I "'F<:Pujj·"Mc ~J' Tim NLN.IPJTTJN, et al. vs. THS Commissioner of I Nternal Revei-Tl'E

DECISION -

CTA CASE NO . 779 2 on April 15, 1939 by the Cour t of First Instance of Manila in Civil Case No . R- 54622 , entitled "Testate Estate of ~'iilliam J . Shaw, deceased"; while petitioner ·lack lvack Golf & Country Club , Inc . (hereinafter referred to as the ttClub 11 ) is a duly registered domestic corporation organized and operated as an athletic and social club with office and clubhouse at Mandaluyong , Rizal . On April 22 , 1949 the Estate , through its adminis- trators and trustees , executed a deed of donation in favor of the Club whereby it transferred and conveyed to the latter 36 parcels of land located in the Municipality of San Felipe Neri , Rizal (now Nandaluyong and Quezon City) particularly described and subject to the conditions and restrictions s pecified in the said deed of donation which read as follows:

PROVIDED , NEVERTHELESS , that this gift is made upon the following conditions and stipulations , the due observance of vJhich is essential to the validity and continuance of this grant .

The said ~·Jack 'da ck Golf and Country Club , Inc ., in taking un- der this instrument and in accept- ing this dona tion , agrees:

1.

That thirty- three (33) of the thirty- six (36) parcels of land above- described , to wit:

those _ covered by Transfer Certificates of Title Nos . 244, 862, 863 , 864, 865, 866 , 867, 868, 869~ 870, 871, 872, •

DECISION -

CTA CASE NO . 779 3 873 , 874, 875, B76, . 877 , 888 , 889 , 890 and 891 shall be used as part of the golf course of the Clubi· and the re- maining three (3) parce s of land, to wit:

those covered by Tr ansfer Certificates of Title Nos . 38107 , 38826 and 40935 shall be used for the purpose of completing the

11SHAW ~1EHO­

RIAL PA.'RK11 as now contemplated by the Club .

To that end , said Club shall never use said property and premises for any other purpose than as here- in stated , and any other use thereof shall work as a forfeiture of this gift .

2.

That said property , nor a.ny part thereof , shall never be commer- cialized , sold , exchanged , mortgaged , or otherwise encumbered by the said Club , without· the consent of the Trustees of \lilliam J . Shaw or their successors in interest , such consent to be evidenced by a publi.c document . 3.

That the said Club shall provide annually a sufficient fund for the maintenance and care of the 11SH11v HENORIAL PARK'' by which name it shall ever be known to perpetuate the memory of the late William J . Shaw , and keep the same in a trim and tidy condition with such ornament of trees , shrubs , and flowers as will make it attr~ctive to the eye and con- ducive to the health , happiness ~nd good morals of the commu.ni ty . 4.

That such said 11SH.A'VJ HENORIAL PARK" 1.vill be policed as to shield itf from depredation and vandalism or so as to prevent disorder and misbehavior ), therein and thereabout , and thereby make it a safe and proper place for the resort of the general public in- cluding women and children .

5.

That the late T/Jilliam J·.

Shaw, having expressed during his lifetime an aversion to gambling in the Club premises , the Club shall prohibit and shall not tolerate gam- bling in its present premises or any premises that hereafter it may acquire .

DECISION -

CT

CASE NO. 779 4 6 • . That the Club and the EST.c TE OF it!ILLIAH J . SHA~il sha 11 bear their respective shares of the gift taxes that may be assessed and collected by the Government on this donation . 7.

That , if the Club shall cease to exist as a corporation or, upon the expiration of its corporate existence , shall not be re-incorporated for substantially the same purposes as those specified in its constitution and by- laws , or shall distribute its assets among its members , the land hereby given and conveyed shall revert and be re- conveyed forthwith

to the Trustees of the ESTATE OF \'JIL-

LIAH J . SHAW, or their successors in interest , free of all liens and en- cumbrances of every nature and des- cription.

Fail ure on the part of the s~id Club, the Donee herein, to keep and observe any one of the terms or con- ditions attached to this gift shall entitle the Trustees of the ESTATE OF I:HLLI 10. J . SI.:rAW, or their successors in intere~t , at any time after such omission or breach, to declare the gift forfeited , and then and there- upon said p~emises and property and all right , title and interest therein shall revert to the EST TE OF WILLiaM J . SHAitl, the Donor of this gift .

It

is distinctly understood and agreed that no lapse of time shall be con- sidered a waiver of such terms and conditions .

By a separate instrument also dated April 22 , 1949 , the Club , through its then president and secretary, Messrs. Eulogio Rodriguez , Jr . and A. P. Reyes , accepted the above-mentioned donation subject to all the terms , conditions and stipula- tions imposed therein .

Sometime after March 1, 1950 but before April

DECISION -

CTA CASE: NO. 779 5 13 , 1950, the Estate and the Club , through their res pective representative , filed with the Bureau of Internal Revenue the corresponding donor ' s and donee ' s gift tax returns .

The aggregate book value of the 36 parcels of land donat ed was declared therein at ~61 , 810 . 25 of which ¥ 50, 651 . 00 represented the nurchase price in 1946 of the 33 parcels of land with a total ~ ~rea of 265,918 square meters and transferred to the Club for use as part of its golf course , and ¥11 , 159 . 25 represented the purchase price of the remaining 3 parcels of land with a total area of 5, 015 square meters and given to the Club for conversion into the 11Shaw Hemorial Park. "

On the basis of the said gift tax returns , res pondent issued on July 27 , 1950 provisional gift tax assessment notices numbered GA-1 062- 49 requiring petitioners to pay ~ 1 , 064 . 66 and ¥9 , 865. 73 as partial settle- ment of the donor's and donee ' s gift taxes , re- spectively, inclusive of the 25% surcharge, interests and compromise penalties, pending examination and investigation of the said returns . The gift taxes in the provisional assessment notices were computed on the basis of ¥61, 810. 25 representing t he book ~value of the properties donated .

Believing that they were not liable to the

DECI SION -

CTA CASE NO. 779 6 surcharge , interests and penalties incident to delinque.ncy declared in the said provisional assessment notices , petitioners paid on August 31, 1950 only P805.1 9 and P7, 662. 05 corresponding to the basic donor ' s and donee ' s gift taxes , re- s pectively .

Subsequently , in two s eparate let- ters , petitioner requested t he condonation of the surcharge , interests and compromise penal- ties .

Respondent , however , denied the said request and the subsequent request for reconsideration thereof .

In the meantime , respondent ordered an investigation of the gift tax case . On February 23 , 1959, after the lapse of about nine years , Revenue Examiner Arturo Hiranda sub~itted a report to the Provincial Revenue Of - ficer , ' uezon Ci ty , wherein he stated that t he 36 parcels of land donated to petitioner Wack Wack Golf & Country Club , Inc ., were cl assified as residential lots and assessed at f-150,600.00 in accordance with the 1949 tax rolls of the Office of the Provincial Assessor , Pasig , Rizal. For gift tax purposes, however, the said revenue exam- iner appraised the fair . market value of the said properties at F1,752,904. oo, computed on the basis of P6.47 per square meter , alleging that it was the / average selling price per squ.are meter of land as shown by a number of coeval sales

DECISION -

CTA CASE NO . 779 7 within the six- month period from April 22, 1949 (when the deed of donation was executed) , as gathered from the records of the Register of Deeds , Fasig , Rizal .

On the basis of his appraisal , Revenue Exam- iner Niranda recommended that the aggregate amount of ¥1,376,889 .73 be assessed against petitioners as deficiency donor ' s and donee ' s gift taxes , in- clusive of the 25% surcharge , interests and com- promise penalties .

Accordingly , the Provincial Revenue Officer of ue 20n City notified peti- tioners of the proposed assessment for deficiency donor ' s and donee ' s gift taxes amounting to ~ 1, 376 , 889 . 73, after crediting the payments al- ready made .

The said official also advised peti- tioners to appear at his office for an informal conference and ~resent their objections, if any, to the proposed assessment .

At the conference held on Harch 31 , 1959, petitioners manifested their objections to the proposed deficiency gift tax assessments . On June 4, 1959 , they filed a memorandum contesting the appraised value of the land in question at ~ 1 , 752 , 904 . 00 and alleged , among others , that the right of the Government to assess the defi- ciency gift taxes had already prescribed .

After

DECISION -

CTA C SE NO . 779 8 receipt of petitioners ' memorandum , respondent transmitted the same and the records of the case to the Chief , I ncome Tax Division, with the observa- tion that there appeared in the records of t he case suffi cient proof to warrant the application of the statutory period of ten years within which to assess the deficiency gift taxes .

