Power of Taxation (FULL TEXT)

1. POWER OF TAXATIONG.R. No. L-25043 April 26, 1968ANTONIO ROXA, E!"AR!O ROXA #$% ROXA & 'IA., i$ ()*ir o+$ r*,p*-(i.* /*)#l0 #$% #, 12%i-i#l -o-32#r%i#$, o0 4OE ROXA, petitioners, vs. 'O"RT OF TAX APPEAL #$% 'O55IIONER OF INTERNAL RE6EN"E, respondents.Leido, Andrada, Perez and Associates for petitioners. Office of the Solicitor General for respondents.7ENG8ON, 4.P., J.:Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the folloing properties!"#$ Agricultural lands ith a total area of #%,&&& hectares, situated in the municipality of 'asugbu, (atangas province)"*$ A residential house and lot located at +right St., ,alate, ,anila) and"-$ Shares of stoc.s in different corporations./omanagetheabove0mentionedproperties, saidchildren, namely, AntonioRoxas, 1duardoRoxasand2oseRoxas, formedapartnership called Roxas y Compania.AGRI'"LT"RAL LAN!At the conclusion of the Second +orld +ar, the tenants ho have all been tilling the lands in 'asugbu for generations expressed theirdesire to purchase from Roxas y Cia. the parcels hich they actually occupied. 3or its part, the 4overnment, in consonance ith theconstitutional mandatetoac5uirebiglandedestatesandapportionthemamonglandlesstenants0farmers, persuadedtheRoxasbrothers to part ith their landholdings. Conferences ere held ith the farmers in the early part of #%67 and finally the Roxas brothersagreed to sell #-,8&& hectares to the 4overnment for distribution to actual occupants for a price of P*,&9%,&67.69 plus P-&&,&&&.&& forsurvey and subdivision expenses.:t turned out hoever that the 4overnment did not have funds to cover the purchase price, and so a special arrangement as made forthe Rehabilitation 3inance Corporation to advance to Roxas y Cia. the amount of P#,8&&,&&&.&& as loan. Collateral for such loan erethe lands proposed to be sold to the farmers. ;nder the arrangement, Roxas y Cia. alloed the farmers to buy the lands for the sameprice but by installment, and contracted ith the Rehabilitation 3inance Corporation to pay its loan from the proceeds of the yearlyamortis tax for #%8*in the amount of P#8&.&& plus P#&.&& compromise penalty for late payment, and P#8&.&& tax for dealers of securities for #%8* plusP#&.&& compromise penalty for late payment. /he assessment for real estate dealer>s tax as based on the fact that Roxas y Cia.received house rentals from 2ose Roxas in the amount of P7,&&&.&&. Pursuant to Sec. #%6 of the /ax Code, an oner of a real estateho derives a yearly rental income therefrom in the amount of P-,&&&.&& or more is considered a real estate dealer and is liable to paythe corresponding fixed tax./he Commissioner of :nternal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia., on the factthat said partnership made profits from the purchase and sale of securities.:n the same assessment, the Commissioner assessed deficiency income taxes against the Roxas (rothers for the years #%8- and#%88, as follos!1953 1955Antonio Roxas P9,&.&& P8,7#-.&&1duardo Roxas 9,*7#.&& 8,7*7.&&2ose Roxas ?,-*-.&& 8,877.&&/he deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 8&@ of the net profits for #%8- and#%88 derived from the sale of the 'asugbu farm lands to the tenants, and the disalloance of deductions from gross income of variousbusiness expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. 3or the reason that Roxas y Cia. subdivided its'asugbu farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as engaged in thebusiness of real estate, hence, #&&@ of the profits derived therefrom as taxed./he folloing deductions ere disalloed!ROXAS Y !A."1953/ic.ets for (an5uet in honor of S. =smeAaP 6&.&&4ifts of San ,iguel beer *7.&&Contributions to BPhilippine Air 3orce Chapel #&&.&&,anila Police /rust 3und #8&.&&Philippines Cerald>s fund for ,anila>s neediest families #&&.&&1955Contributions to Contribution to =ur Dady of 3atima Chapel, 31; 8&.&&A#$O#!O ROXAS"1953Contributions to BPasay City 3iremen Christmas 3und *8.&&Pasay City Police Dept. E>mas fund 8&.&&1955Contributions to B(aguio City Police Christmas fund *8.&&Pasay City 3iremen Christmas fund *8.&&Pasay City Police Christmas fund 8&.&&%&'AR&O ROXAS"1953Contributions to BCijas de 2esus> Retiro de ,anresa 68&.&&Philippines Cerald>s fund for ,anila>s neediest families #&&.&&1955Contributions to Philippines Cerald>s fund for ,anila>s neediest families #*&.&&(OS% ROXAS"1955Contributions to Philippines Cerald>s fund for ,anila>s neediest families #*&.&&/he Roxas brothers protested the assessment but inasmuch as said protest as denied, they instituted an appeal in the Court of /axAppeals on 2anuary %, #%?#. /he /ax Court heard the appeal and rendered judgment on 2uly -#, #%?8 sustaining the assessmentexcept the demand for the payment of the fixed tax on dealer of securities and the disalloance of the deductions for contributions tothe Philippine Air 3orce Chapel and Cijas de 2esus> Retiro de ,anresa. /he /ax Court>s judgment reads!+C1R13=R1, the decision appealed from is hereby affirmed ith respect to petitioners Antonio Roxas, 1duardo Roxas, and2ose Roxas ho are hereby ordered to pay the respondent Commissioner of :nternal Revenue the amounts of P#*,7&7.&&,P#*,779.&& and P##,789.&&, respectively, as deficiency income taxes for the years #%8- and #%88, plus 8@ surcharge and #@monthly interest as provided for in Sec. 8#"a$ of the Revenue Code) and modified ith respect to the partnership Roxas y Cia.in the sense that it should pay only P#8&.&&, as real estate dealer>s tax. +ith costs against petitioners.'ot satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. /he Commissioner of :nternal Revenue did not appeal.T)* i,,2*,9"#$ :s the gain derived from the sale of the 'asugbu farm lands an ordinary gain, hence #&&@ taxableF"*$ Are the deductions for business expenses and contributions deductibleF"-$ :s Roxas y Cia. liable for the payment of the fixed tax on real estate dealersF/he Commissioner of :nternal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in thebusiness of selling real estate. /he business activity alluded to as the act of subdividing the 'asugbu farm lands and selling them tothe farmers0occupants on installment. /o bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in itsarticles of partnership, 5uoted belo!6. "a$ Da explotacion de fincas urbanes pertenecientes a la misma o 5ue pueden pertenecer a ella en el futuro, al5uilandolesporlosplas gratitude./he poer of taxation is sometimes called also the poer to destroy. /herefore it should be exercised ith caution to minimis trust and confidence in the 4overnment this poer must be used justly andnot treacherously. :t does not conform ith =ur sense of justice in the instant case for the 4overnment to persuade the taxpayer to lendit a helping hand and later on to penalis fund for ,anila>s neediest families ere disalloed on the ground that the PhilippinesCerald is not a corporation or an association contemplated in Section -& "h$ of the /ax Code. :t should be noted hoever that thecontributions ere not made to the Philippines Cerald but to a group of civic spirited citi