Pangilinan Pascua, et al. vs. Commissioner of Internal Revenue

DECISION

Promulgated

AUG 2 3 1994

' .

X Sought to b~ refunded by petitioners in the case at bar is the total amount of P386,683.37 representing alleged excess capital gains tax paid under protest on the sale of shares of stock of a domestic corporation. The fact s of the case are not disputed. The above-named petitioners are Filipino citizens, all of legal age and vith office address at Metro House, #34 5 Sen. Gil J. Puyat Avenue, Makati, Metro Manila. On May 11, 1990, the petitioners sold to Messrs. Carlo A.

Carag, Manuelito 0.

Caballes and Elpidio C.

Jamora their res pective shares of stock in FPSP Holdings Corporat i on <"FPSP Holdings">, involving the aggregate amount of 191,998 shares at a price computed at the par 808

- 2 - vaLue thereof of PlO.OO per share as well as their respective shares in First Paci.fic Securities Philippines, Inc.

< F.PSPI >, involving the aggregate amount of 926~2:.32 shares at a price computed at book value thl~eof of P14.49 <Exhibits "A" to "A-5">. Shown below is a summary of said transactions: No. of Selling Price Seller ~ Shares per share TOTAl.

A. FPSP Holdings Corp. ft. V. Pangilinan C. A. Carag &4,000 p 10.00 p &40,000.00 R.S. Pascua ft.O. Caballes &3,999 10.00 &39,990.00 V.C.Tinsay E. C. Jawora, Jr. &3,999 10.00 &39, 990.00 TOTAl.

191,998 P1,919,980.00 B. First Pacific Securities Philippines, Inc. I' II.V. Pangilinan C. A. Carag 308,744 p 14.49 p 4,473, 700.56 R.S. Pascua ItO. Caballes 308,744 14.49 4,473,700.56 l t~ J v.c. Tinsay E. C. Ja110ra, Jr. 308,744 14.49 4.473.700.56 926,232 p 131 4211101. 68 The cost to petitioners of the F.PSP Holdings shares was at par value or P 10. 00 per share while the F.PSPI shares cost appro,.:imately ?8.26487 per share.

Consequently, there was no capital gains on the sale o.f the F.PSP Holdings shares but each petitioner has a capital gains of P1,921,970.56 on the sale o.f FPSPI shares .

The capital gains ta,.: due from each peti ti6ner as a resul t of the foreg oing sales a mount t o ? 3 74,394.1 1 ~onp te a s f ollows :

80 f - 3 - t Capital Capital Gains ~· Seller Selling Price Cost Gains Tax A. FPSP Holdings Corp. JI.V. Pangilinan p 640,000.00 p 640,000.00 0 0 R.S. Pascua 639,990.00 6..19, 990. 00 0 0 v.c. Tinsay · 639,990.00 639,990.00 _o_ 0 TOTAL Pl19191980.00 Pl19191980.00 0 0 B.

l~ o F ~t Pacific Securities Corp. JI. V. Pangilinan p 4,473,700.56 P2,551,730.00 P1,921,970.56 p 374,394.11 R.S. Pascua 4,473,700.56 2,551,730.00 1, 921,970.56 374,394.11 v.c. Tinsay 4,473,700.56 2,551,730.00 1,921.970.56 374,394.11 TOTAL p 131 4211 101. 68 P716651190.00 P517651911.68 p 11 1231 182. 33 On May 14, 1990, the petitioners :filed their individual capital gains tax return on stock transactions <Exhibits "B" to "B - 2" > with the BIR Revenue District O:f:fice No.

3 2 , Makati East and paid the corresponding capital gains tax· due thereon as per con:firmation receipts submitted <Exhibits "C" to "C - 2">. A tax clearance :for the sale however, was not issued by the Bureau o£ Internal Revenue <BIR> since the revenue o:f:ficer assigned to the case disagreed with the computation o£ the capital gains tax due on the sale by petitioners o£ the FPSP Holdings shares on the ground that the capital gains thereon should be computed based on the book value o£ P20.07 per share as against pe titioners, computation based on the alleged true book value o£ P9 .81 er share or P0.19 bel ow i ts a value o:f PLO.OO pe~ s h a r ~.

