15. Cyanamid Philippines, Inc. v. CA G.R. No. 108067.

January 20, 2000

This is a rule 45 case a Petition for review on certiorari filed by the petitioner Cyanamid Phil. assailing the decision of
the Court of Appeals which affirmed the decision of the Court of Tax Appeals, which held the petitioner to pay
respondent Commissioner of Internal Revenue a 25% surtax on improper accumulation of profits for 1981 which the
court found that the accumulation of income was not for the immediate need of the business. The test whether or not the
company can avoid tax on accumulated earnings is the Immediacy Test, it must be shown that the controlling intention of
the taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which are mere
afterthoughts.

Procedure Parties Facts Issue Ruling

1. CIR- Petitioner 1. Cyanamid Petitioner, Cyanamid Whether or not No. Improperly accumulated
protested the Philippines Philippines, Inc., a the respondent earnings tax is penalty tax
assessments corporation organized under court erred in designed to compel
particularly, (1) the 2. Court of Appeals Philippine laws, is a wholly holding that corporations to distribute
25% Surtax owned subsidiary of the petitioner earnings.
Assessment of 3. Court of Tax American Cyanamid Co. is liable for the
P3,774,867.50; (2) Appeals based in Maine, USA. It is accumulated In order to determine
1981 Deficiency engaged in the manufacture earnings tax whether profits are
Income Assessment 4. Commissioner of of pharmaceutical products for the year accumulated for the
of P119,817.00; and Internal Revenue. and chemicals, a wholesaler 1981. reasonable needs of the
1981 Deficiency of imported finished goods, business to avoid the surtax
Percentage and an importer/indentor. upon shareholders, it must
Assessment of be shown that the
controlling intention of the

P8,846.72 which the On February 7, 1985, the
CIR denied. CIR sent an assessment
letter to petitioner and
2. CTA- Petitioner demanded the payment of
appealed to the Court deficiency income tax of
of Tax Appeals. one hundred nineteen
During the pendency thousand eight hundred
of the case, however, seventeen (P119,817.00)
both parties agreed to pesos for taxable year 1981.
compromise the 1981
deficiency income tax On March 4, 1985,
assessment of petitioner protested the
P119,817.00. assessments particularly, (1)
Petitioner paid a the 25% Surtax Assessment
reduced amount — of P3,774,867.50; (2) 1981
twenty-six thousand, Deficiency Income
five hundred seventy- Assessment of P119,817.00;
seven pesos and 1981 Deficiency
(P26,577.00) — as Percentage Assessment of
compromise P8,846.72. Petitioner,
settlement. However, through its external
the surtax on accountant, Sycip, Gorres,
improperly Velayo & Co., claimed,
accumulated profits among others, that the
remained unresolved. surtax for the undue
taxpayer is manifested at the
time of accumulation, not
intentions declared
subsequently, which are
mere afterthoughts.
Furthermore, the
accumulated profits must be
used within a reasonable
time after the close of the
taxable year. In the instant
case, petitioner did not
establish, by clear and
convincing evidence, that
such accumulation of profit
was for the immediate needs
of the business.
As of 1981 the working
capital of Cyanamid was
P25,776,991.00, or more
than twice its current
liabilities. That current ratio
of Cyanamid, therefore,
projects adequacy in
working capital. Said
working capital was
expected to increase further
 accumulation of earnings
3. CA- Petitioner was not proper because the
appealed the Court of said profits were retained to
Tax Appeal's increase petitioner's
decision to the Court working capital and it
of Appeals which the would be used for
CA affirms the reasonable business needs
decision of the CTA. of the company. Petitioner
contended that it availed of
4. SC the tax amnesty under
Executive Order No. 41,
hence enjoyed amnesty
from civil and criminal
prosecution granted by the
law.
Petitioner appealed to the
Court of Tax Appeals.
During the pendency of the
case, however, both parties
agreed to compromise the
1981 deficiency income tax
assessment of P119,817.00.
Petitioner paid a reduced
amount — twenty-six
when more funds were
generated from the
succeeding year's sales.
Available income covered
expenses or indebtedness
for that year, and there
appeared no reason to
expect an impending
'working capital deficit'
which could have
necessitated an increase in
working capital, as
rationalized by petitioner.
If the CIR determined that
the corporation avoided the
tax on shareholders by
permitting earnings or
profits to accumulate, and
the taxpayer contested such
a determination, the burden
of proving the determination
wrong, together with the
corresponding burden of
first going forward with
evidence, is on the taxpayer.
 This applies even if the
thousand, five hundred corporation is not a mere
seventy-seven pesos holding or investment
(P26,577.00) — as company and does not have
compromise settlement. an unreasonable
However, the surtax on accumulation of earnings or
improperly accumulated profits.
profits remained unresolved.
Petitioner claimed that
CIR's assessment
representing the 25% surtax
on its accumulated earnings
for the year 1981 had no
legal basis for the following
reasons: (a) petitioner
accumulated its earnings
and profits for reasonable
business requirements to
meet working capital needs
and retirement of
indebtedness; (b) petitioner
is a wholly owned
subsidiary of American
Cyanamid Company, a
corporation organized under
the laws of the State of
Maine, in the United States
of America, whose shares of
stock are listed and traded in
New York Stock Exchange.
This being the case, no
individual shareholder of
petitioner could have
evaded or prevented the
imposition of individual
income taxes by petitioner's
accumulation of earnings
and profits, instead of
distribution of the same.

Petitioner appealed the

Court of Tax Appeal's
decision to the Court of
Appeals which the CA
affirms the decision of the
CTA.