Greenfield vs. Meer

Losses from buying and selling mining securities are not deductible as trade or business losses under section 30(d)(1)(A) of Commonwealth Act No. 466 where the taxpayer is not a dealer in securities under section 84(t) and does not regularly devote all or the major portion of his time to that business; they are capital losses allowable only to the extent of gains under section 34. Personal and additional exemptions under section 23 of Commonwealth Act No. 466 are deducted from net income before computing the tax, not credited against the tax due.

Milton Greenfield operated an embroidery business and also bought and sold mining stocks and securities for his own exclusive account. Bibiano L. Meer was the defendant who assessed and collected Greenfield’s income tax. The dispute turned on Commonwealth Act No. 466: section 30(d)(1)(A) allowed trade or business losses as deductions, section 34 limited losses from sales of capital assets to gains from such sales, section 84(t) defined a dealer in securities, and section 23 granted personal and additional exemptions.

Milton Greenfield was continuously engaged in the embroidery business in Manila, carried on under his name at 385 Cristobal, from 1933 up to the time of the stipulation of facts. In 1935 he began buying and selling mining stocks and securities for his own exclusive account, not for the account of others. He was not a dealer in securities as defined in section 84(t) of Commonwealth Act No. 466, had no established place of business for the purchase and sale of mining stocks and securities, and was never a member of any stock exchange.

For the calendar year 1939, Greenfield filed an income tax return showing a net profit of P52,449.29 from his embroidery business and P17,850 in dividends from various corporations. From the purchase and sale of mining stocks and securities he made a profit of P10,741.30 and incurred losses of P78,049.10, sustaining a net loss of P67,307.80. He declared the results of his stock transactions under Schedule B (Income from Business), but Meer ruled that they should be declared under Schedule D (Gains and Losses from Sales or Exchanges of Capital Assets, real or personal).

In the return Greenfield claimed a deduction of P67,307.80 representing the net loss sustained in mining stocks and securities during 1939. Meer disallowed the deduction on the ground that the losses were sustained from the sale of mining stocks and securities which are capital assets, and that the loss from the sale of the same should be allowed only to the extent of the gains from such sales, which gains were already taken into consideration in computing the alleged net loss of P67,307.80. Meer assessed Greenfield’s income tax for 1939 at P13,771.06: net income per return of P70,299.29, plus the disallowed net loss of P67,307.80, giving total net income per office audit of P137,607.09; tax on that net income of P13,821.06, less P50 corresponding to the P3,500 personal and additional exemptions.

Meer computed the graduated rate of income tax due on the entire net income per office audit without first deducting the amount of personal and additional exemptions to which Greenfield was entitled, allowing him a deduction from the assessed tax of P50 corresponding to the exemption of P3,500. Greenfield objected and excepted to Meer’s rulings and assessment, and claimed from Meer the refund of P9,008.14 or, in the alternative, P475; Meer overruled the claim.

Exhibit A, attached to the complaint and made part of the stipulation of facts, represented Greenfield’s purchases and sales of each class of stock and security as well as the profits and losses resulting on each class during 1939. It showed purchases and sales of securities only on several days of some months and nothing on others: in January 1939 he purchased shares of stock of different mining corporations on January 2, 3, 4, 6, 13, 19, 20, 25, and 30, and sold some on January 4, 10, 13, and 31; in February he purchased on 1, 8, 13, 14, 25, and 27 and sold on 6, 9, 10, 16, 22, and 30, and sold some on March 9 only; in April he made two purchases on April 3 and 5 and one sale on April 4; in May he purchased on May 9, 10, 13, 19, 24, and 25 and sold on May 9, 10, 12, 13, and 31; in June he purchased on 1, 3, 5, 8, 13, 15, and 17 and sold on 22, 23, 24, and 28; in July he purchased on 1, 3, 6, and 19 and sold on July 24, 25, 26, and 27; in August he purchased on 5, 7, 16, and 18 and sold shares of one mining corporation on August 10 only; in September he did not purchase or sell any securities; in October he sold securities only on the 12th and made no purchase at all; and in November and December he did not purchase or sell any. The parties submitted these facts by stipulation to the Court of First Instance of Manila.

• Deductibility of Stock Losses: Greenfield argued that the losses he sustained from buying and selling mining securities during 1939 were losses incurred in trade or business, deductible under section 30(d)(1)(A) of Commonwealth Act No. 466 from his gains in the embroidery business and other income, and not capital losses from sales of capital assets limited by section 34.
• Engaged in Business Despite Non-Dealer Status: Greenfield argued that although he was not a dealer in mining securities under section 84(t), he could still be considered engaged in the trade or business of buying and selling securities, citing Opinion No. 1818 of the Income Tax Unit of the United States Bureau of Internal Revenue.
• Inventory Treatment of Securities: Greenfield argued that because Exhibit A showed the mining securities were inventoried to arrive at his profits and losses, they could not be considered capital assets, since section 34 does not include property that would properly be included in the inventory.
• Personal and Additional Exemptions: Greenfield argued that the personal and additional exemptions under section 23 of Commonwealth Act No. 466 should be deducted from net income before computing the tax, not treated as a tax credit deducted from the tax on total net income.

• Capital Loss Limitation: Meer argued that the losses from the sale of mining stocks and securities were capital losses from sales of capital assets, allowable only to the extent of the gains from such sales under section 34, and that those gains were already considered in computing the net loss of P67,307.80.
• Tax Credit for Exemptions: Meer argued that the omission in section 23 of Commonwealth Act No. 466 of the phrase “in the nature of a deduction” found in section 7 of the old law showed the intention of the National Assembly to adopt the Tax Commission’s “Wisconsin Plan,” under which the tax is fixed on the net income without regard to the taxpayer’s status and then reduced by a tax credit based on status and dependents, instead of deducting the exemptions from net income.

• Deductibility of Losses from Mining Securities: Whether losses sustained by Greenfield from buying and selling mining securities during 1939 are losses incurred in trade or business deductible under section 30(d)(1)(A) of Commonwealth Act No. 466 from his gains in embroidery business and other income, or are capital losses from sales of capital assets allowable only to the extent of gains from such sales under section 34.
• Treatment of Personal and Additional Exemptions: Whether, under section 23 of Commonwealth Act No. 466, personal and additional exemptions should be deducted from net income before computing the tax, or whether the tax on such exemptions should be deducted from the tax on total net income.

• Deductibility of Losses from Mining Securities: No. The losses were capital losses from sales of capital assets, allowable only to the extent of gains from such sales; Greenfield was not a dealer in securities under section 84(t) and did not regularly devote all or the major portion of his time to buying and selling mining securities.
• Treatment of Personal and Additional Exemptions: Yes. The personal and additional exemptions under section 23 are deducted from net income before computing the tax; the omission of the phrase “in the nature of a deduction” did not change the old law’s construction.

• Deductibility of Losses from Mining Securities: The SC framed the question as whether Greenfield, though not a dealer in mining securities, could be considered engaged in the business of buying and selling them under section 30(d)(1)(A) of Commonwealth Act No. 466. Section 84(t) defines a “dealer in securities” as a merchant of stocks or securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to gains and profits. The SC held that this definition was placed in the law to avoid doubt as to who may be considered engaged in the trade or business of buying and selling securities within the meaning of “incurred in trade or business” in section 30(d)(1)(A). Greenfield was stipulated not to be a dealer under section 84(t), had no established place of business for the purchase and sale of mining stocks and securities, and was never a member of any stock exchange. Even assuming Opinion No. 1818 of the Income Tax Unit of the United States Bureau of Internal Revenue could apply, the taxpayer there had to devote all his time or at least the major portion thereof to the business and regularly carry it on. The stipulation showed Greenfield had been continuously engaged in the embroidery business since 1933 and began buying and selling mining stocks and securities only in 1935 for his own exclusive account; nothing showed he regularly devoted all his time or the major portion thereof to that business. Because he remained continuously engaged in embroidery, he has not and could not have devoted regularly all his time or a major portion thereof to buying and selling mining securities. Exhibit A further showed purchases and sales only on several days of some months and none in others, including no transactions in September, November, and December and only a sale in October. On the inventory argument, the law refers to property that would properly be included in the inventory, not property merely included; section 148 of Income Tax Regulations No. 2 of February 10, 1940 provides that securities inventoried may include only those held for purposes of resale and not for investment, and that taxpayers who buy and sell or hold securities for investment or speculation are not dealers in securities within the meaning of the rule; the General Counsel of the Federal Bureau of Internal Revenue said a person not a dealer in securities is precluded from the use of inventories in computing net income. The SC therefore held that the losses were not losses incurred in business or trade but capital losses from sales of capital assets, and the CFI Manila did not err in dismissing the first cause of action.
• Treatment of Personal and Additional Exemptions: The SC held that the CFI Manila erred in treating the personal and additional exemptions as a tax credit rather than a deduction from net income. Section 7 of the old Income Tax Law provided that, for the purpose of the normal tax only, there shall be allowed as an exemption in the nature of a deduction from the amount of the net income; section 23 of Commonwealth Act No. 466 provides that, for the purpose of the tax provided for in the Title, there shall be allowed the following exemptions. The Tax Commission’s bill had proposed section 22, “Amount of tax credit allowable to individuals,” with a P10 tax credit for single individuals, P30 for married persons or heads of family, and P10 for each dependent, under what was known as the “Wisconsin Plan.” The National Assembly did not adopt that proposed section; instead it copied substantially section 7 of the old law as section 23, changing only the amounts of personal exemption for single individuals from P2,000 to P1,000 and for married persons or heads of family from P4,000 to P2,500. From the complete discard of the proposed section 22, the SC presumed that the National Assembly did not intend to introduce any substantial change in the old law as to the effect of personal and additional exemptions on income tax. The omission of the phrase “in the nature of a deduction” did not and could not effect a change; the phrase was inserted in section 7 out of extreme caution because, even without it, the exemption would have to be deducted from gross income to determine the net income subject to tax. An exemption is an immunity or privilege, freedom from a charge or burden to which others are subjected; if the amounts of personal and additional exemptions fixed in section 23 are exempt from taxation, they should not be included as part of the net income which is taxable. Nothing in section 23 justified fixing the tax on personal exemptions and then deducting it from the tax on net income. The SC also invoked the rule that a revision of statutes does not necessarily alter the construction of the former act by mere alteration of phraseology or omission or addition of words, absent a clear intent or language plainly requiring a change; condensation is a necessity in codification. It noted that United States revenue laws treated personal and additional exemptions as credits against net income, and that section 7 of the old Philippine law had the same effect as those provisions; Paul and Mertens stated that the 1934 change in the United States converted the personal exemption and credit for dependents into deductions. The SC therefore held that the personal and additional exemptions claimed by Greenfield should be credited against or deducted from the net income, and that the CFI Manila erred in not ordering the refund of P475.

• Dealer in securities under section 84(t) — A “dealer in securities” is a merchant of stocks or securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers, buying and selling with a view to gains and profits. The SC applied this definition to hold that Greenfield, who had no established place of business, was not a member of any stock exchange, and bought and sold mining securities only for his own account, was not a dealer and could not claim his stock losses as trade or business losses.
• Trade or business loss versus capital loss — Under section 30(d)(1)(A) of Commonwealth Act No. 466, losses incurred in trade or business are deductible; under section 34, losses from sales or exchanges of capital assets are allowed only to the extent of gains from such sales. The SC held that Greenfield’s net loss from mining stock transactions was a capital loss, not a business loss, because he was not regularly engaged in the securities business.
• Regular engagement requirement for non-dealers — Even if a taxpayer is not a statutory dealer in securities, he may be considered engaged in the business of buying and selling securities only if he devotes all his time or at least the major portion thereof to that business and regularly carries it on. The SC found Greenfield continuously engaged in embroidery and his stock transactions sporadic, so he did not meet the requirement.
• Inventory of securities — Securities may be inventoried only if they are held for purposes of resale and not for investment; taxpayers who buy and sell or hold securities for investment or speculation are not dealers in securities within the inventory rule, and a non-dealer is precluded from using inventories in computing net income. The SC rejected Greenfield’s inventory argument because he was not a dealer.
• Personal and additional exemptions as deductions from net income — Under section 23 of Commonwealth Act No. 466, personal and additional exemptions are deducted from net income before computing the tax, not treated as a tax credit deducted from the tax on total net income. The SC applied this to order the refund of P475.
• Statutory revision and change of phraseology — In the revision of statutes, an alteration in phraseology or the omission or addition of words does not necessarily alter the construction of the former act; a change in construction is warranted only where the intent to change is clear or the new language plainly requires it. The SC applied this rule to hold that the omission of “in the nature of a deduction” from section 23 did not change the old law’s treatment of exemptions.
• Wisconsin Plan not adopted — The Tax Commission proposed a tax-credit system of P10 for single individuals, P30 for married persons or heads of family, and P10 for each dependent, but the National Assembly discarded it and copied the old exemption provision; the SC presumed no intent to adopt the Wisconsin Plan.

• “The question for determination is whether appellant, though not a dealer in mining securities, may be considered as engaged in the business of buying and selling them under section 30 (d), (1) (A) of said Act No. 466.” — This frames the first issue: whether a non-dealer in securities may still claim stock losses as trade or business losses.
• “There is nothing therein to show that plaintiff and appellant has regularly devoted all his time or the major portion thereof to the business of buying and selling mining securities for his own account.” — This is the factual basis for denying the business-loss deduction: Greenfield did not regularly devote all or most of his time to securities trading.
• “The change of phraseology alone does not lead to the conclusion that it was the intention of the lawmaker to amend or change the constructions of the old law as contended by the appellee.” — This rejects Meer’s argument that the omission of “in the nature of a deduction” changed the treatment of personal exemptions.
• “If the amounts of personal and additional exemptions fixed in section 23 are exempt from taxation, they should not be included as part of the net income, which is taxable.” — This states the core reason why exemptions are deducted from net income rather than treated as a tax credit.

• Conger vs. Barker's Adm'r, 11 Ohio St., 1 — Relied on for the rule that a revision of statutes does not necessarily alter the construction of the former act by mere alteration of phraseology or omission or addition of words; a change is warranted only where the intent is clear or the new language plainly requires it.
• Florar vs. Sherifan, 137 Ind., 28; 36 N.E., 365, 369 — Cited for the definition of exemption as an immunity or privilege, freedom from a charge or burden to which others are subjected; used to support treating personal and additional exemptions as amounts excluded from taxable net income.

• Section 30(d)(1)(A), Commonwealth Act No. 466 — Allowed deduction of losses incurred in trade or business; the SC held Greenfield’s stock losses were not deductible because they were not incurred in trade or business.
• Section 34, Commonwealth Act No. 466 — Limited losses from sales or exchanges of capital assets to the extent of gains from such sales; the SC applied it to disallow Greenfield’s net loss deduction.
• Section 84(t), Commonwealth Act No. 466 — Defined “dealer in securities” as a merchant with an established place of business regularly engaged in the purchase of securities and their resale to customers; the SC used it to hold Greenfield was not a dealer and not engaged in the securities business.
• Section 23, Commonwealth Act No. 466 — Granted personal and additional exemptions; the SC held these are deducted from net income before computing the tax, not treated as a tax credit.
• Section 148, Income Tax Regulations No. 2 of February 10, 1940 (39 Off. Gaz., 325) — Provided that securities inventoried may include only those held for purposes of resale and not for investment, and that taxpayers who buy and sell or hold securities for investment or speculation are not dealers in securities; the SC used it to reject Greenfield’s inventory argument.
• Section 7, old Income Tax Law — Provided for an exemption “in the nature of a deduction from the amount of the net income”; the SC compared it with section 23 and held the omission of that phrase did not change the law’s effect.
• Section 22 of the Tax Commission bill — Proposed a tax credit allowable to individuals under the “Wisconsin Plan”; the SC used the National Assembly’s failure to adopt it as legislative history showing no intent to change the old exemption treatment.

• Justice Paras (Concurring and Dissenting) — Concurred in affirming the dismissal of the first cause of action but dissented on the second; argued that the elimination of “in the nature of a deduction” was purposeful and adopted the Wisconsin Plan, so the tax on exemptions should be deducted from the tax due.
• Justice Padilla (Concurring and Dissenting) — Dissented only on the second cause of action; argued that an exemption is not an exclusion or deduction and that the fixed amount of tax condoned, remitted, or waived should be deducted from the tax, making the Collector’s computation correct.
• Justice Perfecto (Dissenting and Concurring) — Dissented on the first cause of action, would allow the stock losses as business losses and order refund of P9,008.14, but agreed with the majority’s theory on the second cause while disagreeing with the refund of P475 because it was pleaded only as an alternative.

• Justice Perfecto (Dissenting and Concurring) — Dissented from the affirmance on the first cause; argued that Greenfield was engaged in the business and trade of buying and selling mining stocks and securities and that the losses sustained should be allowed, warranting refund of P9,008.14. He agreed with the majority’s theory on the second cause but not with the refund of P475 because it was pleaded only as an alternative.
• Justice Paras (Concurring and Dissenting) — Dissented from the reversal on the second cause; argued that the elimination of “in the nature of a deduction” was purposeful and adopted the Wisconsin Plan, so the tax on exemptions should be deducted from the tax due. He would affirm the judgment in toto.
• Justice Padilla (Concurring and Dissenting) — Dissented on the second cause; argued that an exemption is neither an exclusion nor a deduction, that the amount of tax condoned, remitted, or waived is fixed, and that the Collector’s computation gives the same tax saving regardless of the amount of net income. He would affirm the judgment.