CIR v. Visayan Electric Co.

No. L-22611, 27 May 1968

Facts:

Visayan Electric Co. (Visayan) holds a legislative franchise to operate and maintain an electric
light, heat, and power system in Cebu City, some municipalities in the Province of Cebu and
other surrounding places. It established a pension fund known as the Employees Reserve for
Pensions for the benefit of its present and future employees in the event of a retirement,
accident, and disability. An amount is set aside for this purpose every month and is taken from
the gross operating receipts of the company. This reserve fund was later invested by
the company in stocks of San Miguel Brewery, Inc. for which dividends have been regularly
received but these dividends were not declared for tax purposes. The Auditor General sent
Visayan a letter in 1949, informing them that since the company retained full control of the fund,
the dividends are therefore not tax exempt but that such dividends may be excluded from gross
receipts for franchise tax purposes provided that they are declared for income tax purposes.
Because of this, the Provincial Auditor of Cebu allowed the company the option to declare
the dividends either as part of the company s income for income tax purposes or as part of
its income for franchise tax purposes. The company chose the latter. The Revenue Examiner of
Cebu conducted a separate investigation for the BIR and also discovered that the company is
the custodian or has complete control of the fund but disagreed with the Provincial Auditor and
instead considered the dividends as subject to the corporate income tax under Sec. 24 of the
NIRC. The Examiner also concluded that Visayan violated Sec. 259 of the Tax Code which
imposes a 25% surcharge of the franchise taxes remain unpaid for fifteen days and Sec. 2 of
Act 465 for not paying additional residence tax. With the Examiners report as the basis, the
Commissioner of Internal Revenue assessed P2,443.30 as deficiency income tax for 1953 to
1958 plus interest and 50% surcharge, P3,850 as additional residence tax from 1954 to 1959,
and P35,419.05 as 25% surcharge for late payment of franchise taxes for the years 1957, 1958,
and 1959. Visayan appealed to the CA which sustained the additional residence tax but freed
the company from liability for deficiency income tax and the 25% surcharge for late payment of
franchise taxes and cited Sec. 8, Act 3499 as basis.

Issues:

1. Whether Visayan Electric Company liable for deficiency income tax on dividends from
the stock investment of its employees' reserve fund for pensions?

2. Whether they are also liable for 25% surcharge on alleged late payment of franchise tax?
Ruling w/ Doctrine:

1. The disputed income are not receipts, revenues or profits of the company. They do not
go to the general fund of the company. They are dividends from the San Miguel Brewery,
Inc. investment which form part of and are added to the reserve pension fund which is
solely for the benefit of the employees to be distributed among them. Visayan is merely
acting, with respect to the reserve fund, as trustee for its employees when it sets aside
monthly amounts from its gross operating receipts for that fund. And for tax purposes,
the employees reserve fund is a separate taxable entity. Visayan then, while retaining
legal title and custody over the property, holds it in trust for the beneficiaries mentioned
in the resolution creating the trust, in the absence of any condition therein which would,
in effect, destroy the intention to create a trust. And there is no such condition because
nothing in the companys act suggests that it reserved the power to revoke the fund or
appropriate it for itself. The fund may not be diverted for any other purpose and the trust
created is irrevocable. Therefore, the CIR misconceived the import of the law when he
assessed such dividends as part of the income of the company. But the trust fund is still
subject to tax under individuals under Sec. 56 (a) of the Tax Code. But under Sec. 331 of
the Tax Code, internal revenue taxes should be assessed within 5 years after the return
is filed and since the Company was in good faith and the CIR made the honest mistake
of assessing income tax based on corporate tax and not on income tax, then Sec. 332
applies and thus, the tax on the employees reserve fund as individual income tax may
still be collected within 10 years. But the 50% surcharge cannot be imposed on Visayan
because there was no willful or fraudulent neglect to file a return.

2. Sec. 183 provides that taxes shall be paid within 20 days after the end of each month
while the franchise extended to Visayan states that the taxes are due and payable
quarterly. The due and payable quarterly in the franchise only indicates the frequency of
payment of the franchise tax, that is, every three months. It does not refer to the time
limit or the date on which the taxes must be paid. There is no conflict between Sec. 183
and the franchise payment period given to Visayan in the franchise. If there is no period,
then Sec. 183 is controlling, which gives the taxed entity 15 days to pay the tax. But
where there is a period, then the period is controlling. In this case, Visayans franchise
indicated that franchise tax shall be due and payable quarterly or every 3 months. Since
Sec. 183 grants 20 days after the last day of each quarter and Sec. 259 grants another
15 days grace period after that, before imposing the 25% surcharge, then the period for
Visayan to pay the franchise tax is within 20 days after the end of each quarter and if
such tax remains unpaid for 15 days after that 20 days, then the 25% surcharge shall be
imposed upon them. The tax cannot be immediately demandable at the end of each
calendar quarter because the transactions on the last day of the quarter must have to be
included in the computation of the taxpayers return for each particular quarter. It is well
impossible for the taxpayer to add up his income, write down the deductions, and
compute the net amount taxable as of the last working hour of the last day of the quarter,
and at the same time go to the nearest revenue office, submit the quarterly return and
pay the tax