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176203910 Manila Merchants Vs CIR 2233

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SECOND DIVISION

[G.R. No. L-26145. February 20, 1984.]

THE MANILA WINE MERCHANTS, INC., Petitioner, v. THE COMMISSIONER OF INTERNAL REVENUE, Respondent.

Rafael D. Salcedo for Petitioner.

The Solicitor General for Respondent.

SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE; CORPORATE INCOME TAX; ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXEMPTION THEREFROM. — A prerequisite to the imposition of the tax has been that the corporation be formed or availed of for the purpose of avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any other corporation by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. If the earnings and profits were distributed, the shareholders would be required to pay an income tax thereon whereas, if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation (Mertens, Law on Federal Income Taxation, Vol. 7, Chapter 39, p. 44). The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation (Ibid., p. 47). Thus, if the failure to pay dividends is due to some other cause, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose does not fall within the interdiction of the statute (Ibid., p. 45).

2. ID.; ID.; ID.; ID.; ID.; WHEN ACCUMULATION CONSIDERED UNREASONABLE. — An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not required for the purpose of the business, considering all the circumstances of the case (Sec. 21, Revenue Regulations No. 2).

3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS," CONSTRUED. — To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of the United States have invented the so-called "Immediacy Test" which construed the words "reasonable needs of the business" to mean the immediate needs of the business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. American cases likewise hold that investment of the earnings and profits of the corporation in stock or securities of an unrelated business usually indicates an accumulation beyond the reasonable needs of the business. (Helvering v. Chicago Stockyards Co., 318 US 693; Helvering v. National Grocery Co., 304 US 282).

4. REMEDIAL LAW; APPEALS; FACTUAL FINDINGS OF THE COURT OF TAX APPEALS, BINDING. — The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds were in no way related to petitioner’s business of importing and selling wines whisky, liquors and distilled spirits, and thus construed as an investment beyond the reasonable needs of the business is binding on Us, the same being factual (Renato Raymundo v. Hon. De Jova, 101 SCRA 495). Furthermore, the wisdom behind thus finding cannot be doubted, The case of J.M. Perry & Co. v. Commissioner of Internal Revenue supports the same.

5. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF CORPORATIONS; ADDITIONAL TAX ON ACCUMULATED EARNINGS; EXCEPTION THEREFROM; ACCUMULATION OF EARNINGS, MUST BE USED FOR REASONABLE NEEDS OF BUSINESS WITHIN A REASONABLE TIME. — The records further reveal that from May 1951 when petitioner purchased the U.S.A. Treasury shares, until 1962 when it finally liquidated the same, it (petitioner) never had the occasion to use the said shares in aiding or financing its importation. This militates against the purpose enunciated earlier by petitioner that the shares were purchased to finance its importation business. To justify an accumulation of earnings and profits for...