Basilan Estates Inc. v.

CIR and CTA

Sept. 5, 1967 | Bengzon, J.

Facts:
1. Basilan filed it’s income tax return 1953 and paid P8K
2. CIR: assessed deficiency income tax of P3K and P86K as 25% surtax on unreasonably
accumulated profits as of 1953.
a. It disallowed certain expenses and over-claimed depreciation
b. It added 25% surtax on P347k for unreasonably accumulated profits.
3. For non payment a warrant of distraint was issued but Basilan successfully moved that it be put
on hold and maintain constructive embargo instead.
4. CTA: Affirmed deficiency income tax and surtax.

Issue: WON there was unreasonably accumulated profits.

Held:

YES there were unreasonably accumulated profits. Basilan failed to explain the accumulation.

On prescription:
There is a presumption of regularity that the tax assessment was made/delivered within the 5year
prescriptive period. Even if notice had been received late, §331 requiring five years within which to assess
deficiency taxes, the assessment is deemed made when notice is released and mailed. It is not required
that the notice is actually received within the time period.

On assessment – the disallowed tax deductions were proper.

1. Depreciation: Basilan decided to deduct the value of depreciation computed on a reappraised
acquisition value instead of the original cost of the equipment. Depreciation is for the cost of wear
and tear, and allowance for deduction is to see that at the end of the term the investment remains
as It was in the beginning. The income tax law does not authorize the depreciation of an asset
BEYOND its acquisition cost. Recovery (deduction) of an amount more that the invested capital
will transgress the underlying purpose of depreciation allowance. To allow what Basilan did,
would be to allow the not only the cost but ADDITIONAL PROFIT.

2. There were unreasonably accumulated profits.

a. §25 of the Tax Code provides for additional tax on corporations improperly accumulating
profits and surplus.
b. The CIR found that: Basilan had a strong financial position (assests > than liab). It had
considerable capital to meet it’s needs. The 250K reserved profits were reverted to
surplus, without intent to spend it on any future project. Withdrawal by shareholders of
large sums of money alleged to be used for the business, but the unspent balance was
retained by the said shareholders. Investment in asses having no proximate connection
with it’s business (hospital when it’s a coconut co.) Capital stock was increased when
there was no need to raise funds.
c. Explanations: 250K reversion to surplus, for building factory, but explanation was made
after the fact. INSUFFICIENT In order to determine whether profits were accumulated for
the reasonable needs of the business or to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested at the time of the
accumulation, not subsequently declared intentions which are merely the products of
after-thought.1
d. Explanation:Surplus, needed for paying expenses during the year which is greater than
surplus. INSUFFICIENT There is no need to retain such a large amount (P347K in 1953!)
because during the year current assets will be converted to cash + extra profits (ie sell
stock = more money to pay for expenses). It is erroneous to say that the taxpayer is

1
Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213
 entitled to retain enough liquid net assets in amounts approximately equal to current
operating needs for the year to cover "cost of goods sold and operating expenses" for "it
excludes proper consideration of funds generated by the collection of notes receivable as
trade accounts during the course of the year2
e. Explanation:Withdrawals by shareholders, advances in furtherance of business
INSUFFICIENT when in fact the unspent balance was retained by the shareholders.

3. Alleged exemption from the 25% surtax by RA1823 approved June 1957. Not allowed, the
exemption effective 1957 wll not cover assessments for 1953, more than three years before. Tax
laws are prospective in nature unless expressly made otherwise.

WHEREFORE : Modified allowed travelling and misc but otherwise AFFIRMED. Deficiency income tax +
surtax

2
ibid