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CIR v. The Estate of Benigno P.

G.R. No. 147188

September 14, 2004

Davide, JR., C.J.:

NATURE: This Court is called upon to determine in this case whether the
tax planning scheme adopted by a corporation constitutes tax evasion
that would justify an assessment of deficiency income tax

FACTS: Cibeles Insurance Corporation (CIC) authorized its former

president, Mr. Toda Jr. to sell a building and two parcels of land, which
the insurance company owns for PHP 90M pesos.
The properties were sold and income was realized. A detailed account of
the sales show that it was first sold to Rafael A. Altonaga for PHP 100M,
who later sold the properties on the same day to RMI for PHP 200M. For
the sale of the properties to Royal Match Inc. (RMI),

Altonaga paid

Capital Gains Tax of PHP 100M.

CIC filed corporate annual income tax return for 1999, declaring its gain
from the sale of the real property in the amount of PHP 75,728,021. After
crediting withholding taxes of PHP 254,497, it paid PHP 26,341,207 for
its real taxable income of PHP 75,987,725.

On July 1990, Mr. Toda sold his entire shares of stocks in Cibeles
Incorporated to Mr. Choa for PHP 12.5M, as evidenced by a Deed of Sale
of Shares of Stocks.

In the meanwhile, Mr. Toda sold all his shareholdings in the insurance
company to a certain Mr. Choa. A deed of sale was concluded between
them for Mr. Todas shareholdings in the insurance company. Thereafter,
BIR assessed the insurance company deficiency income tax arising from
the sale of the subject real properties. Three years thereafter, Mr. Toda

ISSUE: Whether this is a case of tax evasion or tax avoidance

Case for Petitioner: The Commissioner reiterates her arguments in her

previous 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.

Case for Defendant: respondent Estate asserts that the Commissioner

failed to present the income tax return of Altonaga to prove that the latter
is financially incapable of purchasing the Cibeles property.

SC Ruling: Mr. Toda/CIC is guilty of Tax Evasion

Tax avoidance is the legal utilization of the tax regime to one's own
advantage, to reduce the amount of tax that is payable by means that are
within the law. Tax evasion is the general term for efforts by individuals,
firms, trusts and other entities to evade taxes by illegal means. Tax







concealing the true state of their affairs to the tax authorities to reduce
their tax liability, and includes, in particular, dishonest tax reporting
(such as declaring less income, profits or gains than actually earned; or
overstating deductions).
Tax evasion connotes the integration of three factors:
(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, " "willful," or "deliberate and not
accidental"; and (3) a course of action or failure of action which is

All factors are present in the case at bar. The scheme resorted to by CIC
in making it appear that there were two sales of the properties is tainted
with fraud.

It is obvious that the objective of the sale to Altonaga was to reduce the
amount of tax to be paid. The transfer to RMI would result to a 5%
individual Capital Gains Tax, instead of a 35% Corporate Income Tax. It
was for the sole purpose of creating a tax shelter. Altonaga never
controlled the property. The sale was a tax ploy, a sham, without
business purpose and economic substance.

WHEREFORE, in view of all the foregoing, the petition is hereby

GRANTED. The decision of the Court of Appeals of 31 January 2001 in
CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is
hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay

P79, 099,999.22 as deficiency income tax of Cibeles Insurance

Corporation for the year 1989, plus legal interest from 1 May 1994 until
the amount is fully paid.