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G.R. Nos.

L-28508-9 July 7, 1989


ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil
Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.

CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying
petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959 and
P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for
1959, as part of its ordinary and necessary business expenses, the amount it
had spent for drilling and exploration of its petroleum concessions. This claim
was disallowed by the respondent Commissioner of Internal Revenue on the
ground that the expenses should be capitalized and might be written off as a
loss only when a "dry hole" should result. ESSO then filed an amended return
where it asked for the refund of P323,279.00 by reason of its abandonment
as dry holes of several of its oil wells. Also claimed as ordinary and necessary
expenses in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit remittances to its New
York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,
disallowing the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for
the year 1960, in the amount of P367,994.00, plus 18% interest thereon of
P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of
P434,232.92. The deficiency arose from the disallowance of the margin fees
of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to
its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the
tax credit of P221,033.00 representing its overpayment on its income tax for
1959 and paying under protest the additional amount of P213,201.92. On
August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the
interest on its deficiency income tax. It argued that the 18% interest should
have been imposed not on the total deficiency of P367,944.00 but only on the
amount of P146,961.00, the difference between the total deficiency and its
tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest
on the entire amount of the deficiency tax. On May 4,1965, the CIR also
denied the claims of ESSO for refund of the overpayment of its 1959 and
1960 income taxes, holding that the margin fees paid to the Central Bank
could not be considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959,
contending that the margin fees were deductible from gross income either as
a tax or as an ordinary and necessary business expense. It also claimed an
overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were
not legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for
1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as
excess interest. This portion of the decision was appealed by the CIR but was
affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R.
No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed
the CTA decision denying its claims for the refund of the margin fees
P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now
before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to
Authorize the Central Bank of the Philippines to Establish a Margin Over
Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue
measure. If it is a revenue measure, the margin fees paid by the petitioner to
the Central Bank on its profit remittances to its New York head office should
be deductible from ESSO's gross income under Sec. 30(c) of the National
Internal Revenue Code. This provides that all taxes paid or accrued during or
within the taxable year and which are related to the taxpayer's trade,
business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background
and legislative history of the Margin Fee Law showing that R.A. 2609 was
nothing less than a revival of the 17% excise tax on foreign exchange
imposed by R.A. 601. This was a revenue measure formally proposed by
President Carlos P. Garcia to Congress as part of, and in order to balance,
the budget for 1959-1960. It was enacted by Congress as such and,
significantly, properly originated in the House of Representatives. During its
two and a half years of existence, the measure was one of the major sources
of revenue used to finance the ordinary operating expenditures of the
government. It was, moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting
established principles, pointed out that
We are not unmindful of the rule that opinions expressed in debates, actual
proceedings of the legislature, steps taken in the enactment of a law, or the
history of the passage of the law through the legislature, may be resorted to
as an aid in the interpretation of a statute which is ambiguous or of doubtful
meaning. The courts may take into consideration the facts leading up to,
coincident with, and in any way connected with, the passage of the act, in
order that they may properly interpret the legislative intent. But it is also well-
settled jurisprudence that only in extremely doubtful matters of interpretation
does the legislative history of an act of Congress become important. As a
matter of fact, there may be no resort to the legislative history of the
enactment of a statute, the language of which is plain and unambiguous,
since such legislative history may only be resorted to for the purpose of
solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we
have held that a margin fee is not a tax but an exaction designed to curb the
excessive demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated
through Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction
designed to discourage imports and encourage exports, and ultimately,
'curtail any excessive demand upon the international reserve' in order to
stabilize the currency. Originally adopted to cope with balance of payment
pressures, exchange restrictions have come to serve various purposes, such
as limiting non-essential imports, protecting domestic industry and when
combined with the use of multiple currency rates providing a source of
revenue to the government, and are in many developing countries regarded
as a more or less inevitable concomitant of their economic development
programs. The different measures of exchange control or restriction cover
different phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange allowable. In the
case of the margin levy, the immediate impact is on the rate of foreign
exchange; in fact, its main function is to control the exchange rate without
changing the par value of the peso as fixed in the Bretton Woods Agreement
Act. For a member nation is not supposed to alter its exchange rate (at par
value) to correct a merely temporary disequilibrium in its balance of
payments. By its nature, the margin levy is part of the rate of exchange as
fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign
exchange and hence should not form part of the exchange rate, suffice it to
state that We have already held the contrary for the reason that a tax is levied
to provide revenue for government operations, while the proceeds of the
margin fee are applied to strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v.
Central Bank, 3 the same idea was expressed, though in connection with a
different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's
foreign exchange constitutes an export tax. A tax is a levy for the purpose of
providing revenue for government operations, while the proceeds of the 20%
retention, as we have seen, are applied to strengthen the Central Bank's
international reserve.
We conclude then that the margin fee was imposed by the State in the
exercise of its police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should
nevertheless be considered necessary and ordinary business expenses and
therefore still deductible from its gross income. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the
conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue
Code reading as follows:
SEC. 30. Deductions from gross income in computing net income there shall
be allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; traveling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments required to be
made as a condition to the continued use or possession, for the purpose of
the trade or business, of property to which the taxpayer has not taken or is
not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign
corporations. In the case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the necessary expenses paid or
incurred in carrying on any business or trade conducted within the Philippines
exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 4 the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must
point to some specific provision of the statute in which that deduction is
authorized and must be able to prove that he is entitled to the deduction
which the law allows. As previously adverted to, the law allowing expenses as
deduction from gross income for purposes of the income tax is Section 30(a)
(1) of the National Internal Revenue which allows a deduction of 'all the
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business.' An item of expenditure, in order to be
deductible under this section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of deductibility where it is axiomatic that
to be deductible as a business expense, three conditions are imposed,
namely: (1) the expense must be ordinary and necessary, (2) it must be paid
or incurred within the taxable year, and (3) it must be paid or incurred in
carrying on a trade or business. In addition, not only must the taxpayer meet
the business test, he must substantially prove by evidence or records the
deductions claimed under the law, otherwise, the same will be disallowed.
The mere allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
While it is true that there is a number of decisions in the United States delving
on the interpretation of the terms 'ordinary and necessary' as used in the
federal tax laws, no adequate or satisfactory definition of those terms is
possible. Similarly, this Court has never attempted to define with precision the
terms 'ordinary and necessary.' There are however, certain guiding principles
worthy of serious consideration in the proper adjudication of conflicting
claims. Ordinarily, an expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development of the taxpayer's
business. It is 'ordinary' when it connotes a payment which is normal in
relation to the business of the taxpayer and the surrounding circumstances.
The term 'ordinary' does not require that the payments be habitual or normal
in the sense that the same taxpayer will have to make them often; the
payment may be unique or non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction
depends in each case on the particular facts and the relation of the payment
to the type of business in which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the operation of
the taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense must be
determined from the nature of the expenditure itself, which in turn depends on
the extent and permanency of the work accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals
did not err when it held on this issue as follows:
Considering the foregoing test of what constitutes an ordinary and necessary
deductible expense, it may be asked: Were the margin fees paid by petitioner
on its profit remittance to its Head Office in New York appropriate and helpful
in the taxpayer's business in the Philippines? Were the margin fees incurred
for purposes proper to the conduct of the affairs of petitioner's branch in the
Philippines? Or were the margin fees incurred for the purpose of realizing a
profit or of minimizing a loss in the Philippines? Obviously not. As stated in
the Lopez case, the margin fees are not expenses in connection with the
production or earning of petitioner's incomes in the Philippines. They were
expenses incurred in the disposition of said incomes; expenses for the
remittance of funds after they have already been earned by petitioner's
branch in the Philippines for the disposal of its Head Office in New York which
is already another distinct and separate income taxpayer.
xxx
Since the margin fees in question were incurred for the remittance of funds to
petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can
never be said therefore that the margin fees were appropriate and helpful in
the development of petitioner's business in the Philippines exclusively or were
incurred for purposes proper to the conduct of the affairs of petitioner's
branch in the Philippines exclusively or for the purpose of realizing a profit or
of minimizing a loss in the Philippines exclusively. If at all, the margin fees
were incurred for purposes proper to the conduct of the corporate affairs of
Standard Vacuum Oil Company in New York, but certainly not in the
Philippines.
ESSO has not shown that the remittance to the head office of part of its
profits was made in furtherance of its own trade or business. The petitioner
merely presumed that all corporate expenses are necessary and appropriate
in the absence of a showing that they are illegal or ultra vires. This is error.
The public respondent is correct when it asserts that "the paramount rule is
that claims for deductions are a matter of legislative grace and do not turn on
mere equitable considerations ... . The taxpayer in every instance has the
burden of justifying the allowance of any deduction claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its
head office, cannot now claim this as an ordinary and necessary expense
paid or incurred in carrying on its own trade or business.
WHEREFORE, the decision of the Court of Tax Appeals denying the
petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for
1960, is AFFIRMED, with costs against the petitioner.

G.R. No. L-15290 May 31, 1963


MARIANO ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
-----------------------------
G.R. No. L-15280 May 31, 1963
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
MARIANO ZAMORA, respondent.
-----------------------------
G.R. No. L-15289 May 31, 1963
ESPERANZA A. ZAMORA, as Special Administratrix of Estate of
FELICIDAD ZAMORA, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
-----------------------------
G.R. No. L-15281 May 31, 1963
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
ESPERANZA A. ZAMORA, as Special Administratrix, etc. respondent.
Office of the Solicitor General for petitioner.
Rodegelio M. Jalandoni for respondents.
PAREDES, J.:
In the above-entitled cases, a joint decision was rendered by the lower court
because they involved practically the same issues. We do so, likewise, for the
same reason.
Cases Nos. L-15290 and L-15280
Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila,
filed his income tax returns the years 1951 and 1952. The Collector of
Internal Revenue found that he failed to file his return of the capital gains
derived from the sale of certain real properties and claimed deductions which
were not allowable. The collector required him to pay the sums of P43,758.50
and P7,625.00, as deficiency income tax for the years 1951 and 1952,
respectively (C.T.A. Case No. 234, now L-15290). On appeal by Zamora, the
Court of Tax Appeals on December 29, 1958, modified the decision appealed
from and ordered him to pay the reduced total sum of P30,258.00
(P22,980.00 and P7,278.00, as deficiency income tax for the years 1951 and
1952, respectively), within thirty (30) days from the date the decision
becomes final, plus the corresponding surcharges and interest in case of
delinquency, pursuant to section 51(e), Int. Revenue Code. With costs
against petitioner.
Having failed to obtain a reconsideration of the decision, Mariano Zamora
appealed (L-15290), alleging that the Court of Tax Appeals erred
(1) In dissallowing P10,478.50, as promotion expenses incurred by his wife
for the promotion of the Bay View Hotel and Farmacia Zamora (which is of
P20,957.00, supposed business expenses):
(2) In disallowing 3-% per annum as the rate of depreciation of the Bay
View Hotel Building;
(3) In disregarding the price stated in the deed of sale, as the costs of a
Manila property, for the purpose of determining alleged capital gains; and
(4) In applying the Ballantyne scale of values in determining the cost of said
property.
The Collector of Internal Revenue (L-15280) also appealed, claiming that the
Court of Tax Appeals erred
(1) In giving credence to the uncorroborated testimony of Mariano Zamora
that he bought the said real property in question during the Japanese
occupation, partly in Philippine currency and partly in Japanese war notes,
and
(2) In not holding that Mariano Zamora is liable for the payment of the sums
of P43,758.00 and P7,625.00 as deficiency income taxes, for the years 1951
and 1952, plus the 5% surcharge and 1% monthly interest, from the date said
amounts became due to the date of actual payment.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts
be admitted and approved by this Honorable Court, without prejudice to the
parties adducing other evidence to prove their case not covered by this
stipulation of facts.
1wph1.t

Cases Nos. L-15289 and L-15281


Mariano Zamora and his deceased sister Felicidad Zamora, bought a piece of
land located in Manila on May 16, 1944, for P132,000.00 and sold it for
P75,000.00 on March 5, 1951. They also purchased a lot located in Quezon
City for P68,959.00 on January 19, 1944, which they sold for P94,000 on
February 9, 1951. The CTA ordered the estate of the late Felicidad Zamora
(represented by Esperanza A. Zamora, as special administratrix of her
estate), to pay the sum of P235.50, representing alleged deficiency income
tax and surcharge due from said estate. Esperanza A. Zamora appealed and
alleged that the CTA erred:
The Commissioner of Internal Revenue likewise appealed from the decision,
claiming that the lower court erred:
(1) In giving credence to the uncorroborated testimony of Mariano Zamora
that he bought the real property involved during the Japanese occupation,
partly in genuine Philippine currency and partly in Japanese war notes; and
(2) In not holding that Esperanza A. Zamora, as administratrix, is liable for the
payment of the sum of P613.00 as deficiency income tax and 50% surcharge
for 1951, plus 50% surcharge and 1% monthly interest from the date said
amount became due, to the date of actual payment.
It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50
as promotion expenses incurred by his wife for the promotion of the Bay View
Hotel and Farmacia Zamora. He contends that the whole amount of
P20,957.00 as promotion expenses in his 1951 income tax returns, should be
allowed and not merely one-half of it or P10,478.50, on the ground that, while
not all the itemized expenses are supported by receipts, the absence of some
supporting receipts has been sufficiently and satisfactorily established. For,
as alleged, the said amount of P20,957.00 was spent by Mrs. Esperanza A.
Zamora (wife of Mariano), during her travel to Japan and the United States to
purchase machinery for a new Tiki-Tiki plant, and to observe hotel
management in modern hotels. The CTA, however, found that for said trip
Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and
that in her application for dollar allocation, she stated that she was going
abroad on a combined medical and business trip, which facts were not denied
by Mariano Zamora. No evidence had been submitted as to where Mariano
had obtained the amount in excess of P5,000.00 given to his wife which she
spent abroad. No explanation had been made either that the statement
contained in Mrs. Zamora's application for dollar allocation that she was going
abroad on a combined medical and business trip, was not correct. The
alleged expenses were not supported by receipts. Mrs. Zamora could not
even remember how much money she had when she left abroad in 1951, and
how the alleged amount of P20,957.00 was spent.
Section 30, of the Tax Code, provides that in computing net income, there
shall be allowed as deductions all the ordinary and necessary expenses paid
or incurred during the taxable year, in carrying on any trade or business (Vol.
4, Mertens, Law of Federal Income Taxation, sec. 25.03, p. 307). Since
promotion expenses constitute one of the deductions in conducting a
business, same must testify these requirements. Claim for the deduction of
promotion expenses or entertainment expenses must also be substantiated
or supported by record showing in detail the amount and nature of the
expenses incurred (N.H. Van Socklan, Jr. v. Comm. of Int. Rev.; 33 BTA 544).
Considering, as heretofore stated, that the application of Mrs. Zamora for
dollar allocation shows that she went abroad on a combined medical and
business trip, not all of her expenses came under the category of ordinary
and necessary expenses; part thereof constituted her personal expenses.
There having been no means by which to ascertain which expense was
incurred by her in connection with the business of Mariano Zamora and which
was incurred for her personal benefit, the Collector and the CTA in their
decisions, considered 50% of the said amount of P20,957.00 as business
expenses and the other 50%, as her personal expenses. We hold that said
allocation is very fair to Mariano Zamora, there having been no receipt
whatsoever, submitted to explain the alleged business expenses, or proof of
the connection which said expenses had to the business or the
reasonableness of the said amount of P20,957.00. While in situations like the
present, absolute certainty is usually no possible, the CTA should make as
close an approximation as it can, bearing heavily, if it chooses, upon the
taxpayer whose inexactness is of his own making.
In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev., G.R.
No. L-12798, May 30, 1960, it was declared that representation expenses fall
under the category of business expenses which are allowable deductions
from gross income, if they meet the conditions prescribed by law, particularly
section 30 (a) [1], of the Tax Code; that to be deductible, said business
expenses must be ordinary and necessary expenses paid or incurred in
carrying on any trade or business; that those expenses must also meet the
further test of reasonableness in amount; that when some of the
representation expenses claimed by the taxpayer were evidenced by
vouchers or chits, but others were without vouchers or chits, documents or
supporting papers; that there is no more than oral proof to the effect that
payments have been made for representation expenses allegedly made by
the taxpayer and about the general nature of such alleged expenses; that
accordingly, it is not possible to determine the actual amount covered by
supporting papers and the amount without supporting papers, the court
should determine from all available data, the amount properly deductible as
representation expenses.
In view hereof, We are of the opinion that the CTA, did not commit error in
allowing as promotion expenses of Mrs. Zamora claimed in Mariano Zamora's
1951 income tax returns, merely one-half or P10,478.50.
Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3-%
per annum as the rate of depreciation of the Bay View Hotel Building but only
2-%. In justifying depreciation deduction of 3-%, Mariano Zamora
contends that (1) the Ermita District, where the Bay View Hotel is located, is
now becoming a commercial district; (2) the hotel has no room for
improvement; and (3) the changing modes in architecture, styles of furniture
and decorative designs, "must meet the taste of a fickle public". It is a fact,
however, that the CTA, in estimating the reasonable rate of depreciation
allowance for hotels made of concrete and steel at 2-%, the three factors
just mentioned had been taken into account already. Said the CTA
Normally, an average hotel building is estimated to have a useful life of 50
years, but inasmuch as the useful life of the building for business purposes
depends to a large extent on the suitability of the structure to its use and
location, its architectural quality, the rate of change in population, the shifting
of land values, as well as the extent and maintenance and rehabilitation. It is
allowed a depreciation rate of 2-% corresponding to a normal useful life of
only 40 years (1955 PH Federal Taxes, Par 14 160-K). Consequently, the
stand of the petitioners can not be sustained.
As the lower court based its findings on Bulletin F, petitioner Zamora, argues
that the same should have been first proved as a law, to be subject to judicial
notice. Bulletin F, is a publication of the US Federal Internal Revenue Service,
which was made after a study of the lives of the properties. In the words of
the lower court: "It contains the list of depreciable assets, the estimated
average useful lives thereof and the rates of depreciation allowable for each
kind of property. (See 1955 PH Federal Taxes, Par. 14, 160 to Par. 14,
163-0). It is true that Bulletin F has no binding force, but it has a strong
persuasive effect considering that the same has been the result of scientific
studies and observation for a long period in the United States after whose
Income Tax Law ours is patterned." Verily, courts are permitted to look into
and investigate the antecedents or the legislative history of the statutes
involved (Director of Lands v. Abaya, et al., 63 Phil. 559). Zamora also
contends that his basis for applying the 3-% rate is the testimony of its
witness Mariano Katipunan, who cited a book entitled "Hotel Management
Principles and Practice" by Lucius Boomer, President, Hotel Waldorf Astoria
Corporation. As well commented by the Solicitor General, "while the petitioner
would deny us the right to use Bulletin F, he would insist on using as
authority, a book in Hotel management written by a man who knew more
about hotels than about taxation. All that the witness did (Katipunan) . . . is to
read excerpts from the said book (t.s.n. pp. 99-101), which admittedly were
based on the decision of the U.S. Tax Courts, made in 1928 (t.s.n. p. 106)". In
view hereof, We hold that the 2-% rate of depreciation of the Bay View
Hotel building, is approximately correct.
The next items in dispute are the undeclared capital gains derived from the
sales in 1951 of certain real properties in Malate, Manila and in Quezon City,
acquired during the Japanese occupation.
The Manila property (Esperanza Zamora v. Coll. of Int. Rev., Case No.
L-15289). The CTA held in this case, that the cost basis of property acquired
in Japanese war notes is the equivalent of the war notes in genuine Philippine
currency in accordance with the Ballantyne Scale of values, and that the
determination of the gain derived or loss sustained in the sale of such
property is not affected by the decline at the time of sale, in the purchasing
power of the Philippine currency. It was found by the CTA that the purchase
price of P132,000.00 was not entirely paid in Japanese War notes but
thereof or P66,000.00 was in Philippine currency, and that during certain
periods of the enemy occupation, the value of the Japanese war notes was
very much less than the value of the genuine Philippine currency. On this
point, the CTA declared
Finally, it is alleged that the purchase price of P132,000.00 was not entirely
paid in Japanese war notes, Mariano Zamora, co-owner of the property in
question, testified that P66,000.00 was paid in Philippine currency and the
other P66,000.00 was paid in Japanese war notes. No evidence was
presented by respondent to rebut the testimony of Mariano Zamora; it is
assailed merely as being improbable. We have examined this question
thoroughly and we are inclined to give credence to the allegation that a
portion of the purchase price of the property was paid in Philippine money. In
the first place, it appears that the Zamoras owned the Farmacia Zamora
which continued to engage in business during the war years and that a
considerable portion of its sales was paid for in genuine Philippine currency.
This circumstance enabled the Zamoras to accumulate Philippine money
which they used in acquiring the property in question and another property in
Quezon City. In the second place, P132,000.00 in Japanese war notes in
May, 1944 is equivalent to only P11,000.00. The property in question had at
the time an assessed value of P27,031.00 (in Philippine currency).
Considering the well known fact that the assessed value of real property is
very much below the fair market value, it is incredible that said property
should have been sold by the owner thereof for less than one-half of its
assessed value. These facts have convinced us of the veracity of the
allegation that of the purchase price of P132,000.00 the sum of P66,000.00
was paid in Philippine currency, so that only the sum of P66,000.00 was paid
in Japanese War notes.
This being the case, the Ballantyne Scale of values, which was the result of
an impartial scientific study, adopted and given judicial recognition, should be
applied. As the value of the Japanese war notes in May, 1944 when the
Manila property was bought, was 1 of the genuine Philippine Peso
(Ballantyne Scale), and since the gain derived or loss sustained in the
disposition of this property is to reckoned in terms of Philippine Peso, the
value of the Japanese war notes used in the purchase of the property, must
be reduced in terms of the genuine Philippine Peso to determine the cost of
acquisition. It, therefore, results that since the sum of P66,000.00 in
Japanese war notes in May, 1944 is equivalent to P5,500.00 in Philippine
currency (P66,000.00 divided by 12), the acquisition cost of the property in
question is P66,000.00 plus P5,500.00 or P71,500.00 and that as the
property was sold for P75,000.00 in 1951, the owners thereof Mariano and
Felicidad Zamora derived a capital gain of P3,500.00 or P1,750.00 each.
The Quezon City Property (Mariano Zamora v. Coll. of Customs, Case No.
15290). The Zamoras alleged that the entire purchase price of P68,959.00
was paid in Philippine currency. The collector, on the other hand, contends
that the purchase price of P68,959.00 was paid in Japanese war notes. The
CTA, however, giving credence to Zamora's version, said
. . . If , as contended by respondent, the purchase price of P68,959.00 was
paid in Japanese war notes, the purchase price in Philippine currency would
be only P17,239.75 (P68,959.00 divided by 4, 34.00 in war notes being
equivalent to P1.00 in Philippine currency). The assessed value of said
property in Philippine currency at the time of acquisition was P46,910.00. It is
quite incredible that real property with an assessed value of P46,910.00
should have been sold by the owner thereof in Japanese war notes with an
equivalent value in Philippine currency of only P17,239.75. We are more
inclined to believe the allegation that it was purchased for P68,959.00 in
genuine Philippine currency. Since the property was sold for P94,000.00 on
February 9, 1951, the gain derived from the sale is P15,361.75, after
deducting from the selling price the cost of acquisition in the sum of
P68,959.00 and the expense of sale in the sum of P9,679.25.
The above appraisal is correct, and We have no plausible reason to disturb
the same.
Consequently, the total undeclared income of petitioners derived from the
sales of the Manila and Quezon City properties in 1951 is P17,111.75
(P1,750.00 plus P15,361.75), 50% of which in the sum of P8,555.88 is
taxable, the said properties being capital assets held for more than one year.
IN VIEW HEREOF, the petition in each of the above-entitled cases is
dismissed, and the decision appealed from is affirmed, without special
pronouncement as to costs.

