Roxas v CTA (1968)

Roxas v CTA
GR No L-25043, April 26, 1968

FACTS:
Antonio, Eduardo and Jose Roxas, brothers and at the same time partners of the Roxas y Compania,
inherited from their grandparents several properties which included farmlands. The tenants expressed their
desire to purchase the farmland. The tenants, however, did not have enough funds, so the Roxases agreed
to a purchase by installment. Subsequently, the CIR demanded from the brothers the payment of deficiency
income taxes resulting from the sale, 100% of the profits derived therefrom was taxed. The brothers
protested the assessment but the same was denied. On appeal, the Court of Tax Appeals sustained the
assessment. Hence, this petition.

ISSUE:
Is Roxas liable?

RULING:
No. It should be borne in mind that the sale of the farmlands 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.

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 the sense of justice for the Government to persuade
the taxpayer to lend it a helping hand and later on penalize him for duly answering the urgent call.

In fine, Roxas cannot be considered a real estate dealer and is not liable for 100% of the sale. 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%. 
 EN BANC

[G.R. No. L-25043. April 26, 1968.]

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalfs
and as judicial co-guardians of JOSE ROXAS, Petitioners, v. COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, Respondents.

Leido, Andrada, Perez and Associates, for Petitioners.

Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete

and Atty. Orlando R. Resurreccion for Respondents.

SYLLABUS

1. TAXATION; "POWER TO DESTROY", TO BE EXERCISED FAIRLY, EQUALLY AND UNIFORMLY. —

The power of taxation is sometimes called also the power to destroy. It should, therefore, 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."

2. ID.; REAL ESTATE DEALER’S TAX, HELD INAPPLICABLE. — Even where there were hundreds of
vendees who paid for their respective holdings in installment for 10 years, such fact did not make
the act of subdividing the Nasugbu farm and selling them to the farmers-occupants thereof on
installment basis a business of selling real estate. This was an isolated transaction: the sale of the
farm was made in obedience to the request of the Government whose policy was to allocate lands
to the landless. The Government’s duty was to pay the agreed price of the farm lands after it had
persuaded the petitioner to sell its hacienda. But the Government lacked funds and Roxas y Cia,
obligingly shouldered the government’s burden. It does not conform to one’s sense of justice for
the Government to persuade the taxpayer to lend it a helping hand and later to penalize him for
doing so. The sale, therefore, made by Roxas y Cia, to the farmers of its farmlands does not make
the company a real estate dealer, and the lands sold to the farmers are capital assets. The gain
derived therefrom is capital gain, and is taxable only to the extent of 50%, not 100%.

3. ID.; TAX DEDUCTIONS; CLAIMS DISALLOWED. — Contributions to the Christmas funds of the
Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible because the
Christmas funds were not spent for public purposes but as Christmas gifts to the families of
members of said entities. Section 39 (h) of the Tax Code provides that a contribution to a
government entity is deductible only when used exclusively for public purposes. The contribution
to the chapel of the FEU located in the premises of said school is not deductible because said
chapel was not shown to belong to the Catholic church or any religious organization; on the
contrary it was found to belong to the FEU contributions to which are not deductible under sec. 30
(h) of the Tax Code because the net income of said university inures to the benefit of its
stockholders.

4. ID.; ID.; CLAIMS ALLOWED. — Contributions to the Philippines Herald’s fund for Manila’s
neediest families are allowable deductions because such contributions were not made to the
Philippines Herald but to a group of civic spirited citizens organized by the Herald solely for
charitable purposes and said citizens do not receive profits. Such group of citizens may, therefore,
be classified as an association exclusively organized for charitable purpose mentioned in sec.
30(h) of the Tax Code. Contributions to the Manila y Police Trust Fund constitute allowable
deductions because the trust fund belongs to the Manila Police, a government entity intended to
be used exclusively for its public functions.

DECISION

BENGZON, J.P., J.:

Don Pedro Roxas and Doña Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties: chanrob1es virtual 1aw library

(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 Compañia.

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 P910.00
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: chanrob1es virtual 1aw library

1953 1955

Antonio Roxas P7,010.00 P5,813.00

Eduardo Roxas 7,281.00 5,828.00

Jose Roxas 6,323.00 5,588.00

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: chanrob1es virtual 1aw library

ROXAS Y CIA.: chanrob1es virtual 1aw library

1953

Tickets for Banquet in honor

of S. Osmeña P 40.00

Gifts of San Miguel Beer 28.00

Contributions to —

Philippine Air Force Chapel 100.00

Manila Police Trust Fund 150.00

Philippines Herald’s fund for

Manila’s neediest families 100.00

1955

Contribution to Our Lady of

Fatima Chapel, FEU 50.00

ANTONIO ROXAS: chanrob1es virtual 1aw library

1953
Contributions to —

Pasay City Firemen Christmas

Fund 25.00

Pasay City Police Dept. X’Mas fund 50.00

1955

Contributions to —

Baguio City Police Christmas fund 25.00

Pasay City Firemen Christmas fund 25.00

Pasay City Police Christmas fund 50.00

EDUARDO ROXAS: chanrob1es virtual 1aw library

1953

Contributions to —

Hijas de Jesus’ Retiro de

Manresa 450.00

Philippines Herald’s fund for

Manila’s neediest families 100.00

1955

Contribution to Philippines

Herald’s fund for Manila’s

neediest families 120.00

JOSE ROXAS: chanrob1es virtual 1aw library

1955

Contribution to Philippines

Herald’s fund for Manila’s

neediest families 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: jgc:chanrobles.com.ph

"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." cralaw virtua1aw library

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of
Internal Revenue did not appeal.

The issues: chanrob1es virtual 1aw library

(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: jgc:chanrobles.com.ph

"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 juico 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. Altho 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 the
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 Osmeña and P28.00 for San Miguel beer given as gifts to various persons. The
deductions were claimed as representations 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 inures 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
altho 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: jgc:chanrobles.com.ph

". . .’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 on this
point is sustained.

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 P315,476.59

Add: 1/3 share, profits in Roxas

y Cia. P153,249.15

Less amount declared 146,135.46

—————

Amount understated P 7,113.69

Contributions disallowed 115.00

—————

P 7,228.69

Less 1/3 share of contributions

amounting to P21,126.06 dis-

allowed from partnership but

allowed to partners 7,042.02 186.67

————— —————

Net income per review P 315,663.26

Less: Exemptions 4,200.00

—————

Net taxable income P311,463.26

Tax due 154,169.00

Tax paid 154,060.00

—————

Deficiency P 109.00

==========

EDUARDO ROXAS

Net income per return P304,166.92

Add: 1/3 share, profits in Roxas

y Cia. P 153,249.15

Less profits declared 146,052.58

—————

Amount understated P 7,196.57

Less 1/3 share in contributions

amounting to P21,126.06 dis-

allowed from partnership but

allowed to partners 7,042.02 155.55

————— —————

Net income per review P304,322.47

Less: Exemptions 4,800.00

—————

Net taxable income P299,522.47

Tax due P147.250.00

Tax paid 147,159.00

—————

Deficiency P91.00

=========

JOSE ROXAS

Net income per return P222,681.76

Add: 1/3 share, profits in Roxas

y Cia. P153,429.15

Less amount reported 146,135.46

—————

Amount understated 7,113.69

Less 1/3 share of contributions

disallowed from partnership

but allowed as deductions to

partners 7,042.02 P71.67

—————

Net income per review P222,753.43

Less: Exemption 1,800.00

—————

Net income subject to tax P220,953.43

Tax due P102,763.00

Tax paid 102,714.00

—————

Deficiency P49.00

—————

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. Actg. C . J., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur.