Miguel J. Ossorio Pension Foundation, Incorporated vs. Court of Appeals and Commissioner of Internal Revenue

A co-owner who joins in purchasing land with funds of a tax-exempt employees' trust retains beneficial ownership of his proportionate share under an implied trust created by force of law under Article 1452 of the Civil Code even though legal title is registered solely in another co-owner's name, and income attributable to that share is exempt from income tax under Section 53(b), now Section 60(b), of the Tax Code. The notarized memorandum of agreement establishing common consent and the investment records proving use of trust funds sufficed to establish the trust and the exemption, entitling the trustee to refund of tax erroneously withheld.

Miguel J. Ossorio Pension Foundation, Incorporated is a non-stock and non-profit corporation organized to hold title to and administer the employees' trust fund established for the benefit of employees of Victorias Milling Company, Inc. The fund was claimed to be exempt under Section 53(b), now Section 60(b), of the National Internal Revenue Code, which excepts an employees' trust forming part of a pension, stock bonus or profit-sharing plan from the income tax imposed by the same Title. Citytrust Banking Corporation served as investment manager and reporter of the fund's portfolio.

Miguel J. Ossorio Pension Foundation, Incorporated was organized as a non-stock, non-profit corporation to hold title to and administer the employees' trust fund established for employees of Victorias Milling Company, Inc. (VMC). Through its investment manager Citytrust Banking Corporation, the fund's investments were regularly reported in Portfolio Mix Analyses.

On 25 March 1992, petitioner's Board of Trustees resolved to buy one-half of one Ayala-Alabang lot through VMC, with payment to be made through or reimbursed to VMC. Petitioner alleged that the investment came about upon VMC's invitation and that its share ultimately stood at 49.59%, corresponding to P5,504,748.25 invested in Madrigal Business Park I as reported from 1994 to 1997. The Madrigal Business Park lot was covered by Transfer Certificate of Title No. 183907 registered solely in VMC's name.

Thereafter petitioner needed cash to pay retirement and pension benefits and to reimburse advances made by VMC, and on 24 July 1996 its Board authorized sale of its approximately 500 sq. m. property in Madrigal Park at the best price available. On 14 March 1997 VMC negotiated sale of the lot to Metropolitan Bank and Trust Company, Inc. for P81,675,000, but consummation was initially withheld over application of proceeds to VMC obligations. On 26 March 1997 VMC eventually sold the lot to Metrobank, with its vice-president and assistant vice-president signing the Deed of Absolute Sale as sole vendor, and Metrobank as withholding agent paid the Bureau of Internal Revenue P6,125,625 as withholding tax on the sale of real property. According to petitioner, the co-owners executed a notarized Memorandum of Agreement stating the land was actually co-owned 49.59% by petitioner, 32.23% by VMC, and 18.18% by Victorias Insurance Factors Corporation, with petitioner's gross share at P40,500,000 less pension benefit advances of P21,425,141.54, leaving a net balance of P14,822,358.46 to petitioner.

Because the 7.5% withholding tax attributable to its 49.59% share, P3,037,697.40 rounded to P3,037,500, was claimed to be exempt income of the employees' trust fund, petitioner filed a refund claim on 5 May 1997, invoked Section 53(b) after the Revenue District Officer cited Section 26, and, after inaction by the Bureau and the Commissioner, sought relief from the Court of Tax Appeals. The Tax Court and the Court of Appeals factually found that title, deed of sale, and remittance return were all solely in VMC's name and that the memoranda, secretary's certificates, and Citytrust reports did not prove that trust funds purchased the lot.

• Common Consent and Implied Trust: Petitioner argued that Article 1452 of the Civil Code applied because petitioner, VMC and Victorias Insurance Factors Corporation jointly agreed to purchase the lot and register title in VMC's name, so registration did not make VMC absolute owner or deprive petitioner of co-ownership.
• Public Documents and Substantial Evidence: Petitioner maintained that the three memoranda of agreement were notarized public documents presumed regular and truthful, that board excerpts certified under oath by corporate secretaries were prima facie evidence, and that only substantial evidence was required to prove 49.59% co-ownership.
• Source of Funds: Petitioner argued that the Citytrust Portfolio Mix Analysis concretely proved that P5,504,748.25 of employees' trust funds purchased the lot, its authenticity undisputed by the Commissioner, and that falsification by a reputable bank was unlikely.
• Torrens Title: Petitioner contended that issuance of a transfer certificate does not create or vest title and was never a mode of acquiring ownership.
• Tax Exemption and Standing: Petitioner maintained that exemption under Section 53(b) was undisputed, that as trustee administering the fund it acted for the fund and had personality to file the refund claim for tax erroneously paid on the fund's share.

