CTA Case No. 779 (Decision)

I "'f<:PUJJ�"MC ~J' TIM Nln.IPJttJn_, CO lHM' OF ':FU _..,FE�U WEI!ON GIJP;'f ESTATE OF' tHLLIAM J . CTA CASE NO . 779 SHAW and ;,-z CK HACK GOLF & COUNTRY CLUB , I NC., Petitioners , versus THS COMMISSIONER OF I NTERNAL REVE I-TL'E , Respondent . X- - - - - - - - - - - X DE C I S I 0 N This is a petition to review the decision of respondent Commissioner of Internal Revenue demanding from petitioners , Estate of vJilliam J . Shaw and ~�Jack \vack Golf & Country Club , I nc ., payment of deficiency donor ' s and donee ' s gift taxes of ~ 200 , 998 . 44 and ~ 1 , 364 , 767 . 6 1, res pect- ively , inclusive of the 50% surcharge and interests inciden t to �delinquency, as well as t h e compromise penalty for the failure to file a notice of donation and the late filing of the gift tax returns . The facts of the case are not disputed . Petitioner , Estate of \'lilliam J . Shaw (here- inafter referred to as the 11Estate 11 ) is a trust created by, established and administered pur- suant to the last will and testament of the late vlilliam J . Shaw ' which ~~vaS duly admitted to probate

DECISION - ': CTA CASE NO . 779 2 on April 15, 1939 by the Cour t of First Instance of Manila in Civil Case No . R- 54622 , entitled "Testate Estate of ~'iilliam J . Shaw , deceased"; while petitioner �lack lvack Golf & Country Club , Inc . (hereinafter referred to as the ttClub 11 ) is a duly registered domestic corporation organized and operated as an athletic and social club with office and clubhouse at Mandaluyong , Rizal . On April 22 , 1949 the Estate , through its adminis - trators and trustees , executed a deed of donation in favor of the Club whereby it transferred and conveyed to the latter 36 parcels of land located in the Municipality of San Felipe Neri , Rizal (now Nandaluyong and Quezon City) particularly described and subject to the conditions and restrictions s pecified in the said deed of donation which read as follows: PROVIDED , NEVERTHELESS , that this gift is made upon the following conditions and stipulations , the due observance of vJhich is essential to the validity and continuance of this grant . The said ~�Jack 'da ck Golf and Country Club , Inc ., in taking un- der this instrument and in accept- ing this dona tion , agrees: 1. That thirty- three (33) of the thirty- six (36) parcels of land above- described , to wit: those _ covered by Transfer Certificates of Title Nos . 244 , 862 , 863 , 864 , 865 , 866 , 867, 868, 869~ 870, 871, 87 2 ,

DECISION - CTA CASE NO . 779 3 873 , 874 , 875 , B76 , . 877 , 888 , 889 , 890 and 89 1 shall be used as part of the golf course of the Clubi� and the re- maining three (3) parce s of land, to wit: those covered by Tr ansfer Certificates of Title Nos . 38107 , 38826 and 40935 shall be used for the purpose of completing the 11 SHAW ~1EHO RIAL PA.'RK11 as now contemplated by the Club . To that end , said Club shall never use said property and premises for any other purpose than as here- in stated , and any other use thereof shall work as a forfeiture of this gift . 2 . That said property , nor a.ny part thereof , shall never be commer- cialized , sold , exchanged , mortgaged , or otherwise encumbered by the said Club , without� the consent of the Trustees of \lilliam J . Shaw or their successors in interest , such consent to be evidenced by a publi.c document . 3. That the said Club shall provide annually a sufficient fund for the maintenance and care of the 11SH11v HENORIAL PARK'' by which name it shall ever be known to perpetuate the memory of the late William J . Shaw , and keep the same in a trim and tidy condition with such ornament of trees , shrubs , and flowers as will � make it attr~ctive to the eye and con- ducive to the health , happiness ~nd good morals of the commu.ni ty . 4 . That such said 11 SH.A'VJ HENORIAL PARK" 1.vill be policed as to shield i tf from depredation and vandalism or so as to prevent disorde r and mi sbehavior ), therein and thereabout , and thereby make it a safe and pr oper pla ce for the resort of the general public in- cluding women and children . 5. That the late T/Jilliam J�. Shaw , having expressed during his lifetime an aversion to gambling in the Club premises , the Club shall prohibi t and shall not tolerate gam- bling in its present premises or any premises that hereafter it may acquire .

DECISION - CT CASE NO. 779 4 6 � . That the Club and the ES T.c TE OF it!ILLIAH J . SHA~il sha 11 bear their respective shares of the gift taxes that may be assessed and collected by the Government on this donation . 7. That , if the Club shall cease to exist as a corporation or, upon the expiration of its corporate existence , shall not be re-incorporated for substantially the same purposes as those specified in its constitution and by- laws , or shall distribute its assets among its members , the land hereby given and conveyed shall revert and be re- conveyed forthwith to the Trustees of the ESTATE OF \'JIL- LIAH J . SHAW, or their successors in interest , free of all liens and en- cumbrances of every nature and des- cription. Fai l ure on the part of the s~id Club, the Donee herein, to keep and observe any one of the terms or con- ditions attached to this gift shall entitle the Trustees of the ESTATE OF I:HLLI 10. J . SI.:rAW, or their successors in intere~t , at any time after such omission or breach, to declare the gift forfeited , and then and there- upon said p~emises and prope rty and all right , title and interest therein shall revert to the EST TE OF WILLiaM J . SHAitl, the Donor of this gift . It is distinctly understood and agreed that no lapse of time shall be con- sidered a waiver of such terms and conditions . By a separate instrument also dated April 22 , 1949 , the Club , through its then president and secretary, Messrs. Eulogio Rodriguez , Jr . and A. P. Reyes , accepted the above- mentioned donation subject to all the terms , conditions and stipula- tions imposed therein . Sometime after March 1, 1950 but before April

DECISION - CTA CASE: NO. 779 5 13 , 19 50 , the Estate and the Club , through their res pe ctive representative , filed with the Bureau of Internal Revenue the corresponding donor ' s and donee ' s gift tax returns . The a gg re gate book value of the 36 par cels of land dona t ed was declar ed therein at ~61 , 810 . 25 of which � 50 , 651 . 00 represented the nur chase price in 1946 of the 33 parcels of land with a total ~ ~rea of 265,918 square meters and transferred to the Club for use as part of its golf course , and � 11 , 159 . 25 represented the purchase price of the remaining 3 parcels of land with a total area of 5, 015 square meters and given to the Club for conversion into the 11Shaw Hemorial Park . " On the basis of the said gift tax returns , res pondent issued on July 27 , 1950 provisional gift tax assessment notices numbered GA-1 062- 49 requiring petitioner s to pay ~ 1 , 064 . 66 and �9 , 865 . 73 as partial settle- ment of the donor's and donee ' s gift taxes , re- spectively , inclusive of the 25% surchar ge, interests and compromise penalties, pending examination and investigation of the said returns . The gift taxes in the provisional assessment notices were computed on the basis of �61, 810 . 25 representing t h e book ~value of the pro perties donated . Believing that they were not liable to the

DEC I SI ON - CTA CASE NO. 779 6 surcharge , interests and penalties incident to delinque.ncy declared in the said provisional a ssessment notices , petitioners paid on August 31, 1950 only P80 5.1 9 and P7, 662 . 05 corres ponding to the basic donor ' s and donee ' s gift taxes , re- s pectively . Subsequently , in two s eparate let - ters , petitioner re quested t h e condonation of the surcharge , interests and compromise penal- ties . Respondent , however , denied the said request and the subse quent re quest for reconside ration thereof . In the mean time , respondent ordered an investi gation of the gift tax case . On February 23 , 1959 , after the lapse of about nine years , Revenue Examiner Arturo Hiranda sub~itted a report to the Provincial Revenue Of - ficer , ' uezon Ci ty , wherein he stated that t h e 36 parcels of land donated to petitioner Wack Wa ck Golf & Country Club , Inc ., were c l assified as residential lots and assessed at f- 150, 600 . 00 in accordance with the 1949 tax rolls of the Office of the Provincial Assessor , Pasig , Rizal . For gift tax purpos es, h owever, the said revenue exam- iner appraised the fair . market value of the said properties at F1, 752 , 904. oo , computed on the basis of P6. 47 per square meter , alle ging that it was the / avera ge selling price per squ.are meter of land as shown by a number of coeval sales

