8/31/2016 G.R.No.

156

TodayisWednesday,August31,2016

RepublicofthePhilippines
SUPREMECOURT
Manila

ENBANC

G.R.No.156September27,1946

MILTONGREENFIELD,plaintiffappellant,
vs.
BIBIANOL.MEER,defendantappellee.

FranciscoDalupanforappellant.
FirstAssistantSolicitorGeneralReyesandSolicitorArguellesforappellee.

FERIA,J.:

ThisisanappealfromthedecisionoftheCourtofFirstInstanceofManilawhichdismissesthecomplaintofthe
plaintiffandappellantcontainingtwocausesofactiononetorecoverthesumofP9,008.14paidasincometax
fortheyear1939byplaintifftodefendantunderprotest,byreasonofdefendanthavingdisallowedadeductionof
P67,307.80allegedbyplaintifftobelossesinhistradeorbusinessandtheothertoreclaim,intheeventthefirst
causeofactionisdismissed,thesumofP475collectedbydefendantfromplaintiffillegallyaccordingtothelatter,
becausetheformerhaserroneouslycomputedthetaxonpersonalandadditionalexemptions.

Thefollowingarethepertinentfactsstipulatedandsubmittedbythepartiestothelowercourt:

2. That since the year 1933 up to the present time, the plaintiff has been continuously engaged in the
embroiderybusinesslocatedat385Cristobal,CityofManilaandcarriedonunderhisname

3.Thatin1935theplaintiffbeganengaginginbuyingandsellingminingstocksandsecuritiesforhisown
exclusiveaccountandnotfortheaccountofothers...

4. That Exhibit A attached to the complaint and made a part hereof represents plaintiff's purchases and
salesofeachclassofstockandsecurityaswellastheprofitsandlossesresultingoneachclassduringthe
year1939

5. That the plaintiff has not been a dealer in securities as defined in section 84 (t) of Commonwealth Act
No. 466 that he has no established place of business for the purchase and sale of mining stocks and
securitiesandthathewasneveramemberofanystockexchange

6.Thattheplaintifffiledanincometaxreturnforthecalendaryear1939showingthathemadeanetprofit
amounting to P52,449.29 on embroidery business and P17,850 on dividends from various corporations
andthatfromthepurchaseandsalesofminingstocksandsecuritieshemadeaprofitofP10,741.30and
incurredlossesintheamountofP78,049.10,therebysustaininganetlossofP67,307.80,whichincometax
returnisheretoattachedandmarkedExhibitB

7.Thatinsaidincometaxreturnfor1939,theplaintiffdeclaredtheresultsofhisstocktransactionsunder
ScheduleB(IncomefromBusiness)butthedefendantruledthattheyshouldbedeclaredintheincometax
return,ExhibitB,underScheduleD(GainsandLossesfromSalesorExchangesofCapitalAssets,realor
personal)

8.Thatinsaidincometaxreturn,saidplaintiffclaimshisdeductionofP67,307.80representingthenetloss
sustainedbyhiminminingstockssecuritiesduringtheyear1939andthatthedefendantdisallowedsaid
item of deduction on the ground that said losses were sustained by the plaintiff from the sale of mining
stocksandsecuritieswhicharecapitalassets,andthatthelossarisingfromthesaleofthesameshouldbe
allowedonlytotheextentofthegainsfromsuchsales,whichgainswerealreadytakenintoconsideration
inthecomputationoftheallegednetlossofP67,307.80

9.Thatthedefendantassessedplaintiff'sincometaxreturnfortheyear1939atP13,771.06asshownin
thefollowingcomputationappearingintheauditsheetofthedefendantheretoattachedandmarkedExhibit
C

Netincomeasperreturnofplaintifffor1939 P70,299.29

Add:NetLossonsaleofminingstocksand
securitiesdisallowedinaudit 67,307.80

P137,607.09
Totalnetincomeasperofficeaudit =========

Amountoftaxonnetincomeasperofficeaudit P13,821.06

Less:Taxonexemptions:

Personalexemption P2,500.00

Additionalexemption 1,000.00

Total P3,500.00

Taxonexemption
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Taxonexemption 50.00

P13,771.06
Netamountoftaxdue =========

10. That the defendant computed the graduated rate of income tax due 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
correspondingtotheexemptionofP3,500

11. That the plaintiff, objecting and excepting to all the ruling of the defendant above mentioned and in
assessingplaintiffwithP13,771.06,claimedfromthedefendanttherefundofP9,008.14orinthealternative
caseP475,whichclaimofplaintiffwasoverruledbythedefendant

