CA-G.R. No. 156. September 27, 1946
MILTON GREENFIELD, PLAINTIFF AND APPELLANT, VS. BIBIANO L. MEER, DEFENDANT AND APPELLEE.
FERIA, J.:
This is an appeal from the decision of the Court of First Instance of Manila
which dismisses the complaint of the plaintiff and appellant containing two
causes of action; one to recover the sum of P9,008.14 paid as income tax for the
year 1939 by plaintiff to defendant under protest, by reason of defendant having
disallowed a deduction of P67,307.80 alleged by plaintiff to be losses in his
trade or business; and the other to reclaim, in the event the first cause of
action is dismissed, the sum of P475 collected by defendant from plaintiff
illegally according to the latter, because the former has erroneously computed
the tax on personal and additional exemptions.
The following are the pertinent facts stipulated and submitted by the parties
to the lower court:
“2. That since the year 1933 up to the present time, the plaintiff has been
continuously engaged in the embroidery business located at 385 Cristobal, City
of Manila and oarried on under his name;“3. That in 1935 the plaintiff began engaging in buying and selling mining
stocks and securities for his own exclusive account and not for the account of
others * * *;“4. That Exhibit A attached to the complaint and made a part hereof
represents plaintiff’s purchases and sales of each class of stock and security
as well as the profits and losses resulting on each class during the year
1939;“5. That the plaintiff has not been a dealer in securities as defined in
setion 84 (t) of Commonwealth Act No 466; that he has no established place of
business for the purchase and sale of mining stocks and securities; and that he
was never a member of any stock exchange;“6. That the plaintiff filed an income tax return for the calendar year 1939
showing that he made a net profit amounting to P52,449.29 on embroidery business
and P17,850.00 on dividends from various corporations; and that from the
purchase and sales of mining stocks and securities he made a profit of
P10,741.30 and incurred losses in the amount of P78,049.10, thereby sustaining a
net loss of P67,307.80, which income tax return is hereto attached and marked
Exhibit B;“7. That in said income tax return for 1939, the plaintiff declared the
results of his stook transactions under schedule B (Income from Business); but
the defendant ruled that they should be declared in the income tax return,
Exhibit B, under Schedule D (Gains and Losses from Sales or Exchanges of Capital
Assets, real or personal);“8. That in said income tax return, said plaintiff claims his deduction of
P67,307.80 representing the net loss sustained by him in mining stocks and
securities during the year 1939; and that the defendant disallowed said item of
deduction on the ground that said losses were sustained by the plaintiff from
the sale of mining stocks and securities which are capital assets, and that the
loss arising from the sale of the same should be allowed only to the extent of
the gains from such sales, whioh gains were already taken into consideration in
the computation of the alleged net loss of P67,307.80;“9. That the defendant assessed plaintiff’s income tax return for the year
1939 at P13,771.06 as shown in the following computation appearing in the audit
sheet of the defendant hereto attached and marked Exhibit C;
“Net income as per return of plaintiff for 1939
“Add: Net Loss on sale of mining stocks and securities
disallowed
in audit
_____________
_____________
___________
___________
____________
===========“10. That the defendant computed the graduated rate of income tax on the
entire net income as per office audit, without first deducting therefrom the
amount of personal and additional exemptions to which the plaintiff is entitled,
allowing said plaintiff a deduction from the assessed tax the amount of P50
corresponding to the exemption of P3,500;“11. That the plaintiff, objecting and excepting to all the rulings of the
defendant above mentioned and in assessing plaintiff with P13,771.06, claimed
from the defendant the refund of P9.008.14 or in the alternative case P475.00,
which claim of plaintiff was overruled by the defendant;”
The questions raised by appellant in his four (4) assignments of errors may
be reduced into the following: (1) Whether the losses sustained by the plaintiff
from the buying and selling of mining securities during the year 1939 are losses
incurred in trade and business, deductible under Sec. 30 (d) (1)(A) of
Commonwealth Act No. 466 from his gains in his embroidery business and other
income; or whether they are capital losses from sales of capital assets which
shall be allowed only to the extent of the gains from such sales under Sec. 34
of the same Commonwealth Act No. 466. And (2) whether, under the present law,
the personal and additional exemptions granted by Sec. 23 of the same Act,
should be considered as a credit against or be deducted from the net income, or
whether it is the tax on such exemptions that should be deducted from the tax on
the total net income.
