Commissioner of Internal Revenue v. Visayan Electric Co. DETAILS: G.R. No. L-22611, May 27, 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 Examiner’s 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. Is Visayan Electric Company liable for deficiency income tax on dividends from the stock investment of its employees' reserve fund for pensions? 2. Is it also liable for 25% surcharge on alleged late payment of franchise tax? RULING:1. No. 2. No RATIO: 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 company’s 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, Visayan’s 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 taxpayer’s 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.
