Taxation Law Case Matrix – FREGILLANA

INHERENT LIMITATIONS
CASE FACTS ISSUE/S DOCTRINE
Tio v. The petitioner assails the validity of PD No. 1987 entitled “An Act Is the tax imposed The tax provision is not inconsistent with, or foreign to
Videogram Creating the Videogram Regulatory Board” with broad powers to illegal/unconstitutional? – NO. that general subject and title. As a tool for regulation,
regulate and supervise the videogram industry. The Decree was it is simply one of the regulatory and control
promulgated on October 5, 1985 and took effect on April 10, mechanisms scattered throughout the decree. The tax
1986 15 days after completion of its publication in the OG. The imposed by the decree is not only regulatory but also
Greater Manila Theater’s Association Integrated Movie a revenue measure prompted by the realization that
Producers et al intervened in the proceedings at bar asserting earnings of videogram establishments which amounts
their survival and very existence is being threatened by the to around Php 600 million per annum have not been
unregulated proliferation of film piracy. subjected to tax, thereby depriving the Government if
an additional source of revenue. It is an end-user tax,
Preambular clause of the Decree: imposed in retailers for every videogram they make
1. Proliferation of unregulated circulation of videograms available for public viewing. The levy of the 30% tax is
and the tremendous decline in the collection of sales for public purpose. It was imposed primarily to answer
which led to annual losses amounting to Php 450 M in the need for regulating the video industry, particularly
government revenues; because of the rampant film piracy, the flagrant
2. Earnings of Php 600 M which were not subjected to tax; violation of intellectual property rights, and the
3. Unregulated activities of videogram establishments proliferation of pornographic video tapes. And while it
which has also affected the viability of the movie was also an objective of the Decree to protect the
industry; movie industry, the tax also remains to be a valid
4. To ensure national and economic recovery; imposition.
5. Proper taxation of the activities of videogram
establishments to alleviate the dire financial condition
of the movie industries;
6. The presence of the clear and present danger in the
rampant and unregulated showing of the obscene
videogram features.
Petitioner’s Attack
1. The tax imposition of 30% is considered as a rider and
the same is not germane to the subject matter thereof;
2. The tax imposed is harsh and confiscatory;
3. No factual or legal basis for the exercise by the
president;
4. There is undue delegation of power and authority;
5. The decree is considered ex post facto;
6. There is over regulation of the video industry as if it
 Taxation Law Case Matrix – FREGILLANA
were a nuisance.
CONSTITUTIONAL LIMITATIONS
CASE FACTS ISSUE/S
Sison v. The petitioner assails the validity of Sec. 1 Batas Pambansa Blg. Whether the assailed amendment
Ancheta 135 wherein it amends Sec. 21 of the NIRC of 1977 which of the NIRC is unconstitutional? –
provides for tax rates on citizens or residents wherein it was NO.
asserted that he would be unduly discriminated against by the
imposition of higher rates of tax upon his income arising from
the exercise of his profession vis-à-vis those which are imposed
upon fixed income or salaried individual taxpayers. He
characterizes the above section as arbitrary amounting to class
legislation, oppressive and capricious in character.
DOCTRINE
The power to tax moreover, to borrow from Justice
Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of government." It is, of
course, to be admitted that for all its plenitude 'the
power to tax is not unconfined. There are restrictions.
The Constitution sets forth such limits. Adversely
affecting as it does properly rights, both the due
process and equal protection clauses may properly be
invoked, all petitioner does, to invalidate in
appropriate cases a revenue measure. if it were
otherwise, there would -be truth to the 1803 dictum
of Chief Justice Marshall that "the power to tax
involves the power to destroy."
"The rule of taxation shag be uniform and equitable."
This requirement is met according to Justice Laurel in
Philippine Trust Company v. Yatco, decided in 1940,
when the tax "operates with the same force and effect
in every place where the subject may be found. " 26
He likewise added: "The rule of uniformity does not
call for perfect uniformity or perfect equality, because
this is hardly attainable." The problem of classification
did not present itself in that case. It did not arise until
nine years later, when the Supreme Court held:
"Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class
shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural
classifications for purposes of taxation, ... As clarified
by Justice Tuason, where "the differentiation"
complained of "conforms to the practical dictates of
justice and equity" it "is not discriminatory within the
meaning of this clause and is therefore uniform."
 Taxation Law Case Matrix – FREGILLANA
Pepsi Cola v. Pepsi-Cola Bottling Company is a domestic corporation with
City of Butuan offices and principal place of business in QC. The defendants are
the City of Butuan, its City Mayor and the members of its
municipal board and its City Treasurer. Plaintiff seeks to recover
the sums paid by it to the City of Butuan.
Is the assailed city ordinance
considered as null and void? – YES.
There is quite a similarity then to the standard of
equal protection for all that is required is that the tax
"applies equally to all persons, firms and corporations
placed in similar situation."
Taxpayers may be classified into different categories.
To repeat, it. is enough that the classification must
rest upon substantial distinctions that make real
differences. In the case of the gross income taxation
embodied in Batas Pambansa Blg. 135, the, discernible
basis of classification is the susceptibility of the
income to the application of generalized rules
removing all deductible items for all taxpayers within
the class and fixing a set of reduced tax rates to be
applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As
there is practically no overhead expense, these
taxpayers are e not entitled to make deductions for
income tax purposes because they are in the same
situation more or less. On the other hand, in the case
of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would
not be just then to disregard the disparities by giving
all of them zero deduction and indiscriminately
impose on all alike the same tax rates on the basis of
gross income. There is ample justification then for the
Batasang Pambansa to adopt the gross system of
income taxation to compensation income, while
continuing the system of net income taxation as
regards professional and business income.
As a consequence, merchants engaged in the sale of
soft drink or carbonated drinks, are not subject to the
tax, unless they are agents and/or consignees of
another dealer, who, in the very nature of things,
must be one engaged in business outside the City.
Besides, the tax would not be applicable to such agent
Taxation Law Case Matrix – FREGILLANA

and/or consignee, if less than 1,000 cases of soft

drinks are consigned or shipped to him every month.
When we consider, also, that the tax "shall be based
and computed from the cargo manifest or bill of
lading ... showing the number of cases" — not sold —
but "received" by the taxpayer, the intention to limit
the application of the ordinance to soft drinks and
carbonated drinks brought into the City from outside
thereof becomes apparent. Viewed from this angle,
the tax partakes of the nature of an import duty,
which is beyond defendant's authority to impose by
express provision of law.

Even however, if the burden in question were

regarded as a tax on the sale of said beverages, it
would still be invalid, as discriminatory, and hence,
violative of the uniformity required by the
Constitution and the law therefor, since only sales by
"agents or consignees" of outside dealers would be
subject to the tax. Sales by local dealers, not acting for
or on behalf of other merchants, regardless of the
volume of their sales, and even if the same exceeded
those made by said agents or consignees of producers
or merchants established outside the City of Butuan,
would be exempt from the disputed tax.

It is true that the uniformity essential to the valid

exercise of the power of taxation does not require
identity or equality under all circumstances, or negate
the authority to classify the objects of taxation. The
classification made in the exercise of this authority, to
be valid, must, however, be reasonable and this
requirement is not deemed satisfied unless: (1) it is
based upon substantial distinctions which make real
differences; (2) these are germane to the purpose of
the legislation or ordinance; (3) the classification
applies, not only to present conditions, but, also, to
 Taxation Law Case Matrix – FREGILLANA
Assoc. of The Association of Customs Brokers, Inc., which is composed of
Customs Broker all brokers and public service operators of motor vehicles in the
v. City of City of Manila, and G. Manlapit, Inc., a member of said
Manila association, also a public service operator of the trucks in said
City, challenge the validity of said ordinance on the ground that
(1) while it levies a so-called property tax it is in reality a license
tax which is beyond the power of the Municipal Board of the City
of Manila; (2) said ordinance offends against the rule of
uniformity of taxation; and (3) it constitutes double taxation.
The respondents, represented by the city fiscal, contend on their
part that the challenged ordinance imposes a property tax which
is within the power of the City of Manila to impose under its
Revised Charter [Section 18 (p) of Republic Act No. 409], and
that the tax in question does not violate the rule of uniformity of
taxation, nor does it constitute double taxation.
Is the assailed ordinance null and
void? – YES.
future conditions substantially identical to those of
the present; and (4) the classification applies equally
all those who belong to the same class.
These conditions are not fully met by the ordinance in
question. Indeed, if its purpose were merely to levy a
burden upon the sale of soft drinks or carbonated
beverages, there is no reason why sales thereof by
sealers other than agents or consignees of producers
or merchants established outside the City of Butuan
should be exempt from the tax.
The ordinance infringes the rule of the uniformity of
taxation ordained by our Constitution. Note that the
ordinance exacts the tax upon all motor vehicles
operating within the City of Manila. It does not
distinguish between a motor vehicle for hire and one
which is purely for private use. Neither does it
distinguish between a motor vehicle registered in the
City of Manila and one registered in another place but
occasionally comes to Manila and uses its streets and
public highways. The distinction is important if we
note that the ordinance intends to burden with the
tax only those registered in the City of Manila as may
be inferred from the word "operating" used therein.
The word "operating" denotes a connotation which is
akin to a registration, for under the Motor Vehicle Law
no motor vehicle can be operated without previous
payment of the registration fees. There is no pretense
that the ordinance equally applies to motor vehicles
who come to Manila for a temporary stay or for short
errands, and it cannot be denied that they contribute
in no small degree to the deterioration of the streets
and public highway. The fact that they are benefited
by their use they should also be made to share the
corresponding burden. And yet such is not the case.
This is an inequality which we find in the ordinance,
and which renders it offensive to the Constitution.
 Taxation Law Case Matrix – FREGILLANA
British Paragraph (c) of Section 145 provides for four tiers of tax rates
American based on the net retail price per pack of cigarettes. To determine
Tobacco v. the applicable tax rates of existing cigarette brands, a survey of
Camacho the net retail prices per pack of cigarettes was conducted as of
October 1, 1996, the results of which were embodied in Annex
"D" of the NIRC as the duly registered, existing or active brands
of cigarettes.
SEC. 145. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied,
assessed and collected on cigarettes packed by machine a tax at
the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-
added tax) is above Ten pesos (P10.00) per pack, the tax shall be
Thirteen pesos and forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-
added tax) exceeds Six pesos and fifty centavos (P6.50) but does
not exceed Ten pesos (10.00) per pack, the tax shall be Eight