-
As to the first question, it is agreed in the above-quoted stipulation of
facts that the plaintiff was not a dealer in securities or shares of stock as
defined in section 84 (t) of Commonwealth Act No. 466. The question for
determination is whether appellant, though not a dealer in mining securities,
may be considered as engaged in the business of buying and selling them under
section 30 (d), (1)(A) of said Act No. 466.It is evident that, taking into consideration the nature of mining
securities, which may be bought or sold either as a business or for speculation
purposes only, the National Assembly of the Philippines has deemed it necessary
to define or determine beforehand in Sec. 84 (t) of Commonwealth Act No. 466 who
may be considered as persons engaged in the trade or business of buying and
selling securities within the meaning of the phrase “incurred in trade or
business” used in Sec. 30 (d) (1)(A) of the same Act, in order to avoid any
question or doubt as to deductibility of all losses incurred by a merchant in
securities from his net income from whatever source. The definition of dealer or
merchant in securities given in said section 84 (t) includes persons, natural or
juridical, who are engaged in the purchase and sale of securities whether for
their own account or for others, provided they have a place of business and are
regularly engaged therein. There was formerly some doubt or question as to
whether a person engaged in buying and selling securities for his own account
might be considered as engaged in that trade or business, and several cases
involving such question had been submitted to the Uninted States Federal Courts
for ruling, and to the Income Tax Units of the United states Bureau of Internal
Revenue for opinion. But with the inclusive definition of the term “dealer” or
merchant of securities given in section 84 (t) of Act No. 466, such doubt can no
longer arise.Said section 84 (t) reads as follows:
“(t) The term “dealer in securities” means a merchant of stocks or
securities, whether an individual, partnership, or corporation, with an
established place of business, regularly engaged in the purchase of securities
and their resale to oustomers; that is, one who as a merchant buys securities
and sells them to oustomers with a view to the gains and profits that may be
derived therefrom.”Appellant assumes, however, that the above-quoted definition does not cover
or include all persons engaged in the trade or business of buying and selling
securities within the meaning of said section 30 (d) (1)(A). He contends that,
although he is not a dealer in mining securities, he may be considered as having
been engaged in the trade or business of buying and selling securities. And in
support of his contention appellant quotes Opinion No. 1818 of the Income Tax
Unit of the United States Bureau of Internal Revenue (I. T. No. 1818, C. B. II,
pp. 39-41), in which opinion the following was said:“The taxpayer is not a member of any stock exchange, has no place of
business, and does not make purchases and sales of securities for customers.
Much of his trading is done on margin. He devotes the greater part of the time
in his broker’s office keeping in touch with the market. He has no other trade
or business, his income consisting entirely of interest on bonds, dividends, on
stocks, and profits from the sale or other disposition of securities.“Advice is requested (1) whether this taxpayer is entitled to the benefit of
section 204 of the Revenue Act of 1921, with reference to a net loss incurred in
1921, from the sale of stocks; (2) whether he is entitled to the benefit of
section 206 of the Revenue Act of 1921, with regard to gains derived in 1922
from the sale of two blocks of stock held more than two years.“1. Section 204 (a) provides in part:
“That as used in this section the term “net loss” means only net losses
resulting from the operation of any trade or business regularly carried on by
the taxpayer * * *.’“The question is, then, whether the taxpayer was regularly engaged in the
trade or business of buying and selling securities.“The interpretation placed upon the term ‘business or trade’ by the courts
and by the Department may be indicated by a few illustrative decisions, in two
early cases (In re Marson [1871], Fed. Cas. No. 9142, and In reWoodward
[1376], Fed. Cas. No. 18001) it was held that a speculator in stooks was not a
‘merchant or tradesman’ within the meaning of the Bankruptcy Act of 1867. It was
said in the former case:“‘The only business he was engaged in was what is called speculating in
stocks, that is, buying and selling them, with a view to his own profit, to be
made by the excess of the selling price over the buying price * * *. The fact
that the bankrupt was engaged in no other business can not have the effect to
make him a merchant or a tradesman, because he carried on the business he did
carry on in the way in which he carried it on.’“That is, although his business was buying and selling, since this business
was simply with a view to his own profit and not for others, he was not a
merchant or tradesman. Compare In re Surety Guarantee & Trust Co.
