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Commissionerof Internal
Revenue vFilinvest
DevelopmentCorporation
Petitioner:Commissioner of
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Internal Revenue
Respondent:
Filinvest
Development
Corporation
July 19, 2011
Emergency
Recit:
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FDC owns 80%
of the
outstanding
shares of FAI
and 67.42% of
FLI. FDC and
FAI entered into
a
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Deed of
Exchange with
FLI where the
former will
transfer parcels
of land to the
latter and in
exchange, shares
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of stock
of FLI were
issued to FDC
and FAI. BIR
assessed both
FDC and FAI for
deficiency taxes.
One of the bases
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for the
assessment is the
cash advances
FDC extended in
favor of its
affiliates. The
CIR argued that
they were
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interest free
despite the
interest bearing
loans it obtained
from banking
institutions.
I:
(see issue 1)
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R:
CIR's power to
distribute,
apportion or
allocate gross
income or
deductions
between or
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among
controlled
taxpayers may
be exercised as
long as
the controlled
taxpayer's
taxable income
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is not reflective
of that which it
would have
realized had it
been dealing at
arm's
length with an
uncontrolled
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taxpayer, the
CIR can make
the necessary
rectifications in
order to prevent
evasion of taxes.
However, the to
power to impute
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"theoretical
interests" is not
included in the
broad parameters
of CIR. There is
no
evidence of
actual or
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possible showing
that the advances
FDC extended to
its affiliates had
resulted to the
interests
subsequently
assessed by the
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CIR.
Facts:
(You’ll read this
case again under
a different topic)•
The owner of
80% of theoutstanding
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shares of
respondent
Filinvest
Alabang, Inc.
(FAI),
respondent
Filinvest
Development
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Corporation
(FDC) is a
holding
company which
also owned
67.42% of the
outstanding
shares of
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Filinvest Land,
Inc. (FLI).•
FDC and FAIentered into a
Deed ofExchange with
FLI whereby theformer both
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issued to FDC
and FAI. As a
result
of the exchange,
FLI’s ownership
structure was
changed.•
FLI requested a
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ruling from BIR
to the effect that
no gain or loss
should be
recognized in the
aforesaid
transfer
of real
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properties.
Acting on the
request, the BIR
issued a ruling,
finding that the
exchange is
among those
contemplated
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under Sec 34 (c)
(2) of the old
NIRC which
provides that
“(n)o gain or
loss shall be
recognized if
property is
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transferred to a
corporation by a
person in
exchange for a
stock in such
corporation of
which as a
result of such
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exchange said
person, alone or
together with
others, not
exceeding four
(4) persons,
gains
control of said
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corporation."•
FDC received
from the BIR aFormal Notice of
Demand to paydeficiency
income anddocumentary
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stamp
taxes, plus
interests and
compromise
penalties. The
deficiency taxes
were assessed on
the taxable gain
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supposedly
realized by FDC
from the Deed of
Exchange it
executed with
FAI and FLI, on
the dilution
resulting
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from the
Shareholders’
Agreement FDC
executed with
RHPL as well as
the “arm’s-
length” interest
rate and
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documentary
stamp taxes
imposable on the
advances FDC
extended to its
affiliates.o
FAI similarly
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received from
the BIR a
Formal Letter of
Demand for
deficiency
income taxes.•
Both FDC andFAI filed their
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respective
requests for
reconsideration/p
rotest. The CIR
failed to resolve
their
request thus,
FDC and FAI
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filed a petition
for review with
the CTA
pursuant to Sec
228 of the 1997
NIRC.o
They allege that
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no taxable gain
should have been
assessed from
the subject Deed
of Exchange
since FDC and
FAI collectively