Court of Tax Appeals
0{Evublic of the Philippine? Coury of Tax Appeals et Equipment & vs. Case No, et al.
{EVUBLIC OF THE PHILIPPINE?
COURY OF TAX APPEALS
et EQUIPMENT & versus C.T.As CASE NO, 1795 LITERAL, REVERT Al a ee = ; :
DECTSIOR
Appest fven-e @eeision of respondent Con missioner of Interrel Revenue holding petitioner - ‘United "quipment & Supply Commany Liable in the amounts of #10%854.26 and 034291.02 os additions? tex on unreasons ble secusulation of surplus for the years 1957 and 1958, respectively, levied and _ Amposed under Seetion 25 of the "ations? Interna?
Revenue Code, : | ~ . ection 25(a) of the Revenue Cote, with certain ” _ exceptions not herein applicable, levies an eadi= tone? tax tipon @ corporstion formed or availed of for the purpese, of preventing the imposition of the incdme tax upon its shareholders or the share« - holders of any other corporation throngh the medtum of permitting earnings or profits te accunulsete | insteed of being divided or distrituted snd Seo- tion 25(e) provides that the feet that earnings or 183 pecis1os ws a CTA CAST. NO, 995 wei profits of a corporation are poeut tae to accumulate : beyond the reesonable needs of the “business is - daterntinative of the purpose to avoid the tax upon the shareholders, unless the corporation shell — . prove to the contrary by o elear preponderance of the. ‘evidence. (See Destilerias Ayala, Ine. vs Commis» sioner of Internal Revenue, Coles Case Noe 1664, Dees 275 1969, cert. denied in GR, Bow L-31700, Moreh 3, 197%) Le Consequently, the @ecision in this “ease depends upon whether the finding by respondent thet petitioner uocuntLe ted earnings beyond the reasommble needs of the business finds support in the evidences the facts of the ease ore not Ateputed and nay ' de briefly stated as follows:
Petitioner is a domestic corporation engaged in the. business of selling automotive spare parts ané accessories since 1946 on ‘January Vy 1963 “responéent made an assessnent againat petitioner in the amount of Piby15ie20 allegedly revresenting incowe tax Seficiency for the years 1957 and 19585 eouputed as follewe: + “ b
AST 1 59662457
a sl i sore > 8 coe 6 + + ge tien ah of the rTax Codes « a tneone. pe dh nil investigations » « » Rada $e month bie sé *heen TORAL ANOORE Ae eet :
* 184 DECISION . - CTA CASE HO, 1795 . a fet ineone return ss: ® 135943090 _ tesa one per return » & 35 F'30 - tion 2% of the ee Codes « ep mg EA pep aeaees Ibe ches Adde 28 monthly interest from | | TOTAL anouer bie c é COLINCTIBiR,. 5 a P On Merch 7, 1963 petitioner requested withdrawel ' of the assessnuent for the reason that it had paid all its income tax Mebilities for 1957 and 1958, ane to gonsider the matter closed, In reply thereto, re- “spordent wrote petitioner a letter dated May 1%, 1963, clarifying that the aforesaid amounts re- | present surtax liabilities for 1957 and 1998 under _ Seotion 25 of the National Interns) Revenue Code | (instesd of Seetion EN as stated in the assessnent) on the ground that the petitioner hed prevented _ the imposition of the Ineome tax upon its shareholders through the medium of permitting its gains and profits for the sald years to scounulate beyond the reason- able needs of the business instead of being divided and distributed, | .
Insisting that ft is not also Mable for the said surtax undér Section 25 of the Cote, petitioner, % on June 6, 1963, requested reinvestigation of the case and the withdrawal of the avsessment. .In considers ation of the approval of its request for reinventiga- tion, petittoner exeeuted on July 26, 1965.0 waiver, eh (*
DECTSION « 4 |
CTA CASE HO, 1705. . - & up te December 31, 1969, of its right to the defense _ of preseription under the statute of limitations | provided in Seetions 331 and 332 of the National - Internal Revenve Codes Accordingly, @ reinvestiga- tion of the ease was conducted. On July 2fy 1966, however, respondent denied vetitioner's request for — withdrawal of the assesement and reiterated the demané for the paynent of the surtax liability, Con _ of the said dental was received by petitioner on August 6, 1966. -Prom this decision, petitioner appealed to this Court. | The issves raised by the parties are as ' follows: . .
| — Whether or not petitdoner had unreasonably ted ae or surplus during the years 1957 and 1958 — and, therefore rg to ad- ditional tax of 2 imposed under Sec tion 25 of the Mati Interne! Re- , — respon © asse am aroaheae counula prescribed.
Another the acoumlated reserves exceeded the — reasonable needs of the business gannot be deter= mined from s consi¢eration of » single factors. It is necessary to consider and view a11 the facte and etreunstances in the light of the conditions pre- veiling at the time the surplus, profits were ac~ cumulated, As stated. by this Court in the eases of -prezsr ow - OTA Case Ho, 1795 Wentla Wine Merchant’ Ines vs Comaissioner pf In ternal Revenvey CoTehs Case low M15, Feds 26, 1969 and Destilerias Ayale, Ince Ve» Commissioner of Internal Revenues sunray the touehstone of lability for said tax is the purpose or intent de}.tng the accunviation of profits and earnings which is the avoldange of the payment of ineone tax by the sharee holders or members. Ase prectical matter, liability for the tax unter Section 25 of the Code hinges on whether the corporation has accumulated earnings tn excess of the ressoneble needs of the business. The | question of unreasonable or reasonable accumulation of profits or surplus ts one of fact. The word “reasonable” is @ relative term. “What would be reasonable in one sitoation or.for one business, might be clearly unreasonable in another.
| The feetors and circumstances. vaigh respondent | considered in reaching his conclusion are set out concisely and clearly in his detailed findings of feet as contained in the aemorandum of counsel for ‘the Government dated September fy 1971 (ore 61-925 | Cot ehe records), as follows: — | The petitioner was iSnoapporates 1947 bs Ret sheres snbseribed and ee Up at P1,00050° per « Ga 295 19 9 on waz
of Directors
' 2a its transferring 000,%° out of its P5090, 000 oc 4 1 stoek mt, eS Oe eee eee ee
DROISGLOES ~
6 Ses of #206,000,05 of Ste eure ais st taste edivug 23005000500) game reese transfer ition ander review ine 3 Rfid p Peocmber 3, 1970). - ts belanee ‘yn tee: ‘by pee Bln rece) refie petitioner's ztrong as'of Bt, ‘) a tr ty1 = *teeht pit — see r1%6 ee + ; the <aaseorment wm a i , eccunula tions ee as “ne " eesponient's po Reg gs Bal aide = si, ena be Seles “er of the notion} ‘internal feverme Codes + » Siose the finding by resvondent that peti- toner accumbleted earnings and’ profits beyond the Peasonsble needs of the business Minds sberert in , ie evidenge, the next question therefore ie wether ‘petationer nae sustattind the bution uhicis Gaon: 5 | thon 25¢e) places upct 2f to.oversine = ie ae — ae 188.
PeCisinn «
CRA. CAS Nu, 1795 stayp tan that At was avelled of Cor the orchibited ‘purpose. nck premumrtiion arises ay wirtur of the finding thst petitioner acomulatet profits beyond — - | thé Péaconable seeds of tw bisioeses As earlice steted fn thts decision, omier Seeti on 25ers. the f fest that narnings of prafits af «- corporation are tern tted ta accumtlste beyort the reasonable. necds. of the busier Se Aeterninative of the purpose te ‘aveld the tux pm shoureholierss mies the corners thon shall prove to tive eoetrony Uy » clonr pke- | ponderacer of cue evidenur., “he Jat Werefere penn pases teiel. pottteenss the duty te nagute sucks pure pave. by & clpor peependerunes of the ovidenene H Yeti Mioner- nerks to jostifty ie vemmuldtion | of aorplus nrotite on the qpound that tt bad: definite * a. on the promt ces it vas cenuprings Bt, ov Las ade ready. teen stated above, wntle ae carly 6s Becenber By 9955 v resolution via apiroved by petitioncrte | Poard of Directegs authertstag the trancter of @200, 000.00 fron the rurplus.seeount cf tae earporse tion te’ tue reserve eccount ret the eequisition of S814 leosehold rights ané inprovevertey tce amount was never epont Dor the pumpese tntended but the seme war reverte! to surplus canetine in 1j2 oF 1983.eng recaphtaliseds (Gee pie 2223) totems) , Considering: the ‘tapserof tine free 1955 when the = - , 7 f . i a ay DECISION = . va CPA CAST NO, 1795 waseniiaanedt wes . adooted ts 1963 when the anount set acide was reverted to the surplus ececunt without the plan having been put inte effect, the retention of surplus profits became unreasonable and inprorers — Mere contemplated ad@ittons or repaire do not juati- | fy accumulation of surplus: where the improvenents have not actually been nade. (Perry & Cosy Inte ve - Comatssioner of Internal Revenum, 120 Fe 24 1234) Profits may only be acoumulated for the reasonable needs of the business, and implicit 4n this ts the further requiresent of a reasonable timee There had to be sn imediste need for the funds in onder td justify. the retention of earnings, (Manila Wine ‘Merehante, Inc, v. Coumiseioner of Internal Revenue, suutas Distelerias Ayslay Ince ve Conatssioner of Internal Revenvey guoras) iq . The other ground relied upon by sotitioner in ' guetifying the accumulation of surplus is its | Glleged need for larger working capitals (1) to inereage the inventories of spare parts, (2) te cover the requirenents for the manufacture of motor vehicles — spere parts, and (3) for the operating expenses for mamnfacture. ‘while these factors: yould nereally be _eansidered as reasonable crounds for acoumulating profits, petitioner failed to present sufficient evidence in support of seid allegations, It simply Felled on the testimony of its own witness who nade the cheervation thet there we very little essh tn Vv.
e
DECISION «
CTA CASK HO, 1795 9 _ the coffers of the corporation in 1957 es wel) as in 1958 (ope 17918, totens) withovt presenting focunent- ary evidences to bolster the same, Apert fram being unsubstantiated, it fe belied by the fteures ree flected in petitioner's Statement of Income and Delance Sheet, (Mxhes 3 & 4s) As of Degesber 31, : 1957, petitioner's tote! capita] amounted to *7355= | 1056235 end af of December 314 195%, PAO 5S Its statement of Aincone showed that it hed an ‘operating expense of only P13} 913 1429 for 19574 and P1914 163.005 for 1958. Its uerehendi se in transit was valued at #6 699057 for 12, These fisures clearly indieate that oetitioner was in a strong finanetel position and hed sufficient fynas to meet the anticipated needs adverted to above. Moreover, petitioner's essh on hand end in the bank amounted _ to POS 4026450 For 1957} ond 7625607478 for 195%, while its net income amounted to 036722662 for. 19574 and F11g1%.90 for 19985 We see No reason, theres fore, for the retention of current eornings for larger working cept tele | 43 in dotesnining whether. the taxpayer for e core tain year secunutated crofits beyond the reasonable needs of its business, we aust consider not only the | undistributed earns ngs or orofits for thet year, bet . the eupyp ity if anys sa scoumulated, — assets “pmersiou = GTA CASE Ho. 4795 qo / . of the company and their liquidity, the expenditures | ’ ‘pecessary to be made to meet its financial obliga- tions and to carry on its svecessful operations 7
(YantIe Wine Merchantsy Ines vs Commissioner of In
terndl Revenue, guoras see al2d, Southland Indus- tries, Incey T.Ce Memny Docket Noe 3387, Octe 31) 1946.) The finencial history of petitioner shows that it hed accumulated prefits from 1952 to 1958 and no Aetribution of such profits was ever made to its stockholders. At the beginning of the years 19525 1953p 195M, 1955, 1956, 1957 and 1958 pett- tioner hed acerued surplus balances in the respective amounts as follows: F341,936 7%, P96 )210655, P4625 1226575 P550,009434, P53y896002, 7905276061 and 04354105236 And at the close of its operations in’ 1997 and 1958, it hed a total aggregate net av- “cumulated undistributed incomes of 9135106423 and - P1%59515.68, which sume included the amounts of PR6yS2E 062 and 11,15 9% ‘the accumolated profits under question (fzh. 6). The current assets of petia tioner in the years 1957 and 1958 are in the respect- Ave amounts of F14100,161418 ond POG4yM%9.25. Ite surrent assets included cash on hand ond in bank in the amounts of 95,026.50 and 624627078 and accounts “reeeivables in the total smounts of P&,3+%.5% and #30,213035 (Pxhse F @ b).
» 192 DFCISION = .
‘CTA CASF BO, 1795 1 Considering the aforesaid aecumulated surplus earnings in peior years, assets, including cash on hand and in bank end accounts receivabless and the expenditures necessary ‘to meet financial obligations, we gee no need for petitioner to accumulate its net earnings or profits in the years under questions Current assets compared to current Mabilities in 1957 and 1958 in the amounts of #165,257.95 and 017,567 far exceed current Liabilities. There vas a Tavorable patio of current asseta to operating exnenses and/or eurrent Liabilities. The setting of petitioner in its ove carticuler business presented & bright pioture and the xesuits of ite orerations clearly showed St0 strong ftrimotal position at , the times ~ The contention thet the accumula ardent incomes for 1957 and 1958 are very small in amounts sa¢ can easily be wired out hy uncollected aceoun's bles is urtensbles fetitioner seems to imply that the ecoumulated earnings for those yeers in the anounts of 236,836 662 and PAD 1690 are only the means avell~ able to meet its financiel needs and to carry on its business to e suceessful operation, ‘This 4s far from the truth because the sources from which funds are taken for business operations are not only fron profits but from accumulated earnings of prior years and the current assets of the business, In , 4 93 DECISION .
CTA Caer HO, 1795 12 fact, © business need not have a large ancunt'of cast at the beginning of the year to cover its onerating : expenses since this can be telen cere of by the con ? " warston of the current ‘eseets into eash, ty the real~ _ izgtion of income in the regular course of trade or bosiness and by the funde generated by the colleetion of accounts or notes receivables. (Desilan "state, “Ines v» Coumissioner of Internal Revenue, ele, ow .
Ln 22492, Sept. 5g 1967, 21 SCRA 476) | | In addition, we have in this ease, for 21) prac-_ - ties] purposes, & one-man. corporations As of 1944, petitioner was controlled by the Anerican Interna= ‘tional Commercial Conpany, a noneresifent foreign corporation of Navara, Cubay owning 95% of the anthor~ ized and subserited capital stock of petitioner consisting of 100 shares, The remaining five shares were owned by individual stoctholders owning one Share eaehe This ctreumstanee is not without signi- fleance because if the earnings of petitioner for 1997 and 1998 had been distributed, American Inter- | national Coumereial. Company would receive 95% _theréof which vould doubtless be taxable to the eon trolling corporate stockholer, Wention is made by petitioner of the disntesel by this Court of CeTA, Case Nos 1269, between the sane parties herein and allegedly saveteing the came question although pertaining to a different texable » 494 " ‘pReTsro" .
OTA CASE HO, 1795 year, as an indieation of the impropriety of re~ spondent's assessment. It aprears, however, that in CoTede Case Noy 1269 the 195% income tax liability of petitioner, subject matter of the appeal, was amieably settled by the parties. Upon motion of petitioner, to whieh ne objection was interposed by — “respondent, thim Court ¢ismissed the appeal in its resolution “ated March 37, 1968 without going into the merits of the case, Consequently, the settle- ment of the former case (C.TeA. Case Now 1269) has absolutely no bearing on the instant esse.
In the light of the above, we agree with re- spondent that the accumulation of the 1957 and 1958 ‘surplus of petitioner was in excess of the reasonable needs of its business. And petitioner having failed to overcome by a clear preponderance of the eviderce the statutory presuaption thet it was sveiled of for "the purpose of preventing the imposition of the incone tax upon ite shareholders, the imposition upon peti- tioner of the additional tax provided in ‘ection 25 of the Yationel Internal Nevenue Code ie proper.
In resisting the assesanent emounting to #10,864,26 as aceumlated earnings tex for 1957, ‘petitioner eleo invoked the defense of preseription arainst the right of respondent to assess the said tax, It is contended that since ite Anceme tox ~
DECISION ~ 7
CTA CASE NO. 1795 return for 1957 wes filed tn 1958, and with the clarification by respomient in his letter dated ‘ay 1%, 1963 that the amount sought to be collected was petitioner's surtex Mability under Section 25 rather than 2 deficiency corporate income tax under Seatian 2 of the Metions] Internal Revenue Code, the Assessment hes already preseribed under Seetion 331 of the sane Codes Section 331 of the Revenue Code providest file Buen o..
last dey: That this limitation shall not a © eases paren | io- vestigated prior to the approval of this Code.
¢ Obviously, Seetian 331 applies to asaesement of national internal revenne taxes wifeh require | the filing of returna. A return, the filing of witeh is necessary to start the running of the five-yeer period for asking an aesessnent, must be one which is required for the particular tax. Consequently, - it has been held thet the filing of an income tax return does not start the running of the statute of
DRCISION ~
CTA CAST WO, 4795 5 Lint tation for aneesmnetit of the soles tax. (Butuan Sawthitls Ince Ve Court of Tax Appeals, Ges Nae To 20604, Fabs ae, 1956, 16 SCRA 277.) Although . petitioner filed am income tax return, no return was fil9a covering its surplus profits Wiich were imoroperly aceunula ted. in fact, no return could have been filed, and the law could not pos sabi require, for cbvious reasons, ‘the filing of a return covering unreasonable accumpletion of corporate ' gurplos profits. A tex imposed upon unressonable | Beounulstion of surplus is in the nature of a penalty. (Selvering Vs Rational Grocery “ovy 30% UeBs 262.)
Tt would not be sroper for the law to compel a cor- poration to report improper secumulation of surplus, — Accordingly, Section 334 limiting the right to assers internal revenue taxes within. five years from the date the return wae filed or wat due does not apply. " Meither does Seattion 332 apply» Said Seetion ~
DECISION «
CTA CASF 80, 1795 16 tax, both the Conatesioner of Internal Revenue and the texpayer heve consented S. fuer thee to its sesersment after such the tax may be assessed at any tine pt - to the . of the peril agreed upon. The period so agreed upon ma ve rextenged by ps nag ar som ore ie ese ape of x ig pee previous= agreed vpon.e
(e) Where the sereaunnt of any 4nternalerevenue tex has been made within the period = Saektethan above- Scscsee oe Same a te bere i Steet Hag A te"begon 1) watnts ‘ae years o efter oe rst to rapt col 5 of dng part athan ee te sta estate 0 ofr of Bg pont om Fam cts eh ore ation sv ae ode The period « upon may.
