~ Republic of the Philippines. Court of Tax Appeals Quezon Hospital De San Juan a vs. Commissioner of Jstrrnal Revenue

DECISION

This is en eppeal from the decision of re- spondent assessing petitioner for the sums of PASS 91, £6,467.67, ©3,777.48 and 5,707.35 os deficieney income texes for the respective yore from 1952 to 1955, inclusive of the $% monthlg interest from June 20, 1959 to November ©, 1960, or o totel sum of 916,992.41, and P649,00, ss real estate dealer's fixed tax, also for the years 1952 to 1955, inelusive of the administrative penalties for late payment.

The facts are not in dispute, the parties having submitted the following stipwlation of facts:

denttlins wmadiak, aieeerartt eorporation, duly organized end exist- ing under the lawe of the Philippines 250

DECISION -

CTA CASE NO. 14693 2 with business address at 46 Roxas ra, Pasay City, while the re~- oe pore yar le the duly appeinted Com- ssioner of Internal me with offiees at the Finance Building, Eraite, Manila, duly vested with authority to act as such for the erment of the Republic of the le ippines;

2. That during the years 1952 te 1955, inclusive, the petitioner derived income from the following sources?

(a) income derived from the operation of the hospital and nursing school;

(db) real estate transactions;

(e) income from rentals;

(4) interest income;

(e) Gividends; —

(f) ineome from an aliquot ) building acquired lease; and

(g) miscellaneous income.

3. That the income derived from the operation of the hospitel and the nursing schoel are e from income tax, wille the rest of petitioner's income are subject to income tax, pursvant te the provisions ef Seetion 27(e) of the “National Internal Revenue %.. That the incowe tax returns of the petitioner for the years 1952 to 1955, inelusive, were exasined by agents of the respondent and, in a letter of the respondent dated Jan- wary 15, 1959, the latter avsessed and demanded from the petitioner the payment of the sogreess= awount of §1,462.00 as deficieney income tax- es for the years 1952 to 1955, ée- teils of whieh are ss follows:

DRCISION ~

CTA CASE 80. 1693 12.3.2 Wet income per return . . - - oo oP 14,739.96 Adds Underdeciared income aa per analysis of taxable income and allowable expenses here- to attached . . + «= «+ « © 6 @ 2 ) Wet income per investigation .«. . Li 2s/ Tex due thereon ecw es co so of 3,1 1.0 Less: Amount already assessed and paid s @ @ @ #& balanee ee tf © © @ . .

Adds: 50% surchar ees @ @ @ @ DEPICIENCY TAX D ce ee eee 1.2.5.3 Net Loss yr return . © «© «© « ° (2 23,654.06) Aéd: Unallewable dedvetiors ‘and additional income: | Yet loss per return Wet income as per investigation. » 35,130.65 __55,764.71 Net ineome per investi - gation . 2. «6 «esse Tax Que thereon ...

Ada@s 50% surcharge. .

DRPICICWY TAX MPW..

Net logs per return « « «© © s « « @ 6,732 4%) Unellowable deductions & additional incomes Net loss per return Gisallowed: . . - 86,732.

Net ineome taxable per cnelosed work- ing papers . ~ + 5,394.77 _52.127e2) Net ineome per investi- gation e»vw»ees ee eo 0 @ @ paieitied? Tas @ue thereon... «e+ ceere # Gy! oe adds 508 bet et ae a er en er Lth.% Net income per return . . os «+ « BP Fy5397018 Unallowable deductions & eddition- al income:

Underdeclared incomes 252

DECISION -

CTA CASF NO, 1693 4 Net taxable income as per analysis of taxable in- come and allowable de- dnetions e «a ®©& « ® 8S @ #93, 307.69 Less: “et income ale rea¢y deciare® age per return ie at oe Met ineome per investigation swres lecs: Anount already assessed and peid ¢¢& *® @ 8% ® wie Ada: S08 surcharge. .. 00,00 DPPICTRWY TAK fh see oe ¢ a ee ee son @ @ ee 2 @ ee | ® es a o

5. Thet in adéition to the ag- regate eacunt of #51,462.00 demanded n the abovementioned letter of re- spondent, dated Januery 15, 1959, the further sum of *640,00 os real estate dealer's fixed tax for the years 1952 to 1955, plus administra- tive penalties for late payment, was likewise den,ndedé by respontent fron petitioner,

6. That on Mareh 2, 195° petitioner filed its Sotlios bebea” bruary 2°, 1959 with the respon- dent protesting against the deficien- ey ineome tex assessments for the years 1992 to 1955, inclusive, and request~ ing for their cance Lilation ané with- drewel;

7. That ins letter deted Sovem- ber 8, 1960, the respondent informed the petitioner that the original essessment in the agarezate amount ‘of P51,452.00 for the period from 1952 to 1955, inclusive, was re@uced to an aceregate amount of ®16,652.%1, detaiis of which are as follows:

1242 Taxable income:

Real Vetcte Tneome eo 8 6+ @ & S& P 26, 176. 0°88 Income from Vaysilo Blég.. » « "610 Interest Income hy on +3 Dividends « 25% of #12, 182.40 Aliquot part of Pld«.

eguireéd by lease. . . + + « & 500 ,00 Mage! lancous Tneome «2. 0s 6 ; te | 4

DECISION

CTA CASE NO. 1693 FOTAL se . a aa’ Lesst Allowable dedueti ons Net texable income . » «© +s + « e Tax due thereon a Te so Lese: Amount elready paid ove

Balance ° —

ads :: monthly interest fron + 20, 1959 to Yovember es @e@e 8 @ @ s @ ©

HEAL AMOUNT DER

185.3 ® o ® ¢

Taxable Incomes

Real Sstate Rentals

258 of Dividends -

Interest Income

otal oe Less: Allowable deductions Net taxable a sees Tax due there ‘ Adds bs nonthiy interest from une wee 1959 to November 196 ese @ 8 TOTAL Tae! ONT DUB i225

Texable Income:

Real Estate Income .

25€ of Dividends of

Total

Less: Allowable deductions Net taxable income Tax due thereon Adds 4% monthly interest “from ve. 20, 1959 te November 960 e e Cd 2 e TOTAL ya DUE of P42, 148,00 D e e e © 125.5

Taxable Income:

Dividends = 258 of 017,171.40

Gein on Sele of SMS Shares

Gein on aliquot pert of T Oo t a 1 see «6 @

Lesst Allowable Deductions

Net taxable income Tex due thereon Less: Amount already “pasa Bal : nee Adda: } ee interest fuse 20, 1959 t

TOTAL AMOUNT BUR

- 7.00 os 2,634.78 252704 FG 5659.

a

CRIA

P 30,040.61 ) 35 eO1

Bute

A

& Ve, 17.42 4 5202 2,85 75552012

DECISION ~

CTA CASE MO. 1693 6 likewise, in addition to the aggre- gate amount of 16,852.41 dewanded in the letter of respondent, dated Novewber 8, 1960, the payment of the further sum of F6*+0.00 as real estate dealer's fixed tax for the years 1952 to 1955, plus administra- tive penalties for late paynent, was again demanded by respondent from petitioner;

&. That the deficteney income tax assessments for the years 1952 to 1955, inelusive, in the aggregate amount of Ft a were arrived et by the respondent vy adopting the follewing formula in computing the oo deductions te non-taxable neomes Taxable income Less Dividends x Administration = axable income Less Divi

and Interest Plus Non-Taxable

Ineome

9. That in a letter dated Decender 7, 1960, filed with respontent on the same day, the petitioner protested the revised defielency income tex assessa- ments for the years 1952 to 1955 in the aggregate amount of *16,°52.41 on the basis that petitioner's for- mula of allocating administrative ex- penses, to wit:

TAPERS LSE Tasian™ SStetetes pen ress Sonsolida necome istrative Ixpenses is more reasonable and equitable;

12. That the ‘ssue to be re- solved in this ease is which of the twe formulee for allocating adwin- istrative expenses ~ that of the petitioner or that of tha respondent - i@ the correet formula;

14+ That the parties hereby reserve their rights to (introduce additional evidence net covered by

DECISION «

CTA CASE NO. 1693 ?

this Partial Stipulation of Faets in sup of their respective eontentions.

On December 2, 1967, vetitioner rested its case after the presentation and admission of ite sole evidence, i.e., Exhibit 4 (articles of In- eorperation of the Hospital de San Juan de Dios, Ine.)s This Court {s ealled upon to resolve the following issues, to wits |

1. Which of the two formulae for allocating adninietrative expenses «~ thet of petitioner or that of the respondent - is the correet formulas and _

2. Whether or not petitioner is liable for real estate dealer's fixed tax and penalty for late payment thereof in the total sum ef P64%0,.00 for the yearn 1952 to 1955.

There is no dispute thet petitioner is enraged in both taxable and non-taxsble operations. The income derived from the oreratfone of the hospital and the nersing echool are exempt from income tax while the rest of vetitionar's income ere subject thereto. its taxable or non-operating income eon- sists of rentals, interests and dividends received from its properties and investments. Ta the com putation of its taxable income for the years 1952 to 1955, petitioner allowed 4]] its taxable income 296 DRCISION .

CTA CASE WO, 1693 to share in the allocation of administrative ex- penses. Respondent disallowed, however, the interests snd dividends from sharing in the alloca- tion of administrative expenses on the ground that the expenses incurred in the administration or management of petitioner's investuents are not al- lowable business expense inasmuch as they were not inourred in “garrying on any trade or business" within the contemplation of Section 30(a)(1) of the Revenue Code. Consequently, petitioner was. assessed deficieney income taxes for the years in question.

The provision of the Revenue Code dealing on the deductibility of business expense insofar as it 4s relevant to the question at bar, provides as follows:

SRC, 30. Set eee te alloved as defuetion—-

(a) Expenses:

mo for salaries or other conpenpation for personal services actually ren- dered; . . . (Underlining supplied.)

At the outset, we would like to emphesize that there are three conditions precedent which must be satisfied before a deduction will be allowed for a claized business expense. The 257

DECISION -

CTA CASE NO. 1693 9 expense must be (1) incurred in carrying on a “trade or business," (2) “ordinary end necessary" and (3) “paid or ineurred within the texable year." (See % Merten's Lew of Federal Income Taxation, pars 25206, 1942 ed.)

Guided by the foregoing requirements, we hold that petitioner failed to establish by competent proof that its receipt cf interests and dividends constituted the carrying on of « “trade or busi- ness” so as to warrant the deductibility of the expense inewrred in their realization. ilo evidence whatsoever was presented by petitioner to show boy it handled its investment, the manner it, bought, sold and reinvested its securities, how it made decisions, and whether it consulted brokers, in- vestment or statistical services. either is there any showing of the extent of its activities in stocks or bonds, snd participation, if any, direct or indirect, in the management of the corporations : where it made investments. in effect, there is total absence of any indication of a business-like management or operation of ite interests and divi- dends. (See Roebling v. Comm. of Int. RKev., 37 BTA 62.) Instead, petitioner merely relied on the assumption that “ig it is to handle its 4n- vestment portfolio profitably, it hes either to engage the services of an investment banter or 258 DECISION .

CTA CASE NO, 1693 10 administer it from within but the letter Secessarily involves studying the securities market, the tax aspects of the investments, hiring seeountants,. collectors, clerigal help, etc,“ without showing that it was actually performing t2*®® varied aeti- vitdes, Petitioner could have @#9117 required any of Its responsible officials to **stify on this Pegerd but it failed to do eo, “Under these cir- Cumstences and coupled with the feet that the interasts and dividends here +" question sre sere- ly fae¢idental ineome to petitioner's main asetivity, which 4s the operation of 1** hospital and nursing schools, the conclusion bec®%¢® inevitable that petitioner's getivitses ne % £0 beyond that of a passive lavestor, wageh- unity? existing jurisprudence Go not Cote witha the purview of carrying on any “trade OF businese.“ while the nature of the work is immaterial, syth “etivity as say be 4 A in the . pase sive reciprien ncome from property managed by other is not engaged in business, and this in- cludes such incidental activities as may be te the realisa- tion of Pron one's personal estate. OR ten @ lew of Vederal Income Taxation, par. 25.96.)

in Foss ¥- sioner, 75 ¥.

oe 3m "the ifae teu i tors and persons n ne 2 comes between these who take position of doing only what fis ssery from an in- vestment pofat of view, and those 259

DECISION

CTA CASE NO, 1693 41 who associate themselves actively in the enterprises in whieh the financially interested and devote a substantial part of their tine to that work as a matter of business." P. 35, 122 ALR 211.)

. The expense of renting an office end employing a staff to handle the — texpeyer's extensive personal ine vestments in stocks and bonds, in- volving the koopine of records, securities and cheeks, maki posits, and forwa reports to the owner, who oxercised general supervision over his investmente, is bie fa ascertaining income a fen to eral income tax as an expense in- eurred in carrying on any trade or business. (ii v. Comm, of Int. Reve, 372 U.S. 212, 85 L. ed. 783.)

In our opinion the uere reesipt of income from the property leased (the property being used in business by the lessee, and not by the lesser) end the ances, key an the distri- bution sheréet. anene stoekholdere of the Yanenii) “oun “oarant amount to no more then reeet tne ordinary a that et fees the ownership 57 ke oan Boas "alinedonhaee saneia. )

Gonsequently, the formula adopted by respondent, wherein petitioner's income from interests and dividends were not allowed to participate in the allocation of administrative expenses, is correct.

Petitioner contends, however, that the assess- ments are without legal basis because of the prin- ciple that "4f an item is indirectly attributea to both taxpble income and exempt income, a reasonable 260

DECISION «

CTA CaBE NO. 1693 12 proportion thereof, determined in the light of ell the fects and circumstances in each case, shall be allocated to each.” Petitioner further contends that the arcsessments run counter not only te the very purpose of the exemption which it enjoys but also against the very prineiples of reason and | equity.

We have no quarrel with the principles cited by petitioner./ We believe however that the prin- ciple of alloeating expenses is crounded on the premise that the texable income were derived from the carrying on of o trade or business as dis- tinguished from the mere reeeipt ef interests and Atvidends fron one's investments. As we have clearly foutd in this case, the expenses incurred for handling the funds or income of petitioner consisting solely of dividends and interests were not ineurred in “carrying on any trade or business"; hence, they are not allowable business expense, 4s @ consequence, said income showld not share in the ellocation of administrative expenses, ) Petitioner's appeal te reason and eavity is beside the point.( fuffice it to say that the al- lowanee of deductions from gross income for income tax purposes does not turn on general equitable considerations, but depends upon legislative grace; and only as there is clear provision therefor can

DRCISION «

CTA CASR BO, 1693 13 any perticular deduction be allowed.) (See Deputy ve Du Pont, 398 0.5, 488, 8 L. ed. 416.)

Coming now to the second issue, the records show that petitioner received rental income in the amounts of %26,17633, 42,634.78, #30, 040.61 and #34,147.42 for the respective years 1952, 1953, 195% and 1955.( Since its income from rentals exceeded §3,900.090 a year, petitioner is considered engaged in business as “real estate desler® with- in the purview of Seetion 194(s) of the hevenue ‘Code, and, therefore, subject to real estate dealer's fixed tax of ©150.00 for cach of the aforesaid years, or a totel of #600,90, imposed by Seetion 193(q) of the cane Code.) (See Con-. @regecion de la Miesion de 5an Vicente de Paul v. Comm. of Int. Reva, CTA Case 1468, Oct. 1%, 1968.) Noreover, we presume that petitioner has no ob- jection to the assessment of real estate dealer's fixed tax because it did not object thereto either during the proceedings in the Bureau of Internal Reverme or before this Court.

With retpect to the compromise penalty in the totel amount of 40,009 for late payment of the real estate dealer's fixed tax, this Court is powerless to impose the same in the absence of any showing that petitioner consented thereto. ) (Gee Comm, of Int. Revs v. Abad, I= 19627, June 27, 262

DECISION «

(ota case No. 1693 te 19663 Algue, Inc. ve Comm. of Int. Rev., CTA Case 1620, Jan. 16, 196.)

WHFREPORR, the decision appealed from, ex- cept as to the compromise penalty in the total sum eof 40.00 which is hereby elisinated, is hereby affirmed. Petitioner 1s therefore ordered to pay the government the total sum of ©16,852.41 as deficiency income taxes for 1952 to 1955, in- elusive of the $% monthly interest from June 20, 1959 to November ©, 1960, plus 5% surcharge for late payment and additional interest at the rate of 1% a month not exceeding three (3) years, and the sum of °600.00 as real estate dealer's fixed tax for 1992 to 1955. With corte against peti- tioner.

SO ORD®RED.

. Quezon City, August 29, 196°.

a RAMON L. AVANCEEA

Associate Judge

WE CONCUR:

\

CC _ Cn Uheea

ROMAN MW. UMALI ' Presiding Judge ecerieed K becece. , : NISLAO RR, ALVAREZ

Associate Judge

263