Accord i ngl y 1 pet:i .i oner A were aske d t 808

' - 4 - pay~. ·the capital gains tax due on the sale o:f the FPSP Holdings shares in the total amount of P386,683.87. On July 4, 1'39p, petitioners paid under protest the total amount of P386, 683. 87 <Exhibits "E" to "E-2" > · in or~~r that the sale of the FPSP Holdings shares can already be recorded in the books o:f the company and registered in the name of the new owners. On July 17, 1990, by way of protesting their payment of P386,683.87 as alleged unpaid capital gains tax and in order to formalize its claim for re:fund o:f the said amount, the petitioners, thru counsel, submitted a letter-claim for refund to the Chief, Appellate Division o:f the BIR <Exhibit wF">. On July 2, 1992, petitioners :filed the instant I i • petition :for review because respondent did not act upon '\ ' the petitioners' claim for re:fund since the time it vas filed and to interrupt the running o:f the prescriptive ' period <CTA records, pages 1 - 14). The issue in this case is whether or not petitioners are entitled to their claims for re:fund in the total amount of P386,683.37. The petitioners submit that no capital gains tax was due on their s a le o f t he FPSP Ho d i ngs shares since the selling pr ice ~£ P10.00 pe r shsr~ is equal to i a 8U8

I J \

"If,

:'• '""CISION -

C T. • GASE o.

~825 - 5 - acquisition cost of P 10. ·oo per share while the "tr ue" book value thereof was computed by petitioners to be only P9.81 per share or P0.19 below it par value oi P10.00 per share.

There being no capital gains on the sale oi FPSP Holdings shares, petitioners claim that they are entitled to an immediate refund of the amount oi ?386,683.87 paid by them under protest as alleged unpaid capital gains tax due on aforesaid sale. Whereas, respondent strongly insists that the payment by petitioners of the capital gains tax on the sale of FPSP Holdings shares in the amount oi P386,683.87 is legal and proper.

The capital gains thereon should allegedly be computed based on the book value oi P20. 07 per share determined as per the audited Iinancial statements of FPSP Holdings Corporation as oi December 31, 1989.

Deducting therefrom the acquisition cost oi ~\ the· sale P10.00 per share, the capital gains realized on thereof is P 10. 07 per share. Accordingly, the oapi tal gains of petitioners on the sale' oi the 191,998 FPSP Holdings shares amount to Pl, 933, 419. 86 on which_, the capital gains tax allegedly due thereon is P386,683.87. The difference in the computation oi capital gains tax due on the sale of the FPSP Holdings shares can be traced to the difference in the manner by which the 81 j

- 6 - paJ;:ties assigned .the book value on said shares.

Petitioners ' £allowed the "cost method" o£ accounting as recommended by FPSP Holdings Corp.

external auditor Sycip Gorres and Velayo while respondent simply applied th~ "equity method" o£ accounting as this was the method by which the £inancial statements o:£ FPSP Holdings vas presented.

Shown hereunder is illustration £or purposes o£ comparison: Capital Stock - P10 par value Issued and outstanding - 301,000 shares Retained Earnings Less: Accu•ulated equity in net earnings of FPSI

STOCKHOLDERS' EQUITY

Divide by outstanding shares Book Value Per Share Respondent's Equity ftethod PJ, OJ 0, 000. 00 3,030,678.00 6,040,678.00 6,040,678.00 301, 000 shares p 20.07 the mathematical Petitioners' Cost llethod PJ, OJ 0, 000. 00 3,030,678.00 6,040,678.00 13,086,482.00) 2,954,196.00 301, 000 shares p 9.81 '"' ·;

1 . ' • t.

t The threshold question that need to be addressed is \ whether or not the retained earnings re£lected in tqe £inancial statements arising £rom accumulated equity in the net ear n i ngs o£ a subs idiary <FPSPI> shall be c o sidered n he deter minat i o n £ t h e book va l ue o:£ the arent -Jompan y '~PSP Ho l di ng- > ahro r es £or pur pose s o£ cot.put · x g t e capital g a i e ax o n t he sale by t•e f t.he said a har P 81l

- 7 - The petitioners contend ~hat the re£lection by FPSP Holdings in the Financial Statements o£ its "share in the net earnings o£ its subsidiary" even prior to the receipt thereof as dividends is mandated by equity method o£ I '., a~'counting under Financial Accounting Standard No. il. They are · of the view that said £inancial statements prepared pursuant to the "equity method" o£ accounting while necessary to comply with generally accepted accounting principles, is not conclusive £or taxation purposes, or specifically in this case, £or determining the true book value of the FPSP Holdings shares ' and computing the corresponding capital gains tax due in the sale by the petitioners of said shares. ' The alleged true book value o£ the FPSP Holdings share in the amount of P9.81 or P0.19 below its par valu~ of PlO. 00 per share is arrived at by disregarding thei amount of ?3,030,678.00 reflected as FPSP Holdings retained earnings under the financial statements and taking into account its accumulated losses o£ ?55,884.00 <P3,030,678.00 P3, 086, 482. 00).

company has not realized as income Where the • I parent ! i I any "share in the net earnings" of the subsidiary and said accumulated ""a r i ngs of the subs idiary rema i ns part of retaine~ e ar n i ~qs, t e ~ c os t ~ethocl" o£ 812 ccount.; n g sho .. H l ,.

- 8 - all~gedly be £ollowed ~n determ~n~ng the true book value o£ shares o£ the hold~ng company. Where the cap~tal ga~ns tax on the sale o£ the shares o£ the subs~d~ary < FPSP I), computed based on the boJ~ value thereo£, has already been pa~d by pet~t~oners, to ~nclude the equ~ty ~n net earn~ngs o£ a subs~diary wh~ch ~s re£lected ~n the £~nancial statements o£ the parent company <FPSP Hold~ngs) as "retained earnings", in the computat~on o.£ ~ ts book value results in inequity s~nce the same amount has already been considered in determ~n~ng the book value o£ the subsidiary's shares £or • purposes o£ comput~ng the cap~ tal gains tax on the sale thereo£ by the pet~ t~oners.

The e££ect is to tax the same ret a~ ned earn~ngs both on the level o£ the subs~d~ary <FPSPI> and o£ the parent company <FPSP Hold~ngs).

.

Pet~ t~oners l~kew~se c~ te BIR Ruling No. 117 dated ' .

June 15, 1989 wh~ch lays down the rule that accumulated and current equ~ty ~n the subs~d~ary's net earnings, J '.

w~thout d~v~dend declarat~on o£ sa~d earnings in £avor o£ the parent corporat~on, ~s not considered as income and should not be ~ncluded ~n the determination o£ the book va e o£ t he shares £ t he p- e t c orporat ion for 813

- 9 - pux;:,poses of the capital gains tax on the sale o:f said shares.

On the other hand, respondent argues that since the "equity method" of accounting was used in the preparation oA~ the financial statement of FPSP Holdings, the same method should be used in the computation o:f the book value of FPSP Holdings shares of stock. The shi:fting to the "cost method" in the determination o:f the book value o£ FPSP Holdings share of stock must not allegedly be countenanced.

In the equity method of accounting, the parent company includes in its accounting records its share o:f the subsidiary's net income or net loss, adjusted :for amortization of differences between current :fair value . and carrying amount o£ a purchased subsidiary's net j' assets as of the date of the business combination as well · ~ !

as its share of dividends declared by the subsidiary ' tl " :

[Larsen, John E.; Meigh, Walter B.; Masich, A.M.; "Modern Advanced Accounting", <1980), p.

2921.

There being only one class o£ stock outstanding, the book value o:f P20.07 is arrived at by dividing the total stockholders' equity as reflec ted in the fin a ncial statement b y the number o:f ~ a r e s u t st a n ng.

81 4

- 10 - The determination of tax base for purposes o:f the capital gains tax is provided by Revenue Regulations No. 2 - 82, the pertinent portion of which is quoted hereunder: SEC. 6.

Determination of Tax Base. - In determining the tax base, the following rules ~~ shall apply:

(a> Determination of selling price.

X X

(1) X X X (2) X X X ( 3) exchange exchange, observed:

In the case of sale, of shares not listed in the :following rules trans:fer or the stock shall be (i) In gener al, the unlisted shares shall be valued at their book value nearest the valuation date.

The book value of these unlisted shares of stock shall be prima :facie considered as their :fair market value.

(ii) If such lower fair mar k e t valuation is not clearly established and documented, the book value o:f the unlisted shares of stock shall be adopted.

If there have been previous bonafide sales/exchanges o:f the unlisted shares of stock, the price a t whiph these shares exchanged hands s o e t a keni c · e r e d a s i f a i r ~~~ k e t v a ue/ s I ' .... n t hF ~:e·~;::

a t.

b e r , t !.ro:• .l• ok val "::

o:f P2 0 . -, 4.s c-rriv'?d a ... f o l"ow 'ng t he v a l · a·~· : on ... a · pr :·ided i ~> egu t ' 0 '1 ~ 2-8 2 an ' sha l 1 ~e 815 - 11 - mar_ket value. Respondent further claims that petitioners failed to disprove the same. BIR Ruling No.

