Donor's Tax

Tax II Case Digests

Donor’s Tax

7. Republic v Guzman

Republic vs Guzman GR No 132964 February 18, 2000 (elements of donation)

Facts:
 David Rey Guzman, a natural-born American citizen, is the son of the sps. Simeon Guzman, a
naturalized American citizen, and Helen Meyers Guzman, an American citizen
 1968, Simeon died leaving to his sole heirs Helen and David an estate consisting of several parcels
of land located in Bagbaguin, Sta. Maria, Bulacan
 December 29, 1970 - Helen and David executed a Deed of Extrajudicial Settlement of the Estate
of Simeon Guzman dividing and adjudicating to themselves all the property from the estate of
Simeon. The document of extrajudicial settlement was registered in the Office of the Register of
Deeds
 The taxes due thereon were paid through their attorneys-in-fact, Attys. Juan L. Austria and Lolita
G. Abela, and the parcels of land were accordingly registered in the name of Helen Meyers Guzman
and David Rey Guzman in undivided equal shares
 December 10, 1981 - Helen executed a Quitclaim Deed assigning, transferring and conveying to
her son David her undivided one-half (1/2) interest on all the parcels of land subject matter of the
Deed of Extrajudicial Settlement of the Estate of Simeon Guzman. Since the document appeared
not to have been registered, upon advice of Atty. Lolita G. Abela, Helen executed another
document, a Deed of Quitclaim, on August 9, 1989 confirming the earlier deed of quitclaim as well
as modifying the document to encompass all her other property
 October 10, 1989 - David executed a Special Power of Attorney where he acknowledged that he
became the owner of the parcels of land subject of the Deed of Quitclaim executed by Helen and
empowering Atty. Lolita G. Abela to sell or otherwise dispose of the lots.
 February 1, 1990 - Atty. Lolita G. Abela, upon instruction of Helen, paid donor's taxes to facilitate
the registry of the parcels of land in the name of David.
 March 16, 1994 - a certain Atty. Mario A. Batongbacal wrote the OSG and furnished it with
documents showing that David's ownership of the one-half (1/2) of the estate of Simeon Guzman
was defective.
 On the basis thereof, the Government filed before the RTC of Malolos Bulacan a Petition for
Escheat praying that one-half (1/2) of David's interest in each of the subject parcels of land be
forfeited in its favor.
 David Rey Guzman responded with a prayer that the petition be dismissed.
 Trial Court decision: Dismissed the petition holding that the two (2) deeds of quitclaim executed by
Helen Meyers Guzman had no legal force and effect so that the ownership of the property subject
thereof remained with her.
 CA Decision: The Government appealed the dismissal of the petition but the appellate court
affirmed the court a quo.

Petitioner’s arguments:
 Petitioner anchors its argument on Art. XII of the Constitution which provides —
Sec. 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed
except to individuals, corporations, or associations qualified to acquire or hold lands of the public
domain.
Sec. 8. Notwithstanding the provisions of Section 7 of this Article, a natural-born citizen of the
Philippines who has lost his Philippine citizenship may be a transferee of private lands, subject to
limitations provided by law.
 Thus as a rule, only a Filipino citizen can acquire private lands in the Philippines. The only instances
when a foreigner can acquire private lands in the Philippines are by hereditary succession and if he
was formerly a natural-born Filipino citizen who lost his Philippine citizenship.
 Petitioner therefore contends that the acquisition of the parcels of land by David does not fall under any
of these exceptions. It asserts that David being an American citizen could not validly acquire one-half
(1/2) interest in each of the subject parcels of land by way of the two (2) deeds of quitclaim as they are
in reality donations inter vivos.
 It also reasons out that the elements of donation are present in the conveyance made by Helen in favor
of David:
o first, Helen consented to the execution of the documents;
o second, the dispositions were made in public documents;
o third, David manifested his acceptance of the donation in the Special Power of Attorney he
executed in favor of Atty. Lolita G. Abela;
o fourth, the deeds were executed with the intention of benefiting David; and
o lastly, there was a resultant decrease in the assets or patrimony of Helen, being the donor.
Petitioner further argues that the payment of donor's taxes on the property proved that Helen
intended the transfer to be a gift or donation inter vivos.

