Commissioner of Internal Revenue vs. Bank of Commerce

A purchase and sale of identified corporate assets in consideration of the transferee’s assumption of only identified recorded liabilities, with the parties expressly continuing as separate corporations, does not constitute a merger under Section 40(C)(6)(b) of the Tax Code; absent merger or assumption of the specific tax liability, the transferee cannot be held liable for the transferor’s deficiency documentary stamp tax.

Bank of Commerce (BOC) and Traders Royal Bank (TRB) were separate banking corporations. On November 9, 2001, they executed a Purchase and Sale Agreement under which BOC purchased identified recorded assets of TRB in consideration of assuming identified recorded liabilities; the agreement provided that both would continue as separate corporations with distinct corporate personalities and excluded items in litigation and liabilities not included in the Consolidated Statement of Condition. The dispute implicated Section 40(C)(6)(b) of the Tax Code’s definition of merger and Section 180 of the National Internal Revenue Code on documentary stamp taxes on certificates of deposit bearing interest.

Bank of Commerce (BOC) is a banking corporation with principal office in Makati City. The Commissioner of Internal Revenue (CIR) is empowered to decide, cancel, and abate tax liabilities under Section 244(B) of the Tax Code, as amended by Republic Act No. 8424. On November 9, 2001, BOC and Traders Royal Bank (TRB) executed a Purchase and Sale Agreement whereby TRB desired to sell and BOC desired to purchase identified recorded assets of TRB in consideration of BOC assuming identified recorded liabilities. Under Article II, BOC assumed identified recorded TRB liabilities listed in TRB’s Consolidated Statement of Condition as of August 31, 2001, totaling ₱10,401,436,000, provided that the liabilities assumed would not include items in litigation, actual and prospective, against TRB, including other liabilities not included in the Consolidated Statement of Condition. Article III provided that BOC and TRB would continue to exist as separate corporations with distinct corporate personalities; TRB would exist as an ordinary corporation after transferring its branching licenses and surrendering its commercial banking license; and no employer-employee relationship would exist between BOC and TRB personnel. The second whereas clause stated that the sale of TRB’s assets to BOC was in consideration of BOC assuming identified recorded liabilities of TRB.

On September 27, 2002, BOC received copies of Formal Letter of Demand and Assessment Notice No. DST-99-00-000049 dated September 11, 2002, addressed to “TRADERS ROYAL BANK (now Bank of Commerce)” and issued by the CIR, demanding ₱41,467,887.51 as deficiency DST on TRB’s SSD account for taxable year 1999. On October 11, 2002, TRB filed a protest letter contesting the assessment pursuant to Section 228 of the Tax Code. On March 31, 2004, BOC received the CIR’s Decision dated March 22, 2004 denying the protest; the CIR modified or reduced the assessment to ₱41,442,887.51 and ordered “Traders Royal Bank (now Bank of Commerce)” to pay that amount plus interest within thirty days, failing which collection would be through summary remedies. The CIR stated that this constituted its Final Decision.

On April 30, 2004, BOC filed a Petition for Review with the CTA 2nd Division, praying that it be held not liable for the DST. BOC invoked Article III of the Purchase and Sale Agreement, emphasizing that BOC and TRB continued as separate corporations and that there was no merger; BOC only acquired certain assets of TRB in return for assuming some liabilities. The CTA 2nd Division dismissed the petition on August 31, 2006. It held that the SSD account was subject to DST because its nature and substance were akin to a certificate of deposit bearing interest under then Section 180 of the NIRC. On BOC’s liability, the CTA 2nd Division ruled that the non-merger issue was not raised at the administrative level and could not be raised for the first time on appeal; BOC had actively participated in administrative proceedings without questioning the proper party in interest. The CTA 2nd Division denied BOC’s Motion for Reconsideration on January 8, 2007.

BOC appealed to the CTA En Banc. On June 27, 2007, the CTA En Banc affirmed the CTA 2nd Division, ruling BOC liable for DST on TRB’s SSD accounts. Citing International Exchange Bank vs. Commissioner of Internal Revenue, the CTA En Banc held that TRB’s SSD accounts were certificates of deposit bearing interest subject to DST under Section 180, as they involved deposits that could be withdrawn anytime but earned higher interest when kept for a specified number of days. It also noted BOC’s inconsistent positions on who filed the protest and said it would not be unfair to hold BOC liable because TRB constituted a ₱50,000,000 Escrow Fund to answer claims against TRB excluded from the Agreement. BOC moved for reconsideration, arguing that there was no merger as decided by the CTA 1st Division on June 18, 2007; that it was never a party before the CIR; and that the CIR’s decision holding it liable was void.

On September 17, 2007, the CTA En Banc issued an Amended Decision reversing its June 27, 2007 Decision and finding BOC not liable for the ₱41,442,887.51 deficiency DST on TRB’s SSD accounts for taxable year 1999. It relied on the CTA 1st Division’s June 18, 2007 Resolution in C.T.A. Case No. 6392, Traders Royal Bank vs. Commissioner of Internal Revenue, which involved a deficiency DST assessment against TRB on its SSD accounts for taxable years 1996 and 1997. In that case, when the CIR attempted to implement a writ of execution against BOC by inserting its name beside TRB’s in the motion for execution, BOC filed a Motion to Quash by way of special appearance; the CTA 1st Division granted it, primarily because there was no merger between BOC and TRB. The CTA En Banc also gave weight to BIR Ruling No. 10-2006 dated October 6, 2006, in which the CIR recognized that the Purchase and Sale Agreement did not result in merger. The CIR moved for reconsideration, but the CTA En Banc denied it on November 15, 2007, reiterating that BOC could not be held liable and that the Escrow Fund issue was moot.

The CTA 1st Division’s Resolution, quoted in the CTA En Banc’s Amended Decision, found that the Purchase and Sale Agreement excluded items in litigation from assumed liabilities, provided that BOC and TRB would continue as separate corporations, and contained no provision that BOC acquired TRB’s assets solely in exchange for TRB’s stocks. Because merger under Section 40(C)(6)(b) of the Tax Code requires acquisition of all or substantially all properties solely for stock, the CTA 1st Division concluded that the transaction was a purchase and sale of identified assets, not a merger, and that BOC was a separate entity that could not be held liable for TRB’s deficiency DST. BIR Ruling No. 10-2006 similarly stated that the transaction was a sale of assets with assumption of liabilities rather than a merger, that the Agreement did not mention issuance of BOC shares to TRB stockholders, and that liabilities not assumed by BOC should not be enforced against it. The Joint Stipulation of Facts and Issues stated that both BOC and TRB continued to exist as separate corporations with distinct corporate personalities despite the Agreement.

• Enforcement and Collection Against BOC: Petitioner argued that TRB’s deficiency assessment can be enforced and collected against BOC because BOC assumed TRB’s obligations and liabilities pursuant to the Purchase and Sale Agreement and the applicable law on merger of corporations under Section 80 of the Corporation Code.
• Reversal Contrary to Law: Petitioner argued that the CTA En Banc gravely erred in reversing its previous decision, which had affirmed the assessment and enforcement of deficiency taxes against BOC, contrary to law and jurisprudence.
• Estoppel: Petitioner argued that BOC is estopped from raising the issue that it is not the party liable for TRB’s deficiency DST assessment because it was not a party to the proceedings before the BIR.
• Issues Not Raised Administratively: Petitioner argued that issues not raised at the administrative level cannot be raised for the first time on appeal.
• BIR Ruling No. 10-2006: Petitioner argued that the CTA En Banc erred in considering BIR Ruling No. 10-2006 as a basis for its conclusion because BOC failed to inform the CIR of TRB’s deficiency DST assessments for taxable years 1996, 1997, and 1999 when it requested the ruling.
• Escrow Fund: Petitioner argued that the CTA En Banc had no sufficient justification for not considering the Escrow Fund in its Amended Decision.

• No Question of Law: Respondent argued that the petition for review did not raise questions of law.
• No Merger: Respondent argued that the CTA En Banc was correct and did not commit grave abuse of discretion in finding it not liable because there was no merger between BOC and TRB.
• BIR Ruling No. 10-2006: Respondent argued that the CIR itself ruled and rendered an opinion under BIR Ruling No. 10-2006 that there was no merger between BOC and TRB.
• Not Estopped: Respondent argued that it is not estopped from raising the issue of non-merger because it was not a party to the proceedings before the CIR.
• Void CIR Decision: Respondent argued that the CIR’s decision holding it liable for TRB’s tax liability is void since it was not a party to the proceedings before the CIR.

• Liability for TRB’s Deficiency DST: Whether BOC can be held liable for TRB’s deficiency DST on its SSD accounts for taxable year 1999 in the amount of ₱41,442,887.51.
• Merger Under the Tax Code: Whether the Purchase and Sale Agreement between BOC and TRB resulted in a merger under Section 40(C)(6)(b) of the Tax Code, such that BOC assumed TRB’s tax liabilities.
• Effect of BIR Ruling No. 10-2006: Whether BIR Ruling No. 10-2006, in which the CIR recognized that the Purchase and Sale Agreement did not result in a merger, supports the finding that BOC is not liable.
• Assumption of Liabilities: Whether BOC assumed TRB’s deficiency DST liability under the Purchase and Sale Agreement when it assumed only identified recorded liabilities and excluded items in litigation and liabilities not included in the Consolidated Statement of Condition.

