CIR V BF GOODRICH PHILS INC AND CA

FEB 24 1999 | PANGANIBAN, J ISSUE: WON CIR’s right to assess the deficiency donor’s tax has prescribed? YES

FACTS: BF GOODRICH PHILS INC (now Sime Darby International Tire Co. Inc) was Section 331 of the National Internal Revenue Code provides:
an American owned and controlled corporation. SEC. 331. Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal-revenue taxes shall be assessed within five years after the
 As a condition for approving the manufacture by BF GOODRICH of tires and other
return was filed, and no proceeding in court without assessment for the collection of such taxes
rubber products, Central Bank of PH required that it should develop a rubber shall be begun after expiration of such period. For the purposes of this section, a return filed before
plantation. In compliance, it purchased from PH Government in 1961 under Public the last day prescribed by law for the filing thereof shall be considered as filed on such last
Land Act and the Parity Amendment to the 1935 Constitution, certain parcels of day: Provided, That this limitation shall not apply to cases already investigated prior to the approval
land in Basilan and there developed a rubber plantation of this Code.

More than a decade later, on AUG 2 1973, the justice secretary rendered an opinion ITC, it is clear that the OCT 1980 and MAR 1981 were issued by BIR beyond the 5-
stating that, upon expiration of the Parity Amendment on JUL 3 1974, the ownership year statute of limitations.
rights of Americans over public agricultural lands, including the right to dispose  The subsequent assessment made by the Commissioner on OCT 10, 1980,
or sell their real estate, would be lost modified by that of MAR 16, 1981, violates the law.
 On the basis of this opinion, BF GOODRICH sold to SILTOWN REALTY PH INC  Involved in this petition is the income of the BF GOODRICH for the year 1974, the
on JAN 21 1974, its Basilan landholdings for P500,000 payable in installments. returns for which were required to be filed on or before April 15 of the succeeding
SILTOWN leased the parcels of land to BF GOODRICH for a period of 25 years year.
with an extension of another 25 years at the latter’s option o The returns for the year 1974 were duly filed by the BF GOODRICH, and
assessment of taxes due for such year -- including that on the transfer of
Based on BIR’s Letter of Authority, the books and accounts of BF GOODRICH were properties on JUN 21, 1974 -- was made on APR 13, 1975 and acknowledged
examined for the purpose of determining its tax liability for taxable year 1974. It resulted by Letter of Confirmation No. 101155 terminating the examination on this
in the APR 23 1975 assessment of BF GOODRICH for deficiency income tax in the subject.
amount of P6,005.35 which was duly paid o The subsequent assessment of OCT 10, 1980 modified, by that of MAR 16,
 BIR also issued Letters of Authority and Memorandum Authority for the purpose of 1981, was made beyond the period expressly set in Section 331 NIRC
examining SILTOWN’s business, income and tax liabilities. BIR issued against BF
GOODRICH, on OCT 10 1980 an assessment for deficiency in donor’s tax in CIR: Relies on CTA ruling stating that the present case involves falsity. The second
the amount of P1,020,850 in relation to the previously mentioned sale of its assessment (MAR 16 1981) is the best evidence obtainable to assess the proper tax
Basilan landholdings to SILTWON when there is reason to believe that a report of a taxpayer is false, incomplete or
 APPARENTLY, BIR deemed the consideration for the sale insufficient, and the erroneous.
difference between the fair market value and the actual purchase price a taxable  When there is falsity with intent to evade tax as in this case, the ordinary period of
donation. limitation upon assessment and collection does not apply so that contrary to the
 In a letter, BF GOODRICH contested this assessment. It received another averment of petitioner, the right to assess respondent has not prescribed.
assessment dated MAR 16 1981, which increased to P1,092,949, the amount
demanded for the alleged deficiency donor’s tax, surcharge, interest and ITC, the transfer through the sales of the parcels of land in Basilan in favor of SILTOWN
compromise penalty. was for the sum of P500,000 only whereas said lands had been sworn to under PD 76
 BF GOODRICH appealed the correctness and legality of the assessments to CTA. (DEC 6 1972) as having a value of P2,683,467 (P2,475,467 + P207,700)

