290

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. G.R.No.147188.September14,2004.

*

COMMISSIONEROFINTERNALREVENUE, petitioner, vs.THEESTATEOFBENIGNOP.TODA,JR.,represented by Special Coadministrators Lorna Kapunan and Mario LuzaBautista,respondents.
Taxation; Tax Avoidance Distinguished from Tax Evasion. Tax avoidanceandtax evasion arethetwomostcommonwaysused by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawfulmeansandwhenavailedof,itusuallysubjectsthetaxpayer tofurtheroradditionalcivilorcriminalliabilities. Same; Same; Factors to Determine Tax Evasion .Tax evasion connotestheintegrationofthreefactors:(1)theendtobeachieved, i.e., the payment of less than that known by the taxpayer to be legallydue,orthenonpaymentoftaxwhenitisshownthatatax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willfull, or deliberate and not accidental; and (3) a course of action or failure of action which is unlawful.
_______________
* FIRSTDIVISION.

291

VOL.438,SEPTEMBER14,2004

291

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. Same; Same; Fraud; Meaning of.Fraud in its general sense, isdeemedtocompriseanythingcalculatedtodeceive,includingall acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantageistakenofanother. Same; Same; Same; The intermediary transaction in this case constitutes one of tax evasion .In a nutshell, the intermediary transaction,i.e.,thesaleofAltonaga,whichwaspromptedmoreon themitigationoftaxliabilitiesthanforlegitimatebusinesspurposes constitutesoneoftaxevasion. Same; Prescriptions; The period within which to assess tax in cases of fraudulent returns, false returns and failure to file a return is ten years from discovery of the fraud, falsification or omission .Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discoveryofthefraud,falsificationoromission,asthecasemaybe. Same; Same; The issuance of the correct assessment for deficiency income tax was well within the prescriptive period .As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. Thefalsereturnwasfiledon15April1990,andthefalsitythereof was claimed to have been discovered only on 8 March 1991. The assessmentforthe1989deficiencyincometaxofCICwasissuedon 9January1995.Clearly,theissuanceofthecorrectassessmentfor deficiencyincometaxwaswellwithintheprescriptiveperiod.

PETITIONforreviewoncertiorariofadecisionoftheCourt ofAppeals. ThefactsarestatedintheopinionoftheCourt. Bunag & Associates for The Estate of Benigno P. Toda,Jr.
292

292

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

DAVIDE,JR.,C.J.: ThisCourtiscalledupontodetermineinthiscasewhether the tax planning scheme adopted by a corporation constitutestaxevasionthatwouldjustifyanassessmentof deficiencyincometax. 1 The petitioner seeks the reversal of the Decision of the Court of Appeals of 31 January 2001 in CAG.R. SP No. 2 57799affirmingthe3January2000Decision oftheCourt 3 ofTaxAppeals(CTA)inC.T.A.CaseNo.5328, whichheld that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation(CIC)intheamountofP79,099,999.22forthe year1989,andorderedthecancellationandsettingasideof the assessment issued by Commissioner of Internal RevenueLiwaywayVinzonsChatoon9January1995. The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiencyincometaxarisingfromanallegedsimulatedsale of a 16storey commercial building known as Cibeles Building,situatedontwoparcelsoflandonAyalaAvenue, MakatiCity. On2March1989,CICauthorizedBenignoP.Toda,Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and thetwoparcelsoflandonwhichthebuildingstandsforan 4 amountofnotlessthanP90million.
_______________
1

Rollo, pp. 2231. Per Associate Justice Rodrigo V. Cosico, with

AssociateJusticesRamonA.BarcelonaandAliciaJ.Santosconcurring.
2 Id., pp. 3241; CTA Records, 524533. Per Presiding Judge Ernesto

D. Acosta, with Associate Judges Ramon O. De Veyra and Amancio Q. Sagaconcurring.

3Entitled The

Estate of Benigno P. Toda, Jr., represented by Special

CoAdministrators Lorna PatajoKapunan and Mario Luza Bautista versus Commissioner of Internal Revenue.
4CARollo,p.73.

