WONG & LEE, PETITIONERS, VS. COLLECTOR OF INTERNAL REVENUE AND COURT OF TAX APPEALS, RESPONDENTS.

Wong and Lee versus Collector of Internal Revenue

The Case

This is an appeal by Wong and Lee, a firm operating the Riviera night club in Pasay City, against the Collector of Internal Revenue and the Court of Tax Appeals. The Collector assessed a deficiency amusement tax on cover charges the firm had under-declared, and the firm resisted on several grounds: that the records used against it were illegally taken, that the tax should fall on the promoter rather than on the club, and that the performances were exempt as musical programs. The case matters because it fixes who bears the amusement tax on night clubs, clarifies the scope of the cultural exemption, and states the settled rule on the admissibility of documents however obtained.

Procedural History

The Collector of Internal Revenue assessed the petitioners for deficiency amusement tax, inclusive of surcharges. Wong and Lee appealed the assessment to the Court of Tax Appeals. During the last stages of the trial there, the petitioners moved to amend their petition to add a second cause of action for refund of the tax they had already paid, on the theory that they were not liable for any amusement tax at all. The Tax Court denied the motion, and the denial was carried into the assignments of error on appeal. The Tax Court affirmed the Collector's assessment in full, with costs. Wong and Lee then appealed to the Supreme Court, which resolved the appeal on the merits.

Facts

From January 1952 through the end of 1953, Wong Lee Din and Juanito Lee Tim, doing business as Wong and Lee, operated the Riviera, a night club on Dewey Boulevard in Pasay City, under a lease contract. In early February 1953, Ted Lewin, promoter and booking agent of the Xavier Cugat Orchestra, contracted with Wong and Lee for the orchestra to play and hold floor shows at the Riviera for nineteen nights, from February 13 to March 8, 1953, after its performances at the International Fair Auditorium. Under the contract, Lewin would receive all the cover charges collected from patrons, while the petitioners would keep the proceeds of food and drinks served on the premises.

For that period the petitioners declared cover charges of 23,102.50 pesos in their amusement tax return and paid the ten percent tax of 2,310.25 pesos. In March 1953, agents of the Bureau of Internal Revenue, examining Ted Lewin's books at the Bay View Hotel, were given various working sheets, chits, receipts, and other papers by Carlos Magdaluyo, Lewin's accountant-bookkeeper. From these papers the agents concluded that the real cover charges collected at the Riviera during the nineteen nights were 41,217 pesos. The Collector accordingly assessed 3,170.03 pesos, representing the tax on the undeclared receipts of 18,114.50 pesos, plus a twenty-five percent surcharge for late payment and a fifty percent surcharge for willful under-declaration.

At trial, the Bureau agent Reynaldo Suarez testified for the Collector, while Magdaluyo testified for the petitioners, claiming he had refused to deliver the papers until Lewin was contacted abroad by telephone. The Tax Court credited Suarez, found the delivery voluntary, and found that the exhibits referred to the Cugat performances at the Riviera and totalled 41,217 pesos.

Issues

• Whether or not the real amount of cover charges collected by the petitioners during the Cugat performances was 23,102.50 pesos as declared, or 41,217 pesos as found by the Bureau agents.
• Whether or not the petitioners were liable to pay the amusement tax on those cover charges at all, rather than Ted Lewin who received them.
• Whether or not the papers taken from Lewin's office were voluntarily delivered and admissible in evidence against the petitioners.
• Whether or not the Cugat performances and floor shows fell within the exemption for musical programs under Republic Act Number 722.

Applicable Provisions

Section 260 of the National Internal Revenue Code, as amended by Republic Act Number 43, provides:

SEC. 260. Amusement taxes. — There shall be collected from the proprietor, lessee, or operator of theaters, cinematographs, concert halls, circuses, and other places of amusement the following taxes: * * *. In the case of cockpits, cabarets, and night clubs, there shall be collected from the proprietor, lessee, or operator a tax equivalent to ten per centum, and in the case of race-tracks, twenty per centum of the gross receipt, * * *.

This is the taxing provision under which the deficiency was assessed, and it names the lessee or operator of the night club as the taxpayer.

Section 1 of Republic Act Number 722, as invoked by the petitioners, exempts:

the holding of operas, concerts, recitals, dramas, painting and art exhibitions, flower shows, and literary or oratorical or musical programs from the payment of any national or municipal amusement tax.

This is the exemption the petitioners claimed for the Cugat performances as musical programs.

Ruling

On the first issue, the Court held that the real cover charges were 41,217 pesos. It adopted the Tax Court's finding that the working sheets, chits, and papers, with the notations "Lee," "Wong," or "Wong and Lee," the daily entries from February 13 to March 8, and the unit price of five pesos per ticket, referred to the Cugat performances at the Riviera and not to Lewin's other ventures, and that the first entry of 3,340 pesos also appeared in the Riviera's own books for the same date.

On the second issue, the Court held that the tax falls on the petitioners as lessees or operators of the night club, not on Ted Lewin. Quoting the statute, the Court stressed that the tax is collected "from the proprietor, lessee, or operator" of a night club. If the petitioners delivered the entire cover charges to Lewin without deducting the tax, that was their own concern and not that of the Collector.

On the third issue, the Court held that the delivery by Magdaluyo was voluntary, crediting the testimony of the Bureau agent over that of the petitioners' witness, and added the settled doctrine that documents offered in evidence, if competent and relevant, are admissible no matter how they were obtained, whether legally or illegally.

On the fourth issue, the Court held that the exemption for musical programs covers performances whose primary purpose is the propagation and development of art and culture, with profit only incidental. Judging by the gross receipts of several thousand pesos, the petitioners' primary objective was to popularize the night club and bolster the sale of food and drinks, so the exemption did not apply.

Doctrine

The amusement tax on cabarets and night clubs is a tax on the proprietor, lessee, or operator, and not on the person to whom the gross receipts are destined or eventually paid. A lessee or operator who fails to provide for the tax in his contract bears the burden himself. The exemption under Republic Act Number 722 for musical programs is confined to performances whose primary purpose is the propagation and development of art and culture, where the element of profit is merely incidental; a commercial night club show staged to draw patrons and increase sales of food and drinks does not qualify. Finally, documents offered in evidence, if competent and relevant, are admissible regardless of how they were obtained.

Disposition

The Supreme Court affirmed the decision of the Court of Tax Appeals in full, with costs, so the Collector prevailed and the petitioners were ordered to pay the deficiency amusement tax of 3,170.03 pesos inclusive of surcharges.

Remember This

Memorize the line that the amusement tax is imposed on the lessee or operator of the night club, not on the person to whom the gross receipts are destined. Examiners use this case to test the taxpayer's identity under Section 260 and the narrow, culture-centered reading of the Republic Act Number 722 exemption.