G.R. No.

85749 May 15, 1989

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ANTONIO TUASON, INC. and THE COURT OF TAX AEALS, respondents.
The Office of the Solicitor General for petitioner.
Mendoza & Papa and Roman M. Umali for private respondent.

GRI!O"A#UINO, J.:
Elevated to this Court for review is the decision dated October 14, 1988 of the Court of
Tax Appeals in CTA Case o. !8"#, entitled $Antonio Tuason, nc. vs. !ommissioner of
nternal Revenue,$ which set aside the petitioner %evenue Co&&issioner's assess&ent
of (1,1#1,14".98 as the )#* surtax on the private respondent's unreasonable
accu&ulation of surplus for the +ears 19,#-19,8.
.nder date of /ebruar+ ),, 1981, the petitioner, Co&&issioner of 0nternal %evenue,
assessed Antonio Tuason, 0nc.
a. 1eficienc+ inco&e tax for the +ears 19,#,19," and 19,8 . . . . . . . 22222222..
2222 (!,,491.8!.
3b4 1eficienc+ corporate 5uarterl+ inco&e tax for the first 5uarter of 19,# . . .
2. . . . . . . . . . . . . . . . . . 1"1.49.
3c4 )#* surtax on unreasonable accu&ulation of surplus for the +ears 19,#-
19,8 . . . . . . . . . . . . 1,1#1,14".98.
The private respondent did not ob6ect to the first and second ite&s and, therefore, paid
the a&ounts de&anded. 7owever, it protested the assess&ent on a )#* surtax on the
third ite& on the 8round that the accu&ulation of surplus profits durin8 the +ears in
5uestion was solel+ for the purpose of expandin8 its business operations as real estate
bro9er. The re5uest for reinvesti8ation was 8ranted on condition that a waiver of the
statute of li&itations should be filed b+ the private respondent. The latter replied that
there was no need of a waiver of the statute of li&itaitons because the ri8ht of the
:overn&ent to assess said tax does not prescribe.
o investi8ation was conducted nor a decision rendered on Antonio Tua;on 0nc.'s
protest. &eanti&e, the %evenue Co&&issioner issued warrants of distraint and lev+ to
enforce collection of the total a&ount ori8inall+ assessed includin8 the a&ounts alread+
paid.
The private respondent filed a petition for review in the Court of Tax Appeals with a
re5uest that pendin8 deter&ination of the case on the &erits, an order be issued
restrainin8 the Co&&issioner and<or his representatives fro& enforcin8 the warrants of
distraint and lev+. =ince the ri8ht asserted b+ the Co&&issioner to collect the taxes
involved herein b+ the su&&ar+ &ethods of distraint and lev+ was not clear, and it was
shown that portions of the tax liabilities involved in the assess&ent had alread+ been
paid, a writ of in6unction was issued b+ the Tax Court on ove&ber )", 1984, orderin8
the Co&&issioner to refrain fron enforcin8 said warrants of distraint and lev+. 0t did not
re5uire the petitioner to file a bond 3Annex A, pp. )8-!>, %ollo4.
0n view of the reversal of the Co&&issioner's decision b+ the Court of Tax Appeals, the
petitioner appealed to this Court, raisin8 the followin8 issues?
1. @hether or not private respondent Antonio Tuason, 0nc. is a holdin8
co&pan+ and<or invest&ent co&pan+A
). @hether or not privaaate respondent Antonio Tuason, 0nc. accu&ulated
surplus for the +ears 19,# to 19,8A and
!. @hether or not Antonio Tuason, 0nc. is liable for the )#* surtax on
undue accu&ulation of surplus for the +ears 19,# to 19,8.
=ection )# of the Tax Code at the ti&e the surtax was assessed, provided?
=ec. )#.Additional ta" on corporation improperl# accumulatin$ profits or surplus.%
3a4 mposition of ta". B 0f an+ corporation, except ban9s, insurance co&panies, or
personal holdin8 co&panies, whether do&estic or forei8n, is for&ed or availed of for the
purpose of preventin8 the i&position of the tax upon its shareholders or &e&bers or the
shareholders or &e&bers of another corporation, throu8h the &ediu& of per&ittin8 its
8ains and profits to accu&ulate instead of bein8 divided or distributed, there is levied and
assessed a8ainst such corporation, for each taxable +ear, a tax e5ual to twent+-five per
centu& of the undistributed portion of its accu&ulated profits or surplus which shall be in
addition to the tax i&posed b+ section twent+-four, and shall be co&puted, collected and
paid in the sa&e &anner and sub6ect to the sa&e provisions of law, includin8 penalties,
as that tax.
3b4 Prima facie evidence. B The fact that an+ corporation is a &ere holdin8 co&pan+
shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or
&e&bers. =i&ilar presu&ption will lie in the case of an invest&ent co&pan+ where at an+
ti&e durin8 the taxable +ear &ore than fift+ per centu& in value of its outstandin8 stoc9 is
owned, directl+ or indirectl+, b+ one person.
3c4 &vidence determinative of purpose. B The fact that the earnin8s or profits of a
corporation are per&itted to accu&ulate be+ond the reasonable needs of the business
shall be deter&inative of the purpose to avoid the tax upon its shareholders or &e&bers
unless the corporation, b+ clear preponderance of evidence, shall prove the contrar+.
The petition for review is &eritorious.
The Court of Tax Appeals conceded that the %evenue Co&&issioner's deter&ination
that Antonio Tuason, 0nc. was a &ere holdin8 or invest&ent co&pan+, was
$presu&ptivel+ correct$ 3p. ,, Annex A4, for the corporation did not involve itself in the
develop&ent of subdivisions but &erel+ subdivided its own lots and sold the& for bi88er
profits. 0t derived its inco&e &ostl+ fro& interest, dividends and rental reali;ed fro& the
sale of realt+.
Another circu&stance supportin8 that presu&ption is that 99.99* in value of the
outstandin8 stoc9 of Antonio Tuason, 0nc., is owned b+ Antonio Tuason hi&self. The
Co&&issioner $conclusivel+ presu&ed$ that when the corporation accu&ulated 3instead
of distributin8 to the shareholders4 a surplus of over (! &illion fron its earnin8s in 19,#
up to 19,8, the purpose was to avoid the i&position of the pro8ressive inco&e tax on its
shareholders.
That Antonio Tuason, 0nc. accu&ulated surplus profits a&ountin8 to (!,)"!,!>#.88 for
19,# up to 19,8 is not disputed. 7owever, the private respondent vehe&entl+ denies
that its purpose was to evade pa+&ent of the pro8ressive inco&e tax on such dividends
b+ its stoc9holders. Accordin8 to the private respondent, surplus profits were set aside
b+ the co&pan+ to build up sufficient capital for its expansion pro8ra& which included
the construction in 19,9-1981 of an apart&ent buildin8, and the purchase in 198> of a
condo&iniu& unit which was intended for resale or lease.
7owever, while these invest&ents were actuall+ &ade, the Co&&issioner points out
that the corporation did not use up its surplus profits. 0t alle8ation that (1,#)#,",).,4
was spent for the construction of an apart&ent buildin8 in 19,9 and (1,,#),!!).8, for
the purchase of a condo&iniu& unit in .rdaneta Cilla8e in 198> was refuted b+ the
1eclaration of %eal (ropert+ on the apart&ent buildin8 3Exh. C4 which shows that its
&ar9et value is onl+ (4)9,89>.>>, and the Tax 1eclaration on the condo&iniu& unit
which reflects a &ar9et value of ()9!,8!>.>> onl+ 3Exh. 1-14. The enor&ous
discrepanc+ between the alle8ed invest&ent cost and the declared &ar9et value of
these pieces of real estate was not denied nor explained b+ the private respondent.
=ince the co&pan+ as of the ti&e of the assess&ent in 1981, had invested in its
business operations onl+ ( ,,!,,)> out of its accu&ulated surplus profits of
(!,)"!,!>#.88 for 19,#-19,8, its re&ainin8 accu&ulated surplus profits of
(),489,8#8.88 are sub6ect to the )#* surtax.
All presu&ptions are in favor of the correctness of petitioner's assess&ent a8ainst the
private respondent. 0t is incu&bent upon the taxpa+er to prove the contrar+ 3Dindanao
Eus Co&pan+ vs. Co&&issioner of 0nternal %evenue, 1 =C%A #!84. .nfortunatel+, the
private respondent failed to overco&e the presu&ption of correctness of the
Co&&issioner's assess&ent.
The touchstone of liabilit+ is the purpose behind the accu&ulation of the inco&e and not
the conse5uences of the accu&ulation. Thus, if the failure to pa+ dividends were for the
purpose of usin8 the undistributed earnin8s and profits for the reasonable needs of the
business, that purpose would not fall within the interdiction of the statute$ 3Dertens Faw
of /ederal 0nco&e Taxation, Col. ,, Chapter !9, p. 4# cited in Danila @ine Derchants,
0nc. vs. Co&&issioner of 0nternal %evenue, 1), =C%A 48!, 49!4.
0t is plain to see that the co&pan+'s failure to distribute dividends to its stoc9holders in
19,#-19,8 was for reasons other than the reasonable needs of the business, thereb+
fallin8 within the interdiction of =ection )# of the Tax Code of 19,,.
@7E%E/O%E, the appealed decision of the Court of Tax Appeals is hereb+ set aside.
The petitioner's assess&ent of a )#* surtax a8ainst the Antonio Tuason, 0nc. is
reinstated but onl+ on the latter's unspent accu&ulated surplus profits of (),489,#8#.88.
o costs.
=O O%1E%E1.