G.R. No. 13554. February 28, 1961
[WITH RESOLUTION OF OCT. 30, 1964]
PADILLA, J.:
Section 18, Republic Act No. 1125, for review of a judgment rendered on
22 January 1958 by the Court of Tax Appeals, holding that the
University of the Visayas (formerly Visayan Institute) is exempt from
payment of income tax under the provisions of section 27 (e) of the
National Internal Revenue Code and that the assessments for income tax
made by the petitioner for the years 1946 to 1950, inclusive, in the
total sum of P46,592.03, exclusive of surcharges, penalties and
interests are null and void, and ordering the petitioner to refund to
the respondent the sum of P13,811.31 for income tax erroneously paid by
the respondent (C.T.A. Cebu civil case No. R-3434).
The
respondent did not file with the Bureau of Internal Revenue returns of
net income for the years 1946 to 1950, inclusive. After investigation
conducted by an examiner of the Bureau of Internal Revenue, the
examiner filed returns of respondent’s net income for the said years
based upon the profit and loss statements shown and submitted to the
examiner by the respondent’s accountant (Exhibits 7, 7-A, 7-B, 7-C,
7-D, G, G-1, G-2, G-3, G-4). On 3 and 8 September 1951, the petitioner
assessed the respondent for income received during the years 1946 to
1950, inclusive, and the tax due thereon, surcharges and penalties,
computed as follows:
1946:
Net income as per return Add: Book binding disallowed Net income as per investigation Tax due at 12% 26% surcharge
Total Amount Due
1947:
Net income as per profit and loss statemen Add: Book binding Depreciation Net income as per investigation Tax due at 12% 25% surcharge
Total Amount Due
1948:
Net income as per profit and loss statement Add: Book binding Depreciation disallowed Net income as per investigation Tax due at 12% 25% surcharge Total Amount Due
1949:
Net income as per investigation Tax due at 12% 25% surcharge
Total Amount Due 1950:
Net income per profit and loss statement
Add: Depreciation disallowed Total net income per investigation 16% tax due 25% surcharge Compromise Total Amount Due
(pp. 221-222, 204, BIR rec.): Assessment Nos. AR-123696-50/46,
123697-50/47, 123698-50/48, 123699-50/49 and 123700-50/50 were sent to
the respondent (pp. 183, 179, 175, 172, 202, BIR rec). On 1 and 2
December 1951 the respondent sent telegrams to the petitioner
requesting that it be allowed to pay the taxes, surcharges and
penalties by installment at the rate of P1,000 a month (pp. 223-224,
BIR rec). On 10 December 1951 the petitioner replied that the
respondent could settle its obligation to the Government by paying it
in twelve monthly installments at the rate of P5,808.02 per month, the
first installment due and payable on or before 15 January 1952,
provided that the respondent would file a surety bond on or before 10
January 1952 to ensure payment thereof (Exhibit 11, pp. 226-227 BIR
rec.). On 17 December 1951 the respondent paid P1,000 on account of the
tax assessed against it (Exhibits D and 12, pp. 52-53, CTA rec.;
230-231, BIR rec). On 24 January 1952 the respondent wrote a letter
dated 22 January 1952 addressed to the petitioner requesting that the
25% surcharge imposed for non-payment of income tax be eliminated
because its failure to file income tax returns for the years 1946 to
1950 and to pay income tax thereon was due to the honest belief that
private schools were exempt from taxation (pp. 227-228, BIR rec). On 31
January 1952 the petitioner granted the respondent’s request for
elimination of the 25 % surcharge and reduced to P4,603.77 the monthly
installment to be paid by the respondent, provided that the first
installment would be due and payable on or before 29 February 1952 and
that the surety bond to insure payment would be filed by the respondent
on or before the said date, 29 February 1952. The previous assessments
were amended as follows:
1946 Income tax due per investigation 1947 Income tax due per investigation 1948 Income tax due per investigation 1949 Income tax due per investigation 1950 Income tax due per investigation Total 6% surcharge 1% mo. int. from 9/30/51 to 12/17/51 Total amount due on 12/17/51 (w/out compromise) Less: amt. pd. on 12/17/51 under O. R. 357822 Balance as of 12/17/51 (w/out compromise) 1% mo. int. on P46,592.03 from 12/17/51 to 1/31/53 Compromise for late filing (P20.00 each year) Compromise for late payment Total Amount Due on 1/31/53
(Exhibits D and 12, pp. 52-53, CTA rec; 230-231, BIR rec). On 29
February, 3 April and 5 May 1952, the respondent paid to the City
Treasurer of Cebu the monthly installment at the rate of P4,603.77, or
the total sum of P13,811.31 (Exhibits A, B, C).
