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CIR v. LUCIO L. CO

FACTS:

The respondents in this case were majority shareholders of Kareila Management Corporation and Puregold Price Club, Inc. They owned 99.9999% of Kareila's shares and 66.55% of Puregold's shares. On March 27, 2012, Puregold's Board of Directors approved the exchange of shares between Kareila and Puregold. This exchange was later approved by Puregold's stockholders. As a result, Puregold acquired majority ownership of Kareila and the respondents' ownership in Puregold increased to 75.8329%. The respondents paid capital gains tax (CGT) for the transaction and later filed administrative claims for refund, arguing that it was tax-exempt.

The Commissioner of Internal Revenue (CIR) argued that certain conditions needed to be complied with for the share swap to qualify as a tax-free exchange, including the need for a prior BIR certification or ruling. The respondents claimed that they were not aware of any such condition imposed by law or jurisprudence. Witnesses testified that the respondents exchanged their common shares in Kareila with Puregold's shares. The Kareila shares were valued at P16.467 billion, while the Puregold shares had a subscription price of P16,477,734,375.00. As a result of the share swap, the respondents collectively owned 66.55% of Puregold's outstanding capital stock. The respondents paid CGT of P1,647,615,290.07 and sought a refund. The CTA Division granted their claim for refund, directing the CIR to refund the CGT paid.

Another group of taxpayers engaged in a share swap transaction and claimed tax exemption under Section 40(C)(2) of the NIRC of 1997. The CIR denied their claim, stating that they failed to comply with the requirements for seeking a prior BIR ruling. The taxpayers filed an administrative claim for refund with the CIR, which was granted by the CTA Division. The CIR's motion for reconsideration was denied, and the CTA En Banc affirmed the taxpayers' entitlement to refund, ruling that Section 40(C)(2) covers instances of further control resulting from the exchange.

ISSUES:

  1. Whether the CTA EB erred in finding that respondents are entitled to the claim for refund for erroneously paid CGT.

  2. Whether the exchange of property for stocks between Filinvest Development Corp (FDC) and Filinvest Alabang, Inc (FAI) qualifies as a tax-free transaction under Section 34(c)(2) of the National Internal Revenue Code (NIRC).

  3. Whether FDC and FAI should be held liable for deficiency income taxes assessed by the Commissioner of Internal Revenue (CIR) on the supposed gain resulting from the exchange.

  4. Whether the share swap transaction between respondents and Puregold is covered by the tax-free exchange provisions in the NIRC.

  5. Whether respondents' counsel had the authority to file the administrative claim for refund.

  6. Whether a prior confirmatory ruling is required for tax exemption or refund.

  7. Whether or not the Court of Tax Appeals erred in ordering the refund of excess income tax payments made by the respondents.

RULING:

  1. The Court held that the CTA EB did not err in finding that the respondents are entitled to the claim for refund for erroneously paid CGT. The subject transaction falls under Section 40(C)(2) of the NIRC of 1997, as amended. The Court reiterated the CTA EB's ruling that a prior confirmatory ruling is not a requirement for the availment of tax exemption and a claim for refund of erroneously paid tax. The Court also explained that it is not necessary for each of the transferors to individually gain control of the transferee corporation after the exchange, as long as the transferors, collectively, not exceeding five, increase their equity in the transferee corporation by 51% or more.

  2. The exchange of property for stocks between FDC and FAI qualifies as a tax-free transaction under Section 34(c)(2) of the NIRC. The control of the transferee by the transferor, either alone or with other transferors not exceeding four persons, exempts the transaction from recognizing gain or loss.

  3. FDC and FAI cannot be held liable for deficiency income taxes assessed by the CIR on the supposed gain resulting from the exchange. The combined control of FDC and FAI over the transferee corporation's outstanding shares is 70.99%, which exceeds the 67.42% control FDC initially had prior to the exchange.

  4. The share swap transaction between respondents and Puregold is covered by the tax-free exchange provisions in the NIRC. Respondents increased their control over Puregold from 66.57% to 75.83% after the exchange. Thus, they cannot be held liable for income taxes on the supposed gain resulting from the transfer.

  5. The presumption of authority of respondents' counsel remains unrebutted, and the lack of authority was cured when respondents executed a Special Power of Attorney and submitted it to the court. The Court agrees with the CTA that the administrative claim was valid and timely filed.

  6. A prior confirmatory ruling is not required for tax exemption or refund. BIR rulings merely operate to "confirm" the existence of the conditions for exemption provided under the law. If all the requirements for exemption are complied with, the transaction is considered exempt, whether or not a prior BIR ruling was secured by the taxpayer. The CIR should not impose additional requirements that are not provided by law and should have made its own determination of the merits of the claim for exemption.

  7. The Decision and Resolution of the Court of Tax Appeals ordering the refund of excess income tax payments made by the respondents are affirmed.

PRINCIPLES:

  • The requisites for the non-recognition of gain or loss in a tax-free exchange are: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property of the transferor; (c) the transfer is made by a person, alone or together with others, not exceeding four persons; and, (d) as a result of the exchange, the transferor, alone or together with others, not exceeding four, gains control of the transferee. (Section 40(C)(2) of the NIRC of 1997, as amended)

  • The element of control is satisfied even if one of the transferors is already owning at least 51% of the shares of the transferee corporation, as long as after the exchange, the transferors, not more than five, collectively increase their equity in the transferee corporation by 51% or more. (Filinvest Development Corp. v. Commissioner of Internal Revenue)

  • The term "control" is defined as ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled to one vote.

  • A lawyer is presumed to be properly authorized to represent any cause in which he appears, and no written power of attorney is required to authorize him to appear in court for his client.

  • The presumption in favor of the counsel's authority to appear on behalf of the client is strong, as it arises from the lawyer's pledge to act with honesty, candor, and fairness.

  • Substantial justice, equity, and fair play should prevail over technicalities and legalisms.

  • The government should not misuse technicalities to keep money that does not belong to it and thereby enrich itself at the expense of law-abiding citizens.

  • The government should apply the same standards of fairness and honesty to itself in refunding excess tax payments as it expects from taxpayers.

  • The State must lead by example in adhering to honor, dignity, and uprightness.