- --

REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS
QUEZON CITY

BANICO and SONS,

INC.,

Petitioner ,
_,

C.T.A. CASE NO. 4330

- versus -

BUREAU OF INTERNAL REVENUE

IN
HIS
CAPACITY AS DEPUTY
COftftiSSIONER OF INTERNAL
REVENUE,
and EUFRACIO D. SANTOS,

Respondents.
X

This case
respondent,
petitione r
tax

due

is an

appeal

Bureau of

from

Internal

the decision

Revenue,

of

the

assessing

the

the sums of P7 5, 778 .38 as def i ciency income

to

disallowance

dedu c t i ons a nd

of

various

expenses

P96, 992. 02 as deficiency surtax

alleged un re ason a ble a c cumulation of profits,

the t a xabl e yea r

as

due to

both for

197 9.

The facts of the case are as follows:

On
Inc.,
and

a
by

January

11,

1985,

corporation duly
virtue

Philippines,
corresponding

of

the

petitioner Banico and Sons,

organized and

laws

received
a ss essment

of ,the
demand

not i ces,

-971

all

existing under

Republic

of

letter
dated

July

the
with
11,

1
DECISION C.T.A. CASE NO. 4330
-

1984 from the respondent assessing the corporation for

deficiency income tax and surtax,

details of which are

shown below:
Deficiency Income Tax

( g_~-L...A. ~.-R_~_p_Q_!"d ?J__J!.L--~)

Gross inco11e:
RPnt
Dividend
Other incoliE!
Gain on sale of seeuritil~s
Total gross inco.e
Less: lnco.e subjected to final tax:
Dividend
Share - Equitable Banking Corporation
Gain on sale of securities
Taxable gross inco.e
Less: Allowable deductions:
Interest and bank charges
Taxes and licenses
Donations and contributions
Accountant and auditor' s fees
SSS, Medicare and EC
St tionery and office supplies
Hrt tftxnbl, inr.o
Tax due lht>reon
less: Tax credit
Deficiency incoliE! tax
Add: 14X int. fr. 4/16/80 to 7/31/80
20X int. fr. 8/01180 to 4/15/83
Total A10unt Due and Collectible

P144,000.00
83,589.14
89,711.25
_.P.~,..Q.HJ~

P4S0,344.S2
p 83,589.14

69,185.00
_l:gLQ.{tn

-~~~A!~.~.n

Pl64,526.2S

p 8,599.48

3,372.19
4,519.40
1,000.00
261.70
--- .~-~. ~~

- ~8, JC!.3. Q~
P146 127 23

r~a: 4 ~:-89

-------~4.~~. ! ~
p 47,907.70

1,952.40
-~'Jl.~!-~
p 75! 778.38

Deficiency Surtax
<~..!-I~-.-~..:....-R.t?s;;:...Q.r.-..!i!a..!...-..P~-~ )

Total gro s~ incoae lper stateaentl

Less: Total expenses
Net lnco.e per state1ent
Add: Depreciation deducted
Total net incote
Less: Assees-ents for deficiency inco~e
Net profit
2SX surtax
Add: l4X int. fr. 4/16/80 to 7/31/80
201 int. fr. 8/01 /80 to 4/15/83
Total Aount Due and Collectible

97 2

P450, 344.52
...1.3.;!,_~_1. 84
P216,380.68

_ ?..Q, {)!!_~.!.59
P295,183.27

_ ,9,90f?._lll
P24S,276.45
i~""61;3i9:i1

2,498.96
-~~.H.~~. ~

p 96,992.02

DECISION C.T. A. CASE NO. 4 330

-

Petitioner
Jan ua ry

21,

protested

1985

through

the
a

a bo v e

let te r

assess me nts

d ated

Ja nua r y

on
18 ,

1 985.
On Dece mber 22,
decision ,

respond ent i ssued its i nal

in a letter dated December 6 ,

co-respondent
denying

1988,

Deputy

Comm i ssioner

petitioner's

.factu al b

protest

1988 s ig ned by

Eu r a cio D.

