WISE AND CO., INC.

VS MEER
G.R. NO. 48231 JUNE 30, 1947

Facts:
On June 1, 1937, Manila Wine Merchants, Ltd., a Hongkong company, was liquidated and its
capital stock was distributed to its stockholders, one of which is the petitioner. As part of its
liquidation, the corporation was sold to Manila Wine Merchants., Inc. for Php400,000. The said
earnings, declared as dividends, were distributed to its stockholders. The Hongkong company
then paid the income tax for the entire earnings. As a result of the sale of its business and assets,
a surplus was realized by the Hongkong company after deducting the dividends. This surplus
was also distributed to its stockholders. The Hongkong company also paid the income tax for the
said surplus. The petitioners then filed their respective income tax returns. The respondent
Commissioner, then, made a deficiency assessment charging the individual stockholders for
taxes on the shares distributed to them despite the fact that income tax was already paid by the
Hongkong company. The petitioners paid the assessed amount in protest. The lower courts ruled
in favor of the Commissioner of Internal Revenue, hence, this action.

Issue

Whether the amount received by the petitioners were ordinary dividends or liquidating
dividends.

Held:

The dividends are liquidating dividends or payments for surrendered or relinquished stock in a
corporation in complete liquidation. It was stipulated in the deed of sale that the sale and transfer
of the corporation shall take effect on June 1, 1937 while distribution took place on June 8. They
could not consistently deem all the business and assets of the corporation sold as of June 1, 1937,
and still say that the said corporation distributed ordinary dividends to them thereafter.

CIR v PROCTER & GAMBLE

FACTS

Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble

USA (PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in

trade and business therein. PMC-USA is the sole shareholder of PMC Philippines and

is entitled to receive income from PMC Philippines in the form of dividends, if not rents

or royalties. For the taxable years 1974 and 1975, PMC Philippines filed its income tax

return and also declared dividends in favor of PMC-USA. In 1977, PMC Philippines,
invoking the tax-sparing provision of Section 24 (b) as the withholding agent of the

Philippine Government with respect to dividend taxes paid by PMC-USA, filed a claim

for the refund of 20 percentage point portion of the 35 percentage whole tax paid with

the Commissioner of Internal Revenue.

ISSUE

Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends

declared and remitted to its parent corporation.

HELD

The issue raised is one made for the first time before the Supreme Court. Under the

same underlying principle of prior exhaustion of administrative remedies, on the

judicial level, issues not raised in the lower court cannot be generally raised for the first

time on appeal. Nonetheless, it is axiomatic that the state can never be allowed to

jeopardize the government’s financial position. The submission of the Commissioner

that PMC Philippines is but a withholding agent of the government and therefore

cannot claim reimbursement of alleged overpaid taxes, is completely meritorious. The

real party in interest is PMC-USA, which should prove that it is entitled under the US

Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage points

spared or waived as otherwise considered or deemed paid by the Government.

Herein, the claimant failed to show or justify the tax return of the disputed 15% as it

failed to show the actual amount credited by the US Government against the income

tax due from PMC-USA on the dividends received from PMC Philippines; to present

the income tax return of PMC-USA for 1975 when the dividends were received; and to

submit duly authenticated document showing that the US government credited teh
20% tax deemed paid in the Philippines

CYANAMID PHILS VS. CIR

Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly owned
subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a wholesaler of imported
finished goods and an imported/indentor. In 1985 the CIR assessed on petitioner a
deficiency income tax of P119,817) for the year 1981. Cyanamid protested the
assessments particularly the 25% surtax for undue accumulation of earnings. It claimed
that said profits were retained to increase petitioner’s working capital and it would be
used for reasonable business needs of the company. The CIR refused to allow the
cancellation of the assessments, petitioner appealed to the CTA. It claimed that there
was not legal basis for the assessment because 1) it accumulated its earnings and
profits for reasonable business requirements to meet working capital needs and
retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid
Company, a foreign corporation, and its shares are listed and traded in the NY Stock
Exchange. The CTA denied the petition stating that the law permits corporations to set
aside a portion of its retained earnings for specified purposes under Sec. 43 of the
Corporation Code but that petitioner’s purpose did not fall within such purposes. It found
that there was no need to set aside such retained earnings as working capital as it had
considerable liquid funds. Those corporations exempted from the accumulated earnings
tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those
exempted. The CA affirmed the CTA’s decision.

Issue: Whether or not the accumulation of income was justified.

Held:
In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon the shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts. The accumulated profits must
be used within reasonable time after the close of the taxable year. In the instant case,
petitioner did not establish by clear and convincing evidence that such accumulated was
for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have
invented the “Immediacy Test” which construed the words “reasonable needs of the
business” to mean the immediate needs of the business, and it is held that if the
corporation did not prove an immediate need for the accumulation of earnings and
profits such was not for reasonable needs of the business and the penalty tax would
apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business
depend on the nature of the business, its credit policies, the amount of inventories, the
rate of turnover, the amount of accounts receivable, the collection rate, the availability of
credit and other similar factors. The Tax Court opted to determine the working capital
sufficiency by using the ration between the current assets to current liabilities. Unless,
rebutted, the presumption is that the assessment is correct. With the petitioner’s failure
to prove the CIR incorrect, clearly and conclusively, the Tax Court’s ruling is upheld.