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G.R. No.

L-19201

June 16, 1965

REV. FR. CASIMIRO LLADOC, petitioner, vs. The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX APPEALS, respondents. Hilado and Hilado for petitioner. Office of the Solicitor General for respondents. PAREDES, J.: Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein petitioner, for the construction of a new Catholic Church in the locality. The total amount was actually spent for the purpose intended. On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April 29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the priest. The tax amounted to P1,370.00 including surcharges, interests of 1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the late filing of the return. Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition for review, the Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he was not the parish priest in Victorias; that there is no legal entity or juridical person known as the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable for the donee's gift tax. It was also asserted that the assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such would be a clear violation of the provisions of the Constitution. After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below: ... . Parish priests of the Roman Catholic Church under canon laws are similarly situated as its Archbishops and Bishops with respect to the properties of the church within their parish. They are the guardians, superintendents or administrators of these properties, with the right of succession and may sue and be sued. xxx xxx xxx

The petitioner impugns the, fairness of the assessment with the argument that he should not be held liable for gift taxes on donation which he did not receive personally since he was not yet the parish priest of Victorias in the year 1957 when said donation was given. It is intimated that if someone has to pay at all, it should be petitioner's predecessor, the Rev. Fr. Crispin Ruiz, who received the donation in behalf of the Catholic parish of Victorias or the Roman Catholic Church. Following petitioner's line of thinking, we should be equally unfair to hold that the assessment now in question should have been addressed to, and collected from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his present parish where ever it may be. It does not seem right to indirectly burden the present parishioners of Rev. Fr. Ruiz for donee's gift tax on a donation to which they were not benefited.

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We saw no legal basis then as we see none now, to include within the Constitutional exemption, taxes which partake of the nature of an excise upon the use made of the properties or upon the exercise of the privilege of receiving the properties. (Phipps vs. Commissioner of Internal Revenue, 91 F [2d] 627; 1938, 302 U.S. 742.) It is a cardinal rule in taxation that exemptions from payment thereof are highly disfavored by law, and the party claiming exemption must justify his claim by a clear, positive, or express grant of such privilege by law. (Collector vs. Manila Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.) The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the Constitution of the Philippines, should not be interpreted to mean exemption from all kinds of taxes. Statutes exempting charitable and religious property from taxation should be construed fairly though strictly and in such manner as to give effect to the main intent of the lawmakers. (Roman Catholic Church vs. Hastrings 5 Phil. 701.) xxx xxx xxx

WHEREFORE, in view of the foregoing considerations, the decision of the respondent Commissioner of Internal Revenue appealed from, is hereby affirmed except with regard to the imposition of the compromise penalty in the amount of P20.00 (Collector of Internal Revenue v. U.S.T., G.R. No. L-11274, Nov. 28, 1958); ..., and the petitioner, the Rev. Fr. Casimiro Lladoc is hereby ordered to pay to the respondent the amount of P900.00 as donee's gift tax, plus the surcharge of five per centum (5%) as ad valorem penalty under Section 119 (c) of the Tax Code, and one per centum (1%) monthly interest from May 15, 1958 to the date of actual payment. The surcharge of 25% provided in Section 120 for failure to file a return may not be imposed as the failure to file a return was not due to willful neglect. ( ... ) No costs. The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly committed by the Tax Court, all of which converge on the singular issue of whether or not petitioner should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction of the Victorias Parish Church. Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes, as contra distinguished from excise taxes. In the present case, what the Collector assessed was a donee's gift tax; the assessment was not on the properties themselves. It did not rest upon general ownership; it was an excise upon the use made of the properties, upon the exercise of the privilege of receiving the properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting provisions of the section just mentioned. A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of giftinter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. As well observed by the learned respondent Court, the phrase "exempt from taxation," as employed in the Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes. And there being no clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption herein must be denied.

The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that a tax liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates that he should not be liable, because at the time of the donation he was not the priest of Victorias. We note the merit of the above claim, and in order to put things in their proper light, this Court, in its Resolution of March 15, 1965, ordered the parties to show cause why the Head of the Diocese to which the parish of Victorias pertains, should not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it appearing that the Head of such Diocese is the real party in interest. The Solicitor General, in representation of the Commissioner of Internal Revenue, interposed no objection to such a substitution. Counsel for the petitioner did not also offer objection thereto. On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever legal issues and/or defenses he might wish to raise, to which resolution counsel for petitioner, who also appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of Bacolod, manifested that it was submitting itself to the jurisdiction and orders of this Court and that it was presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own and for all purposes. In view here of and considering that as heretofore stated, the assessment at bar had been properly made and the imposition of the tax is not a violation of the constitutional provision exempting churches, parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head of the Diocese, to which the parish Victorias Pertains, is liable for the payment thereof. The decision appealed from should be, as it is hereby affirmed insofar as tax liability is concerned; it is modified, in the sense that petitioner herein is not personally liable for the said gift tax, and that the Head of the Diocese, herein substitute petitioner, should pay, as he is presently ordered to pay, the said gift tax, without special, pronouncement as to costs. Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur. Barrera, J., took no part. G.R. No. 85749 May 15, 1989 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ANTONIO TUASON, INC. and THE COURT OF TAX APPEALS, respondents. The Office of the Solicitor General for petitioner. Mendoza & Papa and Roman M. Umali for private respondent.

