Republic of the Philippines Court of Tax Appeals Quezor City Pacita Soriano, Inc. vs. ~- the Commissioner of Internal Revenue

DECISION

Petition to review and set aside the decision dated January 9, 1985 of respondent Commissioner of Internal Revenue denying the protest of petitioner Pacita Soriano, Inc., and a to pay the mL B540,416.91 and B102,470.04, a onor's gift tax an@ 25% surtax for improper accumulation of profit for fiscal year ended June 30, 1975, computed as follows:

1. GA-4522-75/80:

Fair market value of real Properties sold .s.tseesad. BI,382',6159\.30

Less: Consideration of the

sale eornreeoereos eee see eaeeeeenr 2,000,000.00 Insufficient consideration subject to donor's tax .... B1,382,619.30 Donor's tax due .ewreceeeeees. B 323,602.94 25% Ad valorem penalty ...... 80,900.74 14% annual interest from 7-25-75 tO 7-25-78 ....ceee 1333913 .23

TOTAL AMOUNT DUE AND

COLLECTIBLE .sineaseose B 540,416.91

VVVVVVVVVVVVV

- 2 - 2.

F/Y Year June 30, 1975:

Surplus unreasonably accumu lated •..... ...•. ~ ... P 25 % surtax ..................

288 ,646.17 72,162.00 14% annual int. from 10-16-75 to l0-16-7H _ ___;3:....;;0, 308 0 04

TOTAL AMOUNT DUE AND

COLLECTIBLE ....•.•••.• ~ 102,470.04 vvvvvvvvvvvvv Petitioner is a corporation organized and existing under the laws .)f the Philippines with principal place of business at La Castellana, Negros Occidental. (par. 1, petition for r eview; admitted, pa~. 1, answer.) The records of the case show that:

1.

On June 25, 1975, petitioner sold to Roberto J. Cuenca parcels of land, buildings, i mprovements , equip- ment and sugar q uota rights for P2 ,0 00,00U.OO. (Exh. 10, pp. 41-44, BIR records.)

2.

Thi s sale is reflected in petitioner' s corpo- rate annual income tax return for fiscal year end e d June 30, 1975 with a net gain of P294,1 24 .70. (Exhs . 14, 14-a, pp. 45-53, BIR records.)

3.

The details of the sales are as follows: (Exh.

14-a, p. 47 , BIR records.)

Sale of Land, improvements & e quipment Book Value of Equ ip.nen t:

Tr.actors Tools & implements

Trucks

Irrigation equipment 154 Pl35 ,12 3.14 56,355.50 41,73 2 .50 39,680.lb fl2,000 , 0UO.UO

Portable rails

Miscellaneous

equipment - 3 - Cost of Land & Improvemen ts :

2,571.02 10,125.60 P397,096.00 888,101.71 285,588 . 02 Cost of land I mprovements

Quota Rights

10,089.57 1,295,287.28

Other Expenses:

Commission paid

Legal Fees

C Js t of Sale Ga i n on Sale EllOO,OOO.OO 25,000.00 125,000.00 121,705,875.JO 4.

As shown in the profit and loss statement of peti- tioner for the crop year 1974-19'75 ending June 3 ~ , 1975, attached to the c orporate r_turn for the same taxable year, petitioner real i zed a net profit of ~336,035.30, deta i ls of which a re as follows:

(pp. 48-49, BIR records.)

PAC I TA SORIANO , INC.

La Castallana, Neg. Occ .

PROFIT & LOSS STATEMENT

For the Crop Yea r 1974-75 Ending June 30, 1 975

I N C 0 M E

Sales of Sugar & Molasses

D 1 vide ;1 .1 I nco me E X P E N S E S :

Plowing

Lev e ling & harrowing Cane points

Planting

Ani ma l cultiva t ion Hand cultivation Drainage & irrigat ion Pest control 155 .!? 33,560.19 14,722.93 130,847.44 140,133.47 45,585.53 219,731.80 91,671.93 42 , 450.25 P3 , 256,175.16 110,914.67

- 4 - Fertilizers & fertilizing Milling expenses Fuel & oil Maintenance fa~m equipment Maintenance farm houses Maintenance roads Salaries & wages Bonus & amelioration Office expenses Traveling expenses General expenses Guards & tenders Medical expenses SSS premiums Inte rest expenses Taxes & :.icenses Donatio:1s & charity Depr eciation 811,025.54 246,860.97 241,050.80 229,383.93 63,464~66 10,959.81 248,676.51 148,077.40 28,130.01 7,770.93 85,627.15 32,925.66 12,928.79 33,668.00 241 , 864.40 20,630.66 2,400.00 20,265.42 3,20 4 ,414.23

Net Profit on Farm Operation

p 162,675.60 Add: Gain on sale of property ¥ 456,800.30

Less: Provision for Income Tax

1 20 ,765.00

NET INCOME TO SURPLUS

5.

As reported in the memorandum report dated April 29, 1977 of the revenue examiners who investigated peti- tioner, no portion of the net profit of ~336~03~.30 was distributed lo its stockholders.

(~xh. 2, pp. 58-60, BIR record s .)

6.

Upon investigation of the books and other account- ing records of petitioner for internal revenue t a x pur- pose s for fiscal year ended June 30 , 1975, respondent issued t o petitioner, on the basis of the examiner's report, deficiency income tax assessment in the amount e of Pl9,2/5.00 for said taxable year. (Exhs. C, C-1 & C-2, pp. 14 & 15, CTA records; p. 8, BIH. tecords.)

It

l r::- 0 d'..J

- 5 - appears that the deficiency income tax of Pl9,275.00 was paid by p e titioner on October 15, 1975 as per Official Receipt No. 4032805-F dated October 15, 1975. (p. 3, CTA records.)

7.

The records of the case reveal further that through the verification of the copy of the absolute deed of sale of petitioner to Roberto J. Cuenca which is on file in the Office of ~ h . Registe r of Deeds and the tax decla ·ations of the properties sold which were obtained from the Assessor's Office, and on the basis of the figures in the financial statements attached to the income tax return of petit i oner the original a . ~ d duplicate copies of which are on file in the Bureau of Internal Revenue, respondent's examiners found that the properties solJ for P2,000,000.00 had an actual value of P3,382,619.30, of which the difference of Fl,382,619.30 was considered a gift; a nd discovering that pet itioner had an earned surplus for the fiscal year ended June 30, 1975 which was not distributed to its stockholders, the revenue examine r s recommended the ass e ssment of pe ti- tioner of su ri a c for improper accumulation of surplu c under Section 25 of the Re venue Code. (Exh. B, pp. 9-11, CTA records; Exh . 2, pp. 58-60, BIR records.) V Consequently, on September 10, 198 0, responde nt assessed petitioner the amou nt of Pl02 ,470.04 as 25% surtax for unreasonable accumulation of surplus fo r fisc a l 15(

- 6 - year ended Ju ne 30, 1975 and the sum o f P540,416.91 as donor's t ax on the differenc:e between t he actua l value of the properties of P3 , 382,619.3 0 and the selling price of ~2,0 00,000 .00 .

(Exh. 7, p. 109, BIR record s ~ Exh. 6r

p. 108, BIR records.) 9.

Both a ssessments were protested by pet it ione r in its lette r dated December 9, 1980, which protest was denied by r e spondent in his l e t ter of J a nuary 9, 1985 . (Exh. 8 , pp . 113-114 , BIR recor ds ~ Exh. 9, pp . 146-148 , BI R rec o rds~ Exh. B , pp. 9-11 , CTA r e cords .) Hence, the instan t appeal.

As posed by the par t ies, t he issues i nvolve C : n this ar e :

Whe ther the assessments for donor's tax and 25 % s urta x for unreasonable accumulation o f surplus in the amount s of P540 , 416.91 a nd Pl0 2 , 470 .04, respec t ive ly, are l egal and jus- tified ; a nd b .

Whe the r the above tax liabilities we re a sse ssed within t he period prescribed by law.

Pe titionr r c ontends t hat it had already been i nves- tigated for all internal reven ue tax purposes fo r th e fi s c a l year e nded Jur1e 30, 1975 unde r Lette r of Authori t y No. 62 6 073 RR dated July 25, 1975, and as a r esult of which wa s made t o pay the amount of Pl9,275.00 as defi- ciency income tax for s a id 9e riod. S i nce the asse s sme nt s 158

DECIS ION -

- 7 - i n qu e stion were an off s hoot of a second inves tigation, it would be i n violation of the then in force Section 337 of the Tax Code.

We f'nd no merit in petitioner ' s cause.

Section 337 requires tha t book s of accounts and other acc ounting records must be preserved for at least five years from the date of t he last entry, and are sub j ec t t o exam ina tion and i •s ; :ect ion at any time by i nter nal revenue officers.

However, examination and inspection may be made only once in a taxable year during the five-year period they are required to be pre- se rved , except i n cases of fraud, irr egular ity oL illis t a ke, or unless the taxpa yer requests otherwise. It i s not disputed that on J une 25, 1975, pe ti tioner sold to a certa i n Kober to J. Cuenca i ts real p r ope rties (p arcels of land), together wi th equipme nt , improvemen t s and q uota rig hts for a consideration of P2 , 000,000.00. Verification made by r e venue e xami ners of r esponde nt disclo s ed tha t t he mar ket value per latest t a x decla- rations of the real prope rties alone amounted to P2,19 8 , 840.0l , a d the improvements , equipment and quota right s have a net book valu e of Pl,l83,770.30, or a t o tal value of P3,382 , 619 .30 .

The r e i s the r efore a differenc e of Pl,382,619.30 which is Uildou btedly subject to donor ' s 0 tax p ursuan t t o Section 12 2 of the the n in f o rce Nat i o n a l I n t e rn a l Revenue Code wh ich c o nside rs transfers ofproperty 158

DECISION -

CTA CASE NO . 3917 - 8 - for less tl1an an adequate and full consideration in money or money's worth as partly a gift to the extent of the difference between the fair market value of the property transferred and the actual conside r a tion paid.

The meri t of respondent's assessment of peti- tioner's l i ability for donor's gift tax is t hus clea r on the basis of the records and the law applicable. As s tated above, the d c ~o - : s gift tax liabili ty was asce rta ined th rough ve rification of the c opy of the ab s olute deed of sale which is on file with the Office of the Reg i s te r of Deeds and the Tax Declarations which were obtained f r om the As sessor's Office . The a~ . ~i ti ona l t ax on improper accumula tion of surplus was assessed based on the figures appearing in the financial s t ate- ments attached t o petit i oner ' s income t a x re tur n t he original and duplicate c op ies of which are on fil e in t he Bureau of Internal Revenue .

(Exh . B, pp. 9-ll, CTA records .)

The subsequent investigation by respondent which l ed to the issuance of the assessments of 2S% surtax for unreasonable acc umulation of pr ofit and donor's tax pur s uant to S~ ct io1 122 of the Revenue Code app l icable does not the r efore contravene the prov ision of Section 337 of the Ta·· Code .

Ver ify ing a copy of the absolu te deed of sale on file with t he office of the registe r o _ deeds and the tax declarations wh ich were obtained from the assessor ' s off ice , and analy zi ng the fig ures in the 16 0

DECISION -

CTA CASE NO . 391 7 - 9 - financial statemen t s of the income tax return on file with the Bu eau of Internal Revenue, cannot by any stretch of the imagination be cons ide red as an exam- ination a nd inspec t ion of the books of account s and othe r accounting r ecords of taxpayers which are kept in their place of bus iness o r res idence. Further, Sect i on 7 of the t hen in force National Inter nal Revenue Code speci f t c 2 lly empowers the Commis- sioner of Internal Reve nue, or his authorized represent- atives, to obtain information from government offices or age ncies for the purpose of defe r mining the tax liabil ity of any person or for discovery of pote 1: t ~ al taxpayers.

As correctly noted by re spondent, what had been examined a nd terminated in the first inve stigation was only the reg ular corporate income tax, and that no mention whatsoever was made of the donor 's gift t ax and the additional t a x on improper accumulation of surplus. As to petitioner's al l egation that it was never informed of the examiners' f indings except whe n the assessments were issued, the Assi s tant Reg ional Director, Revenue Regior GB , Bacolod City, as we ll as the Acting Chief, direct taxes division, Nat i onal Office, ha6 writte n l etters dated May 6, 1977 and October 26, 1979, respect- ively, informing petitioner of the findings of t l1e examiner~ and i nv it ing its repre sentative t o informal confe rence on the dates state d therei n, to enable it to prEsent its

1G 1

- 10 - side of the c ase, but petitioner fa1led to do so.

(Exh. B, pp. 9-11, CTA records; Exh. 9, pp. 146-148, BIR records.} As rightly stated by responde~t, that would have given petitioner the opportunity to go over the finding s of the examiners , present its objections thereto, and submit whatever documentary evidence it may have in its favor.

There is t. e refore no basis in the allegation of petitione +:Lut it was never notified of the reinvestigation conducted in this case, and thus deprived of its right to di spute the findings of the reven u~examiners.

(sec tion 25(a) of the National Internal Reve nue Code imposes a n additional tax upon a corporat i~ n formed or availed of for t he purpose of preventing the imposition of the tax upon its shareholders or the shareholders of ·ny other corporation through the medium permitting its gains and profits to accumulate instead of being divided or distributed .

And Section 25(c} provides that the fact that earnings or profits o f a corporation ar e permitted to accumulate be yond the r easonable needs of the business shall be det • Jminat ive of th e purpose to avoid th tax on shareholders Ult less the corp:)[ation shall prove to t he contrary by a clear preponder ance of the evidence. The Cou rt the r efore recognizes that while re sponde nt ' s determination is presumptively correct and casts upon • pet itioner the bu rden of offer ing evide nce in opposition

1G 2

DF.CISION -

- ll - ther eto, once s uch evidence is presented, the question thus is whe th e r under all the evidence, petitioner has sustained by clear pr e ponderanc e o f evidence the burden which the statute places upon it to overcome the pre- s umpt ion tha t it wa s availed of for the prohibited pur - pose.

Such presumption ari ses by virtue of a findin g that petitione r accumulated profits beyond the re asonable needs of it s busi ness .

(P. l .

~anuf acturing , Inc. vs .

The Commissione r of Inte rnal Revenue , CTA Case No. 2500, December 27, 1985 . )

Respondent poi~t ed out that by petitioner's own admission, it realized a net profit of ~3 36,035. JC (after i ncome t ax profit of ~120,705.00) for fiscal year ended June 30 , 1975.

Con tr ary to the mandate of the law, petitione r did not dis tr ibu te the prof it or surplu s of ~336 ,0J5.30 to its membe r s or sharehold rs. Accordin g l yf pursuan t to Sectio11 25 of t he National I nternal Revenue Code , respondent assessed petit ione r 25% of th e P336,035.2 0 or ?102 , 470.0 4 represent ing surtax f or improper accumu lation of p r ofits.

While

petitione r ~r;t ests the asses smer1t on the ground that in ~ board of d irec tor s ' resolu tion dated Augus t 3, 1975 the profit o f P336 , 035.00 was set aside for fu t ur e expan s ion of the business , no ev i dence was pr esented showing the necessity of the improvement . (p . 81, CTA records.)

As a matter of fact, pe titioner did not 16 2.

- 12 - submit o r presen t before th i s Court pr oofs o f specific, definite and feasible plans for the accumulation in t he taxable year in question .

In Manila Wi ne Merchants, Inc. vs . Commissione r of Inte rnal Revenue, L- 26145, February 20 , 1984 , 127 SC~~ 48 3 , the Supreme Court has already eatabl i shed t he rule that :

To dete rmine t he "..:o c." .::;onable needs" of the busiLe Js in order to ju s t i fy an accumulation o f earn ings , the Courts of the United States have i nven ted the so-c a lled "Immediacy Test" which cons tr ued the words "r easonable needs of the business" to me a n the i mi'[ledia te needs of the bus iness, and i t was gener ally held that if the corpo a tion did nat prove a n immediate need for the accumula tion of the earning s a nd profits, the accumulation was not for the r easonable needs of the bus iness, and the penalty tax would apply .

Such plans as the c orporati on ha s for u se of a ccu- mul a t ed earnings mus t be i n existence at the close of the year in which the accumu latio n is made. In order to determine whether profits were accumulated for the reasonable needs of the bu sines s or t o avoid the sur t ax upon th e shareholders, the controlling intention of the taxpaye r is that which is manifest e d at the time of the acc umulation, not subsequently decla r e d intentions which are merely t he products of afterthought . (Basilan Es t ates , Inc. vs . Commiss ioner of In ternal Revenue , 21 SCRA 17, citing Jacob Merten s , J r ., The Law of Federal Inc ome Taxation, Vol . 7, Cumulat ive Supplemen t , p . 213 .) As righ tly cited by responde nt, the mere intention or 1()4

DECISION -

CTA CASE NO . 3917 - 13 - cons i deration of i mp rovements, even though reser ves are se t aside, wil l no t justify an accumulation where the improvements have not been made and do not appear to be required.

Considering petitioner' s f a ilur e to sustain the bur den which the law applicable places upon it to overcome by clea r pr eponderance of evidence, the deter - ~ination of r esponden t t ha t ~e l tione r was avai led of for the proh i bited p~ose in the fiscal year in question , must be sustained / On th e issue of prescri p tion ; Section 331 o f the Na tional Internal Revenue Code the n in force prov i ·Je s that where ~ return was f i led, which is no t fraudulent , the tax may be assessed within fiv e years from the da te the return was due o r wa s filed .

A re turn fi led before the l ast day fixed by law for the f iling thereof shall be considered as filed on such l as t day. For purposes o f the p r esc riptive periods established by Sect ions 331 and 332 of the applicab l e Tax Code , an as sessment is deemed made when t he notice i s released, ma i led or sent by the Comm i s fi o ne r of Interna l Revenue to the taxp3yer . Fa ilur e o f the taxpayer to receiv e the assessment within the prescr i ptive pe ri od will not affect the val i dity of t he assessment if it was mai l ed and released within said per i od.

(Basil an Es ta te::J vs. Coi·nmissioner o f

Interna~

Revenue, L-2249 2 , September 5, 1957, 21 SCRA 17; Nav a

1GG

DECISION -

CTA CASE NO . 3917 - 14 - vs . Collector o f Inte rn al Re v e nue , L-19470 , January 30, 1 965 , 13 SCRA 104 ; Republic vs. Alane , L-1886 5, Sep t ember 28, 1964, 12 SCRA 24.)

In th e present c ase , pe t it ioner f iled i t s c orpo rate incowe t a x ret u rn r e f lecti ng t he s a]_e of t he subject propert i es on Sep t e mber 2 , 197 5 for the fiscal year ended June 30 , 1975.

(p . 61 & p. 82 , CTA r ecords . )

Unde r the law t hen i n force , '.::.i1e last day f o r f i ling the re t urn was Oc t o be r 15 , 1975 . (Sec . 46 , Na t ional Interna l Reve nue Code. )

The r eturn was d e emed f iled there fo re on Octobe r 15, 197 5 and the Bureau of In ternal Revenu e h ad up to Oc t ober 15 , 1980 withi n which t0 assess petitione r for taxa ble year 1975 . Since the assessment in qu st i on for donor ' s t ax was dated and issued on September 10 , 1980 , t he assessment was issued well with i n th e f iv e -ye 3 r period pre s cribed by the l aw appli- cable.

We s ee no significance therefore in the contention of pet i ti one r that the assessments were iss ued beyond t he f ive - year prescr iptive period bec ause it received the assessments onl y o n Novembe r 10 , 1980 . At any U <t e , no r eturn was filed by petitione r for t he donor's gif t t a x since t he return fil ed was for the corporate income t 3x.

To our mind , such return was not a valid return for the donor's gift tax, · nd i'.::.s 0 filing cannot be cons i dered to start the running of the prescriptive p er iod for the assessment of the donor's tax. lGG DECIS.ION - CTA CASE NO . 3917 - 15 - (See Republic vs. Jal andoni, L-18384, September 2U, 1965, 15 SCRA 51; Collector of Internal Revenue vs . Pineda L- 14520 , May 31, 1961, 2 SCRA 401.) Thus, i t has been held that the income t ax return cannot be considered as the equiva l e nt of th e sal ~s t ax return required under Section 183(a ) of the then in fo rce Revenue Code fo r purposes of the statute of li mi ta tion provided in Sections 318 and 319 of the same CodL- (Butuan Sa~mill vs . Court of Tax Appeals, L-20601, February 28 , 1966, 16 SCRA 277.) Neither may such return be considered for purposes of the statute of limi tation applicable to assessments f or the unreasonable a ccumu l a tion of profits tax. (L 2-.> il<m Estates vs . Commiss ioner of Internal Revenue, L- 22 492 , September 5 , 1967, r esolu tion on motion for reconsider - ation , October 25, 1967, 21 SCRA 17; United Equipment vs. Commissioner of Internal Revenue , CTA Case No. 1795 , October 30 , 1971, certiorari denied in L-35653 , October 24, 1972; Commissioner of Internal Revenue vs. Ayala Securities Corp., L- 29485, March 31, 1976, 70 SCRA 204 . ) Consequently , it can be said that it is as if no return was fil ed fo ~ purposes of the donor's tax, and the pre criptive period applicable is ten years from the date of discovery of the omission to fi le the return. (Sec. 319 {a); H.epublic vs . L ·cia Tan, L-25483, May 23, 1969 , 28 SCRA 325. )

0 [And anent the assessment f o r surtax on improper

DECISION -

CTA CASE NO. 3:17 accumulation of profits, the rule is that there is no such time limit on the right of the Commissioner of internal Revenues to assess the 25%3 tax on unreasonably accumulated surplus provided in Section 25 of the Tax , Since there is ro express sta cf utory provision limiting such right or provicing for its prescription. (Commissioner «= Internal Revenue vs. Ayala Securities Corporation, L-29485, 70 SCRA 264, modified by reso- lution of November 21, 1980, 101 SCRA 231.)_| Accerdingly, the Court finds petitioner Pacita Soriano, Inc., liable to the payment of the amounts c£:

(a) Biu2,470.02 as 25% surtax for improper accu- intlation of surplus for the fiscal year ending June 30, 1975, plus surcharges and interest incident to delin- quency pursuant to the provision of Section 5lie) of

Die We

tt ey the apelice atlonal Internal Revenue Cods, as ae ~ 4 hb to jl 2 ic) donor's gift tax, plus surcharges and interest incident to delinquency pursuant to the provisions oOo. Section 120(b) (1) aud (c) of the appli- cable National Internal Revenue Code RGPORS, the decision appealed from is hereby ae on)

Oo

ical @uezon City, Metro Manila, August 27, 1986.

— LA: IY tet

AMANTO FIL

Presidin ig J jadse .

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