Philamlife vs. Secretary of Finance

The Court of Tax Appeals has exclusive appellate jurisdiction over rulings of the Secretary of Finance reviewing the Commissioner of Internal Revenue's interpretative rulings under Section 4 of the NIRC; furthermore, sales of shares for less than their book value (fair market value) are subject to donor's tax as a "deemed gift" under Section 100 of the NIRC, irrespective of actual donative intent.

Philamlife, a life and general insurance company, decided to divest from the health maintenance organization industry by selling its 49.89% shareholding in PhilamCare Health Systems, Inc. The shares were sold through competitive bidding to STI Investments, Inc. in 2009 for USD 2,190,000. After paying capital gains taxes, Philamlife sought a tax clearance from the BIR, which instead demanded payment of donor's tax on the alleged gift resulting from the difference between the book value and the selling price.

• Philamlife owned 498,590 Class A shares representing 49.89% of PhilamCare Health Systems, Inc.'s outstanding capital stock.
• In 2009, Philamlife offered to sell its shares through competitive bidding to divest from the health maintenance organization industry.
• On September 24, 2009, the shares were sold to STI Investments, Inc. for USD 2,190,000 (equivalent to PhP 104,259,330 based on the prevailing exchange rate).
• After the sale, Philamlife paid documentary stamp and capital gains taxes and filed an application for a certificate authorizing registration/tax clearance with the BIR Large Taxpayers Service Division.
• The BIR informed Philamlife that it needed to secure a ruling regarding potential donor's tax liability because the selling price was allegedly lower than the book value of the shares.
• On January 4, 2012, Philamlife requested a BIR ruling to confirm the sale was not subject to donor's tax, arguing there was no donative intent, the shares were sold at arm's length through competitive bidding, and citing BIR Ruling [DA-(DT-065) 715-09].
• On January 4, 2012, the Commissioner denied the request through BIR Ruling No. 015-12, determining that the selling price was lower than the book value based on PhilamCare's financial statements as of the end of 2008.
• The Commissioner held that the difference between the book value and selling price constituted a taxable donation subject to 30% donor's tax under Section 99(B) of the NIRC pursuant to Section 100 of the NIRC and Revenue Regulation 6-2008.
• The Commissioner also held that BIR Ruling [DA-(DT-065) 715-09] had been revoked by Revenue Memorandum Circular No. 25-2011.
• On November 26, 2012, the Secretary of Finance affirmed the Commissioner's ruling in its entirety.

• The ruling of the Commissioner under the first paragraph of Section 4 of the NIRC (interpretation of tax laws) is subject to review by the Secretary of Finance, and the Secretary's ruling is appealable to the CA via Rule 43, not to the CTA.
• Section 7 of RA 1125 only governs appeals from the Commissioner's rulings under the second paragraph of Section 4 (disputed assessments) and does not encompass rulings from the Secretary of Finance.
• There is a gap in the law regarding appeals from the Secretary of Finance's review, which was remedied by British American Tobacco v. Camacho allowing regular courts to pass upon the validity of regulations.
• The sale was conducted at arm's length through competitive bidding with no donative intent, and therefore does not constitute a taxable donation.
• Section 7(c.2.2) of RR 06-08 alters the meaning and scope of Section 100 of the NIRC by using book value instead of actual fair market value.
• RMC 25-2011 cannot be given retroactive application to the prejudice of Philamlife absent any grounds under Section 246 of the NIRC.

• Even assuming the CTA lacks jurisdiction, Philamlife failed to exhaust administrative remedies by not appealing to the Office of the President before filing with the CA.
• The Department of Finance is not among the agencies enumerated under Section 1, Rule 43 of the Rules of Court whose decisions are appealable to the CA.
• The CTA has jurisdiction under Section 7(a)(1) of RA 1125 over "other matters arising under the National Internal Revenue Code," which includes rulings of the Secretary of Finance reviewing the Commissioner's interpretative rulings.
• Section 100 of the NIRC imposes donor's tax on transfers for less than adequate consideration regardless of donative intent, as the excess is "deemed a gift" by operation of law.
• RR 06-08 merely implements Section 100 and does not alter its meaning; book value is the appropriate measure of fair market value for unlisted shares.
• RMC 25-2011 did not apply retroactively but merely called for the strict application of Section 100 which was already in force.

• Procedural Issues:
  • Whether the Court of Appeals has jurisdiction over a petition for review under Rule 43 assailing the ruling of the Secretary of Finance reviewing the Commissioner's interpretative ruling under Section 4 of the NIRC, or whether such jurisdiction lies with the Court of Tax Appeals.
  • Whether the Secretary of Finance's ruling should first be appealed to the Office of the President before resort to the courts.
• Substantive Issues:
  • Whether the sale of shares for less than their book value through competitive bidding is subject to donor's tax under Section 100 of the NIRC despite the absence of donative intent.
  • Whether Section 7(c.2.2) of Revenue Regulation 06-08 is a valid interpretation of Section 100 of the NIRC.
  • Whether Revenue Memorandum Circular 25-2011 can be applied retroactively to the sale transaction.

