THIRD DIVISION [CA-G.R. SP No. 26115. October 19, 1992.] (C.T.A. Case No.

3814)

SIME DARBY INTERNATIONAL TIRE CO. INC. (formerly B.F. Goodrich Philippines, Inc.), petitioner, vs. COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION

MENDOZA, J p:

This is a petition for review of the decision of the Court of Tax Appeals in CTA Case No. 3814, affirming the tax assessment made by the Commissioner of Internal Revenue against petitioner Sime Darby Int'l Tire Co., Inc., for improperly accumulated profits or surplus. The facts are as follows: Petitioner is a domestic corporation engaged in the manufacture of motor vehicle tires, recapping of old tires, and trading of imported car accessories. In November, 1980, it was assessed by the then Acting Revenue Commissioner the amount of P5,647,512.53, representing tax liability, plus interest (Exh. A), pursuant to sec. 25 of the National Internal Revenue Code, for improperly accumulated profits or surplus for the year 1975. The tax assessment was made on the basis of the following computation:

Improperly accumulated surplus 25% Surtax due thereon Add: 14% interest fr. 4/16/76 (42% max) AMOUNT DUE AND COLLECTIBLE ==========

P15,908,468.00 3,977,121.50

1,670,391.03

5,647,512.53

The assessment was based on an investigation conducted by revenue examiners of the books of accounts for 1975, particularly petitioner's dividend distribution and money market investments which, according to them, showed that petitioner was improperly accumulating its gains and profits instead of distributing them to its stockholders in order to avoid payment of dividend tax. (Exh. 2, Memorandum dated February 26, 1980, and Exh. 5, Second Indorsement dated May 23, 1980) Petitioner disputed the assessment. It contended that its consistent declaration and distribution of substantial dividends for the period 1969 to 1975, the year under review, negated any intention to avoid the

payment of dividend tax. Petitioner claimed that the remaining undistributed surplus was intended, and was in fact utilized, for plant expansion and additions to its fixed assets, equipment, inventories and receivables, as well as for meeting increased need for working capital. (Exh. I, protest letter dated November 24, 1980) Its protest having been denied by the Revenue Commissioner, petitioner appealed to the Court of Tax Appeals. On August 26, 1991, however, the CTA rendered judgment sustaining the Commissioner of Internal Revenue. The dispositive portion of its decision reads: WHEREFORE, the petition for review is dismissed and petitioner in the above-entitled case is hereby ordered to pay the amount of P5,647,512.53 representing the 25% surtax and interest on its unreasonable accumulation of surplus for 1975, and an additional 5% surcharge and 14% interest per annum on the said amount for a maximum of three years computed from receipt by the petitioner of the final decision of the respondent under his letter dated February 7, 1983, pursuant to Section 51(e) (2) & (3) of the National Internal Revenue Code. SO ORDERED. Hence, this petition for review.

First. Sec. 25 of the NIRC provides: SEC. 25. Additional tax on corporations improperly accumulating profits or surplus. (a) Imposition of tax. If any corporation, except banks, insurance companies, or personal holding companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being dividend or distributed, there is levied and assessed against such corporation for each taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by section 24, and shall be computed, collected and paid in the same manner and subject to the same provision of law, including penalties, as that tax: Provided, That no such tax shall be levied upon any accumulated profits or surplus if they are invested in any dollar producing or dollar saving industry or in the purchase of bonds issued by the Central Bank of the Philippines. (As amended by Rep. Act. No. 1823) (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 50% in value of its outstanding stock is owned directly or indirectly by one person. (c) Evidence determinative of 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.

Petitioner denies allowing its gains and profits to accumulate instead of distributing them to its stockholders. It claims that it declared and distributed dividends every year. In 1975 alone, according to petitioner, it paid a total of P39,651,027.00 in dividends and this amount was more than its net income after tax of P35,679,925.00. (Rec., p.272) The claim is untenable. It may be that petitioner regularly declared dividends but, as found by revenue examiners, by far the greater portion of what it had declared was in stocks, the cash dividends being much less. Indeed, the trend of distribution shows the following:

TAXPAYER'S DIVIDEND HISTORY 1969 TO 1975 Cash Stock % of Dividend Paid % of Dividends Distributed Balance Cash Stock Surplus at

Net Income Year After Inc. Tax

Dividend Dividend Year End

1968

(Beg. Surplus)

P27,863,789.00

1969 1970 1971 1972 1973 1974 1975 P10,226,498 17,176,270 18,146,944 18,556,184 18,602,314 33,952,814 35,679,925 P4,321,054 6,426,468 5,687,832 8,427,551 9,270,306 10,197,336 13,564,827 5,917,558 7,101,070 6,390,970 4,899,739 5,389,713 5,928,680 26,086,200 41.37% 57.86% 27,941,685.00 37.41% 41.34% 31,890,417.00 31.34% 35.22% 37,688,889.00 45.42% 26.40% 42,887,453.00 49.83% 28.97% 46,829,748.00 30.03% 17.46% 64,686,546.00 38.02% 73.11% 60,685,444.00

============ 152,340,949 57,805,374 61,713,930 37.94% 40.51%

(See schedule I, Rec. p. 235)

There is a distinction between cash dividend and stock dividend: the first is a disbursement to the stockholder of accumulated earnings, with the corporation parting irrevocably with all its interest therein; whereas the second involves no disbursement and the amount presented by the stock dividend remains that of the corporation's (Fisher v. Trinidad, 43 Phils. 973 [1922]). The result is that petitioner withheld more than it distributed to its stockholders.