Consequent-

ly , he directed the recomputation of t he proposed deficiency gift tax assessments by i ncluding the 50% surcharge as fraud penalty , instead of t he 25% surcharge as originally assessed . Thereafter, on August 25, 1959, respondent demanded from petitioners payment of ~ 2 00 , 998 . 44 and f:1, 364, - 767 . 61 as deficiency donor ' s and donee ' s gift taxes , respectively, inclusive of the 50% sur- charge , 1% and t% monthly interests , and com- promise penalties .

ssessment notices were en- closed in the letters of demand mentioned above . On October 2, 1959, petitioners received re- s pondent ' s l etter of August 25, 1959 .

On October

14, 1959 petitioners requested that t he def iciency gift tax assessments be reconsidered and can- cel led on t he gr ound that (1)the fair market val ue of t he 36 parcels of land as reported by res pond- ent ' s exami ner was i ncorrect and excessive ; (2) the declaration in t he gift tax retur ns of t he purchase price of r61,810. 25 as t he value of the

DECISION

CTA CASE NO . 779 9 properties donated wc;.ts proper and justlfied in the light of the conditions a,nd circum'stances of the case and , therefore , the said returns are not fraudulent; and (3) the right of the Government to assess and collect the deficiency gift taxes in question had already pres cribed . In the said letter , petitioners also requested, and were granted , a period of fifteen ( 1 5) days within vJhich to submit a memorandmo. in support of their contentions . On October 30, 1959 , peti tiooers 1 memorandum 1.vas filed with respondent .

In a letter dated Ear ch 8, 1960, which 1rvas r e- -- reived by petitioners on March 3 0 , 196Q , respondent denied petitioners ' request for reconsideration of the assessment and reiterated his demand for pay- ment of the deficiency donor ' s and donee ' s gift taxes of --200 , 998 .44 and 121,364 , 767 . 61 respectively, plus penal ties incident to delinquency . On Jl_pril 11, 1960, Mr . Gregorio S. Licar os , then president of ~ ac k Wack Golf & Country Cl ub , I nc ., in represent a- "tion of petitioners , requested a period of thirty

(30) days "'Tith~n which to submit a ne\v memorandum in support of petitioners ' request for reconsidera- tion .

The said request was granted by respondent , but before the submission of the supplemental memo- randum on l-1ay 5, 1960, petitioners filed with this Court on April 22 , 1960 a petition for review . The issues presented ~y the parties to this Court for resolution are the following:

DECISION -

CTA C SE NO . 779 1:0 1.

vmether or not the right of respondent to assess petitioners for deficiency donor's and donee ' s gift taxes has prescribed under Section

331 of the National Internal Revenue

Code, in relation to Section 332(a) of the same Code; and 2 .

vmether or not the deficiency donor's and donee ' s gift tax assess- ments of ¥200, 992 .44 and ~ 1,364,- 767 . 61, respectively , inclusive of the 50% surcharge, interests and penalties incident to delinquency, are justified and legal .

Respondent admitted in his Answer that the donor's and donee's gift tax returns must have been filed by pPtitioners with the Bureau of Internal Revenue after Harch 1, 1950 but prior to April 13, 1950 .

Since the deficiency gift tax assessments were issued by respondent only on August 25, 1959 (BIR rec . pp . 154-155), peti- tioners now cont end that the said tax assess- ments have already prescribed under Section 331 of the National Inter nal Revenue Code which provides as follows:

SEC. 331 .

Period of limitation uuon assessment and collecti on.- Except as provided in the succeed- ing section, internal- revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assess- ment for t he collection of such taxes shall be begun after the expiration of such period .

For the purposes of this section a return filed before t he last day prescribed by law for the filing thereof shall be considered as filed on such last day:

Provided, That this limitation shall not apply

DECISION -

CTP .. CASE NO . 779 to cases already investigated prior to the approval of this Code .

Respondent counters by alleging that the donor ' s and donee's gift tax returns filed by petitioners were fraudulent and, therefore, he has ten (1 0) ;)rears from t he discovery of the fraud within which to assess the gift taxes under Section 332(a) of t he Revenue Code . Since fraud was allegedly discovered by respondent's examiner on February 23, 1959, res pondent claims he has a period of ten (1 0) years up to February 23 , 1969 within which to assess the deficiency donor ' s and donee ' s gift taxes .

In sustaining the existence of fraud , re- s pondent alleges and argues as follows: •• o It may be noted that the valuation declared in the returns were even smaller t han the assessed value of the land donated which was ~ 1 50 , 600 . 0 0 .

(Exh . 3) The failure of the petitioners to declare in the returns at least the assessed value of the land i ndicates a delib- erate intent to evade the payment of the correct donor ' s and donee ' s gift taxes .

