REPUBLIC OF THE PHILIPPINES, PETITIONER, VS. JOSE RAZON AND JAI-ALAI CORPORATION, RESPONDENTS. JAI-ALAI CORPORATION OF THE PHILIPPINES, PETITIONER, VS. REPUBLIC OF THE PHILIPPIN…

Republic versus Razon

The Case

This is a collection suit brought by the Republic of the Philippines against Jose Razon and the Jai-Alai Corporation of the Philippines to recover income taxes owing from Haig Assadourian, a nonresident alien, and in particular the withholding tax that should have been deducted from the large sums paid to him. The case matters because it fixes who counts as a withholding agent under the Tax Code, and because it shows how far the Supreme Court will go in accepting the factual findings of the Court of Tax Appeals.

Procedural History

The Republic filed its original complaint with the Court of First Instance of Manila against Jose Razon alone, and later amended it to include the Jai-Alai Corporation and to assert two causes of action. The Court of First Instance of Manila remanded the case to the Court of Tax Appeals for final determination and disposition under Republic Act Number 1125. The Court of Tax Appeals rendered its decision, ordering the Jai-Alai Corporation to pay the Republic twelve thousand pesos as withholding tax on the eighty thousand pesos it paid to Assadourian, plus surcharge, while dismissing the complaint as against Jose Razon and dismissing the Jai-Alai Corporation's cross-claim against him. Both the Republic and the Jai-Alai Corporation appealed to the Supreme Court, and the two appeals were considered jointly because they involved common issues. Jose Razon having died, his widow and the administratrix of his estate, Marina Baretto, was substituted in his place.

Facts

Haig Assadourian, a citizen of Egypt, was admitted to the Philippines for permanent residence and lived here from 1940 to 1945, serving as general manager of the Jai-Alai Corporation. In October 1945 he applied for a re-entry permit, stating that his proposed absence was indefinite, and in March 1946, after appointing Jose Razon as his attorney-in-fact for filing tax returns and paying or compromising taxes during his absence, and after securing a tax clearance on the guaranty of one Jack George, he left for the United States. He never returned, and his re-entry permit expired in October 1947. During his stay here he did not engage in trade or business.

In August 1947, in Los Angeles, the Jai-Alai Corporation, represented by its Vice-President Jose Razon, entered into an indenture with Assadourian whereby, for two hundred thousand pesos, he acknowledged full payment of his claims for management percentage fees earned for the years 1946 to 1950, and the earlier management contracts were terminated. The two hundred thousand pesos was paid in installments: forty thousand pesos by telegraphic transfer sent by the Jai-Alai itself, and the rest in twenty thousand peso payments, some made by the Jai-Alai and some by Madrigal and Company, Incorporated, delivered to Jose Razon for and on behalf of Assadourian, who remitted them abroad.

The Collector of Internal Revenue demanded from the Jai-Alai Corporation and from Razon the twelve percent withholding tax on these payments, and later assessed the same tax against Vicente Madrigal. When the demands went unpaid, the Republic sued.

Issues

• Whether or not Haig Assadourian was a nonresident alien not engaged in trade or business in the Philippines, so that the withholding provisions apply to the sums paid to him.
• Whether or not the two hundred thousand pesos paid to Assadourian was compensation, remuneration, or determinable income subject to withholding, rather than the purchase price of an inchoate or contingent interest.
• Whether or not the Jai-Alai Corporation and Jose Razon had the control, receipt, custody, or disposal of the amounts paid, making them withholding agents.

Applicable Provisions

Section 53(b) of the National Internal Revenue Code provides:

(b) Nonresident aliens. - All persons, corporations and general co-partnerships (companias colectivas), in whatever capacity acting, including lessees or mortgagors of real property, trustees acting in any trust capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and employees of the Government of the Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any nonresident alien individual, not engaged in trade or business within the Philippines therein, shall (except in the cases provided for in subsection (a) of this section) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to twenty per centum thereof.

This is the provision that creates the withholding obligation and defines who must withhold, and the entire liability of the respondents rises or falls on whether they fall within its terms.

Ruling

On the first issue, the Court held that the question of whether Assadourian was a nonresident alien not engaged in trade or business is a question of fact, and that the finding of the Court of Tax Appeals on the matter is not reviewable so long as it is supported by substantial evidence, which the Court found it to be. That finding stands.

On the second issue, the Court rejected the claim that the two hundred thousand pesos was the purchase price of an inchoate or contingent interest. The undisputed facts showed that the amount was in payment of percentages or income earned by Assadourian out of the profits of the Jai-Alai stadium, and being so, it was taxable and the corresponding withholding tax should have been withheld.

On the third issue, the Court held that the Jai-Alai Corporation and Razon did have control, receipt, custody, and disposal of the amounts. As to the forty thousand pesos sent by telegraphic transfer, the Jai-Alai's liability was beyond question. As to the payments delivered to Razon, the Court noted that he had a dual personality, acting both as Vice-President of the Jai-Alai and as attorney-in-fact of Assadourian, and that when he received the amounts to effect payment he also accepted them for Assadourian with the obligation to remit them. The Court concluded that not only the Jai-Alai but Razon also must be deemed withholding agents, and it was their duty, before actually paying the amounts to Assadourian, to deduct the corresponding income tax.

Doctrine

First, the findings of fact of the Court of Tax Appeals are not reviewable by the Supreme Court where they are supported by substantial evidence. Second, payments of percentage fees or income earned out of business profits are fixed or determinable income within the meaning of Section 53(b), and are not converted into a sale of a contingent interest merely because the parties styled the transaction as a settlement or indenture. Third, a person or corporation having control, receipt, custody, disposal, or payment of income of a nonresident alien not engaged in trade or business is a withholding agent under Section 53(b), and a corporate officer who receives such amounts in a dual capacity, as officer of the payor and as attorney-in-fact of the payee, is himself a withholding agent bound to deduct the tax before payment.

Disposition

The Supreme Court upheld the ruling of the Court of Tax Appeals holding the Jai-Alai Corporation liable for the withholding tax on the amount it paid to Assadourian, with the appeal of the Republic as to the other amounts and the appeal of the Jai-Alai Corporation both resolved accordingly.

Remember This

The one line to memorize is that whoever has control, receipt, custody, disposal, or payment of income of a nonresident alien not engaged in trade or business is a withholding agent, and a dual-capacity officer who handles the money is one too. Examiners use this case on the definition of a withholding agent under Section 53(b) and on the finality of the factual findings of the Court of Tax Appeals.