pesos and ninety-six centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-
added tax) is Five pesos (P5.00) but does not exceed Six pesos
and fifty centavos (P6.50) per pack, the tax shall be Five pesos
and sixty centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-
added tax) is below Five pesos (P5.00) per pack, the tax shall be
One peso and twelve centavos (P1.12) per pack.
Variants of existing brands of cigarettes which are introduced in
the domestic market after the effectivity of this Act shall be
taxed under the highest classification of any variant of that
Does the classification freeze violate
the equal protection and uniformity
of taxation clauses in the
constitution? - NO.
In consonance thereto, we have held that "in our
jurisdiction, the standard and analysis of equal
protection challenges in the main have followed the
‘rational basis’ test, coupled with a deferential
attitude to legislative classifications and a reluctance
to invalidate a law unless there is a showing of a clear
and unequivocal breach of the Constitution."47
Within the present context of tax legislation on sin
products which neither contains a suspect
classification nor impinges on a fundamental right, the
rational-basis test thus finds application. Under this
test, a legislative classification, to survive an equal
protection challenge, must be shown to rationally
further a legitimate state interest.48 The
classifications must be reasonable and rest upon some
ground of difference having a fair and substantial
relation to the object of the legislation.49 Since every
law has in its favor the presumption of
constitutionality, the burden of proof is on the one
attacking the constitutionality of the law to prove
beyond reasonable doubt that the legislative
classification is without rational basis.50 The
presumption of constitutionality can be overcome
only by the most explicit demonstration that a
classification is a hostile and oppressive discrimination
against particular persons and classes, and that there
is no conceivable basis which might support it.51
A legislative classification that is reasonable does not
offend the constitutional guaranty of the equal
protection of the laws. The classification is considered
valid and reasonable provided that: (1) it rests on
substantial distinctions; (2) it is germane to the
purpose of the law; (3) it applies, all things being
equal, to both present and future conditions; and (4)
it applies equally to all those belonging to the same
class
Taxation Law Case Matrix – FREGILLANA
brand.
xxxx
New brands shall be classified according to their current net
retail price.
For the above purpose, net retail price shall mean the price at
which the cigarette is sold on retail in 20 major supermarkets in
Metro Manila (for brands of cigarettes marketed nationally),
excluding the amount intended to cover the applicable excise tax
and the value-added tax. For brands which are marketed only
outside Metro Manila, the net retail price shall mean the price at
which the cigarette is sold in five major supermarkets in the
region excluding the amount intended to cover the applicable
excise tax and the value-added tax.
The classification of each brand of cigarettes based on its
average net retail price as of October 1, 1996, as set forth in
Annex "D" of this Act, shall remain in force until revised by
Congress.
As such, new brands of cigarettes shall be taxed according to
their current net retail price while existing or "old" brands shall
be taxed based on their net retail price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR)
issued Revenue Regulations No. 1-97,2 which classified the
existing brands of cigarettes as those duly registered or active
brands prior to January 1, 1997. New brands, or those registered
after January 1, 1997, shall be initially assessed at their
suggested retail price until such time that the appropriate survey
to determine their current net retail price is conducted.
Pertinent portion of the regulations reads –
SECTION 2. Definition of Terms.
The first, third and fourth requisites are satisfied. The
classification freeze provision was inserted in the law
for reasons of practicality and expediency. That is,
since a new brand was not yet in existence at the time
of the passage of RA 8240, then Congress needed a
uniform mechanism to fix the tax bracket of a new
brand. The current net retail price, similar to what was
used to classify the brands under Annex "D" as of
October 1, 1996, was thus the logical and practical
choice. Further, with the amendments introduced by
RA 9334, the freezing of the tax classifications now
expressly applies not just to Annex "D" brands but to
newer brands introduced after the effectivity of RA
8240 on January 1, 1997 and any new brand that will
be introduced in the future.53 (However, as will be
discussed later, the intent to apply the freezing
mechanism to newer brands was already in place even
prior to the amendments introduced by RA 9334 to RA
8240.) This does not explain, however, why the
classification is "frozen" after its determination based
on current net retail price and how this is germane to
the purpose of the assailed law. An examination of the
legislative history of RA 8240 provides interesting
answers to this question.
RA 8240 was the first of three parts in the
Comprehensive Tax Reform Package then being
pushed by the Ramos Administration. It was enacted
with the following objectives stated in the
Sponsorship Speech of Senator Juan Ponce Enrile
(Senator Enrile), viz:
First, to evolve a tax structure which will promote fair
competition among the players in the industries
concerned and generate buoyant and stable revenue
for the government.
Taxation Law Case Matrix – FREGILLANA