DECISION - CTA CASE NO . 779 7 within the six- month period from April 22, 1949 (when the deed of donation was executed) , as gathered from the records of the Register of Deeds , Fasig , Rizal . On the basis of his appraisal , Revenue Exam- iner Niranda recommended that the aggregate amount of �1, 376 , 889 . 73 be assessed against petitioners as deficiency donor ' s and donee ' s gift taxes , in- clusive of the 25% surcharge , interests and com- promise penalties . Accordingly , the Provincial Revenue Officer of ue 20n City notified peti- tioners of the proposed assessment for deficiency donor ' s and donee ' s gift taxes amounting to ~ 1, 376 , 889 . 73, after crediting the payments al- ready made . The said official also advised peti- tioners to appear at his office for an informal conference and ~resent their objections, if any , to the proposed assessment . At the conference held on Harch 31 , 1959 , petitioners manifested their objections to the proposed deficiency gift tax assessments . On June 4, 1959 , they filed a memorandum contesting the appraised value of the land in question at ~ 1 , 752 , 904 . 00 and alleged , among others , that the right of the Government to assess the defi- ciency gift taxes had already prescribed . After

DECISION - CTA C SE NO . 779 8 receipt of petitioners ' memorandum , res pondent transmitted the same and the records of the case to the Chief , I ncome Tax Division , with the observa- tion that there appeared in the records of t he case suffi cient proof to warrant the application of the statutory period of ten years within which to assess the deficiency gift taxes . Consequent- ly , he dir ected the recomputation of t h e proposed deficiency gift tax assessments by i ncluding the 50% surchar ge as fraud penalty , instead of t he 25% surcharge as ori ginally asse s sed . Thereafter, on August 25 , 19 59, res pondent demanded from petition ers payment of ~ 2 00 , 998 . 44 and f: 1 , 364, - 767 . 61 as deficiency donor ' s and donee ' s gift taxes , res pectively , inclusive of the 50% sur - charge , 1% and t% monthly interests , and com- promise penalties . ssessment notices were en- closed in the letters of demand men tioned above . On October 2, 1959 , petitioners received re - s pondent ' s l etter of August 25, 19 59 . On October 14, 1959 petitioners re quested that t h e def iciency gift tax assessments be reconsidered and can- ce l led on t h e gr ound that (1)the fair mar ket va l ue of t he 36 parcels of land as reported by res pond- ent ' s exami ner wa s i ncorrect and excessive ; (2) the decla ration in t he gift tax retur ns of t he purchase price of r6 1, 8 10 . 25 as t h e value of the

DECISION CTA CASE NO . 779 9 properties donated wc;.ts proper and justlfied in the light of the conditions a,nd circum'stances of the case and , therefore , the said returns are not fraudulent; and (3) the right of the Government to assess and collect the deficiency gift taxes in question had already pres cribed . In the said letter , petitioners also requested, and were granted , a period of fifteen ( 1 5) days within vJhich to submit a memorandmo. in support of their contentions . On October 30 , 1959 , peti tiooers 1 memorandum 1.vas filed with respondent . In a letter dated Ea r ch 8 , 1960 , which 1rvas r e- -- reived by petitioners on March 3 0 , 196Q , respondent denied petitioners ' request for reconsideration of the assessment and reiterated his demand for pay- ment of the deficiency donor ' s and donee ' s gift taxes of --200 , 998 . 44 and 121, 364 , 767 . 61 res pe ctively , plus penal ties incident to delinquency . On Jl_ pril 11, 1960 , Mr . Gregorio S . Licar os , then president of ~ ac k Wa ck Golf & Country Cl ub , I nc ., in represent a - "tion of petitioners , requested a period of thirty (30) days "'Tith~n which to submit a ne\v memorandum in support of petitioners ' request for reconsidera- tion . The said request was granted by respondent , but before the submission of the supplemental memo- randum on l-1ay 5, 1960 , petitioners filed with this Court on April 22 , 1960 a petition for review . The issu es presented ~y the parties to this Court for resolution are the following:

DECISION - CTA C SE NO . 779 1:0 1 . vmether or not the right of respondent to assess petitioners for deficiency donor's and donee ' s gift taxes has prescribed under Section 331 of the National I nternal Revenue Code, in relation to Section 332(a) of the same Code; and 2 . vmether or not the deficiency donor's and donee ' s gift tax assess- ments of �200 , 992 . 44 and ~ 1,364,- 767 . 61, res pectively , inclusive of the 50% surcharge, interests and penalties incident to delinquency, are justified and legal . Res pondent admitted in his Answer that the donor's and donee's gift tax returns must have been filed by pP titioners with the Bureau of Internal Revenue after Harch 1, 1950 but prior to April 13, 1950 . Since the deficiency gift tax assessments were issued by respondent only on August 25, 19 59 (BI R rec . pp . 154-155), peti- tioners now cont end that the said tax assess - ments have already prescribed under Section 331 of the National Int er nal Revenue Code which provides as follows: SEC. 331 . Period of limitation uuon assessment and collect i on . - Except as provided in the succeed- ing section, internal- revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assess- ment for t h e collection of such taxes shall be begun after the expiration of such period . For the purposes of this section a return filed before t he last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not a pp ly

DECISION - CTP.. CASE NO . 779 to cases already investigated prior to the a pproval of this Code . Respondent counters by alle ging that the donor ' s and donee's gift tax return s filed by petitioners were fraudulent and, therefore, he has ten (1 0 ) ;)rears from t h e discovery of the fraud within which to assess the gift taxes under Section 332(a) of t h e Revenue Code . Since fraud was alle gedly discovered by res pondent's examiner on February 23, 1959, res pond ent claims he has a period of ten (1 0 ) years up to February 23 , 1969 within which to assess the deficiency donor ' s and donee ' s gift taxes . In sustaining the existence of fraud , re- s pondent alleges and argues as follows: �� o It may be noted that the valuation declared in the returns were even smaller t han the assessed value of the land donated which was ~ 1 50 , 6 00 . 0 0 . (Exh . 3) The failure of the petitioners to declare in the returns at least the assessed value of the land i ndicates a delib- erate intent to evade the payment of the correct donor ' s and donee ' s gift taxes . Petitioners, knew fully well t hat t he valuation of ~6 1, 8 10 . 25 is not t he assessed value but the value of t h e land way back in 1939 . Horeover , the under- declaration of t he value of the donated pro pert y at ~61 , 8 10 . 25 as against its fair mar ket at the time of the donation of �':1 , 752 , 904 . 00 is so glaring as to compel a find- ing of existing intent to defraud . Considering the intelligence of t h e taxpayers a nd t heir couns els , the discr epancy of more than 100% between the fair mar ket value and

DECISION - CTA CASE NO . 779 the reported value of the property strongly indicated fraud . The under - declaration cannot be attributed to an honest mistake or more difference in opinion . The intent to evade the payment of legitimate taxes is ap- parent . (Respondent ' s Memo ., p . 14, CTA rec . p . 257 . ) In short , respondent considered that the donor ' s and donee ' s gift tax returns filed by petitioners were fraudulent because they failed to declare therein at least the assessed value of the land . He also considered that the declared value of the donated property at �61, 810. 25 , as against the reported fair market value of P1,752,- 904 . 00 at the time of the donation indicates that petitioners 1 intended to defraud the Government of its revenue . Inferentially, this argument is based on petitioners ' failure to declare in the return the assessed value of the land in question . Oddly , howev er , respondent also considere~ that the staggering and huge discrepancy between the fair market value and the reported yalue of the said land constitutes fraud because petitioners failed to declare in the gift tax returns the alleged fair market value of the land at ~ 1,752 ,- 904 . 00 . Respondent concluded, therefore, that the under- declaration cannot be attributed to honest mistakes or mere differences of opinion in- asmu ch as the omission of petitioners represents a 1tJilfull intent to evade the payment of gift taxes .

DECISION - CT C SE NO . 779 13 Re spondent ' s conclusion that fraud was com- mitted by the petitioners in filing t he donor ' s and donee 1 s gift tax retur ....s is predicated on Sec- tion 113 of the National Internal Revenue Code 1vhich provides as follows: SEC . 113 . Valuation of gifts made in property .-- If the gift is made in property , the fair mar ket value thr reof at the time of the gift shall be considered the amount of the gift: Provided , That in case of real property , the assessed value in the year of the gift as shown in the tax rolls shall be considered as the fair ma r ke t value, unless the contrary is shown . Under the foregoing provisions of t he Ta x Code , t he assessed value of t h e land in the year the gift was made shall be considered as the fair mar ket value , unless the contra ry is s h own . The declaration of the assessed value of the donated real property in the gift tax retur ns is not a mandatory requirement of the law because the taxpayers ( pe titioners herein) can declare in the said returns a valuation other than the assessed va jue of the land if they considered t ha t the fair mar ket value thereof is either higher or lower than its assessed value . A valuation of real property lower than its assessed value must , hov.Jever , be based on reasonable grounds and not arbitrarily . In the case at bar , peti- tioners have declared in t he gift tax ret urns the 7(

DECISION - CTA CASE NO . 779 book value or purchase price of the donated real prope rt y ">'Jhich is lmver than the assessed value thereof . Said declarations are not per ~fraud - ulent simpl y be cause respondent Commissioner of Inter nal Rev enue and his examiners considered and adopted a very much higher valuation . Af t er all , the term 11market value'1 is not an absolute term; it involves human equation . Valua tion of real property is an i nexact science and the determination thereof by whatever method must remain an approximation . valuation of absolute accuracy is impossible . This impossibility of precise valuation is generall y recognized; the law is not so exact as to require mathematical certainty (City of l:anila v . Estrada , 25 Phil . ~08 ; Manila Ra ilroad Co . v . Velasquez , 32 Phil . 286; Hanila Railroad Co . v . Alano , 36 Phil . 506; see Comm . of Corpora ti ons & Taxat ion v . Worcester -..County Trust Co ., 305 Nass . 460 , 26 N.E . 2d 305) . - The sta gg ering difference b' etween the fair market value arrived at by the respondent and the value adopted by the petitioners is incon- sequential in the det er mination of fraud for gift tax purposes . The alleg ed huge underdeclaration of value re presents a mere conflict of opinion between the party litigants but the said irrecon- cilable disagreement in valuation does not amount (

DECISION - CTA C SE NO. 7'7 9 to fraud in the absence of satisfactory proof . In the instant case , while respondent claims that the gift tax returns filed by petitioners were fraudulent , the said returns or any signed or simple copy t hereof ca nnot be �f ound in the Bureau of I nternal Revenue rec ords s ubmitted to this Court . I t is true t hat the law ~rovides that t he assessed va lue of real property is its minimL~ value for gift tax purposes but , in t he absence of fraudulent intent to evade the gift taxes , no le gal.and valid justification warrants the imposi - tion of the 50% surcharge as fraud penalty . .~It is a cardinal rule in taxation that fraud is a question of fact and, the circumstances con- stituting it must be alle ged and proved (Commis - ; sioner of Internal Revenue v . Gonzales , et al ., G.R. No . 1- 1949 5, November 24 , 1966) . Fr a ud is never preswned because it is a serious charge ( Yutivo Sons Hard1.vare Co . v . Court of Tax Ap- peals , et al ., G. R. No . L-1 3203 , Jan . 28 , 1961); it must be alle ged and proved , at least satis - f a ctorily i f not conclusively by one who alle ges its exist ence (De Roda v . Ball~ , 48 Phil . 104; / De San tos v . Bank of the P . I . , 66 Phil . 38 ; l~enzi & Co . v . Ba stida , 63 Phil . 16; arroyo v . Granada and Gentero , 18 Phil . 484; Gomez v .