293

VOL.438,SEPTEMBER14,2004

293

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

On30August1989,Todapurportedlysoldthepropertyfor P100 million to Rafael A. Altonaga, who, in turn, sold the samepropertyonthesamedaytoRoyalMatch,Inc.(RMI) forP200million.Thesetwotransactionswereevidencedby Deeds of Absolute Sale notarized on the same day by the 5 samenotarypublic. ForthesaleofthepropertytoRMI,Altonagapaidcapital 6 gainstaxintheamountofP10million. On16April1990,CICfileditscorporateannualincome tax return7 for the year 1989, declaring, among other things,itsgainfromthesaleofrealpropertyintheamount of P75,728.021. After crediting withholding taxes of 8 P254,497.00,itpaidP26,341,207 foritsnettaxableincome ofP75,987,725. On12July1990,Todasoldhisentiresharesofstocksin CICtoLeHunT.ChoaforP12.5million,asevidencedbya 9 Deed of Sale of Shares of Stocks. Three and a half years later,oron16January1994,Todadied. On 29 March 1994, the Bureau of Internal Revenue 10 (BIR)sentanassessmentnotice anddemandlettertothe CIC for deficiency income tax for the year 1989 in the amountofP79,099,999.22. ThenewCICaskedforareconsideration,assertingthat theassessmentshouldbedirectedagainsttheoldCIC,and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987 11 1989.
_______________
5CARollo,pp.7478;8892. 6Exh.E,CTARecords,p.306. 7Exh.L,CTARecords,p.340. 8Exhs.M,M1,NandN1,CTARecords,pp.316317. 9Exh.P,CTARecords,pp.357365. 10BIRRecords,pp.448449. 11 Id. ,atpp.446447.

294

294

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special coadministrators Lorna Kapunan 12 andMarioLuzaBautista,receivedaNoticeofAssessment dated 9 January 1995 from the Commissioner of Internal Revenuefordeficiencyincometaxfortheyear1989inthe amountofP79,099,999.22,computedasfollows: IncomeTax1989 NetIncomeperreturn Add:Additionalgainon saleofrealproperty taxableunderordinary corporateincomebutwere substitutedwith individualcapitalgains (P200M100M) TotalNetTaxableIncome perinvestigation TaxDuethereofat35% Less:Paymentalready made 1.Perreturn 2.ThruCapitalGainsTax madebyR.A. Altonaga Balanceoftaxdue Add:50%Surcharge 25%Surcharge Total Add:Interest20%from 4/16/904/30/94(.808) TOTALAMT.DUE& COLLECTIBLE
_______________
12 Id. ,atpp.474475.

P75,987,725.00

10,000,000.00

100,000,000.00 P175,987,725.00 P61,595,703.75 P26,595,704.00 36,595,704.00 P24,999,999.75 12,499,999.88 6,249,999.94 P43,749,999.57 35,349,999.65

P79,099,999.22

295

VOL.438,SEPTEMBER14,2004

295

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. TheEstatethereafterfiledaletterofprotest. 14 Intheletterdated19October1995, theCommissioner dismissedtheprotest,statingthatafraudulentschemewas deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains,thusevadingthehighercorporateincometaxrateof 35%. On 15 15 February 1996, the Estate filed a petition for review withtheCTAallegingthattheCommissionererred inholdingtheEstateliableforincometaxdeficiency;that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the CommissionertoassessCIChadalreadyprescribed. 16 17 In his Answer and Amended Answer, the Commissioner argued that the two transactions actually constitutedasinglesaleofthepropertybyCICtoRMI,and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additionalgainofP100million(thedifferencebetweenthe second simulated sale for P200 million and the first simulatedsaleforP100million)realizedbyCICwastaxed at the rate of only 5% purportedly as capital gains tax of Altonaga,insteadofattherateof35%ascorporateincome tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent.Sincesuchfalsityorfraudwasdiscoveredbythe BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribedbySection223(a)oftheNationalInternal
_______________
13Exh.H,CTARecords,pp.314315. 14Exh.G,CTARecords,pp.311312. 15CTARecords,pp.115. 16CTARecords,pp.104111. 13