David’s arguments:
 Maintains that he acquired the property by right of accretion and not by way of donation, with the
deeds of quitclaim merely declaring Helen's intention to renounce her share in the property and not
an intention to donate.
 Assuming there was indeed a donation, it never took effect since the Special Power of Attorney he
executed does not indicate acceptance of the alleged donation.

Issue: What are the elements of donation?

Ruling:
 Three (3) essential elements of a donation:
o (a) the reduction of the patrimony of the donor;
o (b) the increase in the patrimony of the donee; and,
o (c) the intent to do an act of liberality or animus donandi.

 When applied to a donation of an immovable property, the law further requires that the donation be
made in a public document and that there should be an acceptance thereof made in the same deed
of donation or in a separate public document. In cases where the acceptance is made in a separate
instrument, it is mandated that the donor should be notified thereof in an authentic form, to be noted
in both instruments.

 Not all the elements of a donation of an immovable property are present in the instant case.
 The transfer of the property by virtue of the Deed of Quitclaim executed by Helen resulted in the
reduction of her patrimony as donor and the consequent increase in the patrimony of David as
donee.

 However, Helen's intention to perform an act of liberality in favor of David was not sufficiently
established.
o A perusal of the 2 deeds of quitclaim reveals that Helen intended to convey to her son
David certain parcels of land located in the Philippines, and to re-affirm the quitclaim she
executed in 1981 which likewise declared a waiver and renunciation of her rights over the
parcels of land.
o The language of the deed of quitclaim is clear that Helen merely contemplated a
waiver of her rights, title and interest over the lands in favor of David, and not a
donation.
 o Is further supported by her deposition which indicated that she was aware that a donation
of the parcels of land was not possible since Philippine law does not allow such an
arrangement.
o She reasoned that if she really intended to donate something to David it would have been
more convenient if she sold the property and gave him the proceeds therefrom.
o It appears that foremost in Helen's mind was the preservation of the Bulacan realty within
the bloodline of Simeon from where they originated, over and above the benefit that would
accrue to David by reason of her renunciation.
o The element of animus donandi therefore was missing.
o Likewise, the 2 deeds of quitclaim executed by Helen may have been in the nature of a
public document but they lack the essential element of acceptance in the proper form
required by law to make the donation valid.

 We find no merit in petitioner's argument that the SPA executed by David in favor of Atty. Lolita G.
Abela manifests his implied acceptance of his mother's alleged donation as a scrutiny of the
document clearly evinces the absence thereof.
 The Special Power of Attorney merely acknowledges that David owns the property referred
to and that he authorizes Atty. Abela to sell the same in his name. There is no intimation,
expressly or impliedly, that David's acquisition of the parcels of land is by virtue of Helen's possible
donation to him and we cannot look beyond the language of the document to make a contrary
construction as this would be inconsistent with the parol evidence rule.
 Moreover, it is mandated that if an acceptance is made in a separate public writing the notice of
the acceptance must be noted not only in the document containing the acceptance but also in the
deed of donation. Commenting on Art. 633 of the Civil Code from whence Art. 749 came Manresa
said: "If the acceptance does not appear in the same document, it must be made in another. Solemn
words are not necessary; it is sufficient if it shows the intention to accept . . . . it is necessary that
formal notice thereof be given to the donor, and the fact that due notice has been given must be
noted in both instruments. Then and only then is the donation perfected.
 Santos v. Robledo - we emphasized that when the deed of donation is recorded in the registry of
property the document that evidences the acceptance — if this has not been made in the deed of
gift — should also be recorded. And in one or both documents, the notification of the acceptance
as formally made to the donor or donors should be duly set forth. Where the deed of donation fails
to show the acceptance, or where the formal notice of the acceptance made in a separate
instrument is either not given to the donor or else noted in the deed of donation, and in the separate
acceptance, the donation is null and void.

 These requisites, definitely prescribed by law, have not been complied with, and no proof of
compliance appears in the record.
 The two (2) quitclaim deeds set out the conveyance of the parcels of land by Helen in favor of David
but its acceptance by David does not appear in the deeds, nor in the Special Power of Attorney.
Further, the records reveal no other instrument that evidences such acceptance and notice thereof
to the donor in an authentic manner.
 It is well-settled that if the notification and notation are not complied with, the donation is void.
Therefore, the provisions of the law not having been complied with, there was no effective
conveyance of the parcels of land by way of donation inter vivos.

 However, the inexistence of a donation does not render the repudiation made by Helen in favor of
David valid. There is no valid repudiation of inheritance as Helen had already accepted her share
of the inheritance when she, together with David, executed a Deed of Extrajudicial Settlement of
the Estate of Simeon Guzman on 29 December 1970 dividing and adjudicating between the two
(2) of them all the property in Simeon's estate. By virtue of such extrajudicial settlement the parcels
of land were registered in her and her son's name in undivided equal share and 11 years they
possessed the lands in the concept of owner. Article 1056 of the Civil Code provides —
 The acceptance or repudiation of an inheritance, once made is irrevocable and cannot be
impugned, except when it was made through any of the causes that vitiate consent or when
an unknown will appears.

 Nothing on record shows that Helen's acceptance of her inheritance from Simeon was made
through any of the causes which vitiated her consent nor is there any proof of the existence of an
unknown will executed by Simeon. Thus, pursuant to Art. 1056, Helen cannot belatedly execute an
instrument which has the effect of revoking or impugning her previous acceptance of her 1/2 share
of the subject property from Simeon's estate. Hence, the two (2) quitclaim deeds which she
executed 11 years after she had accepted the inheritance have no legal force and effect.

 Nevertheless, the nullity of the repudiation does not ipso facto operate to convert the parcels of
land into res nullius to be escheated in favor of the Government. The repudiation being of no effect
whatsoever the parcels of land should revert to their private owner, Helen, who, although being an
American citizen, is qualified by hereditary succession to own the property subject of the litigation

 WHEREFORE, the assailed Decision of the CA which sustained the Decision of the RTC of
Malolos, Bulacan, dismissing the petition for escheat is AFFIRMED. No costs. SO ORDERED.

8. ACCRA v CIR

Facts:
 During the 1987 national elections, petitioners, who are partners in the Angara, Abello, Concepcion,
Regala and Cruz (ACCRA) law firm, contributed P882,661.31 each to the campaign funds of
Senator Edgardo Angara, then running for the Senate.
 In letters dated April 21, 1988, the Bureau of Internal Revenue (BIR) assessed each of the
petitioners P263,032.66 for their contributions.
 On August 2, 1988, petitioners questioned the assessment through a letter to the BIR.
 They claimed that political or electoral contributions are not considered gifts under the National
Internal Revenue Code (NIRC), and that, therefore, they are not liable for donor’s tax.
 The claim for exemption was denied by the Commissioner.
 On September 12, 1988, petitioners filed a petition for review with the CTA, which was decided on
October 7, 1991 in favor of the petitioners.
 On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20, 1994.

Issue:
WON the petitioners’ contributions to the campaign funds of Angara donations subject to donor’s tax?

Ruling:
 YES
 Section 91 of the National Internal Revenue Code (NIRC) reads:
o There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift, a tax, computed as provided in Section 92
o The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or personal, tangible or intangible.
 The NIRC does not define transfer of property by gift.
 However, Article 18 of the Civil Code, states:
o In matters which are governed by the Code of Commerce and special laws, their deficiency
shall be supplied by the provisions of this Code.
 Thus, reference may be made to the definition of a donation in the Civil Code.
 Article 725 of said Code defines donation as:
o . . . an act of liberality whereby a person disposes gratuitously of a thing or right in favor of
another, who accepts it.
  Donation has the following elements:
a. The reduction of the patrimony of the donor;
b. The increase in the patrimony of the donee; and,
c. The intent to do an act of liberality or animus donandi

