Atten I Ite - Wepublic of the Philippinis Court of Tax Appeals Man Ila vs. « | CET.A. Case Ho, et al.

DECISION -

G.T.A. CASE M. 255 o3-« appraisel, the Hestly Committee proceeded to make : the valuation item by ftem, To arrive at @ definite price or value of a particuler item, it considered the original velue and then deducted the amount needed for repsration thereof. In ascertaining the prices of the replacement parts, it considered the fair merket value prevailing at the tiwe of appraisal, and, souetiaes, the original value, ainus wear and tear. It took the committee about one aonth to aake the appraisals anc the repert. In consideration of the transfer to 3iscom of the tangible assets of pe- titfiener, theresy valued at #2,541,1/4.69 by the Westly Coazittee, and sugar quota of 2 296,525.856 piculs, which respondent's counsel admitted had « current value of #5.00 per picul or a total value of #1,402,629.26 at the time of conversion or exchange, the petitioner received 216,000 aon par value shares of Biscom's authorized capital stock, 3 shares of which were {ssued to the qualifying incerporaters designated by petitioner. In 1948, three sali svgar centrels, nanely, <abankalan, Salvador Serra and Vie daurrazaga y Mota, contributed their capital essets te the Biscom in exchange of 72,323 Giscom shares, 39,055 of which were {ssued tn consideration of @ voting trust executed by said sugar centrals in favor of petitioner from petitioner's original Shares, thus reducing petitioner's equity in Siscou te 176,945 shares. In 1951, the petitioner sold 176,941 of 1<s shares to the Philippine Planters’ Investment Co. for i i i ls

DECIS TON =

GeTsAe CASE NM, 253 ~d-s= #6,192,935.00, payable in installaents. It retainad four (4) shares in pursuance of the contract of sale suthorizing petitioner to have a representation fn the Board of Directors ef the Bistom until the price is fully paid. In the sams yoor, the petitioner ree Geived an initial pavuens of £1,500,CCO,00; In 1962, $380,764.47, ©4,296.97 of which wea fer Interests and in 1993, #1,231, 710, 75, 213,375.26 of waich was for intexest. ihese receipts, including the sandry nro- fits sac wisselisagous credits to surplus, were ea- ported in petitioner's inceme tax returas for the cor- responding tax years, anc incere tex, #6 reflected ta the returns, in the smeunts of $14,227.00, 37,446.00 and 9139,617.00 was pale, In the enuputeticn of the incons tax, se reflected in the returns, the petite ‘ tigner used the bork (Ramos) value cf ®924,559,.91 as the acquisitton value of the shares sel¢c te the Philip~ pine Ylantors tavestment Go; it dedugted st once the book value from tne ftret tnetallment of »2,800,000,00,4 1% teck inte account #3 fncome only KY of the profit returned fer each veer es texadle end it set forth Gextain Geductions whieh were net allowable, On Move ember 27, 1994, the respendent Collector of "nternal Kevenue esseased egainst the petitiener the respective sues of 267, 246,00, 236,00.00 end £127,949,00, fae Gluding in the latest aux the tax due on uiscelisnecus charges to surplus applicable to pravious parleds in the aggregate Emount of #5,257.60, as deiiciency In~ Come taxes for the tex years 1951, 1952 end 1983, which

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a G.T.A. CASE NO. 253 the petitioner paid under protest. Petitioner's ree quest for refund baying been dented, the present ap~ peal wes filed, Both parties edmit that the Income tax returns filed by the petitioner are erroneous, The peti- tioner is now willing te apportion the scquisition cost of the shares sold to the Philippine Planters’ Investment Co. in proportion to the installment ree ceived in order to get the correct prefit fer each particular tax yeer; it is also willing te consider 100% of its yearly net profit as taxable; it is fur~ ther willing toe forego the deductions disallowed by the respondent Collecter of Internal Aevenue, And abeve ali, it admits the mistake of setting forth tm the returns the book value of + 224,559.91 as the acqui- sition cost of the shares sold which according to it was arbitrary and unreasonably low, The only issue involved in this case is: Whet is the correct scquisition value of the 176,941 shares which the petitioner sold te the Philippine Planters* Investwent Lo.?

| The cespondent weintains that the correct acaule Sition value of the shares is the book (Ramos) value of #824,559.91, Upen the other hand, the petitlener contends that it is the value of the tangible assets on the amount of *2,541,154.69 a8 determined by the Weatly Comalttee plus the sugar quotas of 296,525,856 piculs valued at #1,482,623.28 or a total of #4,023,< 763,97, Geieks GAS WO, 253 !

-6« At the outset, we wish to lay emphasis on the fact that, eside from the unrelated incoses during the years 195i sad 1953, respondent's ceficfency ase sossment wes directed te the prefit or inceme realised from the sale of the shares to the Pailippiae Planters’ Investzent Co, Frem the evicence edcduced curing the hearing of this care, two separate taxable transactions project inte the light. One is the transaction tn« volving the converstor by exchange ef the cepital eseets of the petitioner inte the Hiscom shares. The other {s the transaction regarding the disposition by sale of petitfener’s sheres (converted assets) in favor eof the Philtpetne Plenters' Investment Co. But, as respondent's deficiency assesament was directed funde- mentally te the profit sr Income erisiag from said sale, we shall therefore limit oursslves to the second transaction -- to the sale of perittioner's 176,94! Sis- gom shares in favor of the Phtifppine Planters' Invest ment Co.

