GCommissioner Of Internal Revenue vs. Philippine Airlines, Inc., G.R. No. 180066,

G.R. No.L-25043 April 26, 1968 ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE ROXAS, petitioners, vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Leido, Andrada, Perez and Associates for petitioners. Office of the Solicitor General for respondents. BENGZON, J.P., J.: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the following properties: (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas province; (2) A residential house and lot located at Wright St., Malate, Manila; and (3) Shares of stocks in different corporations. To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania. AGRICULTURAL LANDS At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out however that the Government did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers. In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code. RESIDENTIAL HOUSE During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year. ASSESSMENTS On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax. The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of securities. In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, as follows: 1953 P7,010.00 7,281.00 6,323.00 1955 P5,813.00 5,828.00 5,588.00 Antonio Roxas Eduardo Roxas Jose Roxas The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed. The following deductions were disallowed: ROXAS Y CIA.: 1953 Tickets for Banquet in honor of S. Osmeña Gifts of San Miguel beer Contributions to — Philippine Air Force Chapel Manila Police Trust Fund Philippines Herald's fund for Manila's neediest families 1955 Contributions to Contribution to Our Lady of Fatima Chapel, FEU ANTONIO ROXAS: 1953 Contributions to — Pasay City Firemen Christmas 25.00 100.00 150.00 P 40.00 28.00 100.00 50.00 Fund Pasay City Police Dept. X'mas fund 1955 Contributions to — Baguio City Police Christmas fund Pasay City Firemen Christmas fund Pasay City Police Christmas fund EDUARDO ROXAS: 1953 Contributions to — Hijas de Jesus' Retiro de Manresa Philippines Herald's fund for Manila's neediest families 1955 Contributions to Philippines Herald's fund for Manila's neediest families JOSE ROXAS: 1955 Contributions to Philippines Herald's fund for Manila's neediest families 450.00 25.00 25.00 50.00 50.00 100.00 120.00 120.00 The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads: WHEREFORE, 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 P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's tax. With costs against petitioners. Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal. The issues: (1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable? (2) Are the deductions for business expenses and contributions deductible? in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. To bolster his stand on the point. the municipal council of Nasugbu passed a resolution expressing the people's gratitude. The findings of the Court of Tax Appeals must therefore be sustained. estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse. and Baguio City Police Christmas funds. and to subsequently subdivide them among the farmers at very reasonable terms and prices. And. the proposition of the Commissioner of Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. The contributions to the Christmas funds of the Pasay City Police.(3) Is Roxas y Cia. Pasay City Firemen and Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas . to sell its haciendas. However. but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. Roxas y Cia. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. he cites one of the purposes of Roxas y Cia.00 for tickets to a banquet given in honor of Sergio Osmena and P28. a real estate dealer during the ten-year amortization period. could be considered a real estate dealer because it engaged in the business of selling real estate. Manila Police Trust Fund. liable for the payment of the fixed tax on real estate dealers? The Commissioner of Internal Revenue contends that Roxas y Cia. shouldered the Government's burden. ordinary and necessary. Although they paid for their respective holdings in installment for a period of ten years. The petitioners also claim deductions for contributions to the Pasay City Police. lest the tax collector kill the "hen that lays the golden egg". went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act. DISALLOWED DEDUCTIONS Roxas y Cia. Pasay City Firemen. and the gain derived from the sale thereof is capital gain. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount. In the case at bar. In fine. pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with. quoted below: 4. taxable only to the extent of 50%. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer.00 for San Miguel beer given as gifts to various persons. Hence. it would nevertheless not make the vendor Roxas y Cia. as contained in its articles of partnership. deducted from its gross income the amount of P40. Roxas y Cia. the Government could not comply with its duty for lack of funds. The deduction were claimed as representation expenses. It does not conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call. The above-quoted purpose notwithstanding. the evidence does not show such link between the expenses and the business of Roxas y Cia. alquilandoles por los plazos y demas condiciones. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro. cannot be considered a real estate dealer for the sale in question. Obligingly. equally and uniformly. Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University. It must be exercised fairly. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. and incurred in connection with his business. 69 Less 1/3 share of contributions 7. the disallowance must be sustained. . Section 194 of the Tax Code. . the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police.249. .00 per annum in 1952.02 186. For 1955 they are liable to pay deficiency income tax in the sum of P109. Under Section 39(h). . this point is sustained. a contribution to a government entity is deductible when used exclusively for public purposes. The law. exchanging. does not provide any qualification as to the persons paying the rentals. On the other hand. Rightly. The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code.476.69 115. The findings of the Court of Tax Appeals or.ñët To Summarize. no deficiency income tax is due for 1953 from Antonio Roxas. On the other hand. profits in Roxas y Cia.000.15 146.00 a year. selling. P91. for all the funds they raised were for Manila's neediest families. "Real estate dealer" includes any person engaged in the business of buying.000.00.1äwphï1. the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground that the said university gives dividends to its stockholders. in considering as real estate dealers owners of real estate receiving rentals of at least P3.59 .gifts to the families of the members of said entities.67 P315.135.00 and P49.042. questions the imposition of the real estate dealer's fixed tax upon it. Eduardo Roxas and Jose Roxas. the chapel in question has not been shown to belong to the Catholic Church or any religious organization. computed as follows: * ANTONIO ROXAS Net income per return Add: 1/3 share. a government entity.ñët . Roxas y Cia. Lastly. the lower court found that it belongs to the Far Eastern University. (Emphasis supplied) . one of the partners.228. Less amount declared Amount understated Contributions disallowed P 153. because although it earned a rental income of P8. Located within the premises of the university. said rental income came from Jose Roxas.00. leasing or renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. respectively. For this reason. which states: 1äwphï1.113. contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders.46 P 7. is too clear and explicit to admit construction.00 P 7. intended to be used exclusively for its public functions. The disallowance should be sustained. There is no question that the members of this group of citizens do not receive profits. 681.55 P304.26 7.200.250.00 =========== JOSE ROXAS Net income per return Add: 1/3 share.02 155. profits in Roxas y Cia Less profits declared Amount understated Less 1/3 share in contributions amounting to P21.800.57 P 304.00 147.196.249.169.00 P 109.00 154.15 146.663. profits in Roxas y Cia.26 4.76 P 153.126.47 .00 P91.126.052.135.amounting to P21.00 ========== EDUARDO ROXAS Net income per return Add: 1/3 share.00 P299.92 P315.15 146.46 P222.06 disallowed from partnership but allowed to partners Net income per review Less: Exemptions Net taxable income Tax Due Tax paid Deficiency P147.592.322.58 P 7.00 P311.47 4.06 disallowed from partnership but allowed to partners Net income per review Less: Exemptions Net taxable income Tax due Tax paid Deficiency 154.060.166.042.159.429. Less amount reported P153.463. 00 =========== WHEREFORE. JJ.43 P102.042.953.. the decision appealed from is modified. is hereby ordered to pay the sum of P150. Roxas y Cia. Dizon..763.113. Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00 P 49.800. took no part. Castro. Concepcion. J.00 P220. C. Angeles and Fernando. Zaldivar. and Antonio Roxas..714. . No costs.43 1.J.00 as real estate dealer's fixed tax for 1952.67 P222.00 as their individual deficiency income tax all corresponding for the year 1955.02 71.Amount understated Less 1/3 share of contributions disallowed from partnership but allowed as deductions to partners Net income per review Less: Exemption Net income subject to tax Tax due Tax paid Deficiency 7. concur.753.69 7.00 102.00 and P49. So ordered. Sanchez. Makalintal.B. Reyes. is on leave. P91.. J.00.L. 139 U. 504. 680. Gen. Int. Justice STONE delivered the opinion of the Court. Before the purchase price was paid in full the syndicate defaulted on its payments.0000.[311 U. 506] ents' contribution to the purchase money. and the vendor retained an interest in the land as security for payment of the balance of the purchase price. Co. 504 (1941) 311 U. 310 U. 137 . 48 Stat. 11. some $4. The circuit court of appeals affirmed. Subsection (j) provides that 'losses from sales or exchanges of capital assets' shall be allowed only to the extent of $2. in computing respondents' taxable income for 1934. Robert H.R. 1941. purchased 'on land contract' a plot of land in Oakland County. for petitioner.S.. with other members of a syndicate.2d 614. for the sum of $96. pages 672. The commissioner.S. Green Cove Springs & M.000 plus gains from such sales or exchanges as provided by 117(d). acquired for profit. See Guaranty Trust & Safe-Deposit Co.. to resolve a conflict of the decision below with that of the Court of Appeals for the Second Circuit in Commissioner v. 108 F. The vendor instituted foreclosure proceedings by suit in equity in a state court which resulted in a judicial sale of the property. 504. 707. of Detroit. But they argue that the 'losses from sales' which by 23(j) are made deductible only to the limited extent provided by 117(d) are those losses resulting from sales voluntarily made by the taxpayer.. By 117(b) it is declared that 'capital assets' 'means property held by the taxpayer . 210 U. 619 . The Board of Tax Appeals ruled that the loss was deductible in full. Sp. 110 F. Mich.. or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. In the computation of taxable income 23(e)(2) of the 1934 Revenue Act permits the individual taxpayer to deduct losses sustained during the year incurred in any transaction for profit.C. v. upon a down payment of $20. The precise nature of the contract does not appear beyond the fact that payments for the land were to be made in installments. Michigan. (j).. HAMMEL et ux. 311 U. 2d 753. v. John J.. Asst.. and that losses resulting from forced sales like the present not being subject to the limitations of 117(d) are deductible in full like other losses under 23(e)(2). 28 S. 6 Cir.Ct. 1940. 11 S. was lost.Rev. A.S. We are asked to say whether a loss sustained by an individual taxpayer upon the foreclosure sale of his interest in real estate. Respond. Riggs [311 . Keller. is a loss which. and 117.000. Gen. the vendor becoming the purchaser. Decided Jan. 1077.000. treated the taxpayers' interest in the land as a capital asset and allowed deduction of the loss from gross income only to the extent of $2.Acts. It is not denied that it was the foreclosure sale of respondents' interest in the land purchased by the syndicate for profit.. 505] Mr.HELVERING v. Com'r of Internal Revenue.. 6.S.S. Jackson. We granted certiorari.S. 60 S.000 as provided by 23(j) and 117(d). or is a capital loss deductible only to the limited extent provided in 23(e)(2). and in a deficiency judgment against the members of the syndicate. 673. 41 . for respondents. No. To read this qualification into the statute respondents rely on judicial decisions applying the familiar rule that a restrictive covenant against sale or assignment refers to the voluntary action of the covenantor and not to transfers by operation of law or judicial sales in invitum. Messrs. 49. 687. Electro-Chemical Engraving Co. 512.Ct. Argued Dec. under 23(e)(2) of the 1934 Revenue Act.S. in the case of losses from sales of capital assets. may be deducted in full from gross income for the purpose of arriving at taxable income.' Respondent taxpayers. and Norman D. 504 HELVERING. 26 U. Mr. Williams. [311 U.. holding that the loss established by the foreclosure sale was not a loss from a 'sale' within the meaning of 23(j). but does not include stock in trade of the taxpayer . Atty. Gazlay v.S. HAMMEL. which finally liquidated the capital investment made by its members and fixed the precise amount of the loss which respondents seek to deduct as such from gross income.Ct. to Atty. Sloan. . In this section. In declining to follow this system in its entirety the Committee said: 'It is deemed wiser to attempt a step in this direction without [311 U. but only to the extent that there are taxable capital gains. 227. with amendments not now material.Y. 2d Sess. 509] letting capital gains go entirely untaxed'. they must be deemed to be excluded from the reach of its language. Pursell. It is said that since losses from foreclosure sales not within the control of the taxpayer are not within the evil aimed at by the 1934 Act. The definition of capital losses as losses from 'sales' of capital assets. in the absence of some clear indication to the contrary.S. see Webster's New International Dictionary. No. Helvering v.. whose purpose was to avoid loss of revenue by the application of the capital assets provisions.. But here we are not concerned with a restrictive covenant of the taxpayer. it cannot be assumed.C. was provided for by 206 of the 1921 Revenue Act. the statute provided that capital losses in excess of capital gains should be deducted from ordinary income only to the extent of $2.. Rev. 59 S. substantial loss of revenue would result under the 1934 Act. Int. page 13.S. 350. thereby reducing their taxes. Hence the respondents argue that the purpose of providing in the 1934 Act for a special treatment of gains or losses from capital assets was to prevent tax avoidance by depriving the taxpayer of the option allowed to him by the earlier acts. 53 S. In submitting the proposed Revenue Act of 1924. 42 Stat. on the same scale.S. 26 U. It accordingly reduced the tax burden on capital gains progressively with the increase of the period up to ten years. 811. 184.A. 208. that Congress intended to permit deductions in full of losses resulting from forced sales of the taxpayers' property. 45 Stat. 117(a).A. H. the House committee . to effect losses deductible in full by sales of property at any time within two years after it was acquired.U. 19. as the means of encouraging profit-taking sales of capital investments. 44 Stat. That had been a feature of every revenue [311 U.Ct.A. and 101 of the Revenue Act of 1928. 208. 294 U. 281. capital net gain was defined as 'the excess of the total . depending on the context. See White v.000. from either capital gains or ordinary gross income.305 U. Revenue Act of 1924. The term sale may have many meanings. 43 Stat. 686. but with a sale as an effective means of establishing a deductible loss for the purpose of computing his income tax.Acts. was not new. 55 S. In thus relieving capital gains from the tax imposed on other types of income.. while taxing only a fraction of the gains resulting from the sales of such property. Thus by treating all property acquired by the taxpayer for profit as capital assets and limiting the deduction of capital losses in the manner indicated.S. p. But the treatment of gains and losses from sales of capital assets on a different basis from ordinary gains and losses was not introduced into the revenue laws by the 1934 Act. 507] v. 73d Cong. 8.Rev.Acts. 504. if so construed. for the first time. capital losses being defined as the loss resulting from the sale or exchange of capital assets. the legislative history of this definition shows that it was not chosen to exclude from the capital assets provisions losses resulting from forced sales of taxpayers' property. Acts. 179. 504. To support this contention respondents rely on the report of the Ways and Means Committee submitting to the House the bill which. 508] law beginning with the Act of 1921. 26 U. 74. as we have pointed out. plus $2.S. 9. as in later Acts. Inter-Mountain Life Ins. United States. Int. page 370. and each had defined as capital losses 'losses from sales or exchanges of capital assets'. Harmel. 704. Int.S. The Committee in pointing out a 'defect' of the existing law said: 'Taxpayers take their losses within the two year period and get full benefit therefrom and delay taking gains until the two-year period has expired. 690 S. 253.. 287 U. Finally.. 103.Rev. 262. Co. of capital losses.S. 689 . As will presently appear. page 157. And. The 1934 Act made no change in this respect but for the first time it provided that 'capital assets' should include all property acquired by the taxpayer for profit regardless of the length of time held by him and that capital gains and losses from sales of capital assets should be recognized in the computation of taxable income according to the length of time the capital assets are held by the taxpayer. 791.Ct. capital gain over the sum of the capital deductions and capital losses'.C. pp.Ct. The meaning here depends on the purpose with which it is used in the statute and the legislative history of that use. 75.S. varying from 100% if the capital asset is held for not more than a year to 30% if it is held more than ten years. during which the taxpayer holds the capital asset. became the Revenue Act of 1934.' H. 292 . 574 The taxation of capital gains after deduction of capital losses on a more favorable basis than other income. which until held for that period was not defined as a capital asset. In drafting the 1934 Act the Committee had before it proposals for stabilizing the revenue by the adoption of the British system under which neither capital gains nor losses enter into the computation of the tax. 193. 572. 504. Rept. Revenue Act of 1926. 9 and 10. 106 .C. Rept.000. 2d Sess. 26 U. and permitted the deduction. Burnet v.S. 67th Cong.. the Act materially curtailed the advantages which the taxpayer had previously been able to gain by choosing the time of selling his property. 66 N. courts in the interpretation of a statute have some scope for adopting a restricted rather than a literal or usual meaning of its words where acceptance of that meaning would lead to absurd results. 125 A.pointed out that the 1921 Act contained no provision for limiting deduction of capital losses where they exceeded the amount of capital gains. 504. 117(e)(1). This was remedied by providing in 208(c) that the amount by which the tax is reduced on account of a capital loss shall not exceed 12 1/2% of the capital loss. 373. 761. 357..S. retirement of bonds. 208(c) in the 1924 and 1926 Acts. 179. 26 U. 527 . permitting specified percentages of capital losses to be deducted from ordinary income to the extent of $2. See United States v.S.Ct. which provides that if securities. We can find no basis in the language of the Act. Congress thus has given clear indication of a purpose to offset capital gains by losses from the sale of like property and upon the same percentage basis as that on which the gains are taxed. Rev.000.A. 68th Cong. for saying that losses from sales of capital assets under the 1934 Act.C. These provisions disclose a consistent legislative policy to enlarge the class of deductible losses made subject to the capital assets provisions without regard to the voluntary action of the taxpayer in producing them. It is not without significance that Congress in the 1934 Act. The scope of the capital loss provisions was still further enlarged by 23(k) (2) of the Revenue Act of 1938. under long accepted income tax practice. 117(f).S. 10: 'If the amount by which the tax is to be increased on account of capital gains is limited to 12 1/2% of the capital gain [311 U. if it had thought that the term 'sales or exchanges' as used in both acts did not include such sales of the taxpayer's property.S. which are capital assets. are ascertained to be worthless and are charged off within the taxable year the loss. 59 S. 504. p. Commissioner of Internal Revenue.Rev. Helvering. or would thwart the obvious purpose of the statute. decided this day.L.S. to establish a deductible loss in the case of non-capital assets. which finally cuts off the interest of the mortgagor and is the means for determining the amount of the . Int. would be defeated in a most substantial way if only a percentage of the gains were taxed but losses on sales of like property could be deducted in full from gross income.S. although none of these transactions involves a loss from a sale. 308 U. 117( e)(2). 191.Ct. 447. 305 U. 708. 115(c). shall be considered as a loss arising from a sale or exchange. It thus treats as losses from sales or exchanges the loss sustained from redemption of stock. They are designed for application to the practical affairs of men. 1st Sess. p. enlarged the scope of its provisions relating to losses from sales of capital assets by including within them losses upon the disposition of the taxpayer's property by methods other than sale and without reference to the voluntary action of the taxpayer. 14. 510] it follows logically that the amount by which the tax is reduced on account of capital losses shall be limited to the 12 1/2% of the loss. 281. 23(k) (2). Pleasants. But since the foreclosure contemplated by the decree was foreclosure by sale and the foreclosed property had value which was conclusively established by the sale for the purposes of the foreclosure proceeding. and loss sustained by failure of the holder of an option to exercise it. [311 U. 311 U.Acts. 389 . 102 F. 26 U.Acts. United [311 U. Freihofer. 26 U. 337. were to be treated any differently whether they resulted from forced sales of voluntary sales. 271 U. 60 S. This treatment of losses from sales of capital assets in the 1924 and later Acts and the reason given for adopting it afford convincing evidence that the 'sales' referred to in the statute include forced sales such as have sufficed. 513. We could hardly suppose that Congress would not have made provision for the like treatment of losses resulting from a forced sale of the taxpayer's property acquired for profit either in the 1934 or 1938 Act. Int. sustained in Commissioner v. See McClain v.Rev.. with an exception not now material. 516. 354. 360 . But courts are not free to reject that meaning where no such consequences follow and where. Rept. 511] States v. 47 Stat. losses from short sales. 61 S. Katz. more than its predecessors. 512] Respondents also advance the argument.S. True. that the definitive event fixing respondents' loss was not the foreclosure sale but the decree of foreclosure which ordered the sale and preceded it.R. 52 Stat.A.2d 787. 504.S. The sale.A. 283. page 504. it appears to be consonant with the purposes of the Act as declared by Congress and plainly disclosed by its structure. In commenting on this provision the Committee said. 3 Cir. H.C.. Such sales can equally be taken to establish the loss in the case of capital assets without infringing the declared policy of the statute to treat capital gains and losses on a parity. as here. No. the sale was the definitive event establishing the loss within the meaning and for the purpose of the revenue laws.Ct.S. pages 703.C. This purpose to treat gains and deductible losses on a parity but with a further specific provision provided by 117(d) of the 1934 Act.Ct. 362 . v. its purpose or its legislative history. 101(b) in the 1928 and 1932 Act.S. 46 S.Code.' This provision was continued without changes now material until the 1934 Act. Haggar Co. Int. 108 A. 224 . 46 . 300 U.S. 257 U. Cf. 156.L. Helvering v. 66. it does not appear that there was in fact a forfeiture apart from the sale on foreclosure. Justice ROBERTS is of opinion that the judgment should be affirmed for the reasons stated in the opinion of the Circuit Court of Appeals. 44. and that the only additional advantage of foreclosure was to obtain a deficiency judgment. 57 S..S. 59 S. Commissioner.2d 753. Phellis. 44. United States v. 216. 423. Mr.Ct.Ct.. . 172 . 42 S. 43.S. 6 Cir. Even if it did. 63. REVERSED. Midland Insurance Co.Ct. 436.deficiency judgment against him is a means adopted by the statute for determining the amount of his capital gain or loss from the sale of the mortgaged property. But there is nothing in this record to show that the land contract in this case contained a forfeiture clause. 426. 305 U. 108 F. The court below also thought that the loss suffered by respondents could not be treated as a loss from a sale since by the law of Michigan the vendor upon a landcontract containing the usual forfeiture clause had the right to deprive respondents and their joint adventurers of all interest in the property by a declaration of forfeiture.R. Davidson v. 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots.684 square meters. however. On the basis of the 1957 opinion of the Collector of Internal Revenue. vs. was not leased to any person. more or less. did not employ any broker nor did he put up advertisements in the matter of the sale thereof. J. then subdivided into small lots and paved with macadam roads. J. JR. Mesa streets in Manila.072. the petitioner Antonio Tuason. the petitioner's attorney-in-fact. and was planted to kangkong and other crops. the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question. however. 1953. No. he instructed his attorney-in-fact.G. among which were two contiguous parcels situated on Pureza and Sta. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled. In his 1957 tax return the petitioner as before treated his income from the sale of the small lots (P119. L-24248 July 31. In 1948 the petitioner inherited from his mother several tracts of land. with an area of 318 and 67. as follows: . The essential facts are not in dispute. respectively. against a contrary ruling of a revenue examiner. with an area of 48.000 square meters.:p In this petition for review of the decision of the Court of Tax Appeals in CTA Case 1398. as Commissioner of Internal Revenue. the Commissioner reversed himself and considered the petitioner's profits from the sales of the mentioned lots as ordinary gains. the petitioner deducted the real estate dealer's tax he paid for 1957.18) as capital gains and included only ½ thereof as taxable income. which was concurred in by the Commissioner of Internal Revenue. There was no difficulty encountered in selling the 28 small lots as their respective occupants bought them on a 10-year installment basis.. respectively) as long-term capital gains. Twentyeight were allocated to their then occupants who had lease contracts with the petitioner's predecessor at various times from 1900 to 1903. (hereinafter referred to as the petitioner) assails the Tax Court's conclusion that the gains he realized from the sale of residential lots (inherited from his mother) were ordinary gains and not gains from the sale of capital assets under section 34(1) of the National Internal Revenue Code.79 and P103.56. 1963 the petitioner received a letter from the Bureau of Internal Revenue advising him to pay deficiency income tax for 1957. petitioner. In a memorandum dated July 16. the chief of the BIR Assessment Department advanced the same opinion. to sell them. In this return. It was explained. Antonio Araneta. 1963.R. that the payment of the dealer's tax was on account of rentals received from the mentioned 28 lots and other properties of the petitioner.468. Antonio Araneta. 1974 ANTONIO TUASON. When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. It needed filling because of its very low elevation. CASTRO. JOSE B. Lot 29 could not however be sold immediately due to its low elevation. After the petitioner took possession of the mentioned parcels in 1950. The 29th lot (hereinafter referred to as Lot 29). 1962 to the Commissioner of Internal Revenue. respondent. On May 17. which contracts expired on December 31. LINGAD.050. In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102. On January 28. J. The small lots were then sold over the years on a uniform 10-year annual amortization basis. On January 9. Jr. ........70 Less: Personal exemption ... The petitioner assails the correctness of the opinion below that as he was engaged in the business of leasing the lots he inherited from his mother as well other real properties. in addition.....551.... the present petition.... The National Internal Revenue Code (C.. to pay a 5% Surcharge and 1% monthly interest "pursuant to Sec..00 Less: Amount already assessed .... or real property used in the trade or business of the taxpayer. 59.09 Net income per final investigation ..... 51(e) of the Revenue Code..... (3) property used in the trade or business of the taxpayer and subject to depreciation allowance... the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss.......... 2 Under section 34(b) (2) of the Tax Code.. not commercial lots." The petitioner argues that (1) he is not the one who leased the lots in question. The Tax Code's provision on so-called long-term capital gains constitutes a statute of partial exemption..... 1 If the taxpayer sells or exchanges any of the properties aboveenumerated..824. of a character which is subject to the allowance for depreciation provided in subsection (f) of section thirty.... or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.. his subsequent sales of the mentioned lots cannot be recognized as sales of capital assets but of "real property used in trade or business of the taxpayer. used in the trade or business... 466........ In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer . P98................. or property.....742.. 72..... and so he went up to the Court of Tax Appeals.. and (3) the leases on the 28 small lots were to last until 1953.....095.....095.............024..... 4.. P270..36 TOTAL AMOUNT DUE AND COLLECTIBLE ... except: (1) stock in trade or other property included in the taxpayer's inventory.. and ordered him...... any gain or loss relative thereto is an ordinary gain or an ordinary loss... — The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business).. P269.... and (4) real property used in trade or business..00 Add: ½% monthly interest from 6-20-59 to 6-29-62 ...... The basic issue thus raised is whether the properties in question which the petitioner had inherited and subsequently sold in small lots to other persons should be regarded as capital assets.. 1. only 50% of the net capital gain shall be taken into account in computing the net income...Net income per orig....................... P211......... P26..... As thus defined by law....70 Tax due thereon .....539.352...199... but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year..A. 1...... (2) property primarily for sale to customers in the ordinary course of his trade or business.... 1965....36 Add: 56% of realized profit on sale of lots which was deducted in the income tax return and allowed in the original report of examination ..... which however rejected his posture in a decision dated January 16..........800..." Hence............ as amended) defines the term "capital assets" as follows: (1) Capital assets............00 Balance ... investigation ....... before which date he was powerless to eject the lessees therefrom........00 Amount subject to tax . if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than twelve months. the term "capital assets" includes all the properties of a taxpayer whether or not connected with his trade or business.. P31... (2) the lots were residential.....36 The petitioner's motion for reconsideration of the foregoing deficiency assessment was denied.... a careful examination and weighing of all circumstances revealed in each case must be made. In the present case the taxes were paid. it is the taxpayer's burden to bring himself clearly and squarely within the terms of a tax-exempting statutory provision. (2) they were subdivided into small lots and then sold on installment basis (this manner of selling residential lots is one of the basic earmarks of a real estate business). The controversy was generated in good faith. (4) the employment of J. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different characterization for tax purposes. otherwise. Under the circumstances. and in the case at bar. P102. the delay being with reference to the deficiency. Co. 6 In the case at bar. the petitioner's attorney-in-fact. however. 7 Moreover. including the Commissioner himself. after a thoroughgoing study of all the circumstances relevant to the resolution of the issue raised. by his own tax returns.56 in 1954. transferred to him was not merely the duty to respect the terms of any contract thereon.468. Under the circumstances. the petitioner's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established and maintained. this Court finds no error in the holding below that the income of the petitioner from the sales of the lots in question should be considered as ordinary income.and liberally in favor of the taxing authority. administering and selling the lots in question indicates the existence of owner-realty broker relationship. big enough to be transformed into a subdivision. for the purpose of developing. In our opinion this additional requirement should be eliminated because the petitioner relied in good faith upon opinions rendered by no less than the highest officials of the Bureau of Internal Revenue. even if the leases executed by his deceased mother thereon expired in 1953. the judgment of the Court of Tax Appeals is affirmed. and contemplates a case where the liability for the tax is undisputed or indisputable. The same imposes the penalty of 25% when the percentage tax is not paid on time. all fair doubts will be resolved against him. No costs. and from these the petitioner consequently received substantial income periodically. Collector of Internal Revenue 9 applies with reason to the case at bar: We do not think Section 183(a) of the National Internal Revenue Code is applicable. while its exclusions must be interpreted broadly.18 in 1957. 4 Consequently. managing. at the time material to this case. from which he periodically derived a substantial income. and (7) the petitioner. this Court is of the view. as far back as 1957 the petitioner was receiving rental payments from the mentioned 28 small lots. and for which he had to pay the real estate dealer's tax (which he used to deduct from his gross income). the said properties are located in the heart of Metropolitan Manila. e. engaged in the real estate business: (1) the parcels of land involved have in totality a substantially large area. that the petitioner's thesis is bereft of merit. (5) the sales were made with frequency and continuity. This Court notes. (Phil.79 in 1953. The following circumstances in combination show unequivocally that the petitioner was. 5 It bears emphasis nonetheless that in the determination of whether a piece of property is a capital asset or an ordinary asset.g. owing to a controversy as to the proper interpretation if Circulars Nos. which is hereby set aside. The following ruling in Connell Bros. and so holds.. . nearly seven (7) hectares. 431 and 440 of the office of respondent-appellee. 10 ACCORDINGLY. was not a person who can be indubitably adjudged as a stranger to the real estate business. (3) comparatively valuable improvements were introduced in the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of making the lots more saleable to the general public. 3 the field of application of the term it "capital assets" is necessarily narrow. (6) the annual sales volume of the petitioner from the said lots was considerable.050. When the petitioner obtained by inheritance the parcels in question. the Tax Court also required him to pay a 5% surcharge plus 1% monthly interest. P103. that in ordering the petitioner to pay the deficiency income tax. Antonio Araneta.072. the record discloses that the petitioner owned other real properties which he was putting out for rent.) vs. and P119. except the portion thereof that imposes 5% surcharge and 1% monthly interest. 2. 8 In fact. since that office itself appears to have formerly taken the view that the inclusion of the words "tax included" on invoices issued by the taxpayer was sufficient compliance with the requirements of said circulars. 00 representing real estate dealer's fixed tax of P150. 1986 TOMAS CALASANZ. and reported fifty per centum thereof or P15.00 for the reason that in this jurisdiction.530. On September 29.06 realized from the sale of the subdivided lots. the Revenue Examiner adjudged petitioners engaged in business as real estate dealers. the present appeal. such as good roads.: Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals in CTA No. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax. containing a total area of 1. Rizal. .R. petitioners. required them to pay the real estate dealer's tax 2 and assessed a deficiency income tax on profits derived from the sale of the lots based on the rates for ordinary income. drainage and lighting system. the Tax Court upheld the respondent Commissioner except for that portion of the assessment regarding the compromise penalty of P10. the lots were sold to the public at a profit.24. In order to liquidate her inheritance. THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS.. J. The issues are closely interrelated and will be taken jointly.00 compromise penalty for late payment. In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31. the same cannot be collected in the absence of a valid and binding compromise agreement. FERNAN. The issues for consideration are: a. petitioners disclosed a profit of P31. 90-5-35699 in the amount of P3. No. Soon after. and b.00 and P10. respondents.00 plus interest of P 543. petitioners filed with the Court of Tax Appeals a petition for review contesting the aforementioned assessments.060.00 as real estate dealer's fixed tax. as defined in Section 194 [s] 1 of the National Internal Revenue Code. Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in Cainta. Demand No. 1962. petitioners received from respondent Commissioner of Internal Revenue: a. L-26284 October 8. 1958.018.G. Hence. Assessment No. 1962. Ursula Calasanz had the land surveyed and subdivided into lots. 1966.24 as deficiency income tax and interest for the calendar year 1957 and P150.678. were introduced to make the lots saleable.000 square meters. 90-B-032293-57 in the amount of P160. 1275 dated June 7. On October 17. 1966. Improvements. and b. On June 7.03 as taxable capital gains. ET AL.561. Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates. Upon an audit and review of the return thus filed. holding them liable for the payment of P3. vs. concrete gutters.24 as deficiency income tax on ordinary gain of P3.561. however. Petitioners averred that the tract of land subject of the controversy was sold because of their intention to effect a liquidation. as in the present case. or property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection [f] of section thirty. merely because he disposed of it in the only possible and advantageous way. Each case must in the last analysis rest upon its own peculiar facts and circumstances.Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the sale of the lots under Section 34 [b] [2] 3 of the Tax Code. They claimed that it was parcelled out into smaller lots because its size proved difficult. 4 On the other hand. or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 8 Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business. it is a capital asset. And necessarily. The statutory definition of capital assets is negative in nature. Thus. The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of Section 34[a] [1] of the Tax Code and that an heir who liquidated his inheritance cannot be said to have engaged in the real estate business and may not be denied the preferential tax treatment given to gains from sale of capital assets. stock in trade of the taxpayer or other property of a kind which would properly be included. respondent Commissioner maintained that the imposition of the taxes in question is in accordance with law since petitioners are deemed to be in the real estate business for having been involved in a series of real estate transactions pursued for profit. assets falling within the exceptions are ordinary assets. if not impossible. if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business. However. a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. in the inventory of the taxpayer if on hand at the close of the taxable year. Respondent argued that property acquired by inheritance may be converted from an investment property to a business property if. hence taxable in full. conversely. it was subdivided. continuity and frequency of the sales were such as to constitute "doing business. neither is the presence nor the absence of these factors conclusive.-The term 'capital assets' means property held by the taxpayer [whether or not connected with his trade or business]. Petitioners. any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction. the profits realized therefrom are ordinary gains. 5 If the asset is not among the exceptions. 9 . or real property used in the trade or business of the taxpayer. However. the lots cannot be sold in one isolated transaction. but does not include. 6 Although several factors or indices 7 have been recognized as helpful guides in making a determination. there is no rigid rule or fixed formula by which it can be determined with finality whether property sold by a taxpayer was held primarily for sale to customers in the ordinary course of his trade or business or whether it was sold as a capital asset. improved. The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. admitted that roads and other improvements were introduced to facilitate its sale. certainly. of disposition in one single transaction. and subsequently sold and the number. Respondent concluded that since the lots are ordinary assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows: [1] Capital assets. They pointed out that once subdivided." Respondent likewise contended that inherited property is by itself neutral and the fact that the ultimate purpose is to liquidate is of no moment for the important inquiry is what the taxpayer did with the property. none of these is decisive. We agree with the respondent. The sale may be conducted in the most advantageous manner to the seller and he will not lose the benefits of the capital gain provision of the statute unless he enters the real estate business and carries on the sale in the manner in which such a business is ordinarily conducted. . The court enunciated further: We fail to see that the reasons behind a person's entering into a business-whether it is to make money or whether it is to liquidate-should be determinative of the question of whether or not the gains resulting from the sales are ordinary gains or capital gains.407. Inc. that is.66. Also of significance is the circumstance that the lots were advertised 13 for sale to the public and that sales and collection commissions were paid out during the period in question. in Home Co. the liquidation constitutes a business and a sale in the ordinary course of such a business and the preferred tax status is lost. In that event. Petitioners. The audited financial statements 11 submitted together with the tax return in question disclosed that a considerable amount was expended to cover the cost of improvements. No costs. which stood at P395.Upon an examination of the facts on record. the decision of the Court of Tax Appeals is affirmed. continuity and frequency of the sales. . were undertaken to enhance the value of the lots and make them more attractive to prospective buyers. then it seems indisputable that the property sold falls within the exception in the definition of capital assets . To do so. 12 Another distinctive feature of the real estate business discernible from the records is the existence of contracts receivables. urge that the lots were sold solely for the purpose of liquidation. it is necessary to sell.. While the land was originally devoted to rice and fruit trees. the estimated improvements of the lots sold reached P170. In view of the foregoing. 10 it was subdivided into small lots and in the process converted into a residential subdivision and given the name Don Mariano Subdivision. likewise. 15 the court articulated on the matter in this wise: One may. There is authority that a property ceases to be a capital asset if the amount expended to improve it is double its original cost. Extensive improvements like the laying out of streets. among others. SO ORDERED. The sole question is-were the taxpayers in the business of subdividing real estate? If they were. The sizable amount of receivables in comparison with the sales volume of P446.60 whereas the cost of the land is only P 4. We are convinced that the activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. We hold that in the course of selling the subdivided lots. liquidate a capital asset. petitioners engaged in the real estate business and accordingly.028. for the extensive improvement indicates that the seller held the property primarily for sale to customers in the ordinary course of his business.00 during the same period signifies that the lots were sold on installment basis and suggests the number. vs. Petitioners did not sell the land in the condition in which they acquired it.742. One strong factor against petitioners' contention is the business element of development which is very much in evidence. WHEREFORE. . 1957. 14 the American court in clear and categorical terms rejected the liquidation test in determining whether or not a taxpayer is carrying on a trade or business The court observed that the fact that property is sold for purposes of liquidation does not foreclose a determination that a "trade or business" is being conducted by the seller. of course. the gains from the sale of the lots are ordinary income taxable in full. Commissioner. that it constituted 'property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. In Ehrman vs. construction of concrete gutters and installation of lighting system and drainage facilities. Commissioner.693. As a matter of fact. Additionally.35 as of the year ended December 31. 1095. 134. No. the same property and providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions (Exhibits A to A-5) On August 3. a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.247). in the Municipality of Polo (now Valenzuela). INC. Rollo) On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement. Briefly. the said co-owners leased to Construction Components International Inc. lessee Construction Components International.. Metro Manila (TCT No.500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract.DELPHER TRADES CORPORATION. The dispositive portion of the decision reads: ACCORDINGLY. Delfin Pacheco and his sister.: The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2. 1974. Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. as per stipulation of the parties (Exhs. Inc. more or less. the facts of the case are summarized as follows: In 1974. 1974. Pelagia Pacheco. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES. No. After trial. p. On April 3.. the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to acquire the subject property (right of first refusal) and ordering the defendants and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to acquire the same at the rate of P14. respondents. 1976. 4273) for 2. the Court of First Instance of Bulacan ruled in favor of the plaintiff. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines. 44-45. Rollo) The lower court's decision was affirmed on appeal by the Intermediate Appellate Court. as well as the assignment of lease were annotated at he back of the title. . J. pp. 1-2. filed an amended complaint for reconveyance of Lot.169 square meters only.500. respondent Hydro Pipes Philippines. Valenzuela. pp. 246.. petitioners.000.. Without pronouncement as to attorney's fees and costs. Rec. (Appellant's Brief. (Appendix I. C to C-5. T-4240 of the Bulacan land registry. were the owners of 27. GUTIERREZ. inclusive) (pp. B to B-6 inclusive) The contract of lease. Inc. Inc.169 square meters of real estate Identified as Lot. A to D-3 inclusive) On January 3.00 per square meter.00 (Exhs.500 shares of stock of defendant corporation with a total value of P1.T-4240) together with another parcel of land also located in Malinta Estate. 1095 in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco. Malinta Estate. for Lot 1095 whose area is 27. vs. JR. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. and DELPHIN PACHECO. 254. we set aside the resolution denying the petition and gave it due course. that in order to accomplish this end. they refer to this scheme as "estate planning.1 Million. if anything. were transferred to the corporation. Civil Code). Bulacan exit of the toll expressway) for only P14/sq. Rollo) . We initially denied the petition but upon motion for reconsideration. Pelagia and Delfin acquired 2. was merely in form but not in substance.366. such transfer is not within the letter. as provided in the same contractual provision invoked by private respondent. "Hence. there was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's shares of stock. Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. (pp. or a total of P380. 252. filed a petition for certiorari to review the appellate court's decision.7 hectares (located right after the Valenzuela. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. two pieces of real estate. prejudiced the private respondent's right of first refusal over the leased property included in the "deed of exchange. hence the corporation and the co-owners should be deemed to be the same. including Lot No. he knew all about the contract of lease of Lot. in that: 1. 2. 251-252. although the prevailing value thereof is approximately P300/sq." Eduardo Neria.The defendants-appellants. 1638. Assuming arguendo that there has been a transfer of actual ownership interests. that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid taxes. private respondent will acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation. The transfer of ownership. meter. They argue that there was no sale and that they exchanged the land for shares of stocks in their own corporation. Rollo) Under this factual backdrop. there being in substance and in effect an Identity of interest. now the petitioners. and that at the time of incorporation. No. In reality." (pp. 1095 which had been leased to Hydro Pipes Philippines. Rollo) The petitioners maintain that the Pachecos did not sell the property. ("private respondent") will acquire from petitioners a parcel of industrial land consisting of 27. or even spirit of the contract. a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation. that the leased property was transferred to the corporation by virtue of a deed of exchange of property." (p. in effect. meter or P8. Inc. the petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners. Rollo) The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which. 254-255.000 shares.169 square meters or 2. The petitioners allege that: The denial of the petition will work great injustice to the petitioners. Thus. 1095 to Hydro Pipes Philippines. that in exchange for these properties. petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners. Respondent Hydro Pipes Philippines. In the petitioners' motion for reconsideration." (p. the petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the Pachecos remained in control of the property. 1468. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual ownership interests by petitioners to third parties.500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2. and 3. the Delpher Trades Corporation is a business conduit of the Pachecos. by removing the par value of shares. in exchange for their properties. As explained by Eduardo Neria: xxx xxx xxx ATTY. the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts. But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money. Commentaries and Jurisprudence on the Commercial Laws of the Philippines.. Moreover. but instead is expressed to be divided into a stated number of shares. It is to be stressed that by their ownership of the 2. citing Bole v. the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. Their equity capital is 55% as against 45% of the other stockholders. It maintains that there was actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock. Thus. 430) It is significant that the Pachecos took no par value shares in exchange for their properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value. formed or to be formed. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation.000 shares. 1980 Edition. LINSANGAN: Q Mr. Commentaries and Jurisprudence on the Commercial Laws of the Philippines. it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit." (Rohrlich 243. We rule for the petitioners. 233 Pa.500 no par shares of stock. Consequently. the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation. there was no attempt to state the true or current market value of the real estate. who also belong to the same family group. having treated Delpher Trades Corporation as such a separate and distinct corporate entity. 649. Neria. one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof (Salmon. the Pachecos acquired 2. III. that petitioner Delfin Pacheco.On the other hand. from the point of view of taxation. is not a party who may allege that this separate corporate existence should be disregarded. the Pachecos have control of the corporation. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money. 107).000 or 1/10.00 a square meter. but only an aliquot part of the whole number of such shares of the issuing corporation.00 a square meter was turned over to the family's corporation for only P14. After incorporation. is there any benefit to the spouses Hernandez and Pacheco in connection with their execution of a deed of exchange on the properties for no par value shares of the defendant corporation? . to the extent of 100/1. Land valued at P300. p. (Agbayani. In effect. p. cited in Agbayani. Thus.500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Vol. Unson. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation. as in the case of par value shares. 1980 Edition. 47 Phil. such as. Fulton [1912]. Dexter & Co. III. In the case at bar. Vol. v. no matter what value they may have. 609). 1. Q What provision in the income tax law are you referring to? A I refer to Section 35 of the National Internal Revenue Code under par. COURT: Q What do you mean by "point of view"? A To take advantage for both spouses and corporation in entering in the deed of exchange. Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in respect to taxation? . testified during the last hearing that the decision to have no par value share in the defendant corporation was for the purpose of flexibility. ATTY. if the property is held by the spouse the property will be tied up in succession proceedings and the consequential payments of estate and inheritance taxes when an owner dies. Can you explain flexibility in connection with the ownership of the property in question? A There is flexibility in using no par value shares as the value is determined by the board of directors in increasing capitalization. Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of exchange? A Having fulfilled the conditions in the income tax law. On the other hand. LINSANGAN: Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange? A Continuous control of the property. tax exemption benefits. and other inherent benefits in a corporation. they were able to execute the deed of exchange free from income tax and acquire a corporation. Q Now also from the point of taxation. sir Q You also. sir. The board can fix the value of the shares equivalent to the capital requirements of the corporation." Q Did you explain to the spouses this benefit at the time you executed the deed of exchange? A Yes. C-sub-par. providing for tax free exchange of property. (2) Exceptions regarding the provision which I quote: "No gain or loss shall also be recognized if a person exchanges his property for stock in a corporation of which as a result of such exchange said person alone or together with others not exceeding four persons gains control of said corporation.A Yes. since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least 50 years. is there any flexibility in the holding by the corporation of the property in question? A Yes. Inc." (Liddell & Co. 7 L. The collector of Internal Revenue. There was no transfer of actual ownership interests by the Pachecos to a third party. the instant petition is hereby GRANTED. December 15. by means which the law permits. 596). the private respondent has no basis for its claim of a light of first refusal under the lease contract. The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. 885V-79 of the then Court of First Instance of Bulacan is DISMISSED. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them. ed. 465.. SO ORDERED.A The property is not subjected to taxes on succession as the corporation does not die. No costs. 1981) The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. The ownership remained in the same hands. . v. The Pacheco family merely changed their ownership from one form to another. 293 U. (pp. 3-5. Helvering. 2 SCRA 632 citing Gregory v.S.. WHEREFORE. tsn. Hence. The questioned decision and resolution of the then Intermediate Appellate Court are REVERSED and SET ASIDE. cannot be doubted. Q So the benefit you are talking about are inheritance taxes? A Yes. sir. The amended complaint in Civil Case No. 158. J." On September 16. uncontroverted by petitioner.00 as withholding tax on rental income for 1984. respondents.00 and a tax due of P708.084.00. respondent Commissioner of Internal Revenue.00 for the Second Quarter of 1983. or a total of P3. 1991.00. THE COURT OF TAX APPEALS and THE COURT OF APPEALS.00.525.00.991. (Philamlife) of the amount of P3. & the Court of Tax Appeals" affirming the decision of respondent Court of Tax Appeals which ordered the refund to the Philippine American Life Insurance Co.874.00 as withholding taxes on rental income for 1983 and P133. 1984.464.061. 1992 of the Court of Appeals in CA-GR No. private respondent declared a net taxable income of P2.00 representing 1983 withholding taxes on rental income the same is hereby DENIED for failure to present proof of actual-withholding and payment with the Bureau of Internal Revenue.00 representing the first and second quarterly payments: P215.015. it filed a petition for review with the Court of Tax Appeals (C. Commissioner of Internal Revenue. private respondent filed a claim for its 1982 income tax refund of P133. In 1984. the dispositive portion of which states: WHEREFORE.. Accordingly.246. THE PHILIPPINE AMERICAN LIFE INSURANCE CO.141. Case No. The Philippine American Life Insurance Co.841.T.515.084.00 it declared a refundable amount of P3.867. On November 22. After crediting the amount of P3. No costs. 3868) with respect to its 1982 claim for refund of P133.899. For the Third Quarter of 1983.COMMISSIONER OF INTERNAL REVENUE. entitled "Commissioner of Internal Revenue v. petitioner's claim for refund for P3.00 representing excess corporated income tax payments for the first and second quarters of 1983.643. private respondent again suffered a loss and declared no income tax liability.00 representing excess corporate income taxes for the first and second quarters of 1983. 4018 entitled "The Philippine American Life Insurance Company versus Commissioner of Internal Revenue. However. it declared a refund of P3. On September 26. With respect to petitioner's claim for refund of P215. respectively. it paid P396. In the return for that quarter.742.841.643. 1983. 1983.00 representing its 1982 and 1983 overpaid income taxes and the amount of P250. For its Fourth and final quarter ending December 31. of the Decision 1dated March 26. petitioner.00 is hereby GRANTED.991. the amount of P3. are: On May 30. ROMERO.874. the CTA rendered a decision in the above-entitled case.643. 1984. .084. vs. it applied as tax credit for 1984.00.: This is a petition for review on certiorari filed by petitioner.015.015.00. private respondent Philamlife paid to the Bureau of Internal Revenue (BIR) its first quarterly corporate income tax for Calendar Year (CY) 1983 amounting to P3. is hereby ordered to refund to petitioner Philippine American Life Insurance Company the total amount of P3. Private respondent filed a case before the Court of Tax Appeals (CTA) docketed as CTA Case No.A.141. 26598. The facts.742. On August 29.00 representing 1982 income tax refund applied as 1983 tax credit.671.00 and P396. private respondent suffered a loss and thereby had no income tax liability.246. 708 Less: 1983 claim for refund already filed with the BIR and the CTA (Case No.757. or of any sum alleged to have been excessive or in any manner wrongfully collected. or of any penalty claimed to have been collected without authority.00 215.00 The issue in this case is the reckoning date of the two-year prescriptive period provided in Section 230 of the National Internal Revenue Code (formerly Section 292) which states that: Recovery of tax erroneously or illegally collected. it filed another claim for refund with petitioners appellate division in the aggregate amount of P4. 1985.742. until a claim for refund or credit has been duly filed with the Commissioner. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected.624.242. no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:Provided.858.141. refund . computed as follows: 1982 income tax refundable applied as tax credit 1983 income tax refundable applied as tax credit 1984 tax credit on rental P 133. however.858. whether or not such tax. even without a written claim therefor.00. it amended its petition by limiting its claim for refund to only P3. 4018 regarding its 1983 and 1984 claims for refund in the above-stated amount.109.084 P 3. but such suit or proceeding may be maintained.109. No. 1986.874.246. private respondent filed a petition for review with the CTA.757 P 250. docketed as CTA Case No.757.867 T o t a l P 4. Later. B2269337 B1938178 Amount Paid P3. penalty. 3868) P 133.R. That the Commissioner may.624 =========== On January 2. or sum has been paid under protest or duress. In any case.00 computed as follows: Calendar Year Ending 12-31-83 First Quarter Second Quarter 1983 Withholding Tax on rental income 1983 Income Tax Refundable Date Paid 5/30/83 8/29/83 O.00 P3.00 396.858.084 Net Amount Refundable —————— — P 4.On December 16. in resolving the instant case. Section 292 (now Section 230) stipulates that the two-year prescriptive period to claim refunds should be counted from date of payment of the tax sought to be refunded. 1983. therefore. as reflected in the Corporate Final Adjustment Return subsequently filed with the BIR. a claim for refund of a tax alleged to have been erroneously or illegally collected shall be filed with the Commissioner of Internal Revenue within two years from the date of payment of the tax. the said section further provides that: . Court of Tax Appeals. 1983 and August 29. Petitioner argues that the incorporation of the said phrase did away with any other interpretation and. which became effective January 1. . However. — A refund check or warrant issued in accordance with the pertinent provisions of this Code which shall remain unclaimed or uncashed within five (5) years from the date the said warrant or check was mailed or delivered shall be forfeited in favor of the government and the amount thereof shall revert to the General Fund. particularly Sections 84. Forfeiture of refund. respectively. 3 wherein we said: . In any case. Thus. it is necessary that we consider not only Section 292 (now Section 230) of the National Internal Revenue Code but also the other provisions of the Tax Code. It is true that in the Pacific Procon case. et a1.141. 85 (now both incorporated as Section 68). should not the running of the prescriptive period commence from the remittance/payment at the end of the first quarter of the tax withheldinstead of from the filing of the Final Adjustment Return? In support of its contention. has prescribed. this case was overturned by the Court in Commissioner of Internal Revenue v.246. where a corporate taxpayer remits/pays to the BIR tax withheld on income for the first quarter but whose business operations actually resulted in a loss for that year. Petitioner poses the following question: In a case such as this. no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.00 and P396." hence it applies regardless of the conditions under which payment may have been made. where on the face of the return upon which payment was made. When applied to tax payers filing income tax . . not at the time of filing of the Final Adjustment Return in April of the following year. such payment appears clearly to have been erroneously paid. the reckoning period of prescription under Section 292 (now section 230) is from the date of payment of tax regardless of financial loss (the "supervening cause"). the tax having been found to have been paid at the end of the first quarter when the withholding tax corresponding thereto was remitted to the Bureau of Internal Revenue. As a matter of fact. v. 1973.874. the claim for refund of the amounts of P3. Section 86 (now Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment and Section 321 (now Section 232) on keeping of books of accounts.or credit any tax. we held that the right to bring an action for refund had prescribed. The Tax Court ruled: Under Section 292 (formerly Section 306) of the National Internal Revenue Code. and that no suit or proceeding for refund shall be begun after the expiration of the said two-year period (Citation omitted). petitioner cites the case of Pacific Procon Ltd. We find petitioner's contentions to be unmeritorious. . TMX Sales Incorporated and the Court of Tax Appeals. 69. Petitioner states that the phrase "regardless of supervening cause that may arise after payment" is an amendatory phrase under the said Section 292 which did not appear in Section 306 of the old Tax Code before it was amended by Presidential Decree No.00 paid on May 30. All these provisions of the Tax Code should be harmonized with each other. 2wherein the CTA denied therein petitioner's claim for refund after it construed Section 292 (now Section 230) of the NIRC to be mandatory and "not subject to any qualification. . Private respondent being a corporation. This interpretation may be gleaned from the last paragraph of Section 69 of the Tax Code which provides that the refundable amount. Clearly. this date is April 16. the date of payment mentioned in Section 292 (now Section 230) must be deemed to be qualified by Sections 68 and 69 of the present Tax Code which respectively provide: Sec. as the case may be. which can only be determined after a final adjustment return is accomplished. 1986. the taxes paid in the preceding quarters are merely partial taxes due from a corporation. 1983. or (b) Be refunded the excess amount paid. Moreover. Final Adjustment Return. as provided in Title II of this Code shall be levied. Sections 68.246. Therefore. It may be observed that although quarterly taxes due are required to be paid within sixty days from the close of each quarter. 1984. is that amount which is shown on its final adjustment return and not on its quarterly returns. petitioner Commissioner of Internal Revenue has failed to present any documentary or testimonial evidence in support of . when private respondent paid P3. Sec. the prescriptive period of two years should commence to run only from the time that the refund is ascertained.874. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either: (a) Pay the excess still due. In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid. The Tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year. — Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax. 69.00 on May 30. Neither amount can serve as the final figure to quantity what is due the government nor what should be refunded to the corporation. The same applies with cogency to the payment of P396. This being a question of fact.141. the same is not jurisdictional 4 and may be suspended for reasons of equity and other special circumstances. In the present case. 69. and two years from this date would be April 16. the fact that the amount shall be deducted from the tax due for the succeeding quarter shows that until a final adjustment return shall have been filed. collected and paid. On the other hand.00 on August 29. and 70 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it.returns on a quarterly basis. 1985 and the petition for review was brought before the CTA on January 2. the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year. 5 Petitioner also raises the issue of whether or not private respondent has satisfactorily shown by competent evidence that it is entitled to the amount sought to be refunded. even if the two-year period had already lapsed. Section 292 (now Section 230) cannot serve as the sole basis for determining the two-year prescriptive period for refunds. that the said amount was refundable. in case a refund is due a corporation. 68 Declaration of Quarterly Income Tax. it would not have been able to ascertain on that date. Both dates are within the two-year reglementary period. this Court is bound by the findings of the Court of Tax Appeals which has clearly established the propriety of private respondent's claim for refund for excess 1983 quarterly income tax payments. As we have earlier said in the TMX Sales case. The record shows that the claim for refund was filed on December 10. 1983. 1986. — Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar or fiscal year. whereas petitioner has failed to controvert the same adequately.his case. To repeat. No costs. the instant petition is DISMISSED and the decision of the Court of Appeals is hereby AFFIRMED in toto. WHEREFORE. he opted to postpone the hearings several times and later chose to submit the case for decision on the basis of the records and pleadings of instant case. Instead. . SO ORDERED. we find that private respondent has presented sufficient evidence in support of its claim for refund. MELENCIO-HERRERA. 1 G. L-65773-74 April 30. No. During the periods covered by the disputed assessments. This prompted BOAC to file the Second Case before the Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.. Ltd. 2373 and 2561.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).000. although during the period covered by the assessments. Subsequent investigation resulted in the issuance of a new assessment. 1968-69 to 1970-71.00 as compromise penalty under Section 74 of the Tax Code. The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company.08 for the years 1969 to 1970-71 plus P1. Consequently.79. the First Case) On 7 May 1968. BOAC paid this new assessment under protest.327. and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB). which set aside petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967. petitioner Commissioner of Internal Revenue (CIR. and later Qantas Airways — which was responsible for selling BOAC tickets covering passengers and cargoes. petitioner. 2373. vs. the Second Case) On 17 November 1971. dated 16 January 1970 for the years 1959 to 1967 in the amount of P858. it did not carry passengers and/or cargo to or from the Philippines. respondents.00 and P1. it is admitted that BOAC had no landing rights for traffic purposes in the Philippines.358. BOAC requested that the assessment be countermanded and set aside. 2561. it maintained a general sales agent in the Philippines — Wamer Barnes and Company. No. BOAC's request for reconsideration was denied by the CIR on 24 August 1973. dated 16 February 1972.56 for deficiency income taxes covering the years 1959 to 1963. But before said denial.: Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). This case was subsequently tried jointly with the First Case. G. BOAC filed a claim for refund of the amount of P858. the Tax Court rendered the assailed joint Decision reversing the CIR.79.307. except for a nine-month period. On 26 January 1983. This was protested by BOAC. 1987 COMMISSIONER OF INTERNAL REVENUE. partly in 1961 and partly in 1962.307. respectively. however.800. as well as its Resolution of 18 November.. 65773 (CTA Case No. BOAC had already filed a petition for review with the Tax Court on 27 January 1972.R. Ltd.G. interests. No.132. when it was granted a temporary landing permit by the CAB.R. BOAC was assessed deficiency income taxes. J. for brevity) assessed BOAC the aggregate amount of P2. 65774 (CTA Case No.000. On 25 November 1971.R. and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS. and the additional amounts of P1. assailing the assessment and praying for the refund of the amount paid. In a letter. the CIR not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case the deficiency income tax assessment for P534.498. 1983 denying reconsideration. .43. As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. which claim was denied by the CIR on 16 February 1972. dated 26 January 1983. On 7 October 1970. it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. its main activity. In the alternative that private respondent may not be considered a resident foreign corporation but a non-resident foreign corporation.08 for the fiscal years 1968-69 to 1970-71. during the periods covered by the subject . the Tax Court ordered petitioner to credit BOAC with the sum of P858. constitute income of BOAC from Philippine sources. "was engaged in (1) selling and issuing tickets. Thus. and. do not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and. from 1959 to 1971.assessments.132. 3 BOAC. while having no landing rights here. 2 "In order that a foreign corporation may be regarded as doing business within a State. (i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein It is our considered opinion that BOAC is a resident foreign corporation. (3) receiving the fare from the whole trip. The term implies a continuity of commercial dealings and arrangements. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in the Philippines or has an office or place of business in the Philippines. the generation of sales being the paramount objective. Under Section 20 of the 1977 Tax Code: (h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein.79. and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. The CTA position was that income from transportation is income from services so that the place where services are rendered determines the source. (2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline company. such as the appointment of a local agent. In fact. to that extent. That general sales agent. 3. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation. therefore. has aptly defined the issues. in the dispositive portion of its Decision. in representation of the CIR. this Petition for Review on certiorari of the Decision of the Tax Court. 2. Accordingly. and are in progressive pursuit of. and in progressive prosecution of commercial gain or for the purpose and object of the business organization. 850 of the IATA Agreement. the purpose and object of its organization as an international air carrier. said income is not subject to Philippine income tax. maintained a general sales agent in the Philippines. and not one of a temporary character. thus: 1. taxable. Each case must be judged in the light of its peculiar environmental circumstances. The Solicitor General. accordingly.and later by Qantas Airways.307. 5 ." 4 Those activities were in exercise of the functions which are normally incident to. and to cancel the deficiency income tax assessments against BOAC in the amount of P534. is the very lifeblood of the airline business. then it is liable to Philippine income tax at the rate of thirty-five per cent (35%) of its gross income received from all sources within the Philippines. there must be continuity of conduct and intention to establish a continuous business. and contemplates. during the period in question. Hence. the performance of acts or works or the exercise of some of the functions normally incident to. the regular sale of tickets. (21) dividends. In BOAC's case. activity or service that produced the income. it is sufficient that the income is derived from activity within the Philippines. income is a flow.. by its language." Income means "cash received or its equivalent". 8 For the source of income to be considered as coming from the Philippines. When issued by a common carrier.00. However. or existing under the laws of any foreign country. wages or compensation for personal service of whatever kind and in whatever form paid. the sale of tickets in the Philippines is the activity that produces the income. As used in our income tax law. accordingly. that does not render it less an income from sources within the Philippines. while capital is a fund. trades. A transportation ticket is not a mere piece of paper. Section 37.business.. (4) rentals and royalties. sales. 7 Did such "flow of wealth" come from "sources within the Philippines". except a foreign fife insurance company. (b) Tax on foreign corporations. and income derived from any source whatever (Sec. which enumerates items of gross income from sources within the Philippines. does not mention income from the sale of tickets for international transportation. it constitutes the contract between the ticket-holder and the carrier. The Tax Code defines "gross income" thus: "Gross income" includes gains. and occurred within. growing out of the ownership or use of or interest in such property. enjoying the protection accorded by the Philippine government. and income derived from salaries. it means something distinct from principal or capital. (2) Resident corporations.. (3) service. In consideration of such protection. dividends. For. — . — .. 6 The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to P10. The flow of wealth proceeded from. or the transactions of any business carried on for gain or profile. or dealings in property.428. 24. 29[3]. shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the Philippines. "The words 'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws. we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income from Philippine sources and. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. taxable under our income tax laws. securities.. or gains. the flow of wealth should share the burden of supporting the government. Rates of tax on corporations.368 . The site of the source of payments is the Philippines. does not intend the enumeration to be exclusive. rents. also from interests. whether real or personal. commerce.. binding upon the parties entering into the relationship.. profits. profits. authorized. The source of an income is the property. Philippine territory. (Emphasis supplied) Next. and (6) sale of personal property. — A corporation organized.Sec. it is the amount of money coming to a person within a specific time . Emphasis supplied) The definition is broad and comprehensive to include proceeds from sales of transport documents. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. namely: (1) interest. engaged in trade or business within the Philippines. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract. or from profession. It merely directs that the types of income . 9 True. (5) sale of real property. "income" refers to the flow of wealth. Section 37(a) of the Tax Code. vocations. . international carriers are now taxed as follows: . being a tax on the activity of transporting. "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein. It purports to tax the business of transportation. the income derived is from sources without the Philippines and. not taxable under our income tax laws. Admittedly. No. If it had been intended as an excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business. The 2-½ % tax on gross Philippine billings is an income tax. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets. Presidential Decree No. promulgated on 21 April. pursuant to Presidential Decree No.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge. 24[b] [21. 11Unquestionably. the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. BOAC was an off-line international airline at the time pertinent to this case. that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments in these cases. and the source of an income is that activity . L-30041) on February 3. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. excess baggage or mail provided the cargo or mail originates from the Philippines. we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal inJAL vs. provided a statutory definition of the term "gross Philippine billings. and that no other kind of income may be so considered. 12 it cannot alter the fact that income from the sale of tickets was derived from the Philippines. which produced the income. the decision in one cannot be res judicata to the other. Private respondent. however.. (Sec. would impress upon this Court that income derived from transportation is income for services. privileges or businesses are done or performed within the jurisdiction of the Philippines. does not render the taxpayer therein subject to the common carrier's tax. The test of taxability is the "source". however. and since BOAC's service of transportation is performed outside the Philippines. Tax Code).. Provided. unaccompanied by the physical act of carriage of transportation. 69. WHEREFORE. however. the British Overseas Airways Corporation (BOAC). The Tax Court upholds that stand in the joint Decision under review. with the result that the place where the services are rendered determines the source. 13 It should be pointed out. therefore. Lastly. that of origin.. 1978. " 10 BOAC. 14 Being an excise tax.. promulgated on 24 November. is hereby ordered to pay the amount of P534. whether for passenger. and the origin of the income herein is the Philippines. Commissioner of Internal Revenue (G. . conveying or removing passengers and cargo from one place to another.132. from 1959 to 1967." thus: . the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. The subject matter of the case under consideration is income tax. That international carriers shall pay a tax of 2-½ per cent on their cross Philippine billings.... As elucidated by the Tax Court." Since the two cases treat of a different subject matter.R. The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration. The word "source" conveys one essential idea. or. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities". 1969. 1355. a direct tax on the income of persons and other entities "of whatever kind and in whatever form derived from any source. 1968-69 to 1970-71. is res judicata to the present case.listed therein be treated as income from sources within the Philippines. 1972. For. the common carrier's tax is an excise tax. however. the same can be levied by the State only when the acts. and 1% . . SO ORDERED. The BOAC claim for refund in the amount of P858.307.monthly interest from April 16.79 is hereby denied. Without costs. 1972 for a period not to exceed three (3) years in accordance with the Tax Code.