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Basilan v. CIR Sept. 5, 1967 | Bengzon Pet: Basilan Estates Inc.

(Coco industry, was assessed improperly accumulated earnings tax) by: Resp: Commission of Internal Revenue and Court of Tax Appeals FACTS:

1. Basilan filed its income tax return 1953 and paid P8K

2. CIR: assessed deficiency income tax of P3K and P86K as 25% surtax on unreasonably accumulated profits as of 1953. a. It disallowed certain expenses and over-claimed depreciation b. It added 25% surtax on P347k for unreasonably accumulated profits. 3. For non payment a warrant of distraint was issued but Basilan successfully moved that it be put on hold and maintain constructive embargo instead. 4. CTA: Affirmed deficiency income tax and surtax. ISSUE: w/n there was unreasonably accumulated profits. HELD: YES there were unreasonably accumulated profits. Basilan failed to explain the accumulation. 1. On prescription: There is a presumption of regularity that the tax assessment was made/delivered within the 5year prescriptive period. Even if notice had been received late, 331 requiring five years within which to assess deficiency taxes, the assessment is deemed made when notice is released and mailed. It is not required that the notice is actually received within the time period. On assessment the disallowed tax deductions were proper. 2. Depreciation: Basilan decided to deduct the value of depreciation computed on a reappraised acquisition value instead of the original cost of the equipment. Depreciation is for the cost of wear and tear, and allowance for deduction is to see that at the end of the term the investment remains as It was in the beginning. The income tax law does not authorize the depreciation of an asset BEYOND its acquisition cost. Recovery (deduction) of an amount more that the invested capital will transgress the underlying purpose of depreciation allowance. To allow what Basilan did, would be to allow the not only the cost but ADDITIONAL PROFIT. 3. There were unreasonably accumulated profits. a. 25 of the Tax Code provides for additional tax on corporations improperly accumulating profits and surplus. b. The CIR found that: Basilan had a strong financial position (assests > than liab). It had considerable capital to meet its needs. The 250K reserved profits were reverted to surplus, without intent to spend it on any future project. Withdrawal by shareholders of large sums of money alleged to be used for the business, but the unspent balance was retained by the said shareholders. Investment in asses having no proximate connection with its business (hospital when its a coconut co.) Capital stock was increased when there was no need to raise funds. c. Explanations: 250K reversion to surplus, for building factory, but explanation was made after the fact. INSUFFICIENT In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of after-thought.1 d. Explanation:Surplus, needed for paying expenses during the year which is greater than surplus. INSUFFICIENT There is no need to retain such a large amount (P347K in 1953!) because during the year current assets will be
1

Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213

converted to cash + extra profits (ie sell stock = more money to pay for expenses). It is erroneous to say that the taxpayer is entitled to retain enough liquid net assets in amounts approximately equal to current operating needs for the year to cover "cost of goods sold and operating expenses" for "it excludes proper consideration of funds generated by the collection of notes receivable as trade accounts during the course of the year2 e. Explanation:Withdrawals by shareholders, advances in furtherance of business INSUFFICIENT when in fact the unspent balance was retained by the shareholders. 4. Alleged exemption from the 25% surtax by RA1823 approved June 1957. Not allowed, the exemption effective 1957 wll not cover assessments for 1953, more than three years before. Tax laws are prospective in nature unless expressly made otherwise. WHEREFORE : Modified allowed travelling and misc but otherwise AFFIRMED. Deficiency income tax + surtax

ibid