GRIO-AQUINO, J.: Elevated to this Court for review is the decision dated October 14, 1988 of the Court of Tax Appeals in CTA Case No. 3865, entitled "Antonio Tuason, Inc. vs. Commissioner of Internal Revenue," which set aside the petitioner Revenue Commissioner's assessment of P1,151,146.98 as the 25% surtax on the private respondent's unreasonable accumulation of surplus for the years 1975-1978.

Under date of February 27, 1981, the petitioner, Commissioner of Internal Revenue, assessed Antonio Tuason, Inc. a. Deficiency income tax for the years 1975,1976 and 1978 . . . . . . . .. P37,491.83. (b) Deficiency corporate quarterly income tax for the first quarter of 1975 . . . . . . . . . . . . . . . . . . . . . 161.49. (c) 25% surtax on unreasonable accumulation of surplus for the years 1975-1978 . . . . . . . . . . . . 1,151,146.98. The private respondent did not object to the first and second items and, therefore, paid the amounts demanded. However, it protested the assessment on a 25% surtax on the third item on the ground that the accumulation of surplus profits during the years in question was solely for the purpose of expanding its business operations as real estate broker. The request for reinvestigation was granted on condition that a waiver of the statute of limitations should be filed by the private respondent. The latter replied that there was no need of a waiver of the statute of limitaitons because the right of the Government to assess said tax does not prescribe. No investigation was conducted nor a decision rendered on Antonio Tuazon Inc.'s protest. meantime, the Revenue Commissioner issued warrants of distraint and levy to enforce collection of the total amount originally assessed including the amounts already paid. The private respondent filed a petition for review in the Court of Tax Appeals with a request that pending determination of the case on the merits, an order be issued restraining the Commissioner and/or his representatives from enforcing the warrants of distraint and levy. Since the right asserted by the Commissioner to collect the taxes involved herein by the summary methods of distraint and levy was not clear, and it was shown that portions of the tax liabilities involved in the assessment had already been paid, a writ of injunction was issued by the Tax Court on November 26, 1984, ordering the Commissioner to refrain fron enforcing said warrants of distraint and levy. It did not require the petitioner to file a bond (Annex A, pp. 28-30, Rollo). In view of the reversal of the Commissioner's decision by the Court of Tax Appeals, the petitioner appealed to this Court, raising the following issues: 1. Whether or not private respondent Antonio Tuason, Inc. is a holding company and/or investment company; 2. Whether or not privaaate respondent Antonio Tuason, Inc. accumulated surplus for the years 1975 to 1978; and 3. Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue accumulation of surplus for the years 1975 to 1978. Section 25 of the Tax Code at the time the surtax was assessed, provided: Sec. 25. Additional tax on corporation 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 divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by section twenty-four, and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax. (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 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. The petition for review is meritorious. The Court of Tax Appeals conceded that the Revenue Commissioner's determination that Antonio Tuason, Inc. was a mere holding or investment company, was "presumptively correct" (p. 7, Annex A), for the corporation did not involve itself in the development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends and rental realized from the sale of realty. Another circumstance supporting that presumption is that 99.99% in value of the outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason himself. The Commissioner "conclusively presumed" that when the corporation accumulated (instead of distributing to the shareholders) a surplus of over P3 million fron its earnings in 1975 up to 1978, the purpose was to avoid the imposition of the progressive income tax on its shareholders. That Antonio Tuason, Inc. accumulated surplus profits amounting to P3,263,305.88 for 1975 up to 1978 is not disputed. However, the private respondent vehemently denies that its purpose was to evade payment of the progressive income tax on such dividends by its stockholders. According to the private respondent, surplus profits were set aside by the company to build up sufficient capital for its expansion program which included the construction in 1979-1981 of an apartment building, and the purchase in 1980 of a condominium unit which was intended for resale or lease. However, while these investments were actually made, the Commissioner points out that the corporation did not use up its surplus profits. It allegation that P1,525,672.74 was spent for the construction of an apartment building in 1979 and P1,752,332.87 for the purchase of a condominium unit in Urdaneta Village in 1980 was refuted by the Declaration of Real Property on the apartment building (Exh. C) which shows that its market value is only P429,890.00, and the Tax Declaration on the condominium unit which reflects a market value of P293,830.00 only (Exh. D-1). The enormous discrepancy between the alleged investment cost and the declared market value of these pieces of real estate was not denied nor explained by the private respondent.

Since the company as of the time of the assessment in 1981, had invested in its business operations only P 773,720 out of its accumulated surplus profits of P3,263,305.88 for 1975-1978, its remaining accumulated surplus profits of P2,489,858.88 are subject to the 25% surtax. All presumptions are in favor of the correctness of petitioner's assessment against the private respondent. It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus Company vs. Commissioner of Internal Revenue, 1 SCRA 538). Unfortunately, the private respondent failed to overcome the presumption of correctness of the Commissioner's assessment. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings and profits for the reasonable needs of the business, that purpose would not fall within the interdiction of the statute" (Mertens Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 45 cited in Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, 127 SCRA 483, 493). It is plain to see that the company's failure to distribute dividends to its stockholders in 1975-1978 was for reasons other than the reasonable needs of the business, thereby falling within the interdiction of Section 25 of the Tax Code of 1977. WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby set aside. The petitioner's assessment of a 25% surtax against the Antonio Tuason, Inc. is reinstated but only on the latter's unspent accumulated surplus profits of P2,489,585.88. No costs. SO ORDERED. Narvasa, Cruz and Medialdea, JJ., concur. Gancayco, J., is on leave.