xxxx
Second, to ensure that the tax burden is equitably
3. Duly registered or existing brand of cigarettes – shall include distributed not only amongst the industries affected
duly registered, existing or active brands of cigarettes, prior to but equally amongst the various levels of our society
January 1, 1997. that are involved in various markets that are going to
be affected by the excise tax on distilled spirits,
xxxx fermented liquor, cigars and cigarettes.

6. New Brands – shall mean brands duly registered after January In the case of firms engaged in the industries
1, 1997 and shall include duly registered, inactive brands of producing the products that we are about to tax, this
cigarette not sold in commercial quantity before January 1, means relating the tax burden to their market share,
1997. not only in terms of quantity, Mr. President, but in
terms of value.
Section 4. Classification and Manner of Taxation of Existing
Brands, New Brands and Variant of Existing Brands. In case of consumers, this will mean evolving a multi-
tiered rate structure so that low-priced products are
xxxx subject to lower tax rates and higher-priced products
are subject to higher tax rates.
B. New Brand
Third, to simplify the tax administration and
New brands shall be classified according to their current net compliance with the tax laws that are about to unfold
retail price. In the meantime that the current net retail price has in order to minimize losses arising from inefficiencies
not yet been established, the suggested net retail price shall be and tax avoidance scheme, if not outright tax evasion.
used to determine the specific tax classification. Thereafter, a
survey shall be conducted in 20 major supermarkets or retail
outlets in Metro Manila (for brands of cigarette marketed
nationally) or in five (5) major supermarkets or retail outlets in
the region (for brands which are marketed only outside Metro
Manila) at which the cigarette is sold on retail in reams/cartons,
three (3) months after the initial removal of the new brand to
determine the actual net retail price excluding the excise tax and
value added tax which shall then be the basis in determining the
specific tax classification. In case the current net retail price is
higher than the suggested net retail price, the former shall
prevail. Any difference in specific tax due shall be assessed and
collected inclusive of increments as provided for by the National
Internal Revenue Code, as amended.
Taxation Law Case Matrix – FREGILLANA

In June 2001, petitioner British American Tobacco introduced

into the market Lucky Strike Filter, Lucky Strike Lights and Lucky
Strike Menthol Lights cigarettes, with a suggested retail price of
P9.90 per pack.3 Pursuant to Sec. 145 (c) quoted above, the
Lucky Strike brands were initially assessed the excise tax at P8.96
per pack.

