CTA Case No. 672 (Decision)

/ RF.T'U~LYC OF THE PSTLIPPl~E8 cnr.iRT OF TAX APPEA LS QUEZON crt'Y ALFONSO Z. S YCIP and C. �r. A. CASE No. 672 IN'rERNAT IONAL CONS TRUCT ION CORPORATION, Petitioners, - versus - C0r�llUSS IONBR OF INTERNAL RE;VENUE, ti.es po nne nt. x- - - - - - - - - - - - - -x D E CI S ION This is an appeal from a dec is ion of respondent Commissioner of Internal Revenue dated April 7, 1959, denying the request for the withdrawal or cancella- tion of the donor ' s and donee's 6ift tax assessment issw3d against petitioners, Alfonso z. Sycip, as donor, and International Construction Corporation, as donee, in the amounts of it35,899 . 09 and ~325,198 . 87, respectively . The assess ment v1as issued on account of the transfer allegedly made by petitioner Alfonso Z. Sy- cip of ten (10) parcels of land in favor of the Inter- national Cons tructton Corporation, pursuant to Sec- tion 111 of the Tax Code, wh ich reads: S r.:C. 111 . Transfer for less than aoe,g,uate and fUll cons iderat ion. - Hhere property is transferred for less than an adequate and full consideration in money or money ' s worth, then the amount by i'ITh ich the val U3 of the property exeeed- Ei'J. the value of the consider~tion shall, for t he purpose of the tax 1roposed by this Chapter, be deemed a gift, and shall

.. DECIS ION - CTA CA3E No . 672 2 be incl u:led in computing the amount of gifts made during ,the calendar year. The facts are not disputed . It appears that petitioner International Construction Corporation is a close corporation owned by the family of petitioner Alfons o z. Syc ip. On February 21, 1954, petitioners entered into a contract e nti tle--1 11Agreement of Sale, 11 where in Al- fonso Z. Sycip agreed to sell to the International Construction Corporation, and the latter to buy from the former ten (10) parcels of lan:l , with a total area of 1?,184.95 sq . m., situated at Nagtahan street, district of San t1:iguel, Hanila. , ..,,vith the improvements thereon, except a 15-door building known as the 11Nag - tahan �Apartment, 11 a bodega and a building known as the 11 Grace Christian High School, 11 for the sum of ~227 ,089. 80, with interest at 5% per annum , and pay- able in shares of stock at par value upon the in- crease of its capitalization. The aforesaid ten (1 0) parcels of land subject matter of the agreement of sale is covered by Transfer Certificates of Titl e Nos . 10737, 10738, 21072 , 21073, 21074, 21075, 23775, 23776 and 23777 of th~ Register of Deeds of Manila . The pertinent provisions of tlv~ aforesaid agreement of sale read as follows: NO',~ 'l'H~REFORB , for and in co.ns idera- tion of the fore~oing premises , the par -

.. DECLS I ON - CTA CASE No. 672 3 ties hereto have mutually covenanted and agreed and by these presents covenant and agree, as follows: 1 . That the VTI:NDOR shall sell to the V'\NDES and the VENDETJ! shall purchase from the VTJ!NT)OR the above Clescribed ten (10) parcels of land together with the improvements thereon except as herein- after specified for the sum of T\-JO HUNT)RSD TvJSNTY S TGV1~N THOUSAND EIGHTY- NINS P~SOS AND EIGHTY C~NTAVOS (�227 , 089. 80), Philip- pine currency , to be paid in the manner hereinafter stipulated; 2. That the VSNDES shall execute a promissor.'1 note in favor of the VENDOR for the stipulated purchase price with interest at the rate of five per centum (5%) per annum from the date of the no te until it is fully paid; , 3. That the said amount of �227,089. 80 with interest at the stipulated rate shall be paid to the V8NDOR by the V~NDEE vli th shares of stocks at par value of the VEND- EE corporation upon the increase in capitalization of the said VSND~~ cor- poration; 4. That the V~NDS~ shall ass urr1e and pay all taxes and oth ~ r expenses leVied upon or incurred in connection with the said ten (10) parcels of land and improve- ments thereon except as hereinafter ex- cepted , and shall likewise enjoy the rentals or fruits thereof from March 1 , 1954; 5. That this Agreement of Sale does not inclllfle the buildings in the name of 'Hr . John Sycip presently existing on the lan4 , which consist of a fifteen (15) 11door 11 building known as the 11 Nagtahan Apartment 11 and a bodega built on two ( 2) � parcels of land Oiifned by the herein V~NDOR , and neither dces this Agreement of Sale inclUde the building thereon known as the 11 Grace Christian I!igh S choo1 11 ;