On 1 March
1954 the respondent wrote to the petitioner requesting that the amount
of P1,000 (paid on 17 December 1951, O.R. No. 557822, see Exhibits D
and 12) and P13,811.31, or a total of P14,811.31, be refunded to it on
the ground that being a corporation organized and operated exclusively
for educational purpose, it was exempt from the payment of income tax
(p. 235, BIR rec). On the same day, I March 1954, the respondent
brought an action against the petitioner in the Court of First Instance
of Cebu for recovery of the sum of P14,811.31 (civil No. R-3434). On 7
April 1954 the petitioner filed his answer to the complaint with
counterclaim. After the enactment into law of Republic Act No. 1125 on
16 June 1954, upon motion of the Assistant Provincial Fiscal, on 6
November 1954 the Court of First Instance of Cebu certified the case to
the Court of Tax Appeals pursuant to the provisions of section 22, in
connection with section 7, Republic Act No. 1125. After hearing, on 22
January 195R the Court of Tax Appeals rendered judgment, the
dispositive part of which is as stated at the beginning of this
opinion. On 6 March 1958 the petitioner filed a notice of appeal in the
Court of Tax Appeals and on 20 March 1958, within the extension of time
previously granted, a petition for review in this Court.
Section 27 (e) of the National Internal Revenue Code, as amended, the provisions of law involved in the case at bar, provides:
The following organizations shall not be taxed under this Title in respect to income received by them as such—
* * * * * * *
(e) Corporations or associations organized and operated exclusively for
religious, charitable, scientific, athletic, cultural, or educational
purposes, or for the rehabilitation of veterans no part of the income
of which inures to the benefit of any private stockholder or
individual; Provided, however,
That the income of whatever kind and character from any of its
properties, real or personal, or from any activity conducted for
profit, regardless of the disposition made of such in come, shall be
liable to the tax imposed under this Code;
A corporation or association claiming
exemption from the payment of income tax as provided for in the
aforequoted provision of law, must show that it is organized and
operated exclusively for religious, charitable, scientific, athletic,
cultural or educational purposes, or for the rehabilitation of veterans
and that no part of its income inures to the benefit of any private
stockholder or individual.
The petitioner claims that the
respondent is a corporation organized for profit which inures to the
benefit of Vicente Gullas, its president. The respondent denies the
petitioner’s claim.
In Collector of Internal Revenue vs.
