Haystack: Commissioner of Internal Revenue vs. Ayala Securities Corp. (GR L-29485, 21 November 1980)

Commissioner of Internal Revenue vs. Ayala Securities Corp. (GR L-29485, 21 November 1980)
First Division, Teehankee (J): 4 concur, 1 took no part.

Facts: An assessment made on 21 February 1961 by the Commissioner of Internal Revenue against the Ayala Securities Corporation (and received by the latter on 22 March 1961) in the sum of P758,687.04 on its surplus of P2,758,442.37 for its fiscal year ending 30 September 1955. Raised before the Court of Tax Appeals, the tax court reversed the assessment of the 25% surtax and interest in the amount of P758,687.04, and thereby cancelled and declared of no force and effect the assessment of the Commissioner for 1955.

On 8 April 1976, the Supreme Court affirmed the decision of the Court of Tax Appeals and ruled that the assessment fell under the 5-year prescriptive period provided in section 331 of the National Internal Revenue Code (NIRC) and that the assessment had, therefore, been made after the expiration of the said 5-year prescriptive period and was of no binding force and effect. The Commissioner moved for reconsideration.

The Supreme Court set aside its decision of 8 April 1976, and rendered in lieu thereof another judgment ordering the corporation to pay the assessment in the sum of P758,687.04 as 25% surtax on its unreasonably accumulated surplus, plus the 5% surcharge and 1% monthly interest thereon, pursuant to section 51 (e) of the NIRC, as amended by RA 2343; with costs.

1. United Equipment & Supply Co. vs. CIR (CTA 1795, 30 October 1971)
The provisions of sections 331 and 332 of the National Internal Revenue Code for prescriptive periods of 5 and 10 years after the filing of the return do not apply to the tax on the taxpayer’s unreasonably accumulated surplus under section 25 of the Tax Code since no return is required to be filed by law or by regulation on such unduly accumulated surplus on earnings. The 25% surtax is not subject to any statutory prescriptive period.

2. Section 331 NIRC; Period of limitation upon assessment and collection
Section 331 of the Revenue Code provides that “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.

3. Section 331 applies to National Internal Revenue Taxes which requires the filing of returns
Section 331 applies to assessment of National Internal Revenue Taxes which requires the filing of returns. A return the filing of which is necessary to start the running of the five-year period for making an assessment, must be one which is required for the particular tax. Consequently, it has been held that the filing of an income tax return does not start the running of the statute of limitation for assessment of the sales tax. (Butuan Sawmill, Inc. v. Court of Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).

4. No return required for improperly accumulated surplus profits; Tax thereon imposed as a penalty
No return could have been filed, and the law could not possibly require, for obvious reasons, the filing of a return covering unreasonable accumulation of corporate surplus profits. A tax imposed upon unreasonable accumulation of surplus is in the nature of a penalty. (Helvering v. National Grocery Co., 304 U.S. 282). It would not be proper for the law to compel a corporation to report improper accumulation of surplus.

5. Section 332 NIRC; Exceptions as to period of limitation of assessment and collection of taxes
Section 332 provides that (a) In the case of a false or fraudulent return with intent to evade tax or of 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) Where before the expiration of the time prescribed in the preceding section for the assessment of the tax, both the Commissioner of Internal Revenue and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. (c) Where the assessment of any internal revenue tax has been made within the period of limitation above prescribed such tax may be collected by distraint or levy by a proceeding in court, but only if begun (1) within five years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Commissioner of Internal Revenue and the taxpayer before the expiration of such five-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

6. Section 332 applies to National Internal Revenue Taxes which requires the filing of returns
Section 332 has reference to national internal revenue taxes which require the filing of returns. This is Implied from the provision that the ten-year period for assessment specified therein treats of the filing of a false or fraudulent return or of a failure to file a return. There can be no failure or omission to file a return where no return is required to be filed by law or by regulations.

7. Right of government to assess is imprescriptible, in the absence of express statutory provision; Doctrine’s applicability to Section 25 NIRC
It is well settled limitations upon the right of the government to assess and collect taxes will not be presumed in the absence of clear legislation to the contrary. The existence of a time limit beyond which the government may recover unpaid taxes is purely dependent upon some express statutory provision, (51 Am. Jur. 867; 10 Mertens Law on Federal Income Taxation, par. 57. 02.). It follows that in the absence of express statutory provision, the right of the government to assess unpaid taxes is imprescriptible. Since there is no express statutory provision limiting the right of the Commissioner of Internal Revenue to assess the tax on unreasonable accumulation of surplus provided in Section 25 of the Revenue Code, said tax may be assessed at any time. In fine, limitations upon the right of the government to assess and collect taxes will not be presumed in the absence of clear legislation to the contrary and that where the government has not by express statutory provision provided a limitation upon its right to assess unpaid taxes, such right is imprescriptible.

8. Purpose of additional tax for a corporation’s improperly accumulated profits or surplus
The underlying purpose of the additional tax in question on a corporation’s improperly accumulated profits or surplus is as set forth in the text of section 25 of the Tax Code itself to avoid the situation where a corporation unduly retains its surplus earnings instead of declaring and paying dividends to its shareholders or members who would then have to pay the income tax due on such dividends received by them.

9. Corporation is a mere holding company through its mother company, a registered co-partnership consisting of family members
Ayala Securities Corporation is a mere holding company of its shareholders through its mother company, a registered co-partnership then set up by the individual shareholders belonging to the same family. Said prima facie evidence and presumption set up by the Tax Code is applied without having been adequately rebutted by the corporation.

10. Ayala Securities Corp. falls under Revenue Regulations 2
The Corporation falls under Revenue Regulation 2, implementing the provisions of the income tax law which provides on holding and investment companies that “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.” (Section 20)