fo r

lack

S antos,

legal

a nd

Petit i oner thus sent,

on Jan u ar y 20,

1989 t hrough

<c. T. A. Records, p . 27), t his p et i ti o n

registered ma il

for rev iew which was received by th is Court on J a n u a ry

28,

1989.
Respond e nt on t he other hand ,

way

of specia l

others,
1>

and af.firmative deen ses al l eg e d among

that:
The

assess ments

have

executory and collect ble,

11

of

i n h i s answer a nd by

Repub l ic

Act

al ready

pursu ant

<R. A. >

No .

become

t o Sections
1 1 25,

t h irty seven (37 ) days a fter petiti oner

Decemb er 22,

7 and

beca u se

petition for review was .filed only on J a n u ary 28,

or

i nal,

the
1989,

r e ce ived on

1988 the l etter denying h is p r o test t o the

assessments;
2)
re n tals,

The

expenses

dividends,

disallowed

interests,

e"t;c.

ma in ly

consists

of

which are pass ive

and fixed income th at can n ot be cons i dered as ord i nary

and n ecessa ry expenses deductible u nde r the Tax Code;

97~

DECISION C.T.A. CASE NO. 4330

- 4 3)

The cash

declaration

of

position of

cash

the company

dividends

to

warrants a

shareholders

as

the

investments made were mainly on speculative securities;

4)

Petitioner,

being

closely

held

family
.I

corporation organized as a mere holding company,

exists a

there

prima facie evidence of a scheme to avoid the

tax upon it s s hareholders; and

~ )

Th

ARAeRamenta

in

qua f'ltlon

w Ttt

:iar.tu d

:i.n

accord a n ce with law.

Ref ore

th i.a

Court

for

co nsiders ion

ere

the

following issues:
1.

Whether or not the petition for review

was filed within the prescriptive period
of thirty <30) days, in compliance with
Sections 7 and 11 of R.A. No. 1125;

2.

Whether or not petitioner is liable for

amounting
to
deficiency
income
tax
P75,778.38; and

3.

Whether or not petitioner is guilty of

un reaso nable
accu mul ation
of
profits
making it liable for deficiency surtax
in the amount of P96,992.02.

This Court,
prescription,
filed

within

in response to respondent's defense of

holds
the

that

the

thirty-day

Sections 7 and 11 of R. A.

No.

petition
period
1125.

for

review

was

prescribed

in

Section 1 of Rule

13 of the Rules of Court provides:

"Section 1.
gp u .r:t.L.____cjg:f..4 n...f?d.

The

appearances,
motion s ,
other papers with the
the se rules shall be

~}:_!:_:n g____Jii -~!;l_______t.hJ?.

filing o:f pleadings ,
notices,
orders and
cour t as required by
made by :filing them

DECISION C.T.A. CASE NO.

4330
-

5 -

p erAona lly with

the clerk of the court or by
sending them by :r:e.gis_t_E'T~J.f - ...._f!l_a.:l.._
.:t.
In the
first case ,
the clerk shall endorse on the
pleading the date and hour of filing.
In the
second case,
.t.J1 ~ --- ___c:;f. ~ t E?__ __Q_f_ ___ t.h.~_____!!L~J_.t!D.Q. ___g_t_
!!1 o t i on s, - p 1 E? _
a c:;f. :1.. 11.9 a.' -- Q._ .. ~!! Y......__q ..t Q.~.L...R.?.P ~!:-~------.9. r
payments ___ or. ........ !:! E? p o.~ i :t.~-'- _ a a ---a h 9.~ Q_ b.y_____1;_l:!_~__ p 9 ~.t..
qff ice ~tamp __ q_Q .. the . ~nve.J,..ope>___q_;r::- _j;._!:l~ .--r.~9.t~..t.D~.
receipt, _ s,h~l_J,____ b.e. COD.~i-~~:r..E;"q .....!il~.._ !;._b,_!;?___g_~. t.E'.___Q;{
:their . . :fi.ling, __ payment, . or ... !=fepo_a;l..,_1;___ in __ p _r;>ur:..t .!.
Tl)e env:e.J,.qpe _._...... s.h~ll .bE?_.. ?tJ: _~9.hE?J!._!_g~hE;>_rec_q]:"d
of . ~he q~se ."
<Underscoring supplied>
Thus,
as

the

it

has been held that when a pleading,

herein

petition

for

review,

is

sent

such
by

registered mail,

the date of mailing of such pleading,

as shown

post of fice

by the

registry receipt,
filing

<Mercader

C.T.A .

CaRe No.

shall
vs.

bar was
1989,

considered

the

date

of

Commissioner of Internal Revenue,

October 2,1969. >

1997 ,

Although the

be

stam p on the envelope or

petition for

r eview in

the case at

actually received by this Court on Januar y 28,

the

that the

post office

stamp on the envelope indicates

same was mailed on Januar y 20,

nine <29>

calendar days

the final

decision

of

1989 or twenty

after the petitioner recei ved

the

respondent.

contrary to respondent's claim,

Therefore,

t his action has not yet

prescribed.
This Court

now comes

Petitioner claimed
disallowed

i 'n

that the

gross

to the issue on the merits.

follo wing

violatio n

97 .

of

expenses
its

ri~hts

were
to

DECISION C.T. A. CAS E NO .

433 0

.)

- 6 -

p roce d ural d u e

process of

C.T.A. Recor ds,

p. 5 )

l aw:

Salaries, rages, bonuses

Interest and bank charges
Taxes and licenses
Gas and oil
Telephone, telegra and cable
Car repair/taintenance
Car insurance and registration
Representation and entertaintent
Stationery, printing and supplies
Donations and contributions
Business travel
Accountant and auditor's fees
Transportation and freight
Depreciation
SSS, "edicare and EC contribution
"iscellaneous
"agazines and periodicals
"ebership dues

TOTAL

<Peti t io n

p 63,000. 00
8,599. 48
1, 372.19
6,803.35
746. 34
12,926.10
5,707. 15
4,226. 62
646.25
7.1' 207. 20
16,349. 91
1,000. 00
1, 134. 76
78,802.59
261. 70
4,590.60
249.60
----~~Q~. Q9.

~!3~t~~-~

for Re v iew,

none

p 63, 000.00

p 8,599.48

3,372. 19
none
none
none
none
none
646.25
4,519. 40
none
1,000.00
none
none
261.70
none
none
._..!.UmL._

P18, 399. 02

nime

2,000. 001
6, 803.35
746.34
12, 926. 10
5, 707. 15
4,226. 62
none
22,687.80
16,349. 91
none
1, 134.76
78,802. 59
none
4,590.60
249.60
-------~~ .QQ
_P215, ~4. 8~

It further alleged that:

"The aforementioned ex penses claimed as
deductions
consisting
of
expe n ses
for
salaries,
gas
and oil,
telephone,
car,
maintenance,
etc .
!!.f..~..- ... ~ J,..l___9.J:"'A~!t9.:.f...Y. __~ng
D.!?Gg.~"".!'lr.Y __ .. ex.P..~.n.~~!':!
commonly or
normally
incurred by enterprises engaged in a simila r
field of
business.
The same were all
incurred and paid during t h e taxable year
1979.
The aforesaid deductions %or expenses
were incurred in the course of carrying on
its business as a real estate corporation.
Lastly, t h ese expenses clai med as deductions
are duly supported by vouchers, and/or other
doc'uments which the examner evidentl y did
not b o ther to verify or consider altoget her."
<Petition for Review, C.T.A. Records, p . 7>
The

applicable

provision

bf

t he

Tax

Code

is

Section 30 which reads:

,I

976

DECISION C.T.A. CASE NO.

4330
- 7 -

Deductions from Gross

"Section 30.
Income - In computing net income, there shall
be allowed as deduction a.

