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A shaman’s shambolic sham

(Article published in the February 25, 2002 issue of TODAY, Business Section)

A tax expert recently testified before the Senate Committee on Finance, where the PEACE bonds’ mud-throwing contest had transferred venue following the termination of the Commission on Appointments’ hearings on Secretary Camacho’s nomination, and was reported to have characterized the issuance as a "sham transaction" and a "raid on the treasury". Undoubtedly knowledgeable on shams and raids, he, of national renown, admittedly knows whereof he speaks.

The claim of "raid on the treasury" was promptly described by a former colleague of his in a fallen regime as a "gross simplification", obviously a euphemism for an unrefined misrepresentation. Speaking before a press conference to ensure that he was heard, all the wiser now after not having been allowed to testify before the Commission on Appointments, he pointed out that the tax expert’s computations seemed to have forgotten that the proper way to determine tax loss was to compute a corporate taxpayer’s savings on the PEACE bonds on the basis of net and not on gross income.

Not one, however, has talked about the "sham" argument. Thus, this unexpert foray into the subject.


"Sham transaction", like "step transaction", "equitable recoupment", or "de minimis benefits", is one of a tax practitioner’s many verbal short cuts used in talking with his kind and in reminding those who do not live in the same stratosphere that tax law is not for the ignorant layman. In essence, it means a matter that lacks a business purpose and a mere formality. It is therefore an attribution of an abnormality, since, in the course of normal human behavior, people are supposed to have some business purpose and act on substance rather than form. Thus, in fora less prone to quick denunciations, more responsible people have been less rash in to accepting such allegation.

Two decisions on the Court of Tax Appeals, besides being models of sobriety, indicate to us what to understand by a "sham transaction". In the case of Hawaiian-Philippine Company v. Commissioner (C.T.A. Case No. 4400, promulgated 09 November 1994), the Bureau of Internal Revenue (BIR) sought to disallow deductions claimed by Hawaiian-Philippine Company for management fees it paid to its mother, the Jardine Davies, Inc. The reason, according to the BIR, is that Jardine Davies, Inc. owns 88 percent of Hawaiian-Philippines, and therefore, by that sole fact, the management arrangement, between mother and subsidiary, was a "sham" and designed only to minimize taxes. The tax court, however, after noting that the fees were for services actually rendered and were duly accounted for and tax paid in the income and contractor’s tax returns of Jardine Davies, rejected the argument.

 About four years later, the same court decided Chemical Industries of the Philippines, Inc. v. Commissioner (C.T.A. Case No. 5257, promulgated 29 October 1998) in the same vein. The Commissioner tried to disallow interest expenses claimed by the petitioner on an obligation owed to a subsidiary. The tax court, observed, however that the payments for above-board debts and that the recipient of the payments duly reported them in its income tax return and paid the tax thereon. The court rejected the sham accusation, but, in a twist of fate, nevertheless correctly disallowed the deduction on the basis of a provision in the tax code expressly disallowing interest payments between related taxpayers.

In both cases, the sham transaction argument was raised on the basis of relation that was claimed, ipso facto, to have infected the transaction. In both cases, the simplistic argumentation was rejected on account of a showing the contracts were at arms’ length and that the taxes were duly paid for. In the PEACE bonds extravaganza, a mere accident of birth appears to be the only alibi for all the hysteria and a formal expression of willingness, articulated by Rizal Commercial Banking Corp.’s chairman to pay for all the taxes correctly due on the transaction, stand in the way of the tax expert’s accusation.

What is left as obviously sham about the whole PEACE bonds transaction is the "sham transaction" indictment itself. That is just as sham as the falsified election results which were confessed, on national television, by a heel turned hero turned heel again, some sixteen years ago this month.