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. Osmea 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?

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers? The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below: 4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse; The above-quoted purpose notwithstanding, 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. Although they paid for their respective holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period. 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, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, 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, the municipal council of Nasugbu passed a resolution expressing the people's gratitude. 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. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. 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. In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%. DISALLOWED DEDUCTIONS Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. 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, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained. The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University. The contributions to the Christmas funds of the Pasay City Police, 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

gifts to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions. 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. 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. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. 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. Rightly, 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. Located within the premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University, 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. The disallowance should be sustained. Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. The law, which states: 1wph1.t . . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, 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: . . . (Emphasis supplied) . is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is sustained.1wph1.t To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively, computed as follows: * ANTONIO ROXAS Net income per return Add: 1/3 share, profits in Roxas y Cia. Less amount declared Amount understated Contributions disallowed P 153,249.15 146,135.46 P 7,113.69 115.00 P 7,228.69 Less 1/3 share of contributions 7,042.02 186.67 P315,476.59

amounting to P21,126.06 disallowed from partnership but allowed to partners Net income per review Less: Exemptions Net taxable income Tax due Tax paid Deficiency 154,169.00 154,060.00 P 109.00 ========== EDUARDO ROXAS Net income per return Add: 1/3 share, profits in Roxas y Cia Less profits declared Amount understated Less 1/3 share in contributions amounting to P21,126.06 disallowed from partnership but allowed to partners Net income per review Less: Exemptions Net taxable income Tax Due Tax paid Deficiency P147,250.00 147,159.00 P91.00 =========== JOSE ROXAS Net income per return Add: 1/3 share, profits in Roxas y Cia. Less amount reported P153,429.15 146,135.46 P222,681.76 P 153,249.15 146,052.58 P 7,196.57 P 304,166.92 P315,663.26 4,200.00 P311,463.26

7,042.02

155.55 P304,322.47 4,800.00 P299,592.47

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

7,113.69

7,042.02

71.67 P222,753.43 1,800.00 P220,953.43

P102,763.00 102,714.00 P 49.00 ===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual deficiency income tax all corresponding for the year 1955. No costs. So ordered. Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur. Zaldivar, J., took no part. Concepcion, C.J., is on leave.

HELVERING v. HAMMEL, 311 U.S. 504 (1941) 311 U.S. 504 HELVERING, Com'r of Internal Revenue, v. HAMMEL et ux. No. 49. Argued Dec. 11, 1940. Decided Jan. 6, 1941. Messrs. Robert H. Jackson, Atty. Gen., and Norman D. Keller, Sp. Asst. to Atty. Gen., for petitioner. Mr. John J. Sloan, of Detroit, Mich., for respondents. [311 U.S. 504, 505] Mr. Justice STONE delivered the opinion of the Court. We are asked to say whether a loss sustained by an individual taxpayer upon the foreclosure sale of his interest in real estate, acquired for profit, is a loss which, under 23(e)(2) of the 1934 Revenue Act, 48 Stat. 680, may be deducted in full from gross income for the purpose of arriving at taxable income, or is a capital loss deductible only to the limited extent provided in 23(e)(2), (j), and 117, 26 U.S.C. A. Int.Rev.Acts, pages 672, 673, 707. 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. Subsection (j) provides that 'losses from sales or exchanges of capital assets' shall be allowed only to the extent of $2,000 plus gains from such sales or exchanges as provided by 117(d). By 117(b) it is declared that 'capital assets' 'means property held by the taxpayer ... but does not include stock in trade of the taxpayer ... or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.' Respondent taxpayers, with other members of a syndicate, purchased 'on land contract' a plot of land in Oakland County, Michigan, for the sum of $96,0000, upon a down payment of $20,000. The precise nature of the contract does not appear beyond the fact that payments for the land were to be made in installments, and the vendor retained an interest in the land as security for payment of the balance of the purchase price. Before the purchase price was paid in full the syndicate defaulted on its payments. The vendor instituted foreclosure proceedings by suit in equity in a state court which resulted in a judicial sale of the property, the vendor becoming the purchaser, and in a deficiency judgment against the members of the syndicate. Respond- [311 U.S. 504, 506] ents' contribution to the purchase money, some $4,000, was lost. The commissioner, in computing respondents' taxable income for 1934, 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 $2,000 as provided by 23(j) and 117(d), in the case of losses from sales of capital assets. The Board of Tax Appeals ruled that the loss was deductible in full. The circuit court of appeals affirmed, 6 Cir., 108 F. 2d 753, holding that the loss established by the foreclosure sale was not a loss from a 'sale' within the meaning of 23(j). We granted certiorari, 310 U.S. 619 , 60 S.Ct. 1077, to resolve a conflict of the decision below with that of the Court of Appeals for the Second Circuit in Commissioner v. Electro-Chemical Engraving Co., 110 F.2d 614. It is not denied that it was the foreclosure sale of respondents' interest in the land purchased by the syndicate for profit, 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. 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, 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). 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. See Guaranty Trust & Safe-Deposit Co. v. Green Cove Springs & M.R. Co., 139 U.S. 137 , 11 S.Ct. 512; Gazlay v. Williams, 210 U.S. 41 , 28 S.Ct. 687; Riggs [311

U.S. 504, 507] v. Pursell, 66 N.Y. 193. But here we are not concerned with a restrictive covenant of the taxpayer, but with a sale as an effective means of establishing a deductible loss for the purpose of computing his income tax. The term sale may have many meanings, depending on the context, see Webster's New International Dictionary. The meaning here depends on the purpose with which it is used in the statute and the legislative history of that use. 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, to effect losses deductible in full by sales of property at any time within two years after it was acquired, which until held for that period was not defined as a capital asset, 208, Revenue Act of 1924, 43 Stat. 253, 262, 26 U.S.C.A. Int.Rev. Acts, page 13; 208, Revenue Act of 1926, 44 Stat. 9, 19, 26 U.S.C.A. Int. Rev.Acts, page 157, and 101 of the Revenue Act of 1928, 45 Stat. 791, 811, 26 U.S.C.A. Int.Rev.Acts, page 370. 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, they must be deemed to be excluded from the reach of its language. To support this contention respondents rely on the report of the Ways and Means Committee submitting to the House the bill which, with amendments not now material, became the Revenue Act of 1934. 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, thereby reducing their taxes.' H. Rept. 704, 73d Cong., 2d Sess., pp. 9 and 10. 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. That had been a feature of every revenue [311 U.S. 504, 508] law beginning with the Act of 1921, 42 Stat. 227, and each had defined as capital losses 'losses from sales or exchanges of capital assets'. 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, 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. 117(a). Finally, for the first time, the statute provided that capital losses in excess of capital gains should be deducted from ordinary income only to the extent of $2,000. 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, the Act materially curtailed the advantages which the taxpayer had previously been able to gain by choosing the time of selling his property. The definition of capital losses as losses from 'sales' of capital assets, as we have pointed out, was not new. As will presently appear, 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. And, if so construed, substantial loss of revenue would result under the 1934 Act, whose purpose was to avoid loss of revenue by the application of the capital assets provisions. 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. 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.S. 504, 509] letting capital gains go entirely untaxed'. It accordingly reduced the tax burden on capital gains progressively with the increase of the period up to ten years, during which the taxpayer holds the capital asset, and permitted the deduction, on the same scale, of capital losses, but only to the extent that there are taxable capital gains, plus $2,000. In thus relieving capital gains from the tax imposed on other types of income, it cannot be assumed, in the absence of some clear indication to the contrary, that Congress intended to permit deductions in full of losses resulting from forced sales of the taxpayers' property, from either capital gains or ordinary gross income, while taxing only a fraction of the gains resulting from the sales of such property. See White v. United States,305 U.S. 281, 292 , 59 S.Ct. 179, 184; Helvering v. Inter-Mountain Life Ins. Co., 294 U.S. 686, 689 , 690 S., 55 S.Ct. 572, 574 The taxation of capital gains after deduction of capital losses on a more favorable basis than other income, was provided for by 206 of the 1921 Revenue Act, as the means of encouraging profit-taking sales of capital investments, H. Rept. No. 350, 67th Cong., 2d Sess., p. 8. Burnet v. Harmel, 287 U.S. 103, 106 , 53 S.Ct. 74, 75. In this section, as in later Acts, capital net gain was defined as 'the excess of the total ... capital gain over the sum of the capital deductions and capital losses'; capital losses being defined as the loss resulting from the sale or exchange of capital assets. In submitting the proposed Revenue Act of 1924, the House committee

pointed out that the 1921 Act contained no provision for limiting deduction of capital losses where they exceeded the amount of capital gains. H. Rept. No. 179, 68th Cong., 1st Sess., p. 14. 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. In commenting on this provision the Committee said, p. 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.S. 504, 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.' This provision was continued without changes now material until the 1934 Act. 208(c) in the 1924 and 1926 Acts; 101(b) in the 1928 and 1932 Act, 47 Stat. 191, 26 U.S.C.A. Int.Rev.Acts, page 504. 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. See United States v. Pleasants, 305 U.S. 357, 360 , 59 S.Ct. 281, 283. 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, permitting specified percentages of capital losses to be deducted from ordinary income to the extent of $2,000, 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. 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, under long accepted income tax practice, to establish a deductible loss in the case of non-capital assets. 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. We can find no basis in the language of the Act, its purpose or its legislative history, for saying that losses from sales of capital assets under the 1934 Act, more than its predecessors, were to be treated any differently whether they resulted from forced sales of voluntary sales. True, 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, United [311 U.S. 504, 511] States v. Katz, 271 U.S. 354, 362 , 46 S.Ct. 513, 516, or would thwart the obvious purpose of the statute, Haggar Co. v. Helvering, 308 U.S. 389 , 60 S.Ct. 337. But courts are not free to reject that meaning where no such consequences follow and where, as here, it appears to be consonant with the purposes of the Act as declared by Congress and plainly disclosed by its structure. It is not without significance that Congress in the 1934 Act, 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. It thus treats as losses from sales or exchanges the loss sustained from redemption of stock, 115(c), retirement of bonds, 117(f), losses from short sales, 117(e)(1), and loss sustained by failure of the holder of an option to exercise it, 117( e)(2), 26 U.S.C.A. Int.Rev.Acts, pages 703, 708, although none of these transactions involves a loss from a sale. See McClain v. Commissioner of Internal Revenue, 311 U.S. 527 , 61 S.Ct. 373, decided this day. The scope of the capital loss provisions was still further enlarged by 23(k) (2) of the Revenue Act of 1938, 52 Stat. 447, 26 U.S.C.A. Int. Rev.Code, 23(k) (2), which provides that if securities, which are capital assets, are ascertained to be worthless and are charged off within the taxable year the loss, with an exception not now material, shall be considered as a loss arising from a sale or exchange. 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. 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, 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. [311 U.S. 504, 512] Respondents also advance the argument, sustained in Commissioner v. Freihofer, 3 Cir., 102 F.2d 787, 125 A.L.R. 761, that the definitive event fixing respondents' loss was not the foreclosure sale but the decree of foreclosure which ordered the sale and preceded it. 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, the sale was the definitive event establishing the loss within the meaning and for the purpose of the revenue laws. They are designed for application to the practical affairs of men. The sale, which finally cuts off the interest of the mortgagor and is the means for determining the amount of the

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. 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, and that the only additional advantage of foreclosure was to obtain a deficiency judgment. But there is nothing in this record to show that the land contract in this case contained a forfeiture clause. Even if it did, it does not appear that there was in fact a forfeiture apart from the sale on foreclosure. Cf. Davidson v. Commissioner, 305 U.S. 44, 46 , 59 S.Ct. 43, 44; Helvering v. Midland Insurance Co., 300 U.S. 216, 224 , 57 S.Ct. 423, 426, 108 A.L.R. 436; United States v. Phellis, 257 U.S. 156, 172 , 42 S.Ct. 63, 66. REVERSED. Mr. Justice ROBERTS is of opinion that the judgment should be affirmed for the reasons stated in the opinion of the Circuit Court of Appeals, 6 Cir., 108 F.2d 753.