G.R. No. L-24059 November 28, 1969


C. M. HOSKINS & CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Ross, Salcedo, Del Rosario, Bito and Misa for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Felicisimo R. Rosete and Special Attorney Michaelina R. Balasbas for
respondent.
TEEHANKEE, J.:
We uphold in this taxpayer's appeal the Tax Court's ruling that payment by the
taxpayer to its controlling stockholder of 50% of its supervision fees or the
amount of P99,977.91 is not a deductible ordinary and necessary expense
and should be treated as a distribution of earnings and profits of the taxpayer.
Petitioner, a domestic corporation engaged in the real estate business as
brokers, managing agents and administrators, filed its income tax return for
its fiscal year ending September 30, 1957 showing a net income of
P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in due
course. Upon verification of its return, respondent Commissioner of Internal
Revenue, disallowed four items of deduction in petitioner's tax returns and
assessed against it an income tax deficiency in the amount of P28,054.00
plus interests. The Court of Tax Appeals upon reviewing the assessment at
the taxpayer's petition, upheld respondent's disallowance of the principal item
of petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling
stockholder the amount of P99,977.91 representing 50% of supervision fees
earned by it and set aside respondent's disallowance of three other minor
items. The Tax Court therefore determined petitioner's tax deficiency to be in
the amount of P27,145.00 and on November 8, 1964 rendered judgment
against it, as follows:
WHEREFORE, premises considered, the decision of the respondent is
hereby modified. Petitioner is ordered to pay to the latter or his representative
the sum of P27,145.00, representing deficiency income tax for the year 1957,
plus interest at 1/2% per month from June 20, 1959 to be computed in
accordance with the provisions of Section 51(d) of the National Internal
Revenue Code. If the deficiency tax is not paid within thirty (30) days from the
date this decision becomes final, petitioner is also ordered to pay surcharge
and interest as provided for in Section 51 (e) of the Tax Code, without costs.
Petitioner questions in this appeal the Tax Court's findings that the disallowed
payment to Hoskins was an inordinately large one, which bore a close
relationship to the recipient's dominant stockholdings and therefore amounted
in law to a distribution of its earnings and profits.
We find no merit in petitioner's appeal.
As found by the Tax Court, "petitioner was founded by Mr. C. M. Hoskins in
1937, with a capital stock of 1,000 shares at a par value of P1.00 each share;
that of these 1,000 shares, Mr. C. M. Hoskins owns 996 shares (the other 4
shares being held by the other four officers of the corporation), which
constitute exactly 99.6% of the total authorized capital stock (p. 92, t.s.n.);
that during the first four years of its existence, Mr. C. M. Hoskins was the
President, but during the taxable period in question, that is, from October 1,
1956 to September 30, 1957, he was the chairman of the Board of Directors
and salesman-broker for the company (p. 93, t.s.n.); that as chairman of the
Board of Directors, he received a salary of P3,750.00 a month, plus a salary
bonus of about P40,000.00 a year (p. 94, t.s.n.); that he was also a
stockholder and officer of the Paradise Farms, Inc. and Realty Investments,
Inc., from which petitioner derived a large portion of its income in the form of
supervision fees and commissions earned on sales of lots (pp. 97-99, t.s.n.;
Financial Statements, attached to Exhibit '1', p. 11, BIR rec.); that as
chairman of the Board of Directors of petitioner, his duties were: "To act as a
salesman; as a director, preside over meetings and to get all of the real estate
business I could for the company by negotiating sales, purchases, making
appraisals, raising funds to finance real estate operations where that was
necessary' (p. 96, t.s.n.); that he was familiar with the contract entered into by
the petitioner with the Paradise Farms, Inc. and the Realty Investments, Inc.
by the terms of which petitioner was 'to program the development, arrange
financing, plan the proposed subdivision as outlined in the prospectus of
Paradise Farms, Inc., arrange contract for road constructions, with the
provision of water supply to all of the lots and in general to serve as
managing agents for the Paradise Farms, Inc. and subsequently for the
Realty Investment, Inc." (pp. 96-97. t.s.n.)
Considering that in addition to being Chairman of the board of directors of
petitioner corporation, which bears his name, Hoskins, who owned 99.6% of
its total authorized capital stock while the four other officers-stockholders of
the firm owned a total of four-tenths of 1%, or one-tenth of 1% each, with their
respective nominal shareholdings of one share each was also salesman-
broker for his company, receiving a 50% share of the sales commissions
earned by petitioner, besides his monthly salary of P3,750.00 amounting to
an annual compensation of P45,000.00 and an annual salary bonus of
P40,000.00, plus free use of the company car and receipt of other similar
allowances and benefits, the Tax Court correctly ruled that the payment by
petitioner to Hoskins of the additional sum of P99,977.91 as his equal or 50%
share of the 8% supervision fees received by petitioner as managing agents
of the real estate, subdivision projects of Paradise Farms, Inc. and Realty
Investments, Inc. was inordinately large and could not be accorded the
treatment of ordinary and necessary expenses allowed as deductible items
within the purview of Section 30 (a) (i) of the Tax Code.
If such payment of P99,977.91 were to be allowed as a deductible item, then
Hoskins would receive on these three items alone (salary, bonus and
supervision fee) a total of P184,977.91, which would be double the
petitioner's reported net income for the year of P92,540.25. As correctly
observed by respondent. If independently, a one-time P100,000.00-fee to
plan and lay down the rules for supervision of a subdivision project were to be
paid to an experienced realtor such as Hoskins, its fairness and deductibility
by the taxpayer could be conceded; but here 50% of the supervision fee of
petitioner was being paid by it to Hoskins every year since 1955 up to 1963
and for as long as its contract with the subdivision owner subsisted,
regardless of whether services were actually rendered by Hoskins, since his
services to petitioner included such planning and supervision and were
already handsomely paid for by petitioner.
The fact that such payment was authorized by a standing resolution of
petitioner's board of directors, since "Hoskins had personally conceived and
planned the project" cannot change the picture. There could be no question
that as Chairman of the board and practically an absolutely controlling
stockholder of petitioner, holding 99.6% of its stock, Hoskins wielded
tremendous power and influence in the formulation and making of the
company's policies and decisions. Even just as board chairman, going by
petitioner's own enumeration of the powers of the office, Hoskins, could
exercise great power and influence within the corporation, such as directing
the policy of the corporation, delegating powers to the president and advising
the corporation in determining executive salaries, bonus plans and pensions,
dividend policies, etc.1
Petitioner's invoking of its policy since its incorporation of sharing equally
sales commissions with its salesmen, in accordance with its board resolution
of June 18, 1946, is equally untenable. Petitioner's Sales Regulations
provide:
Compensation of Salesmen
8. Schedule I In the case of sales to prospects discovered and worked by
a salesman, even though the closing is done by or with the help of the Sales
Manager or other members of the staff, the salesmen get one-half (1/2) of the
total commission received by the Company, but not exceeding five percent
(5%). In the case of subdivisions, when the office commission covers general
supervision, the 1/2-rule does not apply, the salesman's share being
stipulated in the case of each subdivision. In most cases the salesman's
share is 4%. (Exh. "N-1").2
It will be readily seen therefrom that when the petitioner's commission covers
general supervision, it is provided that the 1/2 rule of equal sharing of the
sales commissions does not apply and that the salesman's share is stipulated
in the case of each subdivision. Furthermore, what is involved here is not
Hoskins' salesman's share in the petitioner's 12% sales commission, which
he presumably collected also from petitioner without respondent's questioning
it, but a 50% share besides in petitioner's planning and supervision fee of 8%
of the gross sales, as mentioned above. This is evident from petitioner's
board's resolution of July 14, 1953 (Exhibit 7), wherein it is recited that in
addition to petitioner's sales commission of 12% of gross sales, the
subdivision owners were paying to petitioner 8% of gross sales as
supervision fee, and a collection fee of 5% of gross collections, or total fees of
25% of gross sales.
The case before us is similar to previous cases of disallowances as
deductible items of officers' extra fees, bonuses and commissions, upheld by
this Court as not being within the purview of ordinary and necessary
expenses and not passing the test of reasonable compensation.3 In Kuenzle
& Streiff, Inc. vs. Commissioner of Internal Revenue decided by this Court on
May 29, 1969,4 we reaffirmed the test of reasonableness, enunciated in the
earlier 1967 case involving the same parties, that: "It is a general rule that
'Bonuses to employees made in good faith and as additional compensation
for the services actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered' (4 Mertens Law of
Federal Income Taxation, Sec. 25.50, p. 410). The conditions precedent to
the deduction of bonuses to employees are: (1) the payment of the bonuses
is in fact compensation; (2) it must be for personal services actually rendered;
and (3) the bonuses, when added to the salaries, are 'reasonable . . . when
measured by the amount and quality of the services performed with relation
to the business of the particular taxpayer' (Idem., Sec. 25, 44, p. 395).
"There is no fixed test for determining the reasonableness of a given bonus
as compensation. This depends upon many factors, one of them being 'the
amount and quality of the services performed with relation to the business.'
Other tests suggested are: payment must be 'made in good faith'; 'the
character of the taxpayer's business, the volume and amount of its net
earnings, its locality, the type and extent of the services rendered, the salary
policy of the corporation'; 'the size of the particular business'; 'the employees'
qualifications and contributions to the business venture'; and 'general
economic conditions' (4 Mertens, Law of Federal Income Taxation, Secs.
25.44, 25.49, 25.50, 25.51, pp. 407-412). However, 'in determining whether
the particular salary or compensation payment is reasonable, the situation
must be considered as whole. Ordinarily, no single factor is decisive. . . . it is
important to keep in mind that it seldom happens that the application of one
test can give satisfactory answer, and that ordinarily it is the interplay of
several factors, properly weighted for the particular case, which must furnish
the final answer."
Petitioner's case fails to pass the test. On the right of the employer as against
respondent Commissioner to fix the compensation of its officers and
employees, we there held further that while the employer's right may be
conceded, the question of the allowance or disallowance thereof as
deductible expenses for income tax purposes is subject to determination by
respondent Commissioner of Internal Revenue. Thus: "As far as petitioner's
contention that as employer it has the right to fix the compensation of its
officers and employees and that it was in the exercise of such right that it
deemed proper to pay the bonuses in question, all that We need say is this:
that right may be conceded, but for income tax purposes the employer cannot
legally claim such bonuses as deductible expenses unless they are shown to
be reasonable. To hold otherwise would open the gate of rampant tax
evasion.
"Lastly, We must not lose sight of the fact that the question of allowing or
disallowing as deductible expenses the amounts paid to corporate officers by
way of bonus is determined by respondent exclusively for income tax
purposes. Concededly, he has no authority to fix the amounts to be paid to
corporate officers by way of basic salary, bonus or additional remuneration
a matter that lies more or less exclusively within the sound discretion of the
corporation itself. But this right of the corporation is, of course, not absolute. It
cannot exercise it for the purpose of evading payment of taxes legitimately
due to the State."
Finally, it should be noted that we have here a case practically of a sole
proprietorship of C. M. Hoskins, who however chose to incorporate his
business with himself holding virtually absolute control thereof with 99.6% of
its stock with four other nominal shareholders holding one share each. Having
chosen to use the corporate form with its legal advantages of a separate
corporate personality as distinguished from his individual personality, the
corporation so created, i.e., petitioner, is bound to comport itself in
accordance with corporate norms and comply with its corporate obligations.
Specifically, it is bound to pay the income tax imposed by law on corporations
and may not legally be permitted, by way of corporate resolutions authorizing
payment of inordinately large commissions and fees to its controlling
stockholder, to dilute and diminish its corresponding corporate tax liability.
ACCORDINGLY, the decision appealed from is hereby affirmed, with costs in
both instances against petitioner.

G.R. No. L-54108 January 17, 1984


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF TAX APPEALS and SMITH KLINE & FRENCH OVERSEAS
CO. (PHILIPPINE BRANCH), respondents.
The Solicitor General for petitioner.
Siguion Reyna, Montecillo & Ongsiako and J.C. Castaeda, Jr. and E.C.
Alcantara for respondents.

AQUINO, J.:
This case is about the refund of a 1971 income tax amounting to P324,255.
Smith Kline and French Overseas Company, a multinational firm domiciled in
Philadelphia, Pennsylvania, is licensed to do business in the Philippines. It is
engaged in the importation, manufacture and sale of pharmaceuticals drugs
and chemicals.
In its 1971 original income tax return, Smith Kline declared a net taxable
income of P1,489,277 (Exh. A) and paid P511,247 as tax due. Among the
deductions claimed from gross income was P501,040 ($77,060) as its share
of the head office overhead expenses. However, in its amended return filed
on March 1, 1973, there was an overpayment of P324,255 "arising from
underdeduction of home office overhead" (Exh. E). It made a formal claim for
the refund of the alleged overpayment.
It appears that sometime in October, 1972, Smith Kline received from its
international independent auditors, Peat, Marwick, Mitchell and Company, an
authenticated certification to the effect that the Philippine share in the
unallocated overhead expenses of the main office for the year ended
December 31, 1971 was actually $219,547 (P1,427,484). It further stated in
the certification that the allocation was made on the basis of the percentage
of gross income in the Philippines to gross income of the corporation as a
whole. By reason of the new adjustment, Smith Kline's tax liability was greatly
reduced from P511,247 to P186,992 resulting in an overpayment of
P324,255.
On April 2, 1974, without awaiting the action of the Commissioner of Internal
Revenue on its claim Smith Kline filed a petition for review with the Court of
Tax Appeals.
In its decision of March 21, 1980, the Tax Court ordered the Commissioner to
refund the overpayment or grant a tax credit to Smith Kline. The
Commissioner appealed to this Court.
The governing law is found in section 37 of the old National Internal Revenue
Code, Commonwealth Act No. 466, which is reproduced in Presidential
Decree No. 1158, the National Internal Revenue Code of 1977 and which
reads:
SEC. 37. Income form sources within the Philippines.
xxx xxx xxx
(b) Net income from sources in the Philippines. From the items of gross
income specified in subsection (a) of this section there shall be deducted the
expenses, losses, and other deductions properly apportioned or allocated
thereto and a ratable part of any expenses, losses, or other deductions which
cannot definitely be allocated to some item or class of gross income. The
remainder, if any, shall be included in full as net income from sources within
the Philippines.
xxx xxx xxx
Revenue Regulations No. 2 of the Department of Finance contains the
following provisions on the deductions to be made to determine the net
income from Philippine sources:
SEC. 160. Apportionment of deductions. From the items specified in
section 37(a), as being derived specifically from sources within the
Philippines there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of any
other expenses, losses or deductions which can not definitely be allocated to
some item or class of gross income. The remainder shall be included in full as
net income from sources within the Philippines. The ratable part is based
upon the ratio of gross income from sources within the Philippines to the total
gross income.
Example: A non-resident alien individual whose taxable year is the calendar
year, derived gross income from all sources for 1939 of P180,000, including
therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Philippines 12,000
Gain from sale of real property located within the Philippines 11,000
Total P36,000
that is, one-fifth of the total gross income was from sources within the
Philippines. The remainder of the gross income was from sources without the
Philippines, determined under section 37(c).
The expenses of the taxpayer for the year amounted to P78,000. Of these
expenses the amount of P8,000 is properly allocated to income from sources
within the Philippines and the amount of P40,000 is properly allocated to
income from sources without the Philippines.
The remainder of the expense, P30,000, cannot be definitely allocated to any
class of income. A ratable part thereof, based upon the relation of gross
income from sources within the Philippines to the total gross income, shall be
deducted in computing net income from sources within the Philippines. Thus,
these are deducted from the P36,000 of gross income from sources within the
Philippines expenses amounting to P14,000 [representing P8,000 properly
apportioned to the income from sources within the Philippines and P6,000, a
ratable part (one-fifth) of the expenses which could not be allocated to any
item or class of gross income.] The remainder, P22,000, is the net income
from sources within the Philippines.
From the foregoing provisions, it is manifest that where an expense is clearly
related to the production of Philippine-derived income or to Philippine
operations (e.g. salaries of Philippine personnel, rental of office building in the
Philippines), that expense can be deducted from the gross income acquired
in the Philippines without resorting to apportionment.
The overhead expenses incurred by the parent company in connection with
finance, administration, and research and development, all of which direct
benefit its branches all over the world, including the Philippines, fall under a
different category however. These are items which cannot be definitely
allocated or Identified with the operations of the Philippine branch. For 1971,
the parent company of Smith Kline spent $1,077,739. Under section 37(b) of
the Revenue Code and section 160 of the regulations, Smith Kline can claim
as its deductible share a ratable part of such expenses based upon the ratio
of the local branch's gross income to the total gross income, worldwide, of the
multinational corporation.
In his petition for review, the Commissioner does not dispute the right of
Smith Kline to avail itself of section 37(b) of the Tax Code and section 160 of
the regulations. But the Commissioner maintains that such right is not
absolute and that as there exists a contract (in this case a service agreement)
which Smith Kline has entered into with its home office, prescribing the
amount that a branch can deduct as its share of the main office's overhead
expenses, that contract is binding.
The Commissioner contends that since the share of the Philippine branch has
been fixed at $77,060, Smith Kline itself cannot claim more than the said
amount. To allow Smith Kline to deduct more than what was expressly
provided in the agreement would be to ignore its existence. It is a cardinal
rule that a contract is the law between the contracting parties and the
stipulations therein must be respected unless these are proved to be contrary
to law, morals, good customs and public policy. There being allegedly no
showing to the contrary, the provisions thereof must be followed.
The Commissioner also argues that the Tax Court erred in relying on the
certification of Peat, Marwick, Mitchell and Company that Smith Kline is
entitled to deduct P1,427,484 ($219,547) as its allotted share and that Smith
Kline has not presented any evidence to show that the home office expenses
chargeable to Philippine operations exceeded $77,060.
On the other hand, Smith Kline submits that the contract between itself and
its home office cannot amend tax laws and regulations. The matter of
allocated expenses which are deductible under the law cannot be the subject
of an agreement between private parties nor can the Commissioner
acquiesce in such an agreement.
Smith Kline had to amend its return because it is of common knowledge that
audited financial statements are generally completed three or four months
after the close of the accounting period. There being no financial statements
yet when the certification of January 11, 1972 was made the treasurer could
not have correctly computed Smith Kline's share in the home office overhead
expenses in accordance with the gross income formula prescribed in section
160 of the Revenue Regulations. What the treasurer certified was a mere
estimate.
Smith Kline likewise submits that it has presented ample evidence to support
its claim for refund. To this end, it has presented before the Tax Court the
authenticated statement of Peat, Marwick, Mitchell and Company to show
that since the gross income of the Philippine branch was P7,143,155
($1,098,617) for 1971 as per audit report prepared by Sycip, Gorres, Velayo
and Company, and the gross income of the corporation as a whole was
$6,891,052, Smith Kline's share at 15.94% of the home office overhead
expenses was P1,427,484 ($219,547) (Exh. G to G-2, BIR Records, 4-5).
Clearly, the weight of evidence bolsters its position that the amount of
P1,427,484 represents the correct ratable share, the same having been
computed pursuant to section 37(b) and section 160.
In a manifestation dated July 19, 1983, Smith Kline declared that with respect
to its share of the head office overhead expenses in its income tax returns for
the years 1973 to 1981, it deducted its ratable share of the total overhead
expenses of its head office for those years as computed by the independent
auditors hired by the parent company in Philadelphia, Pennsylvania U.S.A.,
as soon as said computations were made available to it.
We hold that Smith Kline's amended 1971 return is in conformity with the law
and regulations. The Tax Court correctly held that the refund or credit of the
resulting overpayment is in order.
WHEREFORE, the decision of the Tax Court is hereby affirmed. No costs.

G.R. No. L-13325 April 20, 1961


SANTIAGO GANCAYCO, petitioner,
vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.
Benjamin J. Molina for petitioner.
Office of the Solicitor General and Special Attorney Antonio A. Garces for
respondent.
CONCEPCION, J.:
Petitioner Santiago Gancayco seeks the review of a decision of the Court of
Tax Appeals, requiring him to pay P16,860.31, plus surcharge and interest, by
way of deficiency income tax for the year 1949.
On May 10, 1950, Gancayco filed his income tax return for the year 1949.
Two (2) days later, respondent Collector of Internal Revenue issued the
corresponding notice advising him that his income tax liability for that year
amounted P9,793.62, which he paid on May 15, 1950. A year later, on May
14, 1951, respondent wrote the communication Exhibit C, notifying
Gancayco, inter alia, that, upon investigation, there was still due from him, a
efficiency income tax for the year 1949, the sum of P29,554.05. Gancayco
sought a reconsideration, which was part granted by respondent, who in a
letter dated April 8, 1953 (Exhibit D), informed petitioner that his income tax
defendant efficiency for 1949 amounted to P16,860.31. Gancayco urged
another reconsideration (Exhibit O), but no action taken on this request,
although he had sent several communications calling respondent's attention
thereto.
On April 15, 1956, respondent issued a warrant of distraint and levy against
the properties of Gancayco for the satisfaction of his deficiency income tax
liability, and accordingly, the municipal treasurer of Catanauan, Quezon
issued on May 29, 1956, a notice of sale of said property at public auction on
June 19, 1956. Upon petition of Gancayco filed on June 16, 1956, the Court
of Tax Appeal issued a resolution ordering the cancellation of the sale and
directing that the same be readvertised at a future date, in accordance with
the procedure established by the National Internal Revenue Code.
Subsequently, or on June 22, 1956, Gancayco filed an amended petition
praying that said Court:
(a) Issue a writ of preliminary injunction, enjoining the respondents from
enforcing the collection of the alleged tax liability due from the petitioner
through summary proceeding pending determination of the present case;
(b) After a review of the present case adjudge that the right of the government
to enforce collection of any liability due on this account had already
prescribed;
(c) That even assuming that prescription had not set in the objections of
petitioner to the disallowance of the entertainment, representation and
farming expenses be allowed;
xxx xxx xxx
In his answer respondent admitted some allegations the amended petition,
denied other allegations thereof an set up some special defenses. Thereafter
Gancayco received from the municipal treasurer of Catanauan, Quezon,
another notice of auction sale of his properties, to take place on August 29,
1956. On motion of Gancayco, the Court of Tax Appeals, by resolution dated
August 27, 1956, "cancelled" the aforementioned sale and enjoined
respondent and the municipal treasurer of Catanauan, Quezon, from
proceeding with the same. After appropriate proceedings, the Court of Tax
Appeals rendered, on November 14, 1957, the decision adverted to above.
Gancayco maintains that the right to collect the deficiency income tax in
question is barred by the statute of limitations. In this connection, it should be
noted, however, that there are two (2) civil remedies for the collection of
internal revenue taxes, namely: (a) by distraint of personal property and levy
upon real property; and (b) by "judicial action" (Commonwealth Act 456,
section 316). The first may not be availed of except within three (3) years
after the "return is due or has been made ..." (Tax Code, section 51 [d] ). After
the expiration of said Period, income taxes may not be legally and validly
collected by distraint and/or levy (Collector of Internal Revenue v. Avelino,
L-9202, November 19, 1956; Collector of Internal Revenue v. Reyes, L-8685,
January 31, 1957; Collector of Internal Revenue v. Zulueta, L-8840, February
8, 1957; Sambrano v. Court of Tax Appeals, L-8652, March 30, 1957).
Gancayco's income tax return for 1949 was filed on May 10, 1950; so that the
warrant of distraint and levy issued on May 15, 1956, long after the expiration
of said three-year period, was illegal and void, and so was the attempt to sell
his properties in pursuance of said warrant.
The "judicial action" mentioned in the Tax Code may be resorted to within five
(5) years from the date the return has been filed, if there has been no
assessment, or within five (5) years from the date of the assessment made
within the statutory period, or within the period agreed upon, in writing, by the
Collector of Internal Revenue and the taxpayer. before the expiration of said
five-year period, or within such extension of said stipulated period as may
have been agreed upon, in writing, made before the expiration of the period
previously situated, except that in the case of a false or fraudulent return with
intent to evade tax or of a failure to file a return, the judicial action may be
begun at any time within ten (10) years after the discovery of the falsity, fraud
or omission (Sections 331 and 332 of the Tax Code). In the case at bar,
respondent made three (3) assessments: (a) the original assessment of
P9,793.62, made on May 12, 1950; (b) the first deficiency income tax
assessment of May 14, 1951, for P29,554.05; and (c) the amended deficiency
income tax assessment of April 8, 1953, for P16,860.31.
Gancayco argues that the five-year period for the judicial action should be
counted from May 12, 1950, the date of the original assessment, because the
income tax for 1949, he says, could have been collected from him since then.
Said assessment was, however, not for the deficiency income tax involved in
this proceedings, but for P9,793.62, which he paid forthwith. Hence, there
never had been any cause for a judicial action against him, and, per force, no
statute of limitations to speak of, in connection with said sum of P9,793.62.
Neither could said statute have begun to run from May 14, 1951, the date of
the first deficiency income tax assessment or P29,554.05, because the same
was, upon Gancayco's request, reconsidered or modified by the assessment
made on April 8, 1953, for P16,860.31. Indeed, this last assessment is what
Gancayco contested in the amended petition filed by him with the Court of
Tax Appeals. The amount involved in such assessment which Gancayco
refused to pay and respondent tried to collect by warrant of distraint and/or
levy, is the one in issue between the parties. Hence, the five-year period
aforementioned should be counted from April 8, 1953, so that the statute of
limitations does not bar the present proceedings, instituted on April 12, 1956,
if the same is a judicial action, as contemplated in section 316 of the Tax
Code, which petitioner denies, upon the ground that
a. "The Court of Tax Appeals does not have original jurisdiction to entertain an
action for the collection of the tax due;
b. "The proper party to commence the judicial action to collect the tax due is
the government, and
c. "The remedies provided by law for the collection of the tax are exclusive."
Said Section 316 provides:
The civil remedies for the collection of internal revenue taxes, fees, or
charges, and any increment thereto resulting from delinquency shall be (a) by
distraint of goods, chattels, or effects, and other personal property of
whatever character, including stocks and other securities, debts, credits, bank
accounts, and interest in and rights to personal property, and by levy upon
real property; and (b) by judicial action. Either of these remedies or both
simultaneously may be pursued in the discretion of the authorities charged
with the collection of such taxes.
No exemption shall be allowed against the internal revenue taxes in any
case.
Petitioner contends that the judicial action referred to in this provision is
commenced by filing, with a court of first instance, of a complaint for the
collection of taxes. This was true at the time of the approval of
Commonwealth Act No. 456, on June 15, 1939. However, Republic Act No.
1125 has vested the Court of Tax Appeals, not only with exclusive appellate
jurisdiction to review decisions of the Collector (now Commissioner) of
Internal Revenue in cases involving disputed assessments, like the one at
bar, but, also, with authority to decide "all cases involving disputed
assessments of Internal Revenue taxes or customs duties pending
determination before the court of first instance" at the time of the approval of
said Act, on June 16, 1954 (Section 22, Republic Act No. 1125). Moreover,
this jurisdiction to decide all cases involving disputed assessments of internal
revenue taxes and customs duties necessarily implies the power to authorize
and sanction the collection of the taxes and duties involved in such
assessments as may be upheld by the Court of Tax Appeals. At any rate, the
same now has the authority formerly vested in courts of first instance to hear
and decide cases involving disputed assessments of internal revenue taxes
and customs duties. Inasmuch as those cases filed with courts of first
instance constituted judicial actions, such is, likewise, the nature of the
proceedings before the Court of Tax Appeals, insofar as sections 316 and 332
of the Tax Code are concerned.
The question whether the sum of P16,860.31 is due from Gancayco as
deficiency income tax for 1949 hinges on the validity of his claim for
deduction of two (2) items, namely: (a) for farming expenses, P27,459.00;
and (b) for representation expenses, P8,933.45.
Section 30 of the Tax Code partly reads:
(a) Expenses:
(1) In General All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; traveling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments required to be
made as a condition to the continued use or possession, for the purposes of
the trade or business, of property to which the taxpayer has not taken or is
not taking title or in which he has no equity. (Emphasis supplied.)
Referring to the item of P27,459, for farming expenses allegedly incurred by
Gancayco, the decision appealed from has the following to say:
No evidence has been presented as to the nature of the said "farming
expenses" other than the bare statement of petitioner that they were spent for
the "development and cultivation of (his) property". No specification has been
made as to the actual amount spent for purchase of tools, equipment or
materials, or the amount spent for improvement. Respondent claims that the
entire amount was spent exclusively for clearing and developing the farm
which were necessary to place it in a productive state. It is not, therefore, an
ordinary expense but a capitol expenditure. Accordingly, it is not deductible
but it may be amortized, in accordance with section 75 of Revenue
Regulations No. 2, cited above. See also, section 31 of the Revenue Code
which provides that in computing net income, no deduction shall in any case
be allowed in respect of any amount paid out for new buildings or for
permanent improvements, or betterments made to increase the value of any
property or estate. (Emphasis supplied.)
We concur in this view, which is a necessary consequence of section 31 of
the Tax Code, pursuant to which:
(a) General Rule In computing net income no deduction shall in any case
be allowed in respect of
(1) Personal, living, or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
(3) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer
or employee, or any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy. (Emphasis supplied.)
Said view is, likewise, in accord with the consensus of the authorities on the
subject.
Expenses incident to the acquisition of property follow the same rule as
applied to payments made as direct consideration for the property. For
example, commission paid in acquiring property are considered as
representing part of the cost of the property acquired. The same treatment is
to be accorded to amounts expended for maps, abstracts, legal opinions on
titles, recording fees and surveys. Other non-deductible expenses include
amounts paid in connection with geological explorations, development and
subdividing of real estate; clearing and grading; restoration of soil, drilling
wells, architects's fees and similar types of expenditures. (4 Merten's Law of
Federal Income Taxation, Sec. 25.20, pp. 348-349; see also sec. 75 of the
income Regulation of the B.I.R.; Emphasis supplied.)
The cost of farm machinery, equipment and farm building represents a capital
investment and is not an allowable deduction as an item of expense. Amounts
expended in the development of farms, orchards, and ranches prior to the
time when the productive state is reached may be regarded as investments of
capital. (Merten's Law of Federal Income Taxation, supra, sec. 25.108, p.
525.)
Expenses for clearing off and grading lots acquired is a capital expenditure,
representing part of the cost of the land and was not deductible as an
expense. (Liberty Banking Co. v. Heiner 37 F [2d] 703 [8AFTR 100111] [CCA
3rd]; The B.L. Marble Chair Company v. U.S., 15 AFTR 746).
An item of expenditure, in order to be deductible under this section of the
statute providing for the deduction of ordinary and necessary business
expenses, must fall squarely within the language of the statutory provision.
This section is intended primarily, although not always necessarily, to cover
expenditures of a recurring nature where the benefit derived from the
payment is realized and exhausted within the taxable year. Accordingly, if the
result of the expenditure is the acquisition of an asset which has an
economically useful life beyond the taxable year, no deduction of such
payment may be obtained under the provisions of the statute. In such cases,
to the extent that a deduction is allowable, it must be obtained under the
provisions of the statute which permit deductions for amortization,
depreciation, depletion or loss. (W.B. Harbeson Co. 24 BTA, 542; Clark
Thread Co., 28 BTA 1128 aff'd 100 F [2d] 257 [CCA 3rd, 1938]; 4 Merten's
Law of Federal Income Taxation, Sec. 25.17, pp. 337-338.)
Gancayco's claim for representation expenses aggregated P31,753.97, of
which P22,820.52 was allowed, and P8,933.45 disallowed. Such
disallowance is justified by the record, for, apart from the absence of receipts,
invoices or vouchers of the expenditures in question, petitioner could not
specify the items constituting the same, or when or on whom or on what they
were incurred. The case of Cohan v. Commissioner, 39 F (2d) 540, cited by
petitioner is not in point, because in that case there was evidence on the
amounts spent and the persons entertained and the necessity of entertaining
them, although there were no receipts an vouchers of the expenditures
involved therein. Such is not the case of petitioner herein.
Being in accordance with the facts and law, the decision of the Court of Tax
Appeals is hereby affirmed therefore, with costs against petitioner Santiago
Cancayco. It is so ordered.

G.R. No. L-16626 October 29, 1966


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CARLOS PALANCA, JR., respondent.
Office of the Solicitor General for petitioner.
Manuel B. San Jose for respondent.
REGALA, J.:
This is an appeal by the Government from the decision of the Court of Tax
Appeals in CTA Case No. 571 ordering the petitioner to refund to the
respondent the amount of P20,624.01 representing alleged over-payment of
income taxes for the calendar year 1955. The facts are:
Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of
his son, the petitioner, herein shares of stock in La Tondea, Inc. amounting
to 12,500 shares. For failure to file a return on the donation within the
statutory period, the petitioner was assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift tax, 25% surcharge and interest,
respectively, which he paid on June 22, 1955.
On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his
income tax return for the calendar year 1955, claiming, among others, a
deduction for interest amounting to P9,706.45 and reporting a taxable income
of P65,982.12. On the basis of this return, he was assessed the sum of
P21,052.91, as income tax, which he paid, as follows:
Taxes withheld by La Tondea Inc. from Mr. Palanca's wages
P13,172.41
Payment under Income Tax Receipt No. 677395 dated May 11, 1956
3,939.80
Payment under Income Tax Receipt dated August 14, 1956
3,939.80

P21,052.01
Subsequently, on November 10, 1956, the petitioner filed an amended return
for the calendar year 1955, claiming therein an additional deduction in the
amount of P47,868.70 representing interest paid on the donee's gift tax,
thereby reporting a taxable net income of P18,113.42 and a tax due thereon
in the sum of P3,167.00. The claim for deduction was based on the provisions
of Section 30(b) (1) of the Tax Code, which authorizes the deduction from
gross income of interest paid within the taxable year on indebtedness. A claim
for the refund of alleged overpaid income taxes for the year 1955 amounting
to P17,885.01, which is the difference between the amount of P21,052.01 he
paid as income taxes under his original return and of P3,167.00, was filed
together with this amended return. In a communication dated June 20, 1957,
the respondent (BIR) denied the claim for refund.
On August 27, 1957, the petitioner reiterated his claim for refund, and at the
same time requested that the case be elevated to the Appellate Division of
the Bureau of Internal Revenue for decision. The reiterated claim was denied
on October 14, 1957.
On November 2, 1957, the petitioner requested that the case be referred to
the Conference Staff of the Bureau of Internal Revenue for review. Later, on
November 6, 1957, he requested the respondent to hold his action on the
case in abeyance until after the Court of Tax Appeals renders its division on a
similar case. And on November 7, 1957, the respondent denied the claim for
the refund of the sum of P17,885.01.
Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500
shares of stock of La Tondea Inc. to be a transfer in contemplation of death
pursuant to Section 88(b) of the National Internal Revenue Code.
Consequently, the respondent assessed against the petitioner the sum of
P191,591.62 as estate and inheritance taxes on the transfer of said 12,500
shares of stock. The amount of P17,002.74 paid on June 22, 1955 by the
petitioner as gift tax, including interest and surcharge, under Official Receipt
No. 2855 was applied to his estate and inheritance tax liability. On the tax
liability of P191,591.62, the petitioner paid the amount of P60,581.80 as
interest for delinquency as follows:
1% monthly interest on P76,724.38
September 2, 1952 to February 16, 1955
P22,633.69
1% monthly interest on P71,264.77
February 16, 1955 to March 31, 1955
1,068.97
1% monthly interest on P114,867.24
September 2, 1952 to April 16, 1953
4,287.99
1% monthly interest on P50,832.77
March 31, 1955 to June 22, 1955
1,372.48
1% monthly interest on P119,155.23
April 16, 1953 to June 22, 1955
31,218.67
Total
P60,581.80
On August 12, 1958, the petitioner once more filed an amended income tax
return for the calendar year 1955, claiming, in addition to the interest
deduction of P9,076.45 appearing in his original return, a deduction in the
amount of P60,581.80, representing interest on the estate and inheritance
taxes on the 12,500 shares of stock, thereby reporting a net taxable income
for 1955 in the amount of P5,400.32 and an income tax due thereon in the
sum of P428.00. Attached to this amended return was a letter of the
petitioner, dated August 11, 1958, wherein he requested the refund of
P20,624.01 which is the difference between the amounts of P21,052.01 he
paid as income tax under his original return and of P428.00.
Without waiting for the respondent's decision on this claim for refund, the
petitioner filed his petition for review before this Court on August 13, 1958. On
July 24, 1959, the respondent denied the petitioner's request for the refund of
the sum of P20,624.01.
The Commissioner of Internal Revenue now seeks the reversal of the Court
of Tax Appeal's ruling on the aforementioned petition for review. Specifically,
he takes issue with the said court's determination that the amount paid by
respondent Palanca for interest on his delinquent estate and inheritance tax
is deductible from the gross income for that year under Section 30 (b) (1) of
the Revenue Code, and, that said respondent's claim for refund therefor has
not prescribed.
On the first point, the Commissioner urges that a tax is not an indebtedness.
Citing American cases, he argues that there is a material and fundamental
distinction between a "tax" and a "debt." (Meriwether v. Garrett, 102 U.S. 427;
Liberty Mutual Ins. Co. v. Johnson Shipyards Corporation, 5 AFTR pp. 5504,
5507; City of Camden v. Allen, 26 N.J. Law, p. 398). He adopts the view that
"debts are due to the government in its corporate capacity, while taxes are
due to the government in its sovereign capacity. A debt is a sum of money
due upon contract express or implied or one which is evidenced by a
judgment. Taxes are imposts levied by government for its support or some
special purpose which the government has recognized." In view of the
distinction, then, the Commissioner submits that the deductibility of "interest
on indebtedness" from a person's income tax under Section 30(b) (1) cannot
extend to "interest on taxes."
We find for the respondent. While "taxes" and "debts" are distinguishable
legal concepts, in certain cases as in the suit at bar, on account of their
nature, the distinction becomes inconsequential. This qualification is
recognized even in the United States. Thus,
The term "debt" is properly used in a comprehensive sense as embracing not
merely money due by contract, but whatever one is bound to render to
another, either for contract or the requirements of the law. (Camden vs. Fink
Coule and Coke Co., 61 ALR 584).
Where statutes impose a personal liability for a tax, the tax becomes at least
in a broad sense, a debt. (Idem.)
Some American authorities hold that, especially for remedial purposes,
Federal taxes are debts. (Tax Commission vs. National Malleable Castings
Co., 35 ALR 1448)
In our jurisdiction, the rule is settled that although taxes already due have not,
strictly speaking, the same concept as debts, they are, however obligations
that may be considered as such. (Sambrano vs. Court of Tax Appeals, G.R.
no. L-8652, March 30, 1957). In a more recent case Commissioner of Internal
Revenue vs. Prieto, G.R. No. L-13912, September 30, 1960, we explicitly
announced that while the distinction between "taxes" and "debts" was
recognized in this jurisdiction, the variance in their legal conception does not
extend to the interests paid on them, at least insofar as Section 30 (b) (1) of
the National Internal Revenue Code is concerned. Thus,
Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed
as an interest deduction should have been paid or accrued within the year. It
is here conceded that the interest paid by respondent was in consequence of
the late payment of her donor's tax, and the same was paid within the year it
is sought to be deducted. The only question to be determined, as stated by
the parties, is whether or not such interest was paid upon an indebtedness
within the contemplation of Section 30(b) (1) of the Tax Code, the pertinent
part of which reads:
Sec. 30. Deductions from gross income In computing net income there
shall be allowed as deductions
xxx xxx xxx
"Interest:
(1) In general. The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase or
carry obligations the interest upon which is exempt from taxation as income
under this Title.
The term "indebtedness" as used in the Tax Code of the United States
containing similar provisions as in the above-quoted section has been defined
as the unconditional and legally enforceable obligation for the payment of
money. (Federal Taxes Vol. 2, p. 13, 019, Prentice Hall, Inc.; Mertens' Law of
Federal Income Taxation, Vol. 4, p. 542.) Within the meaning of that definition,
it is apparent that a tax may be considered an indebtedness. . . . (Emphasis
supplied)
"It follows that the interest paid by herein respondent for the late payment of
her donor's tax is deductible from her gross income under section 30 (b) of
the Tax Code above-quoted."
We do not see any element in this case which can justify a departure from or
abandonment of the doctrine in the Prieto case above. In both this and the
said case, the taxpayer sought the allowance as deductible items from the
gross income of the amounts paid by them as interests on delinquent tax
liabilities. Of course, what was involved in the cited case was the donor's tax
while the present suit pertains to interest paid on the estate and inheritance
tax. This difference, however, submits no appreciable consequence to the
rationale of this Court's previous determination that interests on taxes should
be considered as interests on indebtedness within the meaning of Section
30(b) (1) of the Tax Code. The interpretation we have placed upon the said
section was predicated on the congressional intent, not on the nature of the
tax for which the interest was paid.
On the issue of prescription: There were actually two claims for refund filed by
the herein respondent, Carlos Palanca, Jr., anent the case at bar. The first
one was on November 10, 1956, when he filed a claim for refund on the
interest paid by him on the donee's gift tax of P17,885.10, as originally
demanded by the Bureau of Internal Revenue. The second one was the one
filed by him on August 12, 1958, which was a claim for refund on the interest
paid by him on the estate and inheritance tax assessed by the same Bureau
in the amount of P20,624.01. Actually, this second assessment by the Bureau
was for the same transaction as that for which they assessed respondent
Palanca the above donee's gift tax. The Bureau, however, on further
consideration, decided that the donation of the stocks in question was made
in contemplation of death, and hence, should be assessed as an inheritance.
Thus the second assessment. The first claim was denied by the petitioner for
the first time on June 20, 1957. Thereafter, the said denial was twice
reiterated, on October 14, 1957 and November 7, 1957, upon respondent
Palanca's plea for the reconsideration of the ruling of June 20, 1957. The
second claim was filed with the Court of Tax Appeals on August 13, 1958, or
even before the same had been denied by the petitioner. Respondent
Palanca's second claim was denied by the latter on July 24, 1959.
The petitioner contends that under Section 11 of Republic Act 1124,1 the
herein claimant's claim for refund has prescribed since the same was filed
outside the thirty-day period provided for therein. According to the petitioner,
the said prescriptive period commenced to run on October 14, 1947 when the
denial by the Bureau of Internal Revenue of the respondent Palanca's claim
for refund, under his letter of November 10, 1956, became final. Considering
that the case was filed with the Court of Tax Appeals only on August 13, 1958,
then it is urged that the same had prescribed.
The petitioner also invokes prescription, at least with respect to the sum of
P17,112.21, under Section 306 of the Tax Code.2 He claims that for the
calendar year 1955, respondent Palanca paid his income tax as follows:
Taxes withheld by La Tondea Inc. from Mr. Palanca's wages
P13,172.41
Payment under Income Tax Receipt No. 677395 dated May 11, 1956
3,939.89
Payment under Income Tax Receipt No. 742334 dated August 14, 1956
3,939.89

P21,952.01
Therefore, the petitioner contends, the amounts paid by claimant Palanca
under his withheld tax and under Receipt No. 677395 dated May 11, 1956
may no longer be refunded since the claim therefor was filed in court only on
August 13, 1958, or beyond two years of their payment.
We find the petitioner's contention on prescription untenable.
In the first place, the 30-day period under Section 11 of Republic Act 1125 did
not even commence to run in this incident. It should be recalled that while the
herein petitioner originally assessed the respondent-claimant for alleged gift
tax liabilities, the said assessment was subsequently abandoned and in its
lieu, a new one was prepared and served on the respondent-taxpayer. In this
new assessment, the petitioner charged the said respondent with an entirely
new liability and for a substantially different amount from the first. While
initially the petitioner assessed the respondent for donee's gift tax in the
amount of P170,002.74, in the subsequent assessment the latter was asked
to pay P191,591.62 for delinquent estate and inheritance tax. Considering
that it is the interest paid on this latter-assessed estate and inheritance tax
that respondent Palanca is claiming refund for, then the thirty-day period
under the abovementioned section of Republic Act 1125 should be computed
from the receipt of the final denial by the Bureau of Internal Revenue of the
said claim. As has earlier been recited, respondent Palanca's claim in this
incident was filed with the Court of Tax Appeals even before it had been
denied by the herein petitioner or the Bureau of Internal Revenue. The case
was filed with the said court on August 13, 1958 while the petitioner denied
the claim subject of the said case only on July 24, 1959.
In the second place, the claim at bar refers to the alleged overpayment by
respondent Palanca of his 1955 income tax. Inasmuch as the said account
was paid by him by installment, then the computation of the two-year
prescriptive period, under Section 306 of the National Internal Revenue Code,
should be from the date of the last installment. (Antonio Prieto, et al. vs.
Collector of Internal Revenue, G.R. No. L-11976, August 29, 1961)
Respondent Palanca paid the last installment on his 1955 income tax account
on August 14, 1956. His claim for refund of the alleged overpayment on it was
filed with the court on August 13, 1958. It was, therefore, still timely instituted.
WHEREFORE, the decision appealed from is affirmed in full, without
pronouncement on costs.

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP), petitioner, vs. COURT OF


APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

G.R. Nos. 106949-50 December 1, 1995

COMMISSIONER INTERNAL REVENUE, petitioner, vs. PAPER INDUSTRIES CORPORATION OF THE


PHILIPPINES, THE COURT OF APPEALS and THE COURT OF TAX APPEALS, respondents.
G.R. Nos. 106984-85 December 1, 1995

Decision by: Justice Feliciano

Facts: Paper Industries Corporation of the Philippines (PICOP) is a Philippine corporation


registered with the Board of Investments (BOI) as a preferred pioneer enterprise with respect to
its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its
integrated plywood and veneer mills. Petitioner received from the Commissioner of Internal
Revenue (CIR) two (2) letters of assessment and demand (a) one for deficiency transaction tax
and for documentary and science stamp tax; and (b) the other for deficiency income tax for
1977, for an aggregate amount of PhP88,763,255.00.

PICOP protested the assessment of deficiency transaction tax , the documentary and science
stamp taxes, and the deficiency income tax assessment. CIR did not formally act upon these
protests, but issued a warrant of distraint on personal property and a warrant of levy on real
property against PICOP, to enforce collection of the contested assessments, thereby denying
PICOP's protests. Thereupon, PICOP went before (CTA) appealing the assessments.

On 15 August 1989, CTA rendered a decision, modifying the CIRs findings and holding PICOP
liable for the reduced aggregate amount of P20,133,762.33. Both parties went to the Supreme
Court, which referred the case to the Court of Appeals (CA).

CA denied the appeal of the CIR and modified the judgment against PICOP holding it liable for
transaction tax and absolved it from payment of documentary and science stamp tax and
compromise penalty. It also held PICOP liable for deficiency of income tax.

Issues:

1. Whether PICOP is liable for transaction tax

2. Whether PICOP is liable for documentary and science stamp tax

3. Whether PICOP is liable for deficiency income tax

Held:

1. YES. PICOP reiterates that it is exempt from the payment of the transaction tax by virtue
of its tax exemption under R.A. No. 5186, as amended, known as the Investment
Incentives Act, which in the form it existed in 1977-1978, read in relevant part as follows:
"SECTION 8. Incentives to a Pioneer Enterprise. In addition to the incentives provided in
the preceding section, pioneer enterprises shall be granted the following incentive
benefits: (a) Tax Exemption. Exemption from all taxes under the National Internal
Revenue Code, except income tax, from the date of investment is included in the
Investment Priorities Plan x x x. The Supreme Court holds that that PICOP's tax
exemption under R.A. No. 5186, as amended, does not include exemption from the
thirty-five percent (35%) transaction tax. In the first place, the thirty-five percent (35%)
transaction tax is an income tax, a tax on the interest income of the lenders or creditors
as held by the Supreme Court in the case of Western Minolco Corporation v. Commissioner
of Internal Revenue. The 35% transaction tax is an income tax on interest earnings to the
lenders or placers. The latter are actually the taxpayers. Therefore, the tax cannot be a
tax imposed upon the petitioner. In other words, the petitioner who borrowed funds from
several financial institutions by issuing commercial papers merely withheld the 35%
transaction tax before paying to the financial institutions the interest earned by them
and later remitted the same to the respondent CIR. The tax could have been collected by
a different procedure but the statute chose this method. Whatever collecting procedure
is adopted does not change the nature of the tax. It is thus clear that the transaction tax
is an income tax and as such, in any event, falls outside the scope of the tax exemption
granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended.
PICOP was the withholding agent, obliged to withhold thirty-five percent (35%) of the
interest payable to its lenders and to remit the amounts so withheld to the Bureau of
Internal Revenue ("BIR"). As a withholding, agent, PICOP is made personally liable for the
thirty-five percent (35%) transaction tax 10 and if it did not actually withhold thirty-five
percent (35%) of the interest monies it had paid to its lenders, PICOP had only itself to
blame.

2. NO. The CIR assessed documentary and science stamp taxes, amounting to
PhP300,000.00, on the issuance of PICOP's debenture bonds. Tax exemptions are, to be
sure, to be "strictly construed," that is, they are not to be extended beyond the ordinary
and reasonable intendment of the language actually used by the legislative authority in
granting the exemption. The issuance of debenture bonds is certainly conceptually
distinct from pulping and paper manufacturing operations. But no one contends that
issuance of bonds was a principal or regular business activity of PICOP; only banks or
other financial institutions are in the regular business of raising money by issuing bonds
or other instruments to the general public. The actual dedication of the proceeds of the
bonds to the carrying out of PICOP's registered operations constituted a sufficient nexus
with such registered operations so as to exempt PICOP from taxes ordinarily imposed
upon or in connection with issuance of such bonds. The Supreme Court agrees with the
Court of Appeals on this matter that the CTA and the CIR had erred in rejecting PICOP's
claim for exemption from stamp taxes.

3. YES. PICOP did not deny the existence of discrepancy in their Income Tax Return and
Books of Account owing to their procedure of recording its export sales (reckoned in U.S.
dollars) on the basis of a fixed rate, day to day and month to month, regardless of the
actual exchange rate and without waiting when the actual proceeds are received. In
other words, PICOP recorded its export sales at a pre-determined fixed exchange rate.
That pre-determined rate was decided upon at the beginning of the year and continued
to be used throughout the year. Because of this, the CIR has made out at least a prima
facie case that PICOP had understated its sales and overstated its cost of sales as set out
in its Income Tax Return. For the CIR has a right to assume that PICOP's Books of Accounts
speak the truth in this case since, as already noted, they embody what must appear to be
admissions against PICOP's own interest.

G.R. No. L-11976 September 26, 1961


COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
ANTONIO PRIETO, ET AL., respondents.
Office of the Solicitor General for petitioner.
Ramirez, Ortigas and Formilleza and Latorre for respondents.
RESOLUTION

DIZON, J.:
Before us is petitioner's motion praying that our decision of August 29, 1961
be reconsidered and set aside "insofar as said decision affirms the ruling of
the Court of Tax Appeals charging interest against the Government on the tax
payment declared refundable to the respondents." He relies upon our
decision in Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo,
promulgated on May 25, 1959, in which we said:
We agree, however, with the Solicitor General that the Court of Tax Appeals
erred in ordering the payment of interest on the amount to be refunded to
respondent herein. In the absence of a statutory provision clearly or expressly
directing or authorizing such payment, and none has been cited by
respondent, the National Government cannot be required to pay interest (H.E.
Heacock Co. v. Collector of Customs, 37 Phil 970; Marine Trading Co. v.
Gov't of the P.I., 39 Phil. 29; Sarasola v. Trinidad, 40 Phil. 252). So much of
the decision appealed from as requires the payment of interest should,
therefore, be eliminated.
Prior, however, to the decision relied upon we held in Carcar Electric & Ice
Plant Co., Inc. vs. Collector of Internal Revenue (G.R. No. L-9257, Oct. 17,
1956, 53 O.G. No. 4, 1068) that "under the present Internal Revenue Code
the Collector of Internal Revenue may be made to answer for interest at the
legal rate on taxes improperly collected. Such liability serves as additional
safeguard in favor of the taxpayer against arbitrariness in the exaction or
collection of taxes and imposts." (See Resolution on the Motion for
Reconsideration filed by the Collector of Internal Revenue, 53 O.G. No. 4,
1071-1075).
In reasoning our Resolution in the Carcar case we said that "Under the
Internal Revenue Act of 1914, the Collector of Internal Revenue was liable for
interest on taxes improperly collected as held in Hongkong-Shanghai Bank
vs. Rafferty, 39 Phil. 153; Heacock Co. vs. Collector of Customs, 37 Phil. 970;
Vda. e Hijos de P. Roxas vs. Rafferty, 37 Phil. 957"; that, subsequently,
Section 1579 of the Administrative Code of 1917 expressly authorized suits
against the Collector of Internal Revenue "for the recovery without interest of
the sum alleged to have been illegally collected"; that for this reason,
thereafter no judgments for interest were rendered against the Collector; that
in 1939, the National Internal Revenue Code, in its section 306, authorized
recovery of taxes erroneously or illegally collected, but omitting the
expression "without interest" employed in the aforesaid section of the
Administrative Code of 1917, which it superseded; that considering our
repeated rulings holding the Collector of Internal Revenue liable for interest
on taxes improperly collected, in the absence of express exemption, it was
clear that the Legislature's failure to reenact the words "without interest" of
the Administrative Code of 1917 showed a clear desire to return to the rule in
force before said year.
Our decision in the Carcar case, however, must be understood as holding the
Collector of Internal Revenue liable for interest on taxes improperly collected
only if the collection was attended with "arbitrariness". The facts involved in
the case relied upon by petitioner the St. Paul's Hospital of Iloilo case
do not seem to justify the conclusion that arbitrariness attended or
characterized the collection of the taxes in question therein. Said facts are as
follows:
Petitioner is a corporation "dedicated to charitable, educational and religious
purposes", operating a hospital giving medical assistance to destitute
persons. (See St. Paul's Hospital of Iloilo v. Collector of Internal Revenue,
C.T.A. Case No. 6, promulgated on December 4, 1954). It maintains a
pharmacy department within the premises of its hospital to supply drugs and
medicines only to charity and paying patients confined therein. However, only
the paying patients are required to pay the medicines supplied to them and
the charge consists of the cost of such medicines plus an additional 10%
thereof to partly offset the cost of medicines supplied free of charge to charity
patients. On May 6, 1954, respondent assessed and demanded from
petitioner the sum of P485.00 allegedly representing business tax on its
operation of a pharmacy department. From this assessment petitioner
appealed to this Court.1awphl.nt

The question of whether or not the sale of drugs and medicines made at the
pharmacy department of the St. Paul's Hospital of Iloilo were taxable was, in
our opinion, a fairly debatable issue. The Collector, therefore, can not be said
to have acted arbitrarily in assessing the corresponding tax on the hospital.
This being the case, we see no real conflict between our decision in the
Carcar case, on the one hand, and the one rendered in the St. Paul's Hospital
of Iloilo case.
The question we now have to decide is whether the first or the second ruling
is the one applicable to the present case. Upon consideration of the facts
appearing of record we believe that it is the first. The Collector of Internal
Revenue had no reason to insist in collecting the inheritance tax from
respondents on the basis of the value of the properties allotted to each of
them, in accordance with the project of partition submitted to and approved by
the court without deducting therefrom the cash payments which, in
accordance with their agreement with their co-heirs, they had to pay to the
latter for the purpose of making the share of each heir equal in value to that of
the others as ordained in the will of the deceased Doa Teresa Tuason y
de la Paz, and as agreed among the heirs. What each of the respondents
really received as his share in the estate of said deceased was the value of
the properties allotted to each of them minus the cash payments each had to
make in order to equalize their respective share with that of the other heirs.
The collection of the inheritance taxes herein involved being clearly
unjustified, we are constrained, as already stated above, to hold the ruling in
the Carcar case applicable to the present.
WHEREFORE, petitioner's motion for reconsideration is hereby denied.
TAX BASE AND TAX RATE

G.R. No. 76573 September 14, 1989


MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.),
petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.

FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation
duly organized and existing under the laws of Japan and duly licensed to
engage in business under Philippine laws with branch office at the 4th Floor,
FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the
decision of the Court of Tax Appeals 1 dated February 12, 1986 denying its claim
for refund or tax credit in the amount of P229,424.40 representing alleged
overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf
and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity
investments in AG&P of Manila. For the first quarter of 1981 ending March 31,
AG&P declared and paid cash dividends to petitioner in the amount of
P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared
and paid P849,720 as cash dividends to petitioner and withheld the
corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo,
Japan, net not only of the 10% final dividend tax in the amounts of P764,748
for the first and third quarters of 1981, but also of the withheld 15% profit
remittance tax based on the remittable amount after deducting the final
withholding tax of 10%. A schedule of dividends declared and paid by AG&P
to its stockholder Marubeni Corporation of Japan, the 10% final intercorporate
dividend tax and the 15% branch profit remittance tax paid thereon, is shown
below:

1981
FIRST QUARTER (three months ended 3.31.81) (In Pesos)
THIRD QUARTER (three months ended 9.30.81)
TOTAL OF FIRST and THIRD quarters
Cash Dividends Paid
849,720.44
849,720.00
1,699,440.00
10% Dividend Tax Withheld
84,972.00
84,972.00
169,944.00
Cash Dividend net of 10% Dividend Tax Withheld
764,748.00
764,748.00
1,529,496.00
15% Branch Profit Remittance Tax Withheld
114,712.20
114,712.20
229,424.40 3
Net Amount Remitted to Petitioner
650,035.80
650,035.80
1,300,071.60

The 10% final dividend tax of P84,972 and the 15% branch profit remittance
tax of P114,712.20 for the first quarter of 1981 were paid to the Bureau of
Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt No.
6757880. Likewise, the 10% final dividend tax of P84,972 and the 15%
branch profit remittance tax of P114,712 for the third quarter of 1981 were
paid to the Bureau of Internal Revenue by AG&P on August 4, 1981 under
Central Bank Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid
15% branch profit remittance on cash dividends declared and remitted to
petitioner at its head office in Tokyo in the total amount of P229,424.40 on
April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm
Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends petitioner received from
AG&P are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to the 15% profit
remittance tax imposed under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits
remitted abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to the 15%
profit remittance tax. To be effectively connected it is not necessary that the
income be derived from the actual operation of taxpayer-corporation's trade
or business; it is sufficient that the income arises from the business activity in
which the corporation is engaged. For example, if a resident foreign
corporation is engaged in the buying and selling of machineries in the
Philippines and invests in some shares of stock on which dividends are
subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not
income arising from the business activity in which Marubeni is engaged.
Accordingly, said dividends if remitted abroad are not considered branch
profits for purposes of the 15% profit remittance tax imposed by Section 24
(b) (2) of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the
Commissioner of Internal Revenue on September 24, 1981, petitioner
claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends remitted
by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4,
1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject to the 10%
intercorporate dividend tax, the recipient of the dividends, being a non-
resident stockholder, nevertheless, said dividend income is subject to the 25
% tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980
between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation,
Japan is subject to 25 % tax, and that the taxes withheld of 10 % as
intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %,
the amount refundable offsets the liability, hence, nothing is left to be
refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of
the refund by the Commissioner of Internal Revenue in its assailed judgment
of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court
explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact
that the dividends in question are income taxable to the Marubeni Corporation
of Tokyo, Japan. The said dividends were distributions made by the Atlantic,
Gulf and Pacific Company of Manila to its shareholder out of its profits on the
investments of the Marubeni Corporation of Japan, a non-resident foreign
corporation. The investments in the Atlantic Gulf & Pacific Company of the
Marubeni Corporation of Japan were directly made by it and the dividends on
the investments were likewise directly remitted to and received by the
Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine
Branch has no participation or intervention, directly or indirectly, in the
investments and in the receipt of the dividends. And it appears that the funds
invested in the Atlantic Gulf & Pacific Company did not come out of the funds
infused by the Marubeni Corporation of Japan to the Marubeni Corporation
Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in
authorizing the remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of Japan as a non-
resident stockholder of the Atlantic Gulf & Pacific Company based on the
supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the
person who earned it. Admittedly, the dividends under consideration were
earned by the Marubeni Corporation of Japan, and hence, taxable to the said
corporation. While it is true that the Marubeni Corporation Philippine Branch
is duly licensed to engage in business under Philippine laws, such dividends
are not the income of the Philippine Branch and are not taxable to the said
Philippine branch. We see no significance thereto in the identity concept or
principal-agent relationship theory of petitioner because such dividends are
the income of and taxable to the Japanese corporation in Japan and not to
the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent
relationship theory, Marubeni Japan is likewise a resident foreign corporation
subject only to the 10 % intercorporate final tax on dividends received from a
domestic corporation in accordance with Section 24(c) (1) of the Tax Code of
1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax
under this Code (1) Shall be subject to a final tax of 10% on the total
amount thereof, which shall be collected and paid as provided in Sections 53
and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan,
being a non-resident foreign corporation and not engaged in trade or
business in the Philippines, is subject to tax on income earned from Philippine
sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the
same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations. A foreign
corporation not engaged in trade or business in the Philippines shall pay a tax
equal to thirty-five per cent of the gross income received during each taxable
year from all sources within the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b)
of the Tax Treaty of 1980 concluded between the Philippines and Japan. 11
Thus:
Article 10 (1) Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be taxed in
that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident, and according to the
laws of that Contracting State, but if the recipient is the beneficial owner of
the dividends the tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income
from Philippine sources is therefore the determination of whether it is a
resident or a non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in
trade or business" within the Philippines. Petitioner contends that precisely
because it is engaged in business in the Philippines through its Philippine
branch that it must be considered as a resident foreign corporation. Petitioner
reasons that since the Philippine branch and the Tokyo head office are one
and the same entity, whoever made the investment in AG&P, Manila does not
matter at all. A single corporate entity cannot be both a resident and a non-
resident corporation depending on the nature of the particular transaction
involved. Accordingly, whether the dividends are paid directly to the head
office or coursed through its local branch is of no moment for after all, the
head office and the office branch constitute but one corporate entity, the
Marubeni Corporation, which, under both Philippine tax and corporate laws, is
a resident foreign corporation because it is transacting business in the
Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this
wise:
The general rule that a foreign corporation is the same juridical entity as its
branch office in the Philippines cannot apply here. This rule is based on the
premise that the business of the foreign corporation is conducted through its
branch office, following the principal agent relationship theory. It is understood
that the branch becomes its agent here. So that when the foreign corporation
transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the taxpayer is the
foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office,
the latter becomes the taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a separate and distinct
income taxpayer from the branch in the Philippines. There can be no other
logical conclusion considering the undisputed fact that the investment
(totalling 283.260 shares including that of nominee) was made for purposes
peculiarly germane to the conduct of the corporate affairs of Marubeni Japan,
but certainly not of the branch in the Philippines. It is thus clear that petitioner,
having made this independent investment attributable only to the head office,
cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute
were neither subject to the 15 % profit remittance tax nor to the 10 %
intercorporate dividend tax, the recipient being a non-resident stockholder,
they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totalled the 25 % rate imposed by the
Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a
basic rule in taxation that each tax has a different tax basis. While the tax on
dividends is directly levied on the dividends received, "the tax base upon
which the 15 % branch profit remittance tax is imposed is the profit actually
remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate
under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer
look at the Treaty reveals that the tax rates fixed by Article 10 are the
maximum rates as reflected in the phrase "shall not exceed." This means that
any tax imposable by the contracting state concerned should not exceed the
25 % limitation and that said rate would apply only if the tax imposed by our
laws exceeds the same. In other words, by reason of our bilateral
negotiations with Japan, we have agreed to have our right to tax limited to a
certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is Section 24
(b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said
section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On
dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20 % which represents the difference between the regular tax
(35 %) on corporations and the tax (15 %) on dividends as provided in this
Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a
non-resident foreign corporation, as a general rule, is taxed 35 % of its gross
income from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its
domicile state (Japan) extends in favor of petitioner, a tax credit of not less
than 20 % of the dividends received. This 20 % represents the difference
between the regular tax of 35 % on non-resident foreign corporations which
petitioner would have ordinarily paid, and the 15 % special rate on dividends
received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question
to be computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------
Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------
Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends
received by a foreign non-resident stockholder from a domestic corporation
under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of
the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax
Treaty.
There is one final point that must be settled. Respondent Commissioner of
Internal Revenue is laboring under the impression that the Court of Tax
Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the
Judiciary Reorganization Act of 1980. He alleges that the instant petition for
review was not perfected in accordance with Batas Pambansa Blg. 129 which
provides that "the period of appeal from final orders, resolutions, awards,
judgments, or decisions of any court in all cases shall be fifteen (15) days
counted from the notice of the final order, resolution, award, judgment or
decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the
Court of Tax Appeals which has been created by virtue of a special law,
Republic Act No. 1125. Respondent court is not among those courts
specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected
by an order, ruling or decision of the Court of Tax Appeals is given thirty (30)
days from notice to appeal therefrom. Otherwise, said order, ruling, or
decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's
decision denying its claim for refund on April 15, 1986. On the 30th day, or on
May 15, 1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on November
17, 1986, and notice of which was received by petitioner on November 26,
1986. Two days later, or on November 28, 1986, petitioner simultaneously
filed a notice of appeal with the Court of Tax Appeals and a petition for review
with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal
was perfected well within the 30-day period provided under R.A. No. 1125, the
whole 30-day period to appeal having begun to run again from notice of the denial
of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals
dated February 12, 1986 which affirmed the denial by respondent
Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim
for refund is hereby REVERSED. The Commissioner of Internal Revenue is
ordered to refund or grant as tax credit in favor of petitioner the amount of
P144,452.40 representing overpayment of taxes on dividends received. No
costs.

G.R. No. 103092 July 21, 1994


BANK OF AMERICA NT & SA, petitioner,
vs.
HONORABLE COURT OF APPEALS, AND THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 103106 July 21, 1994
BANK OF AMERICA NT & SA, petitioner,
vs.
THE HONORABLE COURT OF APPEALS AND THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for
petitioner.

VITUG, J.:
Section 24(b) (2) (ii) of the National Internal Revenue Code, in the language it
was worded in 1982 (the taxable period relevant to the case at bench),
provided, in part, thusly:
Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) (ii) Tax on branch profit and remittances.
Any profit remitted abroad by a branch to its head office shall be subject to a
tax of fifteen per cent (15%) . . . ."
Petitioner Bank of America NT & SA argues that the 15% branch profit
remittance tax on the basis of the above provision should be assessed on the
amount actually remitted abroad, which is to say that the 15% profit
remittance tax itself should not form part of the tax base. Respondent
Commissioner of Internal Revenue, contending otherwise, holds the position
that, in computing the 15% remittance tax, the tax should be inclusive of the
sum deemed remitted.
The statement of facts made by the Court of Tax Appeals, later adopted by
the Court of Appeals, and not in any serious dispute by the parties, can be
quoted thusly:
Petitioner is a foreign corporation duly licensed to engage in business in the
Philippines with Philippine branch office at BA Lepanto Bldg., Paseo de
Roxas, Makati, Metro Manila. On July 20, 1982 it paid 15% branch profit
remittance tax in the amount of P7,538,460.72 on profit from its regular
banking unit operations and P445,790.25 on profit from its foreign currency
deposit unit operations or a total of P7,984,250.97. The tax was based on net
profits after income tax without deducting the amount corresponding to the
15% tax.
Petitioner filed a claim for refund with the Bureau of Internal Revenue of that
portion of the payment which corresponds to the 15% branch profit remittance
tax, on the ground that the tax should have been computed on the basis of
profits actually remitted, which is P45,244,088.85, and not on the amount
before profit remittance tax, which is P53,228,339.82. Subsequently, without
awaiting respondent's decision, petitioner filed a petition for review on June
14, 1984 with this Honorable Court for the recovery of the amount of
P1,041,424.03 computed as follows:
Net Profits After Profit Tax Due Alleged
Income Tax But Remittance Alleged by Overpayment
Before Profit Tax Paid Petitioner Item 1-2
Remittance Tax _________ _________ ___________
A. Regular Banking
Unit Operations
(P50,256,404.82)
1. Computation of BIR
15% x P50,256,404.82 - P7,538,460.72
2. Computation of
Petitioner
- P50,256,404.82 x 15% P6,555,183.24 P983,277.48
1.15
B. Foreign Currency
Deposit Unit
Operations
(P2,971,935)
1. Computation of BIR
15% x - P2,971,935.00 P445,790.25
2. Computation of
Petitioner
- P2,971,935.00 x 15% P387,643.70 P58,146.55
T O T A L. . P7,984,250.97 P6,942,286.94 P1,041,424.02" 1
The Court of Tax Appeals upheld petitioner bank in its claim for refund. The
Commissioner of Internal Revenue filed a timely appeal to the Supreme Court
(docketed G.R. No. 76512) which referred it to the Court of Appeals following
this Court's pronouncement in Development Bank of the Philippines vs. Court
of Appeals, et al. (180 SCRA 609). On 19 September 1990, the Court of
Appeals set aside the decision of the Court of Tax Appeals. Explaining its
reversal of the tax court's decision, the appellate court said:
The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the
aforesaid law through an analysis of the wordings thereof, which to their
minds reveal an intent to mitigate at least the harshness of successive
taxation. The use of the word remitted may well be understood as referring to
that part of the said total branch profits which would be sent to the head office
as distinguished from the total profits of the branch (not all of which need be
sent or would be ordered remitted abroad). If the legislature indeed had
wanted to mitigate the harshness of successive taxation, it would have been
simpler to just lower the rates without in effect requiring the relatively novel
and complicated way of computing the tax, as envisioned by the herein
private respondent. The same result would have been achieved. 2
Hence, these petitions for review in G.R. No. 103092 and G.R.
No. 103106 (filed separately due to inadvertence) by the law firms of "Agcaoili
and Associates" and of "Sycip, Salazar, Hernandez and Gatmaitan" in
representation of petitioner bank.
We agree with the Court of Appeals that not much reliance can be made on
our decision in Burroughs Limited vs. Commission of Internal Revenue (142
SCRA 324), for there we ruled against the Commissioner mainly on the basis
of what the Court so then perceived as his position in a 21 January 1980
ruling the reversal of which, by his subsequent ruling of 17 March 1982, could
not apply retroactively against Burroughs in conformity with Section 327 (now
Section 246, re: non-retroactivity of rulings) of the National Internal Revenue
Code. Hence, we held:
Petitioner's aforesaid contention is without merit. What is applicable in the
case at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in
question on March 14, 1979. Memorandum Circular
No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light
of Section 327 of the National Internal Revenue Code which
provides
Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal
of any of the rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the
Bureau of Internal Revenue; (b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-
CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a
retroactive application of Memorandum Circular No. 8-82 is beyond question
for it would be deprived of the substantial amount of P172,058.90. And,
insofar as the enumerated exceptions are concerned, admittedly, Burroughs
Limited does not fall under any of them.
The Court of Tax Appeals itself commented similarly when it observed thusly
in its decision:
In finding the Commissioner's contention without merit, this Court however
ruled against the applicability of Revenue Memorandum Circular No. 8-82
dated March 17, 1982 to the Burroughs Limited case because the taxpayer
paid the branch profit remittance tax involved therein on March 14, 1979 in
accordance with the ruling of the Commissioner of Internal Revenue dated
January 21, 1980. In view of Section 327 of the then in force National Internal
Revenue Code, Revenue Memorandum Circular No. 8-82 dated March 17,
1982 cannot be given retroactive effect because any revocation or
modification of any ruling or circular of the Bureau of Internal Revenue should
not be given retroactive application if such revocation or modification will,
subject to certain exceptions not pertinent thereto, prejudice taxpayers. 3
The Solicitor General correctly points out that almost invariably in an ad
valorem tax, the tax paid or withheld is not deducted from the tax base. Such
impositions as the ordinary income tax, estate and gift taxes, and the value
added tax are generally computed in like manner. In these cases, however, it
is so because the law, in defining the tax base and in providing for tax
withholding, clearly spells it out to be such. As so well expounded by the Tax
Court
. . . In all the situations . . . where the mechanism of withholding of taxes at
source operates to ensure collection of the tax, and which respondent claims
the base on which the tax is computed is the amount to be paid or remitted,
the law applicable expressly, specifically and unequivocally mandates that the
tax is on the total amount thereof which shall be collected and paid as
provided in Sections 53 and 54 of the Tax Code. Thus:
Dividends received by an individual who is a citizen or resident of the
Philippines from a domestic corporation, shall be subject to a final tax at the
rate of fifteen (15%) per cent on the total amount thereof, which shall be
collected and paid as provided in Sections 53 and 54 of this Code. (Emphasis
supplied; Sec. 21, Tax Code)
Interest from Philippine Currency bank deposits and yield from deposit
substitutes whether received by citizens of the Philippines or by resident alien
individuals, shall be subject to a final tax as follows: (a) 15% of the interest or
savings deposits, and (b) 20% of the interest on time deposits and yield from
deposits substitutes, which shall be collected and paid as provided in
Sections 53 and 54 of this Code: . . . (Emphasis supplied; Sec. 21, Tax Code
applicable.)
And on rental payments payable by the lessee to the lessor (at 5%), also
cited by respondent, Section 1, paragraph (C), of Revenue Regulations No.
13-78, November 1, 1978, provides that:
Section 1. Income payments subject to withholding tax and rates prescribed
therein. Except as therein otherwise provided, there shall be withheld a
creditable income tax at the rates herein specified for each class of payee
from the following items of income payments to persons residing in the
Philippines.
xxx xxx xxx
(C) Rentals When the gross rental or the payment required to be made as
a condition to the continued use or possession of property, whether real or
personal, to which the payor or obligor has not taken or is not taking title or in
which he has no equity, exceeds five hundred pesos (P500.00) per contract
or payment whichever is greater five per centum (5%).
Note that the basis of the 5% withholding tax, as expressly and
unambiguously provided therein, is on the gross rental. Revenue Regulations
No. 13-78 was promulgated pursuant to Section 53(f) of the then in force
National Internal Revenue Code which authorized the Minister of Finance,
upon recommendation of the Commissioner of Internal Revenue, to require
the withholding of income tax on the same items of income payable to
persons (natural or judicial) residing in the Philippines by the persons making
such payments at the rate of not less than 2 1/2% but not more than 35%
which are to be credited against the income tax liability of the taxpayer for the
taxable year.
On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), supra,
which indicates that the 15% tax on branch profit remittance is on the total
amount of profit to be remitted abroad which shall be collected and paid in
accordance with the tax withholding device provided in Sections 53 and 54 of
the Tax Code. The statute employs "Any profit remitted abroad by a branch to
its head office shall be subject to a tax of fifteen per cent (15%)" without
more. Nowhere is there said of "base on the total amount actually applied for
by the branch with the Central Bank of the Philippines as profit to be remitted
abroad, which shall be collected and paid as provided in Sections 53 and 54
of this Code." Where the law does not qualify that the tax is imposed and
collected at source based on profit to be remitted abroad, that qualification
should not be read into the law. It is a basic rule of statutory construction that
there is no safer nor better canon of interpretation than that when the
language of the law is clear and unambiguous, it should be applied as written.
And to our mind, the term "any profit remitted abroad" can only mean such
profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is
commonly and popularly accepted and understood. To say therefore that the
tax on branch profit remittance is imposed and collected at source and
necessarily the tax base should be the amount actually applied for the branch
with the Central Bank as profit to be remitted abroad is to ignore the
unmistakable meaning of plain words. 4
In the 15% remittance tax, the law specifies its own tax base to be on the
"profit remitted abroad." There is absolutely nothing equivocal or uncertain
about the language of the provision. The tax is imposed on the amount sent
abroad, and the law (then in force) calls for nothing further. The taxpayer is a
single entity, and it should be understandable if, such as in this case, it is the
local branch of the corporation, using its own local funds, which remits the tax
to the Philippine Government.
The remittance tax was conceived in an attempt to equalize the income tax
burden on foreign corporations maintaining, on the one hand, local branch
offices and organizing, on the other hand, subsidiary domestic corporations
where at least a majority of all the latter's shares of stock are owned by such
foreign corporations. Prior to the amendatory provisions of the Revenue
Code, local branches were made to pay only the usual corporate income tax
of 25%-35% on net income (now a uniform 35%) applicable to resident
foreign corporations (foreign corporations doing business in the Philippines).
While Philippine subsidiaries of foreign corporations were subject to the same
rate of 25%-35% (now also a uniform 35%) on their net income, dividend
payments, however, were additionally subjected to a 15% (withholding) tax
(reduced conditionally from 35%). In order to avert what would otherwise
appear to be an unequal tax treatment on such subsidiaries vis-a-vis local
branch offices, a 20%, later reduced to 15%, profit remittance tax was
imposed on local branches on their remittances of profits abroad. But this is
where the tax pari-passu ends between domestic branches and subsidiaries
of foreign corporations.
The Solicitor General suggests that the analogy should extend to the ordinary
application of the withholding tax system and so with the rule on constructive
remittance concept as well. It is difficult to accept the proposition. In the
operation of the withholding tax system, the payee is the taxpayer, the person
on whom the tax is imposed, while the payor, a separate entity, acts no more
than an agent of the government for the collection of the tax in order to
ensure its payment. Obviously, the amount thereby used to settle the tax
liability is deemed sourced from the proceeds constitutive of the tax base.
Since the payee, not the payor, is the real taxpayer, the rule on constructive
remittance (or receipt) can be easily rationalized, if not indeed, made clearly
manifest. It is hardly the case, however, in the imposition of the 15%
remittance tax where there is but one taxpayer using its own domestic funds
in the payment of the tax. To say that there is constructive remittance even of
such funds would be stretching far too much that imaginary rule. Sound logic
does not defy but must concede to facts.
We hold, accordingly, that the written claim for refund of the excess tax
payment filed, within the two-year prescriptive period, with the Court of Tax
Appeals has been lawfully made.
WHEREFORE, the decision of the Court of Appeals appealed from is
REVERSED and SET ASIDE, and that of the Court of Tax Appeals is
REINSTATED.
G.R. No. L-68375 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS,
respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for respondents.

BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of
the Court of Tax Appeals * in C.T.A. Case No.2884, entitled Wander Philippines, Inc. vs.
Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of
15% withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of
Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a
domestic corporation organized under Philippine laws. It is wholly-owned
subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not
engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second
quarter ending June 30, 1975 and remitted to its parent company, Glaro
dividends in the amount of P222,000.00, on which 35% withholding tax
thereof in the amount of P77,700.00 was withheld and paid to the Bureau of
Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second
quarter ending June 30, 1976 on the dividends it remitted to Glaro amounting
to P355,200.00, on wich 35% tax in the amount of P124,320.00 was withheld
and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal
Revenue a claim for refund and/or tax credit in the amount of P115,400.00,
contending that it is liable only to 15% withholding tax in accordance with
Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos.
369 and 778, and not on the basis of 35% which was withheld and paid to
and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on
July 15, 1977, Wander filed a petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision,
the decretal portion of which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax
credit to petitioner in the amount of P115,440.00 representing overpaid
withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of
Switzerland during the second quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same
was denied in a Resolution dated August 13, 1984. Hence, the instant
petition.
Petitioner raised two (2) assignment of errors, to wit:
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS
ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED INHOLDING
THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS
ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE
PARENT COMPANY OF THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS
SWISS INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20
PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE
DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS IF
PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is
entitled to the preferential rate of 15% withholding tax on dividends declared
and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not
Wander is the proper party to claim the refund; and (2) Whether or not
Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on
such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander,
the remitter or payor of the dividend income and a mere withholding agent for
and in behalf of the Philippine Government, which should be legally entitled to
receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being
raised for the first time in this Court. It was never raised at the administrative
level, or at the Court of Tax Appeals. To allow a litigant to assume a different
posture when he comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a procedure
whereby the Courtwhich is supposed to review administrative
determinationswould not review, but determine and decide for the first time,
a question not raised at the administrative forum. Thus, it is well settled that
under the same underlying principle of prior exhaustion of administrative
remedies, on the judicial level, issues not raised in the lower court cannot be
raised for the first time on appeal (Aguinaldo Industries Corporation vs.
Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev.
Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA
597; Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding
agent of the government and therefore cannot claim reimbursement of the
alleged overpaid taxes, is untenable. It will be recalled, that said corporation
is first and foremost a wholly owned subsidiary of Glaro. The fact that it
became a withholding agent of the government which was not by choice but
by compulsion under Section 53 (b) of the Tax Code, cannot by any stretch of
the imagination be considered as an abdication of its responsibility to its
mother company. Thus, this Court construing Section 53 (b) of the Internal
Revenue Code held that "the obligation imposed thereunder upon the
withholding agent is compulsory." It is a device to insure the collection by the
Philippine Government of taxes on incomes, derived from sources in the
Philippines, by aliens who are outside the taxing jurisdiction of this Court
(Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21
SCRA 944). In fact, Wander may be assessed for deficiency withholding tax
at source, plus penalties consisting of surcharge and interest (Section 54,
NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity
who should for the refund or credit of overpaid withholding tax on dividends
paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or
not Switzerland, the foreign country where Glaro is domiciled, grants to Glaro
a tax credit against the tax due it, equivalent to 20%, or the difference
between the regular 35% rate of the preferential 15% rate. The dispute in this
issue lies on the fact that Switzerland does not impose any income tax on
dividends received by Swiss corporation from corporations domiciled in
foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law
involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National
Internal Revenue Code, as amended, is hereby further amended to read as
follows:
(b) Tax on foreign corporations. 1) Non-resident corporation. A foreign
corporation not engaged in trade or business in the Philippines, including a
foreign life insurance company not engaged in the life insurance business in
the Philippines, shall pay a tax equal to 35% of the gross income received
during its taxable year from all sources within the Philippines, as interest
(except interest on foreign loans which shall be subject to 15% tax),
dividends, premiums, annuities, compensations, remuneration for technical
services or otherwise, emoluments or other fixed or determinable, annual,
periodical or casual gains, profits, and income, and capital gains: ... Provided,
still further That on dividends received from a domestic corporation liable to
tax under this Chapter, the tax shall be 15% of the dividends received, which
shall be collected and paid as provided in Section 53 (d) of this Code, subject
to the condition that the country in which the non-resident foreign corporation
is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax
(35%) on corporations and the tax (15%) dividends as provided in this
section: ...
From the above-quoted provision, the dividends received from a domestic
corporation liable to tax, the tax shall be 15% of the dividends received,
subject to the condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the difference between the
regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends
received by Glaro. Accordingly, Wander claims that full credit is granted and
not merely credit equivalent to 20%. Petitioner, on the other hand, avers the
tax sparing credit is applicable only if the country of the parent corporation
allows a foreign tax credit not only for the 15 percentage-point portion actually
paid but also for the equivalent twenty percentage point portion spared,
waived or otherwise deemed as if paid in the Philippines; that private
respondent does not cite anywhere a Swiss law to the effect that in case
where a foreign tax, such as the Philippine 35% dividend tax, is spared
waived or otherwise considered as if paid in whole or in part by the foreign
country, a Swiss foreign-tax credit would be allowed for the whole or for the
part, as the case may be, of the foreign tax so spared or waived or
considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the
claimant, nevertheless, the fact that Switzerland did not impose any tax or the
dividends received by Glaro from the Philippines should be considered as a
full satisfaction of the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax
provided for under Presidential Decree No. 369, amending Section 24 (b) (1)
of the Tax Code, would run counter to the very spirit and intent of said law
and definitely will adversely affect foreign corporations" interest here and
discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent
Court is but a confirmation of the May 19, 1977 ruling of petitioner that "since
the Swiss Government does not impose any tax on the dividends to be
received by the said parent corporation in the Philippines, the condition
imposed under the above-mentioned section is satisfied. Accordingly, the
withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion
reached by an agency such as the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of
tax problems and has necessarily developed an expertise on the subject
unless there has been an abuse or improvident exercise of authority (Reyes
vs. Commissioner of Internal Revenue, 24 SCRA 198, which is not present in
the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
[G.R. No. L-26145. February 20, 1984.]

THE MANILA WINE MERCHANTS, INC., Petitioner, v. THE COMMISSIONER OF


INTERNAL REVENUE, Respondent.

Rafael D. Salcedo for Petitioner.

The Solicitor General for Respondent.

SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE; CORPORATE INCOME TAX;


ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXEMPTION THEREFROM. A
prerequisite to the imposition of the tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax (or surtax) on its shareholders,
or on the shareholders of any other corporation by permitting the earnings and profits
of the corporation to accumulate instead of dividing them among or distributing them
to the shareholders. If the earnings and profits were distributed, the shareholders
would be required to pay an income tax thereon whereas, if the distribution were not
made to them, they would incur no tax in respect to the undistributed earnings and
profits of the corporation (Mertens, Law on Federal Income Taxation, Vol. 7, Chapter
39, p. 44). The touchstone of liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation (Ibid., p. 47). Thus, if the
failure to pay dividends is due to some other cause, such as the use of undistributed
earnings and profits for the reasonable needs of the business, such purpose does not
fall within the interdiction of the statute (Ibid., p. 45).

2. ID.; ID.; ID.; ID.; ID.; WHEN ACCUMULATION CONSIDERED UNREASONABLE.


An accumulation of earnings or profits (including undistributed earnings or profits of
prior years) is unreasonable if it is not required for the purpose of the business,
considering all the circumstances of the case (Sec. 21, Revenue Regulations No. 2).

3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS," CONSTRUED.
To determine the "reasonable needs" of the business in order to justify an
accumulation of earnings, the Courts of the United States have invented the so-called
"Immediacy Test" which construed the words "reasonable needs of the business" to
mean the immediate needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. American cases likewise hold that investment of the earnings
and profits of the corporation in stock or securities of an unrelated business usually
indicates an accumulation beyond the reasonable needs of the business. (Helvering v.
Chicago Stockyards Co., 318 US 693; Helvering v. National Grocery Co., 304 US 282).

4. REMEDIAL LAW; APPEALS; FACTUAL FINDINGS OF THE COURT OF TAX APPEALS,


BINDING. The finding of the Court of Tax Appeals that the purchase of the U.S.A.
Treasury bonds were in no way related to petitioners business of importing and selling
wines whisky, liquors and distilled spirits, and thus construed as an investment
beyond the reasonable needs of the business is binding on Us, the same being factual
(Renato Raymundo v. Hon. De Jova, 101 SCRA 495). Furthermore, the wisdom behind
thus finding cannot be doubted, The case of J.M. Perry & Co. v. Commissioner of
Internal Revenue supports the same.

5. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF


CORPORATIONS; ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXCEPTION
THEREFROM; ACCUMULATION OF EARNINGS, MUST BE USED FOR REASONABLE
NEEDS OF BUSINESS WITHIN A REASONABLE TIME. The records further reveal that
from May 1951 when petitioner purchased the U.S.A. Treasury shares, until 1962
when it finally liquidated the same, it (petitioner) never had the occasion to use the
said shares in aiding or financing its importation. This militates against the purpose
enunciated earlier by petitioner that the shares were purchased to finance its
importation business. To justify an accumulation of earnings and profits for the
reasonably anticipated future needs, such accumulation must be used within a
reasonable time after the close of the taxable year (Mertens, Ibid., p. 104).

6. ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE TIME OF ACCUMULATION, BASIS OF
THE TAX; ACCUMULATION OF PROFITS IN CASE AT BAR, UNREASONABLE. In order
to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation not subsequently
declared intentions which are merely the product of afterthought (Basilan Estates, Inc.
v. Comm. of Internal Revenue, 21 SCRA 17 citing Jacob Mertens, Jr., The law of
Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213; Smoot and San &
Gravel Corp. v. Comm., 241 F 2d 197). A speculative and indefinite purpose will not
suffice. The mere recognition of a future problem and the discussion of possible and
alternative solutions is not sufficient. Definiteness of plan coupled with action taken
towards its consummation are essential (Fuel Carriers, Inc. v. US 202 F supp. 497;
Smoot Sand & Gravel Corp. v. Comm., supra). Viewed on the foregoing analysis and
tested under the "immediacy doctrine," We are convinced that the Court of Tax
Appeals is correct in finding that the investment made by petitioner in the U.S.A.
Treasury shares in 1951 was an accumulation of profits in excess of the reasonable
needs of petitioners business.
chanroblesvirtuallawlibrary

7. ID.; ID.; ID.; ID.; ACCUMULATIONS OF PRIOR YEARS TAKEN INTO ACCOUNT IN
DETERMINATION OF LIABILITY THEREFOR. The rule is now settled in Our
jurisprudence that undistributed earnings or profits of prior years are taken into
consideration in determining unreasonable accumulation for purposes of the 25%
surtax. The case of Basilan Estates, Inc. v. Commissioner of Internal Revenue further
strengthen this rule in determining unreasonable accumulation for the year
concerned.In determining whether accumulations of earnings or profits in a particular
year are within the reasonable needs of a corporation, it is necessary to take into
account prior accumulations, since accumulations prior to the year involved may have
been sufficient to cover the business needs and additional accumulations during the
year involved would not reasonably be necessary.

DECISION

GUERRERO, J.:

In this Petition for Review on Certiorari, Petitioner, the Manila Wine Merchants, Inc.,
disputes the decision of the Court of Tax Appeals ordering it (petitioner) to pay
respondent, the Commissioner of Internal Revenue, the amount of P86,804.38 as
25% surtax plus interest which represents the additional tax due petitioner for
improperly accumulating profits or surplus in the taxable year 1957 under Sec. 25 of
the National Internal Revenue Code. chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

The Court of Tax Appeals made the following finding of facts, to wit: jgc:chanrobles.com.ph

"Petitioner, a domestic corporation organized in 1937, is principally engaged in the


importation and sale of whisky, wines, liquors and distilled spirits. Its original
subscribed and paid capital was P500,000.00. Its capital of P500,000.00 was reduced
to P250,000.00 in 1950 with the approval of the Securities and Exchange Commission
but the reduction of the capital was never implemented. On June 21, 1958,
petitioners capital was increased to P1,000,000.00 with the approval of the said
Commission.

On December 31, 1957, herein respondent caused the examination of herein


petitioners book of account and found the latter of having unreasonably accumulated
surplus of P428,934.32 for the calendar year 1947 to 1957, in excess of the
reasonable needs of the business subject to the 25% surtax imposed by Section 25 of
the Tax Code.

On February 26, 1963, the Commissioner of Internal Revenue demanded upon the
Manila Wine Merchants, Inc. payment of P126,536.12 as 25% surtax and interest on
the latters unreasonable accumulation of profits and surplus for the year 1957,
computed as follows: chanrob1es virtual 1aw library

Unreasonable accumulation of surtax P428,934.42

25% surtax due thereon P107,234.00

Add: 1/2% monthly interest from June 20,

1959 to June 20, 1962 19,302.12

TOTAL AMOUNT DUE AND COLLECTIBLE P126,536.12

=========

Respondent contends that petitioner has accumulated earnings beyond the reasonable
needs of its business because the average ratio of the cash dividends declared and
paid by petitioner from 1947 to 1957 was 40.33% of the total surplus available for
distribution at the end of each calendar year. On the other hand, petitioner contends
that in 1957, it distributed 100% of its net earnings after income tax and part of the
surplus for prior years. Respondent further submits that the accumulated earnings tax
should be based on 25% of the total surplus available at the end of each calendar
year while petitioner maintains that the 25% surtax is imposed on the total surplus or
net income for the year after deducting therefrom the income tax due.

The records show the following analysis of petitioners net income, cash dividends and
earned surplus for the years 1946 to 1957: 1

Percentage of

Dividends to
Net Income Total Cash Net Income Balance

After Income Dividends After of Earned

Year Tax Paid Income Tax Surplus

1946 P 613,790.00 P 200,000. 32.58% P 234,104.81

1947 425,719.87 360,000. 84.56% 195,167.10

1948 415,591.83 375,000. 90.23% 272,991.38

1949 335,058.06 200,000. 59.69% 893,113.42

1950 399,698.09 600,000. 150.11% 234,987.07

1951 346,257.26 300,000. 86.64% 281,244.33

1952 196,161.97 200,000. 101.96% 277,406.30

1953 169,714.04 200,000. 117.85% 301,138.84

1954 238,124.85 250,000. 104.99% 289,262.69

1955 312,284.74 200,000. 64.04% 401,548.43

1956 374,240.28 300,000. 80.16% 475,788.71

1957 353,145.71 400,000. 113.27% 428,934.42

P4,179,787.36 P3,585.000. 85.77% P3,785.688.50

========== ========= ======= ==========

Another basis of respondent in assessing petitioner for accumulated earnings tax is its
substantial investment of surplus or profits in unrelated business. These investments
are itemized as follows:
chanrob1es virtual 1aw library

1. Acme Commercial Co., Inc. P 27,501.00

2. Union Insurance Society

of Canton 1,145.76

3. U.S.A. Treasury Bond 347,217.50

4. Wack Wack Golf &

Country Club 1.00

375,865.26
=========

As to the investment of P27,501.00 made by petitioner in the Acme Commercial Co.,


Inc., Mr. N.R.E. Hawkins, president of the petitioner corporation 2 explained as
follows:
chanrob1es virtual 1aw library

The first item consists of shares of Acme Commercial Co., Inc. which the Company
acquired in 1947 and 1949. In the said years, we thought it prudent to invest in a
business which patronizes us. As a supermarket, Acme Commercial Co., Inc. is one of
our best customers. The investment has proven to be beneficial to the stockholders of
this Company. As an example, the Company received cash dividends in 1961 totalling
P16,875.00 which was included in its income tax return for the said year.

As to the investments of petitioner in Union Insurance Society of Canton and Wack


Wack Golf Club in the sums of P1,145.76 and P1.00, respectively, the same official of
the petitioner-corporation stated that: 3

The second and fourth items are small amounts which we believe would not affect
this case substantially. As regards the Union Insurance Society of Canton shares, this
was a pre-war investment, when Wise & Co., Inc., Manila Wine Merchants and the said
insurance firm were common stockholders of the Wise Bldg. Co.,, Inc. and the three
companies were all housed in the same building. Union Insurance invested in Wise
Bldg. Co., Inc. but invited Manila Wine Merchants, Inc. to buy a few of its shares.

As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr. Hawkins explained as


follows: 4

With regards to the U.S.A. Treasury Bills in the amount of P347,217.50, in 1950, our
balance sheet for the said year shows the Company had deposited in current account
in various banks P629,403.64 which was not earning any interest. We decided to
utilize part of this money as reserve to finance our importations and to take care of
future expansion including acquisition of a lot and the construction of our own office
building and bottling plant.

At that time, we believed that a dollar reserve abroad would be useful to the Company
in meeting immediate urgent orders of its local customers. In order that the money
may earn interest, the Company, on May 31, 1951 purchased US Treasury bills with
90-day maturity and earning approximately 1% interest with the face value of
US$175,000.00. US Treasury Bills are easily convertible into cash and for the said
reason they may be better classified as cash rather than investments.

The Treasury Bills in question were held as such for many years in view of our
expectation that the Central Bank inspite of the controls would allow no-dollar licenses
importations. However, since the Central Bank did not relax its policy with respect
thereto, we decided sometime in 1957 to hold the bills for a few more years in view of
our plan to buy a lot and construct a building of our own. According to the lease
agreement over the building formerly occupied by us in Dasmarias St., the lease was
to expire sometime in 1957. At that time, the Company was not yet qualified to own
real property in the Philippines. We therefore waited until 60% of the stocks of the
Company would be owned by Filipino citizens before making definite plans. Then in
1959 when the Company was already more than 60% Filipino owned, we commenced
looking for a suitable location and then finally in 1961, we bought the man lot with an
old building on Otis St., Paco, our present site, for P665,000.00. Adjoining smaller lots
were bought later. After the purchase of the main property, we proceeded with the
remodelling of the old building and the construction of additions, which were
completed at a cost of P143,896.00 in April, 1962.

In view of the needs of the business of this Company and the purchase of the Otis lots
and the construction of the improvements thereon, most of its available funds
including the Treasury Bills had been utilized, but inspite of the said expenses the
Company consistently declared dividends to its stockholders. The Treasury Bills were
liquidated on February 15, 1962.

Respondent found that the accumulated surplus in question were invested to


unrelated business which were not considered in the immediate needs of the
Company such that the 25% surtax be imposed therefrom." cralaw virtua1aw library

Petitioner appealed to the Court of Tax Appeals.

On the basis of the tabulated figures, supra, the Court of Tax Appeals found that the
average percentage of cash dividends distributed was 85.77% for a period of 11 years
from 1946 to 1957 and not only 40.33% of the total surplus available for distribution
at the end of each calendar year actually distributed by the petitioner to its
stockholders, which is indicative of the view that the Manila Wine Merchants, Inc. was
not formed for the purpose of preventing the imposition of income tax upon its
shareholders. 5

With regards to the alleged substantial investment of surplus or profits in unrelated


business, the Court of Tax Appeals held that the investment of petitioner with Acme
Commercial Co., Inc., Union Insurance Society of Canton and with the Wack Wack Golf
and Country Club are harmless accumulation of surplus and, therefore, not subject to
the 25% surtax provided in Section 25 of the Tax Code. 6

As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals
ruled that its purchase was in no way related to petitioners business of importing and
selling wines, whisky, liquors and distilled spirits. Respondent Court was convinced
that the surplus of P347,217.50 which was invested in the U.S.A. Treasury Bonds was
availed of by petitioner for the purpose of preventing the imposition of the surtax
upon petitioners shareholders by permitting its earnings and profits to accumulate
beyond the reasonable needs of business. Hence, the Court of Tax Appeals modified
respondents decision by imposing upon petitioner the 25% surtax for 1957 only in the
amount of P86,804.38 computed as follows: chanrob1es virtual 1aw library

Unreasonable accumulation

of surplus P347,217.50

25% surtax due thereon P 86,804.38 7

On May 30, 1966, the Court of Tax Appeals denied the motion for reconsideration filed
by petitioner on March 30, 1966. Hence, this petition.

Petition assigns the following errors: chanrob1es virtual 1aw library

I
The Court of Tax Appeals erred in holding that petitioner was availed of for the
purpose of preventing the imposition of a surtax on its shareholders.

II

The Court of Tax Appeals erred in holding that petitioners purchase of U.S.A. Treasury
Bills in 1951 was an investment in unrelated business subject to the 25% surtax in
1957 as surplus profits improperly accumulated in the latter years.

III

The Court of Tax Appeals erred in not finding that petitioner did not accumulate its
surplus profits improperly in 1957, and in not holding that such surplus profits,
including the so-called unrelated investments, were necessary for its reasonable
business needs.

IV

The Court of Tax Appeals erred in not holding that petitioner had overcome the prima
facie presumption provided for in Section 25(c) of the Revenue Code.

The Court of Tax Appeals erred in finding petition liable for the payment of the surtax
of P86,804.38 and in denying petitioners Motion for Reconsideration and/or New Trial.

The issues in this case can be summarized as follows: (1) whether the purchase of the
U.S.A. Treasury bonds by petitioner in 1951 can be construed as an investment to an
unrelated business and hence, such was availed of by petitioner for the purpose of
preventing the imposition of the surtax upon petitioners shareholders by permitting
its earnings and profits to accumulate beyond the reasonable needs of the business,
and if so, (2) whether the penalty tax of twenty-five percent (25%) can be imposed
on such improper accumulation in 1957 despite the fact that the accumulation
occurred in 1951.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

The pertinent provision of the National Internal Revenue Code reads as follows: jgc:chanrobles.com.ph

"Sec. 25. Additional tax on corporations improperly accumulating profits or surplus.


(a) Imposition of Tax. If any corporation, except banks, insurance companies, or
personal holding companies whether domestic or foreign, is formed or availed of for
the purpose of preventing the imposition of the tax upon its shareholders or members
or the shareholders or members of another corporation, through the medium of
permitting its gains and profits to accumulate instead of being divided or distributed,
there is levied and assessed against such corporation, for each taxable year, a tax
equal to twenty-five per centum of the undistributed portion of its accumulated profits
or surplus which shall be in addition to the tax imposed by section twenty-four and
shall be computed, collected and paid in the same manner and subject to the same
provisions of law, including penalties, as that tax: Provided, that no such tax shall be
levied upon any accumulated profits or surplus, if they are invested in any dollar-
producing or dollar-saving industry or in the purchase of bonds issued by the Central
Bank of the Philippines.
x x x

(c) Evidence determinative of purpose. The fact that the earnings of profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or
members unless the corporation, by clear preponderance of evidence, shall prove the
contrary." (As amended by Republic Act No. 1823).

As correctly pointed out by the Court of Tax Appeals, inasmuch as the provisions of
Section 25 of the National Internal Revenue Code were bodily lifted from Section 102
of the U.S. Internal Revenue Code of 1939, including the regulations issued in
connection therewith, it would be proper to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment. chanrobles virtual lawlibrary

A prerequisite to the imposition of the tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax (or surtax) on its shareholders,
or on the shareholders of any other corporation by permitting the earnings and profits
of the corporation to accumulate instead of dividing them among or distributing them
to the shareholders. If the earnings and profits were distributed, the shareholders
would be required to pay an income tax thereon whereas, if the distribution were not
made to them, they would incur no tax in respect to the undistributed earnings and
profits of the corporation. 8 The touchstone of liability is the purpose behind the
accumulation of the income and not the consequences of the accumulation. 9 Thus, if
the failure to pay dividends is due to some other cause, such as the use of
undistributed earnings and profits for the reasonable needs of the business, such
purpose does not fall within the interdiction of the statute. 10

An accumulation of earnings or profits (including undistributed earnings or profits of


prior years) is unreasonable if it is not required for the purpose of the business,
considering all the circumstances of the case. 11

In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that these bonds
were so purchased (1) in order to finance their importation; and that a dollar reserve
abroad would be useful to the Company in meeting urgent orders of its local
customers and (2) to take care of future expansion including the acquisition of a lot
and the construction of their office building and bottling plant.

We find no merit in the petition.

To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the
purchase of the U.S.A. Treasury Bonds in 1951 with a face value of $175,000.00 was
an investment within the reasonable needs of the Corporation.

To determine the "reasonable needs" of the business in order to justify an


accumulation of earnings, the Courts of the United States have invented the so-called
"Immediacy Test" which construed the words "reasonable needs of the business" to
mean the immediate needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. 12 American cases likewise hold that investment of the
earnings and profits of the corporation in stock or securities of an unrelated business
usually indicates an accumulation beyond the reasonable needs of the business. 13

The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds
were in no way related to petitioners business of importing and selling wines whisky,
liquors and distilled spirits, and thus construed as an investment beyond the
reasonable needs of the business 14 is binding on Us, the same being factual. 15
Furthermore, the wisdom behind thus finding cannot be doubted, The case of J.M.
Perry & Co. v. Commissioner of Internal Revenue 16 supports the same. In that case,
the U.S. Court said the following: jgc:chanrobles.com.ph

"It appears that the taxpayer corporation was engaged in the business of cold storage
and wareshousing in Yahima, Washington. It maintained a cold storage plant, divided
into four units, having a total capacity of 490,000 boxes of fruits. It presented
evidence to the effect that various alterations and repairs to its plant were
contemplated in the tax years, . . .

It also appeared that in spite of the fact that the taxpayer contended that it needed to
maintain this large cash reserve on hand, it proceeded to make various investments
which had no relation to its storage business. In 1934, it purchased mining stock
which it sold in 1935 at a profit of US $47,995.29. . . .

All these things may reasonably have appealed to the Board as incompatible with a
purpose to strengthen the financial position of the taxpayer and to provide for needed
alteration."
cralaw virtua1aw library

The records further reveal that from May 1951 when petitioner purchased the U.S.A.
Treasury shares, until 1962 when it finally liquidated the same, it (petitioner) never
had the occasion to use the said shares in aiding or financing its importation. This
militates against the purpose enunciated earlier by petitioner that the shares were
purchased to finance its importation business. To justify an accumulation of earnings
and profits for the reasonably anticipated future needs, such accumulation must be
used within a reasonable time after the close of the taxable year. 17

Petitioner advanced the argument that the U.S.A. Treasury shares were held for a few
more years from 1957, in view of a plan to buy a lot and construct a building of their
own; that at that time (1957), the Company was not yet qualified to own real
property in the Philippines, hence it (petitioner) had to wait until sixty percent (60%)
of the stocks of the Company would be owned by Filipino citizens before making
definite plans. 18

These arguments of petitioner indicate that it considers the U.S.A. Treasury shares not
only for the purpose of aiding or financing its importation but likewise for the purpose
of buying a lot and constructing a building thereon in the near future, but conditioned
upon the completion of the 60% citizenship requirement of stock ownership of the
Company in order to qualify it to purchase and own a lot. The time when the company
would be able to establish itself to meet the said requirement and the decision to
pursue the same are dependent upon various future contingencies. Whether these
contingencies would unfold favorably to the Company and if so, whether the Company
would decide later to utilize the U.S.A. Treasury shares according to its plan, remains
to be seen. From these assertions of petitioner, We cannot gather anything definite or
certain. This, We cannot approve. chanrobles law library

In order to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation not subsequently
declared intentions which are merely the product of afterthought. 19 A speculative
and indefinite purpose will not suffice. The mere recognition of a future problem and
the discussion of possible and alternative solutions is not sufficient. Definiteness of
plan coupled with action taken towards its consummation are essential. 20 The Court
of Tax Appeals correctly made the following ruling: 21
"As to the statement of Mr. Hawkins in Exh. "B" regarding the expansion program of
the petitioner by purchasing a lot and building of its own, we find no justifiable reason
for the retention in 1957 or thereafter of the US Treasury Bonds which were
purchased in 1951.

x x x

"Moreover, if there was any thought for the purchase of a lot and building for the
needs of petitioners business, the corporation may not with impunity permit its
earnings to pile up merely because at some future time certain outlays would have to
be made. Profits may only be accumulated for the reasonable needs of the business,
and implicit in this is further requirement of a reasonable time." cralaw virtua1aw library

Viewed on the foregoing analysis and tested under the "immediacy doctrine," We are
convinced that the Court of Tax Appeals is correct in finding that the investment made
by petitioner in the U.S.A. Treasury shares in 1951 was an accumulation of profits in
excess of the reasonable needs of petitioners business.

Finally, petitioner asserts that the surplus profits allegedly accumulated in the form of
U.S.A. Treasury shares in 1951 by it (petitioner) should not be subject to the surtax in
1957. In other words, petitioner claims that the surtax of 25% should be based on the
surplus accumulated in 1951 and not in 1957.

This is devoid of merit.

The rule is now settled in Our jurisprudence that undistributed earnings or profits of
prior years are taken into consideration in determining unreasonable accumulation for
purposes of the 25% surtax. 22 The case of Basilan Estates, Inc. v. Commissioner of
Internal Revenue 23 further strengthen this rule, and We quote: jgc:chanrobles.com.ph

"Petitioner questions why the examiner covered the period from 1948-1953 when the
taxable year on review was 1953. The surplus of P347,507.01 was taken by the
examiner from the balance sheet of the petitioner for 1953. To check the figure
arrived at, the examiner traced the accumulation process from 1947 until 1953, and
petitioners figure stood out to be correct. There was no error in the process applied,
for previous accumulations should be considered in determining unreasonable
accumulation for the year concerned.In determining whether accumulations of
earnings or profits in a particular year are within the reasonable needs of a
corporation, it is necessary to take into account prior accumulations, since
accumulations prior to the year involved may have been sufficient to cover the
business needs and additional accumulations during the year involved would not
reasonably be necessary." chanroblesvirtuallawlibrary

WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals
is AFFIRMED in toto, with costs against petitioner.

G.R. No. 85749 May 15, 1989


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ANTONIO TUASON, INC. and THE COURT OF TAX APPEALS,
respondents.
The Office of the Solicitor General for petitioner.
Mendoza & Papa and Roman M. Umali for private respondent.

GRIO-AQUINO, J.:
Elevated to this Court for review is the decision dated October 14, 1988 of the
Court of Tax Appeals in CTA Case No. 3865, entitled "Antonio Tuason, Inc.
vs. Commissioner of Internal Revenue," which set aside the petitioner
Revenue Commissioner's assessment of P1,151,146.98 as the 25% surtax
on the private respondent's unreasonable accumulation of surplus for the
years 1975-1978.
Under date of February 27, 1981, the petitioner, Commissioner of Internal
Revenue, assessed Antonio Tuason, Inc.
a
b Deficiency income tax for the years 1975,1976 and 1978 . . . . . . .
.. P37,491.83.
c
(b) Deficiency corporate quarterly income tax for the first quarter of 1975 . . .
. . . . . . . . . . . . . . . . . . 161.49.
(c) 25% surtax on unreasonable accumulation of surplus for the years
1975-1978 . . . . . . . . . . . . 1,151,146.98.
The private respondent did not object to the first and second items and,
therefore, paid the amounts demanded. However, it protested the
assessment on a 25% surtax on the third item on the ground that the
accumulation of surplus profits during the years in question was solely for the
purpose of expanding its business operations as real estate broker. The
request for reinvestigation was granted on condition that a waiver of the
statute of limitations should be filed by the private respondent. The latter
replied that there was no need of a waiver of the statute of limitaitons
because the right of the Government to assess said tax does not prescribe.
No investigation was conducted nor a decision rendered on Antonio Tuazon
Inc.'s protest. meantime, the Revenue Commissioner issued warrants of
distraint and levy to enforce collection of the total amount originally assessed
including the amounts already paid.
The private respondent filed a petition for review in the Court of Tax Appeals
with a request that pending determination of the case on the merits, an order
be issued restraining the Commissioner and/or his representatives from
enforcing the warrants of distraint and levy. Since the right asserted by the
Commissioner to collect the taxes involved herein by the summary methods
of distraint and levy was not clear, and it was shown that portions of the tax
liabilities involved in the assessment had already been paid, a writ of
injunction was issued by the Tax Court on November 26, 1984, ordering the
Commissioner to refrain fron enforcing said warrants of distraint and levy. It
did not require the petitioner to file a bond (Annex A, pp. 28-30, Rollo).
In view of the reversal of the Commissioner's decision by the Court of Tax
Appeals, the petitioner appealed to this Court, raising the following issues:
1. Whether or not private respondent Antonio Tuason, Inc. is a holding
company and/or investment company;
2. Whether or not privaaate respondent Antonio Tuason, Inc. accumulated
surplus for the years 1975 to 1978; and
3. Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue
accumulation of surplus for the years 1975 to 1978.
Section 25 of the Tax Code at the time the surtax was assessed, provided:
Sec. 25. Additional tax on corporation improperly accumulating profits or
surplus.
(a) Imposition of tax. If any corporation, except banks, insurance
companies, or personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the imposition of the tax
upon its shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a tax equal to
twenty-five per centum of the undistributed portion of its accumulated profits
or surplus which shall be in addition to the tax imposed by section twenty-
four, and shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is a mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned, directly or indirectly, by
one person.
(c) Evidence determinative of purpose. The fact that the earnings or profits
of a corporation are permitted to accumulate beyond the reasonable needs of
the business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.
The petition for review is meritorious.
The Court of Tax Appeals conceded that the Revenue Commissioner's
determination that Antonio Tuason, Inc. was a mere holding or investment
company, was "presumptively correct" (p. 7, Annex A), for the corporation did
not involve itself in the development of subdivisions but merely subdivided its
own lots and sold them for bigger profits. It derived its income mostly from
interest, dividends and rental realized from the sale of realty.
Another circumstance supporting that presumption is that 99.99% in value of
the outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason
himself. The Commissioner "conclusively presumed" that when the
corporation accumulated (instead of distributing to the shareholders) a
surplus of over P3 million fron its earnings in 1975 up to 1978, the purpose
was to avoid the imposition of the progressive income tax on its shareholders.
That Antonio Tuason, Inc. accumulated surplus profits amounting to
P3,263,305.88 for 1975 up to 1978 is not disputed. However, the private
respondent vehemently denies that its purpose was to evade payment of the
progressive income tax on such dividends by its stockholders. According to
the private respondent, surplus profits were set aside by the company to build
up sufficient capital for its expansion program which included the construction
in 1979-1981 of an apartment building, and the purchase in 1980 of a
condominium unit which was intended for resale or lease.
However, while these investments were actually made, the Commissioner
points out that the corporation did not use up its surplus profits. It allegation
that P1,525,672.74 was spent for the construction of an apartment building in
1979 and P1,752,332.87 for the purchase of a condominium unit in Urdaneta
Village in 1980 was refuted by the Declaration of Real Property on the
apartment building (Exh. C) which shows that its market value is only
P429,890.00, and the Tax Declaration on the condominium unit which reflects
a market value of P293,830.00 only (Exh. D-1). The enormous discrepancy
between the alleged investment cost and the declared market value of these
pieces of real estate was not denied nor explained by the private respondent.
Since the company as of the time of the assessment in 1981, had invested in
its business operations only P 773,720 out of its accumulated surplus profits
of P3,263,305.88 for 1975-1978, its remaining accumulated surplus profits of
P2,489,858.88 are subject to the 25% surtax.
All presumptions are in favor of the correctness of petitioner's assessment
against the private respondent. It is incumbent upon the taxpayer to prove the
contrary (Mindanao Bus Company vs. Commissioner of Internal Revenue, 1
SCRA 538). Unfortunately, the private respondent failed to overcome the
presumption of correctness of the Commissioner's assessment.
The touchstone of liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation. Thus, if the failure to
pay dividends were for the purpose of using the undistributed earnings and
profits for the reasonable needs of the business, that purpose would not fall
within the interdiction of the statute" (Mertens Law of Federal Income
Taxation, Vol. 7, Chapter 39, p. 45 cited in Manila Wine Merchants, Inc. vs.
Commissioner of Internal Revenue, 127 SCRA 483, 493).
It is plain to see that the company's failure to distribute dividends to its
stockholders in 1975-1978 was for reasons other than the reasonable needs
of the business, thereby falling within the interdiction of Section 25 of the Tax
Code of 1977.
WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby
set aside. The petitioner's assessment of a 25% surtax against the Antonio
Tuason, Inc. is reinstated but only on the latter's unspent accumulated
surplus profits of P2,489,585.88. No costs.
[G.R. No. 108067. January 20, 2000]
CYANAMID PHILIPPINES, INC., petitioner, vs. THE
COURT OF APPEALS, THE COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL REVENUE,
respondents.
DECISION
QUISUMBING, J.:
Petitioner disputes the decision[if !supportFootnotes][1][endif] of the Court of Appeals
which affirmed the decision[if !supportFootnotes][2][endif] of the Court of Tax Appeals,
ordering petitioner to pay respondent Commissioner of Internal Revenue
the amount of three million, seven hundred seventy-four thousand, eight
hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25%
surtax on improper accumulation of profits for 1981, plus 10% surcharge
and 20% annual interest from January 30, 1985 to January 30, 1987, under
Sec. 25 of the National Internal Revenue Code.
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid Co.
based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods, and an
importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and
demanded the payment of deficiency income tax of one hundred nineteen
thousand eight hundred seventeen (P119,817.00) pesos for taxable year
1981, as follows:
"Net income disclosed by the return as audited

