JBF Investment, Inc. vs. The Commissioner of Internal Revenue

decision

on January 9~ 1985 reiterating the previous assessment.

The taxpayer seeks the review o ·f the decision.

A "personal holding company" under the material provisions of the National Internal Revenue code generally means any corporation at least eighty per centum of the gross income of which is "persona 1 ho 1 ding company income" as the latter term is defined in Section 65; and more than fifty per centum in value of the outstanding stock 5 1~

- 2 - of which is owned~ directly or indirectly by or for not more than five individuals. The taxpayer concedes that it falls within the stock ownership requirement but takes issue on the contention of respondent that eighty per centum of its gross income is personal holding company in c ome.

The income statement of the taxpayer for the yea r ended December 3 1~ 1979, from its audited comparative financial statements for the years ended December 3 1, 1978 and 1979 shows following:

Interest on money market placement Dividend incane subject to final ta:< •. Interest on savings deposits •.••.••• Ott-er- incCJfllE?

•••..••.••.•..•••.•••••• p 409,817.68 1 ~ ".!69 ' 3:'-6 • ::'() 32,768.01 56.00 P1,B)7 ,978.19 the From the foregoing, respondent considered that ta xpayer is a personal holding company since more than 80/. of its gross i ncome, the bu 1 k of which includes intercorporate dividends already subjected to 10/.

final tax, is personal holding company income.

Res pondent justifies his opinion by citing Revenue Memorandum Circular No. 80- 78, thus: "Under Code~ as effective Section 65(a) of amended by P.O.

June 11, 1978, 514 the No.

the Ta >t 1457, term

- 3 - 'personal holding company income' means the portion of the gross income which consists~ among others, of dividends.

Prior to P.D. No.

1457~ the term includes (a) Dividends (other th~.o.._ _ _Qj_'{i.J!~r.H!?.

§1.\..Q.~ c .t . _____ !;.Q._ .. _J: .~.?L _ __ I.J.fl d e.r.:.. ...... J3e_c;j;J on ... _ :?_4...{Ql [should be 24(c)] of this Code) >:

x x."

Section 24(c) refers to the imposition of the 10% final tax on intercorporate divi- dends received by a domestic or resident foreign corporation from another domestic cor poration.

The amendment therefore~ effected by P.D. No. 1457 resulted in the deletion of the said parenthetical phrase.

Hence, 'the dividend received by a corporation is now treated as personal holding company income, for purposes of the gross income requirement which is a requisite in determining whether a corpo- ration is to be treated a personal hold- ing company subject to additional 45% tax under Section 63 of the Tax Code, notwithstanding that such dividend was previously subjected to the 10% final intercorporate dividend tax ' .

(Revenue Memorandum Circular No.

80-78;

Under- scoring ours) In other words~ prior to June 11, 1978, on account of the presence of the parenthetical phrase, dividends subject to the 10% final tax do not form part of the personal holding company income.

Beginning June 11, 1978, on account of the deletion of said paren- thetical phrase, dividends form part of the personal holding company income even if the same have been su bj ec ted to the 10% f ina 1 ta >: ."

(Underscoring supp 1 ied) Ta:-:payer is of the view that with respect to the year in question dividends already subjected to the f ina 1 tax under Section 24 (c) of the Na tiona 1 Internal Revenue Code should not be deemed part of personal holding company income. This stand is anchored on the relevant provisions of Section 51fl

- 4 - 24(c) under P.O. 913 (March 29, 1976) reiterating the amendment made by P.O. 778 of Section 24(c) which reads:

"Sec. 24. Rates of tax on corpo- rations:

XXX HXX (c) Rate of ta H on certain dividends.

Dividends received by a domestic or resident foreign corporation from a domestic corporation liable to ta x under this Code - (1) Shall be subject to a final ta x at 101. on the total amount thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code, and (2) Shall not be included in the determination of the gross income of the recipient corporation.

Taxpayer suggests that Section 24(c) and Section 65(a) can be reconciled, notwithstanding the deletion of the parenthetical phrase "other than dividends subject to tax Ltnder Section 24(d)" (subsequently 24(c) by P.O.

1457 (June 11, 1978) whic h used to qualify the type of dividends that are considered part of personal holding company income.

Af ter its amendment, Section 65(a) reads: "Sec. 65. Personal holding company income. - For the purposes of this Title, the term 'personal holding company income · means the portion of the gross income which consists of: 51h - 5 - (a) Dividends, interests (other than interest constitut- ing rent as defined in sub- section (g) hereof), royalties, (other than mineral, oil, or gas roy a 1 ties) , and annuities.

The term ' royalties', as herein used, includes income from c opyrights, patents, and other similar revenues."

The development of the provisions on "personal holding company income", from one which segregated intercorporate dividends subject to final ta >: in determining gross income for purposes of defining a corporation as "personal holding company" to its present form, plainly manifest the intent to do away with the former disposition and to s ubsequently encompass all dividends, without regard to the provisions of Section 24(c). To be sure, Section 24(c) and Section 65(a) are distinct and separate provisions, the former within the title on Ta x on Corporations and the latter within t ha t on Personal Holding Companies. It cannot be denied that a "personal holding company" is no ordinary corporation as the National Internal RevenLie Code has set aside determinate provisions defining it and the manner of its ta>:ation different from an ordinary corporation . Thus, the consistenc y of gross income for ordinary 51?

- 6 - corporations which was formulated to exclude intercorporate dividends subject to final tax for purposes , of the corporate tax can be made different from the consistency of gross income of corporation susceptible of coming . within the definition of personal holding company. Gross income then has one meaning when used for ordinary corporations in the phrase, to wit: dividends received x x x liable to ta:-: under this Code :·: >:

}: shall not Q.§?.. included X X >C

11 J

and another meaning when used for personal holding companies as is clear from the phrase in Section 65(a) - 'personal holding company income' means the portion of the gross income which consists of In all, to follow the expanded construction offered by taxpayer would erase the distinction between an ordinary corporation and a personal holding company~ an intention surely far from the mind of the law making authority.

WHEREFORE, the decision of the Commissioner of Internal Revenue is AFFIRMED. Judgment is rendered ordering petitioner to pay to respondent the amount of P1,134,755.11 plus 20'1. interest per annutn frotp April 16, 1983 to April 16, 1986 and !OX surcharQR 51R

- 7 - on the basic tax of P716,979.00 pursuant to the provisions of Section ~1(2) and (3) of the National Internal Revenue Code, as amended by P.O. No. 1703.

WE CONCUR:

I t;th/M; ~.

CONSTANTE/ c. ROAQUIN Associate Judge / t ~ Q. .. Qvr.)h._ ERNESTO D. ACOSTA Associ a te Judge ~~ Presiding Judge CERTII!'IC.ATION I hereby certify that this decision .was reac hed after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. 51~ ~ ALEX Z. REYES Presiding Judge Court of Tax Appeals