Application:
 The present case falls squarely within the definition of a donation.
 Petitioners, the late Manuel G. Abello, Jose C. Concepcion, Teodoro D. Regala and Avelino V.
Cruz, each gave P882,661.31 to the campaign funds of Senator Edgardo Angara, without any
material consideration.
 All three elements of a donation are present.
 The patrimony of the four petitioners were reduced by P882,661.31 each.
 Senator Edgardo Angara’s patrimony correspondingly increased by P3,530,645.24
 There was intent to do an act of liberality or animus donandi was present since each of the
petitioners gave their contributions without any consideration.
 Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and
unambiguous, thereby leaving no room for construction.
 In Rizal Commercial Banking Corporation v. Intermediate Appellate Court the Court enunciated:
o It bears stressing that the first and fundamental duty of the Court is to apply the law.
o When the law is clear and free from any doubt or ambiguity, there is no room for
construction or interpretation.
o As has been our consistent ruling, where the law speaks in clear and categorical language,
there is no occasion for interpretation; there is only room for application
o Where the law is clear and unambiguous, it must be taken to mean exactly what it says
and the court has no choice but to see to it that its mandate is obeyed
o Only when the law is ambiguous or of doubtful meaning may the court interpret or construe
its true intent.
o Ambiguity is a condition of admitting two or more meanings, of being understood in more
than one way, or of referring to two or more things at the same time.
o A statute is ambiguous if it is admissible of two or more possible meanings, in which case,
the Court is called upon to exercise one of its judicial functions, which is to interpret the law
according to its true intent.

Sub Issue:
WON the purpose for their contribution, which was to help elect a candidate, negates donative intent

Ruling:
 NO
 Since animus donandi or the intention to do an act of liberality is an essential element of a donation,
petitioners argue that it is important to look into the intention of the giver to determine if a political
contribution is a gift.
 Petitioners’ argument is not tenable.
 First of all, donative intent is a creature of the mind.
 It cannot be perceived except by the material and tangible acts which manifest its presence.
 This being the case, donative intent is presumed present when one gives a part of one’s patrimony
to another without consideration.
 Second, donative intent is not negated when the person donating has other intentions, motives or
purposes which do not contradict donative intent.
 This Court is not convinced that since the purpose of the contribution was to help elect a candidate,
there was no donative intent.
 Petitioners’ contribution of money without any material consideration evinces animus donandi.
 The fact that their purpose for donating was to aid in the election of the donee does not negate the
presence of donative intent.

Sub Issue no. 2:

WON the definition of an electoral contribution under the Omnibus Code is different from a taxable gift

Ruling:
 NO
 Petitioners maintain that the definition of an electoral contribution under the Omnibus Election Code
is essential to appreciate how a political contribution differs from a taxable gift.
 Section 94(a) of the said Code defines electoral contribution as follows:
o The term “contribution” includes a gift, donation, subscription, loan, advance or deposit of
money or anything of value, or a contract, promise or agreement to contribute, whether or
not legally enforceable, made for the purpose of influencing the results of the elections but
shall not include services rendered without compensation by individuals volunteering a
portion or all of their time in behalf of a candidate or political party.
o It shall also include the use of facilities voluntarily donated by other persons, the money
value of which can be assessed based on the rates prevailing in the area.
 Since the purpose of an electoral contribution is to influence the results of the election, petitioners
again claim that donative intent is not present.
 Petitioners attempt to place the barrier of mutual exclusivity between donative intent and the
purpose of political contributions.
 This Court reiterates that donative intent is not negated by the presence of other intentions, motives
or purposes which do not contradict donative intent.
 Petitioners would distinguish a gift from a political donation by saying that the consideration for a
gift is the liberality of the donor, while the consideration for a political contribution is the desire of
the giver to influence the result of an election by supporting candidates who, in the perception of
the giver, would influence the shaping of government policies that would promote the general
welfare and economic wellbeing of the electorate, including the giver himself.
 Petitioners’ attempt is strained.
 The fact that petitioners will somehow in the future benefit from the election of the candidate to
whom they contribute, in no way amounts to a valuable material consideration so as to remove
political contributions from the purview of a donation.
 Senator Angara was under no obligation to benefit the petitioners.
 The proper performance of his duties as a legislator is his obligation as an elected public servant
of the Filipino people and not a consideration for the political contributions he received.
 In fact, as a public servant, he may even be called to enact laws that are contrary to the interests
of his benefactors, for the benefit of the greater good.
 In fine, the purpose for which the sums of money were given, which was to fund the campaign of
Senator Angara in his bid for a senatorial seat, cannot be considered as a material consideration
so as to negate a donation.