On February 17, 2003, Revenue Regulations No. 9-2003,4

amended Revenue Regulations No. 1-97 by providing, among
others, a periodic review every two years or earlier of the
current net retail price of new brands and variants thereof for
the purpose of establishing and updating their tax classification,
thus:

For the purpose of establishing or updating the tax classification

of new brands and variant(s) thereof, their current net retail
price shall be reviewed periodically through the conduct of
survey or any other appropriate activity, as mentioned above,
every two (2) years unless earlier ordered by the Commissioner.
However, notwithstanding any increase in the current net retail
price, the tax classification of such new brands shall remain in
force until the same is altered or changed through the issuance
of an appropriate Revenue Regulations.

Pursuant thereto, Revenue Memorandum Order No. 6-20035

was issued on March 11, 2003, prescribing the guidelines and
procedures in establishing current net retail prices of new
brands of cigarettes and alcohol products.

Subsequently, Revenue Regulations No. 22-20036 was issued on

August 8, 2003 to implement the revised tax classification of
certain new brands introduced in the market after January 1,
1997, based on the survey of their current net retail price. The
survey revealed that Lucky Strike Filter, Lucky Strike Lights, and
Lucky Strike Menthol Lights, are sold at the current net retail
price of P22.54, P22.61 and P21.23, per pack, respectively.7
 Taxation Law Case Matrix – FREGILLANA
Respondent Commissioner of the Bureau of Internal Revenue
thus recommended the applicable tax rate of P13.44 per pack
inasmuch as Lucky Strike’s average net retail price is above
P10.00 per pack.
Abra Valley v. Petitioner, an educational corporation and institution of higher
Hon. Juan learning duly incorporated with the Securities and Exchange
Aquino Commission in 1948. It filed a complaint to annul and declare
void the “Notice of Seizure” and the “Notice of Sale” of its lot
and building located at Bangued, Abra, for non-payment of real
estate taxes and penalties amounting to Php 5,140.31. The said
"Notice of Seizure" of the college lot and building covered by
Original Certificate of Title No. Q-83 duly registered in the name
of petitioner, plaintiff below, on July 6, 1972, by respondents
Municipal Treasurer and Provincial Treasurer, defendants below,
was issued for the satisfaction of the said taxes thereon. The
"Notice of Sale" was caused to be served upon the petitioner by
the respondent treasurers on July 8, 1972 for the sale at public
auction of said college lot and building, which sale was held on
the same date. Dr. Paterno Millare, then Municipal Mayor of
Bangued, Abra, offered the highest bid of P6,000.00 which was
duly accepted. The certificate of sale was correspondingly issued
to him.
FORMS OF ESCAPE IN TAXATION
CASE FACTS
A Notice of Assessment sent to CIC by the Commissioner of Is the respondent estate liable to
Internal Revenue for deficiency income tax arising from an pay the assessed tax? – YES.
alleged simulated sale of a 16-storey commercial building known
as Cibeles Building, situated on two parcels of land on Ayala
Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President
and owner of 99.991% of its issued and outstanding capital
stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than ₱90
million.
Is the disputed property subject to It must be stressed however, that while this Court
tax? – YES allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for
educational purposes" as provided for in Article VI,
Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been
made that exemption extends to facilities which are
incidental to and reasonably necessary for the
accomplishment of the main purposes. Otherwise
stated, the use of the school building or lot for
commercial purposes is neither contemplated by law,
nor by jurisprudence. Thus, while the use of the
second floor of the main building in the case at bar for
residential purposes of the Director and his family,
may find justification under the concept of incidental
use, which is complimentary to the main or primary
purpose—educational, the lease of the first floor
thereof to the Northern Marketing Corporation
cannot by any stretch of the imagination be
considered incidental to the purpose of education.
ISSUE/S DOCTRINE
Tax avoidance and tax evasion are the two most
common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within
the means sanctioned by law. This method should be
used by the taxpayer in good faith and at arms length.
Tax evasion, on the other hand, is a scheme used
outside of those lawful means and when availed of, it
usually subjects the taxpayer to further or additional
civil or criminal liabilities.23
Tax evasion connotes the integration of three factors:
Taxation Law Case Matrix – FREGILLANA
On 30 August 1989, Toda purportedly sold the property for ₱100
million to Rafael A. Altonaga, who, in turn, sold the same
property on the same day to Royal Match Inc. (RMI) for ₱200
million. These two transactions were evidenced by Deeds of
Absolute Sale notarized on the same day by the same notary
public.5
For the sale of the property to RMI, Altonaga paid capital gains
tax in the amount of ₱10 million.6
On 16 April 1990, CIC filed its corporate annual income tax
return7 for the year 1989, declaring, among other things, its gain
from the sale of real property in the amount of ₱75,728.021.
After crediting withholding taxes of ₱254,497.00, it paid
₱26,341,2078 for its net taxable income of ₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le
Hun T. Choa for ₱12.5 million, as evidenced by a Deed of Sale of
Shares of Stocks.9 Three and a half years later, or on 16 January
1994, Toda died.
(1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is
due; (2) an accompanying state of mind which is
described as being "evil," in "bad faith," "willfull," or
"deliberate and not accidental"; and (3) a course of
action or failure of action which is unlawful.24
All these factors are present in the instant case. It is
significant to note that as early as 4 May 1989, prior to
the purported sale of the Cibeles property by CIC to
Altonaga on 30 August 1989, CIC received ₱40 million
from RMI,25 and not from Altonaga. That ₱40 million
was debited by RMI and reflected in its trial balance26
as "other inv. – Cibeles Bldg." Also, as of 31 July 1989,
another ₱40 million was debited and reflected in
RMI’s trial balance as "other inv. – Cibeles Bldg." This
would show that the real buyer of the properties was
RMI, and not the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that
Altonaga was a close business associate and one of
the many trusted corporate executives of Toda. This
information was revealed by Mr. Boy Prieto, the
assistant accountant of CIC and an old timer in the
company.27 But Mr. Prieto did not testify on this
matter, hence, that information remains to be hearsay
and is thus inadmissible in evidence. It was not
verified either, since the letter-request for
investigation of Altonaga was unserved,28 Altonaga
having left for the United States of America in January
1990. Nevertheless, that Altonaga was a mere conduit
finds support in the admission of respondent Estate
that the sale to him was part of the tax planning
scheme of CIC. That admission is borne by the records.
In its Memorandum, respondent Estate declared:
Taxation Law Case Matrix – FREGILLANA

