CTA Case No. 2687 (Decision)

- - - - - -- - --- - ItRPUrH.ir. OF TH E PtHUJ'Prt'\"t3 .) COUHT OF TAX APPEALS Ol'EZON CITY PHILIPPINE COLUMBIAN ~~ SSOCIATION, Petitioner, - versus - C.T oA. CASE NO o 2687 CO~~ISSIONE R OF INTERNA L REVENUE, Respondent. v- - - - - - - - - - - ~ DE C I S I 0 N In this petition for review of the decision of respondent Commissioner of Internal Revenue , peti- t i oner Philippine Columbian Association assails re s pondent's determination that it is a r eal estate dealer liable to the real estate dealer'~ fixed tax for the years 19 5 3 to 1 962 in the sum of ~3,950.00. The records show that petitioner is a non-stock, non-profit corporation or ganized and existing under and by v i rtue of the laws of the Philippines with office at 350 Taft Ave nue, Manila o It is a social and civic organization, and has among its activities, the rendering of restaurant services and the catering of food to its members, to their guests and to such persons as may desire to be served in its premises. (Exh. "1 11 , pp. 3-4., BI R records.) To perform such services, petitioner, sometime in November, 1955, entered into a lease contract and services agreement with one Apolonia R. Cadua Vda. de Vadillo. Petitioner,

DECISION - CTA CASE NO. 2687 - 2- as lessor, leased to Apolonia Cadua de Vadillo, as lessee, the northern wing of its 9uilding located at 350 Taft Avenue, Manila, including the kitchen spaces appurtenant thereto , for a rental of P275.00 per month, payable in advance . (Exh. "1-A", p. 4, BIR records.) The recor 6s also reveal that on September 11, 1950, petitioner, as lessor, entered into a construction and lease agreement with one Enrique P. Samson, as lessee, wher ~ by the former leased its building, . bowling alleys and restaurant-cafe-bar for the irrevocable term of fifteen years counted from January 1, 1951 and ending on December 31, 1965. (Exh. "3", pp. 7-12, BIR records; Exh. "3-A", pp . 11, BIR records.) Under an amendatory agreement entered into by the same parties in March, 1951 1 the construction and lease agreement was modified in order "that at such times as no member or members of the LESSOR association are playing or desire to play, the LESSEE may permit the use by the public of � said two alleys, and for such use, said LESSEE shall have the annual option, which option shall be exercised in writing and duly transmitted to the LESSOR within the first fifteen (15) .days of each calendar year, either to pay the LESSOR the sum of Three Hundred Pesos (P300.00) .Per month in advance within the first five days of each month; or, to pay the LESSOR forty percentum (40%) in cash of what is charged the public

DECISION - CTA CASE NO. 2687 - .3 - X X , X II (Exhs. 2 11 11 & 11 2-A." pp. 5-6, BIR records.) . Upon i nves t igation of petitioner by an examiner of respondent, it was ascertained, among others, that - petitioner derived rental income during the period f rom 1953 to 1962, hence it is subject to the real estate dealer's fixed tax in the sum of ~3,950.00, itemized as f ollows: (Exh. 11 A-3.- A", p. 1, BIR records.) Year Rent Room Restaurant Total Rent Tax Due Income Service Fees Income C-8 1953 ii 2,000.00 �il 7,725.00 �il 10,041.75 ii 2,000.00 ~150.00 1954 10,135.50 11,880.03 2,000.00 1955 2,000.00 29,462.11 150 o00 1956 11,695.56 9, 105.00 11,566.40 31,775.25 150.00 1957 10,132. 50 12,859.35 27,616.18 500.00 1958 9,759.72 8,680.00 12,864.02 34,742 o88 500.00 1959 6,943.88 11,567.32 11,944.72 36,548.14 500.00 1960 11,751.03 19,728 o05 12,488.32 38,240.17 500 a00 1961 15,004. 12 21,064.07 . 15,808.39 45,361.17 500.00 1962 1 4 , 7 2 8 . 14 50,937 o46 500.00 13,144.80 500.00 14,065.00 The 11 room service 11 , as re f lected f rom the data gathered from the registry book of petitioner, accor- ding to the examiner, refers to income from reservations for the use of convenient rooms and social halls for meetings and parties of even non-members of petitioner association. (Exh. 11A-3-A", p. 1, BIR records; p. 168, BIR records.) "Restaur ant fees" represent certain percentages of the gross receipts of Mrs. Vadillo who is allowed to operate a testaurant in the club premises of petitioner u Mrs. Vadillo pays a certain percentage of her gross receipts to reimburse petitioner for ,. ! <) ,...., . .� ,.....,

DECISION - CTA CASE NO. 2687 - 4- maintenance expenses, depreciation, electric bills, water bills, repairs of kitchen and janitorial expen- seso (Exhs. "7" & "7-A" , pp. 153-1.54, BI R records o) As explained by the treas ure r of petitioner association , Mr. Victor Buencamino, Jr., in his testimony before the appellate div is i on of the Bureau of Internal Reve- nue, no fixed amou n t of rent al is demanded from Mrs o Vadillo because t he space or portion which is occupied by her in petitioner'~ premises wo uld depend upon the volume of her business . If the volume of her business is big, she occupie s a bigger portion; if the volume of her business is sma ll, she a s ks for a smaller space. (pp. 171-173, BIR r ecords.) Petitione r being the owner of real property part of which is occupied by and leased to Mrs. Vadillo, respondent considered it a real estate dealer subject to the real estate dealer's fixed tax; the portion of Mrs. Vadillo's gross receipts paid to petitioner to reimburse certain expenses constituting rental payment although it is not of f ixed amount. Accordi ngly, the amount of P3,950.00 as real estate dealer'~ fixed tax for the years 1953 to 1962 was assessed against and demanded from petitioner by respondent. A series of commun ication between petitioner and respondent ensued. Finally on March 10, 1975 respondent informed petitioner that after a areful restudy of the ' ) ., f") '"' i J

DEC ISION - CTA CASE NO. 2687 - .5 - facts and c i rcumstances obtaining in the case, as well as the applicable jurisprude~ce, he found no valid nor plausible reason to reconsider, much less set aside his decision holding petitioner liable to the said tax. Petitioner was therefore requested to pay the sum of P3,950.00 as real estate dealer'~ fixed tax for 1953 to 1 96 2; otherwise, the collection thereof thru judicial action would be effected without any further noticeo Hence, the present recourse. Under the facts and circumstances obtaining herein, is petitioner a real estate dealer, and there- fore subject to the real estate d~aler's fixed tax for the year s 1953 to 1962 in the total amount of P3, 950 o 0.0'? In answering the query in the affirmative, respon- dent by way of special and affirmative defense in his answer states: 6. That petitioner has leased a portion of its property to another person to operate a restaurant business inside its premises, and has derived rental income from the lease of said property; 7. That, consequently, petitioner is considered a lessor of real property within the purview of the Tax Code, and is consi- dered a real estate dealer; and, therefore,� subject to the real estate dealer's. fixed tax (C-8-a) _for the years 1953-1962, in the total amount of P3,950.00; 8. That respondent' s assessment and demand of the real estate dealer'~ fixed tax

DECISION - CTA CASE NO. 2687 - _6 - for the years 1953-~962 is in accordance with Section 182(aa), of the National Internal Revenue Cod~. In asserting the contrary, petitioner, in substance, contends that the real estate dealer'~ fixed tax is a tax on 11 business .. as clearly shown by the caption of both the title and chapter of the National Internal Revenue Code under which it falls, which includes 11 real estate dealer 11 in the list of taxable businessess. Since petitioner is a non-stock, non-profit corporation, the main purpose of which is 11 to foster the spirit of good fellowship among its members; to promote their physical, intellectual and moral welfare, and to enhance their happiness; to inculcate the spirit of good citi- zenship, to cultivate friendly relations between Filipinos and other nationals .. , it is not deemed engaged in business. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive. Who is considered a real estate dealer under the National Internal Revenue Code? The question may be narrowed down to whether in 1953 petitioner was a real estate dealer within the concept of Section 194 (s) .of the National Internal Revenue Code, as amended by Republic Act Noo 588, the pertinent provisions of which read: 11 X x x 'Real estate dealer' _includes any person engaged in the business of buying,

�- ....:...; -��-~ .-..:.:.._;,.._ .... DECISION - CTA CASE NO. 2687 - 7- selling, exchanging, leasing, or renting property on his own acc ount as principal and holding himself out as a . full or part- time dealer in real estate or as an owner of rental property or ~~~ies rent~r of fered to r:~n t for an agg.f!-_gate amoun t of _th reLtho~~~C?...�....2.! .more ~~......Y!:.il:~ x :< x " (Section 194(s), National Internal Revenue � Code as amended "by Section 6 of Republic Act No . 588 , effective September 22, 1950.) (Emphasis supplied.). We observe that Commonwealth Act No. 466, known as the National Internal Revenue Code, as originally enacted and befure amendments were made t hereto, did not provide for a definition of " x:e al estate dealer". Section 193(q) .originally taxed r.eal estate brokers, but not real estate dealers. With the enactment of Republic Act No. 42, which took effect on October 1, 1946, a definition of real estate deale rs was inserted in Section 194(s) of the Ta x Code. This definition states: "x x x� 'r.eal estate dealers' includes all persons who for their own account are engaged in the sale of lands, build- ings, or interests therein or in leasing real estate . " (Section 194( s ), Na tional Intern al Revenue Code as amend~d by Republic Act No. 42.) The above defin ition was su bsequently amended by Republic Ac t No. 588 , heretofore quoted . The explana- tory note of House Bill No. 867, which was enacted into said congressional act, says: "It is also proposed to amend the defi- nition of the term 'real estate dealer' ') �~ {"' "-< '1. 0

DECISION - CTA CASE NO. 2687 - .8 - provided in the same paragraph. Under the present definition, a proprietor of a seven- story office building pays the same tax as the widow with a two-~oor accessoria who lives in one and rents the other. In the former, the tax is insignific ant; whereas in the latter, the tax is may be all or nearly all of the rent collected. Under the proposed amendment, owners of rental property whose income therefrom does not exceed three thousand pesos a year, and owners Of sugar lands who are subject to tax under Commonwealth Act 567, be not con- s ide red real estate dealers o" (May 3, 1950, No. 68, Vol. I, Congressional Record, House of Representatives.) . The definition of real estate dealer given under Republic Act No. 588 is vague and ambiguous. So Con- gress passed Republic Act No. 1612, which took effect on August 24, 1956, for the purpose of - "Modifying the definition of real estate dealer so as to put an end to all doubts as to the meaning thereofo" (See . Explanatory Note on House Bill No. 5809 found in No. 76, Vol. III, Congressional Record, House of Representatives, May 17, 1956. )' Republic Act No. 1612 defines a real estate dealer thus: "x x x 'R.eal estate 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 owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year; Provided, however, That any person receiving an annual income of four thousand pesos or more from buying, selling, exchanging, leasing, or renting property on t i s own account as principal or as an owner of rental property or properties phall be considered as engaged in the busi- . ness as real estate dealer: x x x" (Section 14,

DECISION - CTA CASE NO. 2687 - 9- Republic Act No o 1612; emphasis supplied.) Apparently, Congress was convinced that the defi- nition of real estate dealer prqvided for by Republic Act No. 1612 did not completely clear away the doubt, so a more explicit and emphatic definition was finally provided for in Republic Act No. 2025 , w?ich took ef- fect on June 22, 1957o The explanatory note on House Bill No. 7151, which later became Republic Act No. 2025 , states : "To further clarify the meaning of the term 'real estate dealer', it is proposed that paragraph (s) of Section 194 be amended by stating therein �that mere renting or sub- leasing of property by the owner or lessee for the aggregate amount of P4,000.00 or more is cons i dered engaging in the business of a real estate dealer." (May 7 , 1957, No. 59, Vol . IV, Congressional Record , House of Representatives.) This final definition reads: "x x x 'R.eal estate 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 owner of rental property : or properties rented or offered to rent for an aggregate amount of four thousand pesos or more a yearo Any person shall be con-� . sidered as engaged in business as real estate dealer by the mere fact that he is , the owner or sublessor of property rented or offe red to rent for an aggregate amount of four thousand pesos or more a year: x x x". (Section 9, Republic Act No. 2025; under- seer ing ours .) . From the foregoing observation, we gather that Congress, in progressi~y amending Republic Act Noo 2,18

DECISION CTA CASE NO. 2687 - .10 - 588 upon the prope r inter pr e tation of which the reso- lution o f the qu estion in the cas~ at bar hinges, was cognizant of t he imperfec tion from which the then defin ition of rea l estate de a le r suffered. The mean- ing intended by Congress for the term "real estate de aler" was hidden in a labyrinth of ambiguities created by the imperfect language of Republic Act No. 588. To retrieve th e in tend ed meaning from ambigui- . ties, Congress enacted the amending Republic Acts No s . 1612 and 2025. In the light of the progressive steps tak en in enacting these ame ndments , it appears abun- dan t ly cl ear that Cong re ss in tende d to classify an own e r of rental property or proper ties rented or offered to ren t for an agg re ga te a mount of ~3,000.00 or more a year as a real esta te dealer whe n it enacted Republic Act No. 588. (Bele n T. Ramirez vs. Commissioner of Internal Reve n ue, CTA Case No. 544 , September 14, 1959.) Consequently, a person is consider ed a real estate dealer by the mere owner ship of re n ta l property or properties rented or off ered to rent for an aggregate amount of ~3,000 o 00 or more a yea r under Republic Act No g 588 , effective September 22, 1950, which was in- creased to P4,000.00 or more a year under Republic Ac t No . 1612, approved August 24, 1956, and reenacted in Republic Act No. 2025, which took effect on June 22, 1957, which definition of real estate dealer was

DECISION - CTA CASE NO. 2687 - 11 - clarified to include a sub-lessor of property rented or offered to rent also for an agg~egate amount of ~4,000 or more a year. (Amendments to Section 194(s) of the 1939 National Internal Revenue Code.) Clari- fying provisions of a statute are not uncommon. Clearly, therefore, a person is considered engaged in business .. as real estate dealer by the mere fact that he is the owner or sub-lessor of property rented or offered to rent for an aggregate amount of ~4,000.00 (formerly ~3,000oOO,but now irrespective of amount under Section 192 (3) (aa) .of the 1977 National . Internal Revenue Code) . or more a year. Petitioner having leased a portion of its property to Mrs. Apolonia Vadillo to operate a restaurant busi- I I ness .inside its premises, and has derived rental income from the lease of said property, it is considered a lessor of real property within the .purview of the National Internal Revenue Code. Petitioner is there- fore a real estate dealer and subject to the real estate dealer'~ fixed tax (C-~-a) for the years 1953 to 1962. We note, however, that for the years 1953 and 1954, petitioner's rental income amounted only to ~2,000.00 per annum. Since as owner of rented property during the years 1953 and 1954, petitioner's aggregate rental income was only ~2,000.00 per annum, which is less than <~~' r.~ . ' :..J

DECISION - CTA CASE NO. 2687 - 12 - the P3,000o00 minimum per year fixed by law at that time, petitioner could not be con9idered a real estate dealer in the years 1953 and 1954. Consequently, peti- tioner is not subject to the real estate dealer's fixed tax for the years 1953 and 1954 in the total amount of P300.00. We note also that for the year 1957 the total rental income of petitioner was P27,616ol8, which is not more than P30,000o00, and the real estate dealer�~ fixed tax at that time for an annual income of exceeding PlO,OOOoOO but not ex- ceeding P30,000.00 was P300.00o It follows that peti- tioner should pay only P300o00 as real estate dealer's fixed tax for 1957, ins tead of P500.00 as assessed by respo? dent. 1 ~he net result is that petitioner is exempt from the real estate dealer�~ fixed tax for 1953 and 1954 and liable to the said tax for 1957 in the amount of P300.00. Its total real estate dealer�~ fixed tax liability for the years involved in this case (1953 . to 1962) .is therefor only P3,450.00. Accordingly, petitioner Philippine Columbian Association is hereby ordered to pay respondent Commissioner of Internal Revenue the total amount ofg3,450.00 as real estate dealer�~ fixed tax for the years 1953 to 1962, inclusive. t ' ~~1'-� t N

DECISION - CTA CASE NO. 2687 - 13 - WHEREFORE, the decision appealed from is modified as i ndicated in the above opinion of the Co urt. With costso SO ORDERED" Quezon City, Metro Manila, August 20, 1980. l~/11,A1MLANvTt_E/_._',f(..-'e,IJ/L.4L\E~R' ~/ Presiding Judge WE CONCUR: //'/ CO~ ROAQUIN ~Associate Judge R~~ e Judge