CTA Case No. 995 (Decision)

E . !lT TC 0 , T P IU P EB OC C �r< 'F . PE L. ANTONIO ROXAS , EDU RDO ROXAS , & ROXAS Y CIA., in their own respective behalfs and as judicial co- guardian of JOSE OXAS , . Petitioners, - versus - C. T. A. CASE NO. 995 COJ.l}IISSIONER OF I NTERNAL REVENUE, Respondent . x- - - - - - - - - - - - - - x DE CI S I 0 N This is an appeal from the decision of respon- dent Commissioner of Internal Revenue, holding peti- tioners Antonio , ~duardo and Jose , all surnamed Roxas, liable for deficiency income taxes in the amounts of 1"12 , 823 . 00 , rl3 , 109 . 00 and ?11 , 911 . 00 , respectively, for the years 1953 and 1955, and the part nership Roxas y Cia . in the total amount of � 320. 00 as pri- vilege taxes and compromise penalties for the year 1952. Petitioners Antonio , Eduardo and Jose are Spanish citizens �Nho are brothers and residents of the Phil- ippines . They organized and registered under the laws of the Philippines a general partnership known as Roxas y Cia., one of the purposes of which is to operate jointly an inherited property for the benefit of the co- heirs . Roxas y Cia., as a partnership , and Antonio , Eduardo and Jose , in their individual capacities ,

DECISION - C. T. A. CASE NO . 995 - 2- filed income tax returns for t he years 1953 and 1955. It appears in t he partnership return that only fifty per cent of t he profits ~ealized from t he sale by the partnership of the Nasugbu property was reported on \ the belief that the said profits were capital gains . It appears further that there were claims for deduc- tion vihich were disallov;ed by respondent Commissioner of Int ernal Revenue . After the investigati on of the income tax returns , it was dis closed that the partner- ship s old , in 1952 , 6oo , ooo shares of Masbate Consoli- dated and 300 , 000 shares of Eastern Development Co . which it a cquired before the war . It was also gathered from the books of the partnership that the residential house at 1 850 Wright Street , Manila , was rented in 1952 bJr Jose Hoxas , one of the brothe:rs vrho is a part- ner , for P8 , ooo. oo . Consequently , respondent demanded of the partnership Roxas y Cia . the payment of Pl50 . 00 , a s real estate dealer ' s tax , and PlO . oo , as comp romise , and ? 150 . 00 , as tax for being a dealer in securities and PlO. OO , as compr omise , or a total of ?3 20 . 00. As against the partners , respondent determined a defi- ciency income tax in amounts which follm.v- : Antonio Hoxas 1.95..3. ill5: TOTAL Eduardo Hoxas Jose Roxas j')7, 010 . 00 P5 , 813 . 00 ? 12 , 823 . 00 7 , 281 . 00 5 , 82B . OO 13 , 109. 00 6 , 323 . 00 5 , 58B . oo 11 , 911 . 00 This case turns upon the r esolutions of t he follOiving issues : 1 . I s the profit derived from the sale of the I

DECISION C. T. A. CASE NO . 995 ~ Nasugbu property by the partnership a capital or ordi- nary gain? 2. 'as the partnership Roxas yCia . a real estate dealer in 1952? 3. Are the expenses and/or contributions dis- allmved by respondent allovtable deductions under the law? 4 . l'la s the partnership Roxas y Cia . a dealer ~n securities in 1952? The first and second issues are interrelated and we shall consider and resolve them together . Peti- tioners contend that the sale of the Nasugbu property , which v1as inherited from their mother , is merely a liquidation of ncapital assetn and therefore the pro- I fit realized therefrom should be treated as a capital gain, only fifty per cent of which should be returned ' for income tax purposes . Respondent , on the other hand , advocates as ordinary gain treatment of the pro- ' fit inasmuch a s the Nasugbu property was subdivided into lots and sold on an installment basis during a period of ten years . It is true that the property in question was originally a capital asset . But to re- solve the variant contentions of the parties , it be- 1 comes necessary to determine 1.vhether or not upon the subdivision and sale , the property retained its capi- tal asset status as defined in Section 34(~)(1) and (2) of the National Internal Revenue Code , which pro-

DECISION - C. T. A. CASE NO. 99�5 - 4- vides as follows : "SEC . 34. Capital gains and losses . - (a) Definitions . - As used in this Title- (1) Canital ~ssets . - The term ' capi- tal assets ' means property held by the tax- payer (vrhether or not connected vri th his trade or business) , but does not inc1ud~ ~ock in tr.ade of the taXI>UY~.l' or oth~r: :groper.ty of a kind which Y{ouJJL..P.rcmerlY.: be included in the ipveilfpry of the ta4:gayer if on nanQ ~~ the clofi~ of the taxabl~ y~ar , or pPoperty held by the tqxpaLe~ nrimarily for sale to cus.tom~r..� in the. ordinary course of his trad� or busines~ , or property, used in the t r ade or business, of a character which is subject to the allOi�Tance for depreciation provided in sub- section (f) of section thirty; or real pro- perty used in the trad~ or business of the taxpayer . (Underscoring supplie4) (2) Net canital gai.n . - The term ' net capital gain ' means the excess of t he gains from sales or exchanges of capital assets over the losses from such sales or exchanges ." It 1dll be noted from the afore- quoted defini- tion of 11capita1 assetstt that all properties not specifically excluded in the statutory definition are regarded as capital , the profits from the sale or exchange of 1�Thich are treated as capital gains . Con- versely, all those properties specifically excluded are considered as .ordinary assets and the profits realized therefrom must necessarily have to be treated as ordinary gains . The yardstick therefore for de- termining whether the profit in question is a capital or an ordinary gain is the statutory definition of a capital asset . However , as held : "The definition of a capital asset must be narrowly applied and, ,its exclu- sions interpreted broadly. !his is neces-

DECISION - - C. T. A. CASE NO . 995 - 5- sary to effectuate the basic Congres- sional purpose . (Corn Products Refi- ning Co . v . Comm . 350 u. s. 46 , 100 L. Ed . 29 , 76 S. Ct . 20 (1955) , rehearing den. 350 u. s. 943 , 100 L. Ed . 823 , 76 S. Ct . 297 (1955 ), cited in Mertens ' Law of Federal Income Taxation , Simet & Weiss Rev., Vol . 3B , Sec . 22 . 11 , (Footnote 71) . Petitioners claim tha.... t the partnership Roxas y Cia. has never engaged in the real estate business; that the Nasugbu� property was disposed of , not by way or in the course of realty business, but confor- mably �with the policy enshrined� in the Constitution to break up large estates and apportion them to the landless ; that the property could not be classed as property held for real estate trade ; that the price at which the property was sold was _even lower than the assessed value; that the ordinar y methods used to attract buyers were not resorted to in disposing the property; and that the said disposal took place as a consequence of only one agreement . Accordingly , it is urged that these circumstances demonstrate that the disposal of the property constituted merely a liquidation of capital asset. Wnile it is not disputed that at its inception , the partnership vras not engaged in the real estate business , however , from the time that it subdivided the Nasugbu property and subsequently sold the result- ing lots to the tenants on an installment basis , there was dedication to the business of real estate dealer . The subdivision and sale had the effect of converting it/

DECISION ~ C. T. A. C SE NO . 995 - 6- the property into one used in business (Antonio Tuazon, Jr . vs . Jose B. Lingad , C. T. A. No. 13 98 , January 16 , 1965. ) In conse quence , the Nasugbu property ceased to be a capital asset and assumed the cha racter of an ordinary asset , the gain from the sale of whi ch is tax- able in fUll . It may be true that the disposal of the Nasugbu property was made in pursuance of the constitutional policy of breaking up large estates and apportioning them to the landless and tha t the sale was effected at a price lovrer than the assessed value . But the fact remains that in disposing the said property, the partnership H.oxas y Cia . has engaged in the real estate 'business . The motivation in the disposal of the Nasug- bu property , however notie and patriotic it may have been , is not determinative of whether or not the said property is a capital asset . The gain or loss from the disposition of such real estate would; nevertheless , be treated as ordinary . Similarly , the circt~stances that the partnership did not resort to the ordinary me thods of attracting buyers and that the sale to the tenants was made in pursuance of only one agreement do not militate against its status of real estate dealer . Respondent Commissioner of Internal Revenue has therefore correctly treated the profit realized from the subdivision and sale of the Nasugbu property as an ordinary gain.

DECISION - C. T. A. CASE NO . 995 - 7- Respondent ' s claim that the partnership Roxas y Cia . Has a real estate dealer in 1952 is anchored upon Section 19lt( a ) , of the Nati'onal Internal Revenue Code , which states as follows : " (s) x x x . ' Real ~state dealer ~ includes any person engaged in the business of buying , selling , exchanging , leasing , or renting property as principal and holding himself out as a full or part- time dealer in real estate or as an mmer of an a ggre- gate amount of four thousand pesos or more a year . Any person shall be considered as engaged in business as real estate dealer by the mere fact tha t he is t1be Oimer or sublessor of property rented or offered to rent for an aggregate amount of four thousand pesos or more a year . x x x . 11 It appears from the evidence that the residen- tial house at Nright Street v.-as occupied in 1952 by Jose Roxas Garg ollo , one of the three brothers vTho formed the partnership of Roxas y Cia . , in considera- tion of a nominal rent of P600 . 00 per month , in addi- tion to the real property tax . From t he establishment of the partnership, the house vras used a s residence of the partners- brothers until the partners, Antonio and Eduardo, got married and moved to their o~n res - pective family homes . It is the contention of peti- tioners that the rental of the Wright property amount- ing to Y8 ,ooo. oo (including the real esta te tax ) was recorded merely for accom1ting purposes and not for profit . \�'e believe that it is not t his leasing vThich made the partnership Roxas y Cia . a real estate dealer, but it is the fact th'.".l t as heretofore held , with the subdivision and sale of the lots to t he tenants , the I

DECISION - R� T. A. CASE NO . 995 - 8- partnership has actually engaged i n the real estate business within the contemplation of Section 194(s.) , of the National Internal Revenue Code . 'V e no1.v come to ~he third issue . Are the expenses and/ or contributions disallmved by respondent allow- able deductions under the law? The follo�wing are the only disputed items, as listed in petitioner ' s memo- randum : Roxas y Cia . 1953 (a) Tickets purchased 40 . 00 for the banquet in honor of S. Osmefia (Exhibits Q, Q- 1 & Q- 2) , being re - representation expense deductible under section 30(a) , NIRC � � � � � � � � ? (b) Contribution to con- truction of Philippine Air Force chapel (Exhibit T) , beine a religious contribution, and, at that , to an agency of the Govern- ment , and therefore deduc- tible tmder section 30(h) NIRC � � � � � � � � � � � P 100. 00 (c) Contribution to the Nanila Police Trust Fund (Exhibits EE , EE- l & EE- 2) , being a charit able contri- bution to an organization qualified under section 30(h ) , NI RC � � � � � � � P 150. 00 (d) Contribution to the / Philipp ine Herald ' s fund drive for Manila ' s need- iest families ( Exhibits V, & V- 1) , under section 30(h) , NIRC �� . � � � � � � � �� P 100. 00 (e) Gifts of San Miguel beer (Exhibit s X and X- 1) , being in the nature of re- I~

DECISION .- c . T. A. CASE NO . 995 - 9- presentation expenses de- ductible under section 30 (a), NIRC � � � � � � � � � �~ 28 . 00 (a) Contribution to Lady 50. 00 of Fatima Chapel~ FEU (Ex- hibits HH & HH- lJ , being a qualified deduction ur1der section 30(h) , KikC � � � � �r ANTONIO ROXAS - 1953 (a) Contribution to Pasay 25 . 00 City Firemen ' s Christmas 50 . 00 F'und (Exhibits AA & AA- 1) , qualified under section 30 (h), NI RC � � � � � � � � � � (b) Contribution to the Pasay City Police Depart- ment, an agency of the Go- vernment ( E hibit BB ), de - ductible unuer section 30 (h), NI RC � � � � � � � � � �P (a) Contribution to Ba- 25 . 00 guio City Police Christmas Fund (Exhibits KK , K.K;l, KK-2 & KK- 3), qualified under section 30(h) , NI RC ��P (b) Contribution to Pasay 25. 00 City Firemen 's X' mas Fund (Exhibits 11 , 11-1 & 11-2) qualified tmder section 30 (h), NI RC � � � � � � � � � � P (c) Contribution to Pasay 50. 00 City Police X' mas Fund (Ex- hibits HN , MN- 1, Iv1N- 2 & 1-11{-3), qualified under sec- tion 30(h), NIRC � � � � � � P EDUARDO ROXAS 1953 (a) Contribution to the . Hi~as de Jesus ' Retire de Manresa (Exhibits cc, CC- 1, CC-2, CC-3, CC- 4 , CC-5,

DECISION - C. T. A. CASE NO. 995 - 10 - CC- 6 & CC- 7) , qualified un- der section 30(h) , NI RC � � �P 450. 00 (b) Contribution to the Philippines Herald ' s orga- nized fund drive for Mani- la ' s needies families (Ex- hibits DD , DD- 1 & DD- 2) , qualified under section 30 (h) , NI RC � � � � � � � � � �P 100. 00 (a) Contribution to the 120. 00 Philippines Herald ' s orga- nized fund drive for Mani- la ' s needies fam}lies (Exhibits NN , NN 1 & NN- 2) , qualified under sec- tion 30(h) , NI RC � � � � � �P J OSE ROXAS - 1955 (a) Contribution to the 120. 00 Philippines Herald ' s orga9 nized fund drive for P1ani- la 1s neediest families (Ex- hibits oo , oo;1 & o6- 2) , qualified under section 30 (h) , NI RC � � � � � � � � � P Petitioners justify the deductibility of these items as business expenses. and contributions under the provisions of Section 30 of the National Internal Revenue Code, which read : "SEC. 30 . Deducti..Qll~ from gros~ income . - In computing net inc ome there shall be allowed as deductions - "(a) Exnenses: 11 (1) In general . - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reason~ able allov;ance for salaries or other com- pensation for personal services �actually rendered; traveling expenses while away from home in the pur suit of a trade or {()

DECISION - C. T. A. CASE NO. 995 l !L - business ; and rentals or other payments required to be made as a condition to the continued use or possession, for the purposes of the trade or business , of property to which the taxpayer has not taken or is not taking title or in wh ich he has no equity. "x X X X X "( h) Chari tab...le and other con,.1r.i- butions . - Contributions or gifts actual- ly paid or made vli t hin the taxable yea r to or for the use of the Government of the Philippines or any political subdivi- sion thereof for exclusively public pur- poses , or to domestic corporations or asso- ciations organized and operated exclusively for religious, char itable , scientific, ath- letic , cultural or educational purposes or for the rehabilita tion of veterans, or to societies for the prevention of cruelty to children or animals , no part of the net income of which inures to the benefit of any private stockholder or individual to an amount not in exce ss of six ~er centum in the case of an individual , and three per centum in the case of a corporation, of the taxpayer ' s taxable net income as computed with out the benefit of this para- graph. Such contributions or gift shall be a llO'I.vable as deductions only if verified under rules and regulations prescribed by t he Secretary of Finance . (As amended by sec . 7, Republi c ct No . Ba) Respondent , hovJever , maintains that these expenses and contributions cannot be allovied as deductions because the partnership Roxa s y Cia . does not have a net taxable income . In support of his stand , he quotes Section 703 of t he U. S. Internal Revenue Code (19 54) , wh ich reads as follovrs : "SEC . 703 . PAR'rNERSHIP COMPUTATIONS. tt(a) Income and Deductions . - The taxable income of a partnership shall be computed in t he same manner as in the case of an individual except tha t - "x X X X I

DECISION - C. T. A. CASE i O. 995 - 12 - 11 (2) the following deductions shall not be allovmd to the partnership : X X X 11 (D) the deduction f or chari- t able contributions provided in section 170. 11 ( U. s . I . R. C. (1954) , Sec . 703(a)(2)(D) A per us.al of our National Internal Revenue Code does not yield a provision similar to the above- quoted section of the u. s. Internal Revenue Code . Hence , -the latter can- not be regarded with persuasive effect in our jurisdiction. \'lith respect to item (a) which the partne r ship seeks to deduct as a representation expense , we do not see any direct business benefit which may reasonably be expected to flow from the banquet . Consequently , the disa.llovlance of thQS - deduction claim; should be sustained . Item (b) , a contribution for the construction of a chapel of the Philippine Air Force, i.rlh ich is a part of the Philippine government , is deductible under Sec . 30(h) of the Nat ional Internal Hevenue Code . Items (c) and (d) should likewise be disallowed for the reason that there i s no showing that, the recipients are associations organized and operated exclusively for charitable pu~poses , no part of the net income of which inures to the benef it of any private individual . (See Sec . 30 (h) of the Revenue Code . ) In the absence of evidence that item (e) , consisting of gifts of San Niguel beer , was incurred in producing or in the exp_ectat i on of pr oducing revenue i n t he business of Roxas y Cia ., its disallowance was proper . Similarly, item (a) for 1955 , representing con- tribution to Lady of Fat ima Chapel, FEU, was properly disallowed as the same was made to a recipient Uni- {

DECISION - U. T. A. CASE NO. 995 13 - versity, which is a stock corporation, part of the net income of which inures to the benefit of private stock- holders . Finally, the contributions of the partners to the various city police and firemen ' s funds , and to the Herald ' s fund drives , are not deductible in the absence of proof that the recipients thereof are asso- ciations organized and operated exclusively for chari- table or religious p~rposes , no part of the net income of \vhich inures t o the benefit of private individuals. But t he contribution of Eduardo Roxas to the HlJ'as de Jesus' Retire de 'Hanresa in the amount of P450 . 00 should be deducted under Sec . 30(h) of the National Internal Revenue Code as one made to a reli- gious or charitable association. Huch as vre would like to allow the deduction of all the disputed items i n view of the worthy causes fol: \�:h;i.ch they �Jere given , we are constrained by the provisions of our tax laws to act otherwise. e are called upon to ap ply the la\v, not to legislate . "Deductions are a matter of legis- lative grace . The allO\vance of deduct- ions from gross income does not turn on general equitable considerations but depends upon legislative gr~ce , except 'ltlhere the.ra may be involved exhaustion of capital producing the gross income . Accordingly, a deduction vlill be allovJed only where there is clear provisions for the particular deduction claimed . '' 01Ier- tens Law of Federal Income faxation, Vol . 4, 25 . 03 , p . 306 , citing Deputy eSesc.. DuPont, et al . , Adm ' rs , 308 , v. Pierr U. S. 488 , 84 L. Ed . 416, 60 S. Ct . 363 (1940); New Colonial Ice Co . v . Helvering 292 U. S. 435, 78 L. Ed . 1348 , 54 S. Ct . 788 (1934); and others) . f

DECISION - C. T. A. CASE NO . 995 - 14 \'le nm.v come to the last issue . \vas the part- nership Roxas y Cia . a dealer in securities in 1952? From the records of the case and the evidence pre- sented , it appears that the partnership has been holding various stocks for purposes of investment . I In the year 1952 , the partnership Roxas y Cia . sold the following stocks : 1 . March 13 , 1952 - 300 , 000 shares of Has - bate Consolidated at Pl0 , 237 . 50; 2. Har ch 15 , 1952 - 300 , 000 shares of Has- bate Consolidated at P9 , 945. 00; and 3 . Dec . 26 , 1952 - 300 , 000 shares of the Eastern Development Co . for Pl , 755 . 00 , which it acquired before the last war . Section 194 of the National Internal Hevenue Code , as amended by Rep . ct No . 42 , defines 11dealer in securities 11 as one vTho for his o1m accou.rtt is en- gaged in the sale of stock, bonds , exchange , bullion, coined money , banl~ notes , promissory notes , or other securities . In the light of the evidence presented in this case and considering the statutory definition of udealer in se,curities , 11 we agree with petitioners that the partnership Roxas y Cia . holds its stocks merel~ for investments and that it is not engaged as a "deal- er in securities . 11 The sale of the 600 , 000 shares of lvfasbate Consolidated and the 300 , 000 shares of Eastern Development Co . in 1952 did not make the part- nership a dealer in securities . \ie note that the assessment against the partner- ship Roxas y Cia for real estate dealer ' s tax includes a compromise penalty of PlO . OO . It appearing that JJ j

'"I DECISION - C. T. A. CASE NO. 995 - 15 - there is no compromise agreement between the former and respondent re.garding its pay-ment , the inclusion thereof is unauthorized and illegal. 'V1HEREFORE , the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas , Eduardo Roxas and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal Revenue the amounts of Pl2 , ~08 . oo , Pl2 , 887 . 00 and Pll , 897 . 00 , respectivel y , as deficiency income taxes for the years 1953 and 1955 , plus 5% surcharge and 1~ monthly interest as provided for in Sec . 5l(a) of the Revenue ' Code; and modified vli th respect to the partnership Roxas y Cia . i n the sense that it should pay only Pl50 . oo , as real estate dealer ' s tax . With costs against petitioners. SO ORDEHED. Quezon City , July 31 , 1965. 1/W::f;~' ~ I ~ ILO D. REYES , SR . \/{_ Presiding Judge I CONCUR : ROHAJ.'J H. UMAL I Associate Judge Associate Judge Alejandro B. Afurong did not take part .