V. G. Cinco Educational Corporation, 100 Phil., 126; 53 Off. Gaz.,
2470, the facts are: In June, 1949 Vicente G. Cinco established and
operated an educational institution known as Foundation College of
Dumaguete. On 21 September 1951, in view of the requirement of the
Department of Education that as far as practicable, schools and
colleges recognized by the government should be incorporated, Vicente
G. Cinco and the members of his immediate family organized a non-stock
corporation known as the V. G. Cinco Educational Institution, Inc.,
which was capitalized by Vicente G. Cinco and the members of his
immediate family. Vicente G. Cinco acted as chairman of the board of
directors and president of the college and in 1949 as a part time
teacher but did not collect his salary. The college derived its income
solely from the tuition fees paid by students enrolled and realized
profits out of its operation but did not distribute any dividend or
profit to its stockholders. Part of its income was spent in acquiring
additional buildings and equipment. In upholding the corporation’s
claim that under the provisions of section 27 (e) of the National
Internal Revenue Code, it is exempt from the payment of income tax
because it is organized and maintained exclusively for educational
purposes and no part of its income inures to the benefit of any
individual or stockholder, this Court said:
“*
* * The fact is that, as it has been established, the appellee is a
non-profit institution and since its organization it has never
distributed any dividend or profit to its stockholders. Of course, part
of its income went to the payment of its teachers or professors and to
the other expenses of the college incident to an educational
institution but none of the income has ever been channeled to the
benefit of any individual stockholder. The authorities are clear to the
effect that whatever payment is made to those who work for a school or
college as a remuneration for their services is not considered as
distribution of profit as would make the school one conducted for
profit. Thus, in the case of Mayor and Common Council of Borough of
Princeton vs. State Board of Taxes & Assessments, et al.,
115 Atl., 342, wherein the principal officer of the school was formerly
its owner and principal and as such principal he was given a salary for
his services, the court held that school is not conducted for profit
merely because moderate salaries were paid to the principal and to the
teachers.
Of course, it is not denied that
the appellee charges tuition fees and other fees for the different
services it renders to the students and in fact it is its only source
of income, but such fact does not in itself make the school a
profit-making enterprise that would place it beyond the purview of the
law. In this connection this Court made the following comment:
“Needless
to say, every responsible organization must be so run as to, at least,
insure its existence, by operating within the limits of its own
resources, especially its regular income. In other words, it should
always strive, whenever possible, to have a surplus. Upon the other
hand, appellant’s pretense would limit the benefits of the exemption,
under said section 27 (e), to institutions which do not hope, or
propose, to have such surplus. Under this view, the exemption would
apply only to schools which are on the verge of bankruptcy, for—unlike
the United States, where a substantial number of institutions of
learning are dependent upon voluntary contributions and still enjoy
economic stability, such as Harvard, the trust fund of which has been
steadily increasing with the years—there are, and there have always
been, very few educational enterprises in the Philippines which are
supported by donations, and these organizations usually have a very
precarious existence. The final result of appellant’s contention, if
adopted, would be to discourage the establishment of the colleges in
the Philippines, which is precisely the opposite of the objective
consistently sought by our laws.“Again, the amount of fees charged by a school, college or university depends, ultimately, upon the policy and a given administration, at a particular
time. It is not conclusive of the purposes of the institution.
Otherwise, such purpose would vary with the particular persons in
charge of the administration of the organization.” (Jesus Sacred Heart
College vs. Collector of Internal Revenue, 95 Phil., 16.)Another point raised by appellant to show that appellee is not entitled
to the exemption of the law refers to the use made by it of part of its
income in acquiring additional buildings and equipment which, it is
claimed, would in the end redound to the benefit of its stockholders.
Appellant claims that “by capitalizing its earnings in the
aforementioned manner, the value of the properties of the corporation
was enhanced and, therefore, such profits inured to the benefit of the
stockholders or members. The property of the corporation may be sold at
any time and the profits thereof divided among the stockholders or
members.”This claim is too speculative. While the
acquisition of additional facilities may redound to the benefit of the
institution itself, (it) cannot be positively asserted that the same
will redound to the benefit of its stockholders, for no one can predict
the financial condition of the institution upon its dissolution. At any
rate, it has been held by several authorities, that the mere provision
for the distribution of its assets to the stockholders upon dissolution
does not remove the right of an educational institution from tax
exemption. Thus, in the case of U. S. vs. Pickwick Electric
Membership Corp., 158 F. 2d 272, 277, it was held—”The mere fact that
the members may receive some benefit on dissolution upon distribution
of the assets is a contingency too remote to have any material bearing
upon the question where the association is admittedly not a scheme to
avoid taxation and its good faith and honesty of purpose is not
challenged.” (100 Phil., 133-135; 53 Off. Gaz. pp. 2473-2475.)