Petitioners, knew fully well t hat t he valuation of ~6 1, 8 10 . 25 is not t he assessed value but the value of t he land way back in 1939 .

Horeover , the under- declaration of t he value of the donated property at ~61 , 8 10 . 25 as against its fair market at the time of the donation of ¥':1, 752 , 904. 00 is so glaring as to compel a find- ing of existing intent to defraud . Considering the intelligence of t he taxpayers and t heir counsels , the discrepancy of more than 100% between the fair market value and

DECISION -

CTA CASE NO . 779 the reported value of the property strongly indicated fraud .

The under- declaration cannot be attributed to an honest mistake or more difference in opinion.

The intent to evade the payment of legitimate taxes is ap- parent .

(Respondent ' s Memo., p .

14, CTA rec . p. 257 . )

In short , respondent considered that the donor ' s and donee ' s gift tax returns filed by petitioners were fraudulent because they failed to declare therein at least the assessed value of the land .

He also considered that the declared value of the donated property at ¥61,810. 25, as against the reported fair market value of P1,752,- 904. 00 at the time of the donation indicates that petitioners 1 intended to defraud the Government of its revenue .

Inferentially, this argument is based on petitioners ' failure to declare in the return the assessed value of the land in question . Oddly , however , respondent also considere~ that the staggering and huge discrepancy between the fair market value and the reported yalue of the said land constitutes fraud because petitioners failed to declare in the gift tax returns the alleged fair market value of the land at ~ 1,752 ,- 904. 00 .

Respondent concluded, therefore, that the under- declaration cannot be attributed to honest mistakes or mere differences of opinion in- asmuch as the omission of petitioners represents a 1tJilfull intent to evade the payment of gift taxes .

DECISION -

CT

C SE NO . 779 13 Respondent ' s conclusion that fraud was com- mitted by the petitioners in filing t he donor ' s and donee 1 s gift tax retur .... s is predicated on Sec- tion 113 of the National Internal Revenue Code 1vhich provides as follows:

SEC . 113 .

Valuation of gifts made in property.--If the gift is made in property , the fair market value thr reof at the time of the gift shall be considered the amount of the gift:

Provided , That in case of real property , the assessed value in the year of the gift as shown in the tax rolls shall be considered as the fair mar ket value, unless the contrary is shown .

Under the foregoing provisions of t he Tax Code , t he assessed value of t he land in the year the gift was made shall be considered as the fair market value , unless the contrary is shown . The declaration of the assessed value of the donated real property in the gift tax retur ns is not a mandatory requirement of the law because the taxpayers (petitioners herein) can declare in the said returns a valuation other than the assessed va jue of the land if they considered t ha t the fair mar ket value thereof is either higher or lower than its assessed value . A valuation of real property lower than its assessed value must , hov.Jever , be based on reasonable grounds and not arbitrarily .

In the case at bar , peti- tioners have declared in t he gift tax returns the 7( -

DECISION -

CTA CASE NO . 779 book value or purchase price of the donated real property ">'Jhich is lmver than the assessed value thereof .

Said declarations are not per ~fraud - ulent simpl y because respondent Commissioner of Inter nal Revenue and his examiners considered and adopted a very much higher valuation . Aft er all , the term 11market value'1 is not an absolute term; it involves human equation.

Valuation of

real property is an i nexact science and the determination thereof by whatever method must remain an approximation .

valuation of absolute accuracy is impossible .

This impossibility of precise valuation is generall y recognized; the law is not so exact as to require mathematical certainty (City of l:anila v . Estrada , 25 Phil. ~08 ; Manila Railroad Co. v . Velasquez , 32 Phil . 286; Hanila Railroad Co . v . Alano , 36 Phil . 506; see Comm . of Corporations & Taxation v . Worcester -..County Trust Co ., 305 Nass . 460 , 26 N.E. 2d 305) . ' The staggering difference between the fair market value arrived at by the respondent and the value adopted by the petitioners is incon- sequential in the determination of fraud for gift tax purposes .

The alleged huge underdeclaration of value represents a mere conflict of opinion between the party litigants but the said irrecon- cilable disagreement in valuation does not amount (

DECISION -

CTA C SE NO. 7'79 to fraud in the absence of satisfactory proof . In the instant case , while respondent claims that the gift tax returns filed by petitioners were fraudulent , the said returns or any signed or simple copy t hereof cannot be ·f ound in the Bureau of I nternal Revenue records submitted to this Court .

