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Manila Wine Merchants vs. CIR, G.R. No. L-26145, February 25, 1984

The CIR imposed a 25% surtax on Manila Wine Merchants for unreasonably accumulating profits between 1947-1957. The CTA modified the decision, imposing the surtax for 1957 only. Manila Wine appealed. The Supreme Court upheld the CTA's decision, finding that Manila Wine's investment of accumulated earnings in unrelated businesses like US Treasury bonds indicated an accumulation beyond reasonable business needs, as defined by the immediacy test used in American cases. The Court deferred to the CTA's factual finding that the Treasury bond purchase was unrelated to Manila Wine's import/sale business.

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141 views1 page

Manila Wine Merchants vs. CIR, G.R. No. L-26145, February 25, 1984

The CIR imposed a 25% surtax on Manila Wine Merchants for unreasonably accumulating profits between 1947-1957. The CTA modified the decision, imposing the surtax for 1957 only. Manila Wine appealed. The Supreme Court upheld the CTA's decision, finding that Manila Wine's investment of accumulated earnings in unrelated businesses like US Treasury bonds indicated an accumulation beyond reasonable business needs, as defined by the immediacy test used in American cases. The Court deferred to the CTA's factual finding that the Treasury bond purchase was unrelated to Manila Wine's import/sale business.

Uploaded by

Ayra Cadigal
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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THE MANILA WINE MERCHANTS, INC., Petitioner, v.

THE COMMISSIONER OF INTERNAL REVENUE,


Respondent.

G.R. No. L-26145. February 20, 1984


Ponente: GUERRERO, J.

Facts: Petitioner, a domestic corporation organized in 1937, is principally engaged in the importation
and sale of whisky, wines, liquors and distilled spirits. In June 1958, petitioner’s capital was increased to
P1,000,000.00 with the approval of the said Commission. In December 1957, respondent caused the
examination of petitioner’s book of account and found the latter of having unreasonably accumulated
surplus of P428,934.32 for the calendar year 1947 to 1957, in excess of the reasonable needs of the
business subject to the 25% surtax imposed by Section 25 of the Tax Code. In February 1963, the CIR
demanded petitioner payment of P126,536.12 as 25% surtax and interest on the latter’s unreasonable
accumulation of profits and surplus for the year 1957 and thereafter found that the accumulated surplus
in question were invested to ‘unrelated business’ which were not considered in the ‘immediate needs’
of the Company such that the 25% surtax be imposed therefrom. Petitioner appealed to CTA, and it
modified CIR’s decision by imposing upon petitioner the 25% surtax for 1957 only in the amount of
P86,804.38.
A motion for reconsideration was filed by petitioner but was denied, hence this petition.

ISSUE: Whether petitioner’s unreasonably accumulated earnings is in excess of the reasonable needs of
business, thus making it liable to surtax under the Tax Code?

HELD: Yes. A prerequisite to the imposition of the tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax (or surtax) on its shareholders, or on the
shareholders of any other corporation by permitting the earnings and profits of the corporation to
accumulate instead of dividing them among or distributing them to the shareholders. If the earnings and
profits were distributed, the shareholders would be required to pay an income tax thereon whereas, if
the distribution were not made to them, they would incur no tax in respect to the undistributed
earnings and profits of the corporation. 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 is due to some other cause, such as the use of undistributed earnings and profits for the
reasonable needs of the business, such purpose does not fall within the interdiction of the statute.
An accumulation of earnings or profits (including undistributed earnings or profits of prior years)
is unreasonable if it is not required for the purpose of the business, considering all the circumstances of
the case. o determine the "reasonable needs" of the business in order to justify an accumulation of
earnings, the Courts of the United States have invented the so-called "Immediacy Test" which construed
the words "reasonable needs of the business" to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. American cases likewise hold that investment of the earnings and profits of the
corporation in stock or securities of an unrelated business usually indicates an accumulation beyond the
reasonable needs of the business. The finding of the Court of Tax Appeals that the purchase of the U.S.A.
Treasury bonds were in no way related to petitioner’s business of importing and selling wines whisky,
liquors and distilled spirits, and thus construed as an investment beyond the reasonable needs of the
business is binding on Us, the same being factual.

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