17 Id.,atpp.121128.

296

296

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. Revenue Code of 1986, which provides that tax may be assessedwithintenyearsfromthediscoveryofthefalsityor fraud.Withthesalebeingtaintedwithfraud,theseparate corporate personality of CIC should be disregarded. Toda, beingtheregisteredownerofthe99.991%sharesofstockof CIC and the beneficial owner of the remaining 0.009% sharesregisteredinthenameoftheindividualdirectorsof CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawnbyhimascashadvancesorpaidtohimascash dividends.Sinceheisalreadydead,hisestateshallanswer forhisliability. 18 Initsdecision of3January2000,theCTAheldthatthe CommissionerfailedtoprovethatCICcommittedfraudto deprive the government of the taxes due it. It ruled that evenassumingthatapreconceivedschemewasadoptedby CIC,thesameconstitutedmeretaxavoidance,andnottax evasion.Therebeingnoproofoffraudulenttransaction,the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is threeyearsafterthelastdayprescribedbylawforthefiling of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January1995was,therefore,nolongervalid.TheCTAalso ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, theCTAdeclaredthattheEstateisnotliablefordeficiency income tax of P79,099,999.22 and, accordingly, cancelled andsetasidetheassessmentissuedbytheCommissioneron 9January1995. 19 In its motion for reconsideration, the Commissioner insistedthatthesaleofthepropertyownedbyCICwasthe result of the connivance between Toda and Altonaga. She furtherallegedthatthelatterwasarepresentative,dummy,
_______________

18CTARecords535540. 19 Id. ,pp.534,539.

297

VOL.438,SEPTEMBER14,2004

297

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. andaclosebusinessassociateoftheformer,havingheldhis office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda 20 for representation services rendered. The CTA denied the motion for reconsideration, prompting the 21 Commissionertofileapetitionforreview withtheCourtof Appeals. InitschallengedDecisionof31January2001,theCourt ofAppealsaffirmedthedecisionoftheCTA,reasoningthat the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is better situated to determine the correctness, propriety, and legalityoftheincometaxassessmentsassailedbytheToda 22 Estate. UnsatisfiedwiththedecisionoftheCourtofAppeals,the Commissioner filed the present petition invoking the followinggrounds: I. THECOURTOFAPPEALSERREDINHOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCECORPORATION. II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION. III. THECOURTOFAPPEALSERREDINHOLDING THATTHERIGHTOFPETITIONERTOASSESS RESPONDENTFORDEFICIENCYINCOMETAX FORTHEYEAR1989HADPRESCRIBED. TheCommissionerreiteratesherargumentsinherprevious pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it.

Shefurtherpointsoutthatthedocumentsthemselvesprove thefactof
_______________
20 Id., 550;CARollo,p.32. 21CARollo,pp.720. 22Rollo,p.30.

298

298

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. fraudinthat(1)thetwosalesweredonesimultaneouslyon the same date, 30 August 1989; (2) the Deed of Absolute SalebetweenAltonagaandRMIwasnotarizedaheadofthe alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and thelatter,asDoc.No.92,Page20,BookI,Seriesof1989,of the same Notary Public; (3) as early as 4 May 1989, CIC receivedP40millionfromRMI,andnotfromAltonaga.The saidamountwasdebitedbyRMIinitstrialbalanceasof30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders. For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonagatoprovethatthelatterisfinanciallyincapableof purchasingtheCibelesproperty. ToresolvethegroundsraisedbytheCommissioner,the followingquestionsarepertinent:
1. Isthisacaseoftaxevasionortaxavoidance? 2. Has the period for assessment of deficiency income tax for theyear1989prescribed?and 3. Can respondent Estate be held liable for the deficiency incometaxofCICfortheyear1989,ifany? Weshalldiscussthesequestionsin seriatim.

