubong, Lamitan, Basilan owned by the former and containing an area of NINE HUNDRED NINETY FIVE (995) hectares, more or less, were sold to the latter for the principal sum of FIVE HUNDRED THOUSAND PESOS (F'SOO,OOO.OO); XXX HXX XXX .. 5. Per tax de c lar-ation No. 1082 (2645) of the Regis te r- of Dee ds of Basi lan (Cer-tified true copy of ta:{ declaration forming part of this report) filed by B.F. Goodr-ich Philippines, Inc. under- P.O. No. 76 and 9worn to accordingly on Mar c h 25, 1974, th~t value of the agr-icultural and urban landholdings of B.F. . Goodrich Philippines, Inc. which is the subject of the foregoing Deed of Sale (No. 3 ~bove) is P2,47S,467.00 and P207,700.00, respectively, or an aggregate value of P2,683,467.00; But petitioner would insist that Section 337 of the 1974 Tax Code (now Sec. 235, NIRC of 198b) a llows only one examination and inspection done of 50

DECISION CTA CASE NO. 3237 �- 9 - books or records dur inq the five-year period that books and accounti ng records are required to be preserved. This contention is however unavai 1ing for this case as the condi tions present here put the case within the e:H:eptions covered by Section 337 of the Tax Code of 197 4. F'eti tioner denies fraud~ but instances of irregularity or mistake (fa 1si ty) are a 1so consider�ed exceptio ns~ reading Section 337. Falsity is what we have here~ and for that matter~ we hasten to add that the second assessment (Marc h 16~ 1981) of the Commissioner was well - advised having been made in contemplation of his power under Section 15 of the 1974 Code (now Section 16 ~ of NI RC) to assess the proper tax on to believe that a report of a ta x payer is false~ incomplete or erroneous. " when there is falsity with intent to evade tax as in this case~ the ordinary period of 1 imitation upon assessment and collection does not apply so that contrary to the averment of petitioner~ the right to asgess respondent has not prescribed. What is the considered falsity? The transfer through sale of the parcels of land in Tumajubong~ Lamitan, Basilan in favor of Siltown Realty for the 51.

DECISION CTA CASE NO. 3237 - 10 - sum of P500,000.00 only whereas said lands had been sworn to under Presidential Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2~475,467 + P207,700) (see De claratio r1 of' Real Property f'on�~ p. 28~ and p. 15~ no. s~ BIR Record). Par� agraph 1 of P.D. No. 76 provides: "1. It shall be the duty of all persons, natural or juridical, owning or administering real property, including the improvements therein, within a city, municipality or municipal district, or their duly authorized representative, to prepare, or cause to be prepared, and file with the provincial or city assessor not later than June 30, 1973, a sworn statement declaring the true value of their property , whether previous 1y declared or undeclared, taxable or e:�:empt, which shall be the current and fair market value of the property, as determined by the declarant. The "current and fair market value" shall be understood to mean the "price at which a wi 11 ing seller would se ll and a willing buyer would buy neither being under abnormal pressure ... XX>~ HXX XXX The implication is clear, therefore, that when petitioner swore to the "current and fair market value" of the lands as to be that stated on th� Declaration of Real Property form on March 2~, 1974, SLICh is their "current and fair market value" determined by petitioner as declarant. Reference in turn, to the fair market value as reflected in the Declaration of Real Property form, 52

DECISION CTA CASE NO. 3237 - 11 - is but proper~ for Section 91, from a reading of Section 113 also of the 1974 Tax Code~ point$ to i t as to be the appraised value of the property for gift tax purposes when the ta x payer cannot convincingly show another. Sec. 91. "The estate shall be appraised at its fair market value as of the time of death~ or as of si>: months thereafter~ at the election of the executor or administrator, using for the purpose the current and fair market value as reflected in the schedules of values prepared by provincial and city assessors pursuant to Commonwealth Act. No. 470~ as amended by Presidential Decrees Nos. 76 and 261, and unless the contrary is shown by the taxpayers~ the schedule sha 11 be binding upon all concerned for purposes of computing any internal revenue tax based on the value of the property (as amended by Sec. 1, P.O. No. 539). A genuine business tre\nsac tion does not come within the purport of the gift tax. That is~ a transaction which is bona fide, and at arm 's length (Angela P�rez y Tuason et al .. v .. Thtt Co��ission�r of Intern~I Revenue, C.T.A. Case No . 1707, February 10.11 1969 .� L-30403 1 July 3 .� 1969, citing Co��issioner v. M��yss, 324 U.S. 303, 65 S.Ct. 562 [1945]). Petitioner may say that even to the extent that petitioner was a stockholder of the transferee corporation at the time of the transfer of the l.;md, there c:oLtld not have been a taxable donation (Reply, p.JB .� Record), but t h i s would ba