Other discussions
 Petitioners raise the fact that since 1939 when the first Tax Code was enacted, up to 1988 the BIR
never attempted to subject political contributions to donor’s tax.
 They argue that:
o . . . It is a familiar principle of law that prolonged practice by the government agency
charged with the execution of a statute, acquiesced in and relied upon by all concerned
over an appreciable period of time, is an authoritative interpretation thereof, entitled to great
weight and the highest respect. . . .
 This Court holds that the BIR is not precluded from making a new interpretation of the law,
especially when the old interpretation was flawed.
 It is a well-entrenched rule that. . . erroneous application and enforcement of the law by public
officers do not block subsequent correct application of the statute (PLDT v. Collector of Internal
Revenue, 90 Phil. 676)
9. CIR v BF Goodrich

Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc., G.R. No. 104171, February 24,
1999

Ponente: Panganiban, J.

Nature of the case: This case is a petition for review on certiorari of a decision of the CA, which reversed
the CTA – which upheld the BIR commissioner’s assessments made beyond the five-year statute of
limitations

FACTS:
 Private Respondent BF Goodrich Phils., Inc. (now Sime Darby International Tire Co., Inc.), was
an American-owned and controlled corporation previous to July 3, 1974
 As a condition for approving the manufacture by private respondent of tires and other rubber
products, the Central Bank of the Philippines required that it should develop a rubber plantation
o In compliance with this requirement, private respondent purchased from the Philippine
government in 1961, under the Public Land Act and the Parity Amendment to the 1935
Constitution, certain parcels of land located in Tumajubong, Basilan, and there developed
a rubber plantation
 More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating that:
o Upon the expiration of the Parity Amendment on July 3, 1974, the ownership rights of
Americans over public agricultural lands, including the right to dispose or sell their real
estate, would be lost
 On the basis of this Opinion, private respondent sold to Siltown Realty
Philippines, Inc. on January 21, 1974, its Basilan landholding for P500,000
payable in installments
 In accord with the terms of the sale, Siltown Realty Philippines, Inc. leased the
said parcels of land to private respondent for a period of 25 years, with an
extension of another 25 years at the latter’s option
 Based on the BIR’s Letter of Authority No. 10115 dated April 14, 1975, the books and accounts of
private respondent were examined for the purpose of determining its tax liability for taxable
year 1974
o The examination resulted in the April 23, 1975 assessment of private respondent for
deficiency income tax in the amount of P6,005.35, which it duly paid

 Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and
Memorandum Authority Reference No. 749157 for the purpose of examining Siltown’s
business, income and tax liabilities
o On the basis of this examination, the BIR commissioner issued against private respondent
on October 10, 1980, an assessment for deficiency in donor’s tax in the amount of
P1,020,850, in relation to the previously mentioned sale of its Basilan landholdings to
Siltown
o Apparently, the BIR deemed the consideration for the sale insufficient, and the
difference between the fair market value and the actual purchase price a taxable
donation
o Private respondent contested this assessment [in a letter dated November 24, 1980]
 On April 9, 1981, it received another assessment dated March 16, 1981, which increased to
P1,092,949 the amount demanded for the alleged deficiency donor’s tax, surcharge, interest and
compromise penalty
 Private respondent appealed the correctness and the legality of these last two assessments to the
CTA

CTA Ruling: [dated March 29, 1991]