Expenses

1. In General.
All the ordinary and
necessary expenses paid or incurred during
the taxable year in carryin g on any trade or
business, including a
reas onable allowance
for salaries
or other
compensation for
personal
services
actually
rendered:
travelling expenses while a way fr om home in
the pursuit of a
trade or business, rentals
o r other payments required to be made as a
condition to t h e continued use or possession,
fo r
he
purpose of trade or business,
of
prop e r y to which the taxpayer has not taken
or
a
not taking title or i n which he has no
equity.
XXX

Since

deductions

legislative

xxx"

XXX

grace,

from
only
for

income

those
by

la w

matters

are

expenses
shall

which
be

of
are

allowed.

expressly

provided

Generally,

however,

before an

deduction,

it must:

1) be both ordinary and necessaryJ

2> be
be

e xpense is

allowed

as

paid or incurred within th e taxable year; and 3>

incurred

in

<Aranae,

Updated

Edition,

p.175).

The burden
that the

carrying

trade

National Internal

of proof

expenses

requirements for

on

being

business.

Revenue Code,

1988

is on the petitioner to show

questioned

dedu c tibili y.

Court allow such deductions.

9 77

or

passed

Only then

all

the

will this

DECISION C.T.A. CASE NO.

4330
-

Petitioner rightly
Records,

p.

quoted in its petition <C.T.A.

6> the meaning and appl ication o the term

"ordinary" and "necessary " as all ows:

"Expenses will ordinari ly be c ons i der ed
necessary if the expenditure is app ~op~~~~~
l'ln d .he 1 P-.:(.\J 1 ... in . .de .vg..J,._q_p), o..g __ ~ ot;i ... m~_:!,._nt~. :i,.o.J,JJg._ ..tJ:t~.
t.~r. p_a,}.':E:;>L~.!~L.P .\,1 s .i n.'?.!?l?..
0 b vi o us 1 y, u nder suc h a
view, the necessity involved is not absolute
or inexorable.
Normally, a taxpayer wil l not
incur an
expenditure unless ~.!?..Q:U.:i,_:r_~q_._._ Q~
j IJ_s :t...i, f.:!,. e 9._ .....9 Y....__tJ1 ~ .......... Jl.~ ~-c1.s .... _..Q_!__J;.h'___...._lJ. ~ 13...!.ng~_.
Proceeding on that logical
ass um pti o n, the
courts are slow to override the t axpayer's
judgement as to th e
necessit y for incurring
the expenses.
Consequent ly,
the
real
di ficulties i n the interpretation of the
terms ordinary and n ecessar y arise not rom
the word necessary but rom its companion
word ordinary.
The act tha t
expenses are
necessary is not necessaril y decisive since
personal expenses can
als o be neces sary.
<Merten's Volume
4A,
pp.
39-40). "
<Underscoring supplied )
"An expense will be co nsid ered ordinary
i it normally oc curs in connection with
business si mi lar to the o ne claiming the
deduction.
Ordinary does no t imply that the
payments must be habitual or no rma l
in the
sense that the taxpayer will have to make
them oten .
A necessary expense must not be
essential expense,
but merely one that is
PT.9 per . . <=m.<;L....1:11a c1.E;' .. ___:j. :r:L ...t h!? ______ .:i,JJ..!-..~;r..~~-t_..___Q :f_. __tJJ ~.
.J?usin es~ _,ppe;r.a,ti.P.Il
However , an expense will
not be dedu ct ible i it is necessary bu t not
ordinary.
(Michie' s Federal Tax Handbook, p.
3090>."
<Underscoring Supplied >
Unortunately,
pr eponderance

of

proper deductions

petitioner was not ab le to prove by

evidence,
from gross

expenses
,\
inc ome.

it
It

claimed

as

failed

to

convince this Court that the expenditures it clai med as

deductions are

"appropriate and

978

h e lpul in devel oping

DECISION C.T.A. CASE NO.

4330
- 9 -

and ma intaining
or justified

the taxpayer's business " or " required

by the

needs of the business" or "proper

and made in the interest of the business o peration".

As correctly sta ted by the respon den t:
"T h e
expenses
dis al lowed
are
not
ordinary and necessary expenses co nsidering
that the income of petitioner which cons ists
mainly of rentals , dividends, interest, etc.
and which are considered as passive and fixed
income can be realized witho ut the necessity
of incurring the disallowed e xpens es.

findings of the investigating examiner

disclose that
the rental
income,
which
canst tutes the main bulk of petitioner's
yearly i ncome,
cons ist s of adv anced ren tal
payable every five years begi nn ing 1973 up to
the y ear 1977.
Taking int o consideration
p et itioner's other so u rces of income
which
are mo s tly
passive i n nature , th e disallowed
expen ses cannot be consi dered as ord inary and
necessar y expenses deductible for taxation
pu r poses under Secti on 30 o f the Tax Code.
<A nswer, C.T . A. Records, pp. 36-37>."
further,
even bother

evidence and

petitioner,
to present

for u nknown
a written

memorandum to

suppo rt

reason,

form a l
its

did not

offer of its
allegations.

Section 34 of Rule 1 32 of the Rule s of Court p rovi des:

"Offer of evidence.- Th e court shall

consider no evidence which has not been
fo rmal ly offered.
The purpose for which the
evidence is offered must be s pecified."
Th e evidence

court if

deserves no

not formally

co nsiderat ion

offered in,

from the

evidence <Veran vs.

Court of Tax Appeals 157 SCRA 438; People v s. Vill apana

161 SCRA 72; People vs. Carino 165 SCR A 664; People vs.
Santito J r .

20 1 SCR A 87) .

I ~

DECI S ION
G.T.A . CAHE NU.

4330
-

There is

validity of

10 -

a presumption
the assessment

Tra nsportation

Co.,

presumpt ion was

as to the c orrec tness and

<Collect or va.

Since

the

by the peti t i oner,

t his

Phil.

107

not d estro yed

Bohol Land

965).

Court has no course but to affirm the aame.

With

regard

to

deficiency

surtax ,

th is

Court

u pholds the respo ndent ' s assessment.

The pP.r
Revenue

n . r1t

o e t h en i

<

l't

on o.f

Secti on 2

N l ion 1 Int r nal

wh c h provides:

" Section
25.
Addi ional
Tax
on
Corpora t ions Imprcp r ly Ao o umulat 2 ng Profits
or Surplus.
<a> Imposi tion of Ta x. - If
any corporation ,
except banks,
insurance
companies ,
or personal holdin g co mpanies,
whether domestic or fore gn ,
is formed
or
availed or for the purpose of prev e nt ing t he
imposition of
he
x upon its s hareholders
or members or the shareholde rs or members of
anothe r co rpo ra tion ,
through the medium of
permitting
its
gains
and
profits
to
accumulate instead
of
being
divided or
d is tributed, there is levied and assessed
against su c h corporation, for each tax a ble
y e ar, a
tax equal to twen t y - five per centum
of
the
undi s tr i buted
portion
of
its
accumula ted p r ofits or surplus which shall be
in addition to the tax imposed by Section 24,
and shall be computed, collected and paid in
the sa me manner and subject to the same
provisions of law, including penalties,
as
that tax.
XXX

XXX

XXX

< c > Evide n ce

det.erminati ve of purposes.
The fact
that the e arnings,or profits of a
cor poration are
p e rmitted , to
ac umulate
beyond the re a sona ble ne e ds of the business
shall be determinative of the purpose to
avoid the
tax u pon its sha reholders
or
me mb ers unle s s
the corporat ion,
by clea r

980

DECISION C.T.A. CASE NO.

4330
-

preponderance of
contrary."
In

the

case

Commissioner of
Supreme Court
accumulated

11 -

evidence ,

shall

Basilan

of

Estates,

Internal Revenue
ruled

its

that

the

corporate

prove

<21

SCR A

taxpayer

Inc.

v.

17),

the

unreasonably

based

profits

the

the

on

following circumstances:
"1. Strang financial
position of
the
pet itioner as of Dec e mber 31 , 1953.
As sets
were P388,617.00
while
the
liabilities
amounted to
only P61,117.31
or a
ratio
of
6: 1.

?.
An
Pi
l CJ ~~l ,
th
o pnr , inn
h d
dP.J a hl e capital
adequate
to
meet
th e
reasona ble
need s of the business amounting
to P 327 ,499. 69 <assets less liabilities>.
~ on F.J

.J

3.
The
P200,000.00
reserved
for
mechan ization
electrificat i on of drier and
a nd
the
P50,0UO.OO reserved for
malaria
control were reverted to
its
surplus in
1 953 .

