COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. ANTONIO TUASON, INC. AND THE COURT OF TAX APPEALS, RESPONDENTS.

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)  Deficiency income tax

for
the years 1975

1976 and 1978 . .
. . .        P 37,491.83

(b)
 Deficiency corporate

quarterly
income tax

for
the first quarter

of 1975. . . . . . . . . . .                 161.49

(c)
 25% surtax on unreason-

able
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 limitations because the right of the Government to assess said tax
does not prescribe.

No investigation was
conducted nor a decision rendered on Antonio Tuason
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 from 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 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 a 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 from its earnings in 1975 to 1978, the
purpose was to avoid the imposition of the progressive income tax on its
shareholders.

That Antonio Tuason, lnc. 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.  Its 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 P773,720 out of its
accumulated surplus profits of P3,263,305.88 for 1975-1978, its remaining
accumulated surplus profits of P2,489,585.88 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.

SO ORDERED.

Narvasa, (Chairman), Cruz, and Medialdea, JJ., concur.

Gancayco, J., on leave.