G.R. No. L-24248 July 31, 1974 ANTONIO TUASON, JR., petitioner, vs. JOSE B. LINGAD, as Commissioner of Internal Revenue, respondent. CASTRO, J.:p In this petition for review of the decision of the Court of Tax Appeals in CTA Case 1398, the petitioner Antonio Tuason, Jr. (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. The essential facts are not in dispute. In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters, respectively. When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twentyeight were allocated to their then occupants who had lease contracts with the petitioner's predecessor at various times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square meters, more or less, was not leased to any person. It needed filling because of its very low elevation, and was planted to kangkong and other crops. After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-in-fact, J. Antonio Araneta, to sell them. There was no difficulty encountered in selling the 28 small lots as their respective occupants bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due to its low elevation. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small lots and paved with macadam roads. The small lots were then sold over the years on a uniform 10-year annual amortization basis. J. Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter of the sale thereof. In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots, against a contrary ruling of a revenue examiner. In his 1957 tax return the petitioner as before treated his income from the sale of the small lots (P119,072.18) as capital gains and included only thereof as taxable income. In this return, the petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, 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. On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion, which was concurred in by the Commissioner of Internal Revenue. On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner received a letter from the Bureau of Internal Revenue advising him to pay deficiency income tax for 1957, as follows:

Net income per orig. investigation ............... P211,095.36 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 ................. 59,539.09 Net income per final investigation ................. P270,824.70 Less: Personal exemption ..................................... 1,800.00 Amount subject to tax ................................. P269,024.70 Tax due thereon .......................................... P98,551.00 Less: Amount already assessed .................... 72,199.00 Balance ......... P26,352.00 Add: % monthly interest from 6-20-59 to 6-29-62 .................................... 4,742.36 TOTAL AMOUNT DUE AND COLLECTIBLE ......................................... P31,095.36

The petitioner's motion for reconsideration of the foregoing deficiency assessment was denied, and so he went up to the Court of Tax Appeals, which however rejected his posture in a decision dated January 16, 1965, and ordered him, in addition, to pay a 5% Surcharge and 1% monthly interest "pursuant to Sec. 51(e) of the Revenue Code." Hence, the present petition. 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, 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." The petitioner argues that (1) he is not the one who leased the lots in question; (2) the lots were residential, not commercial lots; and (3) the leases on the 28 small lots were to last until 1953, before which date he was powerless to eject the lessees therefrom. 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. The National Internal Revenue Code (C.A. 466, as amended) defines the term "capital assets" as follows: (1) Capital assets. The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), 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, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, 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; or real property used in the trade or business of the taxpayer. As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not connected with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business. 1 If the taxpayer sells or exchanges any of the properties aboveenumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; 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, 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, only 50% of the net capital gain shall be taken into account in computing the net income. The Tax Code's provision on so-called long-term capital gains constitutes a statute of partial exemption. In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer

and liberally in favor of the taxing authority, 3 the field of application of the term it "capital assets" is necessarily narrow, while its exclusions must be interpreted broadly. 4 Consequently, it is the taxpayer's burden to bring himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be resolved against him. 5 It bears emphasis nonetheless that in the determination of whether a piece of property is a capital asset or an ordinary asset, a careful examination and weighing of all circumstances revealed in each case must be made. 6 In the case at bar, after a thoroughgoing study of all the circumstances relevant to the resolution of the issue raised, this Court is of the view, and so holds, that the petitioner's thesis is bereft of merit. When the petitioner obtained by inheritance the parcels in question, transferred to him was not merely the duty to respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established and maintained. 7 Moreover, the record discloses that the petitioner owned other real properties which he was putting out for rent, from which he periodically derived a substantial income, and for which he had to pay the real estate dealer's tax (which he used to deduct from his gross income). 8 In fact, as far back as 1957 the petitioner was receiving rental payments from the mentioned 28 small lots, even if the leases executed by his deceased mother thereon expired in 1953. 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. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different characterization for tax purposes. The following circumstances in combination show unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business: (1) the parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said properties are located in the heart of Metropolitan Manila; (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); (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; (4) the employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for the purpose of developing, managing, administering and selling the lots in question indicates the existence of owner-realty broker relationship; (5) the sales were made with frequency and continuity, and from these the petitioner consequently received substantial income periodically; (6) the annual sales volume of the petitioner from the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a stranger to the real estate business. Under the circumstances, 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. 2. This Court notes, however, that in ordering the petitioner to pay the deficiency income tax, the Tax Court also required him to pay a 5% surcharge plus 1% monthly interest. 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, including the Commissioner himself. The following ruling in Connell Bros. Co. (Phil.) vs. 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. The same imposes the penalty of 25% when the percentage tax is not paid on time, and contemplates a case where the liability for the tax is undisputed or indisputable. In the present case the taxes were paid, the delay being with reference to the deficiency, owing to a controversy as to the proper interpretation if Circulars Nos. 431 and 440 of the office of respondent-appellee. The controversy was generated in good faith, 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. 10 ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the portion thereof that imposes 5% surcharge and 1% monthly interest, which is hereby set aside. No costs.

G.R. No. L-26284 October 8, 1986 TOMAS CALASANZ, ET AL., petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS, respondents. FERNAN, J.: Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals in CTA No. 1275 dated June 7, 1966, holding them liable for the payment of P3,561.24 as deficiency income tax and interest for the calendar year 1957 and P150.00 as real estate dealer's fixed tax.

Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in Cainta, Rizal, containing a total area of 1,678,000 square meters. In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after, the lots were sold to the public at a profit. In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as taxable capital gains. Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business as real estate dealers, as defined in Section 194 [s] 1 of the National Internal Revenue Code, 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. On September 29, 1962, petitioners received from respondent Commissioner of Internal Revenue: a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate dealer's fixed tax of P150.00 and P10.00 compromise penalty for late payment; and b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on ordinary gain of P3,018.00 plus interest of P 543.24. On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review contesting the aforementioned assessments. On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the assessment regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the same cannot be collected in the absence of a valid and binding compromise agreement. Hence, the present appeal. The issues for consideration are: a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax; and b. 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. The issues are closely interrelated and will be taken jointly.

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. 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, merely because he disposed of it in the only possible and advantageous way. Petitioners averred that the tract of land subject of the controversy was sold because of their intention to effect a liquidation. They claimed that it was parcelled out into smaller lots because its size proved difficult, if not impossible, of disposition in one single transaction. They pointed out that once subdivided, certainly, the lots cannot be sold in one isolated transaction. Petitioners, however, admitted that roads and other improvements were introduced to facilitate its sale. 4 On the other hand, 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. Respondent argued that property acquired by inheritance may be converted from an investment property to a business property if, as in the present case, it was subdivided, improved, and subsequently sold and the number, continuity and frequency of the sales were such as to constitute "doing business." 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. Respondent concluded that since the lots are ordinary assets, the profits realized therefrom are ordinary gains, hence taxable in full. We agree with the respondent. The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows: [1] Capital assets.-The term 'capital assets' means property held by the taxpayer [whether or not connected with his trade or business], 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, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, 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; or real property used in the trade or business of the taxpayer. The statutory definition of capital assets is negative in nature. 5 If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, 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. However, 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. 6 Although several factors or indices 7 have been recognized as helpful guides in making a determination, none of these is decisive; neither is the presence nor the absence of these factors conclusive. Each case must in the last analysis rest upon its own peculiar facts and circumstances. 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. Thus, 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. However, 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. 9

Upon an examination of the facts on record, We are convinced that the activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. One strong factor against petitioners' contention is the business element of development which is very much in evidence. Petitioners did not sell the land in the condition in which they acquired it. While the land was originally devoted to rice and fruit trees, 10 it was subdivided into small lots and in the process converted into a residential subdivision and given the name Don Mariano Subdivision. Extensive improvements like the laying out of streets, construction of concrete gutters and installation of lighting system and drainage facilities, among others, were undertaken to enhance the value of the lots and make them more attractive to prospective buyers. 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. As a matter of fact, the estimated improvements of the lots sold reached P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority that a property ceases to be a capital asset if the amount expended to improve it is double its original cost, for the extensive improvement indicates that the seller held the property primarily for sale to customers in the ordinary course of his business. 12 Another distinctive feature of the real estate business discernible from the records is the existence of contracts receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The sizable amount of receivables in comparison with the sales volume of P446,407.00 during the same period signifies that the lots were sold on installment basis and suggests the number, continuity and frequency of the sales. 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. Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation. In Ehrman vs. Commissioner, 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. 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. The sole question is-were the taxpayers in the business of subdividing real estate? If they were, then it seems indisputable that the property sold falls within the exception in the definition of capital assets . . . that is, that it constituted 'property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter in this wise: One may, of course, liquidate a capital asset. To do so, it is necessary to sell. 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. In that event, the liquidation constitutes a business and a sale in the ordinary course of such a business and the preferred tax status is lost. In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners engaged in the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in full. WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs. SO ORDERED.

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.: 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 2,500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract. Briefly, the facts of the case are summarized as follows: In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry. On April 3, 1974, the said co-owners leased to Construction Components International Inc. 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, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive) The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive) On January 3, 1976, 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.T-4240) together with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, 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, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco. After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads: ACCORDINGLY, 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 P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo) The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision. We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it due course. The petitioners allege that: The denial of the petition will work great injustice to the petitioners, in that: 1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million; 2. 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; and 3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by private respondent. (pp. 251-252, 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, in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed of exchange." Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation; 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; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo) Under this factual backdrop, 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. Thus, the petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, 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. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of interest." (p. 254, Rollo) The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be disregarded. 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. We rule for the petitioners. After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. 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, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 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, but only an aliquot part of the whole number of such shares of the issuing corporation. 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. But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, 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. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107). Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a square meter. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. 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. As explained by Eduardo Neria: xxx xxx xxx ATTY. LINSANGAN: Q Mr. Neria, from the point of view of taxation, 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?

A Yes, sir. 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. ATTY. 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. 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, providing for tax free exchange of property, they were able to execute the deed of exchange free from income tax and acquire a corporation. 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. C-sub-par. (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." Q Did you explain to the spouses this benefit at the time you executed the deed of exchange? A Yes, sir Q You also, testified during the last hearing that the decision to have no par value share in the defendant corporation was for the purpose of flexibility. 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. The board can fix the value of the shares equivalent to the capital requirements of the corporation. Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the property in question? 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. On the other hand, 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. Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in respect to taxation?

A The property is not subjected to taxes on succession as the corporation does not die. Q So the benefit you are talking about are inheritance taxes? A Yes, sir. (pp. 3-5, tsn., December 15, 1981) The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596). The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract. WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs. SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE PHILIPPINE AMERICAN LIFE INSURANCE CO., THE COURT OF TAX APPEALS and THE COURT OF APPEALS, respondents.

ROMERO, J.: This is a petition for review on certiorari filed by petitioner, Commissioner of Internal Revenue, of the Decision 1dated March 26, 1992 of the Court of Appeals in CA-GR No. 26598, entitled "Commissioner of Internal Revenue v. The Philippine American Life Insurance Co. & 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. (Philamlife) of the amount of P3,643,015.00 representing excess corporate income taxes for the first and second quarters of 1983. Private respondent filed a case before the Court of Tax Appeals (CTA) docketed as CTA Case No. 4018 entitled "The Philippine American Life Insurance Company versus Commissioner of Internal Revenue." On September 16, 1991, the CTA rendered a decision in the above-entitled case, the dispositive portion of which states: WHEREFORE, petitioner's claim for refund for P3,246,141.00 and P396,874.00 representing excess corporated income tax payments for the first and second quarters of 1983, respectively, or a total of P3,643,015.00 is hereby GRANTED. Accordingly, respondent Commissioner of Internal Revenue, is hereby ordered to refund to petitioner Philippine American Life Insurance Company the total amount of P3,643,015.00. With respect to petitioner's claim for refund of P215,742.00 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. No costs. The facts, uncontroverted by petitioner, are: On May 30, 1983, private respondent Philamlife paid to the Bureau of Internal Revenue (BIR) its first quarterly corporate income tax for Calendar Year (CY) 1983 amounting to P3,246,141.00. On August 29, 1983, it paid P396,874.00 for the Second Quarter of 1983. For the Third Quarter of 1983, private respondent declared a net taxable income of P2,515,671.00 and a tax due of P708,464.00. After crediting the amount of P3,899,525.00 it declared a refundable amount of P3,158,061.00. For its Fourth and final quarter ending December 31, private respondent suffered a loss and thereby had no income tax liability. In the return for that quarter, it declared a refund of P3,991,841.00 representing the first and second quarterly payments: P215,742.00 as withholding taxes on rental income for 1983 and P133,084.00 representing 1982 income tax refund applied as 1983 tax credit. In 1984, private respondent again suffered a loss and declared no income tax liability. However, it applied as tax credit for 1984, the amount of P3,991,841.00 representing its 1982 and 1983 overpaid income taxes and the amount of P250,867.00 as withholding tax on rental income for 1984. On September 26, 1984, private respondent filed a claim for its 1982 income tax refund of P133,084.00. On November 22, 1984, it filed a petition for review with the Court of Tax Appeals (C.T.A. Case No. 3868) with respect to its 1982 claim for refund of P133,084.00.

On December 16, 1985, it filed another claim for refund with petitioners appellate division in the aggregate amount of P4,109,624.00, 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 133,084 P 3,858,757 P 250,867 T o t a l P 4,242,708

Less:

1983 claim for refund already filed with the BIR and the CTA (Case No. 3868)

P 133,084

Net Amount Refundable

P 4,109,624 ===========

On January 2, 1986, private respondent filed a petition for review with the CTA, docketed as CTA Case No. 4018 regarding its 1983 and 1984 claims for refund in the above-stated amount. Later, it amended its petition by limiting its claim for refund to only P3,858,757.00 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.R. No. B2269337 B1938178 Amount Paid P3,246,141.00 396,874.00 215,742.00 P3,858,757.00

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. 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, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, 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, however, That the Commissioner may, even without a written claim therefor, refund

or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. Forfeiture of refund. 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. Petitioner poses the following question: In a case such as this, 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, as reflected in the Corporate Final Adjustment Return subsequently filed with the BIR, 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, petitioner cites the case of Pacific Procon Ltd. v. Court of Tax Appeals, et a1. 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," hence it applies regardless of the conditions under which payment may have been made. The Tax Court ruled: Under Section 292 (formerly Section 306) of the National Internal Revenue Code, 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, and that no suit or proceeding for refund shall be begun after the expiration of the said two-year period (Citation omitted). As a matter of fact, the said section further provides that: . . . In any case, 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. 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. 69, which became effective January 1, 1973. Petitioner argues that the incorporation of the said phrase did away with any other interpretation and, therefore, 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"). Thus, the claim for refund of the amounts of P3,246,141.00 and P396,874.00 paid on May 30, 1983 and August 29, 1983, respectively, has prescribed. We find petitioner's contentions to be unmeritorious. It is true that in the Pacific Procon case, we held that the right to bring an action for refund had prescribed, 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, not at the time of filing of the Final Adjustment Return in April of the following year. However, this case was overturned by the Court in Commissioner of Internal Revenue v. TMX Sales Incorporated and the Court of Tax Appeals, 3 wherein we said: . . . in resolving the instant case, 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, particularly Sections 84, 85 (now both incorporated as Section 68), 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. All these provisions of the Tax Code should be harmonized with each other. 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. When applied to tax payers filing income tax

returns on a quarterly basis, 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. 68 Declaration of Quarterly Income Tax. 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, as provided in Title II of this Code shall be levied, collected and 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. Sec. 69. Final Adjustment Return. 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. 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; or (b) Be refunded the excess amount paid, as the case may be. In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, 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. It may be observed that although quarterly taxes due are required to be paid within sixty days from the close of each quarter, 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, the taxes paid in the preceding quarters are merely partial taxes due from a corporation. Neither amount can serve as the final figure to quantity what is due the government nor what should be refunded to the corporation. This interpretation may be gleaned from the last paragraph of Section 69 of the Tax Code which provides that the refundable amount, in case a refund is due a corporation, is that amount which is shown on its final adjustment return and not on its quarterly returns. Therefore, when private respondent paid P3,246,141.00 on May 30, 1983, it would not have been able to ascertain on that date, that the said amount was refundable. The same applies with cogency to the payment of P396,874.00 on August 29, 1983. Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. The record shows that the claim for refund was filed on December 10, 1985 and the petition for review was brought before the CTA on January 2, 1986. Both dates are within the two-year reglementary period. Private respondent being a corporation, Section 292 (now Section 230) cannot serve as the sole basis for determining the two-year prescriptive period for refunds. As we have earlier said in the TMX Sales case, Sections 68, 69, and 70 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it. Moreover, even if the two-year period had already lapsed, the same is not jurisdictional 4 and may be suspended for reasons of equity and other special circumstances. 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. This being a question of fact, 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. On the other hand, petitioner Commissioner of Internal Revenue has failed to present any documentary or testimonial evidence in support of

his case. Instead, 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. To repeat, we find that private respondent has presented sufficient evidence in support of its claim for refund, whereas petitioner has failed to controvert the same adequately. WHEREFORE, the instant petition is DISMISSED and the decision of the Court of Appeals is hereby AFFIRMED in toto. No costs. SO ORDERED.

G.R. No. L-65773-74 April 30, 1987 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents. MELENCIO-HERRERA, J.: 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. 2373 and 2561, dated 26 January 1983, which set aside petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983 denying reconsideration. 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). As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. 1 G.R. No. 65773 (CTA Case No. 2373, the First Case) On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest. On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount paid. G.R. No. 65774 (CTA Case No. 2561, the Second Case) On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 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). On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16 February 1972, however, 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 P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for reconsideration was denied by the CIR on 24 August 1973. 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. This case was subsequently tried jointly with the First Case. On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd.,

and later by Qantas Airways, during the period in question, 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, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is income from services so that the place where services are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71. Hence, this Petition for Review on certiorari of the Decision of the Tax Court. The Solicitor General, in representation of the CIR, has aptly defined the issues, thus: 1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable. 2. 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. 3. In the alternative that private respondent may not be considered a resident foreign corporation but a non-resident foreign corporation, 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. 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. (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. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. 3 BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; 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. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. 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. Accordingly, 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. 5

Sec. 24. Rates of tax on corporations. ... (b) Tax on foreign corporations. ... (2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign fife insurance company, engaged in trade or business within the Philippines, 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. (Emphasis supplied) Next, 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, accordingly, taxable under our income tax laws. The Tax Code defines "gross income" thus: "Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3]; Emphasis supplied) The definition is broad and comprehensive to include proceeds from sales of transport documents. "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." Income means "cash received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6 The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7 Did such "flow of wealth" come from "sources within the Philippines", The source of an income is the property, activity or service that produced the income. 8 For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. 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. 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, binding upon the parties entering into the relationship. 9 True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income

listed therein be treated as income from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so considered. " 10 BOAC, however, would impress upon this Court that income derived from transportation is income for services, with the result that the place where the services are rendered determines the source; and since BOAC's service of transportation is performed outside the Philippines, the income derived is from sources without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under review. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the income. 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. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. 13 It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed as follows: ... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code). Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine billings," thus: ... "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, whether for passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ... The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2- % tax on gross Philippine billings is an income tax. 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. Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal inJAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business of transportation. 14 Being an excise tax, the same can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. The subject matter of the case under consideration is income tax, a direct tax on the income of persons and other entities "of whatever kind and in whatever form derived from any source." Since the two cases treat of a different subject matter, the decision in one cannot be res judicata to the other. WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%

monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs. SO ORDERED.