Delpher Trades Corp v IAC

157 SCRA 349 G.R. No. L-69259 January 26, 1988

FACTS: Delfin and Pelagia Pacheco (Pachecos), were the owners of a lot in
Valenzuela City (formerly Municipality of Polo, Bulacan). The said co-owners
leased to Construction Components International Inc. (Construction) the same
property provided that Construction shall enjoy the right of first refusal over the
property should the Pachecos decide to sell the same. Consequently,
Construction assigned its rights and obligations under a contract of lease in
favor of Hydro Pipes Philippines, Inc. (Hydro), as consented by the Pachecos.
Meanwhile, a deed of exchange was executed between the lessors and
Delpher Trades Corporation (Delpher) whereby the former conveyed to the
latter the leased property together with another parcel of land for shares of
stock of Delpher.

Hydro filed a complaint for reconveyance of the subject property on the

ground that it was not given the first option to buy the leased property, as
against Delpher and that there is actual transfer of ownership between the
Pachecos and the latter, which cannot be said to be an alter-ego or conduit of
the same. The CFI ruled in favor Hydro, declaring the validity of the latter’s
right of first refusal. The said decision was affirmed by the IAC on appeal,
hence the petition for review on certiorari filed by the Pachecos, together with
Delpher.

ISSUE: Whether the act of executing the Deed of Exchange of the properties
by and between the Pachecos and Delpher constitutes tax evasion.

RULING: No. The Court found that Delpher Trades Corporation is a business
conduit of the Pachecos and what the latter actually did was to invest their
properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take control of
their properties and at the same time save on inheritance taxes. The "Deed of
Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale as there was no transfer
of actual ownership interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to another. The
ownership remained in the same hands. Moreover, the records do not point to
anything wrong or objectionable about this "estate planning" scheme resorted
to by the Pachecos. "The legal right of a taxpayer to decrease the amount of
what otherwise could be his taxes or altogether avoid them, by means which
the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of
Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L.
ed. 596).