DELPHER TRADES CORPORATION, and DELPHIN PACHECO vs.

INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC.,

G.R. No. L-69259, January 26, 1988

FACTS:

Delfin Pacheco and his sister, Pelagia, who were the owners of Malinta Estate, a 27,169
square meters of real estate in the Municipality of Polo (now Valenzuela), Province of
Bulacan (now Metro Manila), leased said property to Construction Components
International Inc. (CCCI) providing for a right of first refusal should they decide to sell
the property.

 4 months later, lessee CCCI assigned its rights and obligations under the contract
of lease in favor of RESP with the signed conformity and consent of lessors
Pacheco.

A deed of exchange was executed between lessors Pachecos and PET Corporation
whereby the Pachecos conveyed to PET the leased property together with another parcel
of land in exchange for 2,500 shares of stock of PET corporation worth P1,500,000.

RESP Corporation filed an amended complaint for reconveyance in its favor, on the
ground that it was not given the first option to buy the leased property pursuant to the
proviso in the lease agreement.
 PET: No actual transfer of ownership as the Pachecos remained in control of the property because PET Corporation is a
family corporation, organized by the children of Pelagia to perpetuate their control over the property through the
corporation and to avoid taxes.
 RESP: PET Corporation is separate and distinct from the Pachecos.

CFI Bulacan ruled in favor of PET Corporation, which IAC affirmed.

ISSUE:

W/N the "Deed of Exchange" was meant to be a contract of sale which, in effect,
prejudiced the RESP Corporation’s right of first refusal over the leased property- NO

Eduardo Neria, a CPA and son-in-law of the late Pelagia Pacheco testified that PET
Corporation is a family corporation and that it was organized by the children of the
Pacheco siblings in order to perpetuate their control over the property through the
corporation and as a means to avoid taxes.

 Ownership and control of PET Corporation remained in the hands of the original
co-owners as there was no transfer of actual ownership interests over the land
The "Deed of Exchange" cannot be considered a contract of sale because 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 but it 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.

SC: By their ownership of a capital equal to 55% of the shares, the Pachecos have the control of PET Corporation.

 What they really did was to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing PET Corporation to take control of their properties and at the same time save on
inheritance taxes.

By executing the “Deed of Exchange” 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 or objectionable 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.