The questions raised by appellant in his four (4) assignments of error may be reduced into the following: (1)
Whetherthelossessustainedbytheplaintifffromthebuyingandsellingofminingsecuritiesduringtheyear1939
arelossesincurredintradeandbusiness,deductibleundersection30(d)(1)(A)ofCommonwealthActNo.466
from his gains in his embroidery business and other income or whether they are capital losses from sales of
capitalassetswhichshallbeallowedonlytotheextentofthegainsfromsuchsalesundersection34ofthesame
Commonwealth Act No. 466. And (2) whether, under the present law, the personal and additional exemptions
granted by section 23 of the same Act, should be considered as a credit against or be deducted from the net
income,orwhetheritisthetaxonsuchexemptionsthatshouldbedeductedfromthetaxonthetotalnetincome.

1.Astothefirstquestion,itisagreedintheabovequotedstipulationoffactsthattheplaintiffwasnotadealerin
securities or share 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
thebusinessofbuyingandsellingthemundersection30(d),(1)(A)ofsaidActNo.466.

Itisevidentthat,takingintoconsiderationthenatureofminingsecurities,whichmaybeboughtorsoldeitherasa
businessorforspeculationpurposesonly,theNationalAssemblyofthePhilippineshasdeemeditnecessaryto
define or determine beforehand in section 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
"incurredintradeorbusiness"usedinsection30(d)(1)(A)ofthesameAct,inordertoavoidanyquestionor
doubt as to deductibility of all losses incurred by a merchant in securities from his net income from whatever
source.Thedefinitionofdealerormerchantinsecuritiesgiveninsaidsection84(t)includespersons,naturalor
juridical,whoareengagedinthepurchaseandsaleofsecuritieswhetherforhistheirownaccountorforothers,
provided they have a place of business and are regularly engaged therein. There was formerly some doubt or
questionastowhetherapersonengagedinbuyingorsellingsecuritiesforhisownaccountmightbeconsidered
as engaged in that trade or business, and several cases involving such question had been submitted to the
United States Federal Courts for ruling, and to the Income Tax Units of the United States Bureau of Internal
Revenueforopinion.Butwiththeinclusivedefinitionoftheterm"dealer"ormerchantofsecuritiesgiveninsection
84(t)ofActNo.466,suchdoubtcannolongerarise.

Saidsection84(t)readsasfollows:

(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
securitiesandtheirresaleofcustomersthatis,onewhoasamerchantbuyssecuritiesandsellsthemto
customerswithaviewtothegainsandprofitsthatmaybederivedtherefrom.

Appellantassumes,however,thattheabovequoteddefinitiondoesnotcoverorincludeallpersonsengagedin
the trade or business of buying and selling securities within the meaning of said section 30 (d) (1) (A). He
contendsthat,althoughheisnotadealerinminingsecurities,hemaybeconsideredashavingbeenengagedin
thetradeorbusinessofbuyingandsellingsecurities.AndinsupportofhiscontentionappellantquotesOpinion
No.1818oftheIncomeTaxUnitoftheUnitedStatesBureauofInternalRevenue(I.T.No.1818,C.B.II,pp.39
41),inwhichopinionthefollowingwassaid:

The taxpayer is not a member of any stock exchange, has no place of business, and does not make
purchase 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,hisincomeconsistingentirelyofinterestbonds,dividendsonstocks,andprofitsfromthesaleor
dispositionofsecurities.

Adviceisrequested(1)whetherthistaxpayerisentitledtothebenefitofsection204oftheRevenueActof
1921,withreferencetoanetlossincurredin1921,fromthesaleofstocks(2)whetherheisentitledtothe
benefitofsection206oftheRevenueActof1921,withregardtogainsderivedin1922fromthesaleoftwo
blocksofstockheldmorethantwoyears.

1.Section204(a)providesinpart:

Thatasusedinthissectiontheterm"netloss"meansonlynetlossesresultingfromtheoperationofany
tradeorbusinessregularlycarriedonbythetaxpayer...

Thequestionis,than,whetherthetaxpayerwasregularlyengagedinthetradeorbusinessofbuyingand
sellingsecurities.

The interpretation placed upon the term "business or trade" by the courts and the department may be
indicatedbyafewillustrativedecisions.Intwoearlycases(InreMarson[1871],Fed.Cas.No.9142,andIn
reWoodward[1876],Fed.Cas.No.18001)itwasheldthataspeculatorinstockswasnota"merchantor
tradesman"withinthemeaningoftheBankruptcyActof1867.Itwassaidintheformercase:

"Theonlybusinesshewasengagedinwaswhatiscalledspeculatinginstocks,thatis,buyingandselling
them,withaviewtohisownprofit,tobemadebytheexcessofthesellingpriceoverthebuyingprice...
The fact that the bankrupt was engaged in no other business can not have the effect to make him a
merchantoratradesman,becausehecarriedonthebusinesshedidcarryoninthewaywhichhecarried
iton."

