1. MLDCs arguments are not meritorious. MLDC is subject to Improperly Accumulated Earnings Tax (IAET). Sec. 2 of Revenue Regulation No. 2 - 2001 provides a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. It is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation.MLDC is not correct in saying that the legislative intent for the imposition of IAET is to compel the declaration of dividends by a corporation. Rather, the tax is imposed for improperly accumulating of income in order to avoid payment of tax. As a matter of fact, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not make the accumulated profit subject to the tax. Furthermore, RR No. 2-2001 enumerates several corporations which are exempted from paying IAET, to wit: SEC. 4. Improperly Accumulated Earnings Tax shall not apply to the following corporations: a. Banks and other non-bank financial intermediaries; b. Insurance companies; c. Publicly-held corporations; d. Taxable partnerships; e. General professional partnerships; f. Non- taxable joint ventures; and g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local.

MDLC, a wholly owned subsidiary of the Bank of the Philippine Islands, a domestic corporation, does not fall among any of the corporations exempted from payment of IAET. The same conclusion was ruled by the Supreme Court in the case of Cyanamid Philippines, Inc. vs CA, [G.R. No. 108067. January 20, 2000], involving the petitioner, a corporation organized under Philippine laws and a wholly owned subsidiary of another corporation, which was also assessed by the CIR of a surtax due to its undue accumulation of earnings. The Court, not exempting Cyanamid Philippines from paying IAET, held that, petitioner does not fall among those exempt classes. Besides, the rule on enumeration is that the express mention of one person, thing, act, or consequence is construed to exclude all others. Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed, a burden which petitioner here has failed to discharge.Lastly, MLDC argues that under the Tax Code, its declaration of dividend to BPI is in the nature of intercorporate dividend which under the Tax Code is not subject to tax. However, RR No. 2-2001 provides that, Notwithstanding the imposition of the IAET, profits which have been subjected to IAET, when finally declared as dividends, shall nevertheless be subject to tax on dividends imposed under the Tax Code of 1997 except in those instances where the recipient is not subject thereto. Hence, the dividends declared by MLDC to BPI is still liable to dividend tax.