 Modified the decision of CIR in assessing deficiency gift tax
  Ordered private respondent to pay the amount of P1,311,179.01 plus 10% surcharge and 20%
annual interest from March 16, 1981 until fully paid provided that the maximum amount that may
be collected as interest on delinquency shall in no case exceed an amount corresponding to a
period of three years xxx
 Undaunted, private respondent elevated the matter to CA

CA Ruling:
 Reversed the CTA ruling
 What is involved here is not a first assessment; nor is it one within the 5-year period stated in
Section 331 xxx
 Since what is involved in this case is a multiple assessment beyond the five-year period, the
assessment must be based on the grounds provided in Section 337, and not on Section 15 of the
1974 Tax Code
 Section 337 utilizes the very specific terms “fraud, irregularity, and mistake.”
 Falsity does not appear to be included in this enumeration.
 Falsity suffices for an assessment, which is a first assessment made within the five-year period
 When it is a subsequent assessment made beyond the five-year period, then, it may be validly
justified only by “fraud, irregularity and mistake” on the part of the taxpayer
 Hence, this petition.

Petitioner CIR’s contention: [Anent the FIRST ISSUE]

 That CA erred in reversing the CTA on the issue of prescription, because its ruling was based on
factual findings that should have been left undisturbed on appeal, in the absence of any showing
that it had been tainted with gross error or grave abuse of discretion

NOTE: Prescription is the crucial issue in the resolution of this case.

ISSUE 1: Whether or not the petitioner CIR’s right to assess herein deficiency donor’s tax has indeed
prescribed.

RULING 1:
 Yes. The petitioner CIR’s right to assess herein deficiency donor’s tax has indeed prescribed.
o True, the factual findings of the CTA are generally not disturbed on appeal when supported
by substantial evidence and in the absence of gross error or grave abuse of discretion
o However, the CTA’s application of the law to the facts of this controversy is an altogether
different matter, for it involves a legal question
o There is a question of law when the issue is the application of the law to a given set of facts
o On the other hand, a question of fact involves the truth or falsehood of alleged facts
o In the present case, the CA ruled not on the truth or falsity of the facts found by the CTA,
but on the latter’s application of the law on prescription

 Section 331 of the NIRC provides: [now, Section 203 of the NIRC]
o “SEC. 331. Period of limitation upon assessment and collection.– Except as provided
in the succeeding section, internal-revenue taxes shall be assessed within five years after
the return was filed, and no proceeding in court without assessment for the collection of
such taxes shall be begun after expiration of such period. For the purposes of this section,
a return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day: Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.”

Application:
 Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and the
March 1981 assessments were issued by the BIR beyond the five-year statute of limitations
 The Court has thoroughly studied the records of this case and found no basis to disregard the five-
year period of prescription.
  As succinctly pronounced by CA:
o The subsequent assessment made by the respondent Commissioner on October 10, 1980,
modified by that of March 16, 1981, violates the law
o Involved in this petition is the income of the petitioner for the year 1974, the returns for
which were required to be filed on or before April 15 of the succeeding year
o The returns for the year 1974 were duly filed by the petitioner [herein private respondent],
and assessment of taxes due for such year – including that on the transfer of properties on
June 21, 1974 – was made on April 13, 1975 and acknowledged by Letter of Confirmation
No. 101155 terminating the examination on this subject
o The subsequent assessment of October 10, 1980 modified, by that of March 16, 1981,
was made beyond the period expressly set in Section 331 of the National Internal Revenue
Code xxx

 Petitioner relies on the CTA Ruling – which includes among others:

o “Falsity is what we have here, and for that matter, we hasten to add that the second
assessment (March 16, 1981) of the Commissioner was well-advised having been made
in contemplation of his power under Section 15 of the 1974 Code (now Section 16, of
NIRC) to assess the proper tax on the best evidence obtainable “when there is reason to
believe that a report of a taxpayer is false, incomplete or erroneous”
 More, when there is falsity with intent to evade tax as in this case, the ordinary
period of limitation upon assessment and collection does not apply so that contrary
to the averment of petitioner, the right to assess respondent has not prescribed.
xxx
o It considered the transfer through sale of the parcels of land in Tumajubong, Lamitan,
Basilan in favor of Siltown Realty for the sum of only P500,000 – a falsity
 The lands had been sworn to under PD No. 76 (Dec. 6, 1972) as having a value
of P2,683,467

PURPOSE OF PROVIDING A STATUTE OF LIMITATIONS

 For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in the collection of taxes.
 Thus, the law on prescription, being a remedial measure, should be liberally construed in order to
afford such protection
 As a corollary, the exceptions to the law on prescription should perforce be strictly construed.