Second. Petitioner also contends that the retained surplus was reasonable in light of its business needs. In addition, petitioner questions the manner the Revenue Commissioner computed the surplus balance as of December 31, 1975, which is as follows:

Balance of surplus as of

December 31, 1975 Balance Sheet P60,685,444.00

Add back: Stock Dividends distributed (1969 to 1975) 61,713,930.00

Surplus Balance, as of Dec. 31,1975 P122,399,374.00

Petitioner contends that the stock dividend distributions from 1969 to 1975 could no longer be added back to the surplus balance as of 1975 because it had already been plowed back into plant expansion, fixed assets and increased inventory and receivables. We hold that the Revenue Commissioner's computation is correct. For purposes of the improperly accumulated earnings tax, the stock dividends declared in the previous years should be restored to the surplus balance as of 1975. This is because (1) as earlier stated, there was no actual dividend distribution at the time stock dividends were declared, and (2) the U.S. Internal Revenue Code of 1939, secs. 27 (f) and 115 (f), after which the National Internal Revenue Code was patterned sec. 25, NIRC, having been lifted from sec. 102 of the U.S. Tax Code (Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue, 127 SCRA 483,493 (1984)) does not permit crediting as dividends paid non-taxable stock dividend distributions. In fact, in the American case of Electric Regulator Corp. v. Commissioner of Internal Revenue, 336 F. 2d 339 (1964), for purposes of the accumulated earnings tax, the earned surplus figures were adjusted by restoring the amounts of two previously declared nontaxable stock dividends. Neither can it be said that petitioner retained from the surplus only enough to cover its reasonable business needs for the year. As the revenue examiners found, after deducting the business expenses or allowable restrictions to surplus for 1975, there remained a substantial amount of free surplus, computed as follows: Adjusted Surplus balance as of Dec. 31, 1975 P122,399.00

Deduct: Restrictions to Surplus:

1)

Working capital requirements P83,597,350

2)

Amount yet to be spent on

the BOI approval expansion program:

Total as approved P5,000.00 Less: Construction in progress account 37,456.853 17,534.147

3)

Reserve for employees retirement benefits 5,359,391 P106,490,888 Free surplus as of Dec. 31, 1975 P15,908,486.00 ============

(Exh. H)

It thus appears that petitioner set aside more than what it needed for business operations. That is why it was able to invest large amounts in the money market which has no relation to its business of tire making and recapping. It has been held in this connection that the mere investment in an unrelated business enterprise strongly indicates an accumulation of earnings beyond reasonable business needs. (Helvering v. National Grocery Co., 82 L. Ed 1346 (1937); J.M. Perry v. CIR, 120 F. 2d 123 (1941)) Petitioner asserts that its money market placements were short term investments of temporarily idle funds earlier earmarked for specific business expenses. According to petitioner, the placements were on 30day to 60-day term terminable anytime the need for cash outlay arose.

The assertion is without basis. The yearly balance of petitioner's money market placements is as follows: As of Dec. 31, 1969 Dec. 31, 1970 Dec. 31, 1971 Dec. 31, 1972 Dec. 31, 1973 Dec. 31, 1974 Balance P 9,131,273.00 9,000,000.00 6,017,392.00 13,500,000.00 15,000,000.00 20,449,204.00

Dec. 31, 1975

22,500,000.00

As the above figures show, petitioner's money market investments from 1969 to 1975 increased almost every year. By 1975, it had as much as P22,500,000.00 invested in the money market. Petitioner has not shown that it even once liquidated a placement in order to use the money for a business expense. As the CTA observed: To reason out that such investment is necessary so as to have readily available cash to finance its BOI expansion program is not supported by the figures presented for instead of decreasing if it's being used in the expansion program, it is even increasing by the years. The inescapable conclusion, therefore, is that, far from being merely temporarily idle funds, the amounts invested in the money market were set aside and intended particularly for that purpose. Petitioner thus accumulated profits beyond its reasonable business needs, thus making it liable under sec. 25 of the NIRC for the excess of what was reasonably necessary for its business. Indeed, as the CTA held, "petitioner could have declared more cash dividends. . . . It necessarily follows that petitioner had not sustained the burden which sec. 25 of the Tax Code places upon it to overcome the presumption that for 1975, it was availed of for the purpose of preventing the imposition of income tax upon its shareholders."

WHEREFORE, the petition for review is DISMISSED and the decision appealed from is AFFIRMED, with costs against petitioner.

SO ORDERED. Montoya and Abad Santos, Jr., JJ., concur.