.. DSCISION - CTA Ci18 1~ No. 672 4 6. That, upon notice by the Vr.!:ND8E to the VENDOR which shall not be later than October 31, 1952, that said V8NDEE is ready to issue to the VSNDOR the equivalent shares of stock at par value of the ~NDEE corporation for the pay- ment of the said ten (10) parcels of land with the improvements thereon except as hereinabove specil~ied , the said VENDOR shall execute a deed of absolute sale over the real properties subject of this Agree- ment in favor of the V~NDEE; and 7. That the VBNDOR hereby agrees and binds himself and his he irs to execute and deliver in favor of the VSNDE~ any and all documents necessary and proper in order to validly convey the ownership and title of the said ten (10) percels of land together vJith the improvements thereon except as here in- above s _p3c if ied to the VSND~E . On February 21 , 1954, the Vendee International Construction Corporation , thru its Treasurer Mr . Mariano V. Godinez, executed a non-negotiable prom - issory note in favor of Alfonso Z. Sycip in the amount of if227 ,089. 80 , \vith interest at the rate of 5% per annum Which is hereby quoted as follows: In consideration of the transfer to this corporation of the ten (10) parcels of lan~, together with certain improve- ments thereon, situated at Nagtahan Street, San l:iguel, Nanila, covered by Transfer Certificates of Title Nos . 10737, 10738, 21072, 21073, 21074, 21075, 23775, 23776 and 23777 of the Regis try of Deeds for the City of Manila and sub- ject to the terms and conditions speci- fied in that Agreement of Sale executed on even date, we hereby promise to pay t~ , ER . ALFONSO Z. SYCIP a t his office in the City of Manila , Philippines, the sum of T1;IO HUND~SD T'.J"SNTY S SVS!\ THOUSAND ' v7~

D8CIS I ON - CT C.:~ �~ No. r-.,72 5 eighty nine pesos and 80/ 100 (�227 ,089. 80), Philippine currency, with interest there- ' on at the rate of five percent ( 5%) per annum , such payment to be made by the issuance in his favor of fully paid shares of stock at 1Jar value of this corporation upon the increase in its capi talization correspondin6 to the amount of the princi- pal obligation eVidenced by this promissory note With interest dt the above -mentioned rate . On the basis of the above agreement , respondent Commissioner C'f Internal Revenue on July 25, 1956, assessed petitioners Alfonso z. Sycip and the I nterna- tiona1 Construction Corporation for donor ' s and donee ' s 61ft tax in the amount of f35 , 899. 09 an f-325 ,198. 87, respectively. The 'lonor ' s an\1 donee 1s gift tax assessment \>las based on the findings by respon:'lent 's examiner that, per the agreement of sale , there exists a. valir'l transfer of the ten (10) percels of lan"'l from 11.lfonso Z. Sycip to the International Construction Corporation for less than their adequate and full consideration; that this conclusion was arrived at by considerin6 the p~evail in6 market price of thQ ten (10) parcels of lanr at the time of th~ transaction at ~40 . 00 per sq. rn � , and that takin~ into account the total area of the parcels of land to be 15 ,184. 95 sq. m., the total fair market value therQoZ was �607 , 398.00. Deduct:n6 therefrom the value of consicieration of f227,089 . 80 , plus interest of 5fo from February 21 , 1954 to October 31 , 1955 in the

DECISION - CTA CASE NO . 672 6 sum of ~18 , 92~.17 , or a total of ~2~ , 013 . 97 there resulted a difference cf 361 , 38~ . 03 , vlhic h was c onsidered a gift subject to donor ' s and donee ' s taxes under Section 111 of the Tax Code . Petitioners protest~ the donor ' s and donee ' s gift tax assessment in a letter dated October 21 , 1966 , alleging that no transfer taxable as a gift under Sec- tion 111 of the National Internal Revenue Code was effected by the petitioners Alfonso z . sycip and the International Construction Corporation by their agree- ment of sale cf February 21 , 195~ as the ten (10) par- eels af land were never transferred or conveyed to I the said corporation. Petitioners further contended , in the alternative , that assuming the agreement af sale resulted in a taxable donation , the amount of taxes assessed are excessive reasoning out as follows: x x x . In the first place , the fair market value of the real properties as of February 21 , 195~ has been grossly overstated . We have had an independent appraisal made of the properties mentioned in the instrument of February 21 , 195~, and according to this appraisal , the fair market value of the property at the time was only 20. 00 per squa re meter , or a total value of ~303 , 699 . 00 x x x . Lastly, even if it should turn out that the fair market value of the proper- ties to be tr ansferred by Mr . Sycip ex- ceed the fair narket value ct' the shares issued to him , and that it was Mr . Sycip ' s intention to make a taxable gift , never- theless the amount of the taxable gift is not the entire excess but only a portion

