What is the “Immediacy Test?

The Immediacy Test is used to determine the “reasonable needs” of business” in order to justify
an accumulation of earnings. Under this test, the term "reasonable needs of the business" are
hereby construed to mean the immediate needs of the business, including reasonably
anticipated needs. The corporation should be able to prove an immediate need for the
accumulation of the earnings and profits, or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be deemed to be not for the
reasonable needs of the business, and the penalty tax would apply.

In MANILA WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], Manila Wine Merchants
(MWM) invested in several companies and bought shares in Wack Wack Golf and Country
Club and likewise acquired US Treasury Bills. CIR found that MWM had unreasonably
accumulated a surplus. On appeal, the CTA ruled that the purchase of shares were harmless .
However, the CTA also ruled that the purchase of US Treasury Bills was in no way related to
the business of importing and selling wines and ordered MWM to pay IAET on the said treasury
bills. One of the contentions of MWM was that it will be used to aid its importations The
Supreme Court ruled against MWM. It noted that the bonds were bought in 1951 and until
1961; it was never used to aid MWM’s importations. To justify an accumulation of earnings
and profits for the reasonably anticipated future needs, such accumulation must be used within
a reasonable time after the close of the taxable year.

In CYNAMID V. CA [JANUARY 20, 2000] , Cynamid argued that the increase of working
capital by a corporation justifies accumulating income. It invoked the Bardahl Formula which
allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry the
company though one operating cycle and pay all of its current liabilities and any extraordinary
expenses reasonably anticipated. The Supreme Court ruled that, as stressed by American
authorities, the formula is used only for administrative convenience and not a precise rule. The
Court found that in companies where the formula was applied, they had operating cycles
shorten than that of Cynamid. The ratio of current assets to current liabilities should be used to
determine the sufficiency of working capital which ideally should be 2:1. Cyanamid’s ratio is
2.21:1 and, thus, there was no need to infuse working capital.
CHAMBER OF REAL ESTATE AND BUILDERS’ ASSOCIATION, INC. vs. EXECUTIVE
SECRETARY- Minimum Corporate Income Tax

FACTS:
CREBA assails the imposition of the minimum corporate income tax (MCIT) as violation of
the due process clause as it levies income tax even if there is no realized gain. They also
question the creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets stating that (1) they ignore the different treatment of ordinary assets and capital assets;
(2) the use of gross selling price or fair market value as basis for the CWT and the collection
of tax on a per transaction basis (and not on the net income at the end of the year) are
inconsistent with the tax on ordinary real properties; (3) the government collects income tax
even when the net income has not yet been determined; and (4) the CWT is being levied upon
real estate enterprises but not on other enterprises, more particularly those in the manufacturing
sector.

ISSUE:
Are the impositions of the MCIT on domestic corporations and CWT on income from sales of
real properties classified as ordinary assets unconstitutional?

HELD:
NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is
arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost
of goods and other direct expenses from gross sales. Besides, there are sufficient safeguards
that exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows
the carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary
of Finance can suspend the imposition of MCIT in justifiable instances.

The regulations on CWT did not shift the tax base of a real estate business’ income tax from
net income to GSP or FMV of the property sold since the taxes withheld are in the nature of
advance tax payments and they are thus just installments on the annual tax which may be due
at the end of the taxable year. As such the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income and the use of the GSP or FMV is because
these are the only factors reasonably known to the buyer in connection with the performance
of the duties as a withholding agent.
Neither is there violation of equal protection even if the CWT is levied only on the real industry
as the real estate industry is, by itself, a class on its own and can be validly treated different
from other businesses.
 A. Ordinary Asset - Ordinary asset refers to all properties specifically excluded from the
definition of capital assets under Sec. 39 (A)(1) of the NIRC.

B. Capital Asset - Capital asset means property held by the taxpayer (whether or not
connected with his trade or business), but does not include –

a) stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or

b) property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business; or

c) property used in the trade or business of a character which is subject to the allowance
for depreciation provided in subsection (F) of Sec. 34 of the Code; or
d) real property used in trade or business of the taxpayer.

C. Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the
seller from the sale, exchange, or other disposition of capital assets located in the
Philippines, including pacto de retro sales and other forms of conditional sale.

D. Capital Gain - refers to profit that results from a sale of a capital asset, such as stock,
bond or real estate, where the sale price exceeds the purchase price.

CAPITAL VS. ORDINARY ASSET

How can you determine whether a particular real property is a capital asset or an ordinary asset?

a) Real properties shall be classified with respect to taxpayers engaged in the real estate
business as follows:
i) All real properties acquired by the real estate dealer shall be considered as
ordinary assets.
ii) All real properties acquired by the real estate developer, whether developed or
undeveloped as of the time of acquisition, and all real properties which are held
by the real estate developer primarily for sale or for lease to customers in the
ordinary course of his trade or business or which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year and all
real properties used in the trade or business, whether in the form of land,
building, or other improvements, shall be considered as ordinary assets.
iii) All real properties of the real estate lessor, whether land, building and/or
improvements, which are for lease/rent or being offered for lease/rent, or
otherwise for use or being used in the trade or business shall likewise be
considered as ordinary assets.
iv) All real properties acquired in the course of trade or business by a taxpayer
habitually engaged in the sale of real property shall be considered as ordinary
assets.
Note: Registration with the HLURB or HUDCC as a real estate dealer or developer shall be
sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate.

If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or
developer, he/it may nevertheless be deemed to be engaged in the real estate business through
the establishment of substantial relevant evidence (such as consummation during the preceding
year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as
habitually engaged in real estate business with the Local Government Unit or the Bureau of
Internal Revenue, etc.)

b) In the case of taxpayer not engaged in the real estate business, real properties, whether
land, building, or other improvements, which are used or being used or have been
previously used in trade or business of the taxpayer shall be considered as ordinary
assets.

c) In the case of taxpayers who changed its real estate business to a non-real estate
business, real properties held by these taxpayers shall remain to be treated as ordinary
assets.

d) In the case of taxpayers who originally registered to be engaged in the real estate
business but failed to subsequently operate, all real properties acquired by them shall
continue to be treated as ordinary assets.

e) Real properties formerly forming part of the stock in trade of a taxpayer engaged in the
real estate business, or formerly being used in the trade or business of a taxpayer
engaged or not engaged in the real estate business, which were later on abandoned and
became idle, shall continue to be treated as ordinary assets. Provided however, that
properties classified as ordinary assets for being used in business by a taxpayer engaged
in business other than real estate business are automatically converted into capital assets
upon showing proof that the same have not been used in business for more than two
years prior to the consummation of the taxable transactions involving said properties

f) Real properties classified as capital or ordinary asset in the hands of the seller/transferor
may change their character in the hands of the buyer/transferee. The classification of
such property in the hands of the buyer/transferee shall be determined in accordance
with the following rules:

i) Real property transferred through succession or donation to the heir or

donee who is not engaged in the real estate business with respect to the
real property inherited or donated, and who does not subsequently use
such property in trade or business, shall be considered as a capital asset
in the hands of the heir or donee.
ii) Real property received as dividend by the stockholders who are not
engaged in the real estate business and who do not subsequently use such
property in trade or business, shall be considered as a capital asset in the
hands of the recipients even if the corporation which declared the real
property dividends is engaged in real estate business.
iii) The real property received in an exchange shall be treated as ordinary
asset in the hands of the case of a tax-free exchange by taxpayer not
engaged in real estate business to a taxpayer who is engaged in real
 estate business, or to a taxpayer who, even if not engaged in real estate
business, will use in business the property received in exchange.

g) In the case of involuntary transfers of real properties, including expropriations or

foreclosure sale, the involuntariness of such sale shall have no effect on the
classification of such real property in the hands of the involuntary seller, either as
capital asset or ordinary asset as the case may be.

Note: Lifted from the website of the Bureau of Internal Revenue. For more information about
capital gains tax, go to http://www.bir.gov.ph/taxinfo/tax_capgin.htm#6209
E. Progressivity

F. Income

G. Ruling of first Impressions

H. Powers of Commissioner

I. Partnership Sec 26

J. Rate Sec.27

K. Regular and Special Corporations