• Taxability Under Section 26: Respondent, through the Revenue District Officer, countered that under Section 26 of the Tax Code petitioner was not exempt from tax on income from sale of real property and required proof of co-ownership and exemption.
• Torrens System and Estoppel: Respondent argued that under the Torrens system a third person need not go beyond the certificate, and since the registered owner, vendor in the deed, and taxpayer in the remittance return was solely VMC, petitioner was estopped from claiming ownership.
• Strict Construction and Deference: Respondent, through the Office of the Solicitor General, countered that tax exemptions are highly disfavored, must rest on the clearest grant of law, cannot arise by implication, and are strictly construed against the taxpayer, while findings of the Court of Tax Appeals affirmed by the Court of Appeals deserved respect absent abuse of authority.

• Estoppel: Whether petitioner or the Employees' Trust Fund is estopped from claiming that the Employees' Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC merely held 49.59% of the lot in trust for the Employees' Trust Fund.
• Beneficial Ownership and Tax Exemption: Whether petitioner or the Employees' Trust Fund, if not estopped, has sufficiently established that the Employees' Trust Fund is the beneficial owner of 49.59% of the MBP lot and thus entitled to tax exemption for its share in the proceeds from the sale of the lot.

• Estoppel: No. Estoppel does not bar the trustor-beneficiary from proving ownership against the Bureau, which acquired no interest in reliance on the title, pursuant to Article 1452 of the Civil Code.
• Beneficial Ownership and Tax Exemption: Yes. Beneficial ownership was proved by common consent and use of trust funds, and the corresponding sale income is exempt under Section 53(b), now Section 60(b), of the Tax Code, warranting refund.

• Estoppel: The Bureau was not a buyer or claimant that relied on the face of Transfer Certificate of Title No. 183907 to acquire an interest, so no basis existed to foreclose proof of co-ownership or trust when innocent purchaser rights were uninvolved, especially where the registered owner admitted holding merely as trustee. Article 1452 expressly allows registration of the entire land in one co-owner's name while beneficial ownership remains proportionate among all purchasers by common consent, with the title holder serving as legal trustee by force of law.
• Beneficial Ownership and Tax Exemption: Review of factual findings was warranted for misapprehension of facts, as the appellate courts dismissed as self-serving a notarized Memorandum of Agreement specifying 49.59% for petitioner, 32.23% for VMC, and 18.18% for Victorias Insurance Factors Corporation, plus Citytrust Portfolio Mix Analyses for 1994 to 1997 showing P5,504,748.25 invested from the fund, without clear and convincing counter-evidence or repudiation by VMC. Because valuable consideration rather than legal title determines equitable interest, a resulting trust arose by operation of law in favor of the fund, and registration, deed, and remittance return in VMC's name did not defeat it. The fund's tax-exempt character having long been settled by prior Bureau rulings and jurisprudence, income from its investment was exempt and withholding on that income was erroneous, with petitioner as administering trustee possessing personality to recover it.

• Implied trust by common consent under Article 1452 — Where two or more persons agree to purchase property and by common consent legal title is taken in the name of one for the benefit of all, a trust is created by force of law in favor of the others in proportion to each interest. The Bureau had no option but to recognize such legal trust once common consent was shown, as proved here by the notarized agreement among petitioner, VMC and Victorias Insurance Factors Corporation.
• Resulting trust from purchase money — Where a person purchases land with his own money and takes conveyance in another's name, the property is held on resulting trust for the one furnishing consideration, based on the equitable doctrine that valuable consideration and not legal title determines equitable interest. Applied to deem the employees' trust fund beneficial co-owner of 49.59% because its funds paid P5,504,748.25 toward the lot registered in VMC's name.
• Torrens registration is not a mode of acquiring ownership — A transfer certificate merely evidences ownership and its issuance does not create or vest title, foreclose co-ownership by persons not named, or defeat a trust in favor of another. Hence title, deed, and remittance return solely in VMC's name did not conclusively establish sole ownership.
• Exemption of employees' trust income under Section 53(b), now Section 60(b) — The income tax does not apply to an employees' trust forming part of a pension, stock bonus or profit-sharing plan where contributions are made to distribute earnings and principal to employees and the instrument bars diversion to other purposes prior to satisfaction of liabilities, with distributions taxable to the employee only to the extent exceeding his contributions. Taxation of trust earnings would diminish accumulated income and defeat the law's intendment, so withholding on such exempt income is illogical and refundable.
• Notarized instruments as public documents — Documents acknowledged before notaries public are public documents admissible without preliminary proof of authenticity and due execution, carrying a presumption of regularity rebuttable only by clear, convincing and more than merely preponderant evidence. The Bureau presented no such evidence against the notarized Memorandum of Agreement.
• Conclusiveness of Court of Tax Appeals findings and exception — Factual findings of the Court of Tax Appeals, especially when affirmed by the Court of Appeals, are generally final and conclusive, but review lies where judgment is based on misapprehension of facts, as in Far East Bank and Trust Company vs. Court of Appeals. Review was exercised here to re-evaluate probative value of the co-ownership evidence.

• "Documents acknowledged before notaries public are public documents and public documents are admissible in evidence without necessity of preliminary proof as to their authenticity and due execution." — States the evidentiary status of the notarized Memorandum of Agreement and the presumption the Bureau failed to rebut with clear and convincing evidence.
• "The registration of a land under the Torrens system does not create or vest title, because registration is not one of the modes of acquiring ownership." — Defines why sole registration in VMC's name did not foreclose petitioner's claim of proportionate beneficial ownership.
• "It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust." — Articulates the rationale that taxing trust earnings would diminish what beneficiaries receive, supporting exemption of the sale proceeds attributable to the fund.
• "There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56(b), now 53(b), Tax Code)." — Explains why the withholding system, though designed to expedite collection at source, has no logic when applied to income the trust is not supposed to pay.

• Cuizon vs. Remoto, G.R. No. 143027, 11 October 2005 — Followed as authority that notarized documents enjoy presumption of regularity and require clear, convincing and more than preponderant evidence to contradict.
• Naval vs. Court of Appeals, G.R. No. 167412, 22 February 2006 — Followed for the rule that a transfer certificate does not foreclose co-ownership or a trust in favor of another.
• Tigno vs. Court of Appeals, G.R. No. 110115, 8 October 1997 — Followed to define implied resulting trust arising from purchase with one's money with conveyance taken in another's name.
• Buan Vda. de Esconde vs. Court of Appeals, 323 Phil. 81 (1996) — Followed for the principle that valuable consideration, not legal title, determines equitable interest in a resulting trust.
• Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 95022, 23 March 1992 — Followed as controlling rationale that pension trust income is exempt and withholding on such exempt income is illogical, entitling the trust to refund.
• Far East Bank and Trust Company vs. Court of Appeals, G.R. No. 129130, 9 December 2005 — Followed to justify exception to finality of Tax Court findings where judgment rests on misapprehension of facts.
• Miguel J. Ossorio Pension Foundation, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4244, 2 November 1990 — Cited as prior final ruling recognizing the same fund's exempt status and petitioner's refund entitlement for interest income, confirming settled tax-exempt character.
• Citytrust Banking Corporation as Trustee and Investment Manager of Various Retirement Funds vs. Commissioner of Internal Revenue, CTA Case No. 5083, 9 March 1998 — Cited as supporting final ruling that Citytrust-managed trust funds, including petitioner, were refunded withholding taxes on exempt investment income.

• Article 1452, Civil Code — Provides that common consent to take legal title in one purchaser's name for all creates a trust by force of law proportionate to interests; applied to recognize petitioner's 49.59% beneficial ownership despite sole registration in VMC.
• Section 53(b), now Section 60(b), National Internal Revenue Code — Excepts qualifying employees' trusts from income tax, with distributions taxable to employees only in excess of contributions; applied to exempt the fund's P40,500,000 gross share from sale and order refund of P3,037,500 withheld.
• Article 1444, Civil Code — Provides that no particular words are required to create a trust if a trust is clearly intended; applied to sustain trust intent from the parties' agreement and conduct.
• Republic Act No. 4917 — Basis for Bureau rulings qualifying reasonable retirement benefit plans and exempting trust fund income; cited in prior rulings confirming petitioner's fund as qualified and its investment income exempt from withholding.

Peralta, J., Abad, J., Perez, J., and Mendoza, J., concur. Perez, J., designated additional member per Raffle dated 2 June 2010.