After investigation conducted by a BIR Examiner, the examiner filed returns of respondent's net income for the said years based on profit and loss statements shown and submitted to the examiner by the respondent UV accountant.
And in connection with it Respondent wrote a letter addressed to the petitioner requesting that the 25% surcharge imposed for non-payment of income tax be eliminated because its failure to file income tax returns for the years 1946 to 1950 and to pay income tax thereon was due to the honest belief that private schools were exempt from taxation.
The petitioner claims Respondent is not entitled to an exemption since the respondent is a corporation organized for profit which inures to the benefit of Vicente Gullas, its president. The respondent denies the petitioner's claim.
Another point raised by appellant to show that appellee is not entitled to the exemption of the law refers to the use made by it of part of its income in acquiring additional buildings and equipment which, it is claimed, would in the end to redound to the benefit of its stockholders. Appellant claims that "By capitalizing its earnings in the aforementioned manner, the value of the properties of the corporation was enhanced and, therefore, such profits inured to the benefit of the stockholders or members. The property of the corporation may be sold at any time and the profits thereof divided among the stockholders or members."
According to the amended articles of incorporation, all shares of the corporation had been subscribed and paid for In March 1949 the Visayan Institute was raised to the category of a university and renamed "University of the Visayas."
Vicente ' Gullas, president of the respondent, testified that the respondent is not engaged in a profit-making enterprise but in a purely educational pursuit; that the sources of income of the respondent are the various fees paid by the students like annual fee, book rental, etc.; that those receipts are spent for salaries of the teachers, repair of the buildings, purchase of library books and athletic equipment, scholarship funds and contributions to charity; that while the respondent realizes profit out of its operation, the profit goes to the improvement and repurchase of library books and equipment, establishment of scholarship funds, and musical instruments; that since its original incorporation, no dividends have been declared and distributed to the stockholders; and that as president of the respondent, he receives a salary of Pl,000 a month and P300 a month allowance for transportation, representation and entertainment.
ISSUE:
Is the Corporation in question a non-stock corporation and therefore exempt from taxation.
HELD:
The fact that the original articles of incorporation was amended to convert the corporation FROM A NON-STOCK TO A STOCK CORPORATION IS NOT A CONCLUSIVE PROOF THAT THE RESPONDENT IS ENGAGED IN A PROFIT-MAKING BUSINESS, part of which inures to the benefit of a single stockholder or individual.
The fact that when on 29 August 1930 the corporation was converted from a non-stock to a stock corporation, "its assets had increased from P6,000.00 cash and P3,000.00 worth of books (t.s.n., p. 23) into assets worth P50,000.00, which were distributed in the form of shares of stock to the members of the non-stock corporation, predecessor of the stock corporation and that at the meeting of the Board of Trustees of the respondent move to double the stock dividend of the corporation " is not enough for an inference that the respondent has been turned into a corporation for business and profit.
The fact is that since its incorporation, the respondent has not declared any cash dividend and no part of its profits has inured to the benefit of any stockholder or individual. The mere realization of profits out of its operation does not automatically result in the loss of its privilege of exemption from the payment of income tax as long as no part of its profits inures to the benefit of any stockholder or individual.