• Procedural:
  • The Court held that while the CA correctly dismissed the petition, it erred in stating the reason was lack of jurisdiction; rather, the CTA has exclusive appellate jurisdiction over the Secretary of Finance's ruling.
  • Section 7(a)(1) of RA 1125, as amended, vests the CTA with jurisdiction over "other matters arising under the National Internal Revenue Code," which by reasonable interpretation includes rulings of the Secretary of Finance reviewing the Commissioner's interpretative rulings under Section 4 of the NIRC.
  • Following City of Manila v. Grecia-Cuerdo, the CTA has the power of certiorari to determine whether there has been grave abuse of discretion amounting to lack or excess of jurisdiction, and may therefore rule on the validity of revenue regulations and memorandum circulars within its appellate jurisdiction.
  • The Court rejected the argument that appeal to the Office of the President is required, noting that matters calling for technical tax knowledge should be handled by the specialized quasi-judicial body (CTA).
• Substantive:
  • The price difference between the book value and the selling price is subject to donor's tax under Section 100 of the NIRC.
  • Section 100 creates a "deemed gift" by fiction of law, making donor's tax applicable regardless of the absence of actual donative intent.
  • Revenue Regulation 06-08, Section 7(c.2.2), which defines fair market value of unlisted shares as their book value, does not alter Section 100 but merely implements it by setting parameters for determining fair market value.
  • Revenue Memorandum Circular 25-2011 was not applied retroactively; it merely called for the strict application of Section 100 which was already in force at the time of the sale.

• Deemed Gift Rule (Section 100, NIRC) — Transfers of property for less than adequate and full consideration are treated as gifts for tax purposes, with the excess of fair market value over consideration deemed a taxable donation by operation of law, regardless of the transferor's actual intent or the presence of a bona fide business transaction.
• Jurisdiction of the Court of Tax Appeals over Secretary of Finance Rulings — The CTA has exclusive appellate jurisdiction over rulings of the Secretary of Finance reviewing the Commissioner's interpretative rulings under the first paragraph of Section 4 of the NIRC, implied from Section 7(a)(1) of RA 1125 to prevent a gap in the appellate process.
• Certiorari Jurisdiction of the CTA — By constitutional mandate and as recognized in City of Manila v. Grecia-Cuerdo, the CTA has the power to issue writs of certiorari to determine grave abuse of discretion in cases within its appellate jurisdiction, including the power to rule on the validity of revenue regulations and memorandum circulars.
• Fair Market Value of Unlisted Shares — For purposes of donor's tax, the book value of shares as shown in financial statements duly certified by an independent CPA nearest to the date of sale constitutes the fair market value of unlisted shares pursuant to Revenue Regulation 6-2008.

• "Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year." (Section 100, NIRC)
• "The absence of donative intent, if that be the case, does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that the amount by which the fair market value of the property exceeded the value of the consideration shall be deemed a gift. Thus, even if there is no actual donation, the difference in price is considered a donation by fiction of law."
• "It is axiomatic that laws should be given a reasonable interpretation which does not defeat the very purpose for which they were passed."
• "Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be an injustice to taxpayers prejudiced by his adverse rulings."

• British American Tobacco v. Camacho — Cited by petitioner to argue that regular courts have jurisdiction over the validity of administrative rules; distinguished by the Court which held that CTA now has certiorari powers to rule on validity within its jurisdiction.
• Ursal v. Court of Tax Appeals — Cited by petitioner to argue against implied jurisdiction; distinguished by the Court as having been decided on lack of personality, not jurisdiction, and effectively departed from by City of Manila v. Grecia-Cuerdo regarding CTA's certiorari powers.
• City of Manila v. Grecia-Cuerdo — Controlling precedent establishing that the CTA has the power of certiorari by constitutional mandate and implication from its appellate jurisdiction.
• Asia International Auctioneers, Inc. v. Parayno, Jr. — Cited to show that rulings of the CIR implementing the Tax Code are appealable to the CTA.
• Elma v. Jacobi — Cited by respondents regarding the President's power of control over executive departments.

• Section 4, National Internal Revenue Code — Vests the Commissioner with power to interpret tax laws subject to review by the Secretary of Finance, and power to decide disputed assessments subject to CTA jurisdiction.
• Section 7(a)(1), Republic Act No. 1125 (as amended) — Grants the CTA exclusive appellate jurisdiction over "other matters arising under the National Internal Revenue Code," interpreted to include Secretary of Finance rulings.
• Section 100, National Internal Revenue Code — Deems transfers for less than adequate consideration as gifts subject to donor's tax.
• Section 99(B), National Internal Revenue Code — Imposes 30% donor's tax when the donee is a stranger.
• Revenue Regulation 6-2008, Section 7(c.2.2) — Defines fair market value of unlisted shares as book value in financial statements certified by an independent CPA.
• Revenue Memorandum Circular 25-2011 — Revoked prior BIR ruling favorable to petitioner; upheld as merely clarifying existing law.
• Section 246, National Internal Revenue Code — Non-retroactivity of rulings; held not violated because the circular merely applied existing law.