Eloise exemption, the requirements laid by the same are mandatory and should be

strictly construed.
Case No. 187 | CIR v. Visayan Electric Co. | Estate and Trusts

Facts: Visayan Electric Co. (Visayan) 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. CIR
then assessed deficiency income tax as well as additional residence tax from and
25% surcharge for late payment of franchise taxes. 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. Visayan claims before the SC tax exemption under R.A. 1983,
Sec. 1(b) conformably with par. b. Section 56 of the Tax Code which
provides in brief that tax imposed under such RA shall not apply to employees'
trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees (1) if contributions are
made to the trust by such employer, or employees, or both, xxxx and (2) if under
the trust instrument it is impossible, xxxx for any part of the corpus or income
to be (within the taxable year or thereafter) used for, or diverted to, purposes
other than for the exclusive benefit of his employees xxxx

Issue: Whether the pension fund or trust fund as in this case qualifies for tax
exemption.

Ruling: NO. The second requirement in paragraph (b) of Section 56 of the Tax
Code as it was inserted by Republic Act 1983 — non-diversion of fund — was
written into the statute the better to insure that the trust fund and its income
will be used "for the exclusive benefit" of the employees. A trust device used to
disguise added compensation to the shareholders and officers of a company —
and thereby avoid present payment of income tax thereon — instead of
providing for future security of the employees in general will not qualify under
the exemption. The Court found the data presented by Visayan wanting which
would justify t to make a conclusive statement that the trust qualifies under
Section 56 (b) as it was inserted into the Tax Code by Republic Act 1963. The
only written evidence of record of the creation of the pension trust is the
minutes of the board of directors' meeting. Since said proviso grants tax