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CIR vs. THE CLUB FILIPINO, INC. DE CEBU GR No. L-12719 | May 31, 1962 | Paredes, J.

laws. The actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the FACTS: The Club Filipino, is a civic corporation organized under method of operation. From the extrinsic evidence adduced, the the laws of the Philippines with an original authorized capital CTA concluded that the Club is not engaged in the business as a stock of P22,000, which was subsequently increased to P200,000 barkeeper and restaurateur. to operate and maintain a golf course, tennis, gymnasiums, bowling alleys, billiard tables and pools, and all sorts For a stock corporation to exist, two requisites must be complied of games not prohibited by general laws and general ordinances, with: and develop and nurture sports of any kind and any denomination for recreation and healthy training of its 1. a capital stock divided into shares and members and shareholders" (sec. 2, Escritura de Incorporacion 2. an authority to distribute to the holders of such shares, (Deed of Incorporation) del Club Filipino, Inc.). There is no dividends or allotments of the surplus profits on the basis of provision either in the articles or in the by-laws relative to the shares held (sec. 3, Act No. 1459). dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after paying Nowhere in its articles of incorporation or by-laws could be debts, shall be donated to a charitable Phil. Institution in Cebu found an authority for the distribution of its dividends or surplus (Art. 27, Estatutos del (Statutes of the) Club). profits. Strictly speaking, it cannot, therefore, be considered a The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a barrestaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The barrestaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured licenses. In a letter, the Collector assessed 1 against and demanded from the Club P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty. Also, the Collector . On appeal, the CTA reversed the Collector and ruled that the Club is not liable for the assessed tax liabilities of P12,068.84 allegedly due from it as a keeper of bar and restaurant as it is a non-stock corporation. Hence, the Collector filed the instant petition for review. ISSUE: WON the Club is a stock corporation HELD: NO. It is a non-stock corporation. The facts that the capital stock of the Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by1

stock corporation, within the contemplation of the corpo law. ISSUE: WON the Club is liable for the payment of P12,068.84, as fixed and percentage taxes and surcharges prescribed in sec. 2 3 4 182 , 183 and 191 of the Tax Code, in connection with the operation of its bar and restaurant; and for P500 as compromise penalty. HELD: NO. A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al.), which is not the case here. Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Phil. Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant.

P9, 599.07 as percentage tax on its gross receipts (tax years 1946-1951), P2,399.77 surcharge, P70 fixed tax (tax years 1946-1952, and P500 compromise penalty.

Sec. 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." 3 Sec. 183 provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; etc." 4 Sec. 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .".

Ratio: The liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood (CIR v. Manila Lodge & CTA, 1959; CIR v. Sweeney, et al., 1959,; Manila Polo Club v. B. L. Meer, 1960). The Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. CIR, 1954; CIR v. Sinco Educational Corp., 1956). Affirmed. COLLECTOR OF INTERNAL REVENUE vs. UNIVERSITY OF THE VISAYAS G.R. No. L-13554 | Feb. 28, 1961 | Padilla, J. FACTS: In 1919, Vicente Gullas established a school in Cebu City known as the "Visayan Institute" and for a few years remained its sole owner. On Oct. 1, 1921 Vicente Gullas, Pantaleon del Rosario, Paulino Gullas, Manuel Briones and Eugenio del Rosario formed a non-stock corporation with an authorized capital of P20,000 for the purpose of establishing and maintaining a school to be named as the "Visayan Institute". The plan was to finance the school by selling to the public bonds with a par value of P100 each payable out of the funds of the corporation and the interest to be fixed by the by-laws. However, the financing plan was abandoned and instead, Gullas and his wife put in their own money. On Aug. 29, 1930 the Visayan Institute amended its articles of incorporation by converting it into a stock corporation with an authorized capital of P50,000 subscribed 5 and paid by the Gullas(es), del Rosarios, and Briones . It provided that upon dissolution, the properties of the institute (later of the University) will be distributed among the stockholders.

According to the amended articles of incorporation, all shares of the corporation had been subscribed and paid for. In March 1949 the Visayan Institute became a university and renamed "University of the Visayas." However, the University did not file with the BIR returns of net income for the years, 1949 to 1950, inclusive. After investigation conducted by a BIR examiner, the examiner filed returns of the University's net income for the said years based upon the profit and loss statements shown and submitted to the examiner by the University's accountant. On Sept. 3 and 8, 1951, the Collector assessed the University for income received from 1946 to 1950, inclusive, and the tax due thereon, surcharges and penalties of P5,243.62 (1946), P11,474.53 (1947), P10,755.96 (1948), P16,373.41 (1949), and P14,412.00 (1950). Assessments were sent to the University. On Dec. 1 and 2, 1951, the University sent telegrams to the Collector requesting that it be allowed to pay the taxes, surcharges and penalties by installment at P1,000/month. The Collector replied that the University could settle its obligation to the Government by paying it in 12 monthly installments at P5,809.02/month, the first installment due and payable on or before Jan. 15, 1952, provided that the University would file a surety bond on or before Jan. 10, 1952 to insure payment thereof. On Dec. 17, 1951 the University paid P1,000 on account of the tax assessed against it. On Jan. 24, 1952 the University wrote to the Collector requesting that the 25% surcharge be eliminated because its failure to file income tax returns for the years 1946 to 1950 and to pay income tax thereon was due to the honest belief that private schools were exempt from taxation. The Collector granted the University's request and reduced to P4,603.77 the monthly installment to be paid by the University, provided that the first installment would be due and payable on or before Feb. 29, 1952 and that the surety bond to insure payment would be filed by the University on or before Feb. 29, 1952. The previous assessments were amended and the total obligation as of Jan. 31, 1953 was P55,245.24. On Feb. 29, April 3, and May 5, 1952, the University paid to the Cebu City Treasurer the monthly installment of P4,603.77, or the total sum of P13,811.31. On March 1, 1954 the University wrote to the Collector requesting that the P1,000 (paid on Dec. 17, 1951) and P13,811.31, or a total of P14,811.31, be refunded to it on the ground that being a corporation organized and operated exclusively for educational purpose, it was exempt from the payment of income tax. On the same day, the University brought an action against the Collector in the CFI of Cebu for recovery of P14,811.31. The Collector filed his answer with counterclaim. After the enactment into law of RA 1125 on June 16, 1954, upon motion of the Assistant Provincial Fiscal, the CFI of Cebu certified the case to the CTA pursuant to sec 22, and 7 of RA 1125. Vicente Gullas, University president, testified that the University is not engaged in a profit-making enterprise but in a purely educational pursuit; that the sources of income of the University


No. of Stocks Amount Paid Subscribed P 7,000 7,000 7,000 7,000 22,000 70 70 70 220

Pantaleon E. del Rosario 70 Eugenio S. del Rosario Manuel C. Briones Paulino Gullas Vicente Gullas