In Philippine American Life and General Insurance Company vs. The Secretary of Finance and the Commissioner of Internal Revenue, the Supreme Court addressed the applicability of donor’s tax on the sale of shares of stock when the selling price is lower than the book value. The Court ruled that the difference between the fair market value (book value) and the selling price is considered a gift subject to donor’s tax, even in the absence of donative intent. This decision clarifies how the Bureau of Internal Revenue (BIR) assesses donor’s tax on transactions involving the transfer of shares, impacting sellers who may not realize they are incurring such tax liabilities.

Navigating Tax Law: Can a Below-Market Share Sale Trigger Donor’s Tax?

The case stemmed from a sale of Class A shares in Philam Care Health Systems, Inc. by The Philippine American Life and General Insurance Company (Philamlife) to STI Investments, Inc. Philamlife sold its shares at USD 2,190,000, equivalent to PhP 104,259,330. After the sale, the BIR determined that the selling price was lower than the book value of the shares, based on Philam Care’s financial statements from the end of 2008. Consequently, the Commissioner of Internal Revenue (Commissioner) assessed donor’s tax on the price difference, citing Section 100 of the National Internal Revenue Code (NIRC).

Section 100 of the NIRC addresses transfers for less than adequate consideration, stating:

SEC. 100. Transfer for Less Than Adequate and full Consideration. – Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.

Revenue Regulation 6-2008 (RR 6-2008) further implements this provision, specifying how to determine the fair market value of shares not traded on the stock exchange. Section 7(c.2.2) of RR 6-2008 states that the book value of the shares of stock, as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale, shall be the fair market value. The Commissioner, therefore, concluded that the difference between the book value and the selling price constituted a taxable donation subject to a 30% donor’s tax under Section 99(B) of the NIRC.

Philamlife contested this ruling, arguing that the sale was a bona fide business transaction conducted at arm’s length, without any donative intent. They cited a previous BIR ruling, [DA-(DT-065) 715-09], which supported their position, but the Commissioner pointed out that this ruling had been revoked by Revenue Memorandum Circular (RMC) No. 25-2011. Aggrieved, Philamlife appealed to the Secretary of Finance (Secretary), who affirmed the Commissioner’s ruling. Subsequently, Philamlife elevated the case to the Court of Appeals (CA), which dismissed the petition for lack of jurisdiction, stating that the Court of Tax Appeals (CTA) had jurisdiction over the matter.

The Supreme Court was thus faced with two primary issues: first, whether the CA erred in dismissing the petition for lack of jurisdiction, and second, whether the price difference in Philamlife’s sale of shares attracted donor’s tax. The procedural question revolved around whether appeals from the Secretary of Finance’s review of BIR rulings should be directed to the CA or the CTA.

The Court acknowledged the absence of a specific provision explicitly stating where appeals from the Secretary of Finance’s rulings under Section 4 of the NIRC should be filed. However, it interpreted Section 7(a)(1) of Republic Act No. 1125 (RA 1125), as amended, as implicitly vesting the CTA with jurisdiction over such appeals. This section grants the CTA exclusive appellate jurisdiction to review decisions of the Commissioner of Internal Revenue and “other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue.”

The Supreme Court emphasized that laws should be interpreted reasonably to fulfill their intended purpose. Granting the CTA jurisdiction over appeals from the Secretary of Finance ensures that taxpayers prejudiced by adverse rulings have a proper avenue for recourse. Furthermore, the Court noted that the CTA, as a specialized quasi-judicial agency, possesses the expertise to adjudicate tax-related controversies, including the tax treatment of shares of stock sold.

Petitioner cited Ursal v. Court of Tax Appeals to argue against granting the CTA jurisdiction by implication. However, the Supreme Court clarified that the Ursal case was dismissed because the petitioner lacked the legal standing to file the suit. The Court stated that the ruling in Ursal should not be taken out of context. The Supreme Court also addressed the argument that the CTA lacked jurisdiction because Philamlife had challenged the validity of Section 7(c.2.2) of RR 06-08 and RMC 25-11.

The Supreme Court referenced City of Manila v. Grecia-Cuerdo, affirming that the CTA now possesses the power of certiorari in cases within its appellate jurisdiction. This power enables the CTA to determine whether there has been a grave abuse of discretion on the part of the Regional Trial Court (RTC) in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court. Thus, the CTA can rule not only on the propriety of an assessment or tax treatment but also on the validity of the revenue regulation or revenue memorandum circular on which the assessment is based. Consequently, challenging the validity of Sec. 7(c.2.2) of RR 06-08 and RMC 25-11 did not strip the CTA of its jurisdiction.