DBCLSION - CTA CiS :I: No . 672 7 thereof, because Mr . Sycip is a substantial s tockhold.er of the corporation. It is set- tled that the gift tax should only be ap- plied to the extent by which the taxpayer, by his contribution to the corporation, benefited the corporation, after exclUding so much of the corporate interest as be- l ongs to the taxpayer- donor. Neantirne , or on J-anuary 2, 1957, International Construction Corporation increased its capital stock from P5oo ,ooo . oo to ~1 , 5oo , ooo . oo . On October 28 , 1958 , petitioner Alfonso z. Sycip sold a portion of the lands subject matter of the Agreement of Sale and covered by Certificates of Title. Nos . 21072 , 21073 , an~ 21074 (now covered by TCT No . 59373) to the Jovernment of the Republic of the Philip- pines . On January 26, 1959 , petitioners v.;rote a 11JI.~emo - ranr1um 11 reit,erating their protest against the assess- ment an.; requesting \vithdrawal of the same . On April 7, 1959 , responnent ctenied petitioners 1 protest on the ground that there was a val ic1 and com- p1eted sale as the agreement shovJS that the Vendee International Construction Corporation shall assume and pay the realty taxes in connection with the ten (10) parcels of lan4 and L~provements , and shall en - joy the rentals or fruits thereof from Harch 1 , 1954; that the elements of valid sale, namely : (1) sub- ject matter; ( 2) consideration , (3) parties , and (4)

D~CLSION - CT"'" CASE No. 672 8 delivery of the subject matter, are present; that the properties in question have been placed under the vendee ' s possess ion and control as shovm by the facts that it was leasing the same to va'ious tenants from 1955 and paying the real estate tax on said proper- ties; and that there vJas consideration in the form of a non-negotiable promissory note promising to pay the sum of ~227,089 . 80 dated February 21 , 1954 issued by the Treasurer of the Vendee Corporation. From this decision , petitioners appea.lt:!d to this Court on June 15' 1959. During th-e pendency of this appeal, or on October 4, 1960, petitioners Alfonso Z. Sycip and International Construction Corporation entered into an agreement an- nulling ann rescinding their agreement of sale dated February 21 , 1954. The issues submitted for resolution before this Court are: (1~ 1,fuether or not the agreement of sale executed on February 21 , 1954 had the effect of transferring the ten (10) parcels of land in favor of International AClofnosntsrouczt.ioSnyCciopr;poration by petitioner (2) Whether or not the said properties were transferred for lB ss than their ade- quate and fu 11 consideration in money or money ' s worth, the amount of the values of the property in excess of the value of consideration be deemed a 5ift subject to donee 's and donor 's gift tax pursuant to

DECISION - CTA Ci\8 E r~o . 672 9 Section 111 of the Tax Code; (3) Whether or not the fair market value of th.s real properties in question, computed at the rate of ~40 . 00 per sq . m. , repr(~sents the true or fair market value th,ereof after they have executed the con- tract on February 21, 1954; and (4) \Vhethe r or not the entire ex- cess of the fair markef value of the prop- erties over the value of the shares of stock intended as the consideration of the transfer or only a portion thereof cons ti- tutes a taxable e:ift, assumine: that a gift tax is due. 1;1]e will pass upon the first and second issues jointly since they are interrelated. Under Section 111 of the Tax Code, vlhere prop- erty is transferred for less than adequate cons idera- tion, th,g balance bet'.veen the fair market value of the property ~nd the actual consideration is considered a gift . PRti tioners urge that the contract between them !s ~ not - an � executed contract but an executory contract to sell, whgre therR is no legal transfer of 0\vner- ship . 'RP.sponAent for his part contends that the aforesaid contract is a contract of sale that transfers ownership. A sale is an executory contract v1he re the seller merely promises to transfer the property at some future date, or the agreement contemplates the per- formance of some act or condition necessary to complete the transfer (Feliza Roman vs . J . R. Her idge, 47 Phil . ,� -~'""'""' ! 7~ \ ~ ><

