G.R. No. L-26145. February 20, 1984
THE MANILA WINE MERCHANTS, INC, PETITIONER, VS. THE COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS.
GUERRERO, J.:
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.
The Court of Tax Appeals made the following finding of facts, to wit:
“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,
petitioner’s 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 petitioner’s 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 latter’s unreasonable accumulation of profits
and surplus for the year 1957, computed as follows:
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 petitioner’s net income, cash
dividends and earned surplus for the years 1946 to 1957:[1]
|
Year
|
Net Income After Income Tax
|
Total Cash
|
Percentage of Dividens to Net Income After
Net Income |
Balance of Earned Surplus
|
|
1946
|
P613,790.00
|
P200,000.
|
32.58%
|
P234,104.81
|
|
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:
| 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 Gold & Country Club | 1.00 |
| P375,865.26 |
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:
‘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 Dasmariñas 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
main 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.”
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
petitioner’s 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 petitioner’s shareholders by permitting its earnings
and profits to accumulate beyond the reasonable needs of business.
Hence, the Court of Tax Appeals modified respondent’s decision by
imposing upon petitioner the 25% surtax for 1957 only in the amount of
P86,804.38 computed as follows:
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.
Petitioner assigns the following errors:
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 petitioner’s 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 year.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.V
The Court of Tax Appeals erred in finding petitioner liable for the
payment of the surtax of P86,804.38 and in denying petitioner’s 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 petitioner’s 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.
The pertinent provision of the National Internal Revenue Code reads as follows:
“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 x x x x x x
x x x(c) Evidence determinative of purpose. – The fact that
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.
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 petitioner’s 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 this finding cannot be doubted. The
case of J.M. Perry & Co. vs. Commissioner of Internal Revenue[16] supports the same. In that case, the U.S. Court said the following:
“It appears that the taxpayer corporation was engaged in the
business of cold storage and warehousing 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, x x xIt 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. x x xAll 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.”
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.
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 x x x x x x
x x x
“Moreover, if there was any thought for the purchase of a lot and
building for the needs of petitioner’s 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.”
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 petitioner’s 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. vs. Commissioner of Internal Revenue[23] further strengthens this rule, and We quote:
“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 petitioner’s 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.'”
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax
Appeals is AFFIRMED in toto, with costs against petitioner.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion, Jr., Abad Santos, De Castro, and Escolin, JJ., concur.
[1] Exhibit “C”.
[2] Exhibit “D”.
[3] Exhibit “E”.
[4] Exhibit “B”.
[5] CTA Decision, pp. 9-11.
[6] Ibid., pp. 12-13.
[7] Ibid., pp. 18-20.
[8] Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 44.
[9] Ibid., p. 47.
[10] Ibid., p. 45.
[11] Sec. 21, Revenue Regulations No. 2.
[12] Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103.
[13] Helvering vs. Chicago Stockyards Co., 318 US 693; Helvering vs. National Grocery Co., 304 US 282.
[14] Court of Tax Appeals’ Decision, pp. 15-16.
[15] Renato Raymundo vs. Hon.
De Joya, 101 SCRA 495; Comm. of Internal Revenue vs. Cadwallader
Pacific Co., 73 SCRA 59; Vive Chemicals Products, Inc. vs. Comm., 60
SCRA 52; Nasiad vs. CTA, 61 SCRA 238; Aznar vs. CTA, 58 SCRA 519; Coca
Cola Export Corp. vs. Comm., 56 SCRA 5; Comm. of Internal Revenue vs.
Priscila Estate Inc., 11 SCRA 130.
[16] 120 F 2d 123.
[17] Mertens, Ibid., p. 104.
[18] Exhibit “B”.
[19] Basilan Estates, Inc.
vs. Comm. of Internal Revenue, 21 SCRA 17 citing Jacob Mertens, Jr., The
Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213;
Smoot Sand & Gravel Corp. vs. Comm., 241 F 2d 197.
[20] Fuel Carriers, Inc. vs. US 202 F supp. 497; Smoot Sand & Gravel Corp. vs. Comm., supra.
[21] CTA Decision, p. 17.
[22] Sec. 21, Revenue Regulations No. 2.
[23] 21 SCRA 27.