TAX.7.5 Delpher Trades Corp. v.

Intermediate Appellate Court

FACTS: Delfin Pacheco and sister Pelagia were the owners of a parcel of land in Polo (now Valenzuela).
Subsequently, they leased to Construction Components International Inc. the property and providing for a right of first
refusal should it decide to sell the said property. Construction Components International, Inc. assigned its rights and
obligation sunder the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of
Delfin and Pelagia. In 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant
Delpher Trades Corporation whereby the Pachecos conveyed to the latter the leased property together with another parcel
of land also located. On the ground that it was not given the first option to buy the leased property pursuant to the lease
agreement, respondent Hydro Pipes Philippines filed an amended complaint for reconveyance of the lot under the
conditions similar to those of Delpher. The court ruled in favor of Hydro declaring the existence of its preferential right to
acquire the subject property. IAC affirmed. Petitioner Delpher contend that there was actually no transfer of ownership,
the Pachecos having remained in control of the property. They alleged that petitioner. Delpher is a family corporation,
organized by the children of Pelagia, who owned the parcel of land leased to private respondent Hydro to perpetuate their
control over the property through the corporation and to avoid taxes. It also alleged that to accomplish this, the leased
property was transferred to petitioner Delpher by virtue of a deed of exchange, and in exchange for the properties they
acquired majority shares of petitioner Delpher corporation. In short, petitioners contend that the Pachecos did not sell the
leased property since they exchanged the land for shares in their own corporation. Private respondent, however, contend
that petitioner Delpher Trades is a corporation separate and distinct from the Pachecos.

ISSUE: Whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the Delpher
Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private respondent's
right of first refusal over the leased property included in the deed of exchange

RULING: The Court ruled in favor of the petitioner. The "Deed of Exchange" of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of sale. 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. Hence, the private respondent has no basis for its claim of a light of first refusal
under the lease contract. By their ownership of a capital equal to 55% of the shares, the Pachecos have the control of the
petitioner corporation. In effect, the petitioner corporation is a business conduit of the Pachecos. What they really 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 execution
of the deed of exchange on the properties for no par value shares, the Pachecos were able to provide for a tax free exchange
of property, such that they were able to execute the deed of exchange free from income tax and acquire a corporation.
Sec. 35 of the NIRC provides that “No gain or loss shall also be recognized if a person exchanges his property for stock in
a corporation of which as a result of such exchange said person alone or together with others not exceeding four persons
gains control of said corporation." The Court believes that there is nothing wrong about the “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.

TAX.7.6 CIR v. Gotamco & Sons, Inc.

FACTS: The World Health Organization (WHO) enjoys privileges and immunities which are defined more specifically in
the Host Agreement entered into between the Republic of the Philippines and the said Organization on July 22, 1951.
Section 11 of that Agreement provides inter alia, that the organization, its assets, income and other properties shall be, (a)
exempt from all direct and indirect taxes. It is understood however that the Organization will not claim exemption from
taxes which are, in fact, no more than charges for public utility services . .) When the WHO decided to construct a building
to house its own offices, it entered into a further agreement with the Government of the Philippines. This agreement
contained the following provision (Article 3, paragraph 2), “The Organization may import into the country materials and
fixtures required for the construction free from all duties and taxes and agrees not to utilize any portion of the international
reserves of the Government.” The construction contract was awarded to respondent John Gotamco & Sons, Inc. for the
stipulated price of P370,000.00, but when the building was completed the price reached a total of O452, 544.00.

On May 1958, the WHO received an opinion From the Commissioner of the BIR stating that “as the 3% contractor’s tax
is not a direct nor indirect tax on the WHO, but a tax that is primarily due from the contractor, the same is not covered by
. . the Host Agreement.” On January 1960, the WHO Issued a certification stating “When the request for bids for the
construction of the WHO office building was called for, contractors were informed that there would be no taxes or fees
levied upon them for their work in connection with the construction of the building as this will be considered an indirect
tax to the organization cause by the increase of the contractor’s bid in order to cover these taxes. This was upheld by the
BIR and it can be stated that the contractors submitted their bids in good faith with the exemption in mind. The undersigned,
therefore, certifies that the bid of John Gotamco & Sons , made under the condition stated above, should be exempted from
any taxes in connection with the construction of the WHO office building.