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Thatis,althoughhisbusinesswasbuyingandselling,sincethisbusinesswassimplywithaviewtohisown
profitandnotforothers,haswasnotamerchantortradesman.CompareInreSuretyGuarantee&Trust
Co.([1902],121Fed.,73)andInreH.R.Leighton&Co.([1906],147Fed.,311).

Withthisbackground,theDepartment,inTreasuryDecisions1989,2005,2090,and2135(notpublishedin
Bulletin service), held that the provision of paragraph B of the 1913 Act, allowing as a deduction for the
purposeofthenormaltax"lossesactuallysustainedduringtheyear,incurredintrade...",didnotinclude
lossesfromisolatedtransactionsforinstance,instocksandbonds.InMentevs.Eisner([1920],266Fed.,
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,inL.O.601(notpublishedinBulletinservice),itwasheldthat"lossessustainedbyaperson
inbuyingandsellingsecuritiesinhisownaccount,henotbeingalicensedstockandbondbrokerbuying
and selling for others as well as for himself, are not deductible as losses in trade within the meaning of
paragraphBoftheActofOctober3,1913."Thebasisoftheseopinionsisthusseentobe(1)thatdealing
insecuritiesonone'sownaccountisnottechnicallya"trade"(2)thatisolatedtransactionsinsecurities,not
connectedwiththetaxpayer'sregularbusinessdonotconstitutea"trade."

IntheActofSeptember8,1916,thewordingofthe1913Actwasslightlychanged(section5[a],fourth)to
permit a deduction of "losses actually sustained during the year, incurred in his business or trade . . ."
Underthismoreliberalprovision,ithasbeenuniformlyheldthatwhereataxpayerdevotedallhistime,or
the major portion of it, to buying and selling securities on his own account, this occupation was his
"business"andthereforehewaspermittedtodeductlossessustainedinsuchdealingsasbeing"incurred
inhisbusiness."A.R.R.404(C.B.4,p.157)sembleL.O.601.Theserulingsareinferentiallysupportedby
the definitions of trade or business to comprehend "all his activities for gain, profit, or livelihood, entered
intowithsufficientfrequency,oroccupyingsuchportionofhistimeorattentionastoconstituteavocation,"
contained in article 8 of Regulations 41, relative to the war excessprofits tax (approved in Woods vs.
Lewellyn[1921],289Fed.,498)...

It is submitted that these decisions are a sound interpretation of the accepted definition of business:
"Businessisaverycomprehensivetermandembraceseverythingaboutwhichapersoncanbeemployed."
Black's Law Dictionary, 158, citing People vs. Commissioners of Taxes (23 New York, 242, 244). "That
whichoccupiesthetime,attentionandlaborofmenforthepurposeofalivelihoodorprofit."Bouvier'sLaw
Dictionary,Vol.1,p.273.Flingvs.StoneTracyCo.(1910),220U.S.,107at17131SupCt.,34255Law.
ed., 389 Ann. Cas. 1912B, 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,entitledtothebenefitoftheprovisionsofsection204(a).(I.T.No.1818C.B.II2,pp.39
41.)

But,assumingarguendothattheabovequotedopinionmaybeappliedtothepresentcase,itisevidentthatthe
appellantcannotbeconsideredashavingbeenengagedinthebusinessofbuyingandsellingsecuritieswithin
the meaning of section 30 (d) (1) (A) of Act No. 466 According to said opinion, in order that he may so be
considered,itisnecessarythathemustdevoteallhistimeoratleastamajorportionthereoftosaidbusinessand
thatthelattermustberegularlycarriedonbyhim.

Inthestipulationoffactspresentedinthiscaseitisagreedthat"sincetheyear1933uptothepresenttime,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 and 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
thathehasbeencontinuouslyengagedintheembroiderybusinessduringthesametime,itnecessarilyfollows
that he has not and could not have devoted regularly all his time or a major portion thereof to the buying and
sellingofminingsecurities.

Furthermore, from Exhibit A attached to the complaint and made a part of said stipulation of facts, which
representsplaintiff'spurchasesandsalesofeachclassofstocksandsecuritiesaswellastheprofitsandlosses
resulting therefrom during the year 1939, it appears that he made purchases and sales of securities only on
severaldaysofsomemonthsandnothingonothers.Asshowninsaidexhibit,duringthemonthofJanuary,1939,
appellantpurchasedsharesofstockofdifferentminingcorporationsonJanuary2,3,4,6,13,19,20,25,30,and
soldsomeofthemonJanuary4,10,13and31.DuringFebruaryhemadepurchasesonthedates1,8,13,14,
25, and 27 and sales on 6, 9, 10, 16, 22, and 30, and sold some on March 9 only. During April he made two
purchasesonApril3and5,andonesaleonApril4.DuringMayhepurchasedminingsharesofstockonMay9,
10, 13, 19, 24, and 25 and sold some of them on May 9, 10, 12, 13, and 31. During June appellant made
purchaseson1,3,5,8,13,15,and17,andsaleson22,23,24,and28.DuringJuly,purchaseson1,3,6,19
andsalesonJuly24,25,26,and27.DuringAugusthepurchasedsharesofstockonsomeminingcorporations
on5,7,16,and18andsoldsharesofoneminingcorporationonAugust10only.DuringSeptemberappellantdid
not purchase or sell any securities. During October he sold securities only on the 12th of said month, and he
madenopurchaseatall.AndduringNovemberandDecemberhedidnotpurchaseorsellany.

AppellantcontendsthatasfromExhibitAitappearsthattheminingsecuritieswereinventoriedinordertoarrive
athisprofitsandlosses,theycannotbeconsideredascapitalassets,because,accordingtosection34,theterm
capitalassetsdoesnotincludepropertywhichwouldproperlybeincludedintheinventory.Butitistobeobserved
thatthelawrefersnottopropertymerelyincluded,buttothatwhichwouldbeproperlyincludedintheinventory.
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,"andthat"thetaxpayerswhobuyandsellorholdsecuritiesforinvestmentorspeculation,...arenot
dealersinsecuritieswithinthemeaningofthisrule."AndtheGeneralCounseloftheFederalBureauofInternal
Revenue,afterquotingArticle105ofUnitedStatesRegulations74fromwhichsaidsection148ofourIncomeTax
Regulations was taken, said that a person not a dealer in securities is precluded from the use of inventories in
computinghisnetincome."(C.B.X2,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
lossessustainedbyappellantfromthebuyingandsellingofminingsecuritiesarenotlossesincurredinbusiness
ortradebutarecapitallossesfromsalesofcapitalassets,ascontendedbyappellee.

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2.Withregardtothesecondpoint,thelowercourtheldthat,asthenewlawdoesnotprovidethatthepersonal
exemptionsshallbeallowedinthenatureofadeductionfromthenetincome,asprescribedintheoldlaw,and
thereisadistinctionbetweenexemptionanddeduction,thetaxdueonsaidexemptionsmustbedeductedfrom
the tax due on the whole net income, instead of deducting the total amount of the exemptions from the net
income.

Theargumentoftheappelleeinsupportofthelowercourt'sdecisionisthattheomissioninsection23ofActNo.
466ofthephrase"inthenatureofadeduction"foundinsection7oftheoldlaw,showsthatitwastheintentionof
theNationalAssemblytoadopttheinnovationproposedbytheTaxCommissionwhichpreparedthedraftofthe
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
regardtothestatusofthetaxpayer,andthenthisamountisreducedbythetaxcreditfixedinthelawaccordingto
thestatusofthetaxpayerandthenumberofhisdependentsasfollows:forsingleindividuals,thereisalloweda
tax credit of P10 for married persons or heads of family, P30 and for each dependent below 21 years of age,
P10.

Section7oftheoldlawprovided:"Forthepurposeofthenormaltaxonly,thereshallbeallowedasanexemption
inthenatureofadeductionfromtheamountofthenetincome..."whilesection23ofthenewlawprovides:
"For the purpose of the tax provided for in this Title there shall be allowed the following exemptions." Now, the
questiontobedeterminedoransweredis:Doesthischangeinthephraseologyofthelawshowtheintentionof
theNationalAssemblytochangethetheoryorpolicyoftheoldlawsoastodeductnowthetaxonthepersonal
andadditionalexemptionsfromthetaxfixedontheamountofthenetincome,insteadofdeductingtheamountof
personalandadditionalexemptionsfromthatofthenetincome,beforedeterminingthetaxdueonthelatter?

It is a wellsettled rule of statutory construction that where a statue has been enacted which is susceptible of
severalinterpretationsthereisnobettermeansforascertainingthewillandintentionofthelegislaturethanthat
which is afforded by the history of the statue. Taking into consideration the history of section 23 of the
Commonwealth Act No. 466, the answer to the abovepropounded question must obviously be in the negative.
Section22ofthebillentitled"AnActtorevise,amendandcodifytheInternalRevenueLawsofthePhilippines,"
prepared by the Tax Commission and submitted to the National Assembly of the Philippines, in substitution of
section7oftheoldIncomeTaxLaw,readsasfollows:

SEC.22.Amountoftaxcreditallowabletoindividuals.Thereshallbeallowedasacreditinthenatureofa
deductionfromtheamountofthetaxpayablebyeachcitizenorresidentofthePhilippinesundersection
20:

(a)Taxcreditofsingleindividuals.ThesumofP10ifthepersonmakingthereturnisasinglepersonora
marriedpersonlegallyseparatedfromhisorherspouse.

(b)Taxcreditofamarriedpersonorheadoffamily.ThesumofP30ifthepersonmakingthereturnisa
married man with a wife not legally separated from him, or a married woman with a husband not legally
separatedfromher,ortheheadofthefamilyProvided,Thatfromthetaxdueontheaggregateincomeof
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 a woman with one or
bothparents,oroneormorebrothersorsisters,oroneormorelegitimate,recognizednaturaloradopted
childrendependentuponhimorherfortheirchiefsupportwheresuchbrothers,sisters,orchildrenareless
thantwentyoneyearsofage.

(c) Additional tax credit for dependents.The sum of P10 for each legitimate, recognized natural, or
adoptedchildwhollydependentuponthetaxpayer,ifsuchdependentsareundertwentyoneyearsofage,
or incapable of selfsupport because mentally or physically defective. The additional tax credit under this
paragraphshallbeallowedonlyifthepersonmakingthereturnistheheadofthefamily.

ButtheNationalAssembly,insteadofadoptingorincorporatingsaidproposedsection22intheNationalInternal
RevenueCode,C.A.No.466,copiedsubstantiallyinsection23ofthelatterprovisionofsection7oftheoldlaw
relatingtopersonalandadditionalexemptions,withtheonlymodificationthattheamountofpersonalexemption
ofsingleindividualshasbeenreducedfromtwothousandtoonethousandpesos,andthatofmarriedpersonsor
headsoffamilyfromfourthousandtotwothousandfivehundredpesos.

IfitweretheintentionoftheNationalAssemblytoadoptthe"Wisconsinplan"proposedbythetaxCommission,it
would have adopted literally, or at least substantially, the provisions of said section 22 as section 23 of
CommonwealthActNo.466,insteadofsubstantiallyincorporatingsection7oftheoldIncomeTaxLawassection
23ofthenew,exceptthefirstparagraphthereofwhichreads:"Forthepurposeofthenormaltaxonly,thereshall
beallowedasanexemptioninthenatureofadeductionfromtheamountofthenetincome."Thiswaschanged
insaidsection23,whichprovides:"ForthepurposeofthetaxprovidedforinthisTitle,thereshallbeallowedthe
followingexemptions:"FromthefactthattheNationalAssemblydiscardedcompletelysection22ofthebilldrafted
in accordance with the "Wisconsin Plan" and submitted by the Tax Commission, it is to be presumed that the
NationalAssemblyofthePhilippinesdidnotintendtointroduceanysubstantialchangeintheoldlawinsofaras
theeffectofpersonalandadditionalexemptionsontheincometaxisconcerned.

The mere fact that the phrase "in the nature of a deduction" found in section 7 of the old law was omitted in
section23oftheneworNationalInternalRevenueCodedidnotandcouldnoteffectanychangeinthelaw.Itis
evident that said phrase was added or inserted in said section 7 only out of extreme caution, because, even
withoutit,theexemptionwouldhavetobedeductedfromthegrossincomeinordertodeterminethenetincome
subjecttotax.Hadtheprovisionintheoldlawbeendraftedinexactlythesametermasthatofsaidsection23,
thesameconstructionshouldhavebeenadopted.Because"Exceptionisanimmunityorprivilegeitisfreedom
fromachargeorburdentowhichothersaresubjected."(Florarvs.Sherifan,137Ind.,2836N.E.,365,369.)If
theamountsofpersonalandadditionalexemptionsfixedinsection23areexemptfromtaxation,theyshouldnot
beincludedaspartofthenetincome,whichistaxable.Thereisnothinginsaidsection23tojustifythecontention
that the tax on personal exemptions (which are exempt from taxation) should first be fixed, and then deducted
fromthetaxonthenetincome.