Petitioner, however, claims there was a "change of

structure" of the proceeds of sale. Admitted one
hundred percent. But isn’t this precisely the definition
of tax planning? Change the structure of the funds and
pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code
exists, allowing tax free transfers of property for
stock, changing the structure of the property and the
tax to be paid. As long as it is done legally, changing
the structure of a transaction to achieve a lower tax is
not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate

altogether, a tax. Surely petitioner [sic] cannot be
faulted for wanting to reduce the tax from 35% to
5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear

that there were two sales of the subject properties,
i.e., from CIC to Altonaga, and then from Altonaga to
RMI cannot be considered a legitimate tax planning.
Such scheme is tainted with fraud.

Fraud in its general sense, "is deemed to comprise

anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of
legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by
which an undue and unconscionable advantage is
taken of another."30

Here, it is obvious that the objective of the sale to

Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would
then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax.
Altonaga’s sole purpose of acquiring and transferring
title of the subject properties on the same day was to
Taxation Law Case Matrix – FREGILLANA

create a tax shelter. Altonaga never controlled the

property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a
tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the
two sales was calculated to mislead the BIR with the
end in view of reducing the consequent income tax
liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the

sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an

income tax incidence only when it is consummated.32
The incidence of taxation depends upon the substance
of a transaction. The tax consequences arising from
gains from a sale of property are not finally to be
determined solely by the means employed to transfer
legal title. Rather, the transaction must be viewed as a
whole, and each step from the commencement of
negotiations to the consummation of the sale is
relevant. A sale by one person cannot be transformed
for tax purposes into a sale by another by using the
latter as a conduit through which to pass title. To
permit the true nature of the transaction to be
disguised by mere formalisms, which exist solely to
alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.33

To allow a taxpayer to deny tax liability on the ground

that the sale was made through another and distinct
entity when it is proved that the latter was merely a
conduit is to sanction a circumvention of our tax laws.
Hence, the sale to Altonaga should be disregarded for
income tax purposes.34 The two sale transactions
Taxation Law Case Matrix – FREGILLANA

should be treated as a single direct sale by CIC to RMI.