Republic of the Philippines v.

Heirs of Jalandoni

G.R. No. L-18384, September 20, 1965

..if there is any mistake in the valuation made by Jalandoni the same can only be
considered as honest mistake, or one based on excusable inadvertence, he being not an
expert in appraising real estate... the fact that the value given in the returns did not tally
with the book value appearing in thr corporate books is not in itself indicative of fraud
especially when take into consideration the circumstances that said book value only become
known several months after the death of the deceased.

Facts: Isabel Ledesma died intestate leaving real properties situated in the provinces of Negros
Occidental and Rizal and in the cities of Manila and Baguio, and personal properties consisting
of shares of stock in various domestic corporations. She left as heirs her husband Bernardino
Jalandoni and three children, namely, Cesar, Angeles and Delfin, all surnamed Jalandoni.

Cesar Jalandoni filed an estate and inheritance tax return reporting the following: (1) that the real
and personal properties owned by the deceased and her surviving husband had a total market
value of P1,324,555.80; (2) that after deducting therefrom the conjugal share of her husband and
some expenses the net estate subject to estate tax was P28,148.04; and (3) that the amount
subject to inheritance tax was P542,225.83. This return also shows that no testamentary or
intestate proceedings were instituted.

On the basis of this return the BIR made an assessment calling for the payment of the amounts of
P31,435.95 and P58,863.52 as estate and inheritance taxes, respectively, stating therein that the
assessment was "to be considered partial pending investigation of the return." These sums were
paid by Cesar Jalandoni.

A Second assessment was made by the BIR showing that there was due from the estate the
amounts of P5,539.67 and P9,899.37 as deficiency estate and inheritance taxes, respectively, for
which reason a demand was made on Bernardino Jalandoni stating therein that the same was still
"to be considered partial pending further investigation of the return," which amounts were paid
by Bernardino Jalandoni.

BIR conducted another investigation and this time it found (1) that the market value of the lands
reported in the return filed by Cesar Jalandoni was underdeclared and on the basis of these
findings a third assessment was made against the estate wherein the heirs were required to pay
the amounts of P29,995.30 and P49,842.05 as deficiency estate and inheritance taxes,
respectively, including accrued interests, with the warning that failure on their part to pay the
same would subject them to the payment of surcharge, interest, and penalty for late payment of
the tax.

Bernardino Jalandoni, Lorenzo J. Teves, in his capacity as counsel of the heirs of the deceased,
wrote a letter to the Collector of Internal Revenue setting up the defense of prescription in the
sense that the deficiency in the estate and inheritance taxes payment of which was required
therein can no longer be collected since more than five years had already elapsed from the filing
of the return invoking in his favor Section 331 of the National Internal Revenue Code.

To this defense, the Collector retorted claiming that the stand of counsel cannot be entertained
for the reason that, it appearing that the estate and inheritance tax return which was filed by the
administrator or by the heirs contained omissions which amount to fraud indicative of an
intention to evade payment of the proper tax due the government, the taxes then being collected
could still be demanded within ten years from the discovery of the falsity or omission pursuant to
Section 332(a) of said Code, which period had not yet expired, and as a consequence, the
assessment notice was reiterated with the request that the deficiency estate and inheritance taxes
therein demanded be settled as soon as possible. And noting that the 30-day period within which
the heirs could appeal the Collector's assessment to the Court of Tax Appeals had already
elapsed, while on the other hand they indicated their unwillingness to settle the claim, the
Collector of Internal Revenue filed the present case before the Court of First Instance of Manila
pressing the collection of the deficiency estate and inheritance taxes assessed against the heirs of
the deceased Isabel Ledesma Jalandoni.

Issue: Whether or not the heirs should pay the additional alleged deficiency of the estate taxes.

Ruling: The finding of the BIR is is neither fair nor reasonable. To begin with, it should be here
noted that when this case was pending hearing on the merits before the lower court, the latter,
upon request of appellants, ordered the Collector of Internal Revenue to verify the allegation that
there were seven lots in Negros Occidental which were claimed not to have been included in the
return filed by Cesar Jalandoni, and to this effect the Collector designated Examiner Genaro
Butas to conduct the examination.

Certainly if there is any mistake in the valuation made by Jalandoni the same can only be
considered as honest mistake, or one based on excusable inadvertence, he being not an expert in
appraising real estate. The deficiency assessment, moreover, was made by the Collector of
Internal Revenue more than five years from the filing of the return, and experience shows that
such an intervening period is sufficiently long to, warrant an increase in value of real estate
which is precisely what was found by the Collector of Internal Revenue with regard to the lands
in question. It is certainly an error to impute fraud based on an honest difference of opinion.
The fact that the value given in the returns did not tally with the book value appearing in the
corporate books is not in itself indicative of fraud especially when we take into consideration the
circumstance that said book value only became known several months after the death of the
deceased. Moreover, it is a known fact that stock securities frequently fluctuate in value and a
mere difference of opinion in relation thereto cannot serve as proper basis for assessing an
intention to defraud the government.

Having reached the conclusion that the heirs of the deceased have not committed any act
indicative of an intention to evade the payment of the inheritance or estate taxes due the
government, as evidenced by their willingness in the past to pay all the taxes properly
assessed against them, it is evident that the instant claim of appellee has already prescribed
under Section 331 of the National Internal Revenue Code.

Yutivo Sons Hardware v. Court of Tax Appeals

G.R. No. L-13203, January 28, 1961

The intention to minimize taxes, when used in the context of fraud, must be proved to exist
by clear and convincing evidence amounting to more than mere preponderance, and cannot
be justified by a mere speculation. Mere understatement of tax in itself does not prove
fraud.

Facts: Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies
and equipment. It bought a number of cars and trucks from General Motors Overseas
Corporation an American corporation licensed to do business in the Philippines. As importer,
GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its
selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no
further sales tax on its sales to the public.

Southern Motors, Inc. was organized to engage in the business of selling cars, trucks and spare
parts. After the incorporation of SM and until the withdrawal of GM from the Philippines in the
middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM
which, in turn, sold them to the public in the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and Mindanao,
and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that
GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax
prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is
collected only once on original sales, SM paid no sales tax on its sales to the public.

Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter
P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of
1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the
taxable sales were the retail sales by SM to the public and not the sales at wholesale made by,
Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former
being the subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the case having been
made by the agents of the Bureau of Internal Revenue, the respondent Collector in his letter
dated November 15, 1952 countermanded his demand for sales tax deficiency on the ground that
"after several investigations conducted into the matter no sufficient evidence could be gathered
to sustain the assessment of this Office based on the theory that Southern Motors is a mere
instrumentality or subsidiary of Yutivo.

A Second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals,
alleging that there is no valid ground to disregard the corporate personality of SM and to hold
that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be
disregarded, the sales tax already paid by Yutivo should first be deducted from the selling price
of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been
erroneously imposed by respondent.

Issue: Whether or not Yutivo should be held liable to pay for the tax deficiencies.
Ruling: It is an elementary and fundamental principle of corporation law that a corporation is an
entity separate and distinct from its stockholders and from other corporation petitions to which it
may be connected. However, "when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime," the law will regard the corporation
as an association of persons, or in the case of two corporations merge them into one.

At this juncture, it should be stated that the intention to minimize taxes, when used in the
context of fraud, must be proved to exist by clear and convincing evidence amounting to
more than mere preponderance, and cannot be justified by a mere speculation. This is
because fraud is never lightly to be presumed. Fraud is never imputed and the courts never
sustain findings of fraud upon circumstances which, at the most, create only suspicion.

SM was organized and it operated, under circumstance that belied any intention to evade sales
taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden
devices to lessen or defeat taxes. The transactions between Yutivo and SM, however, have
always been in the open, embodied in private and public documents, constantly subject to
inspection by the tax authorities. As a matter of fact, after Yutivo became the importer of GM
cars and trucks for Visayas and Mindanao, it merely continued the method of distribution that it
had initiated long before GM withdrew from the Philippines.

Sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only on
every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer."
The use of the word "original" and the express provision that the tax was collectible "once only"
evidently has made the provisions susceptible of different interpretations. In this connection, it
should be stated that a taxpayer has the legal right to decrease the amount of what otherwise
would be his taxes or altogether avoid them by means which the law permits.

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing
proof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt
or hesitancy as to the existence of fraud. He even doubted the validity of his first assessment
dated November 7, 1959. It must be remembered that the fraud which respondent Collector
imputed to Yutivo must be related to its filing of sales tax returns of less taxes than were legally
due. The allegation of fraud, however, cannot be sustained without the showing that Yutivo, in
filing said returns, did so fully knowing that the taxes called for therein called for therein were
less than what were legally due. Considering that respondent Collector himself with the aid of his
legal staff, and after some two years of investigation and duty of investigation and study
concluded in 1952 that Yutivo's sales tax returns were correct only to reverse himself after
another two years it would seem harsh and unfair for him to say in 1954 that Yutivo fully
knew in October 1947 that its sales tax returns were inaccurate.