The change of phraseology alone does not lead to the conclusion that it was the intention of the lawmaker to
amendorchangetheconstructionsoftheoldlawascontendedbytheappellee.Foritisawellestablishedrule,
recognizedbytheSupremeCourtofOhiointhecaseofCongervs.Barker'sAdm'r(11OhioSt.,1)"thatinthe
revisionofstatutes,neitheranalterationinphraseologynortheomissionoradditionofwordsinthelatterstatute,
shallbeheld,necessarily,toaltertheconstructionoftheformeract.Andthecourtisonlywarrantedinholdingthe
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constructionofastatute,whenrevised,tobechanged,wheretheintentofthelegislaturetomakesuchchangeis
clear,orthelanguageusedinthenewactplainlyrequiressuchchangeofconstruction.Itshouldberemembered
that condensation is a necessity in the work of compilation or codification. Very frequently words which do not
materiallyaffectthesensewillbeomittedfromthestatutesasincorporatedinthecode,orthatsamegeneralidea
will be expressed in briefer phrases. No design of altering the law itself could rightly be predicated upon such
modificationsofthelanguage."(Emphasisours.)(SeeBlackontheconstructionandInterpretationoftheLaws,
SecondEdition,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, 1936 and 1938 amended the former acts by making said exemptions as credits
againstthenetincomeforthepurposeofboththenormaltaxandsurtax.Section7ofouroldIncomeTaxLaw,
instead of providing that the personal and additional exemptions shall be allowed as a credit against the net
income,asintheUnitedStatesRevenueActs,prescribedthattheamountsspecifiedthereinshallbeallowedas
anexemptioninanatureofdeductionfromtheamountofthenetincome.Whichhasexactlythesameeffectas
theprovisionregardingpersonalandadditionalexemptionsinthesaidUnitedStatesRevenueActs.For,asitwas
explainedintheWaysandMeansCommitteeReportNo.764,73dCongress,2dSession,pages6,23:

To carry out the policy of retaining practically the same tax burden on ordinary income, it is necessary in
connectionwiththeproposedplantoallowthepersonalexemptionandcreditsfordependentsasanoffset
againstsurtaxaswellasnormaltax.Thepersonalexemptionandcreditsfordefendantswouldappearto
be in lieu of deductions for necessary living expenses. They may well apply to both taxes as do all other
ordinarydeductions.

AndPaulandMertens,LawofFederalTaxation,Vol.3,p.509,stateregardingthechangeintheUnitedStates
RevenueActof1934:"Thepracticaleffectofthisstatutorychangeistoconvertthepersonalexemptionandcredit
fordependentsintodeductions..."(Emphasisours.)

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
refundtoappellantthesumofP475.

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
pronouncementastocosts.Soordered.

Moran,C.J.,Pablo,Hilado,Bengzon,Briones,andTuason,JJ.,concur.

SeparateOpinions

PARAS,J.,concurringanddissenting:

Iconcurinthemajorityopinioninsofarasitaffirmsthedismissalofappellant'sfirstcauseofaction,butIdissent
fromsomuchthereofasreversesthedismissalofappellant'ssecondcauseofaction.

Theeliminationfromsection23oftheNationalInternalRevenueCodeofthewords"inthenatureofadeduction
fromtheamountofthenetincome"(whichappearedinsection7oftheoldIncomeTaxLaw),couldnothavebeen
effectedwithoutapurposeandsaidpurposecertainlyisnottoretainthemeaningandeffectofthesuppressed
words.Ifthelegislativedepartmentdidnotintendtomakeanessentialchange,thelogicalandclearwayofdoing
so was to recopy the old provision. Said elimination was undoubtedly in answer to, and an acceptance of, the
innovationproposedbytheTaxCommission,namely,thattheamountpayableunderthepresentlawshouldbe
thedifferencebetweenthetaxdueontheentirenetincomeandthatdueontheexemptions,therebydoingaway
withtheformerpracticeofallowingtheexemptionstobedeductedfromthenetincomeandbasingthetaxonthe
difference. We cannot say that the failure of the law makers to incorporate in the new Code the provision
regardingtaxcreditsallowabletoindividuals,aspreparedandsubmittedbytheTaxCommissiontotheNational
Assembly in substitution of section 7 of the old Income Tax Law, suggests a rejection of the new plan and the
retentionoftheoldpolicy,sincethedesiredaimhadequallybeenaccomplishedbymereeliminationofthewords
above referred to. Indeed, at the rates fixed in section 21 of the new Code, the amounts of personal and
additionalexemptionsgrantedtoindividualsundersection23areexactlytheamountsspecifiedintheprovision
recommendedbytheTaxCommission,namely,P10forsingleindividuals,P30formarriedpersonsorheadsof
family,andP10foreachdependent.Section23shouldthusbeconstruednotasanoriginalprovision,butasone
whichistheresultofarevision.

The interpretation now pursued by the Government is further consistent with the circumstance that the tax is
levieduponthe"entirenetincome"(section21),whichmeans"thegrossincomecomputedundersection29,less
thedeductionsallowedbysection30"(section28).Itissignificantthatsection30failstomakeanyreferenceto
"personal exemptions." The explanation contained in the Ways and Means Committee Report No. 764, 73rd
Congress,2ndSession,totheeffectthatthe"personalexemptionandcreditsfordependentswouldappeartobe
inlieuofdeductionsfornecessarylivingexpenses,"cannothavecontrollingforcebecause,incomputingthenet
income both under the new Code (section 31) and under the old Income Tax Law (section 5), no deduction is
allowedinrespectoflivingexpenses.

Of course, neither an alteration in phraseology nor the omission or addition of words in a later statute will
necessarilyaltertheconstructionoftheformeract,but,inthepresentcase,theeliminatedwordswerethevery
basisforthepriorconstruction.Thealternationhereisoneofsubstance,andnotmerelyofform.

Besides,themajority,bytheirposition,aretheirposition,are(unwittinglyIhope)playingfavoritetothetaxpayers
in the upper brackets, a situation which undoubtedly could not have been intended by the legislators. The
followingremarksofcounselfortheGovernmentareinpoint:

Lastly,theactionoftheappelleeCollector,inallowingmerelyataxcreditupontheamountofthepersonal
exemptions,givesalltaxpayersentitledtothesameexemptions,anequalprivilege.Thetaxsavingisthe
same for taxpayers having equal number of the dependents, whether rich or poor, just as the amount of
exemptionsremainsthesameforalltaxpayersunderanalogouscircumstances.

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On the contrary, the method advocated by appellant (of deducting the exemption from the total taxable
income)benefitstherichtaxpayers,ratherthanthepoorones.Toconvinceusofthefact,itisenoughto
computethetaxonanincomelesserthanappellant'ssayofP15,000.

Appellant'sMethod Appellees

Netincome...... 15,000.00 Netincome....... P

Lessexemption... 3,500.00 Taxableincome.... P15,000.00

Taxableincome... P11,500.00

Taxedasfollows:

Income Rate Tax Income Tax

P2,000.00 1% P20.00 P2,000.00 Exempt.

2,000.00 2% 40.00 2,000.00 P10.00(1,500

2,000.00 3% 60.00 2,000.00 60.00

4,000.00 4% 160.00 4,000.00 160.00

1,500.00 5% 75.00 5,000.00 250.00

P11,500.00 P355.00 P15,000.00 P480.00

Acomparisonofthiscomputationwiththatofthetaxonappellant'sincome,page19ofthisbrief,reveals
that, in appellant's case, the deduction of the exemption results in a saving of 15 per cent tax on P3,500
(P525)whileinthecasejustdiscussed,wherethetaxpayer'sincomeismuchless,thedeductionmethod
savesthetaxpayeronly5percenttaxonP3,500(P175),becauseinthiscasethehighestbracketofthe
taxpayer's income is only subject to 5 per cent. So that the appellant, with an income of P137,607.09,
economizesbythedeductionthreetimesmorethanthesecondtaxpayerwhoseincomeismerelyP15,000.
Itrequireslittleargumenttoshowthatamethodofcomputingtaxeswherebythesameexemptionresultsin
ahigherbenefitforthetaxpayerwiththebiggerincomecanneitherbejustnorequitable.

Myvoteistoaffirmthejudgmentappealedfromintoto.

PERFECTO,J.,dissentingandconcurring:

Wedissentfromthemajorityofaffirmingthedecisionofthelowercourtinsofarasitdismissesappellant'sfirst
causeofaction.

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 minings stock and securities he made a profit of P10,741.30 and incurred losses in the
amountofP78,049.10,therebysustaininganetlossofP67,307.80...

Defendant disallowed the deduction of the loss of P67,307.18, on the theory that the loss was sustained by
plaintifffromthesaleofminingstocksandsecuritieswhicharecapitalassetsandthatthelossarisingfromthe
sameshouldbeallowedonlytotheextentofthegainfromsuchsales.

Thequestioniswhetherthelosswasincurredintradeandbusiness.

