G.R. No.

108067 January 20, 2000

CYANAMID PHILIPPINES, INC., petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,respondent.
FACTS : Cynamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly owned
subsidiary of American Cyanamid, engaged in the manufacture of pharmaceutical products and chemicals,
a wholesaler of imported finished good an importer/indentor,
The Commissioner of the Internal Revenue (CIR for brevity) assessed Cynamid the amount of P119,817.00
and P3,774,867.50 as deficiency on income tax and 25% surtax on improperly accumulation of profits for
1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987, under
Sec. 25 of the National Internal Revenue Code.
Petitioner contends that it should not be assessed for surtax on improperly accumulation of profits for the
reasons : a) petitioner accumulated its earnings and profits for reasonable business requirements to meet
working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of
American Cyanamid Company, a corporation organized under the laws of the State of Maine, in the United
States of America, whose shares of stock are listed and traded in New York Stock Exchange. This being
the case, no individual shareholder income taxes by petitioner's accumulation of earnings and profits,
instead of distribution of the same.
Petitioner appealed with the Court of Tax Appeal against the decision of the CIR. The Court of Tax Appeal
affirmed the decision of the CIR in toto.
Petitioner disputes the decision of the Court of Appeals which affirmed the decision of the Court of Tax
Appeals, ordering petitioner to pay respondent Commissioner of Internal Revenue the amount of three
million, seven hundred seventy-four thousand, eight hundred sixty seven pesos and fifty centavos
(P3,774,867.50) as 25% surtax on improperly accumulation of profits for 1981, plus 10% surcharge and
20% annual interest from January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal
Revenue Code.
Petitioner feeling aggrieved then filed an appeal with the Court of Appeals which again affirmed the
decision of the Court of Tax Appeal. Left with no recourse, petitioner now went to the Supreme Court for
relief.

ISSUE : Whether or not the assessment of the CIR for the deficiency income tax and surtax on improperly
accumulation of surplus in the respective amounts of P119,817.00 and P3,774,867.50 plus 10% surcharge
and 20% annual interest from January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal
Revenue Code justifiable?

HELD: The Court ruled that Cynamid is liable for the assessment made by the CIR on it s liabilities on the
improperly accumulated profits and penalties. The contention of Cynamid that it will use the surplus or
profits as additional capitalization and payment for its obligation does not hold water for the reason that it
had a considerable liquid fund to tide up its obligations. the ratio of its current asset against liabilities is at
the ratio of 2.21: Clearly there is no need of infusing additional capitalization from its surplus or profits to
tide up its obligation. Secondly the Court stated that the provision of the NIRC particularly Section 25 is
intended to prevent its shareholders or members of another corporation, through the medium of permitting
its gains and profits to accumulate instead of being divided or distributed, hence avoiding the imposition of
income tax on such profit or dividend of the shareholders. The provision discouraged tax avoidance
it

through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not
paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of
surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said
earnings by shareholders could, in turn, be taxed