• Liability for TRB’s Deficiency DST: No. BOC cannot be held liable because the Purchase and Sale Agreement did not result in a merger and BOC did not assume the specific deficiency DST liability; only identified liabilities were assumed, with exclusions.
• Merger Under the Tax Code: No. The agreement was a sale of identified assets with assumption of identified liabilities, not a merger under Section 40(C)(6)(b), which requires acquisition of all or substantially all properties solely for stock.
• Effect of BIR Ruling No. 10-2006: Yes. The CIR’s own ruling recognized no merger and was properly considered; it was based on the agreement and the Tax Code, not on TRB’s tax deficiencies.
• Assumption of Liabilities: No. The deficiency DST was not among the liabilities assumed; Article II excluded items in litigation and liabilities not included in the Consolidated Statement of Condition.

• Liability for TRB’s Deficiency DST: The petition was denied. The issue boiled down to whether BOC is liable for TRB’s deficiency DST for taxable year 1999. The CTA En Banc relied on the CTA 1st Division’s Resolution in Traders Royal Bank and BIR Ruling No. 10-2006. The CTA 1st Division categorically addressed merger based on the Purchase and Sale Agreement and the Tax Code. Article II limited assumed liabilities to identified recorded liabilities in the Consolidated Statement of Condition as of August 31, 2001, totaling ₱10,401,436,000, and excluded items in litigation and other liabilities not included. Article III stated that BOC and TRB would continue as separate corporations. The second whereas clause confirmed a sale of assets in consideration of assumption of some liabilities. Because the Agreement did not provide that BOC acquired TRB’s assets solely in exchange for TRB’s stocks, no merger under Section 40(C)(6)(b) occurred. BOC remained a separate entity and could not be liable for TRB’s deficiency DST. The Supreme Court found the CTA 1st Division’s interpretation correct and saw no reason to reverse the CTA En Banc’s Amended Decision.
• Merger Under the Tax Code: Section 40(C)(6)(b) defines merger or consolidation as the ordinary merger or consolidation, or the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock, provided that the transaction is undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. The Purchase and Sale Agreement was a purchase and sale of identified assets with assumption of identified liabilities. It did not involve the issuance of BOC shares to TRB stockholders. The parties expressly continued as separate corporations with distinct corporate personalities. Thus, no merger was created.
• Effect of BIR Ruling No. 10-2006: The CIR argued that the ruling could not be used as a basis because BOC failed to inform it of TRB’s tax deficiencies. This contention was untenable. BIR Ruling No. 10-2006 ruled on the issue of merger without any reference to TRB’s subject tax liabilities. It was based on the Purchase and Sale Agreement, factual evidence on the status of both companies, and the Tax Code provision on merger. The CIR’s knowledge of TRB’s tax deficiencies would not be material to the merger ruling. The resolution of the merger issue depended on the agreement between TRB and BOC, not on TRB’s tax liabilities. The ruling was not shown to have been revoked or nullified.
• Assumption of Liabilities: The liabilities assumed by BOC were limited to those identified as of August 31, 2001, totaling ₱10,401,436,000, with enumerated exclusions. BIR Ruling No. 10-2006 stated that liabilities not assumed by BOC should not be enforced against it. The deficiency DST was not among the liabilities assumed. The Joint Stipulation of Facts and Issues also stated that both BOC and TRB continued to exist as separate corporations with distinct corporate personalities. Therefore, BOC cannot be held liable for TRB’s deficiency DST.

• Merger Under Section 40(C)(6)(b) of the Tax Code — The term “merger” or “consolidation” means either the ordinary merger or consolidation, or the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock; the transaction must also be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. In this case, the Purchase and Sale Agreement did not involve the issuance of BOC shares to TRB stockholders and was merely a sale of identified assets with assumption of identified liabilities, so no merger occurred.
• Ordinary merger or consolidation; or
• Acquisition by one corporation of all or substantially all the properties of another corporation solely for stock; and
• Undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation.
• Assumption of Identified Liabilities and Separate Corporate Personality — A corporation that acquires identified assets and assumes only identified liabilities does not thereby assume all liabilities of the transferor, especially where the agreement excludes items in litigation and liabilities not included in the transferor’s Consolidated Statement of Condition. BOC and TRB expressly continued as separate corporations with distinct corporate personalities, and BOC assumed only ₱10,401,436,000 in identified liabilities; it did not assume TRB’s deficiency DST.
• Respect for Administrative Interpretative Rulings — A BIR ruling contains the official written interpretative opinion of the Commissioner of Internal Revenue addressed to a particular taxpayer regarding taxability. The interpretation of an administrative agency like the BIR is accorded great respect and ordinarily controls the construction of the courts. BIR Ruling No. 10-2006, in which the CIR recognized that the Purchase and Sale Agreement did not result in a merger, was properly considered and was not shown to have been revoked or nullified.

• "The effectivity of this Agreement shall have the following effects and consequences: 1. [BOC] and TRB shall continue to exist as separate corporations with distinct corporate personalities;" — This contractual provision was central to the finding that the Purchase and Sale Agreement did not result in a merger and that BOC remained a separate entity from TRB.
• "Since the purchase and sale of identified assets between the two companies does not constitute a merger under the foregoing definition, the Bank of Commerce is considered an entity separate from petitioner. Thus, it cannot be held liable for the payment of the deficiency DST assessed against petitioner." — This passage, quoted from the CTA 1st Division’s Resolution and affirmed by the Supreme Court, states the ratio decidendi on BOC’s non-liability for TRB’s deficiency DST.
• "The CIR’s knowledge then of TRB’s tax deficiencies would not be material as to affect the CIR’s ruling. The resolution of the issue on merger depended on the agreement between TRB and BOC, as detailed in the Purchase and Sale Agreement, and not contingent on TRB’s tax liabilities." — This passage rejects the CIR’s argument that BIR Ruling No. 10-2006 could not be relied upon because BOC allegedly failed to disclose TRB’s tax deficiencies.
• "A perusal of BIR Ruling No. 10-2006 will show that the CIR ruled on the issue of merger without any reference to TRB’s subject tax liabilities." — This passage explains why the CIR’s own administrative ruling was properly considered on the merger issue independently of TRB’s pending tax liabilities.

• International Exchange Bank vs. Commissioner of Internal Revenue, 549 Phil. 456 (2007) — Cited by the CTA En Banc in its June 27, 2007 Decision to hold that TRB’s SSD accounts were akin to certificates of deposit bearing interest subject to DST under Section 180. The Supreme Court did not rely on it for the final disposition, which turned on BOC’s non-liability.
• Traders Royal Bank vs. Commissioner of Internal Revenue, C.T.A. Case No. 6392 (June 18, 2007 Resolution) — Prior related CTA 1st Division case relied upon by the CTA En Banc; it categorically ruled that the Purchase and Sale Agreement did not result in a merger and granted BOC’s motion to quash the writ of execution. The Supreme Court found this ruling correct.
• Nestle Philippines, Inc. vs. Court of Appeals — Cited by the CTA En Banc in its Amended Decision to explain that the interpretation of an administrative agency like the BIR is accorded great respect and ordinarily controls the construction of the courts. The Supreme Court did not discuss it, but the CTA En Banc’s reliance on BIR Ruling No. 10-2006 was affirmed.

• Section 40(C)(6)(b), National Internal Revenue Code of 1997 — Defines merger or consolidation as the ordinary merger or consolidation, or the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock, provided it is for a bona fide business purpose and not solely for tax avoidance. The Court applied this provision to find that the Purchase and Sale Agreement did not result in a merger.
• Section 180, National Internal Revenue Code — Imposes documentary stamp tax on certificates of deposit bearing interest. The CTA 2nd Division and the CTA En Banc initially applied this provision to TRB’s SSD accounts; the Supreme Court’s final disposition did not resolve the taxability issue because it found BOC not liable.
• Section 228, National Internal Revenue Code — Governs the protest of tax assessments. TRB filed its protest letter contesting the assessment pursuant to this section.
• Section 244(B), National Internal Revenue Code, as amended by Republic Act No. 8424 — Confers on the Commissioner of Internal Revenue the power to decide, cancel, and abate tax liabilities. This provision was cited in the stipulated facts.
• Section 80, Corporation Code — The CIR invoked this as the applicable law on merger of corporations. The Court resolved the merger issue under Section 40(C)(6)(b) of the Tax Code.
• Rule 45, 1997 Rules of Civil Procedure — The basis for the CIR’s Petition for Review on Certiorari before the Supreme Court.

Maria Lourdes P. A. Sereno (Chief Justice, Chairperson); Lucas P. Bersamin; Martin S. Villarama, Jr.; Bienvenido L. Reyes.