REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

CYANAMID PHILIPPINES, INC.,

Petitioner,
-

C.T.A. CASE NO. 42SO

versus -

COMMISS IONER OF I NTERNAL

REVENUE,
Respondent.
M -

This

is

:t

an

appeal

Philippines,

Inc.,

Commissioner

of

:t

from

by
a

petitioner,

decision

Internal

Revenue

of

Cyanaid
respondent

imposing

25~

undue accumulation of profits

busine s s needs of petitioner
for the taMable year
P3,774,8G7.50,
Section
<NIRC)

1981

involving the amount

of

i nc lusive of in tere st.

25(a )

of

the

National

Revenue

Code

imposes an additional t aM upon a corporation

formed or

vailed of for the purpose of preventing

the imposition of the taM upon its share holders or

the

shareholders

the adiulll o f

of any

per11itting

278

other corporati on

through

its gains and profits to

DECISION
CTA CASE NOS. 4250
- 2 accumulate instead of being divided or
On the other hand,
that

the

fact

di~tributed.

Section 25(c ) NIRC provides

earnings

that

or

profits

of

corporation are permitted to accumulate beyond the

reasonc!kble

of

nee d~

determinative

of

the

the

shall

bltsiness

purpose

to

avoid

the

be

tax

on

shareholders unless the corporation shall prove the

contrary by a clear preponderance of evidence.
Petitione r

Cyanamid

Philippines ,

wholly-owned

of

Inc.

is

Cyanamid

American

Company, a co rporat ion orqanized and existing under

and by

v:i.rt1..11t
lt

U. !:3. A.

of the

of

imported

indento r. (p.

prod1..1cts

and

finis hed
171'

of the State
in

enqa~ed

il!l

pharm.aceutical

laws

the

BIR

manufacture

chemicals,

qoods~

Rec.,

of Maine,

wholesaler

importer
and

and

an

admitted

in

"Memorll\\ndllm for Respo nde nt", CTA Records p.

On

Janllc!kry

30,

examin er conducted

an

books

and

of

account s

1985

after

examination
other

respondent Co mmis sioner of

138).

respondent's

of

petitioner's

accounting

Internal

of

records,

Revenue

issued

assessment notices both numbered 32-05048-001889-81

to petitioner demanding payments of P119,817.00

a~

deficiency income tax for 1981 and P3,774,867.50 as

25')(.

s.1rtax

for

improper

acc1..1mulation

for the taxable year 1981 computed

a~

of

earnings

follows:

DECISION
CTA CASE NOB. 4250
-

3 -

PH51 2801 587,00

Ntt Rtttlntd Earning1btg.

Addt Ntt profit during tht yttr

L1111 Ineo11 TaM ptid

Alount tubJtCt under Ste. 2S

Pl4 1 70S1 370.00

-' '""4.00
p 9, ~. 926.00
--~

p 2~ 385, 232. 00

TaM due thtrton

Addr lnttrtlt fro
4/16/SH/16/BS
TAX Dtl H taLECTlll.E

On

Oetobe ~

M rc:h

eo,

7,

peti tioner

1983,

1987.

Hence, thi5

com prom is

to

nt

IA!Ui

paid

the

re aining

Th e
petitioner

is

, however , both

e~

the

deficie ncy

1981

Petition l!n"

of P119, 817. 00.

of

P26, 577. 00

is ue

liable

for

said

ppeal.

During th pende ncy of the

gre

protestl!d

COIIIprolliSit

wh ther
the

25~

or

not

accumulated

earnings tax in the tax year 1981.

The
the

pertin ent

law

.mder

corresponding
of

surplus

25~

for

provisions
which

of

Sect ion 25 NIRC,

res pondent

assess ed

the

tax for unreasonabl e accumulation

the

fisca l

year

1981,

r~tads

follows
SEC.
25.
AdditiOn!'l
tax
on
corporations
improperly
aceuulating
profit 1 or surplus.
<a> I pos it ion of
Tax If any corporation except banks,
insurance co11panies, or personal holding
copan i es, whether do11est ic or foreign,
is forMed or availed of for the purpose
of preventing the imposition of tax upon
its
shareholders
or
members
or
th e
shareholders
or
members
of
another
11

28l

as

DECISION
CTA CASE NOS. 42SO
- 4 corporation,
through
the
Mediu
of
permitting
its
gains
and
profits
to
accumulate inst ead of being dividttd or
distributed, there is levied and assessttd
against
such
corporation,
for
each
taxable year, a t a x equal to twenty-five
per centum of the .mdistrib.tted pOt''tion
of its accumulated profits or surplus
which shall be in addition to the tcl\\x
iMposed
by Section 24,
and
shall
be
computed, collected and paid in the same
manner and subject to the same provisions
of
law,
including
penalties,
as that
tax. "
XXX

XXX

XXX

"(c)

Evidence
detet"' minative
of
- the fact that the earnings or
profits of a corporation are permitted to
accumulate beyond the reasonable needs of
the b.tsiness shall be detet"'inative of
the purpose to avoid the tax upon its
shareholders
or
members
unless
the
corporation,
by clear preponderance of
the evidence, shall prove the contrary."
~rposeL

A prerequisite to the imposition of the tax is

that

the

corporation

the

purpose

of

shareholders,

or

corporation by
of

the

them

shareholders.
to

so111e

formed

avoiding
on

the

among
If the

to
or

earnings

fall

within

the

and

theM

other

profits

to

pay dividends

as

the

use

pt"'ofi ts

for
its

instead

distributing

interdiction

28?

of any

accu!Wt..llate

s.Jch

of
on

earnings and

reasonable needs of the business,

not

tax

shareholders

failure to

other cause,

undistributed

or avai 1 ed

inCOIWe

permitting the

corporation

dividing

due

be

of

for

of
the
is
the
the

such purpose does

of

the

statute.

DECISION
CTA CASE NOS.

42~0

- 5-

Chapter

3 9,

p.

Rgulations No.
of

February 20,

1984,
much

mind or intent,
the

Internal

S ec.

Revenue

21,

Inc.

L-26145,

No.

Revenue,

v.

127 SC RA 483).

as
it

surrounding

~-t.~_Q_

Manila Wine Merchants,

2;

Coissioner

In as

P~.!t

44,

"Q.!J.LQOse_"

involves a

state

is always necessary to

circum s tances

and

the

of

look at

attendant

facts on a case by c a se b a sis to deterine whether

the non-distribution of ea rnings and profits was to
permit the

shareholder s to avoid

incoe

such was for some 1 eg it i mate purpose,

or if

ta~

such as,

its

use for the reasonable needs of the bt.nines<s.

In

this

regard,

ta~payer,

the

their

of

the

generally, the issue is to be resolved

light

including

the

officers and s tockholders is entitled to

some weight,
in

although

of

the

actual

the

interests
conduct.

Incoe Taxation,

surrounding
of

circumstances,

those

in

<Merten<s,

Law

Vol. 7, Chapter 39,

control
of

of

Federal

p. 45).

Respondent submits the following findings and

analysis

allegedly

determinative

of

petitioner's

accumulation of profits or earnings for the

year

i nvo 1 ved

business:

as

being

<E~aminer's

BIR Records.>

beyond

Memorandum;

the
E~h.

ta~able

needs

of

its

2-A,

pp.

169

DECISION
CTA CASE NOS. 4250
- 6 "A .
That the corpora tion,
while
declaring stock and cas h dividends
in
1 '~80,
did no t o r fa iled to de c lare a ny
durin q the ye ar undet~ review, permitting
t he ac c .1 mulation of profits instead of
b ei n~
divided o r disttibuted to taxable
shareholders; "
"B.
The fina ncial position of the
company as of Novembel'" 30 , 1'381:
Assets
werl!
P52,316,680. 00
~J h ile
liabilities
amountl!d to P 22,2 12,063.00 6r a ratio of
2.5 to 1; 11
"C.
That
the
corporation
had
considerable liql\id funds consisting of
Cash, Receivables,
Inventories and even
its sales for the perio d ~ould adequately
provid e
the
no rmal
needs
of
the
business ...
Petitioner
dividends

fot~

contends
the

yeat"

accumulated earninqs
meet

its

permits a
of

its

In

the

that
1'381

it
in

did

not

ot"der

to

business

needs".

stock corporation to set

case

at

for accumulating

earnigs
bat",
its

use

as working capital reserve

"reasonable

retained

declal'"e

fot"

howevet",

The

aside a

specified

to
law

portion

purposes.1

p e titioner's

earnings does not

the

purpose

fall

within

the ambit of any of these specified purposes.

Sec. 43 par. 2 Corporation Code of the Philippines - Stock corporations are

prohibited fro retaining surplus profits in excess of one hundred <100~) of their
paid-in capital stock, except: (1) when justified by definite corporation expansion
projects or prograas approved by the board of directors or; (2) when the corporation is
prohibited under any loan agreeaent with any financial institution or creditor, whether
~ocal or foreign, fro1 declaring dividends without it s/his consent, and such consent
has not yet been secured ; or ; (3) when it can be dearly shown that such retentions is
necessary under special circuastances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies. In)

2R4

DECISION
CTA CASE NOS. 4250
-

More comp llinq

no need

for

7 -

is the findinq t hat there was

to

petitionet~

set

aside a

portion of

its re t ained ear inqs As workinq capital reserve as

it claims

it

sine

r view
statement

of

the

p.

127,

coporati on

had

c on5istinq

f .mds

accoi..\nts receivable ,
th~

the

that

inventory and

funds.

financial

the Balance Sheet ,

v als

l iql.li d

for

petit i onet~' s

of

(p a;n~ ticllla r ly

liq1.1id

co n sidet~a ble

ha d

even

of

cash,

its

s ales

period is adequate to meet the normal needs

This

business.

compt..\tinq the

c1.1n~

nt

can

Asset

be

dete rmined

by

liability ratio of

to

current assets

curr nt rli!\tio ...

c1.1r rent liabilities
P47 , 052 ,S35.00
P21 , 275,54 4.00

The

signific nee

primary

test

of this

of

ratio

company's

to

is

serve

so lvency

as

to

Meet

current obligatio ns from current assets as a going

concern

or

of

adequacy

of

working

c apital.
Petitioner
imm diacy

of

in
its

this

case

failed

need

for

the

to

prove

accumu lation

the
of

DECISION
CTA CASE NOS. 4250
- 8earning~,

h r11=e

r asonable
surt x

We

fur-ther'

and

for t h ct

thus,

Man i la

<Th

appl Y

v.

No.

bus1ne5s

th

then

lm: .. ,

GR.

ceJiilul ation was not

of

h ould

Meretumta,
Revenu~,

ne

the

the
Win

Th Coisioner of Intctrnal

L -26145,

February

ao,

1984,

127

J c::t p t i t i oner ' s a""gument t hat

"the aeoumul _ted earnings tax does not apply to a

jurisprudenc

citing

cor porati on"

pJbl icl y - he ld

to

support

Amet"'ican

posi tion .

its

The

refe rence finds no app l ication in the case at bar

because under S ec:: ion 25 of th
Sect itH'l 5
1980),

the

of

No.

P. D.

exc:: pt

io n~

tax are expressly

bank

137'a

NIRC , as amende d by
(dated

Sept ember

to the aceum1.1lated earnings

numerat d,

to wit:

Bank,

int rmediaries ,

financi 1

organized primarily,

17,

nd

non-

corp orati ons

uthorized by the Central

Bank o f the Philippines to hold share s of st ock of

banks,

insurance

comp nies,

or

personal

compani e s , whether domestic or f orei gn .

the matte r

Th e law on

i s clear and spe c ific.

no need to resort
the

holding

American

enlightenmctnt

to a ppl ieabl e eases decided by

Fed era l
as

to

Cour ts

for

guidancct

whether

the

provision

and
of

Se c tion 25 of the NI RC shou l d apply t o pet i ti on er.

DECISION
CTR CASE NOB. 4250
- 9 Equally cl ear and
of

E. 0.

s p ec i f ic are the

p ar ti c ula r ly

41

to

respe c t

appears

It

c o ve t"a q e.

and

effectivity

with

provisions

that

petitioner availed of the tax amnesty under E.O.

Ltnder

File

confirmed

No.
by

as

32A - F - 0004 5 5-41B

respondent

throu q h

cEn"tified

its

Implementation Office on Octobet" 6,

Tax

amended

cases,
issL1ed

is

for

the

after

Ordet" No.

198'7.

bar.

August

assessments

on

availment
amended,

the

January
of

appropriate

the

assessMent

<Hevenue

issued

Memorand.1m

before

petitioner seeks to do

Therefore,

issued

of

1 ~-3 86

2 1,

in

41

Sa id availment does not result in

of

1'386 as

basis,

cancellation

4-87>.

cancellation
21,

sufficient

and

Amnesty

The availment of the tax amnesty under E.O.

as

41

the

in the case at

assessments

3 0,

ta x

in

despite

1985

a mn est y

August

under

this

case,

petitioner's
E.O.

41

as

still sub!>ist.

Based on the foreqoinq,

1 iabl e

fot"

the

surtax

on

undue

amount

of

payment

of

we find the petitioner

the

accumulation

P3,774,86'7.50

41.fore111ent i oned
of

surplus

inclusive

of

in

25'}(.
the

interest.

Petitioner was unable to prove its non-liability by

a cleil.r preponderance of evidence.

WHEREFORE
Inc.,

petitioner

Phi 1 ippines,

is ordered to pay respondent Coisaioner of

2~7

DECISION CTA CASE NOS. 42SO

- 10 the

I nternal
represent ing

25~

P3, 774, 867.50

of

surtaK on ipro per a ccuulation o f

profit fo r 1981, plus

10~

sureh rge a nd

20~

annua l

i n tere t f ro January 30, 1985 to Januar y 30, 198 7 .

Cost s a gai n st petitioner.

SO ORDERED.

WE CONCURt

<evERNESTO
.. ~~~
D. ACOSTA
A!uociate Judg e

C E R T I F I C A T I 0 N
I

he r eby

c e rtify

that

t his

decision

reached after due consultation a mong the

the

Court

of

TaK

App ea l s

in

wa s

~embers

accordance

of

with

Section 13, Article VII I of the Constituti o n.

P r e s iding Judgtt
Court of Ta~ Appeals