CEBU MUTUAL BUILDING AND LOAN ASSOCIATION, PLAINTIFF AND APPELLEE, VS. JUAN POSADAS, COLLECTOR OF INTERNAL REVENUE, DEFENDANT AND APPELLANT.

Plaintiff
brought suit in the Court of First Instance of Cebu for the recovery of
certain income taxes paid to the defendant, the Collector of Internal
Revenue, under protest. The assessment was made on the business of
plaintiff for the years 1927, 1928, and 1929, because during those
years it acted as an insurance agent of certain fire insurance
companies and solicited and wrote a number of policies not only for the
stock-holders of plaintiff but for non-members of the association. On
those policies the association retained 10 per cent of the premiums
paid, as a commission.

After trial on an agreed statement of
facts, the Court of First Instance held that plaintiff was taxable on
its insurance business but was not taxable on its general business as a
building and loan association and gave judgment accordingly. From that
decision defendant appeals and contends here, as it did in the lower
court, that the business of the association cannot be divided into two
portions, one taxable, and one not taxable.

Appellant relies
upon the doctrine that exemption from taxation is “in derogation of the
sovereign authority and of common right, and therefore not to be
extended beyond the exact and express requirement of the grants,
construed strictissimi juris.” (Vicksburg, etc., Railroad Co. vs. Dennis, 116 U. S., 668; Yazoo and Mississippi Valley Railroad Co. vs. Thomas, 132 U. S., 174.)

Neither party was able to submit any adjudicated cases. Holmes Federal Taxes, 6th edition, page 356, says:

“An
organization which would otherwise be exempt, but which operates in a
nonexempt manner is not entitled to exemption; * * * An organization
may not be partly exempt and partly taxable.”

and gives as authority for this conclusion Office Decisions and Treasury Bulletins.

Defendant-appellant also submits the following administrative rulings of the United States Treasury Department:

“The
business conducted by an insurance agency is not of the kind usually
carried on by a building and loan association, and the transaction of
such business by a building and loan association, will defeat its
exemption under section 231 (4) of the Revenue Act of 1918.”
(Cumulative Bulletin, Vol. V, page 201.)

“A building and
loan association which conducts an insurance agency and sells insurance
is not entitled to exemption under section 231 (4) of the Revenue Act
of 1918.” (Off. Dec. 1129, Cumulative Bulletin, Vol. V, page 201, cited
in Consolidated United States Income Tax Laws, paragraph 1683.24, page
1286.)

In Madrigal and Paterno vs. Rafferty and Concepcion (38 Phil., 414, 423), this court said:

“In
connection with the decision above quoted, it is well to recall a few
basic ideas. The Income Tax Law was drafted by the Congress of the
United States and has been by the Congress extended to the Philippine
Islands. Being thus a law of American origin and being peculiarly
intricate in its provisions, the authoritative decision of the official
who is charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law, whose
meaning is doubtful, by the department charged with its execution. (U.
S. vs. Cerecedo Hermanos y Cia. [1907], 209 U. S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.)”

The trial court declined to follow these decisions because it felt the
adoption of the rule of liability to taxation was harsh and
inequitable. In one aspect of the case this is true, but there are
other important questions of public policy that must not be lost sight
of. A building and loan association, when honestly operated within the
scope of its authority, is a safe investment for home-builders of
limited means. If it leaves its direct field of endeavor and enters
competitive fields for gain, not only does it compete with citizens who
pay taxes but also in the desire to make money, such associations are
apt to enter into fields in which the assets of the company are liable
to be endangered. The insurance of the members is taken out to protect
the association, yet the association, by the collecting of a commission
fee, becomes the agent of the insurance company, and in case of a fire
of doubtful origin, it would be compelled to elect whether it would be
loyal to the insured or loyal to the insurance company. It could not
represent both. If such associations desire to take advantage of the
exemption of taxes which has been granted by the Legislature, it is no
hardship that they limit their activities in the pursuit of gain within
their normal and well recognized activities.

For the above
reasons and under the doctrine of the Madrigal case, we feel
constrained to follow the decisions of the Treasury Department and we
therefore hold that appellee is liable for the taxes and is not
entitled to recover such taxes paid under protest.

The
judgment appealed from is therefore reversed and vacated and judgment
will be entered absolving the appellant from the demands made. Costs
against appellee. So ordered.

Avanceña, C. J., Malcolm, Villa-Real, and Imperial, JJ.. concur.