TL;DR

The Supreme Court affirmed that a sale of shares of stock for less than their fair market value is subject to donor’s tax, even without donative intent. This ruling clarifies that the difference between the fair market value and the selling price is considered a gift by law, regardless of whether the seller intended to make a donation. The decision impacts shareholders selling stock, particularly in private transactions, as it emphasizes the importance of adhering to fair market valuations to avoid unintended tax liabilities. It reinforces the Commissioner of Internal Revenue’s authority to determine fair market value and clarifies the jurisdiction of the Court of Tax Appeals (CTA) over disputes involving tax rulings and regulations.

Can a Bargain Stock Sale Trigger Unexpected Taxes?

This case revolves around a sale of shares by The Philippine American Life and General Insurance Company (Philamlife) in Philam Care Health Systems, Inc. The sale price was lower than the book value of the shares, leading the Commissioner of Internal Revenue to impose a donor’s tax on the difference. Philamlife contested this assessment, arguing that there was no donative intent and that the sale was a legitimate business transaction. The central legal question is whether a sale of stock for less than its fair market value can be considered a taxable gift, even in the absence of an intention to donate.

The core of the dispute lies in the interpretation of Section 100 of the National Internal Revenue Code (NIRC), which addresses transfers for less than adequate consideration. The provision states:

SEC. 100. Transfer for Less Than Adequate and full Consideration. – Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.

The Commissioner relied on this provision, along with Revenue Regulation 6-2008 (RR 6-2008), which defines the fair market value of shares of stock not traded on a local stock exchange as their book value. Philamlife argued that the absence of donative intent and the fact that the sale was conducted through competitive bidding should exempt the transaction from donor’s tax. The Court, however, rejected this argument, emphasizing that Section 100 of the NIRC deems the difference between the fair market value and the consideration as a gift, regardless of actual intent.

A critical procedural issue was which court had jurisdiction to hear the appeal. Philamlife initially filed a petition with the Court of Appeals (CA), but the CA dismissed it for lack of jurisdiction, stating that the Court of Tax Appeals (CTA) was the proper venue. The Supreme Court affirmed the CA’s decision, clarifying that the CTA has jurisdiction over “other matters” arising under the NIRC, including appeals from rulings of the Secretary of Finance on interpretations of tax laws. This ruling underscores the specialized nature of the CTA in resolving tax-related disputes, even when the validity of administrative rules or regulations is challenged.

The Supreme Court addressed the issue of whether the CA petition should be dismissed, pointing out that taxpayers face uncertainty regarding the appropriate appeal method. The court clarified that while the validity of an administrative rule is challenged, the CTA has jurisdiction, as the court now has the power of certiorari. Therefore, the CTA can rule on the validity of a revenue regulation or circular, as long as it is within its appellate jurisdiction. Furthermore, the court emphasized that Section 7(c.2.2) of RR 06-08 does not alter Section 100 of the NIRC but provides parameters for determining the “fair market value” of a sale of stocks, pursuant to the Commissioner’s powers. It follows that the price difference in the stock sale is subject to donor’s tax and that RMC 25-11, which called for the strict application of Sec. 100, was not being applied retroactively in contravention to Sec. 246 of the NIRC.

FAQs

This case serves as a reminder of the importance of accurate valuation in stock sales and the potential tax implications of transactions that deviate from fair market value. It also highlights the CTA’s role as the primary forum for resolving tax disputes, even when constitutional or validity questions are raised.

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Philippine American Life vs. Secretary of Finance, G.R. No. 210987, November 24, 2014