Is this a case of tax evasion

or tax avoidance? Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayeringoodfaithandatarmslength.Taxevasion,on the other hand, is a scheme used outside of those lawful meansandwhenavailed
299

VOL.438,SEPTEMBER14,2004

299

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. of,itusuallysubjectsthetaxpayertofurtheroradditional 23 civilorcriminalliabilities. Taxevasionconnotestheintegrationofthreefactors:(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willfull, or deliberate and not accidental; and (3) a course of action or failure of action 24 whichisunlawful. All these factors are present in the instant case. It is significanttonotethatasearlyas4May1989,priortothe purported sale of the Cibeles property by CIC to Altonaga 25 on 30 August 1989, CIC received P40 million from RMI, and not from Altonaga. That P40 million was debited by 26 RMI and reflected in its trial balance as other inv. CibelesBldg.Also,asof31July1989,anotherP40million was debited and reflected in RMIs trial balance as other inv.CibelesBldg.Thiswouldshowthattherealbuyerof thepropertieswasRMI,andnottheintermediaryAltonaga. The investigation conducted by the BIR disclosed that Altonagawasaclosebusinessassociateandoneofthemany trustedcorporateexecutivesofToda.Thisinformationwas revealedbyMr.BoyPrieto,theassistantaccountantofCIC 27 andanoldtimerinthecompany. ButMr.Prietodidnot testifyonthismatter,hence,thatinformationremainstobe hearsay and is thus inadmissible in evidence. It was not verified either, since the28 letterrequest for investigation of Altonaga was unserved, Altonaga having left for the

United
_______________
23 Jose C. Vitug and Ernesto D. Acosta, Tax

Law and Jurisprudence

44(2nded.,2000)(hereafterVitug).
24DELEON, FUNDAMENTALS

OF TAXATION 53(1988ed.),citing

Batter,FraudunderFederalTaxLaw15(1953ed.).
25Exh.3,CTARecords,p.476. 26Exh.6,CTARecords,p.470. 27Exh.1,CTARecords,p.461. 28CTARecords,p.466.

300

300

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. States of America in January 1990. Nevertheless, that Altonagawasamereconduitfindssupportintheadmission ofrespondentEstatethatthesaletohimwaspartofthetax planning scheme of CIC. That admission is borne by the records.InitsMemorandum,respondentEstatedeclared:
Petitioner,however,claimstherewasachangeofstructureofthe proceeds of sale. Admitted one hundred percent. But isnt this preciselythedefinitionoftaxplanning?Changethestructureofthe funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists,allowingtaxfreetransfersofpropertyforstock,changingthe structureofthepropertyandthetaxtobepaid.Aslongasitisdone legally, changing the structure of a transaction to achieve a lower taxisnotagainstthelaw.Itisabsolutelyallowed. Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for 29 wanting to reduce the tax from 35% to 5%. [Italicssupplied].

The scheme resorted to by CIC in making it appear that thereweretwosalesofthesubjectproperties, i.e.,fromCIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is taintedwithfraud. Fraud in its general sense, is deemed to comprise anythingcalculatedtodeceive,includingallacts,omissions, and concealment involving a breach of legal or equitable

duty, trust or confidence justly reposed, resulting in the damage to another, or by which an 30 undue and unconscionableadvantageistakenofanother. Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subjecttheincometoonly5%individualcapitalgainstax, and not the 35% corporate income tax. Altonagas sole purposeofacquiringand
_______________
29RespondentsMemorandum,pp.45;Rollo,pp.7879. 30 Commissioner

of Internal Revenue v. Court of Appeals,327 Phil. 1,

33;257SCRA200,225(1996). 301

VOL.438,SEPTEMBER14,2004

301

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. transferringtitleofthesubjectpropertiesonthesameday was to create a tax shelter. Altonaga never controlled the propertyanddidnotenjoythenormalbenefitsandburdens ofownership.Thesaletohimwasmerelyataxploy,asham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequentincometaxliability. Inanutshell,theintermediarytransaction, i.e.,thesale ofAltonaga,whichwaspromptedmoreonthemitigationof tax liabilities than for legitimate business purposes 31 constitutesoneoftaxevasion. Generally, a sale or exchange of assets will have an 32 income tax incidence only when it is consummated. The incidence of taxation depends upon the substance of a transaction.Thetaxconsequencesarisingfromgainsfroma sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transactionmustbeviewedasawhole,andeachstepfrom thecommencementofnegotiationstotheconsummationof the sale is relevant. A sale by one person cannot be transformedfortaxpurposesintoasalebyanotherbyusing thelatterasaconduitthroughwhichtopasstitle.Topermit