I t is true t hat the law ~rovides that t he assessed value of real property is its minim L~ value for gift tax purposes but , in t he absence of fraudulent intent to evade the gift taxes , no legal.and valid justification warrants the imposi- tion of the 50% surcharge as fraud penalty. ~It is a cardinal rule in taxation that fraud .

is a question of fact and, the circumstances con- stituting it must be alleged and proved (Commis- ;

sioner of Internal Revenue v . Gonzales , et al., G.R. No. 1- 19495, November 24, 1966) . Fraud is never preswned because it is a serious charge (Yutivo Sons Hard1.vare Co . v . Court of Tax Ap- peals , et al., G.R. No. L-1 3203, Jan . 28, 1961); it must be alleged and proved , at least satis- f actorily i f not conclusively by one who alleges its existence (De Roda v . B all~ , 48 Phil . 104; / De Santos v . Bank of the P. I . , 66 Phil . 38; l~ e n zi & Co. v . Bastida , 63 Phil . 16; arroyo v . Granada and Gentero , 18 Phil . 484; Gomez v .

DECISION -

CTA CASE NO . 779 16 Domingo , CTA Case No . 11 68 , Feb . 15, 1964) . Moreover , the burden of proof in tax cases in- volving fraud will not be sustained where re- spondent introduces no affir mative evidence but rests only on j_nferences to be drawn from col- lateral facts (Balter , Fr aud under Federal Tax Law, par . 11 2, 1953 ed . ; Ayala Securities Corpora- tion v . Commissioner of Inter nal Revenue , CTA No. 1346 , June 20, 1968) .

And since a 11false or fraudulent return with intent to evade tax" involves a state of mind , there must be an actual evil motive or intent to evade taxes or wilfully acted contrary to the truth and with the tax- payer ' s knowledge of the falsi t y of the declara- tion .

To be considered are all of t he facts and circumstances incident to the preparation.of the alleged fraudulent return (Balter , Fraud under Federal Tax Law , par . 113 , 1953 ed . ) .

According-

ly, we ~a nnot subscribe to the theory of re- spondent that peti tioner_s committed fraud . We find that respondent has failed t o prove that petitioners wilfully filed false and fraud- ulent gift tax returns with the intent to evade gift taxes .

We will appl y, therefore, the pres- criptive period of five (5) years embodied in Section 331 of t he Tax Code , supra . As the donor ' s and donee ' s gift tax returns have admitted-

DECISION

CT

CASE NO . 7'79 17 ' ;

' ly been filed with the Bureau of Internal Revenue after March 1, 1950 but ~rior to ~pril 13 , 1950 (par . 5, Respondent ' s Al1swer , CTA rec . pp . 50- 51) , res pondent has t he right to assess the deficiency gift taxes not later than April 13, 1955.

The disputed assessments in question having been issued by respondent on August 25, 1959 , or more t han five (5) years from the date t he gift tax returns were filed , the right of the government to assess the deficiency gift taxes had already prescribed .

Consequently , it is purposeless to resolve the second question at issue by going into the merits of the case . As regards the compromise penalties for failure to file a notice of donation and late filing of the gift tax returns , it is already well- settled jurisprudence that the Commissioner of Internal Revenue does not have the authority to impose such penalties without the consent of the taxpayer (Coll . v . U. S. T., G.R. Nos . ~-1 1274 & L- 11280, Nov . 28 , 1958; Coll . v . Bautista , G.R. No . L-1 2250, May 27 , 1959 ; Phil . Int . Fair v . Coll., G.R. Nos . L-1 ~928 & 1~1 2932 , March 31 , 1962) .

1fHEREFORE , the decision of respondent Com- mi ssioner of I nternal Revenue , assessing and

DECISION -

CT. CASE NO . 779 ,; , demanding from petitioners , Estate of dilliam J . Shaw· and Wack :Jacl~ Golf & Country Club , Inc ., payment of P-1, 565, 776 . 05 consisting of deficiency donor ' s and donee ' s gift taxes in the sums of i=200, 998 . 4Ll- and 5f1,364, 767 . 61, respective- ly, inclusive of 50% surcharge and i nterests , is reversed .

ccordingly, said assessments of re ~ s pondent are hereby cancelled and declared of no for ce and effect .

~vi thout pronouncement as to costs .

\VE CONCTJR:

it--

1 L ~

R.IU-fON L • .&VANCEf~A

Associate Judge

4 · 4ttf.J~ .

'~LAO R. ALV ~':JF

Associate Judgef'