BIR Ruling No. 280-61

July 24, 1961 BIR RULING NO. 280-61 There is transmitted to you herewith the entire records of the case bearing on the pending internal revenue case under Section 25 of the Tax Code of the . . ., hereafter referred to as the Corporation, involving the total amount of 149,482.82. The records of this case disclose that as of December 1, 1955, the Corporation had an accumulated surplus of P544,563.97, P174,828.00 of which correspond to the earned surplus for the year 1955. The difference of P300,725.97 corresponds to earned surplus thru all the years past. (Pls. see income tax return of 1955). The assessment of P149,482.82 constitute of the 25% surtax on the total accumulated surplus of P544,563.97 as of December 31, 1955. In 1953, the Corporation declared a cash dividend of 100,000.00 but because of foreign exchange restrictions it did not declare further dividends during the intervening period. In the ruling contained in his 2nd indorsement dated October 22, 1955, the Secretary of Finance hold that, notwithstanding foreign exchange restrictions, a corporation is liable to the 25% surtax on its undistributed surplus. However, considering our ruling of November 4, 1952 to the effect that accumulations of earnings or profits may not be deemed unreasonable for purposes of Section 25 if such accumulation was due solely to the inability of the corporation to obtain licenses for remittances of dividends to non-resident stockholders, the Secretary of Finance gave only a prospective application of his ruling and advised that the taxpayers should be directed to effect the distribution of so much of their surplus as has been accumulated beyond the reasonable needs of their business within a reasonable period. The ruling of the Secretary of Finance was published in our General Circular No. V201 dated February 6, 1955. From the past observations of the routine movements of our circulars, General Circular No. V-201 may be presumed to have been actually mimeographed and made available for distribution three (3) months after the date of its preparation, that is more or less in the month of May, 1956. On October 10, 1956, the corporation declared a dividend of P100,000.00. This declaration was perhaps made in view of General Circular No. V-201. But, notwithstanding, why did the Corporation declare only P100,000 and retained P444,563.97 out of the 544,563.97 accumulated surplus as of December 31, 1955? In view of the declaration of P100,000 dividend in 1956 our assessment on February 8, 1961 on the basis of the accumulated surplus of P544,563.97 as of December 31, 1955 is obviously erroneous. In retaining the surplus of P444,563.97 on October 10, 1956, notwithstanding the ruling of the Secretary of Finance, it is apparent that the Corporation considered the retained amount as reasonable for the needs of its business and in fact this is now the issue in this case. Undistributed income is properly accumulated if retained for working capital needed by the business (Sec. 21, Regulations No. 2) Necessarily the directors and officers of the corporation must be given, in tax matters, some discretion and latitude as to what constitutes the reasonable needs of the corporate business. (R. C. Tway Coal Sales Co. v. U. S. 3 F Supp. 668 (1933), aff'd 75F (2d) 336 (CCA 6th, 1935) In 1950, the Corporation spent the amount of P684,064.39 in the production of the film entitled "American Guerilla in the Philippines". If the expenditure of such amount is required of the Corporation at a single instance, there is certainly no doubt of the reasonableness of its retention of the amount of P444,563.97 in October, 1956. It retained this amount obviously for working capital. There is no hard and fast rule in the application of Section 25 of the Tax Code. The imposition of the 25% surtax on unreasonable accumulation of profits involves essentially a question of fact. The application thereof must have necessarily to be dependent upon the circumstances prevailing in each case. Under the prevailing circumstances of this case, this Office believes that the retention by the Corporation of the accumulated surplus of P444,563.97 was justified. Motion picture production hazards justified retention of earnings. (Com. v. De Mille Productions, Inc. (CCA-9) 37-1 USTC # 9249, 90 Fed. (2d) He is, therefore, advised to take action in this case accordingly. LexLib