ISSUES: (1) Whether Host Agreement is Null and Void; (2) Whether the assessed 3% contractor’s tax from the respondent is not an “indirect
tax”

RULING: Held: No. The Court find no merit in this contention. While treaties are required to be ratified by the Senate under
the Constitution, less formal types of international agreements may be entered into by the Chief Executive and become binding
without the concurrence of the legislative body. The Host Agreement comes within the latter category; it is a valid and binding
international agreement even without the concurrence of the Philippine Senate. The privileges and immunities granted to the
WHO under the Host Agreement have been recognized by this Court as legally binding on Philippine authorities. No. In context,
direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect
taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the
burden to someone else. The contractor’s tax is of course payable by the contractor but in the last analysis it is the owner of the
building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-
preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner,
the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor
and it certainly cannot be said that ‘this tax has no bearing upon the World Health Organization. Petition is dismissed, CTA
decision is affirmed.

TAX.7.7 Joya v. PCGG

FACTS: Mateo Caparas, then Chairman of the PCGG, through the authority granted by then Pres. Aquino, signed a
Consignment Agreement allowing Christie’s of New York to auction off Old Masters Paintings and the 18th and 19th
century silverware alleged to be part of the ill-gotten wealth of Pres. Marcos, his relatives, and cronies, for and in behalf
of RP. 35 petitioners in this Special Civil Action for Prohibition and Mandamus with Prayer for Preliminary Injunction
and/or Restraining Order sought to enjoin PCGG from proceeding with the auction sale which nevertheless proceeded on
schedule. Petitioners claim that, as Filipino citizens, taxpayers, and artists deeply concerned with the preservation and
protection of the country’s artistic wealth and that the paintings and silverware are public properties collectively owned by
them and the people in general to view and enjoy as great works of art alleging that they have been deprived of their right
to public property without due process of law, they have the legal personality to restrain the respondents who are acting
contrary to their public duty to conserve the artistic creations as mandated by Sec. 14-18 of Art. XIV of the Constitution
and RA 4846.

ISSUE: Whether the petition complies with the legal requisites for the Court to exercise its power of judicial review over
this case.

RULING: NO. Petitioners failed to show that they have the legal standing, i.e. a personal and substantial interest in the
case such that they have sustained or would sustain direct injury as a result of the governmental act that is being challenged,
because they are not the legal owners of the artworks/silverwares or that the valued pieces have become publicly owned
since such artworks are in fact owned by the Metropolitan Museum of Manila Foundation, a non-profit, non-stock
corporation established to promote non-Philippine arts and the silverwares were in fact gifts to the Marcos couple on their
silver wedding anniversary. The mandamus suit cannot prosper because what the petitioners seek is the enjoining of an
official act because it is constitutionally infirmed not because they are after the fulfilment of a positive duty required of
the respondent public officials which is the only ground for a writ of mandamus to be issued. The taxpayers’ suit cannot
prosper as well since the items in question were acquired from private sources and not with public money. For a Court to
exercise of its power of adjudication there must be actual controversy one which involves a conflict of legal interest an
assertion of opposite legal claims susceptible of judicial resolution the case must not be moot or academic. Since the
purpose of this petition for prohibition is to enjoin the respondents from holding the auction sale of the artworks on a
particular dates which had long past the issues raised had become moot and academic. Nevertheless, the court has the
discretion to take cognizance of a suit which does not satisfy the requirements of an actual case or legal standing when
paramount public interest is involved. However, there is no such justification in this petition. Petition dismissed.