GOSk PP. FRRVANDEL vs. TH? ACTING COMMISSIONER | OF INTSRMAL BEVERUR _ hervondent. hs f\ Rewe wnaeseeuwe i DFréIsieRr Petitioner appealed from the decisions ef responient assessing petitioner for deficien-~ ey ineeme tezes of $10, et al.

SEPUBLIC OF THE PHILIPPIN}?

COURT OF TAX APPEAL#

QUEZON CITY

GOSk PP. FRRVANDEL

Petitioner, |

versus , CTA CASE NO, 1756

TH? ACTING COMMISSIONER |

OF INTSRMAL BEVERUR _

hervondent. hs

f\

Rewe wnaeseeuwe i

DFréIsieRr

Petitioner appealed from the decisions

ef responient assessing petitioner for deficien-~

ey ineeme tezes of $10,884.40 and §6,060.2%, plus

£30.00 and ®140,00 compromise penalties, for 1960

and 19614, respectively.

Petitioner filed his income tax returns for

1969 and 1961 wherein he claimed eertain dedue:

thens from his gross income (fxhs. A 4 5, pp. 23,

31-34, BIR vee.) After verification and inves-

tigation of the incosze taz return and books of |

accounts of petitioner for 195°, respondent is-

sued a “efficiency income tax assessment dated

Mey 31, 1965 againet the former dewanding the

payment of §19,861.40, plus the sum of *35.00 as

eompromise penalty, because respondent disallowed

petitioner's claim for de@uetions of: (1) losses

incurred in the breeding an¢ training of race

DECISIOF -

CTA CASE MO. 1796

2

horses, and (2) contributions to charitable in-

stitutions, computed and itemized as follows:

Net income diselesed by the

return as andited »« . 2. 26.0 © 6a,075 046

Unallowable deductions g ad~

ditional intone:

(1) a:

© 6 & © « of 3,706.00

(2) re on Horse — aid

Nacing (Net in

eonnection with

the yor int ° £195790017

Tetal Adjustments . . « « » «

fet income as per investigation eReE

Leese personal and additional

exemptions ..«+s++s«s# e

Anonnt- sudjeet te tax « « «

Income tax due thereon « e «

Less amount already assessed

ow lens ¢~ 2’ ee a

thiy foterest from

i . Row qlee

Totel deficiency income tax due. .

Compromise for no books of

vs e¢8& @ @

eee

eecountsa . s+ + « ? 30,00

no belance sheet

¥e13) . $

rotak COM” RoMISTS DUE gue

(Sante DO 3y Pe 13, SIP rec.

Respondent likewise disallowed similer clains

of deduction by petitioner and issued om Apria 15,

1966, am ag@eSsment notice ageinst him fer +961

deficieney income tax of P,060.26, plus Pi#0,00

as ounpnenbes penalty, computed and itembsed as

follows: .

Net 4 4iselosed by the

Oats as audited .. 2 se. ® 63,29°.5%

deductions 4

eres 1 income:

= in horse races.

was 4isallowed

» 44

DECIGION~j

CTA CASF WO. 1756

— in the. re-

oe 8 @ ®@ 913,626.15

(2) Genteibations un

supported .. » « is). 00

ie edjustments .

t income as per investigation 2 Igoe

sil ee ° a

Amount subject to oo* © @ @ 9 .

Income tax due thereon «.. +. «+ » 26,682.00

Less amount uety asessest. ose

Asterass f

to Wee —

Total deficiency income tex due . . cee

Conyieatons

—* Profit i

and Less é 0 « #90,00

ae cortification by

Certified Public Ac

*soe«e 70.00

sheet

compromise due

(Exh. G, p. 47, BIR rec.

In a letter dated July 1%, 1965 wnieh was re-

ceived by respondent on the same date, petitioner

requested the reconsideration of the said 1960 defi-

ciency income tax assessnent, but the same was

denied by respondent in his letter of April il, 1966

which was received by petitioner on April 19, 1966

(pe 26, BIN rec. and p. 1, par. 4, Petition, CTA

rec.). “hereafter, petitioner filed with this

Court a petition for review aveailing respondent's

deficiency income tax assessments for 1960 and

1961.

PRECISION «

CTA CAGE Ko. 1756

*%

The isenes submitted frr the resolution of

this Court are the following:

(1) Whether or oot this Court has

jurisdiction to entertain the appeal

on the deficiency income tex assess-

ment for 1961;

(2) whether or not petitioner is

engegeé in the business of breeding

and treining race horses 8° af to en- \

title hie te deduct from bis gross fae

ome the expenses incurred thereiny

(2) Whether or not petitioner's

elaim for charitable contributions

shovlé be allowed ae deduction re

gross ineome.

FIRST ISHUB: 7 ;

Respondent raises in his memorandum the issue

of whether or not thia Court has juristiction to

entertain the apreal or the 1961 4efictency inecowe

tex assessment in aveation, lie contends that the

aforesaid assessment hae never heen contested or

disputed by petitioner and, therefore, there is no

decision of respondent which 12 enpealadle to this

Court.

We find reepomient’s coantertion well takea.

The BIR reeords show that the 1951 defteteney in-

come tax assessment dnote? ‘nril 15, 21966 had never

been eontested or disputed by petitioner. ‘The ap-

peal, therefore, of petitioner anavates from the

assesrvent itself and not from « decision of the

respondert Cowmmiseioner of Internal Revesue on a

DECISION «

CTA CASE WO, 1756

disputed assessuent.

Seetion 7(1) of Republie Act io. 1125 provides

as follows:

onc. 7. . «= The

Court of Tax 4 = exercise

exclusive te te jurisdiction to

review by appeal, as herein provided -

(4) Snare ef the Colicctor

of Internal Revenue :

3

nternal revenue —— er other

charges, penalties in relation

thereto, or other matters arising on-

der the tational Internal “evenue Code

or other lew or part of law sdminis-

bent os 1 Arr the Bureau of Internal "avenue.

Underlining supplied.)

An assessment issued by the respondent egeinst

a taxpayer is act appeslable to this Court. nly

the deeision of responient on a disputed assess-

ment is appealable thereto. An assessment leeved

by the Commissioner of Internal levenue becomes a

disputed assesement whare the taxpayer questions

ite legality either by protest, requests for can

Cellation, reacnsideration or reinvestigaticn, it

is the conclusive answer or decision of respondert

to the protest, requests icr cancellation, recon

sideration, or reinvestigation of the taxpayer which

is appealable to this Court.)

In other words, the decision (not the scsers-

ment itself) of respondent on a disputed assesauent

4s appealable to the Court ef Tax Appeals. (5t.

DECISION «

CTA CASE NO. 1756

6

Stephen's Asa. v. Coll. of Int. Bev. 10% Phil.

31%; Comm. of Int. feve vs Villa, at al., O.%. Mo.

L~23988, Jan. 2, 1968.) Thus, our Supreme Court

in the above~eited case of Ville held, among

ses as follows:

«, Note that the lew uses the

wore ‘eeeistons” not yy et ee

Since in the instant case the

py r appealed from the assessment

of Commissioner of Internal Kev-

ernie without srqrhenny eee

ourt

jurisdiction. As sueh, it ean take

cognizance only of such matters as

are Clearly within ite jurisdietion.

(Unéderiining supplied.)

Consequently, the appeal involving the 1961

deficiency income tax ssseserent issued by re-

Spondent ageinst vetitioner should be, as it is

hereby, dismissed for lack of jurisdietion.

SRCOMD IsSiRs

Respondent cleias thet the breeding and main-

tenance of race horses by petitioner is werely a

hobby and not a business cendugted for profit be-

cause: (1) petitioner's income from seid activity

DTCISION «

CTA CASP BO. 1756

7

came solely from prises of winning horses whille |

the expenses for breeding ant reising of rece

horses are excessive and not commensurate with ‘the

income derived therefrom; (2) petitioner's income

tax returns for the past five years, inclusive of

1960 and 1961, refleeted losses in the venture in

questions (3) petitioner fs known as a horse racine

fen whose pictures appeareé in the newspapers to-

gether with his winning horses; and (4%) petitioner's

executive position in various business corporations

is incompatible and alien to the business of breed~

ing an@ reising of race horses.

VA We eannot subseribe te respondent's view.

There is no incompatibility in the work of a person .

who is an executive in various business corporations

and et the sane time engeging in the business of

breeding and raising of race hersea. ‘f the tax~

payer devotes time, attention and labor to the

latter undertaking with the intention of deriving

profit therefrom, he is deemed to be enyaged in

business. In the ease of Commiesioner of 'noternal

Revenue vs Fielé (67 F Z2d/ 876-878), which is

similar to the case at bar, the taxpayer was en-

gered in banking ané other business enterprises,

including the overation of a farm and horse breed-

ing and racing. In his income tex returns, tax-

prerere: -

CTA CAGE RO, 1756

payer cherced off loseos suetetred by nin in the

| overation of » farr sed racing viable. The | iaSs

Commissioner of ‘'cterosl \evenue, like our re

spentant, tefrced ta allow the deduetion of losses

from eroes income becarss the tarneyer was coerating

his fern ard recine steble as @ acbby ent not as

a business for premite Both the . SG, Soard of

Tax Apreals anf the Cisenit Court of Anceals allowed

the gednetfom of said locses from the taxpayer's

gross ircene en! ruled ae Pellowss

S. « « the court re, 48 tec u

éefinition of business as "het witch

eceuplrs She. Pong » ettention, and

later of men for he pw ory oe

lMiveliheed or prerit.' Tt is not es-

sentinl that the taxverer be ercerr?

aclely in ome bosiness, He may have

interests tn severe) enternrizes anong

watch he ‘ftwides hig tine. "3s in-

tention ts imnortant. . «

“Tn the fnstan® cause, thete 4:

substauntieol evidence that the enter-

prises vere confuete’ as « business

Tor profit ead with an expectatior of

ultisete orefitse, ‘os cannot csr that

the expectation of profits 4s unrea-

senoble or foreeast cantimuonr tostes

‘Gm the Licht of experienee in cattle

or horse bree@ing and reaing. ° the

right to Se¢uct lesses under the

stetute reowired thet ereftt ersesr to

the court to be possible, that reqiire=

went wonld be ouite qenere? ant —

ve Hey recone to any enterprise

t wes forsing, ateies

bis pPometion af eny cherecter

may aot, in this

Lessee Weeee

DECIBION «

CTA CAST WO. 1796

our

guide. -9 this case we think the ree

spormient embarked in these enterprises

with the expeetetion of making profits;

at least he did so with an carnest

acd honest intention,”

7

Again, in the case of Commissioner of Internal

Revenue v. Widener (33 ¥ 24 833), the deduction of

lesses for breeding and meintenenee of race horses

was sustained by the Court, It was held therein

thats

"The first auestion te be

answered fe whether the setivities

of the petitioners in respect of

their racing end breeding stables

conatituted a business. An affir-~

mative answer carries with it the

right to deduct the expenses of

bow nal operation and the losses sus-

8 °

"The evidence establishes that

the petitioners were engaged in the

business of breeding, buying, and

selling race horses and entering

them im recing contests for cain.

They tortified that they sought ot

all times te meke 9 suecess of the

enterprises and that their only

neasure cof success was financial

gain. Their horses were chased

af investments, the selective bdbraed-

ing wat inflwenced by the thought

_ Of winning stakes and purses, ané

the @isposition of horses was either

for profit by sele or for riddance

of those not economieally useful.

These are emong the chareecteristies

2 F. #, 2 Ae lols 174%. The feet

DECISION -«

CTA Case WH). 1756

qo

. t were utter

erent to whether there wes

less or ge or if 1t were shown

thet the sta were an incident

te the social or domestic aspects

of their daily lives, the result

might be Seaiest ier? as in Thacer

} Ls _instea’ i appears that .

they 4 e¢ themselves seriously

and elias to the economic

promotion of ir stables, alweys

in the hone b pad press® would re-

In the instant case, the evidence adduced

during the trial shows thet petitioner has been

engaged in the business of breeding horses since

1950 (ons 7of, “0, teseme)s that when he bevan

breeding horses, it was his purpose and intention

to realise a profit therefrom by ertering the said

horses in races (op. 5S, 36, teSefie)s that et the

beginning of the breeding venture, he hed only

five to six horses which accounted for hie losses

(pre 32, 40-41, totems), but he euloulated that

after importing some good breeds, he would aske

money by 1968 (p. 11, teSe%e)s that he tried to

eross~breed Betangas horses with local stallions,

but the resulting breed was not satisfactory and,

- -- &= Snmambed heand maven from California

DECISION «

CTA CASE HO, 1756

a4

end stallions fram '\nglend, to make hie projeetion

come true; that petitioner has established a

stable in ‘anila and e stud farm in Delupiri where

ecattie is also raised under the resident manager-

ahip of a veterinarian (pps 39-4), tesene)y that

he has hired employees and workers for the neces-

sary waintenance ef such farms (ppe 37<38, 39,

teo.ns); and thet he Supervises the stable in San

Francisco del Nonte almost everyéay and during his

spare time (p. %5, tosene)» (In short, the actua-—

tions of petitioner indicate that he is engages in

the business of breeding ae treining of rece horses.

Considering further the value of the expensive

horses and the high cost of their maintenance, ve

are prone to believe that petitioner is engaged in

a profit venture, and not fn a mere hobby as con-~

tended by respondent. The mere fact that petitioner

has been continuously losing in the venture does

not negate the profit motive of petitioner. Pure

theremore, evidence was introduced to show that

losses in the breeding venture was Giminishing, jus-

tifying petitioner's projection that by 1960 he

would be making a profit. )

og-—the overetion of a factne

Stable or a Drestin

on a

or a breeding farm being in

DRCISION - .

CTA CASE HO. 1756

12

its essence a risky business Preguent-

ly eivine rise to consecutive veriads

of annual losses, has cceasioned com

siderable tax litigation. while horse

_ is a sport, it nevertheless

netitute a business. existence

oF substantial finanejal risk in the

canduet of such besiness does oct

necessarily convert it inte a hebby

any more than in the case of sny other

adventurous business, such as mining,

of" develonmment or treding in securi-

tles. «il of these businesses involve

a substential risk faetor and frequent-

ly ceeesion periods of continued losses,

the Buresv hes in reetiae frequentiy

digalloved raging and breeding stabie

iosses on the gronm that the taxrayer

had not entered into the transactinn |

for the purpose of deriving 2 profit

and was not operating the steble with

thet owrpese in mind during the taxable

year. In the enses in which the Boreaw

haa rec ged that the trarsection was

origina entered inte for the pose

of waking s profit, it has aie

denieé@ deductions in subseqrent years

where the operetion of the stable hes

shown & consistent series of losses.

“neh ¢isallowanees har been ~remised

apperentiy on the assumption that a .

person would net centinue in a business

which hes conristertly shown licsces

unlese auch continuance was motivated

primarily by the pleasure derived there-~

from. In most cases this is a mere ae-

sumption and aust be supported by or

eld to the ~~ soaee auvelves.

DECISION o

CTa Caste 80, 1756

13

“There must age at ‘the incep=

tion of the venture, an intention to

@erive ineone thete and ordineri-

ly an eupectation of bg a ven-

Wis RPG l od = it Lx fee

ot become @ hobt .

sile que sroftt-netive ena By

ap tease he The genres ui

eater ly su _

r Stina arto t ma LiteLinond a

* he stat oseedt ° sta aards

of ordinary busineseman ag to

whether the business is or is not ea

successful one are avtcunty not

appliceble. In view of the cherac-

ter of horse recing and horse breed-

ing, the finaneiel reevlt is uent-

ly either a feast or a famine. To

steady the curve wires considerable

experience and skil

"It has been held in a number of

cases that the mere feet that the

venture has shown continuous losses is

not alone sufficient to werrant the

cenclusion that the stable is not

ane _— erated for profit." age

edersi income Taxati Vol.

8 “26.7, Chap. 26, pages 326-327,

1953 Revised Paition.)

we are satisfied from the evidence that the

losses were incurred by petitioner in the busi-

‘pees of breeding and training of race horses.

The egaid losses are, therefore, dedvetible from

petitioner's gross income. .

THIRD ISSU®,

Respentent disallowed petitioner's elais for

pROCISION ~

te

certain deduetions of contribution because they

are not supported or evidenced by receipts. iec-

tion 30(h) of the Tax Code, and Geetion 116 of

Revenue Regulations No. 2, whieh ere relevant to

the question at issue, read as follows:

SEC, 30, .

ein _Sonpatine et _ineoar there

be al as deduetions -

a x x a

x

(h) Charitable and othex con-

irpimiond° ontri ons or gifts

ectua pe

id or wade within the

taxable year to or for the use of the

Government of the Fnilippines or any

politieal scubdivision thereof for ex-

elusive publie purposes, or to domes-

tie corporations cr agsoefations

organized ant operated exclusively for

athletic, eultural or educational por-

poses or for the rehabilitation of

veterans, or to societies far the

prevention of cruelty to children or

enimals, no part of the net ineome of

whieh inures to the benefit of any

private stockholder or individual te

an emount not in exeess of six

in the case of an individual,

and three per in the case of a

corporation, e taxpayer's tax-

able net income as computed without

the benefit of this paragraph. By