CTA Case No. 3917 (Decision)

ct~OBLIC 0 i' fl-1� PtlH..lPPtNi'9 ~OURT OF TAX APPEAUt QU�ZO~ O"n' PACITA SORIANO, !~C., Petitioner , - versus - C.T.A. CASE NO . 3917 THE COHMISSIONER OF INTERNAL REVENUE, Responde nt. X - - - �� ------X DE C I S I 0 N Petition to review and set aside the deci~ion dated January 9 , 1985 of respondent Com~issioner of Internal Revenue denying the protest of petitioner Pacita Soriano, Inc. , and requiri/ it to pay th e arnou nt:iof El54U,416.9land a~onor's an~ Ell02,470.04, gift tax sur�tax for improper accumu lation of profi t for fiscal year e nded June 30, 1975, computed as follows: l. GA-4522- 75/80: Fair market value of real ~3 , 382,619.30 properties sold Less: C..o.n.s.i.d.e.r.a.ti.o.n. .o..f..th.e... 2,0 00,000.00 sa l e Insufficient cons i de ration s bj e c t to donor's tax ... . Ell,382,619 .30 Donor's tax due . . .. . . ... .... ~ 323,602 . 94 25% Ad valorem penalty .. ... . 80,900 .74 14 % annua l inte r est from 135 , 213.23 7-25-75 tO 7- 25-78 . .. ... . . TOTAL AMOUNT DUE AND � COLLECTIBLE .. ... ... .. . ~ 54 0 ,416.91 vvvvvvvvvvvvv l vr u')

DECISION - CTA CASE NO. 3917 - 2- 2. F/Y Year June 30, 1975: Surplus unreasonably .................. accumu la ted �..... ...�. ~ ... P 288 ,646.17 25 % surtax 72,162.00 14% annual int. from _ ___;3:....;;0, 308 0 04 10-16-75 to l0-16-7H TOTAL AMOUNT DUE AND COLLECTIBLE ....�.���.� ~ 102,470.04 vvvvvvvvvvvvv Petitioner is a corporation organized and existing under the law s .) f the Philippines with principal place of business at La Castellana, Negros Occidental. (par. 1, petition for r evie w; admitted, pa~. 1, answer.) The records of the case show that: 1. On June 25, 1975, petitioner s old to Robert o J. Cuenca parcels of land, buildings, i mprovements , equip- ment and sugar q uota rights for P2 ,0 0 0,00U.OO. (Exh. 10, pp. 41-44, BIR records.) 2. Thi s sale is reflected in petitioner' s corpo- rate annual income tax return for fiscal year end e d June 30, 1975 with a net gain of P294,1 24 .70. (Exhs . 14, 14-a, pp. 45-53, BIR records.) 3. The details of the sales are as follows: (Exh. 14-a, p. 47 , BIR records.) Sale of Land, improvements & fl2,000 , 0UO.UO e quipment Book Value of Equ ip .nen t: Tr.actors Pl35 ,12 3.14 Tools & implements 56,355.50 Trucks 41,73 2 .50 Irrigation equipment 39,680.lb 1 54

DECISION - CTA CASE NO. 3917 - 3- Portable rails 2,571.02 285,588 . 02 Miscellaneous 10,125.60 equipment Cost of Land & Improvemen ts : Cost of land P397,096.00 I mp rovements 888,101.71 Quota Rights 10,089.57 1,295,287.28 Other Expenses: Commission paid EllOO,OOO.OO 125,000.00 Legal Fees 25,000.00 C Js t of Sale 121,705,875.JO Ga i n on Sale 4. As shown in the profit and loss statement of peti- tioner for the crop year 1974-19'75 ending June 3 ~ , 1975, attached to the c orporate r_turn for the same taxable year, petitioner real i zed a net profit of ~336,035.30, deta i ls of which a re as follows: (pp. 48-49, BIR records.) PAC I TA SO RIANO , INC. La Castallana, Neg. Occ . PROFIT & LOSS STATEMENT For the Crop Yea r 1974-75 Ending June 30, 1 975 I N C 0 ME P3 , 256,175.16 Sales of Sugar & Molasses 110,914.67 D1 vid e ;1 .1 I nco me E XP E NS E S : .!? 33,560.19 Plowing 14,722.93 Leve ling & harrowing Cane points 130,847.44 Planting 140,133.47 Ani ma l cultiva t ion Hand cultivation 45,585.53 Drainage & irrigat ion 219,731.80 Pest control 91,671.93 42 , 450.25 15 5

DECISION - CTA CASE NO. 3917 - 4- Fertilizers & fertilizing 811,025.54 3,204 ,414.23 Milling expenses 246,860.97 Fuel & oil 241,050.80 Maintenance fa~m equipment 229,383.93 Maintenance farm houses Maintenance roads 63,464~66 Salaries & wages Bonus & amelioration 10,959.81 Office expenses 248,676.51 Traveling expenses 148,077.40 General expenses Guards & tenders 28,130.01 Medical expenses 7,770.93 SSS premiums Inte rest expenses 85,627.15 Taxes & :.icenses 32,925.66 Donatio:1s & charity 12,928.79 Depr eciation 33,668.00 241 , 864.40 20,630.66 2,400.00 20,265.42 Net Pro fit on Farm Operation p 162,675.60 Add: Gain on sale of property � 456,800.30 Less: Provision for Income Tax 1 20 ,765.00 NET INCOME TO SURPLUS 5. As reported in the memorandum report dated April 29, 1977 of the revenue examiners who investigated peti- tioner, no portion of the net profit of ~336~03~.30 was distributed lo its stockholders. (~xh. 2, pp. 58-60, BIR record s .) 6. Upon investiga tion of the books and other account- ing records of petitioner for internal revenue t a x pur- pose s for fiscal year ended June 30 , 1975, respondent issued t o petitioner, on the basis of the examiner's report, deficiency income tax assessment in the amount e of Pl9,2/5.00 for said taxable year. (Exhs. C, C-1 & C-2, pp. 14 & 15, CTA records; p. 8, BIH. tecords.) It l r::- 0 d'..J

DECISION - CTA CASE NO. 3917 - 5- appears that the deficiency income tax of Pl9,275.00 was paid by p e titioner on October 15, 1975 as per Official Receipt No. 4032805-F dated October 15, 1975. (p. 3, CTA records.) 7. The records of the case reveal further that through the verifica tion of the copy of the absolute deed of sale of petitioner to Roberto J. Cuenca which is on file in the Office of ~h. Registe r of Deeds and the tax decla �ations of the properties sold which were obtained from the Assessor's Office, and on the basis of the figures in the financial statements attached to the income tax return of petit i oner the original a . ~d duplicate copies of which are on file in the Bureau of Internal Revenue, respondent's examiners found that the properties solJ for P2,000,000.00 had an actual value of P3,382,619.30, of which the difference of Fl,382,619.30 was considered a gift; a nd discovering that pet itioner had an earned surplus for the fiscal year ended June 30, 1975 which was not distributed to its stockholders, the revenue examine r s recommended the ass e ssment of pe ti- tioner of su ri a c for improper accumulation of surplu c under Section 2 5 of the Re venue Cod e. (Exh. B, pp. 9-11, V CTA records; Exh . 2, pp. 58-60, BIR records.) Consequently, on September 10, 198 0, responde nt assessed petitioner the amou nt of Pl02 ,470.04 as 25% surtax for unreasonable accumulation of surplus fo r fisc a l 15 (

DECISION - CTA CASE NO. 39 1 7 - 6- year ended Ju ne 30, 1975 and the sum o f P540,416.91 as donor's t ax on the differenc:e between t he actual value of th e properties of P3 , 382,619.3 0 and the selling price of ~2,0 00,000 .00 . (Exh. 7, p. 109, BIR record s ~ Exh. 6r p. 108, BIR records.) 9. Both a ssessments were protested by pet it ione r in its lette r dated December 9, 1980, which protest was denied by r e spondent in his l e t ter of J a n uary 9, 19 85 . (Exh. 8 , pp . 11 3- 114 , BIR recor ds ~ Ex h. 9, pp . 146-14 8 , BI R rec o rds~ Exh. B , pp. 9-11 , CTA r e co rds .) Hence, the instan t appeal. As posed by the par t ies, t he issues i nvolve C : n this ar e : Whe ther the assessments for donor's tax and 25 % s urt a x for unreason ab le accumulation o f surplus in the amount s of P540 , 416.91 a nd Pl0 2 , 470 .04, respec t ive ly, are l egal and jus- tified ; a nd b . Whe th e r the above tax liabilities we re a ss e ss ed within t he period prescribed by law. Pe titionr r c ontends t hat it had already been i nves- tigated for all internal reven ue tax purposes fo r th e fi s c a l y ear e nded Jur1e 30, 1975 unde r Lette r of Au thori t y No. 62 6 073 RR dated July 25, 1975, and as a r es ult of which wa s ma de t o pay the amount of Pl9,275.00 as defi- ciency income tax for s a id 9e rio d. S i nce the asse s sme nt s 15 8

DECI S ION - CTA CASE NO. 3917 - 7- i n qu e stion were an off s hoot of a second inves tigation, it would be i n violation of the then in force Section 337 of the Tax Code. We f'nd no merit in petition er ' s cause. Section 337 requires tha t book s of accounts and other acc ounting records must be preserved for at least five years from the date of t he last entry, and are sub j e c t t o exam in a ti on and i � s ; :e ct io n at any time b y i nter nal revenue of ficers. However, examination and inspection may be made only once in a tax able year during the five-year period they are required to be pre- se rved , exce pt i n cases of fraud, irr egu lar ity oL illis t a ke, or unless the taxpayer requests otherwise. It i s not disputed that on J une 25, 1975, pe ti tioner sold to a certa i n Kober to J. Cuenca i ts real p r ope rties (p arcels of lan d), to geth er wi th eq uipme nt , improve men t s and q uota rig hts for a consideration of P2 , 000,000.00. Verification made by r e venue e xami ners of r esponde nt disclo s ed tha t t he mar ket value per latest t ax decla- rations of the real prope rties alone amounted to P2,198 , 840.0l , a d the improvements , equipment and quota rights have a net book value of Pl,l83,770.30, or a t o tal value of P3,382 , 619 .30 . The r e i s the r efore a differenc e of Pl,382,619.30 which is Uildou b tedly sub ject to donor ' s 0 tax p ursuan t t o Section 12 2 of the the n in f o rce Nat i o n a l I n t e rn a l Revenue Code wh ich c o n side rs transfers ofproperty 15 8

DECISION - CTA CASE NO . 3917 - 8- for less tl1an an adequate and full consideration in money or money's worth as partly a gift to th e extent of the difference between the fair market value of the property transferred and the actual con side r a tion paid. The meri t of respondent's assessment of peti- tioner's l i ability for donor's gift tax is t hus clea r on the basis of the records and the law applicable. As s tated above, th e d c ~o - : s gift tax lia bili ty was asce rta ined th rough ve rification of the c opy of the ab s olute deed of sale which is on file with the Office of the Reg i s te r of Deeds and the Tax Declarations whi ch were obtaine d f r om the As sessor's Office . The a~ . ~i ti ona l t ax on improper accumula tion of surplus was assessed based on the figures appearing in the financial s t ate- ments attached t o pet it i oner ' s income t a x re tur n t he original and duplicate c op ies of which are on fil e in t he Bureau of Internal Revenue . (Exh . B, pp. 9-l l, CTA records .) The subsequent investigation by respondent which l ed to the issuance of the assessments of 2S% surtax for unreasonable acc umulation of pr o fit and donor's tax p ur s uant to S~ ct io1 122 of the Revenue Code app l icable does not the r efore contravene the prov ision of Section 337 of the Ta�� Cod e . Ver if y ing a copy of th e absol u te deed of sale on file with t he office of the registe r o _ deeds and the tax declarations wh ich were obtained from the assessor ' s off ice , and analy zi ng the fig ures in the 16 0

DECISION - CTA CASE NO . 3 91 7 - 9- financial statemen t s of the income tax return on file with the Bu eau of Internal Revenue, cannot by any stretch of the imagination be cons ide red as an ex am - ination a nd in spec t ion of the books of accounts and othe r accoun ting r ecor ds of taxpayers whi ch are kept in their place of bus iness o r res idence. Further, Sect i on 7 of the t hen in force National Inter nal Reve nue Co de speci f t c 2 lly empowers the Commis - sioner of Internal Reve nue, or his authorized repre sent- atives, to obtain information from government offices or age ncies for the purpose of defe r mining the tax li abil it y of any pers on or for discovery of pote 1: t ~ al taxpayers. As correctly noted by re spondent, what had been examined a nd term inated in the first inve stigation was only the reg ular corporate income tax, and that no mention whatsoever was made of the donor 's gift t ax and the additional t a x on improper accumulation of surplus. As to petitione r's al l egation that it was never informed of the examiners' f indi ngs except wh e n the assessments were iss ue d, the Assi s tant Reg ional Directo r, Revenue Regior GB , Baco lod City, as we ll as the Actin g Chief, direct taxes division, Nat i onal Office, ha6 writte n l et ters dated May 6, 1977 and October 26, 1979, respect- ively, informing petitioner of the findings of t l1 e examiner~ and i nv it ing its repre sentative t o informal confe rence on the dates state d therei n, to enable it to prEsent its 1G 1

DECISION - CTA CASE NO. 3917 - 10 - side of the c ase, but petitioner fa1led to do so. (Exh. B, pp. 9-11, CTA records; Exh. 9, pp. 146-148, BIR records.} As rightly stated by responde~t, that would have given petitioner the opportunity to go over the finding s of the examiners , present its objections thereto, and submit whatever documenta ry evidence it may have in its favor. There is t. e refore no basis in the allegation of petitione +:Lut it was never notified of the reinvestigation conducted in this case, and thus deprived of its right to di spute the findings of the reven u~examiners. (sec tion 25(a) of the National Internal Reve nue Code imposes a n additional tax upon a corporat i~ n formed or availed of for t he purpose of preventing the imposition of the tax upon its shareholders or the shareholders of �ny other corporation through the medium permitting its gains and p rofits to accumulate instead of being divided or distributed . And Section 25(c} provides that the fact that earnings or profits o f a corporation ar e permitted to accumulate be yond the r easonable needs of the business shall be det � Jminat ive of th e purpose to avoid th tax on shareholders Ult less the corp:)[ation shall prove to t he contrary by a clear preponder ance of the evidence. The Cou rt the r efore recognizes that while re sponde nt ' s determination is presumptively correct and casts upon � pet itioner the bu rden of offer ing evide nce in opposition 1G 2

DF.CISION - CTA CA SE NO. 3917 - ll - ther eto, once s uch evidence is presen ted, the question thus is whe th e r under all the evidence, petitioner has sustained by clear pr e ponderanc e o f evidence the burden which the statute places upon it to overcome the pre- s umpt ion tha t it wa s availed of for the prohibited pur - pose. Such presumption ari ses by virtue of a findin g that petitione r accumulated profits beyond the re asonable needs of it s busi n ess . (P. l . ~anuf acturing , Inc. vs . The Commission e r of Int e rnal Revenue , CTA Case No. 2500, December 27, 1985 . ) Respondent p oi~t ed out that by petitioner's own admission, it realized a net profit of ~3 36,035. JC (after i ncome t ax profit of ~120,705.00) for fiscal year ended June 30 , 1975. Con tr ary to the mandate of the law, petitione r did not dis tr ibu te the pr of it or surp lu s of ~336 ,0J5.30 to it s membe r s or sharehold rs. Accordin g l yf pursuan t to Sectio11 25 of t he National I nternal Revenue Code , respondent assessed pe tit ione r 25% of th e P336,035.2 0 or ?102 , 470.0 4 repres ent ing surtax f or improper accumu lation of p r ofits. While petitio ne r ~r;t ests the as ses smer1t on the ground that in ~ board of d irec tor s ' res olu tion dated Augus t 3, 1975 the profit o f P336 , 035.00 was set aside for fu t ur e expan s ion of the business , no ev i dence was pr esented showing the n eces sity of th e improvement . (p . 8 1, CTA records.) As a matter of fact, p e titioner di d not 16 2.

DECISION - CTA CASE NO. 3917 - 12 - submit o r presen t before th i s Court pr oofs o f specific, definite and feasible plans for the accumulation in t he taxable year in question . In Manila Wi ne Merchants, Inc. vs . Commission e r of Int e rnal Revenue, L- 26145, February 20 , 19 84 , 127 SC~~ 48 3 , the Supre me Co u rt has already eatabl i shed t h e rule that : To dete rmine t he "..:o c." .::; onable needs" of the busiLe Js in order to ju s t i fy an accumulation o f earn ings , the Courts of the United States have i nven ted the so-c a lled "Immediacy Test" which cons tr ued the words "r easonable needs of the business" to me a n the i mi'[ledia te needs of the bus iness, and i t was gener ally held that if the corpo a tion did nat prove a n immediate need for the accumula tion of the earning s a nd profits, the accumulation was not for the r easonable needs of the bus iness, and the penalty tax wo uld apply . Such plans as the c orporati on ha s for u se of a ccu- mul a t ed earnings mus t b e i n existenc e at the close of the year in which the accumu latio n is made. In order to determine whether profits were accumulated for the reasonable needs of the bu sines s or t o avoid the sur t ax upon th e shareholders, the controlling intention of the taxpaye r is that which is manifeste d at the time of the accumulation, not subsequently declar e d intentions which are merely t he products of afterthought . (Basilan Es t ates , Inc. vs . Commiss ioner of In ternal Revenue , 21 SCRA 17, citing Jacob Mert en s , J r ., The Law of Federal In c o me Taxation, Vol . 7, Cumul at ive Supplemen t , p . 213 .) As righ tly cited by responde nt, the mere intention or 1() 4

DECISION - CTA CASE NO . 3917 - 13 - cons i deratio n of i mp rovements, even though reser ves are se t aside, wil l no t justify an accumulation where the improvements have not been made and do not appear to be required. Considering petitione r' s f a ilur e to sustain the bur d en which the law a ppli ca bl e places upon it to overcome by clea r pr eponderance of evidence, the deter - ~ination of r esponde n t t ha t ~e l ti one r was a vai led of for the proh i bited p~ose in the fiscal year in question , must be sustaine d / On th e issue of pr es cri p tio n ; Section 331 o f the Na tional Internal Revenue Code th e n in force pro v i �Je s that where ~ return was f i led, which is no t fraudulent , the tax may be assessed within fiv e years from the da te the return was due o r wa s filed . A re turn fi led before the l ast day fixed by law for the f iling thereof shall be considered as filed on such l as t day. For purposes o f the p r esc riptive periods established by Sect ions 331 and 332 of the applicab l e Tax Code , an as sessment is deemed made when t he noti ce i s released, ma i led or sent by the Comm i s fi o ne r of Intern a l Revenue to the taxp3yer . Fa ilur e o f the taxpayer to receiv e the assessment within the pre scr i ptive pe ri od will not affect the val i dity of t he assessment if it was mai l ed and released within said p er i od. (Basil an Es ta te::J vs. Coi�nmissioner o f Interna~ Revenue, L-2249 2 , Septe mb er 5, 1957, 21 SCRA 17; Na v a 1G G

DECISION - CTA CASE NO . 391 7 - 14 - vs . Collector o f Inte rn al Re v e nu e , L-19470 , January 30, 1 965 , 13 SC RA 104 ; Re publi c vs. Alane , L- 1 886 5, Sep t ember 28, 1 96 4, 12 SCRA 2 4.) In th e present c ase , pe t it ioner f iled i t s c orpo rate incowe t a x ret u rn r e f lec ti ng t he s a]_e of t he subject propert i es on Sep t e mber 2 , 197 5 for the fiscal year ended June 30 , 1 97 5. (p . 61 & p. 82 , CTA r ecords . ) Und e r the law t h en i n force , '.::.i1 e last day f o r f i ling the re t urn was Oc t o be r 15 , 1975 . (Sec . 46 , Na t ional Interna l Reve nue Code. ) The r eturn was de emed f iled there fo re on Octobe r 15, 197 5 and the Bureau of In ternal Revenu e h ad up to Oc t ober 1 5 , 19 80 withi n which t0 assess petiti one r for taxa ble year 1975 . Since the assessment in qu st i on for donor ' s t ax was dated and issued on September 10 , 1980 , t he assessment was issued well wit h i n th e f iv e -ye 3 r period pre s cribed by the l aw appli- cable. We s ee no significance therefore in the contention of pet i ti one r that the assessments were iss ued beyond t he f ive - year prescr iptive period bec ause it received the assessments onl y o n No v embe r 10 , 1980 . At any U <t e , no r eturn was filed by petition e r for t he donor's gif t t a x since t he return fil ed was for the corporate income t 3x. To our mind , such return was not a valid return for the do n or's gift tax, � nd i'.::.s 0 filing cannot be cons i dered to start the running of the prescriptive p er iod for the assessment of the donor's tax. lG G

DECIS.ION - CTA CASE NO . 391 7 - 15 - (See Republic vs. Jal andoni, L-18384, September 2U, 1965, 15 SCRA 51; Colle cto r of Internal Revenue vs . Pine da L- 1 4520 , May 31, 19 61, 2 SCRA 401.) Thus, i t has been held that the income t ax return cannot be considered as the equiva l e nt of th e sal ~s t ax return required un d er Section 18 3(a ) of the then in fo rce Revenue Code fo r purposes of the statute of li mi ta tion provided in Sections 318 and 319 of the same Cod L- (B utuan Sa~mill vs . Court of Tax Appeal s, L-2060 1, February 28 , 1966, 16 SCRA 277.) Neither may such return be con si d ered for purposes of the statute of limi tation app licable to assessments f or the unreason able a ccu mu l a ti on of profits tax. ( L 2-.> il<m Estates vs . Commiss ioner of Internal Revenue, L- 22 492 , September 5 , 1967, r esolu tion on motion for reconsider - ation , October 25, 1967, 21 SCRA 17; United Equipment vs. Commissioner of Intern al Revenue , CTA Case No. 1795 , October 30 , 1971, certiorari denied in L-35653 , October 24, 1972; Commissioner of Internal Revenue vs. Ayala Securities Corp., L- 29485, March 31, 1976, 70 SCRA 204 . ) Consequently , it can be said that it is as if no return was fil ed fo ~ purposes of the donor's tax, and the pre criptive period applicable is ten years from the date of discovery of the omission to fi le the return. (Sec. 319 {a); H.epublic vs . L �cia Tan, L-25483, May 23, 1969 , 28 SCRA 325. ) 0 [And anent the assessment f o r surtax on improper

DECISIO!'J - CTA CASE NO . 3 ~ 1 7 - 16 - a c cumulation of p r o f its , t he r u le i s t ha t t here i s no s uch time l imit o n t he right of t h e Co mm i ss i o n er o f Interna l Revenue t o as s e s s t he 25 % t ax on un r e a sonabl y accumulated surpl us provided i n Sactio n 25 of the Tax Code, since there is no expr ess s ta tu t o ry provis i on l imiting such right o r p r ov i d ing f o r i t s prescr ip t ion. (Commission e r cf Interna l Revenue v s . Aya l a Se c u rities Corporation, L-29485 , 70 SC RA 26 4 , modif i ed by reso- lution of Nov ember 2 1 , 1980 , 1 01 ? CRA 231~ Ac cordin gl y , the Court finds pe tit i o ner Pac j ta Soriano , I nc . , l iab l e t o th e p a y me n t o f t h e amoun t s of : (a) ~102 , 47 0 . 02 as 2S % su rt ax f o r i mprope r accu- mu l a tion of surplus for the f i scal. year ending J une 30, 1975 , plus surcharges and i n t erest i nc i den t t o delin- que1cy pursuant to t he p rovis i on of Section Sl(e ) o f the applicable Nat i ona l In ter n a l Re venue Code, as amended ; (b} ~540 , 416.91 as don o r's g i ft t ax, p lu s surcharges an d inte re st inc i dent t o del i nquency pursuant to the provisions o.::: Section l3 0 {b ) ( l) a n d (c) of the appli - cable Nat i onal I nterna l Revenue Code . WHEREFORE , the d e cision -ppealed from is hereby affi r med a t petitione r' s costs . 16 8

DECISION - CTA CASE NO . 391 7 - 17 - SO ORDERED. Quezon City, Me t ro Manila, August 27, 1986. apA4MAA/N~~0~~/ Pr es i d"lng Judge WE CONCUR: 1 - ""ROAQU IN Judge y. u _/ ~ l->L~X ~(R~ EYE~U( . J. ASSOC l ate Judg / 16 9