CTA Case No. 193 (Decision)

llEPUBLIC OP THE PHILIPPINES COURT OF TAX APPEALS MANILA J�. �ie U �.3Lh~ J.. W � 1 L~ '"'" 1 � eti ioner , 193 v 0 0 ,-. 0 C, �..:).C 1\l(.;o - versus - OJLLECT0R UF li<JTL:. �,::.-\L HE\11:.1 .c., � espondent o x- - ~ - - - ~ ~ - - - - - ~ x D i: C I 3 I G l~ � his is a claim for refund of the a:nount of i!..-9,024.84 alle ed to have been ille9ally assessed and collected by respondent Collector of nternal � venue from the petitioner J. ~ . Tuason ~Co~ , Inc., representing deficiency broker's percentag~ tax , urcharge and compromise penalty for the period from November 1951 to the 2nd qliarter of 1953. The petitioner is a corporation duly organized and exi ting under Philippine Law as a realtor , en- gaged in the b~siness of developing subdivisions and promoting sales of lo�s therein. Gn November 6 , 1951 , the petitioner entered into a contract i:.xhibit A 11 11 ) with the Varsity Hill s, :J:nc o, real estate ov.ners, - by the terms of ~Jhich the petitioner agreed in brief to~ a) develop into a subdivision, real estate property belonging to the Van ity ills, Inco consi ting of about 106 hec ares of ontiguous land located at Jalara, ~ezon City; and b) ell or lease the lots of the subdivi ion at pri es and terms recommended by the forme and ap- proved by the latter. The petitioner ~as authorized 9

, DECIS IGN - C. I . ' � C.\vE i'JO . 193 - 2- by power of attorney not only to sell or lease the lots but al so to cancel contracts of sale and lease affecting the property and to take charge of col- lection of acc ounts relative thereto , expenses bein0 borne by the herein petitioner . The subdivision developr.1ent plan recommended by petitioner was sub- ject to the approval of Varsity Hills , Inc . for such services rendered , petitioner would get the following as c ompensation~ ( 1) as 11 selling conrmission 11 an amount equal to l~o (ten per ce~t) on all the sale~ of lots in the subdivision; and in addition (2) as "adminis- tration fee 11 an amount equivalent ,to eight ( 8;o) per cent on the-gross SUQS collected and received by the petitioner in connection with the discharge of its dutieso As an . impl ementation of the above - mentioned c ontract, the ~arsity Hills , Inc. , on November 26 , 1951 executed a 11 Special Power of P.ttorney 11 Exhi- bit "d") in favoi of petitioner for the proper dis- charge of the latter's duties under the contract . There is no dispute that the petitioner , J . i�1� Tuason & Co ., Inc. , during the period from the 4th quarter of 1951 to the 2nd quarter of 1953 , inclu - - sive , received fron1 the Varsity liills , Inc., a.s COH1- pensation , pursuant to the contract E.xhioit A 11 11 , the amount of ~282,852 . 70 as lC,o selling c ommission for the sale of the lots in subdivision , and anot her amount of �l-11 6, 331 . 21 as 11 administration fee" (Ex- hibit 111 11 , p . 5 , BIB. re c. )o It is likewise admitted that on the amount of i282 , 852. 7u , the petitioner had du l y paid for the corresponding quarter involved the

- 3- percenta9e tax of S;'.- thereof prescribe<i in section 195 of the Tax Code. ,,fter examination of the taxpayer' recorus the respond8nt determi'!eG. that the so- callcc\ 11 admi- nistration {ee 11 received :)y petitioner pursua:-1-c to the contract .:..xhibit 11.'. 11 , should have been included in its returns as pari ;f the gross com9ensation of the latter as realtor -and which is subject to the 6;c; broker's tax prescri~Jed bj' section l9S of the Tax Code. .\ccordingl y, the respondent on ,\ugust 29, 1953 assesseJ against and demanded from J o 1'1 � T.1ason ~Co ., Inca the sum of ~8,724.84 as deficiency b.ro- ~er's percentage tax and surchar~e corresponJinJ to the period from the 4th quarter of 1951 to the 2nd quarter of 1953. 0n .Jeptember 10, 1953, anc..:_ on se - veral dates thereafter, the petitioner contested the legality of the above mentioned assess~ent par. 3 , n�vJ."'"�' 'ns, .. c,....) .D.1. e�l-t.,_...".';_t5_.0"'.1..�� ...Lr.. OI'�� ._ ~-wvg a "'d.t!nJ.�-1t.-,.�.v1-..n..-~~..L~. n J'i.~o ~Jv ...... o ruary 23 , 1954, the responde'lt -~stai'lin~ the le - ~ality of tha aforesaid assessment , demandinJ fro~ the petitioner the su,,1 of k-9,u24.84 Nhich consisted of the deficiency percentage tax and surcharge of f..-8 ,724o84 as ;.>reviously determined plus f.-30C.0C com- promise penalty , requirin:-3 that payment be made �.vithin ten lG) days fron receipt of demand other~ise the collection thereof would � be effected D1 Y summary prIo - c edures . In view or this de~anJ, the petitioner on I~1ay 14, '1954 paid to the Jureau of Internal i{evenue the amount o:f .:.9 , C24 . 84., On ].,arch 31, 1955 � the pe - I~ a

DECIS I01'J - C. I . A. V\SE NO . 193 - 4- titioner filed a claim for refund of the aforesaid amo~n t of ~9 , 024.84 , which petitioner fol lowe d with another letter of similar import dated !'.ay 13,1955. the The respondent denied " afore - ~nentioned pe�!:itioner 's claim for refund in a letter a ated 0eptember 7 , 1955 , which letter , as shown by Exhibit 110 - 211 , was posted by ordinary ~nail to petitioner on September 12 , 1955. Thereupon, on Gctober 11 , 1955, the pe- titioner thrcu~h c ounsel filed the herein petition for review cf this decision deny:Lng the refund claim. In the course of the trial of this case, the respondent raised ~he q~estion of jurisdiction , c on- tending th3t the present petition for review was fi l ed out of ti1ne or beyond the reglementary period of thirty (30) ciays as prescribed in section 11 of .tlepublic ;-.ct i'-lo . 11 25o �;he jurisdictional question was subillittcd for resol~tion tosether wit~ the issue on the :nerits p that is, whether the auou;it of ~,9 , u24 . 84 paid by petitioner as deficiency broker 's tax was illegally assessed and collected by respo~dent Col - lector of lnternal Revenue . Gn .the jurisdictional issue, the court no~as that the enve l ope {Exhibit 110-211 ), in whic,h v;as contained respondent's de cision dated September 7, 1955, deny- ing the ;JCl.itioner�s claim for refund, clearly ..J<.m::..- fest that the sau1e \Jas peste~.-: cnl y on .3ep te.�1ber 12, 19:J5o Even if ~Je were to 2.ssuu1e th2t t:1e pe�citioner re c eived the aforesaid letter en t~e very day it was / tfj

D.&.:.CI3I0i.-J - C. T.A. C'\JE 1~0. � 193 - 5- mailed, the fact that the herein pe.tition for review was fileJ on Gctober 11, 1955 undoubtedly how that the appeal '"'as brought within the 30- day period � pres- cribed by section 11, Republic Act 1~0 . ll25o In ac - cordance with the oft- repeated rule, applicable in th~ co~putation of the period to appeal, i.e. excl~d ing the first and including the last day (federal Films v . C. F.I. Judge of t-1anila , 78 Phil. 475) , we find that from September 12, 1955 to October 11 , 1955, only 29 days had elapsed and we therefore hold that � the present petition for review was seasonably filedo ~Je proc eed now to consider the principal ques - tion. Under section 195 of the National Internal Re - venue Code, real estate brokers are subject to the pay- ment of 11a percentage tax equivalent to six per c entum ( 6i~) of the gross compensation received by them11 , pay- able quarterlyo In this case, the dispute in the main lies in the scope and interpretation of the phrase 11 gross compensation received by them (brokers)" as ~pplied tq the Jo ru . Tuason ~Co ., Inc . Petitioner ma intains that under the terms of its contra ct vvith Varsity I-Iills , Inc. (Exhibit A 11 11 ) the former had two obligations to perform, e<J.ch-pres- tation distinct and separate from the other , i . e . one as . "administrator11 and the other as 11 broker11 in the strlct sense of the word � . Hence, peiitioner ar9ues that the gross compensation received by it under the said contract should not ~ toto be subject to t he

' u.c ..;IS ICA~ - C. T . /~ . G'\.SE Nv . 193 - 6- 6;o broker 1 s cax, but only such part of its inc oi1lC denou1i a t ed as selling commission , whic h is derived in consideration of the pcrforillance of its duties of a broker in the strict se~se. In o her words , pe itioner c ontends th.::.t the co..lpensation deno,ninatecl as administr2.tion fee, received ir, pa.y.llent of its duties of "<:.0..�dnist.rator 11 under said contract should 110t. i:>e suuj e c t to t!:. percent<:::Je t.ax imposed oy said sect� en 19~ o I his ar':;jUu<ent of 1Jetitioner steulS fro lil the theory ~,. ha c t:~ c o tr~ct herein involv0d (~xhl - ' bit d :. tl ) is in .:.-a t or..p osed of two par c , or.e of notwitLstanain'.:l the appellation '.:liven it by peti- t.cec � oi" Lro!.. craS;e , in that the duties vk.ich purport o be ac ~s cf adu1inistration were in fa ct par�t and parcel of the c ontract of brokerage . It is contended that t he duty to su~divide and the tiuty to collect ac c ou~ts <:.re not distinct and severable from the other duties but are in fact preparatory and incidental to t erea into- the sale or l ease of the property by the petitioner as SJbdivided lots. rlence , respondent arsues that the entire c ~apensation re c eived by pe - titioner u:-.>.der the a~reeu.ent is SJbject to t~1e 6;.., jroker's tax. / / ~~ .. � I/ __,/ "

� D~ CI3 IC..ii.'-l - C. I.A. ~\~� ~c. 193 - 7- ~ careful perusal of the contents of the con- tract f s alient poi.1ts. sho'�'' ~xhibit IIlo' ' ll) + h n .. .i. ~~~ oll01.:1in~ U .l;.\; ( 1) fl1at the principal ..w ., 5_ vc or inJ.uce..~ent �.hich ..10veu the v 3rsi ty ri.:lls, lnc. , to c ontrf'3.ct c:1e services of petitioner herein,~. m. Tu~son ~ ~ co , I~c., to sell or have leased the real property of the for- "is en'::Ja':;le~ in the Du incss of deve l opi.:-1';;; SuD~ivisions and 2.n pro..1o tin0 the sales of lots therein 11 � .i f H Cl ause ( b) , ~� 2); 0.::.) 1.,n2 t the cons~dcration is . \ 2 ) to the Varsity J:dlls , Inc., the davelopment into a subdivision of its property a.nd c:.e sale or lease of / the sa..1e LJ j�. hi . fuason (.)< �Co. , Inc. in the fora1 of . s ubdivided lots; and (0) �>v"lt'.l . , re~aru 't.o ~.:.. v O. , Inc., - the .nonetary c o,;.pensation it i.JOuld re - c eiv fr~J the sale or lease of the subdivided property of the f or.ner ; 3) That without prejudic e to the ri':;lht cf the " cvvner to terminate for c ause, �::.he duration of the a~rae - .:nent 11 shall contir1ue until C).ll of the lots into vJhich ~aid ~roperty des cri~ed in para0raph ( a) hereof is � subdivided. shall have been sold or leased, and there- after , so lon~ as there are st ill collections to be il1ade . II .f:::.Xhibit n,"\H f par . 16, p . 7); 4) That the princ ipal obligations of t he 11Ad- Jninistrator" petitioner herein) are~ ( a) to develop the prope rt y into a subdivision (Exhibit "A" , pars . 1 and 2 , p. 2 , and par . ) , p. 4) ; (b) t o sell or � / t jL . � ' I

DECI..;, I0u - ....;. T�.-.. c:.vc. H0. 193 - 8- lease ~~e ~ubdi~ided l~ts of the afores5id su~Jivi - sian exhibit 11 /. 11 t pars. 3 to 6, pp . 2- 3, par. 11, p . 4, _anJ par. 17 , p. 7), and (c) to perfoi\a '"~Cts relative to collection of accounts , disbursement of expenses incurred in the subdivision sale and lease of the property; and the 0jection of tenants or squatters . on �che property at th2 ov~~1er 1 s expense if the letter fails to do so Lxhibit ~ 11 11 , pars. 7 and 8, pp. 3- 4, pars. lC &ud 12, t:-t.Jo 4 - 5); \/arsit~' i-iills , Inc.) is com.nission11 - 10~0 on all s ales of lots of the sub- division w~ether or not effected by the ~~ninistra - tor payablE: in full im:neclia cely (.t.:.xhibit '1/. 11 ' par . 13 , p . S) rlus 81.;) on the gross su:11s collected and re ~ ceived by the ];dJninistrator as "ad.�dnistrat.ion fee" (.exhibit 111\11 1 par. 14, P� u) e The foregoiny analysis of the contract ~xhibi' "A", -.vas arrived at beari.lSJ :.:n ..:1ind the rule that the various stipulations of a contract shall be interpreted toS:Jether ..rt. 1374 , Ci�Jil Code). Thus vievJing the contract as a whole , we find that i was the inten- tion of the parties that the duty of the petitioner under the contract were indivisible in the same .aanner as the obliyation of the Varsity Hills, Inc . to pay 'compensation for such services rendered . At the out- set and at the time the contract was entered into the land was still undeveloped and undivided . hence , when the services of petitioner were obtained for the pur-

DECISI01'l - C. T.A . C:\SE NO . 193 - 9- pose of selling the lane, in question in the �ior,J of ll12rkctable subdivision lots , it was an essential preparatory or incidental act thal the land of Var- sity Hills , Inc . be firs)~ developed and subdivided . Thus t he duties undertaken by J . M. Tuason & Co . , Inc. under the contract constituted several related but nevertheless inseparable acts and obligations of first developing the lands into a subdivision, then selling or leasing the subdivided lots , and fina~ly c ollecting the price or rents in c onnection with the c ontra c ts of sale or lease that 1aay be entered into oy -cho petitioner in behcilf of Varsity Hills , Inc. From another viewpoint , the indivisibility of the performance of the ob l igation of the parties may likewise be taken in relation to the consideration thereof as to treat the contract as indivisible . Thus , v.nere the c onsideration giving rise to the e xistence of the contract is entire and indivisible , the contract i s indivisible . "Divisible and indivisible obliga- tions are not synonymous with divisible .or indivisible contrac ts . The divi s i - bility or indivisibility of obligations refers to the pre~tation , t~e possi~i lity or impossibility of partial pres- tation . On the other hand , whether a contract is entire or severable depends in geneDal upon the consideration , not upon its obje c t . ~hen the consideration is entire and single , the contract ~ust be he l d to be indivisib l e ~ so that if part of such consideration is illegal , the whole con s ideration is general l y de - cl ared unenforc eable . 11 Vol . II, Civil Code Annotated , Padilla ~ pp . 542- 543 c iting: 1 2 /.m . Jur . 74GJ / - ...

DE.CIS ICi" - C. T.l.. . V'.:::iE 1~0 . 193 - 10 - his test of indivisibil ity of consideration g.:!.ving ri s e t o an indivisible c ontract applies equally to c o~nerc ial contracts su c h as sa l e � as well as to contracts involving services as the case at bar . 11 The question of indivisibility is difficul t , and this difficulty has re- sulted in a dir c t c onflict of dec isions . ' The contrac t oay be entire or severable , acc ording to the circumstances of its particular case t it has been said in speak- ing o contracts of sale , ' and the cri- terion is to be found in the question whe - ther ~he whol e quantity-- all of the things as a whole -- is of the essenc e of the c on- tract . If it appears that the purpose was to take the whole or none , then the c on- tra c t wou ld be entire; otherwis~ , it would be severable ���� ' Thou~h this was said in reference to a contract of sale , the reason appl ies to other contra ts as well." ( 3rd. hd . Clark on Contrac ts , P o 569 , c iting: 1J ooten v . Lv'a l ters , llu f\i . C. 251 , 14 .:>E 734; 3rouner v . ?..ayner , 68 ;,rd . 47 , 11 Atl . 833) (underscoring supplied . ) . In the present c ase , as we see it the c onsidera- tion i s s ing l e , entire and indivisible . As far as Vars ity Hills , Inc. is concerned , the property in ques- tion mu st be sold or leased as subdivided lots . Until and unless the sale or lease of the property in que s- tion as subdivided lots is effected , the Varsity Hils , Inc., is not liable to pay any compensation to peti- tioner in any form as the s2.me is based on t he proceed derived from t he s ale or lease thereof . Henc e , the mere completion of the subdivis ion of the property in ques t ion doe s not entitle the petitioner t o the c om- pensation agreed and the saille does not attach unl e ss and unti l a sale or lease of a subdivided l ot is fir st effec ted . Neither wi l l c ompensation be due the peti- .

DECISION - .. C. T. �\. C/\SE NO . 193 - - 11 - tioner for the sale or lease of the whole or part of the property in question , unless the same be first subdi- vided into lots by petitioner. Stated otherwise, in order that petitioner would be entitled to compensa- tion under the terms of the contract Exhibit "A" there must first be a subdivision of the property "int; lots , followed by a sale or lease of the same . decause of this 11 oneness 11 or indivisibility of the consideration of the contract Exhibit. 11A'1 , we are of the opinion that the activities of the peiiti6ner of subdividing the property or collecting accounts , which petitioner de- nominated 11 acts of administration" are not in fact de - tached, distinct , nor transcendental to the brokerage relationship created byaforesaid. contract , but rather acts which are merely incidental to the priraary pur- pose for which the agree~ent was entered into. This conclusion becomes more significant and clear when we take into account the legal rule appli- cable to the relationship of petitioner and Varsity Hills , Inc. as broker and principal from the tax view- point . Under section 194 (s) of the ~ational Internal .evenue Code a "real .:state broker 11 is defined thus .. ~(s) . 'Ieal estate broke~~ includes any p~rscn , other than a real estate sales - man . as hereinafter defined, who for another, and for a compensation or in the expectation or promise of receiving compensation, (1) sells or offers for sale, buys or offers to buy, lists, or solicits for prospective pur- chasers , or ne~otiates the purchase� sale or exchan~c of real estate or interests therein; l2) or . egotiates loans on real estate; (3) o~ leases or offers to lease or ne~otiates t~ sale, purchase or exchan~6 of a lease, or rents or places for rent or

DECI3 Ivl~ - C. T..'. . ~'\..3E J.'<C . 193 - 12 - collects rent from re3l estate or im- r::roveulents thereon; (4) or shall be e.�iployed by or on behalf of the ovm.:::r or owners of lots or other parc els of real estate at a stated salary, on c omJ1ission , or otherwise , to sel l such real estate or any parts thereof in lots or parc elso x x x x Ju~ the fore - 90in9 definitions do not include a per- son who shal l directly perform any of the acts aforesaid with reference to his o~n property , where sue~ acts are per- formed in the re:sula.r course of 0r as an inc ide. �::. �:o the .ilanc:.ge.~1ent of such property; nor shall they apply to per- sons actiny pursuant to a duly c~ecuted power o: .Jt torney fro:" t~e Ov<r:.ur 2u t.h - orizins fin2.1 consurn:i,aU.on by perfoDaance of a contract con~eyin0 real estate 0y sale, mort9age or lease; x x x 11 .1e fir:.d that th2 h.e:cei.: petitioner cle2.rly falls \dt~:dr. J..:he definitiono Cn ;)ehalf of Varsity Hills , Inc . , the ~atitioner J. M. Tuason ~Co., Inc. undertook to develop a subdivision out of the for,ner's ~roperty ancl .to proi!wte sales of lots therein for co~ �1pe11sa �d.on . In connection therewith the petitioner under the con- tract I; xh i bit 11F\ 11 was tc odvertisc the sale of th~ lots (paro 11), and -t; execute contracts to effect the sale or lease of tlTe lots havins .been srantec. pov:c:c anO. o.uchority to t..ake such contracts \dth power to Co!!Cel said con~racts ~ar . 4). hovvever , petitioner seeks exclusion frout the above defini�cicn of a real es-cate :Oro:cer 2,1d invokes the proviso � hat the same does not ~apply to persons ac tin.; pursuant .to a duly execute0. power of attorney frolil the owner authorizing fina l consuHtJI12tion by per- f orJi1C.nce of a controct conveyL19 real estate 0y sale 1 mortsa.;e or leas.:: . 11 TLis c on�t ention is without werit . ( _&?.

DE CIS IU�, - : . Te H o 0,._;i.L.: 1~(; . 193 - 1~ - The exeil1ption of those p2rsons cluly provided vJith a power of attorney refers only co those persons actins pursuant to such power authorizins final consunm1ation by perform2.nce oi a contract convcyins;; ~�eal estc>.t8 DY sale , 1.10rtga~e or le2se as distinguished from ne - gotiatins it. 11 3uch a construction of the act , how- ever is not ~ ~easona~le one. It ~ould not only render the act invalid , but , even if i did not do this , it would practically re der it ineffective, since as has been said, any Drcker could secure escape from its provisions merely by being car~ ful to secure written authority in every case. A mu c h Jnore natural construction is that by po\lver of a torney is meant writ ten autho- rity to act for and in place of the prin- cipal in consumating the transaction as dis- tincjuished from 1nerely ne:;;otio.tir:c, it. This construction removes the objection of unrea- sonable discrimination; for such an agent is much more than a broker , and there is nothing unreasonable in not applying to him the regulations applicable to brokers. 11 rliley v. Chambers , (Cal) , 185 Pac 855 , a A . L.~. 418) . There is indeed a substantial distinction between the phases of the generation and perfection of a con- tract on the one hand and that of consumnation on the other o '-i:hile the former includes the preli�ninary steps � of negotiation and the bi:rth of a juridical relation, the latter refers to the perforli1ance and execution of the prestations derived from the contract {see 3 Casten, Derec ho Civil Espanol , 7th Edo p . 379- 380) . Be that as it may , the tax herein i.J'7iposed is not by reason alone of the act of petitioner in executing the contracts of sale or lease but upon its rendition of / 10

DECISI ON - C. T . i . CASE. i~G . 193 - 14 - acts in behalf of another for compensation, of sell- ing or leasing 9 offering to sel l or lease , solicit- ing for prospective purchasers, negotiating the sale or lease or c ollecting rents of real estate (see Sec ., 195� National Internal Revenue Code) bel onging to Varsity Hills , Inc., ..:>ince petitioner ' s 11 ac ts of administration 11 so- called under brokerage~contra c t ixhibit 11/ 11 , ~ere inc idental to or intimately linked with and -did in fact form part of petition er's nec essary obl igations to ef - fec t the sale of subdivided lots as a broker under the terms of said agreement , such incidental acts should not be given a distinct and different treatment from the princ ipal acts . Hence , whatever amount petitioner received as compensation for the servic es rendered oy . it , by virtue of the c ontra c t of brokerage Exhibit II II may be rightly c onsidered part of the "gross eompen .:. - sation11 subjec t to brokers percentage fax imposed by sectio~ 195 of the Tax Code . Inasmuch as the law uses the term 11 gross com- pensation" and that the payments ;nade by -Varsity Hills, Inc. were -made to c ompensate the servic es of petitioner taken in its entirety , we believe that any and all amounts received by petitioner pursuant to the con- tract Exhibit A 11 11 , whether designated a s 11 administra - tori s fee 11 or ''selling c ommission" , fall within the purview of "grOSS COi11pensation 11 as provided for by section 195 of the Tax Code , a~d therefore subject to the 6/o broker t s tax imposed there in. I /f

D cr;.;; IGh - LC . 193 . ....,. T . .-...,..,l ... \...,� .1 � . l o l....o ~..; - 15 - ��iliEl-=i~Ci�, the de ision of the respondent Col - lector of Internal ! evenue denyin0 the petitioner ' s cl aim for refu11d of he anount o.f ~.9,C24.84 is hereby affirmea , and the pet!tion for review should be , as it is hereby , dis~i se~ with costs 2~ainst petitic~er. fuanila, Phtlippines , September 29 , 1956 � ..-, ?~--~ 1"/>i L :u~v ....J, �.uL2. residins Juu'::ie RGj�,/�h 1.,. J,,._'.LI HSSO i?tc Judge II?_