 On the other hand, Section 15 of the NIRC provides that “When a report required by law as a
basis for the assessment of any national internal revenue tax shall not be forthcoming within the
time fixed by law or regulation, or when there is reason to believe that any such report is false,
incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on
the best evidence obtainable.”
o Clearly, Section 15 does not provide an exception to the statute of limitations on the
issuance of an assessment, by allowing the initial assessment to be made on the basis
of the best evidence available.
o Having made its initial assessment in the manner prescribed, the commissioner could not
have been authorized to issue, beyond the five-year prescriptive period, the second and
the third assessments under consideration before us.

 Nor is petitioner’s claim of falsity sufficient to take the questioned assessments out of the ambit of
the statute of limitations.
 The relevant part of then Section 332 of the NIRC [now, Section 222 of NIRC], which enumerates
the exceptions to the period of prescription, provides:
o “SEC. 332. Exceptions as to period of limitation of assessment and collection of
taxes. – (a) In the case of a false or fraudulent return with intent to evade a tax or of a
failure to file a return, the tax may be assessed, or a proceeding in court for the collection
 of such tax may be begun without assessment, at any time within ten years after the
discovery of the falsity, fraud, or omission: x x x”

 While petitioner insists that private respondent committed “falsity” when it sold the property for a
price lesser than its declared fair market value, this fact alone did not constitute a false return
which contains wrong information due to mistake, carelessness or ignorance.
 It is possible that real property may be sold for less than adequate consideration for a bona fide
business purpose;
o In such event, the sale remains an “arm’s length” transaction.

 In the present case, the private respondent was compelled to sell the property even at a price less
than its market value, because it would have lost all ownership rights over it upon the expiration of
the parity amendment.
o In other words, private respondent was attempting to minimize its losses.
o At the same time, it was able to lease the property for 25 years, renewable for another 25.
o This can be regarded as another consideration on the price.

 Furthermore, the fact that private respondent sold its real property for a price less than its declared
fair market value did not by itself justify a finding of false return.
o Indeed, private respondent declared the sale in its 1974 return submitted to the BIR.
o Within the five-year prescriptive period, the BIR could have issued the questioned
assessment, because the declared fair market value of said property was of public record.
o This it did not do, however, during all those five years.

 Moreover, the BIR failed to prove that respondent’s 1974 return had been filed fraudulently.
 Equally significant was its failure to prove respondent’s intent to evade the payment of the correct
amount of tax
 Ineludibly, the BIR failed to show that private respondent’s 1974 return was filed fraudulently with
intent to evade the payment of the correct amount of tax

DONOR’S TAX vs. CAPITAL GAINS TAX

 Moreover, even though a donor’s tax, which is defined as “a tax on the privilege of transmitting
one’s property or property rights to another or others without adequate and full valuable
consideration,” is different from capital gains tax, a tax on the gain from the sale of the taxpayer’s
property forming part of capital assets, the tax return filed by private respondent to report its income
for the year 1974 was sufficient compliance with the legal requirement to file a return
 In other words, the fact that the sale transaction may have partly resulted in a donation does not
change the fact that private respondent already reported its income for 1974 by filing an
income tax return

ISSUE 2: Whether or not the herein deficiency donor’s tax assessment for 1974 is valid and in accordance
with law.

RULING 2:
 Based on the foregoing, a discussion of the validity and legality of the assailed assessments has
become moot and unnecessary.
 Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return
with the intent to evade tax, or that it had failed to file a return at all, the period for assessments
has obviously prescribed.
 Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers,
considering that the prescriptive period was precisely intended to give them peace of mind.

Disposition: Petition denied.