CTA: CIR DECISION MODIFIED – BF GOODRICH ordered to pay P1,311,179.01 plus For the purpose of safeguarding taxpayers from any unreasonable examination,
10% surcharge and 20% annual interest investigation or assessment, our tax law provides a statute of limitations in the collection
CA: CTA REVERSED of taxes.
 What is involved here is not a first assessment; nor is it one within the 5-year period  The law on prescription, being a remedial measure, should be liberally construed
in Sec 331. Since what is involved in this case is a multiple assessment beyond in order to afford such protection.
the five-year period, the assessment must be based on the grounds provided in
Section 337, and not on Section 15 of the 1974 Tax Code. ON THE OTHER HAND, Sec 15 NIRC provides that when a report required by law as
 Section 337 utilizes the very specific terms fraud, irregularity, and mistake. Falsity a basis for the assessment of any national internal revenue tax shall not be forthcoming
does not appear to be included in this enumeration. Falsity suffices for an within the time fixed by law or regulation, or when there is reason to believe that any
assessment, which is a first assessment made within the five-year period. such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue
 When it is a subsequent assessment made beyond the five-year period, then, it shall assess the proper tax on the best evidence obtainable.
may be validly justified only by fraud, irregularity and mistake on the part of the  Sec 15 does not provide an exception to the statute of limitations on the
taxpayer issuance of an assessment, by allowing the initial assessment to be made
 on the basis of the best evidence available. Having made its initial assessment
in the manner prescribed, the commissioner could not have been authorized to
issue, beyond the five-year prescriptive period, the second and the third
assessments.

CIR: Claims there is falsity sufficient to take the assessments out of the ambit of the
statute of limitations and cites Sec 332 NIRC. It insists that BF GOODRICH committed
falsity when it sold the property for a price lesser than its declared fair market value

SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. -- (a)
In the case of a false or fraudulent return with intent to evade a tax or of a failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be begun
without assessment, at any time within ten years after the discovery of the falsity, fraud, or
omission

COURT: The fact that it was sold for a price lesser than the declared fair market value
did not constitute a false return which contains wrong information due to mistake,
carelessness or ignorance.
 It is possible that real property may be sold for less than adequate consideration
for a bona fide business purpose; in such event, the sale remains an arm’s length
transaction.
 ITC, BF GOODRICH was compelled to sell the property even at a price less than
its market value, because it would have lost all ownership rights over it upon the
expiration of the parity amendment. It was attempting to minimize its losses
 It was able to lease the property for 25 years, renewable for another 25. This can
be regarded as another consideration on the price
 FURTHERMORE, BF GOODRICH declared the sale in its 1974 return submitted
to the BIR. BIR could have issued the assessment within the 5-year prescriptive
period because the declared fair market value was of public record, but they did
not.
 It failed to prove that BF GOODRICH’s 1974 had been filed fraudulently. It also
failed to prove BF GOODRICH’s intent to evade the payment of the correct amount
of tax

Even though a donor’s tax, which is defined as “a tax on the privilege of transmitting
one’s property or property rights to another or others without adequate or full valuable
consideration” is different from capital gains tax, “a tax on the gain from the sale of
the taxpayer's property forming part of capital assets”, the tax return filed by BF
GOODRICH to report its income for the year 1974 was sufficient compliance with the
legal requirement to file a return.
 IN OTHER WORDS, the fact that the sale transaction may have partly resulted in
a donation does not change the fact that BF GOODRICH already reported its
income for 1974 by filing an income tax return.

Since BIR failed to demonstrate clearly that BF GOODRICH had filed a fraudulent
return with intent to evade tax, or that it had failed to file a return at all, the period for
assessments has prescribed.
 Such instances of negligence or oversight on the part of the BIR cannot prejudice
taxpayers, considering that the prescriptive period was precisely intended to give
them peace of mind.

WHEREFORE, PETITION DENIED; CA AFFIRMED