CIR v. DAKUDAO & SONS INC.

The Revenue Regulation does not deal with a requirement to apply for a ruling
CTA EB CASE NO. 1150 ; 12 May 2015
Topic: Family-Owned Corporations | Ponente: J. Mindaro-Grulla | Author: Lorenzo
Doctrine: If the transferee of the transferred real property by a real estate dealer is
another real estate dealer, in an exchange where the transferor gains control of the
transferee-corporation, no output VAT is imposable on the said transfer.
Emergency Recit: Dakudao assigned 2 parcels of land to MSDPC in exchange for 75% of
its capital stock. Dakudao gained control of MSDPC. The CTA ruled that the transfer is
VAT-exempt.
Facts:
 Dakudao owned two (2) parcels of land located in Davao City. Metro South
Davao Property Corporation (MSDPC) was registered with the SEC as a domestic
corporation with an authorized capital stock divided into 20,000 shares, 15,000
of which Dakudao bought. To accommodate additional subscription, MSDPC's
authorized capital stock was amended, a total increase of 4,964,000 shares
that the SEC approved. As consideration for the subscription, Dakudao
executed a Deed of Assignment in favour of MSDPC, assigning all its rights and
interest over the two (2) parcels of land. Dakudao paid the BIR the amount of
P112,140,000.00 for the VAT of said transfer and alleged that since the
transfer of the subject parcels of land was made in exchange for shares of
stock to a controlled corporation, its payment of VAT was erroneous and/or
excessive. Dakudao filed an administrative claim for VAT refund.
 Dakudao's claim was anchored in Section 4.106-8 of RR No. 16-2005 and in
Sections 204(C) and 229 of the 1997 NIRC, asserting that revenue regulations or
administrative issuances have the force of law and are entitled great weight.
 CIR reproduced RR No. 18-2001 in relation to Section 40 (C) (2) of the 1997
NIRC, arguing that since Dakudao failed to apply for a BIR ruling to confirm
that the exchange of property for shares of stock is exempted from payment of
VAT as mandated by said RR, it therefore correctly paid the VAT due on the
transfer of its parcels of land. Furthermore, the CIR asserts that the exchange
of Dakudao's parcels of land with shares of stocks of MSDPC is not one of the
exempt transactions enumerated under Section 109 of the 1997 NIRC.
 The claim for refund to Dakudao was granted and CIR filed an MR which was
denied.
as a prerequisite for the entitlement of the exemption.
 If the transferee of the transferred real property by a real estate dealer is
another real estate dealer, in an exchange where the transferor gains control
of the transferee-corporation, no output VAT is imposable on the said transfer.
 A Real Estate Dealer includes any person engaged in the business of buying,
developing, selling, exchanging real properties as principal and holding himself
out as a full or part-time dealer in real estate. Based on the AOI and the
definition of "Real Estate Dealer" as provided for under RR No. 16-2005, both
respondent and MSDPC are considered as real estate dealers.
 When Dakudao subscribed 4.964M shares of capital stock of MSDPC (75%) and as
payment of the subscription, Dakudao assigned two parcels of land to MSDPC.
The assignment resulted to respondent having controlling interest over MSDPC.
As such, the transfer of the lands in exchange for MSDPC's shares of stock is not
subject to VAT.
 Third, anent petitioner's contention that it is imperative for respondent to
show proof of compliance with the checklist of requirements to be submitted
involving a claim for VAT refund, this Court agrees with respondent that said
RMO is for tax audit investigation and not for refund of erroneously paid VAT.
Even assuming arguendo that respondent failed to submit the complete
documents listed in RMO No. 53-98, this Court has consistently held that the
term "complete documents" should be understood to refer to those documents
that are necessary to support the application for refund or tax credit
certificate, as determined by the taxpayer. The BIR examiner can require the
taxpayer to submit additional documents but the examiner cannot demand
what type of supporting documents should be submitted. Otherwise, the
taxpayer will be at the mercy of the examiner, who may require the
production of documents that the taxpayer cannot submit.

Issue/s: Whether or not the Second Division of the CTA erred in granting the refund
representing erroneous payment of VAT in the 4th quarter of the taxable year 2011?

Held: NO. Upon the assignment of Dakudao to MSDPC the 2 parcels of land in exchange
for 75% of its capital stock, Dakudao gained control of MSDPC. When such happens to
two real estate dealers, the transfer is VAT-exempt.

Ruling:
 The BIR ruling required under RR No. 18-2001 is for determining gain or loss on
a subsequent sale or disposition of property subject of the tax-free exchange,
and not as a precondition for availment of a tax exemption. It merely provides
for guidelines in the monitoring of the properties as well as shares of stocks,
which are involved in a tax-free exchange under Section 40(C)(2) of the NIRC.