Collector of Internal Revenue vs. Club Filipino, Inc. de Cebu

A corporation possessing capital stock divided into shares but lacking authority to distribute dividends or surplus profits to shareholders is not strictly a stock corporation; consequently, if its bar and restaurant operations are merely incidental to its primary non-profit purpose of providing recreation to members and no profits are distributed to shareholders, it is not engaged in "business" subject to fixed and percentage taxes under Sections 182, 183, and 191 of the Tax Code.

This case involves a dispute over tax assessments levied by the Bureau of Internal Revenue against a civic club operating recreational facilities. The controversy centers on whether the operation of a bar and restaurant by a membership club constitutes taxable business activity or falls within the exempt category of non-profit recreation, and whether a corporation with shares but no dividend authority should be treated as a stock corporation for tax purposes.

• Club Filipino, Inc. de Cebu is a civic corporation organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, subsequently increased to P200,000.00.
• Its stated purpose is to provide, operate, and maintain a golf course, tennis courts, gymnasiums, bowling alleys, billiard and pool tables, and all kinds of games not prohibited by law, and to develop and cultivate sports for the healthful recreation and entertainment of its stockholders and members.
• Neither the articles of incorporation nor the by-laws contain provisions relative to dividends and their distribution; however, upon dissolution, remaining assets after paying debts shall be donated to a charitable Philippine institution in Cebu.
• The Club owns and operates a clubhouse, bowling alley, golf course (on government-leased land), and a bar-restaurant where it sells wines, liquors, soft drinks, meals, and short orders exclusively to its members and their guests.
• The bar-restaurant was a necessary incident to the operation of the club and its golf course.
• The Club is operated mainly with funds derived from membership fees and dues.
• In 1951, the Club declared stock dividends from capital surplus arising from revaluation of real properties, but no actual cash dividends were distributed to stockholders.
• Whatever profits were derived from the bar-restaurant were used to defray overhead expenses and improve the golf course on a cost-plus-expenses basis.
• In 1952, a BIR agent discovered the Club had never paid percentage tax on the gross receipts of its bar and restaurant despite having secured the necessary licenses.
• The Collector assessed percentage taxes for 1946-1951, fixed taxes for 1946-1952, surcharge, and compromise penalty totaling P12,068.84.

• The Club is liable for fixed and percentage taxes under Sections 182, 183, and 191 of the Tax Code as a keeper of bar and restaurant engaged in business.
• Unlike previously decided cases involving non-stock corporations (Manila Elks Club, International Club of Iloilo), the respondent Club is a stock corporation because its capital stock is divided into shares.
• The existence of capital stock and the declaration of stock dividends in 1951 demonstrate that the Club is profit-oriented and therefore subject to business taxes.

• The Club is not engaged in the business of operating a bar and restaurant; liability for taxes does not attach merely by reason of operating such facilities.
• The bar and restaurant are necessary adjuncts to foster the Club's primary purposes of developing and cultivating sports for recreation.
• Profits derived from these facilities are merely incidental to the primary non-profit object and are used to defray overhead expenses and improve the golf course, not for distribution to shareholders.
• Strictly speaking, the Club is not a stock corporation because while it has capital stock divided into shares, it lacks authority to distribute dividends or allotments of surplus profits to shareholders, as required by Section 3 of Act No. 1459.
• Taxes are burdens that should not be deemed imposed upon fraternal, civic, non-profit organizations unless the legislative intent to tax is manifest and patent.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the respondent Club is liable for fixed and percentage taxes under Sections 182, 183, and 191 of the Tax Code as a keeper of bar and restaurant.
  • Whether the Club is liable for the payment of compromise penalty.
  • Whether the Club, despite having capital stock divided into shares, is a stock corporation engaged in business for profit.

• Procedural: N/A
• Substantive:
  • The Club is not liable for fixed and percentage taxes. The liability for such taxes does not ipso facto attach by mere operation of a bar and restaurant; the operator must be engaged in business as a barkeeper and restaurateur where profit is the purpose or livelihood is the motive.
  • The Club is not engaged in business as an operator of bar and restaurant. Its primary purpose is to develop sports for healthful recreation, and the bar-restaurant is merely a necessary incident to this purpose.
  • The fact that the Club derived profit does not convert it into a profit-making enterprise; profits were used for overhead and improvements, not distributed to members.
  • The Club is not strictly a stock corporation. For a stock corporation to exist, two requisites must concur: (1) capital stock divided into shares, and (2) authority to distribute to shareholders dividends or allotments of surplus profits. The Club lacks the second requisite as its articles and by-laws contain no provision for dividend distribution.
  • The Club is not liable for compromise penalty because it is not liable for the principal taxes.

• Definition of "Business" for Tax Purposes — The term "business" in its plain and ordinary meaning is restricted to activities or affairs where profit is the purpose or livelihood is the motive. Mere operation of facilities does not constitute taxable business if not conducted for profit or livelihood.
• Two-Requisite Test for Stock Corporations — Under Section 3 of Act No. 1459, a stock corporation must have: (a) capital stock divided into shares, and (b) authority to distribute dividends or allotments of surplus profits to shareholders on the basis of shares held. The absence of the second requisite means the corporation is not strictly a stock corporation despite having shares.
• Incidental Profit Doctrine — That a club makes some profit does not make it a profit-making club; profits must be incidental to the primary non-profit purpose and used for the organization's benefit rather than distributed to members or shareholders.
• Strict Construction of Tax Laws Against the Government — A tax is a burden; as such, it should not be deemed imposed upon fraternal, civic, non-profit, and non-stock organizations unless the intent to tax is manifest and patent.

• "The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood."
• "It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise."
• "That a Club makes some profit, does not make it a profit-making Club."
• "For a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held."
• "A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the contrary is manifest and patent."

• Collector of Internal Revenue v. Manila Lodge No. 761 of the BPOE (Manila Elks Club), G.R. No. L-11176, June 29, 1959 — Cited for the definition of "business" and the principle that taxes should not be imposed on non-profit organizations unless intent is manifest.
• Collector of Internal Revenue v. Sweeney, et al. (International Club of Iloilo, Inc.), G.R. No. L-12178, August 21, 1959 — Cited as having similar facts to the present case; established that non-stock clubs operating bars for members are not engaged in taxable business.
• Manila Polo Club v. B.L. Meer, G.R. No. L-10854, January 27, 1960 — Cited regarding the non-taxable nature of club operations not conducted for profit.
• Jesus Sacred Heart College v. Collector of Internal Revenue, G.R. No. L-6807, May 24, 1954 — Cited for the principle that clubs should strive to have surplus and that making profit does not make an institution profit-making.
• Collector of Internal Revenue v. Sinco Educational Corporation, G.R. No. L-9276, October 23, 1956 — Cited regarding non-profit educational institutions and the incidental nature of profits.

• Section 182, Tax Code — Imposes fixed annual tax of ten pesos on persons engaging in business subject to percentage tax.
• Section 183, Tax Code — Provides that percentage taxes shall be payable quarterly on business transacted.
• Section 191, Tax Code — Imposes percentage tax of three percent on restaurants and five percent on bars/cafes based on gross receipts.
• Section 3, Act No. 1459 (The Corporation Law) — Defines stock corporations as those with capital stock divided into shares and authorized to distribute dividends or surplus profits to shareholders.

• Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Dizon, JJ. — Joined in the unanimous decision affirming the Court of Tax Appeals.

• N/A (Chief Justice Bengzon was on leave).