CTA Case No. 2960 (Decision)

R&PU.BUC OF Hi~ I"mU!F'li'll"~ COUI?iT OF 'lr X '-~.LS nr:r�~~ON CB"V /rzUMMER COMivlEHCIAL COf\PORA'riON, Petitioner, - versus - C.T.A. CASE NO . 2960 CO~~ISSIONER OF INTERNAL REVENUE , Respondent. X- - - - - - - - - - - - - - X DE C I S I 0 N The basic question in this appeal is whether petitioner Kummer Commercial Corporation was a personal holding company in the year 1974, and this depends upon whe the r its Jain of P540, 094.36 re~lized in 1974 from the sale of its investments (Scm l-1iguel Corpo �a tic:! shares of stock) .acquired afte r November 5, 1970 is to be classified as per- sonal holding company income so as to be c~.msidered as ~ personal holding company. Broadly stated, by Section 64 of the National Internal Revenue Code, a personal holding company is defined as any corpo r ation at lea st 80% of whose gr~ss income is persotal holding company income as determined in Section 65 of the same Code, and at any time during the last half of the taxable year nore than 50% in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. Under 1'' I. .. - - I ,, )

DECISION - CTA CASE NO. 2960 - 2 �- the terms of Section 65 personal holding company income means the portion of gross income which consi sts of various gains, and, among others, pursuant to subsection (b) .thereof, except ~n the case of regular dealers in stock or securi- tie s (as defined in subsection Ls7 of Section 84) (now Section 20 j_u/ of the Revenue Code, gains from the sale or exchange of stcck or securities. We come, then, to petitioner's status in the year involved. It is a domestic cor poration du]y organized and registered under the laws of the Philippines with its principal office at 503 China Bank Building, Dasmari~as, Manila. It had been organized in March, 1926 under the firm name of Kummer & Comins, Inc . , for the purpose, among others, to c a rry on the business of a textile importer. On June 2, 1975, petitioner was re- named Kummer Commercia l Corporation. For the calendar year ended December 31, 1974, petitioner requested for tax credit in the amount of P23,565.72 resulting from overpayment of quarterly income tax corresponding to that year. On August 19, 1976, respondent Commissioner of Internal Revenue issued a tax credit memo in its favor rfor the amount of �>23,565.72 representing . t ' ,.. ' .j i j

.' DECISION - CTA CASE NO. 2960 - 3- overpaid income tax for 1974. Aftrr investigation, however, petitioner was found to be a personal holding company. Consequently, the additional 45% personal holding company tax for 1974 in the amount of Pl84,077.43, exclusive of interest was imposed on petitioner . The said tax was computed as follows: Net Income to Retained Earnings 1?'604,579.35 Deduct: Cash Dividends ~~ Amount Subject to 45% (S ec. 63) ~409,060.95 45% Personal Holding Company Tax ~18lf ,077 .Lf3 Less: Tax Paid Per Return -~3,565.72 TAX DUE Pl60,511.]1 VVVVVV1.'VVVV 'Ihe arn.ount of Pl60 ,511. 71 was paid under Official Receipt No . CB242817 dated February 23, 1976 . For late payment, however, petitioner was fu rther assessed the amount of P21,674.61 representing in- terest .imposed under Section 5l(d) .of th ~ Na~ional Internal Revenue Code, as amended by Presidential Decree No. 69, details of which are as fellows: Personal holding company tax !i!l84 ,077 .4.3 Less: Tax withheld � � � . 23,565.72 Balance: � � � � � . � Pl60:S~7I Add: 14% int. fr. 4-16-76 l~ 2-23-76 19,157.32 Amount due on Feb. 23, 1976 � Jn79,669.03 Less: An1ount paid on 2-23-76 160.511.71 � � ii! 19 ~ 157.32 Balance: ���. Add: 14% int. fr. 2-23-76 to 2,517.29 1-31-77 � . A110UNT STILL DUE AND COLLECTIBLE � E! 21,67:'�..:_,61 VVVVV'\.'VVVVV

DECISION - CTA CASE NO. 2960 �- 4 - In a letter dated January 31, 1977, with the corresponding assessment notice enclosed therein, respondent requested petitioner to pay the aforesaid amount in order that the case may be considered closed and terminated. On March 17, 1977, petitioner protested the above assessment, questioning the legality of the imposition of the interest, and asked that the same be cancelled. By his letter dated April l8r 1978, respondent denied however the protest of petitioner a d reiterated his demand for tha payment of the aforesaid amount of P21,674.6l. Hence, the present peti~ion filed on June 27, 1978 for the review of the assessment of deficiency and delinquency interest and the refund of the sum of Pl84,077.43 representing payment of the personal holding company tax. As special and affirmativ e defenses, respond e nt alleges in his answer that: 8. Petitioner failed to comply with the mandatory requirement of Section 292 of the Tax Code cf 1977 that a claim for refund be duly filed with the Commissioner of Internal Revenue; hence, this action for refund of Pl60,Sll.71 (Pl84,077.43 nu�n us P.-1. 3 , 5� 6-!) � "72) .1� s prema t ure an d t..h .1� .s c.. our t- :11as no jurisdiction over this �case; 9. Granting ~~endo that this Court bas

DECISION - CTA CASE NO. 2960 - 5- jurisdiction over this a c tion, nevertheless, pe- titioner is not entitled to a refund because - (a) ~ithholding tax on inter-corporate dividend is not a final tax pursuant to Section 24(d) ~as amended by Presidential Decree No. 369, in relation to Secti~ns 53(d) .and 54(e) ~ all of the Tax Code (before 1977 Tax Code) and, therefore, the amount of Pl52,937.29, being dividend income , should be included as part of the gros s income of petitioner for 1974; (b) .Republic Act No. 6141, as amended, inserting Section 19 5-B (now Sect ion 210) .in the Tax Code, which provides for exemption from capital gains tax under certain conditions, for a period of five (5) .years from November 5, 1970, is not applic~ble in the instant case, there being no proof that the conditions therein imposed have been complied with by petitioner. Said section, in part, reads: "For a period of five years from the effectivity of this Act, any capital gain arising from a stock transaction on which the tax herein imposed has been paid shall not be taken into account in computing net capital gain or loss under Section thirty f o ur of this Code if (1) . both the acquisition and the disposition o f said s t ock by the taxpayer are effected after the effectivity of this Act; and (2) the sale, exchange, and transfer is bona fide and the consideration for the

.' DECISION CTA CASE NO. 2960 -6 - transaction repr esents the s ubs tantial fai r mar ket value of the stock; Provided, XXX xxx . 11 10. In an action for refund, peti t ioner has the burden of proof to show that it is entitled to refund because taxes are presumed to have been collected in accordance wi th l aw and existing revenue regulat i ons; 11. The cla im of peti tioner for refund has no factua l nor legal basis. Was petitioner Kummer Commerci al Corpor a tion a personal holding company i n the year 1974 as defined in Section 64 of the Na t ional Internal Revenue Code and therefore liable, i n addit ion to the normal tax on corporations impo sed by Section 24, to the personal holding company tax equal to 45% of its undistributed income p rovided for l y Section 63~ both of the same Code? As earl i e r stated, a personal holding company is defined as any corpora tion at least 80% of its gross income for the taxable year is personal holding company income and at any time during the last half of the taxable year more th an 50% in value of its outstanding stock is owned, directly or indirectly, by or for not more t han five individuals. In the instan t cuse , it is not controverted that the sources of income of petitioner du~ing the taxable year involved were derived from the follo wing revenue: f .J' .' ....,I Ii

DECISION - CTA CAS E NO. 2960 - 7- Dividends on investments � � � � . � . ~152,937.29 Gain on sa l e of investments acquired before Nov. 5, 1970 25,600.99 Gain on sale of investments acquired after November 5, 1970 � � � . 540 '09!+. 36 Interest income 143, 568.96 Miscellaneous income 2,433.50 Total gross income � � !?FJ3s--:-i~ Pursuant to Section 65(a) of th e N ~ L i onal Internal Tie venue Code, a s a me n d ed by P r e s i de n tial D e~r ee No. 299-A and impleme nted by Revenu e Re gulati on s No. 8-73, intercorporate coltpany dividends are not con s i d e r ed personal holding company income and should not be considered as part of dividend inc ome of the personal holding company for purposes of the gros s income re- qui r ement prov i ded fo r in Section 64 of the Reve nue Cod e . In the instant case, the amount of ~152, 9 3 7. 29 repr esenting intercompany dividend s receiv e d by petitione r in 1974 shou l d therefore be exc:ude d in the de t e rmina t ion of the personal holding company income of petitioner . Petitioner's submission that s ince the gain on sale of investments acquired a f ter Novembe r 5 , 1970 in the amount of P540,094.36 (capital g ain r e alize d in 1974 from the sale of its San Miguel Corporation shares of stock acquired after November 5, 1970) .ha d already be e n subjected to the ~ of 1% stoc k tran s actio~ tax under Presidential Decree No. 10 and said gain no longe r formed pa rt of its gross t axa bl e income i n 197 4 should also be excluded from the determina tion