4. Withdrawal
by shareholders
sums of money as personal loans.

of large

5. Investments of undistributed earnings

in assets having no proximate connection with
the business
as hospital
building and
equipment
worth P 59 ,794.72.
6. In
1953 , with an increase of surplus
amounting to P677,232.01, the capital stock
was increased to P500,000.00 although there
was no need for such increase. "
Petitioner

claimed

that

c ircumstances do

not exist

in the
I

Ba nic o and

Inc. "

Hecor ds,

Sons ,
p. 10 >

<Petition

However,

c o rporatio n disclosed

"<t>he

it

a stro ng

98

foregoing

case of petitioner
for Review,

conceded

that

C.T.A.
"the

financial position in

DECISION C.T.A. CAS E NO.

4330
-

t h e year

of 1979

total ass e ts

a s s h o wn by the fact tha t

am o unting to

l i ab i l i t ies amo unt e d

l iab ility

12 -

P4, 356,65 3.00,

out of th e
outstanding

o nl y to P70 4,314.00 for an asset-

ratio of 6. 1 to 1. "

Pe t itioner would

like to

( L bid. )

i mpre ss u pon th i s Court

t hat there was no un r easonable accumulation o f

(1) it

It argued that

had n o

a d e q u a te c apital to
(2 )

meet the reasonable n eeds of the bu s iness ;

shareholders had

not wit h drawn

profits .

l a r g e sum

of

its

mo n ey as

(3) it h ad

personal loan from the cor p orati on; and

not invested ita ear n ings i n asse t s h a v i ng no proximate

connec tion to the business but h ad invested the s ame in
accordance with

the prima ry and sec ondary p u rposes for

which the corporation was organi zed.

The arguments

would n ot

s tand s c ru ti n y

of

this
_,

Court.
Firstly,
dated

peti ioner,

December

c l aimed that
properties,

1982

marketable

were

securi t ies,

to

respondent

Re cord s,

99),

ti e d

in

r eal

and

up

t emporary

resulted to in adequa c y of its . capital

the reaso n able

claim h owever,

letter

<B.I. R .

corporate funds

in v estment which
to meet

23 ,

in a

needs o f

was belied

t he business .

The

by t h e fin anci al sta t e me nts

\
I

submitted by
that,

in

the corporation .

1979,

the

petitioner

98 2

Th e

had

st a tements showed
an

increase

in

DECISION C.T.A. CASE NO.

4330
- 13 -

investment

to

amounting

computed

P694,531.81

as

follows:

narketable securities and teaporary

invest~ents:

P2,933,930.62

As of Oeceaber 31, 1979 IBIR records, p. 271

Less: As of January 1, 1979 !BIR Records, p. 101
Increase in investent in 1979
In

arguing

"the

th at

sufficient cash

from which

at

r~. 239. 398 .

p 694 531.81
::-.-:::::::::0'.:!-:-~-:: :.

co mpany

do es

to d ecl are

not

have

cas h dividends

and that to sell the se securiti es will either res ult in

a loss

or at the v ery least,

speculative

activities",

it invested

Rec or ds,

< B. I. R.

petitioner did not explai n,

Court why

will h a mper the co mpany's

p.99)

to th e satisfaction of this

an additio n al P694 ,531.81 worth

of securities.
Furthermore,
it

had

contrary

considerable

reasonable

needs

P3,65 2 , 338.41

to pe titioner 's contention,

capital

of

the

a dequ ate
busi ness

to

meet

the

amo un ting

to

<assets less liabilities).

Secon dly,

while

it is true that no personal loans

were gran ted to the shareholders by the petitioner,

B.l.R.

Records

wage s~

salaries . and
insurance,

reveal that
gasoline

registration

and

representation

allowances ;

c o ntributions;

bus iness

etc.

which,

rendered to

the latter

as previously
enhance the

gave

the

bonuses,

al lowanc es ; car ' rep airs,

maintenance
personal

travels:

a ll owances;

donations

telephone

and

c harges;

disc ussed "not for services

business of

the company

xxx

..