DECISION CTA CASE NO. 3237 - 12 - of no conseqLience bec ause t he element of donative inte nt i s not ma t eria l i n t r a nsfe r s for less than Tuason lll. , s upra). It is al!lo this circums tance that pe titione r is a stockholder of Siltown Realty, a nd t he f ac t tha t the concern of thi s trans feree corpora t ion Si 1town is 1imi ted to acquir i ng and holding the lands talked .about in thi s c a se , which d eci d e d 1 y wor-k against whatever pretension that the aforesaid sale of lands is a transac tion at "arm 's length". Verily, if Siltown was formed for sue h pu rpose and petitioner is one of its stoc kholders , petitioner should have been 1 ook ing on 1 y to t.he f or me r f or the sa 1 e. � For that mat t er , the forth c oming end of the E>:ecuti ve Agreement appended as the Parity Amendment to the 1935 Constitution could not have come as a surprise for peti t .ioner� . The Parity Amendme nt i tself hinted that the effect i vity of the privilege granted through the executive agreement to citi zehs of the United States and to all forms of busin�ss enterprise owned or controlled, directly or indirectly, by citizens of the United States was in no case to extend beyond the third of July, 1974 fR�public v. Quashll 11 L- 30 2 99, Aug u st 17, 19 72, 46 SCRA 160,

DECISION CTA CASE NO. 3237 - 13 - 175-176). And, in the case of Republic of the Philippin�s v. Quash�~ s upra, the Supreme Court had ruled and made known that an American or American- owned business enterprises who had acquired ownership of public agricultural or residential lands under and by virtue of the Parity Amendment will lose said ownership on July 1974. With these previous pronouncements~ petitioner should have been given adequate time and opportunity to prepare for the eventual termination of the Executive Agreement. And, if petitioner was minded to assist in the formation of a corporation that shall hold and acquire its lands~ then i t is only reasonable to infer that petitioner with its legal advisers should have been conscious all a long of the date July 3~ 1974. Con si d er� ing ~ ther�efore , the findings made� by Us in thi s case, and comparing them with the computations and findings made by Revenue Examiner Valentin B. Santos CBIR record~ s upra) we deem that the total amount due from petiti6ner is as follow$: Fair Market Value (under PD. 1\b. 76) Sold P2,683,467~00 Dec:ILtct: Selling Pric:e ...................... . ----~.000.~ ~t subject to Dcnor's Tax for insufficient P2..L~~.J 467...!..Q2 c01sideration under Section 111, NIRC ��� p 615~ 577.00 ~ax [)L.te ttle!t-e!CJ'1 � � � � � � � � � � � � � � � � � � � � � � � � � � � � � YJ7 ~ 7B3.50 M:f: ~!. 9...lrct"large �������������������������� 14% Interest from 7/21/74 to 7/21/77 (42'1. Max. ) ������������������ TOT~ ~ IJt..E ����������������������������

- DECISION CTA CASE NO. 3237 - 14 - WHEREFORE, t~ decision of the Com�issioner of Internal Revenue assessing petitioner deficiency Qi f t ta>e i s MODIFIED And petitioner i s ordered to pay tha amount of P1,311,179.01 plus lOX surcharge and 20Y. annuAl interest from March 16, 1991 until fully paid provided that the ma>eimum amount thAt may be collected AS interest on delinquency shall in no case exceed an amount correspondino to a period of three years pursuant to Section 130(b)(1) and (c) of the 1977 Tax Code, as amended by P.D. No. 1705, which took effect on August 1, 1980. SO ORDERED. Quezon City Metro Manila~ March 29~ 1991. Presiding Judge WE CONCUR: ROADUIN Judge Associate Judge

- DECISION CTA CASE NO. 3237 - 15 - CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. Presiding Judge Court of Tax Appeals