DECISION - CTA CASE NO. 2960 -� 8 - of the qross income requirement and in the -u--n--d-i�-s�t-r�i-- .._____ J:!;.-....- ....- -.._---~----��-.--.-......:o.-.---iro~a..... butQ<Ln_et ~pc_c_;m~ of a per: sonal l"1oJ.a��,l� ng ,...c,,.,~panv s ' 1' ---- - - , _; ��� .L �� however, positively without merit. In its textual completeness, Section 64(1) provides: of its gross i ncome for the taxable year i s personal holding company income as defined in Section 65, x x --- i~." .?\.nd Section 65(b) specifies: "Stoc�--k--a-n��...-.d-- s.-e.-c--u�-- dealers in stoc k or securities (as defined in sub- section (s) .of Section 84) . ;now Sec ti on 20L,u/) '� gains from the sale or exchange of stock cr ::>e:cur i ties." While Section 29 of the National Internal Revenue Code defines GrO.�.:~..li.l..S�.~ a:;; "including gains 1 profits , and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever torm paid, or from professions , vocations, trades , businesses, commerce, sales, or dealings in property, whether real or personal , growing out of the owner- or r~1 rn0 p use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profitt or gains , profits, and income derived from any source whatever . " From this, we cannot but extract the view that personal holding company income as defined in Section '; \ ') b � ) ,)

DECISION - CTA CASE NO. 2960 -9 - 65 is to be considered in the determination of the gross income requirement of a personal holding company even if it has already been subjected to the stock transaction tax, grante d credit provision , or accorded exemption from income tax, unless such income by statu- tory provision is excluded from the gross income re- quirement of a personal holding company, like inter- corporate company dividends under Presidential Decree No. 299-A. The law employs the term gross income - NOT taxable qr oss income. Nothing th ere speaks of gains froro the sale or exch~nge of stock or securities which are exempt from income tax, or alr eady subjected to a final tax, being excluded from the determination of the gross income requirement of a personal holding company. Where the law does not exact the t a xability of an income, to arrive at gross income, as a condition for its inclusion in the determination of the gross income requirement of a personal holding company for purposes of the additional 45% tax, that condition should not be read into the law. The law is clear and should ther ~f o 1 e be applied as worded. If it had been the legislative intent to define personal holding company income to mean the portion of the gross ta~able inc~~� which consists of personal holding company income as specified in Sectio~ 65, the legislative body, or the law-making authority, could have easily done so by

DECISION - CTA CASE NO. 2960 - 10 - inserting the term "taxable", or the like ; h~tHeen the words "gross" and "income". According l y, on the assumption that t he amount o[ ~540, 0 94 . 36 realized in 1974 by petitioner from the sale of its San Miguel Cor poration shares o f sto ck acsL: red after November 5, 1 970 was already su bje cted to the stock transaction tax of l/4 of 1% and di d not form part of its taxable gross income, it does not lo ~i cally follow that said gain is excluded from the determination of the gross income requirement for purposes of its classification as a personal holding co~pany. And neither is petitioner a regular deal er i n stock or s ecu rities as defined in subsection (s ) ?f Section 84 (now Section 20Lu7)of the National Internal Revenue Code so as to fall within the purview of the exception. (p . 29, t.s.n., hearing on July ll~ 1979.) The net result is that under Section 65 of the R_2venue Code, the following were the personal holding company income of petitioner in 1974, to wit: Gain on sale of investments acquired before Nov. 5, 1970 (Sec. 63(b) . . ~ 25,600.99 Gain on sale of investments acquired after Nov. 5, 1970 (Sec. 63(b) �� 54 0, 094.36 Interest income (Sec. 63(a) �.� � . 143,568.96 Total personal holding company income � ~709,264.31 = �- The total personal holding company income of ~709,264 . 31 is e q ui v alent t o eighty-two (82% ) .pe r centum of the gross income of petitioner for the �"J r ,.... ""' J ,J

DECISION - CTA CASE NO. 2960 -� 11 - taxable year 1974 in the ct ggre ga te -amount of P864 ,6 35 . 10, compu ted as fol lows: Ei709,264 . 3l X 100 = 82% P864 ,6 35.10 It s ee ms cl ear beyond doubt therefore that at le ast eighty (80%) _per c e ntum of the gross income of pet itioner for the taxable ye a r under conside ration is p~rsonal holding comp a ny income as de fi ned in Section 65; ~ence , satisfying the gross income requiremeDt pr~scribed under Section 64, bo th of the National Inter nal L"venue Code . Wit h regard to t.he r::1tock ownership re quirement of a personal holding company , the records of this case disc ~ ose that in 1974, the taxable year in question, mo r e than 50% in value of the outstanding stock of petit ioner is owned , directly or indirectly, by or for no t more than five individua l s , as shown by the books of pet i t ioner, to wit: (Exhib it 11 6", pp. 131-135, BIR records) Date Shareholders No. of shares Value 1074 8,478.13 l\18Ll 7,8 13.00 84.78% Jan. l Hax Kumme1� 850.00 .085% Dec . 31 Vict or Tanlayco ____8.507..99.. _55_ 795.00 .0795% 7 795.00 .0795% Pacita S. Trinidad 8,502 . 53 nr-s-'_;;;o:-9-?.~ s�-j;::�-=oo 8s.o�2t}%- He i nz ~{oe l ke To t a 1 s 1,497 .47 1Lf9,'7�~7.00 __ ____ 1.!+.976% Number, value ar.d pe r cen tage 1:�.J2.Q0 �00 _!'l_, 0002.�00 �00 - - - -� 10...0_... .00% of unissued shares Grand Totals

DECISION - CTA CASE NO. 2960 - 12 - By these facts and fi g u res, almost 85% in value of the outstanding stock of petitioner is owned by only one person , Max Kummer . While it appears that 14.976% remains unissued, the rest which is l e ss than one (l) _per cent (1%) _is owned by other persons . Unquesti~nably, the stock ownership requirement prescribed in Section 64(2) of the National Internal Revenue Code is likewise fulfilled. Clearly, therefore, petitione r Kummer Commercial Corpo~at ion falls within the definition of a personal holding company unde r Section 64 a nd is acc ordingly subject to t he 45% personal hold ing company tax imposed under Section 63. Given t he f a. ct that pe titioner is a personal holding compant in 1914, it however assails respondent's right t o assess the ~d d:tional 45% personal holding com- pany tax on the ground that it had no taxabl e net in come in tha t year. On the co nt rary, pe titi oner alleges that it incurred a net loss of P88,452.30 , computed as follows : Gross in.come . e � � � � � � 3' � " � � � � ..� F864,635.10 Le s s: Inc ome already taxed: Dividends ..� P-152 ,937 .29 Capital gains _...?.~.QtQ.;-~~.;}6 . � i:i61'7913_,60_ 30_13,._6! _5,-- Groos taxable income . . ��. � � i .e.!. , , � .,}..) Less: Operating expenses . -~6.0_, 01:~.:.?2. . . . ,. Net los s .. (? ~.!~~_:l_Cl_)

DECISION - .. CTA CASE NO. 2960 - 13 �- In other words, since the intercompany dividends of ~152,937.29 had already been subjected to the final tax of 15% under Pre sident ial Decree No. 299-A and the capital gain of P540,094.26 was also subjected to the stock t r ansaction tax, and both were excluded from the taxable income of petitioner for purposes of the cor- porate income tax under Section 24 of the National Inte r nal Revenue Code~ the same should also be excluded from its undistributed net incohle for purposes of the personal holding company tax imposed by Section 63. There being ~o taxable net income in 1974 subject to corporate income tax , petitioner wou ld argue that there is no legal basis for the assessment of the additional personal holding company tax. The argument m~sses the point . It bears emphasis that petitioner did not incur a net loss of P88,452.30 in 1974 as claimed by it. The fallacy of the argument is its assumption that sin" c the amounts of Pl52,937 . 29 and P540,094.36 had already been taxei and accorded statutory exclusion from th~~ computation cf the t;:..xable net income under S e ct ion 24 of the Crx1e, ,,uch J: ece i p l:.s of income do not anymore form part of the net income of petitioner available for dis t ribution . The personal holding company tax of 45% imposable under Section 63 is levied, collected and paid upon the und istr ibutec~_net _income of of the personal holding company, while the corporate ) f ..... ,.. � , .i . )

DECISION - CTA CASE NO. 2960 -� 14 - income tax under Section 24 is imposed upon the fore that the amounts of �152,937.29 and �540,094.36 no longer form part of the net income of petitioner available for distribution is to create a book situa- tion altogether contrary to the actual undistr ibu t ed net assets of the corporation. By no str~tch of the accorded partia l or total tax exemption, or excluded from t~xable ne t income, is based upon actual net income in tle hands of the corpora tion. The concept is much closer to the earned surplus determined by the accountant than lo net income subject to tax under Section 24 of Lhe Code. In fine, the intercompany dividends of Pl52,937.29 and the gain of P540 ,094 . 36 on sale of investments ac- quired after NoJcmber 5 , 1970 form part of the un- distributed net income of petitioner in 1974 for purposes of determi. ing th e L o.��;is of the additional 45% personal holding company ta ~~ , l ~�VJ ing reached the resul. t tb.a t. petitioner was a per s~n~ l holding company in 1974, no error was therefore comrrd. t ted by responder: t in assess- ing, and by petitioner in paying, the amount of Pl84 1 077.93 representing personal holding company tax for the taxable year 1974. Since the pe rsonal holding '' \. (*..\J ....:~ j

DECISION - CTA CASE NO. 2960 �- 15 - company tax is in addition to the tax imposed by Section -7.4 o -~ � tl~ e3 c~odo,__ and pa� yabJ_-E..� t-o r ' eac~ t:axaIJ1e year (Se c. 63, ibid)~ and the same was not fully pa id on the du e date, the assess ment in question, computed as follows: Total gross income � � . � � � . Less: Operating expenses Net profit (p. 51 BIR rec.) Dednct: Cash dividends Amount s 1bject to lf5% (Sec. 63) 45% personal holding company tax Less: Tax withheld . . � � Balance . . . ,. ~ ,., (I' � � Add: 14% in t fr. 4-16-76 to 2-23-76 � � . � � . � � 19,157.32 Amount due on 2-23-76 F.ll9:669. ci:3 L - ~ s: Amount paid on 2-23-76 160 ,511 . 71 Balance � . � � � . . . � � i l- - � J;- l;'~()$"1'..7.)-,-��~-~-2- Add: 14% int fr. 2-23-76 to 2, 517.32 � ;:_ _ -;.;-21-;~-.:,--:� ""7:l- 1�-31- 77 ,_L�.~2.:2...:_ Amount still due and collect ible With this conclusion, it becomes unnecessary to decide the question posed by petitioner whether or not on the f~ ce of the return filed by it for t he taxabl~ year 1974, upon '.Vhich the pa _;mcnt of the amount of ~184,077.43 was made, respondent is authorized to refund the said amount even if no written claim for refund was filed by petitioner. Nonetheless, it should be state a by way of personal observdtion only that under Section 292 of the National Internal Revenu ~ Code (formerly Section 306) r, in all case~:; for the r e c o �- very of any national internal revenue tax alle ge~ to

DECISION - CTA CASE NO. 2960 -- 16 - have been e r roneously or illegally assessed or collected without authority the suit must be brought within two years from the date of pay- ment thereof in order to confer jurisdiction upon the court. In the instant case, the petition for review was filed with this Court on June 27, 1978 or more than two years f rom February 23, 1976 when the amount of Pl60,5ll. / 1 was paid or from April 15, 1975 when the tax credit of P23,565.72 was applied. Accordingly, we find no merit in the instant petition for review and petitioner Kurriller Cammer- c5al' Corporation is ordered to pay to respondent Commissioner of Internal Revenue the amount of P21 , 674.6l representing interest for late pay- ment of the personal holding ccmpany tax, plus the surcharge and interest which have accrued thereon incident to delinquency, pursuant to Section 51 (e) of the J\;,:~tional Int.ernc:tl Hc~vcnue Code, as amended. WHEREFORE, the decision a ~ 0ealed from is hereby affirmed at petitioner's costs.

DECISION �- CTA CASE NO. 2960 - 17 - SO O.RDERED . Quezon City, Metro Manila, August 28, 1981. (/ ) / __,__ ,/......) "f:::7fA,bv~~ (:~~~- AL��"~L-A"n' rr.-c.:;..� .t,, _r, LE�~.R�' '"'(., Pr E:S id in ' ~�lE CONCUR: / .._ie.e_a7. Co'lTv(z' ~2~ N'_F_ .4...' (\',j!'... -l;'i;. 0 h.'(,JJUfJ.1l\.i. iJ!ssoc ia te J uds(~ I ,1~� c~ ~~}(0 2 / Z. R.EYE0 -" .,_A; SSOC. late ~d g e ull �. ( \ q :.) � I '"