117 which was cited by petitioners in support of its case allegedly contemplates of different \ :

seb\ of facts and circumstances. Respondent alleges that petitioners never presented any evidence other than its mere allegations to prove that indeed the retained earnings were from its subsidiary ( FPSPI >. Since claims for refund are in the nature of exemption from taxation, they are construed strictly against the claimant <MERALCO vs. CIR, 67 SCRA 357). Thus, petitioners failed to show that they are entitled to the refund. We find in favo r of petitioners. While it is true that Revenue Regulations No. 2-82, Section 6 <a> < 3 > < i > provides that in the case of sale o:f l:

' shares not listed i n the stock exchange, the unlisted shares shall be valued at their book value nearest the valuation date, the same shall be merely prima :facie considered as their fair market value :for purposes o:f determining the tax base for capital gains tax. It .

further provides that in case the shares are valued on a basis lower than their book values, a justification :for the deviation from the book va toge h e with he ev ' dencea i n sup por t thereof, should e su bmittPd.

816

- 12 - The book value o£ the FPSP Holdings share o£ ?20.07 as per the £inancial statements £or the year ended December 31, 1989 under the "equity method" should thus }' be merely prima £acie considered as the £air market value ol~ the said share.

The petitioners have indubitably shown that the book value o£ the FPSP Holdings share £or capital gains tax is P9. 81 per share using the "cost method" o£ accounting. The equity method employed by FPSP Holdings in the preparation o£ £inancial statements is in accordance with the generally accepted accounting principles. However, it does not necessarily £allow that in determining the book value and capital gains tax, the same should be applied.

They do not accurately re£1ect the retained J.

,,.

earnings o£ FPSP Holdings and the book value o£ its )cj'' shares £or purposes o£ computing the corresponding i capital gains tax due thereon because it includes its share in the net earnings o£ its subsidiary <FPSPI>, even though it has not received the same as no cash dividend was ever declared by the latter since its incorporation I X ' . b ..

F'" ) •

T - .e eq i t • in ne t e a rn i n~s o:f t.h e s s ' di.ary

PSI >

··as n'" ve·~ < a l..; 2.ed as i"lc om uy t ·~e paren c mp ny ( .

~ :o t I • ar t -f e a i ned earn '•gs I.

·;:,~e

i. -· ,, 81 ?

t ' :~ >

- 13 - subsidiary < FPSPI >. In actuality, it was considered in computing the book value and capital gains tax on the sale of the FPSPI shares. r.

To include the same retained earnings in determining th~\ book value and capital gains tax on the sale of FPSP Holdings share even without declaration of cash dividend is tantamount to taxing the same retained earnings both in the level of FPSPI <the subsidiary> and of FPSP Holdings <the parent company>, Pursuant to BIR Ruling No.

117- 89 dated June 5 • 1989, then Commissioner of Internal Revenue Jose U. Ong ruled in a case with substantially similar set of facts as the case at bar as follows: "In reply thereto, I have the honor to inform you that appreciation in value of property is not even an accrual of income to taxpayer prior to the realization of such appreciation through sale or conversion of _the property <Sec.

38, Revenue Regulations No. 2 >.

Such being the case, the "accumulated and current equity in the investees net earnings" i.e..

the imputation but without dividend declaration of tile earnings of the subsidiary or sister corporation to the parent or stockholder corooration in the amount of P117. 562.844.00 and the "share in revaluation · cre ments" i.e., incre~se in value of property be a us e of r e ap praisal t he e t cur ·en v a lue without .a e e .c hange "in t he amoun o£ Pl 4, 0 04, 128.00 are not conside red as incom not t he r e f o e be ed in the the bo ok the PH! NMA ur oose s o f t he ai~a tax on of said shares.~ <Underac r ing 818 I,.

., 'i - 14 - \ \ '' The audited financial statements of FPSP ~ Holdings for the year ended December 31, 1989 and the accompanying notes to the financial statements <Exhibit "D" > clearly illustrate and serve as justification for the use of the i "c~t method" of accounting in determining the book v~lue and capital gains tax on the sale of FPSP Holdings shares.

It should be noted that FPSP Holdings only subsidiary is FPSPI, its only asset is its investment therein and its income is to a large extent its equity <share) in the net earnings of its subsidiary. The book value of P9.81 per share of FPSPI Holdings using the boat method is therefore correct hence, no capital gains is recognizable upon its sale at P10.00 per share. In view of the foregoing, We find petitioners to have factually and legally established their entitlement to the refund sought.

WHEREFORE, respondent Commissioner o:f Internal Revenue is hereby ordered to refund to petitioners the amount of P386, 683. 87 representing excess capital gains tax paid on their sale of FPSP Holdings Corporation s a ·es ,., stoc k .

< I 818

- 15 -

WE CONCUR:

Judge ~I!;.~ I

RAIION 0 D~~

Associate Jud ~Q.

c;:_~ ERNESTO D. ACOSTA Presiding Judge CERTIFICATION ~ I hereby certify that this decision was I reac;;:Jl,ed ,, after due consultation among the members of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution.

~20 ~Q .. Q~ ..

ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals