G.R. No. 85749 - Commissioner of Internal Revenue vs. Antonio Tuason, Inc.

On February 27, 1981, the Commissioner of Internal Revenue assessed Antonio Tuason, Inc. for the following:

Deficiency income tax for the years 1975, 1976, and 1978 amounting to P37,491.83.
Deficiency corporate quarterly income tax for the first quarter of 1975 amounting to P161.49.
A 25% surtax on the alleged unreasonable accumulation of surplus profits for the years 1975-1978 amounting to P1,151,146.98.

The respondent did not dispute the first two items and paid the assessed amounts.
The protest was raised solely against the 25% surtax on the grounds that the surplus accumulation was intended for business expansion and not for evading dividend taxation.

The respondent requested a reinvestigation of the 25% surtax assessment, contending that the accumulation of surplus profits was solely for financing its planned expansion.
The request for reinvestigation was conditionally granted, contingent upon the filing of a waiver of the statute of limitations.
The respondent maintained that a waiver was unnecessary on the basis that the Government’s right to assess the surtax does not prescribe.
No further investigation ensued, and no decision was rendered regarding the protest.
Meanwhile, the Commissioner proceeded with enforcing the original assessment by issuing warrants of distraint and levy for collection.
In response, the respondent filed a petition for review in the Court of Tax Appeals (CTA) and secured a writ of injunction on November 26, 1984, restraining the enforcement of the warrants pending resolution of the merits.

The Commissioner’s determination that Antonio Tuason, Inc. operated as a mere holding or investment company was “presumptively correct” given its business practice of subdividing its own lots for resale at higher profits.
The corporation’s income was primarily derived from interests, dividends, and rentals from real estate transactions.
The fact that Antonio Tuason owned 99.99% of the corporation’s outstanding stock further supported its characterization as a holding/investment company.

It was undisputed that the corporation had amassed surplus profits amounting to P3,263,305.88 for 1975-1978.
The respondent argued that the surplus was allocated to its expansion program, which included:

The construction of an apartment building (alleged investment of P1,525,672.74 in 1979).
The purchase of a condominium unit intended for resale or lease (alleged investment of P1,752,332.87 in 1980).

The market value of the apartment building was only P429,890.00 (as per the Declaration of Real Property).
The condominium unit’s market value was only P293,830.00 (as per the Tax Declaration).

Consequently, it was determined that the corporation had invested merely P773,720.00 of its accumulated surplus, leaving P2,489,585.88 unspent and subject to the surtax.

The Court of Tax Appeals’ decision set aside the Commissioner’s assessment concerning the 25% surtax.
The Commissioner appealed this reversal to the Supreme Court.
The appeal raised the following issues concerning the nature of the corporation, the accumulation and use of its surplus, and the imposition of the surtax.

Whether or not private respondent Antonio Tuason, Inc. qualifies as a holding company and/or investment company, considering that it largely derived income from non-operational activities such as interest, dividends, and rental earnings, and that 99.99% of its outstanding stock is owned by Antonio Tuason himself.

Whether Antonio Tuason, Inc. indeed accumulated surplus profits during the years 1975-1978 as claimed by the Commissioner, irrespective of the respondent’s assertion that such accumulation was intended for financing business expansion.

Whether Antonio Tuason, Inc. is liable for the imposition of the 25% surtax on undue accumulation of surplus, in light of the discrepancy between the purported expansion investments and the actual utilization of the surplus funds, as well as the presumption that the surplus was amassed for the purpose of avoiding dividend taxation.