On the substantive issue, the Court held that the price difference in Philamlife’s sale of shares was indeed subject to donor’s tax. The Court relied on Section 100 of the NIRC, which deems the excess of the fair market value over the consideration as a gift. The absence of donative intent is irrelevant because the law considers the difference a donation by legal fiction. This means that even if the seller did not intend to make a gift, the tax applies because the transaction is treated as such under the law.

The court also addressed Philamlife’s contention that Section 7(c.2.2) of RR 06-08 altered Section 100 of the NIRC. The Court clarified that the regulation merely establishes the method for determining the “fair market value” of the shares, aligning with the Commissioner’s authority to interpret tax laws and issue implementing rules. Finally, the Court dismissed the argument that RMC 25-11 was being applied retroactively, explaining that it merely reinforced the application of Section 100, which was already in effect.

The Supreme Court’s decision underscores the importance of properly valuing shares in sales transactions, especially when dealing with related parties or transactions that may not be at arm’s length. Taxpayers should be aware that the BIR may assess donor’s tax if the selling price is significantly lower than the book value, regardless of their intent. This ruling serves as a reminder that the government may impose tax even when there is no intention of donating or making a gift, especially if the transfer of property for less than adequate consideration is proven.

FAQs

What was the key issue in this case?	The primary issue was whether the difference between the book value and the selling price of shares of stock sold constitutes a taxable donation subject to donor’s tax, even in the absence of donative intent. The case also tackled the proper venue for appealing decisions from the Secretary of Finance regarding BIR rulings.
What is Section 100 of the National Internal Revenue Code (NIRC)?	Section 100 of the NIRC states that if property is transferred for less than adequate consideration, the excess of the fair market value over the consideration shall be deemed a gift and included in computing gifts made during the year. This provision forms the basis for imposing donor’s tax on the price difference.
How is the fair market value of shares determined in this case?	According to Revenue Regulation 6-2008 (RR 6-2008), specifically Section 7(c.2.2), the fair market value of shares not traded on the stock exchange is the book value as shown in the financial statements certified by an independent CPA nearest to the date of sale. This regulation provides the benchmark for assessing the value.
Does the absence of donative intent affect the imposition of donor’s tax?	No, the absence of donative intent does not exempt the transaction from donor’s tax. Section 100 of the NIRC considers the difference between the fair market value and the consideration as a gift by legal fiction, regardless of whether the seller intended to make a gift.
Which court has jurisdiction over appeals from the Secretary of Finance on BIR rulings?	The Supreme Court ruled that the Court of Tax Appeals (CTA) has jurisdiction over appeals from the Secretary of Finance regarding BIR rulings, interpreting Section 7(a)(1) of RA 1125 as implicitly granting the CTA this power. This ensures a specialized court reviews these tax-related disputes.
What is the significance of Revenue Memorandum Circular (RMC) No. 25-2011?	RMC 25-2011 revoked a prior BIR ruling that supported Philamlife’s argument against donor’s tax. It reinforced the strict application of Section 100 of the Tax Code, clarifying that there are no exempt transactions under that provision.
Can the CTA rule on the validity of revenue regulations?	Yes, the Supreme Court affirmed that the CTA, through its power of certiorari, can rule on the validity of revenue regulations or memorandum circulars as long as it is within its appellate jurisdiction. This allows the CTA to assess both the tax treatment and the validity of the underlying regulations.
What is the donor’s tax rate applicable in this case?	In this case, the donor’s tax rate is 30% of the net gifts because the donee (STI Investments, Inc.) is considered a “stranger” as defined under Section 99(B) of the NIRC. The term stranger refers to someone who is not a close relative, lineal descendant or ascendant of the seller.
What was Philamlife’s primary argument against the donor’s tax assessment?	Philamlife primarily argued that the sale was a bona fide business transaction conducted at arm’s length, without any donative intent. They claimed that Section 100 of the Tax Code should not apply to sales made in the ordinary course of business.

The Supreme Court’s decision in Philamlife vs. Secretary of Finance serves as a critical reminder of the complexities involved in tax compliance, particularly concerning the valuation of shares in sales transactions. Businesses must exercise diligence in ensuring transactions are structured in accordance with tax laws. Failure to consider these tax implications may result in unexpected tax liabilities, even when transactions are conducted at arm’s length and in good faith.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY VS. THE SECRETARY OF FINANCE AND THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 210987, November 24, 2014