Repureic of the Philippin' Culrt of Tax Appeals Gvkzen Gity as Marcial Pe Lichauco, Inc. vs. 1723 Commissioner of Internal Reve Nuk

REPUREIC OF THE PHILIPPIN' *

CULRT OF TAX APPEALS

gvkzen GITY

as

MARCIAL Pe LICHAUCO, INC.

Petitioner

versus CTA CASE 80, 1723

COMMISSIONER OF INTERNAL

REVE NUK,

Respondent.

DECIBIOR

Petitioner Wereial |. Lichsuco, Inc. ques-

tions e decision of respondent Commissioner of

Internal Nevenue declaring it a pergonal holding

Gompany in the taxable year 1955 und assessing

against it the amount of *29,389.068 as personal

helding company tax -for the said year.

agetion 63 of the National Interne! Kevenue

Code imposes o tax of 455 of the undistributed

income of a personal holding company. Under

Section 6% of said Code, s personal holding coapsny

is defined es any corporetion at least §O8 of whose

gross income is personal holding company iocone as

defined in Section 65 and if at any time during

the last half of the taxable year more than $08

in value of its ovtstanding stock is owned, direat-

ly or indireetiy, by or for not more than five indi-

viduals. |

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DECISION «

CTA CASE NO, 1723

=x es

Petitioner admits under paragraph © of ites

amended petition for review that “during the year

1958, five ($) of the twelve stockholders of Mar-

| ' gfel P. Liehaneo, Inc. together owned sore than

508 of the company's outstanding ecapitel stock.”

With thie admission, it say be stated thst the

steek ownership requirement for a personal holding

company has been satisfied. Consequently, the

legality of the respontent's assessment depends

upen whether the gross income of petitioner during

the taxable year in question consisted of et

least 50% personal holding company income as

defined in Section 65 of the Revenue Code, whieh

reads as follows:

ore. 65.

» the +f Seepacenl

holding income” seans the

portion of the gross income which

consists of:

(se) Dividends, interest (other

than interest const! rent ss

defined in subsection Bs poh

royalties (other then etl,

or gas royslties), and Genaxvien

The term “royalties", as herein ised,

includes income from eee

patents, and other sint

s in stock or ties (as de

fined in subseetion of section

eighty-four), cains the sale or

exchange of stock or securities.

(e) fon, future Teeneactions.

—Qgings from ure transac

in any Commodity on or rp ogi

rules of a bosrt of trade oF con=

‘~ 267

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; DECISION «

CTA CASE MO, 1723

3

; ; modity exchange. This subsection

a shall not apply to gains by « producer,

5 processor, serchant, or handler of the

coumodity which erise out of bona

transactions reasonably

neces te the conduct of ite busi-

ness in the asnrer in which such busi-

nees is customarily and usually con-

{d) ammount 6

includible in compu net in-

cone of estates and trust under sec-

tion fifty-six; and gains from the

sale or other sos ea ag of any in-

terest in an estate or trust.

le)

(1) s reecive

unter whieh the pines + yg is te

furnish personal serviecs, if some

person other than the corporation has

the right to designete (by name or by

deseription) the individuerl who is to

perform the services, or if the indi-

orenes ya Feeeeen Vee geemoee

8 designe seri p-

tion) in the react; ly FE saounts

reeeived from the sale or other dis-

position of such « contract. This

subsection shall a with respect

to amounts recei for services under

& particular contrect only if eat sone 4

— during the —— t ;

five at mn Velue of

the outset po agp of the corpore- e)

tion fe owned, directly or indirectly, |

Soeonay iets farferny omy 30 Sos

is to perf be desig-~ |

noted. tay" nane or i denser fon) as |

pe one to perform, such services. nee

(ft) ;

hx_sharelighiag.—osouste reaeived ts

compensation (however designated and

from whomscever received) for the uae

of, or a use, property of of the g

corporation any case Te, at any

time during the gente » twenty~

faye ee am A value of

ts pe Bi cop of the corpors-

tion is owned, » danetin indireet-

ly, by or for’an intividvel niterastsl

i

‘ -

oct DRCTSION -

= to the use of the property, whether

ji euch right is obtained directly fron

a the corporation or by sesns of a sub-

ae lease or other arrangenent.

mers

. for sale to customers in the ordinary

} course of its trade or business wos

gold or exchanged by the corporation;

_ but does not include amounts con-

etituting personal holding company

income under subseetion (/).

fe (hn) manors tity fF eae rayne

c. tise, unless (1) constituting fifty

* ae ee the eobustaene wehesing

ra se sage canrn other than compensation

a, i services rendered by

a a 9 “onetitete fifteen pers

= centum or more of the gross icone.

Petitioner is a domestic corporation orgenized

and registered with the Securities aod Exchange

—- Comuiesioner sonetiwe in 1951. The principal

ef eubseribers are the spouses “arcial *. iichaueo

as and Jessie C, Lichaueo, while their brother Thomas

‘a ". idehaveo, their mother, laisse *. Lichauce, and

_ VYieteria V. Nerrere ere the other nominal incor=-

poratcrs. The primary purpose of the corporation

is to engage in reel estate business but it was

g@lsc authorised to act as agent, attorney-in-fact,

purchasing agent and general agent, It sppears

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PRECISION -

CTa CASH HO, 1723

that the reasons why the Lichauco spouses decided

I to form this family corporstion were tc subdivide

E> into suell lots and sell on instellment basis «

; ‘big residential land in Antipolo, then to die-

? tribute te each of their children shares of stock

in the corporation in such amounts as the spouses

wished to donate to their children.

For the taxable year 1958, petitioner filed .

its income tax return declaring therein « net i

7 - income of 740,908.10 on which it paid the ecer-

‘ responding income tex. A breskdown of the incone

for the said year shows that it hed the following

sources of gross income:

.

» Gross income from properties . . 24,160.00 °.

26, e N |

earned fr @ @ * #8 6

from the sale of

ao ley Vo? oo - - a a ae 7g 2900

Pay oertificates. . 1. ss + « —ipt27.10

TOTAL se see eee s « » Boo 0

Of the smount of #11,212.30 received by petitioner

es dividends from other corporations, only 25%

thereof or 62,803.98 was declared as texable in-

come, pursuant to Seetion 24(a) of the Revenue

Code, enee, only the amount of *62,089.88 was

reported as its erose incone.

After examination of petitioner's incone

tax return for 1958, reepontent considered the

following as personal holding company income:

a* “ 4 di

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DECISION «

CTA CASE NO. 1723

6

2. Commissions earned «.. » 26,620.50

3. Rental income (gross

income from properties )_ 24,160.00

TOTAL PYRSOMAL HOLDING

COMPANY INCOME . « « «

Inasmeh as the reported gross income of petitioner

for the year involved was ?62,050.86, respondent

contends thet petitioner's personal holding company

income of #53,583.58 exeeeds the [0% requirement

(962,080.00 x 508 « 49,664.70). Consequently,

respondent considered petitioner as a personal

holding company eubject to the personal holding

company tax under Seetion 63 ef the Kevenue Code.

Parenthetically, it aay be stated thet in

computing the amount of £29,389.08 as alleged

personal holding company tax, respondent besed it

on @ net income of *55,34%7.47 instead of P+0,908.18..

The difference of P1%,439,.29 was a certain com-

mission income of petitioner for 1957 but erroneous-

ly included by respondent ag income for 1958, Re-

spondent admitted this error in his letter te coun-

sel fer petitioner dated ‘ovember 10, 1965 (Annex

4 of the Petition for Seview and the Amended Peti-

tion for Review), but continues to include the

14,439.29 as part of the income of the texpayer

for purposes of the personal holding company tax.

It may also be stated thet for purposes of the

personal holding company income requirement, re-

spondent now alleges on page 11 of his senorandus

271 °

ee —

DECTBLON «

CTA CASE MO, 1723

?

that the following are the personel holding cam-

pany income of petitioner:

Dividend received . «++ s @ PL iy

Cocani sessions earned a e©e 26,629 050

Gross ineome from properties 24,160.00 ©

Sale of palay (cersidered

a i sR a CF

Under Section 65{e) of the Revenue Code, supra,

personal service income includes any ancunt reeeived

ander a centract pursuant te which the corporation

is to furnish personal services, if (a) some per-

son other than the corporstion hes the right to

designate (by name or by deseription) the indi-

vidual who is to perform the services, or if the

individual who is te perform the services is

designated (by name or by deseription) in the con-

treet, and if (hb) at some time during the texable

year 25% or more in value of the outstanding stock

of the corporation is owned, directly of indireet-

ly, by or for the individual who hes performed, is

te perform, or may be designated (by same or by

deseription) as the one te perform such services.

Inasmuch ag respondent eensidered the commissions

earned by petitioner in the sum of $26,620.50 an

amount received under a personel service eontract

between petitioner and the Thomes de la fue & Co.,

Ltd. of England, the first, and the decisive, ques

tion ia whether “ereial °,. Lichauco is “designated

bey the contraet as the one to perform such service"

for De la Rue or some person other than petitioner

a 02

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DECISION «

CTA CASE NO, 1723

haa the right te designate hia, by came or by

description, as the individuel who is te perform

the service.

There ig no doubt thet, as respondent alleges,

Me. Meareial ?. Lichauco, whe is the president of

petitioner, is a well-known lawyer and an ine

fluential figure. ‘ie has degrees obtained in the

United States. Te is also a corporation lawyer

whe has travelled far and wide, and probably known

to the British printer, Thomes de la hue & Co.,

Ltd. as a man of considerable prestige and con-

nections. ut nowhere end in no wise does the

reeord of the case show that some person other

than petitioner hed the right te designate, by

name or by description, “r. Mareial ©. Lichauco

as the individual who was to perform the service

for De a Rue. Neither dees the record show that

Mr. “Marcial '. Lichauco wes the individual who wes

cesignated, bg name or by deseription, as the

person toe perform such services. As a matter cof

fact, it has been shown that not only “r, “arcial

P, Lichaueo but also his brother Thomas rendered

the services in question for De la Rue, And it

could never be said that Mr. Marefal ?, Lichaueco

was naneq in the contract with De la Aue beesuse

when its representative from ingland called on hia,

he said, “You ¢o sot seed a lawyer. What you need

is @ representative or agent™ (p. 142, t.a.%.).

273

DECISION «

CTA CAGE HO, 1723

9

An analysis of the nature of the services

rendered to or performed for Be la Rue by peti-

tioner, aeting through Thossas ". Lichanco and/or

Mareial *. Lichaueo, reveals that it is basically

the work of an agent, which is included in the

secondary purpose of the taxpayer. Accompanying

a De la fue representative te such Central Sank

officials as he sey wish to eall on ia connection

with propesed bidding for printing ef paper eur-

reney end bonds, when the contract is always

awarded to the lowest bidder; making inquiries to

determine what would be needed, how much it would

cost and what personnel should be hired te look

efter De la fue's exhibits in a trade show; look-

ing into the possibilities of De la tue entering

into an informe] pertmership with a good Pilipino

printing firm for the setting up of a machinery in

Mantle for the printing of postege stamps and

cigarette strip stamps, being requested to offer

for sale a be la Rue banknote counting machine to

the Central Bank which the Sank rejected; and

securing the printing in various “anila newspapers

of a statement thet woulé make the Filipino reading

publie more conscious of the superiority of De ls

Rue's work in conneetion with the printing of

Philippine paper eurreney ~ ali these and other

similar services do not by any streteh of the

imaginetion require the talent or skill of a well-

x

DECIEION «

CTA CASE BO. 1723

10

known corporation lewyer, an inflvential figure

with decrees obtained in the United Stetes and a

san considerable prestige and connections.

J sie 65 ef the Nevenue Code is an exact

copy ef the United States Federal Income Tax Lew

on the subject (Gee 1.8.0. J195%7, See. 93 La7

L357; 18.0. A939, See. 502Le7; 1938 Rev. Act,

See. 4O3Ze7; 1936 Nev. set, Tee. 353 Le7, as

amended by 1937 "ev. Act, Sec. 15 see alse 7 Mer-

tens, Law of Federal Ineome Taxation, p. 22) | as

construe? in the United Ststes, the provision is

regard to persona? service contracts (Sec. 65 /67),

4s intended primarily to reech cases of “incorpo-

rated talents,” which is e tax avoidance schene

through the formation of « corporation whereby

the individual who is praetieally the sole incor-

porator, enters into « contract with the eerpo-

ration to perform pereonal services for the per-

son or persons whom the corporation might designate

st a nominal compensation but for whiek services

the corporation collects a much bigger amount fros

the person or persons for whom the services are

actually performed. Thus the individual achieves

substantial imeunity from high individuel rates by

having the corporetion accumulate most of the sums

received, paying thereon only the normal corporate

tax (7 Mertens, law of Yederal Income Taxation,

Supra). By the deviee of the personel holding

DECISION «

CTA CASE 85. 1723

11

company, therefore, an individual whose income

from his extraordinary skill or exceptions! talent

is large, like a movie star or business executive,

would form a corporation ané contract his services

te sueh corporation at a nouinal sus. In turn,

the corporation would then contract with third

persona, who are the real empleyers, who are will-

ing to pay huge amounts for the extraordinary skill

er exceptional talent of the designated party, and

the highly skilled or talented person would thereby

avotd high income tax retes, The highly skilled

or talented person, who is to furnish the services,

ie always oamed or designated in the contract with

the real employers. |

In the cage at bar, there ig no indication

that petitioner corporation was designed to avoid

the income tax due from ". *. Licheueo through the

formation of a personal holding company. The

corporation was organized to engage in a legitinete

business. Probably, the services of Mr. Nercial

Pe Licheweo vere some of its valuable essete, wt

the contract with De le Nwe 414 not specifically

require his services by name or by deseription.

"fo doubt De le Rue probably desired his services,

but the services were equally performed by r.

Thomas “. dchauco. Sven more, as stated above,

petitioner was incorporated in 1951 while the

services now under question were sot rendered until

Ne

bat

a

DECISION «

CTA CASE 80, 1723

2 |

1958. It can hardly be said that “%. Marcial F.

Lichauco formed petitioner corporation for the

purpose of siphoning the income to be derived

from the personal services te be performed by hin

personally for De la Sue at a not too substantial

commission ef °26,620.50,. The instant case is

only that of a taxpayer engaged in a legitimate |

business with no purpose or intention to use the |

eorporation to evade texes, even if it is owned or

contrelled by one family.

L” Inasumch as no person other than petitioner

had the right te designate, by name or by deserip-

tion, “ir. Marcial P. Lichauce as the individual

whe was to perform the services with De La Rue,

or “r. Marcial ?. Lichauco was not designated, by

name oF by Geseription, in the contract as the

‘individual to perfora such services, the sum of

$26,620.50, whieh petitioner earned as commissions

in the taxable year 1958, can aot be considered as

amount received under a personal service contract

with the Thomas de la Rue & Co., Ltd. of Mngland,

Consequently, 1% 3s not a personal holding company

income for purposes of determining whether peti«-

tlioner is a personal holding company in the taz~

able year 1956, \ With thia conclusion, it becomes

unnecessary te decide whether Mr, Marcial Ps

Lichaveo, at some time during the taxable year

1958, owned, directly or indireetiy, 25% or more