Sometime in 1919, Vicente Gullas established a school in Cebu City
known as the “Visayan Institute” and for a few years remained its sole
owner. On 1 October 1921 Vicente Gullas, Pantaleon E. del Rosario,
Paulino Gullas, Manuel C. Briones and Eugenio S. del Rosario formed a
non-stock corporation with an authorized capital of P20,000 for the
purpose of (establishing and maintaining a school to be named as the
“Visayan Institute” [(Exhibits 1, 1-A. pp. 193 (i) to 198 (k)]. The
plan was to finance the school by selling to the public bonds with a
par value of P10O each payable out of the funds of the corporation and
the interests to be fixed by the by-laws. However, the financing plan
was abandoned and instead of selling bonds to the public, Vicente
Gullas and his wife “put in” their “own money.” On 29 August 1930 the
Visayan Institute amended its articles of incorporation by converting
it into a stock corporation with an authorized capital of P50,000,
subscribed and paid as follows by:
Name
SubscribedAmount paid Pantaleon E. del Rosario Eugenio S. del Rosario Manuel C. Briones Paulino Gullas Vicente Gullas
According to the amended articles of incorporation, all shares of the
corporation had been subscribed and paid for (Exhibits 2, 2-A, E, E-2,
pp. 193 (f) to 193 [h]). In March 1948 the Visayan Institute was raised
to the category of a university and renamed “University of the Visayas.”
Vicente Gullas, president of the respondent, testified that the
respondent is not engaged in a profit-making enterprises but in a
purely educational pursuit; that the sources of income of the
respondent are the various fees paid by the students like annual fee,
book rental, etc.; that these receipts are spent for salaries of
teachers, repair of the buildings, purchase of library books and
athletic equipment, scholarship, funds and contributions to charity;
that while the respondent realizes profit out of its operation, the
profit goes to the improvement and repair of the buildings, purchase of
library books and equipment, establishments of scholarship funds and
purchase of musical instruments; that since its original incorporation,
no dividends have been declared and distributed to the stockholders;
and that as president of the respondent, he receives a salary of P1,000
a month and P300 a month allowance for transportation, representation
and entertainment.
Teofilo Castillejo, accountant of the
respondent, testified that the income of the respondent is derived only
from admission, tuition, diploma, ROTC and laboratory fees paid by the
students; that no dividends have been distributed to its stockholders
since its incorporation; and that the net income of the respondent
remains as surplus in its book of accounts.
Juan Gandiongco,
at present chief of the Collection Branch, BIR Regional District No. 7,
and from 1934 to the end of the war and from 1946 to 1951, was an
income tax examiner, testified that sometime in 1941 he examined the
books of account of the Visayan Institute and submitted a report of his
examination to the chief of the Income Tax Division; and that in the
course of his examination of its books of account, he found that at no
time from 1920 to 1941 did the Visayan Institute declare any stock or
cash dividend.
Zacarias Chua, Group Supervisor in the Bureau
of Internal Revenue and income tax examiner, and from 1946 to 1951 was
stationed in Cebu City, testified that in 1951 he had occasion to
examine the books of account of the Visayan Institute or the University
of the Visayas; and that he did not find any declaration and payment of
cash dividend to its stockholders.