DECISION - CTA CASE NO . 779 16 Domingo , CTA Case No . 11 68 , Feb . 15, 1964) . Moreover , the burden of proof in tax cases in- volving fraud will not be sustained where re- sponden t introduces no affi r ma tive evidence but rests only on j_nferences to be drawn from col- later al facts (Balter , Fr aud under Federal Tax Law , par . 11 2 , 1953 ed . ; Ayala Se curities Corp ora- tion v . Commissioner of Int er nal Rev enue , CTA No . 1346 , June 20 , 1968) . And since a 11 false or fraudulent return with intent to evade tax" involves a state of mind , ther e must be an actual evil mo tive or intent to evade taxes or wilfully acted contrary to the truth and with the tax- payer ' s knowledge of the falsi t y of the declara- tion . To be considered are all of t he facts and circumstances incident to the prepa ration.of the alleged fraudule n t return (Balter , Fraud under Federal Tax Law , par . 113 , 1953 ed . ) . According- ly , we ~annot subscribe to the theory of re - spondent that peti tioner_s committed fraud . We find that respondent has failed t o prove that petitioners wilfully filed false and fraud- ulent gift tax returns with the intent to evade gift taxes . We will appl y , therefore, the pres - criptive period of five (5) years embodied in Section 33 1 of t h e Tax Code , supra . As the donor ' s and donee ' s gift tax returns have admitted-

DECISION '; CT CASE NO . 7'79 ' 17 ly been filed with the Bureau of Internal Revenue after March 1, 1950 but ~rior to ~pril 13 , 1950 ( pa r . 5, Respondent ' s Al1swer , CTA rec . pp . 50- 51) , res pondent has t he right to assess the deficiency gift taxes not later than April 13, 1955 . The disputed assessments in question h aving been issued by respondent on August 25 , 1959 , or more t han five (5) years from the date t he gift tax returns were filed , the right of the governmen t to assess the deficiency gi ft taxes had already prescribed . Consequently , it is purposeless to resolve the second question at issue by going into the me rits of the case . As re gards the compromise penalties for failure to file a notice of donation and late filin g of the gift tax returns , it is already well- settled jurisprudence that the Commissione r of Int ernal Revenue does not have the authority to impose such pena lties without the consent of the taxpayer ( Coll . v . U. S . T., G. R. Nos . ~-1 1274 & L- 11280 , Nov . 28 , 1958 ; Coll . v . Ba utista , G. R. No . L-1 2250 , May 27 , 1959 ; Phil . Int . Fair v . Coll ., G. R. Nos . L-1 ~928 & 1~1 2932 , Ma rch 31 , 1962) . 1fHEREFORE , the decision of res pondent Com- mi s sioner of I nternal Rev enue , assessing and

,,; DECISION - CT. CASE NO . 779 demanding from petitioners , Esta te of dilliam J . Shaw� and Wack :Jacl~ Golf & Country Club , Inc ., payment of P- 1, 565 , 776 . 05 consisting of deficiency donor ' s and donee ' s gift taxes in the sums of i=200 , 998 . 4Ll- and 5f1, 364 , 767 . 61, res pectiv e- ly , inclusive of 50% surcharge and i nterests , is reversed . ccordingly , said assessments of re ~ s pondent are hereby cancelled and declared of no for ce and effe c t . ~vi thout pronouncement as to costs . SO ORDERED. uezon City , August 23 , 1968 . 4 . ' ~� 4LAtOtRf. .ALJV~~':JF Associate Judgef' \VE CONCTJR: it-- 1 L ~ R.IU-fON L � .&VANCEf~A Associate Judge