14,575,210.00
Add: Discrepancies:

Professional fees/yr.
per investigation
17018
262,877.00
110,399.37
Total Adjustment
152,477.00
Net income per Investigation
14,727,687.00
Less: Personal and additional exemptions
___________
Amount subject to tax
14,727,687.00
Income tax due thereon .25% Surtax 2,385,231.50
3,237,495.00
Less: Amount already assessed .
5,161,788.00
BALANCE .
75,709.00
_______ monthly interest from ..1,389,636.00
44,108.00
_________
____________
Compromise penalties ...
___________
TOTAL AMOUNT DUE ..3,774,867.50
119,817.00"[if !supportFootnotes][3][endif]
Sc-lex
[if !supportEmptyParas] [endif]
[if !supportMisalignedColumns]

[endif]
On March 4, 1985, petitioner protested the assessments particularly, (1) the
25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income
Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment
of P8,846.72.[if !supportFootnotes][4][endif] Petitioner, through its external accountant,
Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax for the
undue accumulation of earnings was not proper because the said profits
were retained to increase petitioners working capital and it would be used
for reasonable business needs of the company. Petitioner contended that it
availed of the tax amnesty under Executive Order No. 41, hence enjoyed
amnesty from civil and criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused
to allow the cancellation of the assessment notices and rendered its
resolution, as follows:
"It appears that your client availed of Executive Order No. 41 under File
No. 32A-F-000455-41B as certified and confirmed by our Tax Amnesty
Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of the
tax amnesty under Executive Order No. 41, as amended is sufficient basis,
in appropriate cases, for the cancellation of the assessment issued after
August 21, 1986. (Revenue Memorandum Order No. 4-87) Said availment
does not, therefore, result in cancellation of assessments issued before
August 21, 1986, as in the instant case. In other words, the assessments in
this case issued on January 30, 1985 despite your clients availment of the
tax amnesty under Executive Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay
this Office the aforementioned deficiency income tax and surtax on undue
accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty
(30) days from receipt hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter."[if !supportFootnotes][5]
[endif]

Petitioner appealed to the Court of Tax Appeals. During the pendency of


the case, however, both parties agreed to compromise the 1981 deficiency
income tax assessment of P119,817.00. Petitioner paid a reduced amount --
twenty-six thousand, five hundred seventy-seven pesos (P26,577.00) -- as
compromise settlement. However, the surtax on improperly accumulated
profits remained unresolved.
Petitioner claimed that CIRs assessment representing the 25% surtax on its
accumulated earnings for the year 1981 had no legal basis for the
following reasons: (a) petitioner accumulated its earnings and profits for
reasonable business requirements to meet working capital needs and
retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of
American Cyanamid Company, a corporation organized under the laws of
the State of Maine, in the United States of America, whose shares of stock
are listed and traded in New York Stock Exchange. This being the case, no
individual shareholder of petitioner could have evaded or prevented the
imposition of individual income taxes by petitioners accumulation of
earnings and profits, instead of distribution of the same. Scl-aw
In denying the petition, the Court of Tax Appeals made the following
pronouncements:
"Petitioner contends that it did not declare dividends for the year 1981 in
order to use the accumulated earnings as working capital reserve to meet
its "reasonable business needs". The law permits a stock corporation to set
aside a portion of its retained earnings for specified purposes (citing
Section 43, paragraph 2 of the Corporation Code of the Philippines). In the
case at bar, however, petitioners purpose for accumulating its earnings
does not fall within the ambit of any of these specified purposes.
More compelling is the finding that there was no need for petitioner to set
aside a portion of its retained earnings as working capital reserve as it
claims since it had considerable liquid funds. A thorough review of
petitioners financial statement (particularly the Balance Sheet, p. 127, BIR
Records) reveals that the corporation had considerable liquid funds
consisting of cash accounts receivable, inventory and even its sales for the
period is adequate to meet the normal needs of the business. This can be
determined by computing the current asset to liability ratio of the
company:
current ratio
= current assets / current liabilities

= P 47,052,535.00 / P21,275,544.00

= 2.21: 1

The significance of this ratio is to serve as a primary test of a companys


solvency to meet current obligations from current assets as a going
concern or a measure of adequacy of working capital.
xxx
We further reject petitioners argument that "the accumulated earnings tax
does not apply to a publicly-held corporation" citing American
jurisprudence to support its position. The reference finds no application in
the case at bar because under Section 25 of the NIRC as amended by
Section 5 of P.D. No. 1379 [1739] (dated September 17, 1980), the
exceptions to the accumulated earnings tax are expressly enumerated, to
wit: Bank, non-bank financial intermediaries, corporations organized
primarily, and authorized by the Central Bank of the Philippines to hold
shares of stock of banks, insurance companies, or personal holding
companies, whether domestic or foreign. The law on the matter is clear
and specific. Hence, there is no need to resort to applicable cases decided
by the American Federal Courts for guidance and enlightenment as to
whether the provision of Section 25 of the NIRC should apply to
petitioner. Rtc-spped
Equally clear and specific are the provisions of E.O. 41 particularly with
respect to its effectivity and coverage...
... Said availment does not result in cancellation of assessments issued
before August 21, 1986 as petitioner seeks to do in the case at bar.
Therefore, the assessments in this case, issued on January 30, 1985 despite
petitioners availment of the tax amnesty under E.O. 41 as amended, still
subsist."
xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay
respondent Commissioner of Internal Revenue the sum of P3,774,867.50
representing 25% surtax on improper accumulation of profits for 1981,
plus 10% surcharge and 20% annual interest from January 30, 1985 to
January 30, 1987."[if !supportFootnotes][6][endif]
Petitioner appealed the Court of Tax Appeals decision to the Court of
Appeals. Affirming the CTA decision, the appellate court said:
"In reviewing the instant petition and the arguments raised herein, We find
no compelling reason to reverse the findings of the respondent Court. The
respondent Courts decision is supported by evidence, such as petitioner
corporations financial statement and balance sheets (p. 127, BIR Records).
On the other hand the petitioner corporation could only come up with an
alternative formula lifted from a decision rendered by a foreign court
(Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying
said formula to its particular financial position, the petitioner corporation
attempts to justify its accumulated surplus earnings. To Our mind, the
petitioner corporations alternative formula cannot overturn the persuasive
findings and conclusion of the respondent Court based, as it is, on the
applicable laws and jurisprudence, as well as standards in the computation
of taxes and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED and the decision of the Court of Tax Appeals dated August 6,
1992 in C.T.A. Case No. 4250 is AFFIRMED in toto."[if !supportFootnotes][7][endif]
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT
THE PETITIONER IS LIABLE FOR THE ACCUMULATED
EARNINGS TAX FOR THE YEAR 1981.[if !supportFootnotes][8][endif]
Section 25[if !supportFootnotes][9][endif] of the old National Internal Revenue Code of
1977 states: Sd-aad-sc
"Sec. 25. Additional tax on corporation improperly accumulating profits
or surplus -
"(a) Imposition of tax. -- If any corporation is formed or availed of for the
purpose of preventing the imposition of the tax upon its
shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its
gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-
five per-centum of the undistributed portion of its
accumulated profits or surplus which shall be in addition to
the tax imposed by section twenty-four, and shall be
computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties,
as that tax.
"(b) Prima facie evidence. -- The fact that any corporation is mere holding
company shall be prima facie evidence of a purpose to
avoid the tax upon its shareholders or members. Similar
presumption will lie in the case of an investment company
where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned,
directly or indirectly, by one person.
"(c) Evidence determinative of purpose. -- The fact that the earnings or
profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative
of the purpose to avoid the tax upon its shareholders or
members unless the corporation, by clear preponderance of
evidence, shall prove the contrary. M-issdaa
"(d) Exception -- The provisions of this sections shall not apply to banks,
non-bank financial intermediaries, corporation organized
primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.
The provision discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends,
income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax
designed to compel corporations to distribute earnings so
that the said earnings by shareholders could, in turn, be
taxed.
Relying on decisions of the American Federal Courts, petitioner stresses
that the accumulated earnings tax does not apply to
Cyanamid, a wholly owned subsidiary of a publicly owned
company.[if !supportFootnotes][10][endif] Specifically, petitioner cites
Golconda Mining Corp. vs. Commissioner, 507 F.2d 594,
whereby the U.S. Ninth Circuit Court of Appeals had taken
the position that the accumulated earnings tax could only
apply to a closely held corporation.
A review of American taxation history on accumulated earnings tax will
show that the application of the accumulated earnings tax to
publicly held corporations has been problematic. Initially,
the Tax Court and the Court of Claims held that the
accumulated earnings tax applies to publicly held
corporations. Then, the Ninth Circuit Court of Appeals
ruled in Golconda that the accumulated earnings tax could
only apply to closely held corporations. Despite Golconda,
the Internal Revenue Service asserted that the tax could be
imposed on widely held corporations including those not
controlled by a few shareholders or groups of shareholders.
The Service indicated it would not follow the Ninth Circuit
regarding publicly held corporations.[if !supportFootnotes][11][endif] In
1984, American legislation nullified the Ninth Circuits
Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held corporations.[if !
supportFootnotes][12][endif] Clearly, Golconda is no longer a reliable

precedent. Sl-xm-is
The amendatory provision of Section 25 of the 1977 NIRC, which was PD
1739, enumerated the corporations exempt from the
imposition of improperly accumulated tax: (a) banks; (b)
non-bank financial intermediaries; (c) insurance companies;
and (d) corporations organized primarily and authorized by
the Central Bank of the Philippines to hold shares of stocks
of banks. Petitioner does not fall among those exempt
classes. Besides, the rule on enumeration is that the express
mention of one person, thing, act, or consequence is
construed to exclude all others.[if !supportFootnotes][13][endif] Laws
granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing
power.[if !supportFootnotes][14][endif] Taxation is the rule and exemption is
the exception.[if !supportFootnotes][15][endif] The burden of proof rests upon
the party claiming exemption to prove that it is, in fact,
covered by the exemption so claimed,[if !supportFootnotes][16][endif] a
burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is
that increase of working capital by a corporation justifies
accumulating income. Petitioner asserts that respondent
court erred in concluding that Cyanamid need not infuse
additional working capital reserve because it had
considerable liquid funds based on the 2.21:1 ratio of
current assets to current liabilities. Petitioner relies on the
so-called "Bardahl" formula, which allowed retention, as
working capital reserve, sufficient amounts of liquid assets
to carry the company through one operating cycle. The
"Bardahl"[if !supportFootnotes][17][endif] formula was developed to measure
corporate liquidity. The formula requires an examination of
whether the taxpayer has sufficient liquid assets to pay all
of its current liabilities and any extraordinary expenses
reasonably anticipated, plus enough to operate the
business during one operating cycle. Operating cycle is the
period of time it takes to convert cash into raw materials,
raw materials into inventory, and inventory into sales,
including the time it takes to collect payment for the sales.[if !
supportFootnotes][18][endif]

Using this formula, petitioner contends, Cyanamid needed at least


P33,763,624.00 pesos as working capital. As of 1981, its
liquid asset was only P25,776,991.00. Thus, petitioner
asserts that Cyanamid had a working capital deficit of
P7,986,633.00.[if !supportFootnotes][19][endif] Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly
accumulated to increase the petitioners working capital for
the succeeding year.
We note, however, that the companies where the "Bardahl" formula was
applied, had operating cycles much shorter than that of
petitioner. In Atlas Tool Co., Inc. vs. CIR,[if !supportFootnotes][20][endif] the
companys operating cycle was only 3.33 months or 27.75%
of the year. In Cataphote Corp. of Mississippi vs. United
States,[if !supportFootnotes][21][endif] the corporations operating cycle was
only 56.87 days, or 15.58% of the year. In the case of
Cyanamid, the operating cycle was 288.35 days, or 78.55%
of a year, reflecting that petitioner will need sufficient
liquid funds, of at least three quarters of the year, to cover
the operating costs of the business. There are variations in
the application of the "Bardahl" formula, such as average
operating cycle or peak operating cycle. In times when
there is no recurrence of a business cycle, the working
capital needs cannot be predicted with accuracy. As stressed
by American authorities, although the "Bardahl" formula is
well-established and routinely applied by the courts, it is
not a precise rule. It is used only for administrative
convenience.[if !supportFootnotes][22][endif] Petitioners application of the
"Bardahl" formula merely creates a false illusion of
exactitude. Sl-xsc
Other formulas are also used, e.g. the ratio of current assets to current
liabilities and the adoption of the industry standard.[if !
supportFootnotes][23][endif] The ratio of current assets to current liabilities

is used to determine the sufficiency of working capital.


Ideally, the working capital should equal the current
liabilities and there must be 2 units of current assets for
every unit of current liability, hence the so-called "2 to 1"
rule.[if !supportFootnotes][24][endif]
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more
than twice its current liabilities. That current ratio of
Cyanamid, therefore, projects adequacy in working capital.
Said working capital was expected to increase further when
more funds were generated from the succeeding years sales.
Available income covered expenses or indebtedness for that
year, and there appeared no reason to expect an impending
working capital deficit which could have necessitated an
increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,[if !supportFootnotes][25]
[endif] we held that:

"...[T]here is no need to have such a large amount at the beginning of the


following year because during the year, current assets are
converted into cash and with the income realized from the
business as the year goes, these expenses may well be taken
care of. [citation omitted]. Thus, it is erroneous to say that
the taxpayer is entitled to retain enough liquid net assets in
amounts approximately equal to current operating needs for
the year to cover cost of goods sold and operating expenses:
for it excludes proper consideration of funds generated by
the collection of notes receivable as trade accounts during
the course of the year."[if !supportFootnotes][26][endif]
If the CIR determined that the corporation avoided the tax on shareholders
by permitting earnings or profits to accumulate, and the
taxpayer contested such a determination, the burden of
proving the determination wrong, together with the
corresponding burden of first going forward with evidence,
is on the taxpayer. This applies even if the corporation is
not a mere holding or investment company and does not
have an unreasonable accumulation of earnings or profits.[if !
supportFootnotes][27][endif]

In order to determine whether profits are accumulated for the reasonable


needs of the business to avoid the surtax upon shareholders,
it must be shown that the controlling intention of the
taxpayer is manifested at the time of accumulation, not
intentions declared subsequently, which are mere
afterthoughts.[if !supportFootnotes][28][endif] Furthermore, the accumulated
profits must be used within a reasonable time after the close
of the taxable year. In the instant case, petitioner did not
establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the
business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,[if !
supportFootnotes][29][endif] we ruled: xl-aw

"To determine the reasonable needs of the business in order to justify an


accumulation of earnings, the Courts of the United States
have invented the so-called Immediacy Test which
construed the words reasonable needs of the business to
mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs
of the business, and the penalty tax would apply. (Mertens,
Law of Federal Income Taxation, Vol. 7, Chapter 39, p.
103).[if !supportFootnotes][30][endif]
In the present case, the Tax Court opted to determine the working capital
sufficiency by using the ratio between current assets to
current liabilities. The working capital needs of a business
depend upon the nature of the business, its credit policies,
the amount of inventories, the rate of turnover, the amount
of accounts receivable, the collection rate, the availability
of credit to the business, and similar factors. Petitioner, by
adhering to the "Bardahl" formula, failed to impress the tax
court with the required definiteness envisioned by the
statute. We agree with the tax court that the burden of proof
to establish that the profits accumulated were not beyond
the reasonable needs of the company, remained on the
taxpayer. This Court will not set aside lightly the conclusion
reached by the Court of Tax Appeals which, by the very
nature of its function, is dedicated exclusively to the
consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been
an abuse or improvident exercise of authority.[if !supportFootnotes][31]
[endif] Unless rebutted, all presumptions generally are indulged

in favor of the correctness of the CIRs assessment against


the taxpayer. With petitioners failure to prove the CIR
incorrect, clearly and conclusively, this Court is constrained
to uphold the correctness of tax courts ruling as affirmed by
the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the
Court of Appeals, sustaining that of the Court of Tax Appeals, is hereby
AFFIRMED. Costs against petitioner.