D~CISION CTA CJ~S �~ IJo . r..,72 10 98 ). Un0er such a contract, there is no transfer of ownership; it only creates personal obligations t.o comply (GuerrPro vs . Yfiigo, 50 O. G. 5281) . In the case of Leon s . Ramos vs . Filemon F. Salcedo, 48 Off . Gaz . 729,732 January 31, 1950, it was held tha t: A sale is an executory contract, 11 if the seller merely promises to transfer the property at some future dat.a, or the agreement contemplates th~ performance of some act or condition necessary to com- plete the transfer. Under such a contract, until the act is performed or the condi- tion fulfilled, which is nece ~ sary to con- vert the executory into an executed con- tract, no title passes to the buyer as against the seller or persot~ claiming un- d3r h irn tt (McCUllough & Co . vs . Berger, 43 Phil. 823, 831). While it is conceded that a mere recital tha t the seller 11agree to sell" may not be conclus iva that tha title was not intended to pass immediately, it is however, clear from the agreement Exhibit A 11 11 that it imports an executory contract. In it, th~ seller an0 appellee merely 1 ~gree0 to sell, transfer and con- vey to the purchaser-appellant, the prop- erty at some future 0ate, ann it contem- plat~s the performance of some act or con- Aition necessary to complete the transfer, that is, payment by appellant of all th~ installments within the periods specified in paragraph 3 thereof; that according to paragraph 4 of the same contract, only upon the full payment of the pQrchase price in th3 manner s tipula.tei in paragraph 3 shall the formal deed of conveyance of said prop- erty in favor of the appellant be executed by the appellee; an that, according to paragraph 6, the non-payment of such price as agreed upon, renders the contract auto- matically rescinded . Being an executory contract, it did not, therefore, operate to pass title to or dominion over the ~rop erty (~J as vs . Lanuza, 5 Phil . 457, 458); and the appellee is not bound to deliver

DECISION - CTA CASE No . 672 11 or give the material possession of said property to appellant , merely upon its execution. xx x.x :xx. A perusal of the terms of the contract Exhibit A readily shows that same is merely an executory contract to sell and not an executed contract of sale ., The contract states: "The VENDOR shall sell to the VENDEE and the VENDEE shall purchase from the vrENDOR x x . " It contemplates the performance of some acts or condi- tion necessary to complete the transfer, 1:o wit , that petitioner corporation increases its capitalization and thereafter gives notice "not later than October 31,1955 that said VENDEE is ready to issue to the VENDOR the equivalent shares of stock at par value of the VENDEE corporation x X x . �� The consideration of the sale is not the stipulated ~227 , 089.,80 as pretended by re- spondent but its equivalent in stocks . As stated in the promissory note '*such payment be made by the issuance in his favor of fully paid shares of stock at par value of this corporation upon the increase in its capitalization.tt In the words of the contract itself , said shares of stock are "the payment of said ten (10) parcels of land." OWnership was obviously never intended to pass to International Construction Corporation by the mere execution of Exhibit A; hence, the stipulation that the nvendor shall execute a deed of absolute sale x x" when the stocks are

D~CIS ION - CTA C.~-~ �~ N8 . 672 12 ready a.n:'l notice is given "not later than October 31, 1955, 11 which was never c'lot13 . Needless to say, under the terms of Exhibit A what the ' parties executed was an executory contract to sell that does not pass title and not an executeri contract of sale that con- veys owners hip. Taxv.rise, for a gift to exist 11 there must be a conveyance, assignment, or transfer sufficient to vest le~al title on the donee without power of revocation ~t the will of the donor . 11 C~dson vs . Lucas, 40 F (20) 398. ) The executory contract to sell, Sxhibit A, was not a transf3r sufficient to vest legal title on peti- tioner corporation; that transfer had yet to b3 ~ade by an executed contract of sale by the parties there- in. To lay the gift tax at once in spite of the pos- sibility that th~ sale may not be consummated, is to lay it on gift that may never become consummated in a real sense . The gift tax 11 is aimed at transfers of title that have the quality of a gift, and a gift is not consummated until put beyonti recall . 11 (Burnet vs . Guggenheim, 77-u . s . , 1 . ed. 748. ) Thus, it has been held that wh.9n the consummation of a gift is conditioned on the occurrence of certain events, 11s uch conditions precedent are themselves sufficient to prevent the contract from constituting a gift 1~ (Fred G. Gruen vs . Commissioner of Internal Revenue, 1 T. C. 130) .