( we shall now proceed to detereing the correct acquisttion value of the 176,941 S{sces shares which the petitioner sold te the Philippine Planters’ In- vestment Ce. {fn order to ascertain the taxabie income arising from the sele. As afere-steted, the 416,000 no par sheres were received by the petitioner in ex change of {ts assets, which consists of tangible pro- perties velued by the Hestly Committed at ¥2,841,134,.69 aac suger quota ef 296, 575.256 piculs, which, a5 ad~ mitted by respendent's counsel, had # current value of -r 984 Spe ss a

DEC TS ION -

CelsAe CASE MO, 253

» Ve

#5.00 per picul or 4 totel current value of #1,432,- 629.28. The law provides that “in case of the ex- change of ene plece of property for another, the pre-e perty received in exchange shali be considered es the equivalent of woney in 2 sum equal te its fair aarket value on the date on which the exchenge wes mede.* (Sec. Bec, Hat. Int. Aev. Code.) In the deternine- tion of such value, the “appraisal depends in large part upon the ability and relfisbf{ltty of the sppreiser's Gare with which the appraisal is made, end the feni- ifarlty of the appraiser with the property.* (Mertens, Lew of fed. Income Taxation, Yol. los, See. 59.96, pe 15.) )

/ The valuation of petitieaer's tangtole asacts st 42,541, 134.69 was arrived 4t by sen whese adtifty as appratsers is not disputed by respondent. “r. Nestiy, by reason of his position as General superintendent of Del Carmen 4 Calamba suger istete, wos femilier with the preperiies he wes called upen te appratee anc was in our opinion highly qualified to appraise petitioner's tangible assets. Frem the evidence presented, It ape pears thet Hessrs, Robles and Guillen, who are beth engineers with years sf experience in various sugar centrals sre just os qualified as ue. westly, Indual- tebly, they were ia & dsttier position to deteraine ap- proximately, {{ net accurately, the value ef the tan- gible properties than the womvers of the Rates Comnittee. The integrity of these three sen a6 appraisers cannot be doubted, One of the members represented the peti- 285 504

DECTSION «

C.T.A. CASE NO. 253 tionery the other, Isebela Sugar Co. It may be said that these two members represented conflicting in- terests. Zech hed to see thet the assets of the other's principal were not unduly everpriced to the prejudice of his own principal's interests. the taree appraisers spent ebout ene menth tn theiz task, waking the va- lvation item by item, For these observeticns alene, we believe thet the valuation ef the sestly Comaittee — should be accorded censideravie weight. Upen the other hand, we cannot give the same weight te the valuation of the Ramos Comzittee principaliy secause it was based not on fair market value out on veok vaiue. *oreover, there is no Ghewing regerding their tesiliarity with the pre- perties in question and the care with wnich their ap- praise] was sede, An eppreisel eof this «ind requires technical anowledge of aachineries, which, we sel leve essr6. Hames, Gien and Vowinge did sot possess. ) Moreover, froa the wathemetical aspect, we are inclined to give sere creait te tie “estiyvy appraisal @8 expressing, “cre or less correctly, the valve of petitioner's tengible assets, which were excheaged for the Siscem sheres, then te the dems valuation of #824,559.91. “4s heretofore steted, the total original acquisition vtlue of petitioner's tenytole capital eosets was 77, 797,994.69. Around 40% to He of these assets was destroyed curing the war. ihe sestiy ap- peeisal of ©£2,541,154.69 is 3,68% of the oniginel acquisition value ct petitioner's tangible capitel assets. [he fawos valuation which was made earlier then the iestly Comittee appraisal {is only 9.4% of 6 286 203 tal"

DECISION -

GeTeA, CASE NO. 253 “Je the original acquisition value of petitioner's tangible Gapiteal assets. Considering thet further depreciation " im the tangible properties occurred up te the westly Committee appraisal, it is obvious that this appraisal is & sore or less correct veluation of said properties. But avove ali, tre sestly Comittee appraisal was adopted in the agreement between Isevela sugar Co, and the petitioner, which was then practically owned by the Philippine Netional tank, to arganize the Siscoa. It was envedied as Annex “A* in the Articles of Incer- poration of Siscen, which was duly registered in the Securities 4 Exchange Comaission. Heving oeen thus adepted, embodied and registered, there ‘s no reou ior doubt thet as vetween the testly Comalttee appraisal and the Ramet valu2tion, the former expresses more appro- uimately, {f not more accurstely, the correct ee quist- tion valwe of petitioner's tangible assets. “Consequently, considering that respondent's counsel sdattted that the Suger quots of 296,52 .896 miculs hed « current tetal valué of81,482, 629.28, we find thet the correct scquisi- tien value of the 216,COO shares was #4,023,763.97. Howe ever, inasmuch as the 39,C55 sheres were conveyed to thy chree sugar centrals in consideration of the voting tzust and four (4) sheres were withheld or retained ay petitioner, the 176,941 shares disposed of by way of saie te the Philippine Planters’ Lavestuent co. had an acquie sition value of #4,023,6735.02, net »4,023,635.34 as ere roneously computed vy petitioner. ) To obtain the taxable income trising from the receipts of sale of the 176,941 shares, the following mathemeticel formula, as adwitted by both parties, Gheuld be appl ted: 3 07 a nar re

