G.R. No. L-29485 - Commissioner of Internal Revenue vs. Ayala Securities Corp.

Case Summary (G.R. No. L-29485)

Key Dates and Procedural Posture

Assessment issued by the Commissioner: February 21, 1961 (received by Ayala Securities Corporation on March 22, 1961).
Taxable year at issue: Fiscal year ending September 30, 1955.
Supreme Court decision on reconsideration: November 21, 1980.
Applicable constitution at time of decision: 1973 Philippine Constitution (decision pre-dates the 1987 Constitution).

Applicable Law Cited

National Internal Revenue Code: Section 25 (additional tax on corporations improperly accumulating profits or surplus), Section 331 (five-year period of limitation for assessment when a return is required), Section 332(a) (ten-year exception for false or fraudulent return or failure to file), and Section 51(e) (surcharge and interest provisions as amended by R.A. 2343).
Revenue Regulation No. 2 (definitional/implementing rule regarding holding and investment companies).

Core Legal Issue

Whether the Commissioner’s assessment of the 25% surtax on unreasonably accumulated surplus under Section 25 is subject to the five-year prescriptive period of Section 331 or the ten-year exception of Section 332(a), or whether no prescriptive period applies so that the assessment is valid notwithstanding the passage of time.

Petitioner’s Principal Argument

The Commissioner argued that Sections 331 and 332 apply only to taxes the basis of which must be reported in a return (e.g., income or sales tax). Because the 25% surtax on accumulated surplus under Section 25 is not required to be reported in any return and corporations would not be compelled to disclose improper accumulations, the Commissioner contended that those prescriptive provisions do not apply and that the assessment was therefore timely (or, alternatively, that the return necessarily partook of a false or fraudulent character, invoking the ten-year rule).

Court of Tax Appeals Precedent and Reasoning (United Equipment & Supply Co.)

The Court of Tax Appeals had previously held that Sections 331 and 332 do not apply to the Section 25 surtax because no return is required to report unreasonable accumulation of surplus. The tax on such accumulation was analogized to a penalty (citing U.S. precedent Helvering v. National Grocery Co.), and the CTA reasoned it would be improper to require a taxpayer to report its own improper accumulation. The CTA further concluded that limitations on the government’s right to assess taxes are not to be presumed and must be grounded in express statutory language; because Section 25 contained no prescription provision, the tax was imprescriptible.

Supreme Court’s Reconsideration and Rationale

On reconsideration, the Supreme Court accepted the fundamental principle relied upon by the Commissioner and the CTA precedent: limitations on the government’s right to assess and collect taxes will not be presumed in the absence of clear statutory provision. The Court retracted its prior view that the five-year prescriptive period in Section 331 applied and instead held that the 25% surtax under Section 25 is not subject to the five-year limitation or to the ten-year provision of Section 332(a) where no return is legally required covering the accumulated surplus. The Court therefore concluded that no statutory prescription barred the Commissioner’s assessment.

Evidentiary Findings Concerning the Respondent’s Status and Presumptions Under Section 25

The record showed facts supporting the statutory prima facie presumption in Section 25: Ayala Securities Corporation was effectively a holding/investment company, with nearly all shares owned by Ayala and Company and strong overlap in management and employees. Testimony established that Ayala Securities had minimal independent activity, employees and officers were effectively shared with Ayala and Company, and Ayala and Company exerted governing influence. Revenue Regulation No. 2 expressly designates corporations with practically no activities except holding property as holding companies for purposes of Section 25. Given those factual findings, the statutory prima facie presumption of an intent to

Case Syllabus (G.R. No. L-29485)

Citation and Procedural Posture

Reported at 189 Phil. 159, First Division, G.R. No. L-29485, decided November 21, 1980.
Matter: Motion for reconsideration filed by petitioner Commissioner of Internal Revenue of this Court's decision dated April 8, 1976 which had affirmed in toto the decision of the Court of Tax Appeals (CTA) cancelling an assessment for 25% surtax for fiscal year ending September 30, 1955.
Earlier dispositive portion (April 8, 1976 decision) quoted: "WHEREFORE, the decision of the respondent Commissioner of Internal Revenue assessing petitioner the amount of P758,687.04 as 25% surtax and interest is reversed. Accordingly, said assessment of respondent for 1955 is hereby cancelled and declared of no force and effect. Without pronouncement as to costs."
This opinion resolves the Commissioner’s motion for reconsideration of that April 8, 1976 decision.

Facts Relevant to the Dispute

An assessment was made by the Commissioner of Internal Revenue on February 21, 1961 against Ayala Securities Corporation, received by the corporation on March 22, 1961.
The assessment amount: P758,687.04, representing the 25% surtax on an identified surplus of P2,758,442.37 for the fiscal year ending September 30, 1955.
The assessment was for the 25% surtax imposed under section 25 of the National Internal Revenue Code on unreasonably accumulated profits or surplus.
The Court record contains testimony indicating the corporate relationship between Ayala Securities Corporation and Ayala and Company: large share ownership by Ayala and Company, shared offices and employees, and substantial influence by Ayala and Company over Ayala Securities Corporation’s policy and projects.

Testimonial and Documentary Evidence Presented

Accountant Lamberto J. Cabral testified:
- Ayala Securities Corporation had 175,000 outstanding shares for 1955.
- Ayala and Company owned 174,996 of those shares.
- Affirmed that Ayala Securities Corporation was a holding or investment company and that officers and employees were housed in the same building and were the same personnel as Ayala and Company.
Salvador J. Lorayes, Secretary and head of the Legal Department, testified:
- Ayala Securities Corporation is an affiliate of Ayala and Company.
- Ayala and Company is the mother corporation.
- Ayala and Company exercises strong influence over Ayala Securities Corporation’s policy; if a project is assigned to Ayala Securities Corporation, it will be followed by Ayala Securities Corporation.
The record showed application of Revenue Regulation No. 2 implementing the income tax law defining holding and investment companies, specifically SEC. 20: "A corporation having practically no activities except holding property, and collecting the income therefrom or investing therein, shall be considered a holding company within the meaning of section 25."

Statutory Provisions and Regulatory Texts Quoted or Applied

Section 25 of the National Internal Revenue Code (text excerpts quoted in the source):
- (b) Prima facie evidence: "The fact that any corporation is a mere holding company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an investment company where at any time during the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person."
- (c) Evidence determinative of a purpose: "The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove the contrary."
Section 331 of the National Internal Revenue Code (quoted in United Equipment decision excerpt):
- "SEC. 331. Period of limitation upon assessment and collection. - Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purpose of this section a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day; Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code."
Section 332 of the National Internal Revenue Code (quoted in United Equipment decision excerpt):
- "SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. - (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission. (b) ... (c) ..."

Prior Rulings and Controlling Authority Cited

Court of Tax Appeals ruling in United Equipment & Supply Company v. Commissioner of Internal Revenue (CTA Case No. 1795, Oct. 30, 1971) — discussed at length in the source and relied upon by petitioner and this Court:
- CTA ruled that sections 331 and 332 do not apply to the 25% surtax under section 25 because no return is required to be filed for accumulated surplus; thus, no five-year or ten-year prescriptive period applies.
- CTA reasoning included that a tax upon unreasonable accumulation of surplus is in the nature of a penalty (citing Helvering v. National Grocery Co., 304 U.S. 282), and it would be improper to compel a corporation to report improper accumulation of surplus.
This Court noted that the United Equipment case was appealed to t