DECISION C.T.A. CASE NO.

4330
- 14 -

(H)

ow e v er ,

maybe

it

divid e nds to

treat e d

th e sto c kholde rs. "

as

distribution

<B.I.R.

Records,

of
p.

5 5)

An d t hi r d ly ,
argume nt.

p e ti t ione r failed to support its last

I t s p e tition re ads a s follows:

"C R >esp onde nts

evi d en tly
failed
to
consider the pr i mary and s e con da r y pu r poses
for whic h t h e
petitioner c orp o r atio n wa s
organi z ed.
Among o th ers,
t he
co mpany was
organ ize d to
engage in the re al es tate
busines s , a gr ic u lture a nd i n inves tment i n
ma rketable sec u rities,
b o nds,
d e bent ur es,
e t c.
Likewise ev ident is that respond e nt' s
examiner a ls o
over looke d
th e
fact
as
disclosed in the finan ci a l statement !or the
yea r
that th e
pet it io n er cor poration had
und er s tudy ,
p ro p osed, var ious projects such
as c onstructi o n of a n ice plan t
and sa l t
making p r oject,
whi ch a re all in line with
he purposes for which
he corpo r ation
was
f ormed .
x xx
Consider in g the purposes for whi ch the
petit i oner corporatio n wa s
formed tog et her
with the va rio u s proj e cts i t was intend ing to
unrl er take , it ca n not be sa id that Ba n ico an d
~; n o n ,
In c .
h d allow d impr op er ecc u rn u l tion
o 1 e arning s
beyond t h e
re s o na bl e n eed s
of
its business.
On
the
contr ary,
t he
' <J J p<trat i o n wa s
a c tu ll y i n ne d of
rnor
f u nds to
p urs u e
its
prop osed
v a r i o us
projects."
<C.T .A. Records ,
pp. 8- 9 >
In the

case o f

Commissi oner of
Su pr eme Co u r t,
Tax a tion,

Manila Wine

Inter n a l

Re v e nue

quot ing Mer ten s ,

'

Merchants.

Inc.

vs.

<127 S CR A

483>,

the

Law of Fede r al I ncome

hel d:

" A p re requisite to t h e i mpositio n of the

tax h a s
bee n th at th e corp o r a tion be for med
or ava i led o f for t he pu r pose of avoidi ng the
i n c ome t ax
(o r s urtax>
on its shareho lder s ,
the s ha reholders
of
any
ot her
or
on

DECISION C.T.A. CASE NO.

4 330
-

15 -

corporation by permitting th e earnings and

pro fits of the corporatio n to accumulate
instead
of
dividing
the m
among
or
distributing them to the shareholders.
If
the earnings and profits were
distributed ,
thP s har eho ders
would be re quired to pay a n
income
tax
thereon
whereas ,
if
the
d atri bution we re
not made to them,
the y
would incur
no tax
in respect to the
undi stributed earnings and profits of the
corporation.
The touchstone of liability is
the purpose behind the accum u lation of t he
income and
not the conse quences of the
accumulation.
Thus, if the fail ure to pay
dividends is due o some oth er cause , such as
the us e ...9 f u n dis t rib _u \ e>_c:L -~a rn..:!..D. g s ___stJ:l q__ .P.t:::.Qfi t,g
for t 11 e .... ea~g_r:g:~ble. ___nl?..~ds__,__ J:;>.f . _,_:t_h?__ ~B~.~. ;l,.!J.'_~~.
such purpose
does not
fall
wit hin t he
interdiction of the statute.
To de erm'ne the 'reaso nable needs' of
the business
in order
to
j ust ify
an
accumulation o
earnings,
he Cour ts of the
United St~ e
hav e
invented the so-called
'I.mmediacy ...T~s.t.'
which cons trued the words
're sonable needs
f
he
us ness' to mean
he . mme!-Ha e .. _.. Jleeds ... ot...... j.~e_p_~_gi __ -~-~-' and it
was genera ly held that 'if the cor poration
did not
prove an
i mmedi te n ed for the
accumula ion o the earnng and p ro f its, the
sccumula ion was not for
he r
sona ble needs
of the busin s , n
th
pen al y
tax would
apply.~
<Underscorin g suppli ed >
In that

case,

the

S upr eme

Court

affirmed

the

decision of this Court in finding that "the pu rc hase of

the U. S . A.