DECISION - CTA CASE No . 672 13 Respondent , however , calls .our attention to the fact that on January 28 , 1957, the capital stock of petitioner corporation was increased and thereafter Alfonso z. Sycip demanded in writing the compliance of the terms of Exhibit A. We do not find these as of decisive consequence . It is well to recall in this connection that nothing resulted from said demand and on October 28, 1958-, Alfonso Sycip sold three of the ten parcels of laqd in question and there is nothing to show that the purchase price thereof landed in . the coffers of petitioner corporation. Moreover , on Octo- ber 4, . 1960; Alfonso Sycip and petitioner corporation m~tually cancelled Exhibit A. Under Article 733 of the Civil Code of the Philippines , dor~tions with an onerous cause is governed by the rules on contract and under said rules the gift becomes consummated only upon the consummation of the sale on which it is dependent. Apparently, the parties never constwmated the sale and thus there is a lack of the essential requisite of a taxable �gift , which is 11 a conveyance, assignment or transfer sufficient to vest title on the donee . " (Edson v. Lucas , supra) Respondent cites the case -of William H. Board vs . Commissioner of Internal Revenue , 14 TC 322, where it was held that a completed gift is subject to the gift

DECISION - CTA CAS.-;: r~o . 672 tax although it is later returned. Sa:id case is not in point b3cause there is no completed gift in the present -case. Res pondent urges that after the execution of ~x- h ibit A, P�3tit ioner corporation exercised 11 unfe ttered right of ov.rnership 11 over the parcels of lan c1 in ques- tion _, basing this sweeping conclusion on the fact that in the contract petitioner corporation assumed the payment of taxes but was gran ted the right to en- joy the rentals of the property in question from March 1 , 1954~ An executed contract of sale operates to pass title to, or dominion over th3 subject of the contract and this involves not only the obliga tion to pay taxes and the right to enjoy th3 rentals but a host of other obligations and rights . That petitioner had only this one obligation an~ this one right hardly supports the pretension that petitioner corporation had unfettered ri.sht of ownership. Then again the fact that the parties expressly made a stipulation that pe- titioner corporation should pay the taxes but enjoy the fruits r a ther clearly indicate that Bxhibit A is indeed an executory contract to sell and not an executed contract. If the parties intended Exhibit A to be an executed contract of sale anci so draften it, there would have been no need to make an express stipulation on the payment of taxes an~ the enjoyment of rentals

DGCIS ION - CTA CllSE No . 672 15 because these pass onto the vendee \vithout so stipulat- ing. Respondent invites our attention to the examiner 's finding submitted on June 2, 1950, four years after the assessMent, to the effect that the ten parcels of land in question and the related obligation in the amount of ~227,089. 80 plus interest of 5% per annum under the promissory note of petitioner corporation dated Februa- ry 21, 1954 ar3 entered in the ~ooks of p8titioner cor - poration. In this connection, it appears that in the financial statement , Exhibit R-1, of September 30, 1959 vlhich is not contested by responnent there is an item unaer "Liabilities and Stockholders ' Equity" which says: 11NOTS PAYABL"?. TO S TOCKROLDERS (Prin- cipal of �227,089 . 80 and Accrued Interest) (Note 3) 11 Note 3 aforesaid reads as follows: "Note 3: Land costing ~227,089 . 80 is the subject of an agreement of sale between the company ani Nr . Alfonso Sycip . The absolute deed of sale transferring trn ownership to the company \vill be executed upon notice from the company that it is ready to issue to the vendor the equiva- lent shares of the company ' s stock at par value in payment for the purchase price of the property plus accumulated interest . 11 It can b,e rea/! ily gleaned from this entry that they do nothing more than record the transaction in-

� DECISION - CTA CASE NO. 672 16 volving the executory contract to sell of February 21 , 1955 , of the ten parcels of land involved here- in . In effect, the entry does not deny that the sale was still to be consummated , the consideration thereof yet to be paid, and the title to the parcels of land still to be transferred to petitioner- corporation . This is hardly consistent with re- spondent ' s pretension that the entry aforesaid shows that the contract in question was an executed contract of sale and title passed onto the peti- tioner- corporation . Having reached the conclusion that there was no gift subject to the gift tax , it is unnecessary to pass on the other issues raised in this case . WHEREFORE, the appealed decision is hereby reversed . Without pronouncement as to costs . SO ORDERED . Quezon City , November 28, 1973 . ;L__ �f ,;(__.___ ~ RAMON L. AVAI\fCENA Associate Judge WE CONCUR: ---;/R1-/miA~ N M. DMALI . -- ) Presiding Judge ~foi~~ft As~~~~te .Jud~~~ ~