Case of the Philippine and American Cigar and Cigarette Manufacturing Co., Inc.

April 2, 1959 BIR RULING NO. 169-59 The Regional Director BIR Regional District No. 4 Quezon City S i r : There is referred to you herewith the entire record of the case of the Philippine and American Cigar and Cigarette Manufacturing Co., Inc., hereafter referred to as the Corporation, 504-A, Protacio Street, Pasay City. cdti It appears that the Corporation was originally incorporated on December 1, 1949 and its term of existence fixed at only five (5) years. On December 2, 1954, a new Articles of Incorporation was filed with the Securities and Exchange Commission. The capital stock of the original corporation was P500,000.00 and the amount which had been actually subscribed and paid up is P400,000.00. The balance sheet of the Corporation as of November 30, 1954 shows a net profit of P3,462,992.55. The new articles of incorporation show also a capital stock of P500,000.00, of which P400,000.00 was subscribed and paid. During all the years of its existence, the old (original) Corporation did not declare any dividend. The question now, therefore, arises as to whether or not the Corporation can be held liable for 25% tax on unreasonable accumulation of profits or as to whether or not the stockholders of the Corporation can be held liable for the income tax on their corresponding share of the accumulated surplus of the Corporation as of November 30, 1954. We agree with the observations contained in the 1st Indorsement dated March 20, 1956 of the then Acting Chief of the Income Tax Division to the effect that since the Corporation was deemed dissolved on December 1, 1954, the net assets of the corporation and the accumulated surplus of P3,462,992.55 as of November 30, 1954 should have been distributed among the stockholders. It is believed unwise, at this late period, to impose the 25% tax on accumulated profits of the corporation as prescribed in Section 25 of the Tax Code. Besides, the accumulation of a big surplus is not be itself conclusive proof of the corporations liability under Section 25 of the Tax Code. It must be shown that the surplus is in excess of the reasonable needs of the corporation, a fact that has not been considered in this case. Accordingly, appropriate assessments should immediately be made against the stockholders in accordance with the observations contained herein, unless the same have been made already. Early report of the action taken hereon is desired. cdtech Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue