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Commissionerof Internal

Revenue vFilinvest

DevelopmentCorporation

Petitioner:Commissioner of



Internal Revenue

Respondent:

Filinvest

Development

Corporation

July 19, 2011

Emergency

Recit:



FDC owns 80%

of the

outstanding

shares of FAI

and 67.42% of

FLI. FDC and

FAI entered into

a



Deed of

Exchange with

FLI where the

former will

transfer parcels

of land to the

latter and in

exchange, shares



of stock

of FLI were

issued to FDC

and FAI. BIR

assessed both

FDC and FAI for

deficiency taxes.

One of the bases



for the

assessment is the

cash advances

FDC extended in

favor of its

affiliates. The

CIR argued that

they were



interest free

despite the

interest bearing

loans it obtained

from banking

institutions.

I:

(see issue 1)



R:

CIR's power to

distribute,

apportion or

allocate gross

income or

deductions

between or



among

controlled

taxpayers may

be exercised as

long as

the controlled

taxpayer's

taxable income



is not reflective

of that which it

would have

realized had it

been dealing at

arm's

length with an

uncontrolled



taxpayer, the

CIR can make

the necessary

rectifications in

order to prevent

evasion of taxes.

However, the to

power to impute



"theoretical

interests" is not

included in the

broad parameters

of CIR. There is

no

evidence of

actual or



possible showing

that the advances

FDC extended to

its affiliates had

resulted to the

interests

subsequently

assessed by the



CIR.

Facts:

(You’ll read this

case again under

a different topic)•

The owner of

80% of theoutstanding



shares of

respondent

Filinvest

Alabang, Inc.

(FAI),

respondent

Filinvest

Development



Corporation

(FDC) is a

holding

company which

also owned

67.42% of the

outstanding

shares of



Filinvest Land,

Inc. (FLI).•

FDC and FAIentered into a

Deed ofExchange with

FLI whereby theformer both



issued to FDC

and FAI. As a

result

of the exchange,

FLI’s ownership

structure was

changed.•

FLI requested a



ruling from BIR

to the effect that

no gain or loss

should be

recognized in the

aforesaid

transfer

of real



properties.

Acting on the

request, the BIR

issued a ruling,

finding that the

exchange is

among those

contemplated



under Sec 34 (c)

(2) of the old

NIRC which

provides that

“(n)o gain or

loss shall be

recognized if

property is



transferred to a

corporation by a

person in

exchange for a

stock in such

corporation of

which as a

result of such



exchange said

person, alone or

together with

others, not

exceeding four

(4) persons,

gains

control of said



corporation."•

FDC received

from the BIR aFormal Notice of

Demand to paydeficiency

income anddocumentary



stamp

taxes, plus

interests and

compromise

penalties. The

deficiency taxes

were assessed on

the taxable gain



supposedly

realized by FDC

from the Deed of

Exchange it

executed with

FAI and FLI, on

the dilution

resulting



from the

Shareholders’

Agreement FDC

executed with

RHPL as well as

the “arm’s-

length” interest

rate and



documentary

stamp taxes

imposable on the

advances FDC

extended to its

affiliates.o

FAI similarly



received from

the BIR a

Formal Letter of

Demand for

deficiency

income taxes.•

Both FDC andFAI filed their



respective

requests for

reconsideration/p

rotest. The CIR

failed to resolve

their

request thus,

FDC and FAI



filed a petition

for review with

the CTA

pursuant to Sec

228 of the 1997

NIRC.o

They allege that



no taxable gain

should have been

assessed from

the subject Deed

of Exchange

since FDC and

FAI collectively



gained further

con

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