176203910 Manila Merchants Vs CIR 2233
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
[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