At present, the stockholders of the corporation and their respective shareholding and investment are:
Atty. Vicente Gullas Atty. & Mrs. Vicente Gullas Senator Manuel C. Briones Atty. Vicente del Rosario Dr. Rosario Gullas-Cruz Atty. Braulio K. Oro and Alberto Pusod Mr. Jose E. Gullas Mr. Eduardo R. Gullas Miss Glicoria R. Gullas Mrs. Josefina R. Gullas Mr. Felicisimo Cabusas Pres. U. V. Alumni Association Atty. Hipolito Alo Mr. Sabas Ramirez
(Exhibit 15, p. 310, BIR rec). The following is a list of stockholders
employed by and receiving compensation from the respondent:
Year 1946
Atty. Vicente Gullas, President
December 1946Dr. Rosano G. Cruz, Secretary
December 1946
Year 1947
Atty. Vicente Gullas, President
December 1947Dr. Rosario G. Cruz, Secretary
December 1947Mrs. Josefina K. Gullas, Treasurer
December 1947
Year 1948
Atty. Vicente Gullas, President
December 1948Mrs. Josefina E. Gullas, Treasurer
December 1948Dr. Rosario G. Cruz, Secretary
December 1948Atty. Vicente Gullas, President
December 1949Mrs. Josefina E. Gullas, Treasurer
December 1949Hon. Vicente del Rosario, Instructor
December 1949Atty. Vicente Gullas, President
December 1950Mrs. Josefina K. Gullas, Treasurer
December 1950
The
respondent has satisfactorily established its claim that it is
organized and operated, exclusively for educational purposes and that
no part of its income has inured to the benefit of any stockholder or
individual. The original articles of incorporation of the respondents
states—
That the purpose for which such,
corporation is formed for the upbuilding and development of the mind
and body of the Filipino youth, and to promote that which is helpful
and beneficial to the moulding of their character. To accomplish this
end, the corporation shall establish and maintain, to begin with, a
high school course, a school of law and of commerce, and may also
establish sometime in the future some other institutions of learning
such as colleges of education, medicine, engineering etc. (Exhibit 1)
and its amended articles of incorporation states—
That the purpose for which such corporation is formed is to give to the
Filipino youth such training and instruction which may make them
well-prepared to honorably exercise the rights and to perform and
discharge the duties and obligations of a good, patriotic and useful
citizen. The corporation will direct its efforts to the symmetrical
development of their character, mind and body. To accomplish this end,
the corporation will establish and maintain, to begin with, a high
school or secondary course of instruction, a college of commerce and
business administration, and a college of law: In the future, when
conditions warrant it, the corporation may open, establish and maintain
additional courses, schools, and colleges, such as: college of liberal
arts, college of education, college of engineering, college of
dentistry and pharmacy, college of medicine And surgery, et al.,
(Exhibit E-1).
The above quoted purposes of
the respondent show that it is engaged in an educational endeavor and
in no other. The profit and loss statements of the respondent for the
years 1946 to 1950, inclusive, show that its income was solely derived
from admission fees, tuition fees, diploma fees, graduation fees, ROTC
fees and laboratory fees paid by the students (Exhibits G, G-1, G-2,
G-3, G-4).
The fact that the original articles of
incorporation was amended to convert the corporation from a non-stock
to a stock corporation is not a conclusive proof that the respondent is
engaged in a profit-making business, part of which inures to the
benefit of a single stockholder or individual. As correctly held by the
Court of Tax Appeals, “Section 27 (e) of the National Internal Revenue
Code does not make any distinction between stock and non-stock
corporations, and it is not for this Court to make the distinction.”
The fact that when on 29 August 1930 the corporation was converted from
a non-stock to a stock corporation, “its assets had increased from
P6,000.00 cash and P3,000.00 worth of books (t.s.n,, p. 23) into assets
worth P50,000.00, which were distributed in the form of shares of stock
to the members of the non-stock corporation, predecessor of the stock
corporation (Exhibit 2, p. 13 h, Vol. I, BIR rec.);” and that at the
meeting of the Board of Trustees of the respondent held on 12 February
1350, there was a move to double the stock dividend of the corporation
“in view of P200,000 gain in property—real and personal besides the
goodwill,” which was not actually carried out (Exhibits 3-B, 3-C, p.
39, BIR rec), is not enough for an inference that the respondent has
been turned into a corporation for business and profit. The fact is
that since its incorporation, the respondent has not declared any cash
dividend and no part of its profits has inured to the benefit of any
stockholder or individual. The mere realization of profits out of its
operation does not automatically result in the loss of its privilege of
exemption from the payment of income tax as long as no part of the
profits inures to the benefit of any stockholder or individual.
The petitioner’s claim that the respondent has invested in other
schools established in Toledo, Danao, Sogod, Colon, Sibonga and Cebu
City is denied by Vicente Gullas, president of the respondent, who
testified that the respondent is merely supervising these schools and
does not receive any fee for such; that the only benefit the respondent
derives in return is the encouragement of the graduates of the
supervised schools to enroll in the respondent; that it is the witness
himself who supervises them and receives remuneration for his services
and not the respondent, and that although at the meeting of the board
of trustees of the respondent held on 12 February 1950, there was a
move to require the Toledo Colleges, Danao Colleges and Cebu Northern
High Schools to give the respondent 5% of their admission fees and 10%
of their graduation fees as remuneration for checking their financial
account and for advertising their schools, yet the board of trustees
had not been able to compel them to do so because the supervised
schools stood “on their own and not directed by the University of the
Visayas” and that “they pay directly their fees to Manila or they
cannot get graduation special order or when there is a contribution for
girl scouts or boy scouts or for the anti T.B., they don’t pay thru the
University of the Visayas.”
Neither the fact that there was
an offer to purchase the assets of the University of the Visayas for
the sum of P4,000,000, which means that the stockholder’s original
investment of P1 is now worth P119, nor that fact that the respondent’s
profits are being kept for future distribution to stockholders would
deprive the respondent to the privilege of exemption. As long as it
continues to engage solely in the operation and maintenance of the
school and no dividend inures to the benefit of any stockholder or
individual, the respondent would enjoy the exemption from the payment
of income tax provided for in section 27 (e) of the National Internal
Revenue Code.
The action for refund, as far as the sum of
P1,000 paid by the respondent on 17 December 1951 is concerned, is
already barred.[1] The
respondent does not insist on asking for refund of this sum. And as far
as the action for refund of the sum of P4,603.77 paid by the respondent
on 29 February 1952 is concerned, the Court of Tax Appeals correctly
ruled that it is not barred, because as the last day of the two-year
period (28 February 1954) within which an action may be brought in
court for its refund, as provided for in section S06 of the National
Internal Revenue Code, fell on Sunday, the action for refund brought by
the respondent in the Court of First Instance of Cebu on the following
day, to wit: 1 March 1954, was within the statutory period. The action
for refund of P4,603.77 paid on 3 April, and of an equal amount paid on
5 May 1952, by the respondent, is obviously within the statutory period.
The judgment under review is affirmed, without pronouncement as to costs.
Bengzon, Acting C. J., Bautista Angelo, Labrador, Concepcion, Reyes, J. B. L., Barrera, Paredes and Dizon, JJ., concur.
[1] Section 306, National Internal Revenue Code, Commonwealth Act No. 466.
R E S O L U T I O N
October 30, 1964
REYES, J. B. L., J.:
The Commissioner of Internal Revenue has moved for the
reconsideration of our decision in the above-entitled case affirming
the decision of the Court of Tax Appeals in its interpretation and
application of Section 27 (e) of the tax code, and declaring: (1) that appellee University of the Visayas be exempt from income tax under Section 27(e)
of the Internal Revenue Code; (2) annulling the income tax assessments
for 1946 to 1950 made against the University; and (3) ordering the
refund of previous income taxes collected from it.
The petitioner-movant re-asserts his position that the respondent University of the Visayas is not tax-exempt because the legislature intended to remove from the purview of the exemption provided for in Section 27 (e)
of the Revenue Code not only organizations or corporations distributing
cash dividends to any stockholder or individual but also those whose
income inures to the benefit of any stockholder or individual. In
support thereof, he emphasizes the difference between the old law
(Commonwealth Act No. 466) thus:
“(f)
Corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, cultural, or educational
purposes, no part of the net income of which is distributed to any
private stockholder or individual:
and its amendment by Republic Act No. 82, as follows:
“(c)
Corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, cultural or educational,
purposes, or for the rehabilitation of veterans no part of the net
income of which inures to the benefit of any private stockholder or
individual * * *.”
and finally cites and
relies on the explanatory note to House Bill No. 729, which became
Republic Act No. 82. The pertinent portions of the explanatory note are
hereunder quoted:
“The attached bill,
therefore, proposes to increase the present rates of income tax and to
modify the other features of the present law “with a view of providing
additional revenue. A brief explanation of the changes proposed to
Title II (Income Tax) of the National Internal Revenue Code is set
forth below.“4. Amendment of provision granting
exemption in favor of religious, charitable, scientific, athletic,
cultural, or educational organizations or institutions. The present
law section 27(f), National Internal Revenue Code exempts the
organizations if no part of their net income “is distributed to any
private stockholder or individual.” This provision has been
authoritatively construed as exempting such organization or association
from payment of the income tax for any year in which no dividends are
distributed to stockholders. The present law as so construed,
therefore, makes it possible for a corporation to avoid the payment of
income tax by simply desisting from declaring a divider during any
given year notwithstanding the fact that it may have earned a very
substantial amount of income in that year. Furthermore, if the
corporation desires to distribute dividends, it could effect the
distribution during a taxable year in which it expects to suffer a
loss, or derive only a small income, thus making it possible for such
corporation to entirely avoid the payment of the income tax by availing
of the loophole in the law to suit its advantage. Under the proposed
amendment, the above-mentioned corporations and associations will pay
income tax on their profits in any year although no dividends are
declared for such year.” (Congressional Record, House of
Representatives, Sept. 9, 1946, Vol. 1, No. 69, p. 1599.)
The Revenue Commissioner further argues that the undistributed
dividends necessarily increase the value of the stockholders’ equity,
and that, in the particular case, it is not denied that the market
value of the shares of the University of the Visayas has increased
considerably; hence, it is urged, the undistributed dividends actually
inured to the benefit of its private stockholders, thus coming within
the purview of the statutory requisite for taxability.
In
reply, the appellee University of the Visayas argues that the foregoing
explanatory note lends no assistance to the movant’s position because
it merely states the intended safeguard or remedy against tax evasion
without, however, expressing that the intent of the legislature was to
withdraw the exemption from income tax of the corporations or
institutions enumerated in Section 27 (e). The law itself, it is
argued, sanctions the exemption; and if the exemption were withdrawn,
the law would have simply taxed educational institutions that produce a
net income or profits. Appellee further urges that, literally
understood, the said Section 27 (e) would tax all the institutions
mentioned therein that have any net income whatever, since the
production of net income naturally (although not necessarily) results
in the increase of the stockholders’ equity in the corporation; but
such a literal interpretation has no justification, and would make the
law senseless in its application by granting and, at the same time,
withdrawing the exemption.
Finally, appellee argues that
under the interpretation advocated by the Revenue Commissioner, only
educational institutions without net income would be exempt; and that
the increase of a stockholder’s equity in the corporation is not only
theoretical while the shares are not disposed of, or the corporation
liquidated, but may arise from causes unconnected with its net income.
That what is referred to by the phrase “net income inures to the
benefit of any private stockholder or individual” is the disposition or
channeling of the net income of the corporation to the benefit of the
stockholder or individual in an indirect or manipulative manner.
