Case Summary (G.R. No. 120223)
Facts
Cibeles Insurance Corporation (CIC), 99.991% owned by Benigno P. Toda, Jr., sold its Makati City commercial building in two simultaneous transactions on August 30, 1989: first to Rafael A. Altonaga for ₱100 million, then by Altonaga to Royal Match Inc. (RMI) for ₱200 million. CIC declared only ₱75.7 million gain in its 1989 return and paid corporate tax accordingly; Altonaga paid ₱10 million capital gains tax. Toda sold his CIC shares in July 1990 and died in January 1994. In March 1994 the BIR assessed CIC (and later Toda’s estate) for ₱79.1 million deficiency income tax. The Court of Tax Appeals and the Court of Appeals held the scheme to be lawful tax avoidance, ruled the three-year assessment period had lapsed, and refused to pierce CIC’s separate personality.
Applicable Law
1987 Philippine Constitution; National Internal Revenue Code of 1986 (NIRC), as amended by the Tax Reform Act of 1997; key provisions:
• Section 24(a) (35% corporate tax rate)
• Section 34(h) (5% capital gains tax on individuals)
• Section 203 (three-year assessment period)
• Section 223(a) (ten-year assessment period for false or fraudulent returns)
Issues
- Whether the two-step sale constituted tax evasion rather than permissible tax avoidance.
- Whether the BIR’s assessment was barred by prescription.
- Whether Toda’s estate could be held personally liable for CIC’s deficiency tax.
Tax Evasion vs. Tax Avoidance
The Court found the intermediary sale to Altonaga to be a sham designed solely to reduce tax from 35% to 5%. Evidence showed RMI paid CIC proceeds before Altonaga paid CIC, and Altonaga never assumed real ownership or economic risk. The SC held the transactions must be viewed in substance as a single direct sale by CIC to RMI, triggering corporate income tax at 35% on the full gain. The scheme bore all elements of tax evasion—underpayment of tax known to be due, fraudulent intent, and unlawful means—and thus the BIR’s deficiency assessment was justified.
Period of Assessment
Because CIC’s 1989 return omitted the true gain with intent to evade tax, it constituted a false return. Under NIRC Section 223(a), the ten-year assessment period runs from discovery of the fraud (March 8, 1991). The January 9, 1995 assessment fell well within that period and was therefore valid.
Personal Liability of the Estate
While corporate personality is generally
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Facts of the Case
- Cibeles Insurance Corporation (CIC), 99.991% owned by Benigno P. Toda, Jr., sold a 16-storey commercial building and two parcels of land on Ayala Avenue, Makati City, on 30 August 1989.
- CIC purportedly sold the property to Rafael A. Altonaga for ₱100 million; Altonaga immediately sold it the same day to Royal Match Inc. (RMI) for ₱200 million.
- Altonaga paid a ₱10 million capital gains tax on the second sale.
- On 16 April 1990, CIC filed its 1989 corporate income tax return, declaring a gain on sale of real property of ₱75,728,021 and paying net income tax of ₱26,341,207.
- On 12 July 1990, Toda sold his entire shares in CIC to Le Hun T. Choa for ₱12.5 million and undertook to hold the buyer and CIC free from tax liabilities for fiscal years 1987–1989.
- Toda died on 16 January 1994.
Procedural History
- 29 March 1994: BIR issued Notice of Assessment to CIC for ₱79,099,999.22 deficiency income tax for 1989.
- 27 January 1995: Estate of Toda received a separate Notice of Assessment for the same amount.
- 19 October 1995: Commissioner dismissed the Estate’s protest, finding a fraudulent tax-evasion scheme.
- 15 February 1996: Estate filed petition for review with the Court of Tax Appeals (CTA).
- 3 January 2000: CTA Decision held the scheme was mere tax avoidance, prescribed under three-year period, and declined to pierce CIC’s corporate veil.
- 31 January 2001: Court of Appeals (CA) affirmed the CTA.
- Present petition for review to the Supreme Court challenges the CA decision.
Issues
- Whether the two-step sale scheme constitutes tax evasion or lawful tax avoidance.
- Whether the ten-year or three-year prescriptive period applies to the assessment.
- Whether the Estate of Toda can be held liable for C