Treasury bond s

petitioner's bu si n ess
whisky ,

liquors

construed as

and

were in

of importi ng

n o way

and selling
s p irits ,

distilled

related to

and

wines
thus

an investment beyond the reasonable needs

I
I

of the business . "

It further held t h at:

"In orde r
to determine whether profit s
are accumulated or the reasonable rieeds o f
the business as to avoid the surtax upon

985

DECISION C.T.A. CASE NO.

4330
-

16 -

_,

shareholders, the
controlling
intention
of
the taxpayer
is that
which is manifeste d at
the time
of
accumulation
not
subsequently
declared
intentions
which
are
merely
the
product of
afterthought.
f. .. spec>q~,l,?.t_i_y_E;>___ ?nd
_:i,ndefi,ni t~-- pu~pose ..... ~;i,.l,.l __ not ___ su_f;fip~!.-- _____l:_h~.
!!!f:='rE?_ . r:e_9 9gni ti,_on.. __ of . _a _ ;futl:lr:e_ ... P.r:.9.P-tl?.!'.l___g.D.c:i.....t.D.!'?.
ciiscussio_n, _of. __ po~~j.ble .... a\'1~
a+:t;e.:rQ?ti_\.'1?.
E!Olut,ions i s _r:tot _ suff;i,._ciep_t . .. Qe.J:i r:tiJ:.er:te ~s of
plan coupled
wi t.h act ion
ta_\5E?J),__:t. 9.W.~r.!:f.s ______ i,\~?
<Underscoring
consummat.i<:J.n.. _are___ e~s_e_n_t;i..?.~. "
supplied>
In the

case under

consideration,

the taxable

year 1979,

had an

P694,531.81.

amounting to
bereft of

it

Petitioner was

on what
into

entered

in

increase in investment
however,

Its pleading,

any explanation

investments

petitioner,

type

or

kind

the

during

is
of

year.

confident that by mere stating that the

corporation was
investing

in

debentures,

the

organized to engage in the business of

marketable
corporation is

securities,

bonds

or

no longer liable under

Section 25 of the Tax Code.

In line

with the

Wine nerchants,

doctrine enunciated

case (supra>,

this

in

court

nanila

finds

the

conclusion made by the petitioner totally misplaced.

As to
and salt
the trial,

the proposed

construction of

making project,
failed to

petitioner in

an ice plant
the course of

present as part of its evidence,

I

the AT ticles of IncorporAtion and ,the Bo rd Resolutions

to prove

the approval

Consequently,

or existence

of the

projects.

this Court finds the proposal speculative

'\ -

9 86
'

_!

DECISION C.T.A. CASE NO.

4330
- 17 -

and indefinite.

They are mer ely conjectures,

surmises

or spe c ulations which did not pass the "immediacy test"

as discussed in the above - cited case .
in

WHEREFORE,
decision of

view of

the respondent

the foregoing,
ordering

the

final

petitione~

to pay

the am o unts of P75,778.38 for deficiency income tax and

P96,99 2 .02 for deficiency surtax is hereby AFFIRft ED.
SO ORDERED.
Quezon City,

Metro Manila,

September 21,

1993.

Q~(Q,~
ERHESTO D. ACOSTA
Presiding Judge
WE CON CUR:

z~,.

GRUBA
Judge

t(y

RAI10N 0 DE V . 'A
Asso ciate Jud e

CERTIFICATE
I hereby
after due

certify that

consultation among

of Ta x

Ap p eals in

VIII o f

th e Constitution.

this decision

was reached

the members of the Court

a c c o rdan c e with Section 13,

Article

~ Q.O-~
ERNESTO D. ACOSTA
Presiding Judge

98 '(