VEC TZ TON ©

CeTsAs CASE NO, 253

« 1D «

Gress Profit Profit

. Instaliment = for Aegarding the percentage of gain thet should be taken inte account in computing the net income of pee titioner, which it now submits should be 1OGk, K is well te stete here thet Section HM (%) of the Tex Code ie applicable only to @ taxpayer cther than 4 corpore- tien, “x x x. A® respects cerporations, since there ere no similar provisions cutting dowa the amount of the gain or less, capital gains or lessee are fully taken inte aceount." (Federal Income Taxation (Cases 4 Materials) by Surrey & Warren, Port I, p. 478). | It follows that the incose of petitioner is texable te the extent of 100x. | Regarding the assessments ca the sundry protite of #12.00 returned {fn 1951 and the credits te surplus of #231,.06 and *€,217.47, respectively, reported in 1991 and 1953, we find for the respondent Collector of Internal Reverwe for the reason thet said ascess- aenks were not contested by the petitioner. For the same reason, we hold as taxebla the alscellaneous charges te surplus applicable to previous periods totalling #4,259.6, which, though net reported, were nevertheless included {n the aasesament for 1953, Respondent argues against the consideration of the sugar quote fn fixing the ecquisitien value of the shares sold te the Philippine Planters’ investwent Co.

2 ele a oe * bee Is low CeToA, CASE NO, 283 «ll « It is contended that the sugar quotes, heaving been | acquired free and without cost before the war, can- | not be expected to have or acquire any acquisition Gest for purposes of determining any profit realized from the sale of the discen shares. This argusent is without merit. te sre called upen te determine a Spl ci eign ste Pt, ast fis truc thst potitiener sequired the suaar quota free. Sut at the time ef the conversion by exchange of the Sugar quote into Siscou shares, the sugar quota, ao aguitted vy respondent's counsel, had & current value. Since the sugar queta had @hen s current value and ferucd part of the consideration in the conversion ay exchange into shares, which shares were subsequently sold, they should therefore oe texen inte account in ascertaining the acquisition value ef the shares for the purpose of fining the prof{t realized frea seid S@le@isec. 35-c, Nat. Int. Rev. Code). | AS regards the vook (Hames) valuation, the res- pondent charges the petitioner with equitable estoppel or estoppel ip pais. He avers thet the petitioner having represented in its books that the value of {ts a6S8ets was only £624,559,91, It cannet now be pe ruitted to repudiate it. We cannet agree with the preposition that estoppel in should be made to cperste against the petitioner. “In order te constitute thie kind of estoppel the respondent aust heve relied on or acted upon the book (Kasecs) valuetion te his prejudice — to the prejudice of the government which he now represents 289 300 —_ bec To hi C.T.A. CASE NO, 253 « 280 {see Central Impr. Co. v. Canbria Steel Co., 210 Fed. 696.) Im the case at bar, the sespondent dic act present evidence te prove that the government has been prejudiced sy his reliance on the book valuation of £824,559.91. And we canact perceive aAow the gev- ernment could heve been prejudiced thereby. On the | contrary, should we sanction the use of the book ve- luetion in computing the taxasle profit accruing fron the sale of the shares nerely because of such reliance, the gevernmaent would stand to collect taxes in excess ef what is legally cue. In this eventuality, 1% would be the petitioner, net the governaent, who would oe prejudiced, orcever, ® taxpayer sheuld be given an oppertuaity to correst honest and f{naccent m{etakes in Sis retarns (ihede Islind Hospital [rust Co. vs. Gomsisstener, 29 F 2d 359; Union ©. R. Co, vs. Sowers, 24 7 2d 788).

In view of ail the foregeing, we find thet the insome taxes due from the petitioner during the tex years 1951, 1952 and 19535 te oe in the respective amounts of £64,613,.00, £23,523. and *91,419.00, or in the tote) amount of #179,555.00. It appearing that for the seme years, the petitioner paid the sums Of #261,575.00, #73,476.C0 and $267,546.00, ar @ tetel of 7622,615,.00 as income taxes, there is therefore aa overpsyment of *443,960.00,

WHEREFORE, the assessment of Nevember 27, 1954 is modified and the respondent Collector of Internal Revenue is hereby ordered to refund to the petitioner, | Binalvagan Estate, Inc., the sum of $445,000.00, with —_— von a ee a ae ee LECTIS I0u - C.T.A. CASE MO. 253 legal interest thereon from tne date of paysent. witheut special prenouncement as to costs.

SO ORDEAED, Manila, Philippines, June 29, 1957,

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