E. !Lt Tc 0, et al. vs. vs. COJ.L}Iissioner of I Nternal Revenue

DECISION -

C. T.A. CASE NO . 995 - 2 - filed income tax returns for t he years 1953 and 1955. It appears in t he partnership return that only fifty per cent of t he profits ~ealized from t he sale by the partnership of the Nasugbu property was reported on \ the belief that the said profits were capital gains . It appears further that there were claims for deduc- tion vihich were disallov;ed by respondent Commissioner of Int ernal Revenue .

After the investigation of the income tax returns , it was disclosed that the partner- ship sold, in 1952 , 6oo, ooo shares of Masbate Consoli- dated and 300, 000 shares of Eastern Development Co. which it acquired before the war . It was also gathered from the books of the partnership that the residential house at 1850 Wright Street , Manila , was rented in 1952 bJr Jose Hoxas , one of the brothe:rs vrho is a part- ner , for P8, ooo. oo.

Consequently , respondent demanded of the partnership Roxas y Cia . the payment of Pl50. 00, as real estate dealer ' s tax , and PlO. oo, as compromise , and ?150. 00, as tax for being a dealer in securities and PlO. OO , as compromise , or a total of ?320. 00. As against the partners , respondent determined a defi- ciency income tax in amounts which follm.v-: 1.95..3.

ill5:

TOTAL

Antonio Hoxas

j')7, 010. 00 P5 , 813 . 00 ?12, 823 . 00

Eduardo Hoxas

7, 281 . 00 5, 82B . OO 13 ,109. 00

Jose Roxas

6, 323 . 00 5, 58B. oo 11 , 911 . 00 This case turns upon the r esolutions of t he follOiving issues :

1. I s the profit derived from the sale of the

I

DECISION

C. T.A. CASE NO . 995 ~ Nasugbu property by the partnership a capital or ordi- nary gain?

2. 'as the partnership Roxas yCia . a real estate dealer in 1952?

3.

Are the expenses and/or contributions dis- allmved by respondent allovtable deductions under the law?

4.

l'las the partnership Roxas y Cia. a dealer ~n securities in 1952?

The first and second issues are interrelated and we shall consider and resolve them together .

Peti-

tioners contend that the sale of the Nasugbu property , which v1as inherited from their mother , is merely a liquidation of ncapital assetn and therefore the pro-

I

fit realized therefrom should be treated as a capital gain, only fifty per cent of which should be returned ' for income tax purposes .

Respondent , on the other hand , advocates as ordinary gain treatment of the pro- ' fit inasmuch as the Nasugbu property was subdivided into lots and sold on an installment basis during a period of ten years .

It is true that the property in question was originally a capital asset. But to re- solve the variant contentions of the parties , it be- 1 comes necessary to determine 1.vhether or not upon the subdivision and sale , the property retained its capi- tal asset status as defined in Section 34(~)(1) and

(2) of the National Internal Revenue Code , which pro-

DECISION -

C. T .A. CASE NO. 99·5 - 4 - vides as follows :

"SEC . 34. Capital gains and losses . -

(a) Definitions . - As used in this Title-

(1) Canital ~ssets . - The term ' capi- tal assets ' means property held by the tax- payer (vrhether or not connected vri th his trade or business) , but does not inc1ud~ ~ock in tr.ade of the taXI>UY~.l' or oth~r: :groper.ty of a kind which Y{ouJJL..P.rcmerlY.: be included in the ipveilfpry of the ta4:gayer if on nanQ ~~ the clofi~ of the taxabl~ y~ar , or pPoperty held by the tqxpaLe~ nrimarily for sale to cus.tom~r..§ in the. ordinary course of his trad§ or busines~ , or property, used in the t r ade or business, of a character which is subject to the allOi·Tance for depreciation provided in sub- section (f) of section thirty; or real pro- perty used in the trad~ or business of the taxpayer . (Underscoring supplie4)

(2) Net canital gai.n . - The term 'net capital gain ' means the excess of t he gains from sales or exchanges of capital assets over the losses from such sales or exchanges."

It 1dll be noted from the afore- quoted defini- tion of 11capita1 assetstt that all properties not specifically excluded in the statutory definition are regarded as capital , the profits from the sale or exchange of 1·Thich are treated as capital gains .

Con-

versely, all those properties specifically excluded are considered as .ordinary assets and the profits realized therefrom must necessarily have to be treated as ordinary gains .

The yardstick therefore for de- termining whether the profit in question is a capital or an ordinary gain is the statutory definition of a capital asset .

However , as held :

"The definition of a capital asset must be narrowly applied and, ,its exclu- sions interpreted broadly.

!his is neces-

DECISION - -

- 5 - sary to effectuate the basic Congres- sional purpose .

(Corn Products Refi-

ning Co. v. Comm. 350 u.s. 46 , 100 L. Ed. 29 , 76 S. Ct. 20 (1955) , rehearing den. 350 u.s. 943 , 100 L. Ed . 823 , 76 S. Ct . 297 (1955), cited in Mertens ' Law of Federal Income Taxation, Simet & Weiss Rev., Vol . 3B, Sec . 22.11 , (Footnote 71) . Petitioners claim that the partnership Roxas y ....

Cia. has never engaged in the real estate business; that the Nasugbu· property was disposed of , not by way or in the course of realty business, but confor- mably ·with the policy enshrined· in the Constitution to break up large estates and apportion them to the landless ; that the property could not be classed as property held for real estate trade ; that the price at which the property was sold was _even lower than the assessed value; that the ordinar y methods used to attract buyers were not resorted to in disposing the property; and that the said disposal took place as a consequence of only one agreement . Accordingly , it is urged that these circumstances demonstrate that the disposal of the property constituted merely a liquidation of capital asset.

Wnile it is not disputed that at its inception, the partnership vras not engaged in the real estate business , however , from the time that it subdivided the Nasugbu property and subsequently sold the result- ing lots to the tenants on an installment basis , there was dedication to the business of real estate dealer . The subdivision and sale had the effect of converting it/

DECISION

C. T. A. C SE NO. 995 ~ - 6 - the property into one used in business (Antonio Tuazon, Jr . vs . Jose B. Lingad , C. T.A. No. 1398 , January 16 , 1965. )

In consequence , the Nasugbu property ceased to be a capital asset and assumed the character of an ordinary asset , the gain from the sale of which is tax- able in fUll .

It may be true that the disposal of the Nasugbu property was made in pursuance of the constitutional policy of breaking up large estates and apportioning them to the landless and that the sale was effected at a price lovrer than the assessed value . But the fact remains that in disposing the said property, the partnership H.oxas y Cia. has engaged in the real estate 'business .

The motivation in the disposal of the Nasug- bu property , however notie and patriotic it may have been, is not determinative of whether or not the said property is a capital asset .

The gain or loss from the disposition of such real estate would; nevertheless , be treated as ordinary.

Similarly, the circt~stances that the partnership did not resort to the ordinary methods of attracting buyers and that the sale to the tenants was made in pursuance of only one agreement do not militate against its status of real estate dealer . Respondent Commissioner of Internal Revenue has therefore correctly treated the profit realized from the subdivision and sale of the Nasugbu property as an ordinary gain.

DECISION -

C. T. A. CASE NO . 995 - 7 - Respondent ' s claim that the partnership Roxas y Cia. Has a real estate dealer in 1952 is anchored upon Section 19lt(a) , of the Nati'onal Internal Revenue Code , which states as follows :

" (s) x x x .

' Real ~state dealer ~ includes any person engaged in the business of buying , selling , exchanging , leasing , or renting property as principal and holding himself out as a full or part- time dealer in real estate or as an mmer of an aggre- gate amount of four thousand pesos or more a year .

Any person shall be considered as engaged in business as real estate dealer by the mere fact that he is t1be Oimer or sublessor of property rented or offered to rent for an aggregate amount of four thousand pesos or more a year . x x x. 11 It appears from the evidence that the residen- tial house at Nright Street v.-as occupied in 1952 by Jose Roxas Gargollo , one of the three brothers vTho formed the partnership of Roxas y Cia. , in considera- tion of a nominal rent of P600. 00 per month, in addi- tion to the real property tax.

From t he establishment of the partnership, the house vras used a s residence of the partners- brothers until the partners, Antonio and Eduardo, got married and moved to their o~n res- pective family homes .

It is the contention of peti- tioners that the rental of the Wright property amount- ing to Y8,ooo. oo (including the real estate tax) was recorded merely for accom1ting purposes and not for profit.

\·'e believe that it is not t his leasing vThich made the partnership Roxas y Cia. a real estate dealer, but it is the fact th'.".l t as heretofore held , with the subdivision and sale of the lots to t he tenants , the

I

DECISION -

R· T.A. CASE NO . 995 - 8 - partnership has actually engaged i n the real estate business within the contemplation of Section 194(s.) , of the National Internal Revenue Code. 'V e no1.v come to ~he third issue . Are the expenses and/ or contributions disallmved by respondent allow- able deductions under the law?

The follo·wing are the only disputed items, as listed in petitioner ' s memo- randum :

Roxas y Cia.

1953

(a) Tickets purchased for the banquet in honor of S. Osmefia (Exhibits Q, Q- 1 & Q- 2) , being re- representation expense deductible under section 30(a) , NIRC •••••••• ?

40. 00

(b) Contribution to con- truction of Philippine Air Force chapel (Exhibit T) , beine a religious contribution, and, at that , to an agency of the Govern- ment , and therefore deduc- tible tmder section 30(h) NIRC • • • • • • • • • • • P 100. 00

(c) Contribution to the

Nanila Police Trust Fund

(Exhibits EE, EE- l & EE- 2) , being a charit able contri- bution to an organization qualified under section 30(h ) , NIRC • • • • • • • P 150. 00

(d) Contribution to the Philippine Herald ' s fund drive for Manila ' s need- / iest families (Exhibits V, & V-1) , under section 30(h) , NIRC •• .••••••• ••

P

(e)

Gifts of San Miguel

beer (Exhibits X and X- 1) , being in the nature of re-

I

~ 100. 00

~Q9-

presentation expenses de- ductible under section 30

(a) bd NIRC e e e e e e e e e

(a) Contribution to Lady of Fatima Chapel, FEU (Ex- hibits HH & HH-13, being a qualified deduction under section 30(h), NIRC....

ANTONIO ROXAS - 1953

(a) Contribution to Pasay

City Firemen's Christmas

Fund (Exhibits AA & AA-1), ualified under section 30 h), NIRC eo ee 8 @® @ e# @ @

(b) Contribution to the

Pasay City Police Depart-

ment, an agency of the Go- vernment (E hibit BB), de- ductible under section 30 (h), NIRC e e e e e e e e e

(a) Contribution to Ba- guio City Police Christmas Fund (Exhibits KK, KK-1, KK~2 & KK=3), qualified under section 30(h), NIRC .

(b) Contribution to Pasay

City Firemen's X'mas Fund

(Exhibits LL, LL-1 & LL=2) ualified under section 30 th), NIRC « « «eo © wo © oO

(c) Contribution to Pasay

City Police X'mas Fund (Ex-

hibits MM, MM-1, MM-2 & MM=3), qualified under sec- tion 30¢

EDUARDO ROXAS = 1953

(a) Contribution to the.

Hijas de Jesus' Retiro de

Manresa (Exhibits CC, CC-1, OG=2, 06-3, CO-k, 00-5, oF a ..

h), NIRC . 2s sss P 28.00 50.00 25.00 50.00 25200 25.00 50.00

- 10 - CC- 6 & CC- 7) , qualified un- der section 30(h) , NIRC ••• P 450. 00

(b) Contribution to the Philippines Herald ' s orga- nized fund drive for Mani- la ' s needies families (Ex- hibits DD, DD- 1 & DD- 2) , qualified under section 30

(h) , NIRC •••••••••• P 100. 00

(a) Contribution to the Philippines Herald ' s orga- nized fund drive for Mani- la ' s needies fam}lies (Exhibits NN, NN 1 & NN- 2) , qualified under sec- tion 30(h) , NIRC •••••• P 120. 00

JOSE ROXAS - 1955

(a) Contribution to the Philippines Herald ' s orga9 nized fund drive for P1ani- la 1s neediest families (Ex- hibits oo , oo;1 & o6- 2) , qualified under section 30

(h) , NIRC ••••••••• P 120. 00 Petitioners justify the deductibility of these items as business expenses. and contributions under the provisions of Section 30 of the National Internal Revenue Code, which read:

"SEC. 30.

Deducti..Qll~ from gros~ income . - In computing net income there shall be allowed as deductions - "(a) Exnenses:

11 (1) In general . - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reason~ able allov;ance for salaries or other com- pensation for personal services ·actually rendered; traveling expenses while away from home in the pur suit of a trade or {() l !L - business ; and rentals or other payments required to be made as a condition to the continued use or possession, for the purposes of the trade or business , of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

"x

X

X

X

X

"(h) Chari tab...le and other con,.1r.i- butions . - Contributions or gifts actual- ly paid or made vli t hin the taxable year to or for the use of the Government of the Philippines or any political subdivi- sion thereof for exclusively public pur- poses , or to domestic corporations or asso- ciations organized and operated exclusively for religious, charitable , scientific, ath- letic , cultural or educational purposes or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals , no part of the net income of which inures to the benefit of any private stockholder or individual to an amount not in excess of six ~er centum in the case of an individual , and three per centum in the case of a corporation, of the taxpayer ' s taxable net income as computed without the benefit of this para- graph.

Such contributions or gift shall be allO'I.vable as deductions only if verified under rules and regulations prescribed by t he Secretary of Finance . (As amended by sec . 7, Republic ct No. Ba) Respondent , hovJever , maintains that these expenses and contributions cannot be allovied as deductions because the partnership Roxas y Cia . does not have a net taxable income .

In support of his stand , he quotes Section 703 of t he U. S. Internal Revenue Code (1954) , which reads as follovrs : "SEC . 703 . PAR'rNERSHIP COMPUTATIONS. tt(a) Income and Deductions . - The taxable income of a partnership shall be computed in t he same manner as in the case of an individual except that - "x

X

X

X

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DECISION -

C. T. A. CASE i O. 995 - 12 - 11 (2) the following deductions shall not be allovmd to the partnership :

X

X

X

11 (D) the deduction f or chari- t able contributions provided in section 170. 11 (U. s . I . R. C. (1954) , Sec . 703(a)(2)(D) A per us.al of our National Internal Revenue Code does not yield a provision similar to the above- quoted section - of the u.s. Internal Revenue Code . Hence , the latter can- not be regarded with persuasive effect in our jurisdiction. \'lith respect to item (a) which the partner ship seeks to deduct as a representation expense , we do not see any direct business benefit which may reasonably be expected to flow from the banquet .

Consequently, the disa.llovlance of thQS - deduction claim; should be sustained. Item (b) , a contribution for the construction of a chapel of the Philippine Air Force, i.rlhich is a part of the Philippine government , is deductible under Sec . 30(h) of the National Internal Hevenue Code. Items (c) and (d) should likewise be disallowed for the reason that there i s no showing that, the recipients are associations organized and operated exclusively for charitable pu~poses , no part of the net income of which inures to the benef it of any private individual . (See Sec . 30 (h) of the Revenue Code . )

In the absence of evidence that item (e) , consisting of gifts of San Niguel beer , was incurred in producing or in the exp_ectati on of producing revenue i n t he business of Roxas y Cia., its disallowance was proper. Similarly, item (a) for 1955, representing con- tribution to Lady of Fatima Chapel, FEU, was properly disallowed as the same was made to a recipient Uni- {

DECISION -

U.T.A. CASE NO. 995 13 - versity, which is a stock corporation, part of the net income of which inures to the benefit of private stock- holders .

Finally, the contributions of the partners to the various city police and firemen ' s funds , and to the Herald ' s fund drives , are not deductible in the absence of proof that the recipients thereof are asso- ciations organized and operated exclusively for chari- table or religious p~rposes , no part of the net income of \vhich inures t o the benefit of private individuals. But t he contribution of Eduardo Roxas to the HlJ'as de Jesus' Retire de 'Hanresa in the amount of P450. 00 should be deducted under Sec . 30(h) of the National Internal Revenue Code as one made to a reli- gious or charitable association.

Huch as vre would like to allow the deduction of all the disputed items i n view of the worthy causes fol: \·:h;i.ch they ¥Jere given, we are constrained by the provisions of our tax laws to act otherwise. called upon to apply the la\v, not to legislate. "Deductions are a matter of legis- lative grace .

The allO\vance of deduct- ions from gross income does not turn on general equitable considerations but depends upon legislative gr~ce , except 'ltlhere the.ra may be involved exhaustion of capital producing the gross income . Accordingly, a deduction vlill be allovJed only where there is clear provisions for the particular deduction claimed.'' 01Ier- tens Law of Federal Income faxation, Vol . 4, Sec . 25. 03 , p. 306 , citing Deputy

v. Pierre s. DuPont, et al . , Adm ' rs , 308, U. S. 488, 84 L. Ed. 416, 60 S. Ct . 363 (1940); New Colonial Ice Co . v. Helvering 292 U. S. 435, 78 L. Ed. 1348, 54 S. Ct. 788 (1934); and others) .

f e are

DECISION -

C. T.A. CASE NO . 995 - 14 \'le nm.v come to the last issue . \vas the part- nership Roxas y Cia. a dealer in securities in 1952? From the records of the case and the evidence pre- sented , it appears that the partnership has been holding various stocks for purposes of investment .

I

In the year 1952 , the partnership Roxas y Cia. sold the following stocks :

1 . March 13 , 1952 - 300, 000 shares of Has- bate Consolidated at Pl0 , 237. 50;

2. Harch 15, 1952 - 300 , 000 shares of Has- bate Consolidated at P9 , 945. 00; and

3. Dec . 26 , 1952 - 300 , 000 shares of the Eastern Development Co . for Pl , 755. 00, which it acquired before the last war .

Section 194 of the National Internal Hevenue

Code , as amended by Rep .

ct No. 42 , defines 11dealer in securities 11 as one vTho for his o1m accou.rtt is en- gaged in the sale of stock , bonds , exchange , bullion, coined money , banl~ notes , promissory notes , or other securities .

In the light of the evidence presented in this case and considering the statutory definition of udealer in se,curi ties , 11 we agree with petitioners that the partnership Roxas y Cia. holds its stocks merel~ for investments and that it is not engaged as a "deal- er in securities . 11 The sale of the 600 , 000 shares of lvfasbate Consolidated and the 300, 000 shares of Eastern Development Co . in 1952 did not make the part- nership a dealer in securities .

\ie note that the assessment against the partner- ship Roxas y Cia for real estate dealer ' s tax includes a compromise penalty of PlO. OO.

It appearing that JJ j

- 15 - ' "

I

there is no compromise agreement between the former and respondent re.garding its pay-ment , the inclusion thereof is unauthorized and illegal. 'V1HEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas , Eduardo Roxas and Jose Roxas who are hereby ordered to pay the respondent Commissioner

of Internal Revenue

the amounts of Pl2 , ~08 . oo , Pl2 , 887. 00 and Pll , 897. 00 , respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1~ monthly interest as provided for in Sec . 5l(a) of the Revenue Code; and modified vli th respect to the partnership Roxas y Cia. i n the sense that it should pay only Pl50. oo, as real estate dealer ' s tax. With costs against petitioners .

SO ORDEHED.

Quezon City, July 31 , 1965.

I CONCUR :

R OHAJ.'J H. UMAL I

Associate Judge

I

\/{_ 1/W::f;' ~~ ~ ILO D. REYES , SR.

Presiding Judge

' Associate Judge Alejandro B. Afurong did not take part.