([1902],121 Fed., 73) and In re H. R. Leighton & Co.([1906], 147 Fed.,
311).“With this background, the Department, in Treasury Decisions 1989, 2005,
2090, and 2135 (not published in Bulletin service), held that the provision of
paragraph B of the 1913 Act, allowing as a deduction for the purpose of the
normal tax ‘losses actually sustained during the year, incurred in trade * * *’,
did not include losses from isolated transactions; for instance, in stocks and
bonds. In Mente vs. Eisner ([1920], 266 Fed., 161) (certiorari denied, 254 U.
S., 635), these rulings were upheld in a case in which a manufacturer of bagging
was denied deductions for losses in buying and selling cotton on the cotton
exchange for his individual account, not connected with his manufacturing
business. (Cf. Black vs. Bolen [1920], 268 Fed., 427.) Likewise, in L. O. 601
(not published in Bulletin service), it was held that ‘losses sustained by a
person in buying and selling securities on his own account, he not being a
licensed stock and bond broker buying and selling for others as well as for
himself, are not deductible as losses in trade within the meaning of paragraph B
of the Act of October 3, 1913.’ The basis of these opinions is thus seen to be
(1) that dealing in securities on one’s own account is not technically a
‘trade’; (2) that isolated transactions in securities, not connected with the
tax payer’s regular business, do not constitute a ‘trade’.“In the Act of September 8, 1916, the wording of the 1913 Act was slightly
changed (section 5 [a] fourth) to permit a deduction of ‘losses actually
sustained during the year, incurred in his business or trade * * *.’ Under this
more liberal provision, it has been uniformly held that where a taxpayer devoted
all his time, or tne major portion of it, to buying and selllng securities on
his own account, this occupation was his ‘business’; and therefore he was
permitted to deduct losses sustained in such dealings as being ‘incurred in his
business.’ A.R.R. 404 (C.B. 4, p. 157); semble L. O. 601. These rulings are
inferentially supported by the definitions of trade or business to comprehend
‘all his activities for gain, profit, or livelihood, entered into with
sufficient frequency, or occupying such portion of his time or attention as to
constitute a vocation,’ contained in article 8 of Regulations 41, relative to
the war excess-profits tax (approved in Woods vs. Lewellyn [1921], 289 Fed.
498). * * *“It is submitted that these decisions are a sound interpretation of the
accepted definition of business: ‘Business is a very comprehensive term and
embraces everything about which a person can be employed.’ Black’s Law
Dictionary, 158, citing People vs. Commissioners of Taxes (23 New York, 242,
244). “That which occupies the time, attention and labor of men for the purpose
of a livelihood or profit.’ Bouvier’s Law Dictionary, Vol. 1, p. 273. Fling vs.
Stone Tracy Co. (1910), 220 U. S., 107 at 171, 31 Sup. Ct., 342, 55 Law ed.,
389; Ann. Cas. 1912-B, 1312; cited with approval in Von Baumbach vs. Sargent
Land Company (1916), 242 U. S., 503, at 515. If they are sound, the facts of the
instant case require a ruling that the taxpayer was regularly engaged in the
business of buying and selling securities on his own account and was, therefore,
entitled to the benefit of the provisions of section 204 (a).” (I. T. No. 1818;
C. B. II-2, pp. 39-41.)But, assuming arguendo that the above-quoted opinion may be applied
to the present case, it is evident that the appellant can not be considered as
having been engaged in the business of buying and selling securities within the
meaning of section 30 (d) (1)(A) of Act No. 466 According to said opinion, in
order that he may be so considered, it is necessary that he must devote all his
time or at least a major portion thereof to said business and that the latter
must be regularly carried on by him.In the stipulation of facts presented in this case it is agreed that “since
the year 1933 up to the present time, the plaintiff has been continuously
engaged in the embroidery business,” and that “in 1935, the plaintiff began
engaging in buying and selling mining stocks and securities for his own
exclusive account.” There is nothing therein to show that plaintiff-appellant
has regularly devoted all his time or the major portion thereof to the business
of buying and selling mining securities for his own account. On the contrary, it
having been stipulated that he has been continuously engaged in the embroidery
business during the same time, it necessarily follows that he has not and could
not have devoted regularly all his time or a major portion thereof to the buying
and selling of mining securities.Furthermore, from Exhibit A attached to the complaint and made a part of said
stipulation of facts, which represents plaintiff’s purchases and sales of each
class of stocks and securities as well as the profits and losses resulting
therefrom during the year 1939, it appears that he made purchases and sales of
securities only on several days of some months and nothing on others. As shown
in said exhibit, during the month of January, 1939, appellant purchased shares
of stock of different mining corporations on January 2, 3, 4, 6, 13, 19, 20, 25,
30, and sold some of them on January 4, 10, 13 and 31. During February he made
purchases on the dates 1, 8, 13, 14, 25 and 27; and sales on 6, 9, 10, 16 and
17. During March, he purchased mining securities on 7, 8, 9, 10, 16, 22 and 30,
and sold some on March 9 only. During April he made two purchases on April 3 and
5, and one sale on April 4. During May he purchased mining shares of stock on
May 9, 10, 13, 19, 24 and 25; and sold some of them on May 9, 10, 12, 13 and 31.
During June appellant made purchases on 1, 3, 5, 8, 13, 15 and 17, and sales on
22, 23, 24, and 28. During July, purchases on 1, 3, 6, 19; and sales on July 24,
25, 26 and 27. During August he purchased shares of stock on some mining
corporations on 5, 7, 16, and 18 and sold shares of one mining corporation on
August 10 only. During September appellant did not purchase or sell any
securities. During October he sold securities only on the 12th of said month,
and made no purchase at all. And during November and December he did not
purchase or sell any.Appellant contends that as from Exhibit A it appears that the mining
securities were inventoried in order to arrive at his profits and losses, they
cannot be considered as capital assets, because, according to section 34, the
term capital assets does not include property which would properly be included
in the inventory. But it is to be observed that the law refers not to property
merely included, but to that which would be properly included in the inventory.
Section 148 of the Income Tax Regulations No. 2 of February 10, 1940, (39 Off.
Gaz. 325) provides that “the securities (to be) inventoried as here provided may
include only those held for purposes of resale and not for investment,” and that
“the taxpayers who buy and sell or hold securities for investment or
speculation, * * * are not dealers in securities within the meaning of this
rule.” And the General Counsel of the Federal Bureau of Internal Revenue, after
quoting Article 105 of U. S. Regulations 74 from which said Section 148 of our
Income Tax Regulations was taken, said that a person not a dealer in securities
is precluded from the use of inventories in computing his net income.” (G. B.
X-2, p. 128, G. C. M. 9656).The lower court has not therefore erred in dismissing appellant’s first cause
of action, on the ground that the losses sustained by appellant from the buying
and selling of mining securities are not losses incurred in business or trade
but are capital losses from sales of capital assets, as contended by
appellee. -
With regard to the second point, the lower court held that, as the new law
does not provide that the personal exemptions shall be allowed in the nature of
a deduction from the net income, as prescribed in the old law, and there is a
distinction between exemption and deduction, the tax due on said exemptions must
be deducted from the tax due on the whole net income, instead of deducting the
total amount of the exemptions from the net income.
The argument of the appellee ia support of the lower oourt’s decision is that
the omission in section 23 of Act No. 466 of the phrase “in the nature of a
deduction” found in section 7 of the old law, shows that it was the intention of
the National Assembly to adopt the innovation proposed by the Tax Commission
which prepared the draft of the new law, an innovation based on what is known as
the “Wisconsin Plan” now in operation in several American states. Under said
plan, the cumulative amount of the tax is fixed on any given amount of net
income without regard to the status of the taxpayer, and then this amount is
reduced by the tax credit fixed in the law according to the statue of the
taxpayer and the number of his dependents as follows: for single individuals,
there is allowed a tax credit of P10; for married persons or heads of family,
P30; and for each dependent below 21 years of age, P10.
Section 7 of the old law provided; “For the purpose of the normal tax only,
there shall be allowed as an exemption in the nature of a deduction from the
amount of the net income * * *”; while section 23 of the new law provides: “For
the purpose of the tax provided for in this Title there shall be allowed the
following exemptions;” Now, the question to be determined or answered is: Does
this change in the phraseology of the law show the intention of National
Assembly to change the theory or policy of the old law so as to deduct now the
tax on the personal and additional exemptions from the tax fixed on the amount
of the net income, instead of deducting the amount of personal and additional
exemptions from that of the net income, before determining the tax due on the
latter?
It is a well-settled rule of statutory construction that where a statute has
been enacted which is susceptible of several interpretations there is no better
means for ascertaining the will and intention of the legislature than that which
is afforded by the history of the statute. Taking into consideration the history
of section 23 of the Commonwealth Act No. 466, the answer to the
above-propounded question must obviously be in the negative. Section 22 of the
bill entitled “An Act to revise, amend and codify the Internal Revenue Laws of
the Philippines,” prepared by the Tax Commission and submitted to the National
Assembly of the Philippines, in substitution of section 7 of the old Income Tax
Law, reads as follows:
“SEC. 22. Amount of tax credit allowable to individuals.—There’
shall be allowed as a credit in the nature of a deduction from the amount of the
tax payable by each citizen or resident of the Philippines under section 20:“(a) Tax credit of single individuals.—The sum of P10 if the person
making the return is a single person or a married person legally separated from
his or her spouse.“(b) Tax Credit of a married person or head of Family.—The sum
of P30 if the person making the return is a married man with a wife not
legally separated from him, or a married woman with a husband not legally
separated from her, or the head of a family: Provided, That from the
tax due on the aggregate income of both husband and wife when not legally
separated only one tax credit of P30 shall be deducted. For the purpose
of this section, the term “head of a family’ includes an unmarried man or woman
with one or both parents, or one or more brothers or sisters, or one or more
legitimate, recognized natural or adopted children dependent upon him or her for
their chief support where such brothers, sisters, or children are less than
twenty-one years of age.(c) Additional Tax Credit for Dependents.—The sum of P10
for each legitimate, recognized natural, or adopted child wholly dependent upon
the taxpayer, if such dependents are under twenty-one years of age, or incapable
of self-support because mentally or physically defective. The additional tax
credit under this paragraph shall be allowed only if the person making the
return is the head of a family.”
But the National Assembly, instead of adopting or incorporating said proposed
section 22 in the National Internal Revenue Act, Code, C. A. No. 466, copied
substantially in section 23 of the latter the provision of section 7 of the old
law relating to personal and additional exemptions, with the only modification
that the amount of personal exemption of single individuals has been reduced
from two thousand to one thousand pesos, and that of married persons or heads of
family from four thousand to two thousand five hundred pesos.
If it were the intention of the National Assembly to adopt the “Wisconsin
plan” proposed by the Tax Commission, it would have adopted literally, or at
least substantially, the provisions of said section 22 as section 23 of
Commonwealth Act No. 466, instead of substantially incorporating section 7 of
the old Income Tax law as section 23 of the new, except the first paragraph
thereof which read: “For the purpose of the normal tax only, there shall be
allowed as an exemption in the nature of a deduction from the amount of the net
income.” This was changed in said section 23, which
provides: “For the
purpose of the tax provided for in this Title, there shall be allowed the
following’exemptions:” From the fact that the National Assembly discarded
completely section 28 of the bill drafted in accordance with the “Wisconsin
Plan” and submitted by the Tax Commission, it is to be presumed that the
National Assembly of the Philippines did not intend to introduce any substantial
change in the old law in so far as the effect of personal and additional
exemptions on the income tax is concerned.
The mere fact that the phrase “in the nature of a deduction” found in section
7 of the old law was omitted in section 23 of the new or National Internal
Revenue Code did not and could not effect any change in the law. It is evident
that said phrase was added or inserted in said 7 only out of extreme caution,
because, even without it, the exemption would have to be deducted from the gross
income in order to determine the net income subject to tax. Had the provision in
the old law been drafted in exactly the same term as that of said section 23,
the same construction should have been adopted. Because “Exemption is an
immunity or privilege; it is freedom from a charge or burden to which others are
subjected.” (Florar vs. Sherifan, 137 Ind. 28; 36 N. E. 365,
369) If the amounts of personal and additional exemptions fixed in section 23
are exempt from taxation, they should not be included as part of the net income,
which is taxable. There is nothing in said section 23 to justify the contention
that the tax on personal exemptions (which are exempt from taxation) should
first be fixed, and then deducted from the tax on the net income.
The change of phraseology alone does not lead to the conclusion that it was
the intention of the lawmaker to amend or change the construction of the old law
as contended by the appellee. For it is a well-established rule, recognized by
the Supreme Court of Ohio in the case of Conger vs. Barker’s Adm’r, (11 Ohio St.
1); “that in the revision of statutes, neither an alteration in phraseology nor
the omission or addition of words in the latter statute, shall be held,
necessarily, to alter the construction of the former act. And the court is only
warranted in holding the construction of a statute, when revised, to be changed,
where the intent of the legislature to make such change is clear, or the
language used in the new act plainly requires such change of construction. It
should be remembered that condensation is a necessity in the work of
compilation or codification. Very frequently words which do not materially
affect the sense will be omitted from the statutes as incorporated in the code,
or that same general idea will be expressed in briefer phrases. No design
of altering the law itself could rightly be predicated upon such modifications
of the language.” (Italics ours) (See Black on the Construction and
Interpretation of the Laws, Second Edition, pp. 594-595.)
Our Income Tax law is patterned after the United States Revenue or Income Tax
laws. The United States Revenue laws of 1916, 1918, 1921, 1924, 1926, 1928 and
1932 considered the personal and additional exemptions as credits against the
net income for the purpose of the normal tax; and subsequently, the United
States Revenue Acts of 1934, 1935 and 1938 amended the former acts by making
said exemptions as credits against the net income for the purpose of both the
normal tax and surtax. Section 7 of our old Income Tax Law, instead of providing
that the personal and additional exemptions shall be allowed as a credit against
the net income, as in the United States Revenue Acts, prescribed that the
amounts specified therein shall be allowed as an exemption in the nature of a
deduction from the amount of the net income. Which has exactly the same effect
as the provision regarding personal and additional exemptions in the said United
States Revenue Acts. For, as it was explained in the Ways and Means Committee
Report No. 764, 73d Congress, 2nd Session, pages 6, 23:
“To carry out the policy of retaining practically the same tax burden on
ordinary income, it is necessary in connection with the proposed plan to allow
the personal exemption and credits for dependents as an offset against surtax as
well as normal tax. The personal exemption and credits for dependents would
appear to be in lieu of deductions for necessary living expenses. They may well
apply to both taxes as do all other ordinary deductions.”
And Paul and Mertens, Law of Federal Taxation, Vol. 3, p. 509, state
regarding the change in the United States Revenue Act of 1934; “The practical
effect of this statutory change is to convert the personal exemption and credit
for dependents into deductions * * *.” (Italics ours.)
The lower court, therefore, erred in not declaring that personal and
additional exemptions claimed by appellant should be credited against or
deducted from the net income, and consequently in not sentencing appellee to
refund to appellant the sum of P475.00.
In view of all the foregoing, the decision of the lower court is affirmed in
so far as it dismisses appellant’s first cause of action, and is reversed in so
far as it dismissed his second cause of action. Appellee is sentenced to refund
to appellant the sum of P475 claimed in the second cause of action of the
complaint. Without pronouncement as to costs. So ordered.
Moran, C. J.,
Pablo, Hilado, Bengzon, Briones, and Tuason, JJ., concur.
CONCURRING AND DISSENTING
PARAS, J.:
I concur in the majority opinion in so far as it affirms the dismissal of
appellant’s first cause of action, but I dissent from so much, thereof as
reverses the dismissal of appellant’s second cause of action.
The elimination from section 23 the Nationax Internal Revenue Code of the
words “in the nature of a deduction from the amount of the net income” (which
appeared in section 7 of the old Income Tax Law), could not have been effected
without a purpose; and said purpose ceitainly is not to retain the meaning and
effect of the suppressed words. If the legislative department did not intend to
make an essential change, the logical and clear way of doing so was to recopy
the old provision. Said elimination was undoubtedly in answer to, and an
acceptance of, the innovation proposed by the Tax Commission, namely, that the
amount payable under the present law should be the difference between the tax
due on the entire net income and that due on the exemptions, thereby doing away
with the former practice of allowing the exemptions to be deducted from the net
income and basing the tax on the difference. We cannot say that the failure of
the lawmakers to incorporate in the new Code the provisiont regarding tax
credits allowable to individuals, as prepared and submitted by the Tax
Commission to the National Assembly in substitution of section 7 of the old
Income Tax Law, suggests a rejection of the new plan and the retention of the
old policy, since the desired aim had equally been accomplished by mere
elimination of the words above referred to. Indeed, at the rates fixed in
section 21 of the new Code, the amounts of personal and additional exemptions
granted to individuals under section 23 are exactly the amounts specified in the
provision recommended by the Tax Commission, namely, PlO for single individuals,
P30 for married persons or heads of family, and P10 for each dependent. Section
23 should thus be construed not as an original provision, but as one which is
the result of a revision.
The interpretation now pursued by the Government is further consistent with
the circumstance that the tax is levied upon the “entire net income” (section
21), which means “the gross income computed under section 29, less the
deductions allowed by section 30” (section 28). It is significant that section
30 fails to make any reference to “personal exemptions”. The explanation
contained in the Ways and Means Committee Report No. 764, 73rd Congress, 2nd
Session, to the effect that the “personal exemption and credits for dependents
would appear to be in lieu of deductions for necessary living expenses,” cannot
have controlling force because, in computing the net income both under the new
Code (Section 31) and under the old Income Tax Law (section 5), nc deduction is
allowed in respect of living expenses.
Of course, neither an alteration in phraseology nor the omission or addition
of words in a later statute will necessarily alter the construction of the
former act, but, in the present case, the eliminated words were the very basis
for the prior construction. The alteration here is one of substance, and not
merely of form.
Besides, the majority, by their position, are (unwittingly I hope) playing
favorite to the taxpayers in the upper brackets,-a situation which undoubtedly
could not have been intended by the legislators. The following remarks of
counsel for the Government are in point:
“Lastly, the action of the appellee Collector, in allowing merely a tax
credit upon the amount of the personal ‘exemptions, gives all taxpayers entitled
to the same exemptions, air equal privilege. The tax saving is the same for
taxpapers having equal number of dependents, whether rich or poor, just as the
amount of exemptions remains the same for all taxpayers under analogous
circumstances.“On the contrary, the method advocated by appellant (of deducting the
exemption from the total taxable income) benefits the rich taxpayers, rather
than the poor ones. To convince us of the fact, it is enough to compute the tax
on an income lesser than appellant’s; say, of P15.000.
“Net income “Less exemption Taxable income Taxed as follows:
_________
________
________
________
________“A comparison of this computation with that of the tax on appellant’s income,
page 19 of this brief, reveals that, in appellant’s case, the deduction of the
exemption results in a saving of 15 per cent tax on P3,500 (P525) while in the
case just discussed, where the taxpayer’s income is much less, the deduction
method saves the taxpayer only 5 per cent tax on P3,500 (P175), because in this
case the highest bracket of the taxpayer’s income is only subject to 5 per cent.