the true nature of the transaction to be disguised by mere formalisms,whichexistsolelytoaltertaxliabilities,would seriously impair the effective administration of the tax 33 policiesofCongress. To allow a taxpayer to deny tax liability on the ground thatthesalewasmadethroughanotheranddistinctentity whenitisprovedthatthelatterwasmerelyaconduitisto sanctionacircumventionofourtaxlaws.Hence,thesaleto Altonaga
_______________
31 See Commissioner

of Internal Revenue v. Norton & Harrison Co .,

120 Phil. 684, 691; 11 SCRA 714 (1964); Commissioner of Internal Revenue v. Rufino , G.R. No. L3366568, 27 February 1987, 148 SCRA 42.
32VITUG,138. 33 Commissioner

v. Court Holding Co .,324U.S.334(1945). 302

302

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. should be disregarded for income tax purposes. The two saletransactionsshouldbetreatedasasingledirectsaleby CICtoRMI. Accordingly,thetaxliabilityofCICisgovernedbythen Section24oftheNIRCof1986,asamended(now27(A)of theTaxReformActof1997),whichstatedasfollows:
Sec. 24. Rates of tax on corporations.(a) Tax on domestic corporations.Ataxisherebyimposeduponthetaxablenetincome received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance withthefollowing: Twentyfive percent upon the amount by which the taxable net incomedoesnotexceedonehundredthousandpesos;and Thirtyfive percent upon the amount by which the taxable net incomeexceedsonehundredthousandpesos.
34

CIC is therefore liable to pay a 35% corporate tax for its

taxablenetincomein1989.The5%individualcapitalgains 35 taxprovidedforinSection34(h)oftheNIRCof1986 (now 6%underSection24(D)(1)oftheTaxReformActof1997)is

_______________
34 See Gregory

v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v.

United States,435U.S.561(1978);Commissioner of Internal Revenue v. Court of Appeals, 361 Phil. 103, 126; 301 SCRA 152 (1999) citing Asmussen v. Court of Internal Relations,36B.T.A.(F)878;SeealsoNeff v. U.S., 301 F2d 330; Cohen v. U.S., 192 F Supp 216; Herman v. Comm ., 283 F2d 227; Kessner v. Comm ., 248 F2d 943; Comm. v. Pope, 239F2d881;U.S. v. Fewel,255F2d396.
35Sec.34. Capital

gains and loses.

... (h) The provisions of paragraph (b) of this section to the contrary notwithstanding, sales, exchanges or other dispositions of real property classified as capital assets, including pactoderetro sales and other forms of conditionalsale,byindividuals,includingestatesandtrusts,shallbetaxedat the rate of 5% based on the gross selling price or the fair market value prevailingatthetimeofsale,whicheverishigher.

303

VOL.438,SEPTEMBER14,2004

303

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. inapplicable. Hence, the assessment for the deficiency incometaxissuedbytheBIRmustbeupheld. Has the period of assessment prescribed? No.Section269oftheNIRCof1986(nowSection222ofthe TaxReformActof1997)read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.(a) In the case of a false or fraudulent return withintenttoevadetaxoroffailuretofileareturn,thetaxmaybe assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years afterthediscoveryofthefalsity,fraudoromission: Provided , That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or

criminalactionforcollectionthereof....

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years fromdiscoveryofthefraud,falsificationoromission,asthe casemaybe. It is true that in a query dated 24 August 1989, Altonaga,throughhiscounsel,askedtheOpinionoftheBIR 36 onthetaxconsequenceofthetwosaletransactions. Thus, theBIRwasamplyinformedofthetransactionsevenprior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made withtheexecutionofpublicdocumentsandthedeclaration of taxes for 1989. However, these circumstances do not negatetheexistenceoffraud.Asearlierdiscussedthosetwo transactions were tainted with fraud. And even assuming arguendothattherewasnofraud,wefindthattheincome tax return filed by CIC for the year 1989 was false. It did notreflectthetrueorac
_______________
36Exh.A,CTARecords,p.296.

304

304

SUPREMECOURTREPORTSANNOTATED

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr. tual amount gained from the sale of the Cibeles property. Obviously,suchwasdonewithintenttoevadeorreducetax liability. As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April1990,andthefalsitythereofwasclaimedtohavebeen 37 discoveredonlyon8March1991. Theassessmentforthe 1989deficiencyincometaxofCICwasissuedon9January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period. Is respondent Estate liable for

the 1989 deficiency income tax of Cibeles Insurance Corporation? A corporation has a juridical personality distinct and separatefromthepersonsowningorcomposingit.Thus,the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personalliabilitymayarise.Ithasbeenheldinanumberof casesthatpersonalliabilityofacorporatedirector,trustee, orofficeralong,albeitnotnecessarily,withthecorporation mayvalidlyattachwhen: 1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders,orotherpersons; 2. Heconsentstotheissuanceofwatereddownstocks or,havingknowledgethereof,doesnotforthwithfile with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liablewiththecorporation;or
_______________
37Exh.2,CTARecords,p.464.

305

VOL.438,SEPTEMBER14,2004

305

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.

4.Heismade,byspecificprovisionoflaw,topersonallyanswerfor 38 hiscorporateaction.

ItisworthnotingthatwhenthelateTodasoldhissharesof stocktoLeHunT.Choa,heknowinglyandvoluntarilyheld himselfpersonallyliableforallthetaxliabilitiesofCICand thebuyerfortheyears1987,1988,and1989.Paragraphg oftheDeedofSaleofSharesofStocksspecificallyprovides:

g. Except for transactions occurring in the ordinary course of

business, Cibeles has no liabilities or obligations, contingent or otherwise,fortaxes,sumsofmoneyorinsuranceclaimsotherthan thosereportedinitsauditedfinancialstatementasofDecember31, 1989, attached hereto as Annex B and made a part hereof. The business of Cibeles has at all times been conducted in full compliancewithallapplicablelaws,rulesandregulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 39 1987, 1988 and 1989. [ItalicsSupplied].

When the late Toda undertook and agreed to hold the BUYERandCibelesfreefromanyallincometaxliabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he therebyvoluntarilyheldhimselfpersonallyliabletherefor. Respondentestatecannot,therefore,denyliabilityforCICs deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arosefromTodascontractualundertaking,ascontainedin theDeed of Sale of Shares of Stock. WHEREFORE,inviewofalltheforegoing,thepetition isherebyGRANTED.ThedecisionoftheCourtofAppeals of 31 January 2001 in CAG.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby renderedordering
_______________
38 Atrium

Management Corporation v. Court of Appeals, G.R. Nos.

109491 and 121794, 28 February 2001, 353 SCRA 23, 31, citing FCY Construction Group Inc. v. Court of Appeals, G.R. No. 123358, 1 February2000,324SCRA270.
39CTARecords,pp.200201.

306

306

SUPREMECOURTREPORTSANNOTATED Cojuangco, Jr. vs. Palma

respondent Estate of Benigno P. Toda, Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles InsuranceCorporationfortheyear1989,pluslegalinterest from1May1994untiltheamountisfullypaid. Costsagainstrespondent. SOORDERED.

 Quisumbing, YnaresSantiago, Carpioand Azcuna, JJ., concur. Petition granted, assailed decision reversed and set aside. Note.A taxpayer only has thirty (30) days within whichtoprotestanassessment.(Protectors Services, Inc. vs. Court of Appeals,330SCRA404[2000]) o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved.