THE COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. THE CLUB FILIPINO, INC. DE CEBU, RESPONDENT.

This is a petition to review the decision of the Court of Tax
Appeals, reversing the decision of the Collector of Internal Revenue,
assessing against and demanding from the “Club Filipino, Inc. de Cebu,”
the sum of P12,068.84 as fixed and percentage taxes, surcharge and
compromise penalty, allegedly due from it as a keeper of bar and
restaurant.

As found by the Court of Tax Appeals, the “Club Filipino, Inc. de
Cebu,” (Club, for short), is a civic corporation organized under the
laws of the Philippines, with an original authorized capital stock of
P22,000.00, which was subsequently increased to P200,000.00, among
others, to “proporcionar, operar, y mantener un campo de golf, tenis,
gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar
y pool, y toda clase de juegos no prohibidos por leyes generates y
ordenanzas generates; y desarollar y cultivar deportes de toda clase y
denominacion cualquiera para el recreo y entrenamiento saludable de sus
miembros y accionistas” (sec. 2, Escritura de Incorporacion del Club
Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a
provision relative to dividends and their distribution, although it is
covenanted that upon its dissolution, the Club’s remaining assets,
after paying debts, shall be donated to a charitable Philippine
Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a).

The Club owns and operates a club house, a bowling alley, a golf course (on a lot teased from the government), and a bar-restaurant
where it sells wines and liquors, soft drinks, meals and short orders
to its members and their guests. The bar-restaurant 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 B-4, B-9 (a)
and B-7 licenses. In a letter dated December 22, 1952, the Collector of
Internal Revenue assessed against and demanded from the Club, the
following sums;—

As percentage tax on its gross receipts during the tax
years 1946 to 1951……………………………………………………. P9.599.07
Surcharge therein ……………………………………………………….. 2,399.77
As fixed tax for the years 1946 to 1952 ……………………………… 70.00
Compromise penalty ……………………………………………………… 500.00

The Club wrote the Collector, requesting for the cancellation of the
assessment. The request having been denied, the Club filed the instant
petition for review.

The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of
   the sum of P12,068.84, as fixed and percentage taxes and surcharges
   prescribed in sections 182, 183 and 191 of the Tax Code, under which
   the assessment was made, in connection with the operation of its bar
   and restaurant, during the periods mentioned above; and

2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 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.” Section 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.” And section 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 bars and cafes where wines or liquors are served, five per centum
of their gross receipts * * *.” It has been held that 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 restauranteur. The
plain and ordinary of a 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
(The Coll. of Int. Rev. vs. Manila Lodge No. 761 of the BPOE (Manila
Elks Club) and Court of Tax Appeals, 105 Phil., 983 giving full
definitions of the word “business”; Coll. of Int. Rev. vs. Sweeney, et
al. [International Club of Iloilo, Inc.] 106 Phil., 59, the facts of
which are similar to the ones at bar; Manila Polo Club vs. B. L. Meer,
etc. 106 Phil., 885.)

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 assests, after paying debts, shall be
donated to a charitable Philippine 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 CM) is not engaged in the business of an operator of bar and
restaurant (same authorities, cited above).

It is conceded that 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 a surplus (Jesus
Sacred Heart College vs. Collector of Int. Revenue, 95 Phil., 16;
Collector of Int. Revenue vs. Sinco Educational Corp., 100 Phil., 127;
53 Off. Gaz., (8) 2470).

It is claimed that unlike the two cases just cited (supra), which
are non-stock, the appellee Club is a stock corporation. This is
unmeritorious. The fact that the capital stock of the respondent 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 by-laws. It is a familiar rule that 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 method of operation. From the extrinsic evidence
adduced, the Tax Court concluded that the Club is not engaged in, the
business as a barkeeper and restauranteur.

Moreover, for a stock corporation to exist, two requisites must be
complied with, to wit: (1) a capital stock divided into shares and (2)
an authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the shares held (sec.
3, Act No. 1459). In the case at bar, while the respondent Club’s
capital stock is divided into shares, nowhere in its articles of
incorporation or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking,
it cannot, therefore, be considered a stock corporation, within the
contemplation of the corporation law.

“A tax is a burden, and, as such, it should not be deemed imposed
upon fraternal, civic, non-profit, non-stock organizations, unless the
intent to the contrary is manifest and patent” (Collector vs. BPOE Elks
Club, et al., supra), which is not the case in the present appeal.

Having arrived at the conclusion that respondent Club is not engaged
in the business as an operator of a bar and restaurant, and therefore,
not liable for fixed and percentage taxes, it follows that it is not
liable for any penalty, much less of a compromise penalty.

Wherefore, the decision appealed from, is affirmed, without costs.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J. B. J., Barrera, and Dizon, JJ., concur.