So that the appellant, with an income of P137,607.09, economizes by the
deduction three times more than the second taxpayer whose income is merely
P15,000. It requires little argument to show that a method of computing taxes
whereby the same exemption results in a higher benefit for the taxpayer
with the bigger income can neither be just nor
equitable.”
My vote is to affirm the judgment appealed from
in toto.
DISSENTING AND CONCURRING
PERFECTO, J.:
We dissent from the majority opinion affirming the decision of the lower
court in so far as it dismisses appellant’s first cause of action.
Plaintiff “filed an income tax return for the calendar year 1939 showing that
he made a net profit amounting to P52,449.29 on embroidery business and P17,850
on dividends from various corporations; and that from the purchase and sales of
mining stocks and securities he made a profit of P10,741.30 and incurred losses
in the amount of P78,049.10, thereby sustaining a net loss of P67,307.80 * *
*.”
Defendant disllowed the deduction of the loss of P67,307.80, on the theory
that the loss was sustained by plaintiff from the sale of mining stocks and
securities which are capital assets and that the loss arising from the same
should be allowed only to the extent of the gain from such sales.
The question is whether the loss was incurred in trade and business.
“Business is a very comprehensive term and embraces everything about which a
person can be employed. Black’s Law Dictionary, 158 citing People vs.
Commissioners of Taxes (23 New York; 242, 244). ‘That which occupies the time,
attention, andlabor of men for the purpose of a livelihood or profit.’ Bouiver’s
Law Dictionary, Vol. 1, p 273. Flint vs. Stone Tracy Co. (1910), 220 U. S., 107,
171; 31 Sup. Ct., 342; 55 Law. Ed., 389; Ann. Cas. 1912-B, Law. 1312, cited with
approval in Von Baumbach vs. Sargent Land Company. (1916) 242 U. S., 503 at
515.”
We do not have any doubt that plaintiff engaged in the business and trade of
buying and selling mining stocks and securities. We do not see any reason why
the losses sustained by hin in said business should be disallowed in the
computation for purposes of determining the income tax he has to pay.
We are of opinion that the lower court’s decision should be reversed and
that, as to plaintiff’s first cause of action, defendant should be ordered to
reimburse the plaintiff to defendant under protest.
In regards to the second
cause of action of plaintiff, we agree with the theory of the majority as
explained in the opinion, but we can not concur in the dispositive part thereof
ordering the refund of the sum P475, in view of the conclusion we have arrived
at regarding plaintiff’s first cause action, it appearing that plaintiff only
prays for the refund of P475 as an alternative in the event his first cause of
action is dismissed.
CONCURRING AND DISSENTING
PADILLA, J.:
I dissent from the opinion of the majority on the second cause of action
only.
It must be borne in mind that an exemption is neither an exclusion provided
for in section 29(b) nor a deduction provided for in section 30, C. A. No. 466.
Not being a deduction, the amount constituting an exemption must not be excluded
or deducted from the gross or net income. Exemption means condonation,
remission, or, as the trial court aptly calls, waiver of the tax by the
government. The amount of exemption being fixed (section 23, C. A. No. 466), the
tax condoned, remitted or waived must also be fixed. The exemption provided for
in the Income Tax Law is for personal, living, or family expenses of the
taxpayer. It is the same amount regardless of the amount of net income subject
to tax. The law makes no distinction between small and large incomes. The
Collector’s computation accomplishes the aim of the law, for the tax on the
amount exempted would be tho same for every net income, large or small, subject
to tax. To illustrate, let us take the case of two married persons with spouses
not legally separated from them and each.with three dependent children, whose
net incomes are P10,000 and P30,000, respectively. Under the Collector’s
interpretation of the law, the computation would be, as follows:
would be, as follows:
____________
_____________
computation would be, as follows:10,000.00
_______________
______________
______________
The result under appellant’s computation is that a large net income would
enjoy a bigger amount of tax exemption than a small net income, when the law is
clear that such exemption is of fixed amount regardless of the amount of net
income subject to tax.
It is not correct to say that the “Wisconsin Plan” referred to in the
majority opinion was not adopted. It was adopted not in form but in
substance.
I am of the opinion the at the judgment under review should be affirmed.