in writi vy scbgeat the expiration of the peFiod previously agreed pane It will be noted that Section 332 has reference to nations? interns} revenue toxes walsh require the filing of returns, ‘This is implied from the provision that the’ ten-year period for assessment — erecified therein treats of the filing of a false or fraudulent return or of a fatJpre to file « return. There ean be no failure or omlagion to file a re- . turn where no return is required to be filed by lew or by regulations. It is, therefore, our opinion thet the ten-year period for making en assessment _ under Seetion 332 does not apply to internal revenne taxes which do not require the filing of a returns 198
DECISION «
CTA CAST HO, 1795 17 “Xt 1s well settled that limitations upon the rteht of the government to pesess and collect tenes will not be oresumed in the absence of clear legise lation to the contrary. The existence of a tine limit beyand wileh the government way recover un~ paid texes Ye purely dependent upon sone express statutory provision. {51 Ams Jor, 8673 10 Mertens, Law of Federal Income Taxation, Pars 57202.) “It followa thet in the ebsener of exoress statutory provision, the right of the government te srsess unpaid taxes is imprescriptible. Since there 1s no express statutory provision limiting the right of the Comsissioner ef Internal Revenue to assess the tax on unressanable accumulation of surples provides : in ection 25 of the Revenue Code, said tax may be assessed at any time. a We Tind, however that a , ativtahe was commit ted in the process aprlied by respondent in the asseeo- ment of the tex in questions In determining whether “accumulations of qarnings or profits in a pertieular ‘yoar are within the reasonable needs of a sorporation, | it 4s necessary to take into account prior sccumla- tions, since seeunvlations prior to the year in- volved may have been sufficient to cover the busi- ness needs and ad@itional sccumuletions during the year involved would net reseseatiy be necessary.
PRCISION «
CTA CASF NO, 1795 8 * (asilon Cetaten, Ines ve Commissioner of Internal — Revenue, auncas Destilerias Ayala, Ine, v. Comise stoner of Internal Nevenue, suuta.) Respondent — covered the period 1957=1958 in his assessment, which ere also the texable years under review, and assested the 25% surtax wpon the acounn lation of . profits as of the end of each rerticular year ~ 1957 and 1958 « instead of the accumulation of earnings outstanding as of the end of the period covered, or ae of December By 19586 Sinee previous eccummle. tions should elways be considered in determining un-, “the ecousulstion of profits as of the end of Decem — ber 31) 1957 should therefore be added to the ace cumlsted eurnings at the end of December 31, 1958 to errive at the esccunuletian of surplus outstanding as of the end of the period under reviews Thus, _the 25% surtax assessed for the year 1958 should | be besed on sccumulated curplus in 1957 in the ancunt Of 36,828.62 plus the scounulsted earnings in 1950 (OF 119154690, or & total of M¥7,963—52y sinee this sum represents the surplus unréasonably acousulated | ‘during the period involved in responient's azsess- «ent. with respect to the aceuniletions pricr te 19575 we cannot, however, take then into considera» tion for purposes of A asain the <seameain prorite | CTA CASE WO, 1795 4 during the period under review because the 25% sure tax assessed by respondent on May i, 1963 48 only | upon sceumutations of profits as of 1957 and 1958. They are not therefore covered by this apreals : Accordingly, the 25% surtex due on the unreasonable scemmlation of surplus of petitioner for the years 1957 and 1958 is #11,995.88, computed as follows.
Sur unreasonably scoumula Ce ee ee “Serene .62 oe es ® @ © # 8 © mw dg 17020 WI"RRPORE, the decision appealed from ig hereby modified, Petitioner is ordered to pay respondent ‘Comminsioner of Internal lievenve or his duly avthor- ~ §ged collection agent the sum of £11,995.98 within ‘thirty (30) days from the date this decision be- - comes final, Costs against petitioner. — SO GRDFA"D. r Gueson City, Coteber 30, 1974s ; Presiding Judge we CS .
wine Bs ALVARNS | i,