G.R. No.

L-69259 January 26, 1988

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

Facts: The Pacheco siblings , were the owners of real estate in the Municipality of
Polo in Bulacan (Transfer Certificate of Title No. T-4240 )They leased it to
Construction Components International Inc. providing that during the existence or
after the term of this lease the lessor should he decide to sell the property leased
shall first offer the same to the lessee and the letter has the priority to buy under
similar conditions. In 1974, the lessee assigned its rights and obligations under the
contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity
and consent of Pacheco siblings.The contract of lease, as well as the assignment of
lease were annotated at he back of the title, as per stipulation of the parties.
Later on 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property together with another parcel of land for
2,500 shares of stock of defendant corporation with a total value of P1.5 M.
On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc.,
filed an amended complaint for reconveyance of Lot. in its favor under conditions similar to
those whereby Delpher Trades Corporation acquired the property from them.
The lower courts ruled in favor of the plaintiff and ordered the conveyance of the property to the
plaintiff which is the subject of this appeal:
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no
sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such
transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent while there is a barter or exchange when
one thing is given in consideration of another thing.
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate
entity separate and distinct from the Pachecos. That petitioner Delfin Pacheco, having treated
Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may
allege that this separate corporate existence should be disregarded. It maintains that there was
actual transfer of ownership interests over the leased property when the same was transferred to
Delpher Trades Corporation in exchange for the latter's shares of stock.

Issue: Whether or not the "Deed of Exchange" of the properties executed by the Pachecos and the
Delpher Trades Corporation was meant to be a contract of sale which prejudiced the private
respondent's right.
Decision: We rule for the petitioners.The right of the respondent lies on the agreement that in case
the siblings will sell the property they shall offer it first to the respondents. However, there seem to be
no sale that took place.

Delpher Trades Corporation is a family corporation; that the corporation was organized by the
children of the two who owned in common the parcel of land that is subjected to this case. The deed
of exchange exetued is in order to perpetuate their control over the property through the corporation
and to avoid taxes; They refer to this scheme as "estate planning." Under this factual backdrop, the
Pachecos remained in control of the property.There was no transfer of actual ownership interests
over the land when the same was transferred Depher Trades in exchange for the latter's shares of
stock.
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The Pachecos remained in control of the property being 55% stockholders of Delpher
The fact that they tool no-par value shares is significant because they are owners of
an aliquot part of the assets, including the land.
In effect, Delpher is a business conduit of the Pachecos. All the deed of exchange did
was change the nature of ownership from unincorporated to incorporated form.
One of the reasons for this is to save on income tax. Sec, 35 of the NIRC exempts
from taxes an exchange of a persons property for stock in a corporation as a result of
such exchange said person (or persons not exceeding 4) gains control of the
corporation.
Another benefit would be that the corporation could hold on to the property instead
of it being tied down in succession proceedings and the consequential payment of
estate and inheritance taxes.
There is nothing objectionable with the estate planning that the Pachecos resorted
to.
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.

PEN: Sec, 35 of the NIRC."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."
This provision can be resorted to be exempt from taxes when a persons makes an
exchange of property for stock in a corporation as a result of such exchange said person (or
persons not exceeding 4) gains control of the corporation