The importance 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 & profits for the reasonable needs of the business, that purpose would not fall to overcome the presumption and correctness of CIR.
• CTA set aside petitioner’s revenue commissioner’s assessment of 1.1 M as the 25% surtax on private respondent’s unreasonable accumulation of surplus for the year 1975-1978.
• Private respondent protested the assessment 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 a real estate broker.
• Private res. Filed a petition that pending determination of the case, an order be issued restraining the commissioner and/or his reps from enforcing the warrants of distraint and levy. Writ of injunction was issued by tax court.
• Due to the reversal of CTA of the commissioner’s decision, CIR appeals to the SC.
1. Whether or not private respondent is a holding company and/or investment company?
2. Whether or not Antonio accumulated surplus for years 75-78
3. Whether or not Tuason Inc. is liable for the 25% surtax on undue accumulation of surplus for 75-78
HELD: Yes to all. Antionio is liable for the 25% surtax assessed.
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 twentyfour, 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.
• In this case, Tuason Inc, a mere holding company 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 rentals realized from the sale of realty.
• Tuason Inc is also owned by Antonio himself. While these profits were actually made, the commissioner points out that the corp. did not use up its surplus profits. Antonio claims that he spent the money to build an apartment in urdaneta but there’s a large discrepancy bet. The market value and the alleged investment cost.
• The importance 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 & profits for the reasonable needs of the business, that purpose would not fall to overcome the presumption and correctness of CIR.