We have carefully reexamined the records of this case, and reached the
conclusion that while the arguments advanced by the appellee
educational institution are deserving of careful consideration and bear
weight, the peculiar circumstances of the present case clearly indicate
that said original appellee is not entitled to claim exemption,
contrary to our original decision. The reason is that the facts of
record prove that the corporation is under absolute control of the
president and his immediate family (who hold 85% of the capital stock)
to an extent that warrants the conclusion that the corporate entity is
but an alter ego or a business conduit for said stockholders;
wherefore, a disregard of the corporate fiction is justified, and the
net income of the corporation may well be viewed as that of the
controlling group (cf. Koppel [Phil.] Inc. vs. Yatco, 77 Phil., 496, and authorities cited).
The operation of the appellee educational enterprise was indeed limited
to educational purposes, and the income derived solely from admission,
tuition, diploma, laboratory and ROTC fees paid by students. However,
the net income of P302,479.02 from 1946 to 1950, with the exception of
the relatively small amount of P28,000 intended for operating expenses,
were invested in the purchase of real properties. Said properties, it
is admitted, belong to the university, but they have been placed in the
name of the president alone, or in the name of his wife, or both. The
reason is that, as the president truthfully admitted, he is the
university and the university belongs to him. Shares of stock belonging
to other stockholders were acquired by the president, and although not
at their market value, nevertheless, at prices very much more than par
value. No less than the president testified that for every peso share
the value is now P119. This increase in value is due not only to the
operation of the educational enterprise but also in the increase of its
permanent assets, including those that had been placed in the name of
the president, his wife, or both. One of the facts clearly denoting
that the personality of the university and that of the president is one
is that the board of directors of the university had once proposed the
issuance of additional shares on the accumulated net income or profits.
The president, however, objected to this proposal of the majority of
the persons composing the board for the reason that the same would be a
useless and unnecessary gesture, as he was practically the corporation.
The objection of the president defeated the proposal.
Considering that the net income, except for the sum of P28,000.00 set
aside for operational expenses, was invested in permanent assets placed
in the name of the president, his wife, or both, it is very obvious
that such net income realized by the university inured to the benefit
of the president and his family. It is thus perfectly understandable
that the president would decline to declare dividends. Having the
permanent assets consisting of seven buildings in his name or that of
his wife, he is certainly benefited by desisting from declaring any
kind of dividend. If dividends had been declared and distributed the
funds and assets of the university would be diminished, insofar as the
president and his family is concerned, to the amount, although
insignificant, that has to be distributed to the stockholders holding
15% of the shares. However, if no dividends are declared or
distributed, 100% of the net income or accumulated funds or assets of
the corporation would remain with him, so that he would benefit not
only from his 85% holding but also from the 15% holding of others.
The foregoing proves in a clear manner, not only on the basis of a
statement under oath but also on the history of the respondent
institution from incipiency to the present time when the tax is being
collected, the existence of a setup designed to avoid the payment of
taxes. If the net income of the institution inured to the benefit of
the university, as claimed by its president under the aforementioned
circumstances, it likewise inured to the benefit of the president, as
the two are admittedly, and shown to be, the same. Hence, the
university is liable for income tax under the amendment.
In
view of the foregoing considerations, the original decision of 28
February 1961 is hereby reconsidered and set aside, and another one
entered (a) reversing the decision of the Court of Tax Appeals, in CTA
Cebu CM Case No. R-3434, and declaring appellee University of the
Visayas not entitled to the refund of P13,811.31, for income taxes
previously paid; (b)1 denying the refund aforesaid; (c) declaring that
the Commissioner of Internal Revenue was lawfully empowered to assess
and collect income taxes from the appellee, University of the Visayas;
and (d) ordering the said appellee to pay the amount of P37,212.06, as
taxes on its income for the years 1946 to 1950, together with one per
centum (1%) monthly interest on the sum of P31,780.72 until paid, plus
the sums of P40 and P100 as administrative penalties for lateness in
filing returns and payment. No costs.
Concepcion, Barrera, Paredes, Dizon, Regala, Makalintal, Bengzon, and Zaldivar, JJ., concur.