"Business"isaverycomprehensivetermandembraceseverythingaboutwhichapersoncanbeemployed.
Black's Law Dictionary, 158, citing People vs. Commissioners of Taxes (23 New York, 242, 244). "That
whichoccupiesthetime,attention,andlaborofmenforthepurposeofalivelihoodorprofit."Bouvier'sLaw
Dictionary,Vol.1,p.273.Flintvs.StoneTracyco.(1910),220U.S.,107at17131Sup.Ct.,34255Law.
Ed.,389Ann.Cas.1912B,Law.1312,citedwithapprovalinVonBaumbachvs.SargentLandCompany.
(1916)242U.S.,503at515.

Wedonothaveanydoubttheplaintiffengagedinthebusinessandtradeofbuyingandsellingminingstocksand
securities.Wedonotseeanyreasonwhythelossessustainedbyhiminsaidbusinessshouldbedisallowedin
thecomputationforpurposesofdeterminingtheincometaxhehastopay.

Weareofopinionthatthelowercourt'sdecisionshouldbereversedandthat,astoplaintiff'sfirstcauseofaction,
defendant should be ordered to reimburse the plaintiff the amount of P9,008.14 paid by plaintiff to defendant
underprotest.

Inregardstothesecondcauseofactionofplaintiff,weagreewiththetheoryofthemajorityasexplainedinthe
opinion,butwecannotconcurinthedispositivepartthereoforderingtherefundofthesumofP475,inviewof
theconclusionwehavearrivedatregardingplaintiff'sfirstcauseofaction,itappearingthatplaintiffonlypraysfor
therefundofP475asanalternativeintheeventhisfirstcauseofactionisdismissed.

PADILLA,J.,concurringanddissenting:

Idissentfromtheopinionofthemajorityonthesecondcauseofactiononly.

Itmustbeborneinmindthatanexemptionisneitheranexclusionprovidedforinsection29(b)noradeduction
providedforinsection30,C.A.No.466.Notbeingadeduction,theamountconstitutinganexemptionmustnot
beexcludedordeductedfromthegrossornetincome.Exemptionmeanscondonation,remission,or,asthetrial
courtaptlycalls,waiverofthetaxbythegovernment.Theamountofexemptionbeingfixed(section23,C.A.No.
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466),thetaxcondoned,remittedorwaivedmustalsofixed.TheexemptionprovidedforinIncomeTaxLawisfor
personal,living,orfamilyexpensesofthetaxpayer.Itisthesameamountregardlessoftheamountofnetincome
subject to tax. The law makes no distinction between small and large incomes. The collector's computation
accomplishestheaimofthelaw,forthetaxontheamountexemptedwouldbethesameforeverynetincome,
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.UndertheCollector'sinterpretationofthelaw,thecomputationwouldbe,asfollows:

P10,000.00netincomeP30,000.00netincomeP2,000.001%P20.00P2,000.001%P20.002,000.002%40.00
2,000.002%40.002,000.003%60.002,000.003%60.004,000.004%160.004,000.004%160.00
10,000.005%500.00P10,000.00TaxP220.0010,000.006%600.00ExemptionP60.00
P30,000.00TaxP1,320.00ExemptionP60.00.

Underappellant'sinterpretationofthelaw,thecomputationwouldbe,asfollows:.

P10,000.00netincomeP30,000.00netincome4,000.00lessexemption4,000.00lessexemption
P6,000.00taxablenetP26,000.00taxablenetP2,000.001%P20.00P2,000.001%P20.002,000.002%40.00
2,000.002%40.002,000.003%60.002,000.003%60.004,000.004%160.00P6,000.00
TaxP120.0010,000.005%500.006,000.006%360.00P26,000.00TaxP1,140.00.

orunderappellant'sotherinterpretationofthelaw,thecomputationwouldbe,asfollows:

P2,000.001%P20.00P2,000.001%P20.002,000.002%40.002,000.002%40.002,000.003%60.002,000.00
3%60.004,000.004%160.004,000.004%160.0010,000.005%500.00P10,000.00
TaxP120.006,000.006%360.00ExemptionP160.004,000.006%240.00
P26,000.00TaxP1,140.00ExemptionP240.00.

Theresultunderappellant'scomputationisthatalargenetincomewouldenjoyabiggeramountoftaxexemption
thanasmallnetincome,whenthelawisclearthatsuchexemptionisoffixedamountregardlessoftheamountof
netincomesubjecttotax.

It is not correct to say that the "Wisconsin Plan" referred to in the majority opinion was not adopted. It was
adoptednotinformbutinsubstance.

Iamoftheopinionthatthejudgmentunderreviewshouldbeaffirmed.

TheLawphilProjectArellanoLawFoundation

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